Social Franchising - Do Franchise Laws Impede Progress to Do Good?

Thanks to an old friend and former client, Tony Wells, I was introduced to the notion of "social franchising" this week. (Tony and his wife Dana operate the Wells Foundation - click here) Social franchising is related to "social entrepreneurship," which is loosely defined as applying business techniques and approaches to solve social problems and concerns. This may mean developing a product or service that serves the greater good rather than pure capitalistic interests, i.e. making a profit. It can also mean developing a business model that generates revenue to sustain a not-for-profit, charitable organization with all proceeds devoted to the charitable mission.

Well, in short measure, I learned that there is great interest in using the "franchise model" to advance the concept of "social entrepreneurship," In fact, the International Franchise Association has established the IFA Social Sector Franchising Task Force (find here), chaired by Michael Seid, founder and managing director of Michael H. Seid & Associates. As noted on the Task Force's website: The mission statement of the Social Sector Task Force is: “To Enhance The Quality Of Life In Underserved Populations – One Opportunity At A Time.”

Further, I was informed by one of my franchise-lawyer colleagues, Donna Christopherson (who is a member of the Task Force) and by my old friend Tony that the social franchise model has been used in Europe and Africa but not so much in the U.S. Indeed, there is the European Social Franchising Network (click here) that indicates that the purpose of this type of franchise is "a social goal, such as the employment of disabled people, the democratisation of the economy or tackling climate change. As such the social franchise has a social purpose and is often owned by its social franchise members but it is also a business that makes profits. Without these profits, it could not survive and grow and meet its social aims."

So what's holding us up in the U.S.? Maybe nothing ...but in my learning process I was informed (by my brilliant colleagues on the ABA Forum on Franchising List-Serv) that state franchise laws and regulations, requiring disclosure documents and other qualifications, may apply to not-for-profits. The FTC staff, in a series of informal advisory opinions, has given legitimately organized not-for-profits a pass because it does not view these types of franchises as "commercial relationships." But, there does not seem to be any guidance from state franchise examiners that the same standard would be applied and there is concern that a federal case, Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, Inc., 646 F.3d 983 (7th Cir. May 31, 2011), points to the application of state franchise laws to not-for-profit organizations.

This post is already too long ... but is it time for the adoption of an exemption from the FTC Rule and the state franchise and business opportunity laws to allow those who want to do good to do even more good?

NLRB Decision - Joint Employers - Not Franchise Case

If you just skim the surface, you may be led to believe that the National Labor Relations Board just issued a decision determining that franchisORS are "joint employers" of their franchisEES' employees. But this is not the case. The case involved employees of a temporary staffing company that supplied "rented" workers to Browning-Ferris Industries of California, Inc. and whether Browning-Ferris (which is not a franchisor) can be deemed a joint employer of those employees.

Here is the 50-page decision and dissent - CLICK HERE. Other than a reference in a footnote to the "International Franchise Association," the word "franchise" does not appear in the main decision (the first 21 pages) and the majority makes clear (in footnotes to the dissent) that the case does not involve franchises. The word "franchise" does appear in the dissent ...but more on this later.

Here are the basic facts: BFI owns and operates the Newby Island recycling facility, which receives approximately 1,200 tons per day of mixed materials, mixed waste, and mixed recyclables. BFI, the user firm, contracts with Leadpoint, the supplier firm, to provide the workers who manually sort the material. The relationship between BFI and Leadpoint is governed by a temporary labor services agreement. The issue is, for collective bargaining purposes, should BFI be considered a joint employer - in essence, as stated in the decision: "...the Union asserts that absent a change in the joint-employer standard, a putative employer, like BFI, that is a necessary party to meaningful collective bargaining will continue to insulate itself by the 'calculated restructuring of employment and insertion of a contractor to insulate itself from the basic legal obligation to recognize and bargain with the employees’ representative.'” By a 3-2 decision, the Board determined that BFI is a joint employer for collective bargaining purposes.

Now, back to the dissent, the word "franchise" and the footnotes. As my ABA Forum on Franchising colleagues pointed out in our Forum List-Serv yesterday:

• There is some faint hope for franchising.  Footnote 94 mentions the Patterson v. Domino's decision and says "That decision also addressed the particularized features of franchisor/franchisee relationships, none of which are present here."  A franchise is (hopefully) clearly distinguishable from the relationship before the Board which involved a staffing agency providing employees to work on the premises of the purported joint employer.  The Dissent in its discussion of the threat to franchising also notes that the General Counsel in his amicus brief argued that the Board "should continue to exempt franchisors from joint employer status to the extent that their indirect control over employee working conditions is related to their legitimate interest in protecting the quality of their product or brand."  

•  FN 120 is even more to the point: "The dissent is simply wrong when it insists that today’s decision “fundamentally alters the law” with regard to the employment relationships that may arise under various legal relationships between different entities: “lessor-lessee, parent-subsidiary, contractor-subcontractor, franchisor-franchisee, predecessor-successor, creditor-debtor, and contractor-consumer.” None of those situations are before us today, and we decline the dissent’s implicit invitation to address the facts in every hypothetical situation in which the Board might be called on to make a joint-employer determination. As we have made clear, the common law test requires us to review, in each case, all of the relevant control factors that are present determining the terms of employment. In this case we are specifically concerned with only two employers: BFI and Leadpoint.

'Nuff said.