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chisee may find himself in a position wherein he will be better off financially if he is terminated than he would be if he sold out to a responsible buyer.
We recommend, accordingly, that a franchisee be permitted to sell his business to anyone of his choosing without the permission of the franchisor, and that goodwill value of the business which the franchisor would be obligated to pay upon termination would be figured from the beginning of the relationship with the original party, rather than at the time of acquisition by a new owner.
Franchisors have customarily reserved the right to disapprove any sale of the "franchise” by the franchisee. As long as such veto power exists, the franchisee really has no right to sell his own business. If the franchisor does not want to do business with the new owner, he is free to terminate him after a minimum period of time which could be specified in the law. But the new owner should be entitled to proper compensation, including the value of the goodwill which has accumulated over the years.
So much for our comments on the provisions of S. 2321 itself. We would now like to comment briefly on a few objections invariably raised to such protective legislation. Please bear in mind that we refer to the brewing industry situation only, since that is where our familiarity lies.
1. The question has been raised whether brewers would switch from using independent distributors to their own branches if protective legislation were enacted. We believe that such a switch is extremely unlikely, merely because such legislation is put into effect. Brewers use independent distributors because they provide the most economical and effective way of marketing their products, not just because they like distributors or are interested in preserving the small businessman.
When the brewers feel they can do better without independent distributors, they will do so whether or not S. 2321 is enacted. However, such a trend toward vertical integration would be more expensive under S. 2321, since the past contribution by the distributor in developing a market for the brewers' products would have to be taken into consideration.
A more likely effect of such legislation is that brewers now unable to get good distributorships will be able to find them, and thus increase their own opportunities for survival. But, even if franchisees who are now classified as “independent,” but are in fact "captive,” are replaced by franchisor branches, nobody will suffer because a “captive” franchisee is virtually indistinguishable from a company employee. Actually, such a captive franchisee is in an inferior position to an employee.
It is worthy of note that since restrictive State laws applying to the brewing industry were passed in North Carolina and Virginia, in 1965 and 1964, respectively, there has been no tendency for brewers to replace their wholesalers with branch operations.
Despite claims that restrictive legislation might hamper brewery sales efforts, beer sales in North Carolina, where a restrictive law was enacted in 1965, jumped by 16 percent during the first full year following its enactment. So far this year, North Carolina sales are up 28 percent over last year. Such a rate of increase is several times above the national average.
2. Cannot State legislation do the job? The marketing of beer is becoming more national. We contend that Federal legislation is needed to restrain dominant firms doing business on an interstate basis, over a wide geographic area.
North Carolina and Virginia wholesalers are protected from unfair brewery practices. To a lesser extent, beer wholesalers in Indiana also enjoy such protection. A formidable protective measure is pending in the Michigan Legislature.
It is extremely unlikely that many States, two or three at the most, will succeed in securing effective legislative relief. The reasons are many. A few are obvious. Generally, most beer wholesalers and their associations are so dependent upon the major brewers that they are unable to support or promote such legislation. Many wholesalers are afraid to write a U.S. Senator because of the remote possibility that someone might tell their suppliers about it. A pathetic situation, to be sure. That is why legislative relief is needed, as in S. 2321.
One might also cite the superior resources that giant firms can utilize during the course of any legislative struggle. One might also observe that antitrust legislation progress is hindered in most State legislatures because the antitrust field is one in which only a few experts are conversant, and comparatively few of them are found among State representatives.
Is existing antitrust law not adequate to prevent anticompetitive practices? Such a question can best be dealt with by an antitrust authority who has represented franchisees attempting to protect themselves from unfair supplier actions. It is our belief that franchisees can, under ideal circumstances, protect themselves from the most serious antitrust violations. However, this requires the assistance of a highly competent antitrust attorney. It also requires legal expenditures that are beyond the grasp of the typical small businessman, coupled with years of litigation leading toward a most uncertain outcome.
We might project the observation that suppliers' lawyers can probably devise subtle means of maintaining tight control over a franchisee, resulting in anticompetitive effects. Indeed, an obviously illegal act on the part of a franchisor usually is necesary, before a franchisee can seek to obtain relief under the antitrust laws.
