Fast Food Nation - Eric Schlosser [56]
In recent years conflicts between franchisees and franchisors have become much more common. As the American market for fast food grows more saturated, restaurants belonging to the same chain are frequently being put closer to one another. Franchisees call the practice “encroachment” and angrily oppose it. Their sales go down when another outlet of the same chain opens nearby, drawing away customers. Most franchisors, on the other hand, earn the bulk of their profits from royalties based on total sales — and more restaurants usually means more sales. In 1978 Congress passed the first federal legislation to regulate franchising. At the time, a few chains were operated much like pyramid schemes. They misrepresented potential risks, accepted large fees up front, and bilked millions of dollars from small investors. The FTC now requires chains to provide lengthy disclosure statements that spell out their rules for prospective franchisees. The statements are often a hundred pages long, with a lot of small print.
Federal law demands full disclosure prior to a sale, but does not regulate how franchises are run thereafter. Once a contract is signed, franchisees are largely on their own. Although franchisees must obey corporate directives, they are not covered by federal laws that protect employees. Although they must provide the investment capital for their businesses, they are not covered by the laws that protect independent businessmen. And although they must purchase all their own supplies, they are not covered by consumer protection laws. It is perfectly legal under federal law for a fast food chain to take kickbacks (known as “rebates”) from its suppliers, to open a new restaurant next door to an existing franchisee, and to evict a franchisee without giving cause or paying any compensation.
According to Susan Kezios, president of the American Franchise Association, the contracts offered by fast food chains often require a franchisee to waive his or her legal right to file complaints under state law; to buy only from approved suppliers, regardless of the price; to sell the restaurant only to a buyer approved by the chain; and to accept termination of the contract, for any cause, at the discretion of the chain. When a contract is terminated, the franchisee can lose his or her entire investment. Franchisees are sometimes afraid to criticize their chains in public, fearing reprisals such as the denial of additional restaurants, the refusal to renew a franchise contract at the end of its twenty-year term, or the immediate termination of an existing contract. Ralston-Purina once terminated the contracts of 642 Jack in the Box franchisees, giving them just thirty days to move out. A group of McDonald’s franchisees, unhappy with the chain’s encroachment on their territories, has formed an organization called Consortium Members, Inc. The group issues statements through Richard Adams, a former McDonald’s franchisee, because its members are reluctant to disclose their names.
The fast food chains are periodically sued by franchisees who are upset about encroachment, about inflated prices charged by suppliers, about bankruptcies and terminations that seemed unfair. During the 1990s, Subway was involved in more legal disputes with franchisees than any other chain — more than Burger King, KFC, McDonald’s, Pizza Hut, Taco Bell, and Wendy’s combined. Dean Sager, a former staff economist for the U.S. House of Representatives’ Small Business Committee, has called Subway the “worst” franchise in America. “Subway is the biggest problem in franchising,” Sager told Fortune magazine in 1998, “and emerges as one of the key examples of every [franchise] abuse you can think of.”
Subway was founded in 1965 by Frederick DeLuca,