Does incompetent franchisee deserve termination payment! At the outset of our statement, we emphasized that the purpose of S. 2321 is to prevent anticompetitive practices. This cannot be done if compensation upon termination is seriously in doubt. The prevention of anticompetitive practices is more important than being unduly concerned about several franchisees getting a few dollars more than they may deserve upon termination.
The question of whether a franchisee deserves to be terminated is a complex one. Every franchisor believes he terminates only incompetent franchisees, while every franchisee is likely to feel he has been unjustly treated. A restricted payment provision would, in our opinion, greatly reduce the deterrent value of this legislation.
S. 2321 already contains a provision which relieves suppliers from the responsibility of reimbursing franchisees who have acted in bad faith in performing their duties under a valid contract. This should protect franchisors from flagrant conduct on the part of franchisees.
A franchisee who has performed well over 20 to 30 years on behalf of a supplier, for example, should not be cut off without a cent because of "inadequate performance” over a period of 1 year or even 3 years. At least, as much weight should be given to his good years as to the few bad years, over which he may not have had control.
We have not had sufficient time to study the “Franchise Distribution Act of 1967,” S. 2507, sponsored by Senator Eastland.
We are in general agreement with the aims and provisions of the
However, we do wish to withhold any endorsement of sections 7 and 8 of this proposed legislation at the present time since we are uncertain of the implications such provisions would pose for the brewing industry. We request permission to offer our views on S. 2507 for the hearing record at a later date.
Senator Hart. This opportunity will be extended.
Mr. HOPKINS. The National Beer Wholesalers' Association congratulates this subcommittee on the fine job it has done in investigating franchising problems and in proposing a legislative solution in the form of S. 2321, which we urge you to report favorably, taking into consideration the recommendations we have submitted today in our prepared statement.
Now, the first industry member I would like to introduce for a digested statement (I know he and the others will realize our time is less than originally anticipated) is Elliot S. Kaplan, an attorney, who is considered an expert on these matters, from Minneapolis, Minn.
Senator Hart. Mr. Kaplan, we welcome you. STATEMENT OF ELLIOT S. KAPLAN, PARTNER, ROBINS, DAVIS &
LYONS, ATTORNEYS AT LAW, MINNESOTA Mr. KAPLAN. Thank you, Senator.
Mr. Chairman, members of the committee, it is a great pleasure and privilege for me to appear before the Antitrust and Monopoly Subcommittee today in connection with S. 2321, the Franchise Competitive Practice Act of 1967.
During the past several years, I have had an opportunity to represent numerous franchisees, independent wholesalers and distributors (hereinafter referred to as “franchisee”) many of whom had been exclusive or semiexclusive sellers of beer and malt beverage products. In many instances, suit has been instituted on behalf of a beer franchisee as a direct result of the franchisor's unilateral act of terminating the contractual relationship between the parties without awarding any compensation to the terminated franchisee. The acute problems which exist within the brewing industry are not unique to such industry and prevail throughout the commercial world.
Judicial decisions, both State and Federal, are replete with examples of unsuccesful franchisees who have instituted suit against their franchisors because of unilateral acts of termination by the franchisor of the relationship between the parties. The vast majority of courts have consistently adhered to the rigid position that a wholesaler or distributor may not recover damages against his supplier for breach of contract because the alleged contract is indefinite in duration and hence lacks mutuality of obligation. As a direct result of the position adopted by the courts, and the superior bargaining power of franchisors, self-serving declarations and documents are executed between the franchisor and franchisee whereby the franchisee is compelled to declare that the relationship between the parties is not for any definite duration, that the parties are acting solely as buyer and seller and hence the relationship is terminable at will by either party.
An enlightened minority of jurisdictions have recognized the substantial investment that a franchisee must make in his business and the goodwill that he necessarily creates for the benefit of the franchisor, and, therefore, hold that the termination of a franchise is tantamount to driving a franchisee out of business without affording to the franchisee an opportunity to recover his investment in the business. In fact, the minority judicial position points out that the majority view creates an injustice that is so substantial and prejudicial that courts should adopt the rule of law that a franchisor is stopped from denying that a binding and enforceable agreement exists between himself
and his franchisee. Significantly, the majority of courts, while refusing to permit a terminated franchisee to maintain an action in damages against his franchisor, have recognized the inequities of their decisions. As stated by the Eighth Circuit Court of Appeals in E. I. DuPont de Nemours & Co. v. Člaiborne-Reno Co., 64 Fed. 2d 224 (8th Cir. 1933):
We have much sympathy with the theory upon which the case was disposed of in the court below. It seems fair that after having spent 6 years in developing the territory assigned to it, the Reno Co. should have been permitted to continue or should have been compensated for the injury done it by having its business taken away
Thirty-four years have now elapsed since the decision of the Eighth Circuit Court of Appeals; however, the court has not yet seen fit to adopt the principles of fairness which it clearly recognized in 1933. Thus, the evident need for Federal legislation such as S. 2321 becomes increasingly apparent.
Prior to commenting upon the specific provisions of S. 2321, I would like to remind the distinguished members of this committee that the threat of termination by a franchisor of a franchise agreement is frequently employed in an attempt to compel and coerce franchisees to comply with anticompetitive practices which inure to the benefit of the franchisor but detrimentally affect the franchisee and the natural free forces of competition. Examples of such anticompetitive practices are vertical price fixing, trying agreements, territorial and customer restrictions, and exclusive dealing contracts. The remedies provided to the franchisee under S. 2321 will serve to deter a franchisor from making unlawful threats of termination and thereby many anticompetitive practices which now exist may ultimately be eliminated.
Perhaps the most critical section of S. 2321 is section 2(b) wherein the term "franchise" is defined. A review of judicial decisions from all jurisdictions quickly reveals that many cases have been decided solely upon the basis that the franchisee was unable to successfully sustain his burden of proof in establishing the existence of an enforceable contractual relationship between himself and the franchisor, notwithstanding a long and continuous history of dealing between the parties. Thus, S. 2321 must, if it is going to accomplish its ostensible purpose, alleviate the difficult, if not impossible, burden of proof which franchisees are presently confronted with in attempting to negate the franchisor's argument that his "refusal to deal” with the franchisee is lawful because the relationship between the parties is nothing more than that of "buyer and seller."
I would now like to direct my comments to the specific provisions of S. 2321. I respectfully submit that section 2(b) should be amended as follows:
(b) The term "franchise” means a contract, agreement, or understanding between two persons that results in or involves a continuing commercial relationship between them and that grants to one person, hereinafter called “the franchisee,” the right to offer, sell, and distribute goods, services, or commodities manufactured, processed, distributed, or in the case of services) organized and directed by the other person, hereinafter called "the franchisor.” Provided, that any commercial relationship in effect for less than 12 months or involving less than 25 percent of the annual gross sales or receipts of the franchisee shall be exempt from the provisions of this act.
The insertion of the words “results in or” will relieve the franchisee from having to establish that an actual “agreement” or an “agreement or understanding” existed between the parties. The inclusion of the words “results in or” will permit a court to be guided by a course of conduct that the parties have adhered to for a period of time, notwithstanding the absence of proof of an actual agreement between the parties.
I would further suggest and recommend that section 2(b) be amended so as to provide that if a commercial relationship has existed between the franchisor and the franchisee for a period of 12 or more continuous months, that it shall be prima facie evidence of an “agreement or understanding” between the parties.
B. PARTIAL TERMINATION
Section 2(c) should be expanded to include a “partial termination" or “substantial termination” whereby the franchisee's territory or area of primary responsibility are substantially reduced. In addition, if a franchisor refuses to permit the franchisee to continue to sell a substantial portion of the varieties of goods or brands offered by the franchisor, which goods or brands the franchisee formerly sold, the relief of the act should be afforded to the franchisee. Either of the latter two occurrences may make it impossible or impractical for the franchisee to continue in business on a profitable basis because of the resulting reduced volume and hence there has been an effective termination insofar as the franchisee is concerned.
Section 2(d) states that the term "commerce" shall have the same meaning as in antitrust laws of the U.S.
The term "commerce” has not been defined uniformly in the antitrust laws. For example, the courts have been more liberal in finding