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Control Without Responsibility: The Legal Creation of Franchising, 1960–1980

Published online by Cambridge University Press:  28 February 2020

BRIAN CALLACI Open the ORCID record for BRIAN CALLACI [Opens in a new window]
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Abstract

While the first business organizations to reach large size in the late nineteenth century did so through the route of vertical integration—formal ownership of assets and direct employment of workers—mid-twentieth-century franchising firms pioneered a new path to bigness, relying on restrictive contracts rather than formal integration to control their business organizations. Franchised chains replaced formal ownership and employment with contractual mechanisms known as vertical restraints (contractual controls on separate firms, such as price and supplier restrictions) to achieve uniformity and control over their outlets, without directly owning them. While most existing accounts of franchising focus on efficiency reasons for the evolution of the business form, this paper identifies a policy and legal mechanism: the relaxing of antitrust prohibitions on vertical restraints. These policy and legal changes were heavily lobbied for by franchising firms themselves. Whatever the efficiency implications of franchising, the increasing legalization of vertical restraints also had the benefit for franchising firms of allowing them to pull in the legal boundaries of the firm, leaving workers and other stakeholders outside. At the same time that they pursued franchising as a kind of vertical integration by other means, franchisors lobbied to preserve the legal benefits of having franchisees considered separate firms under a variety of laws, such as access to Small Business Administration loans and exclusion of workers at franchised establishments from access to collective bargaining and other rights against them.

Type
Article
Information
Enterprise & Society , Volume 22 , Issue 1 , March 2021 , pp. 156 - 182
Copyright
© The Author 2020. Published by Cambridge University Press on behalf of the Business History Conference. All rights reserved.

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Footnotes

I would like to thank the Center for Engaged Scholarship the Washington Center for Equitable Growth, and the Political Economy Research Institute for financial support, and the following people for helpful discussions or comments on earlier drafts: Desiree Barron-Callaci, Nancy Folbre, Carol E. Heim, Fidan Ana Kurtulus, Naomi Lamoreaux, Sharon Murphy, Sanjukta Paul, Robert Pollin, Lisa Saunders, Marshall Steinbaum, Donald Tomaskovic-Devey, and two anonymous reviewers. Any remaining errors or omissions are my own.

References

Bibliography of Works Cited

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McCurdy, Charles W. “American Law and the Marketing Structure of the Large Corporation, 1875–1890.” Journal of Economic History, 38, no. 3 (1978): 631–649.CrossRefGoogle Scholar
Paul, Sanjukta. “Antitrust as Allocator of Coordination Rights.” UCLA Law Review, 67, no. 2 (2019): 1–64.Google Scholar
Power, Thomas J. “Fast Food Sweatshops: Franchisors as Employers Under the Fair Labor Standards Act.” City University of New York Law Review, 19, no. 2 (2016): 337–372.Google Scholar
Rudnick, Harry L. “General Counsel’s Report.” IFA Legal Bulletin, 1, no. 1 (1967): 25–29.Google Scholar
Rudnick, Lewis G. “The Pathology of the Franchise Relationship.” IFA Legal Bulletin, 1, no. 2 (1967): 244–57.Google Scholar
Rudnick, Lewis G., and Dickens, John F.. “Franchisors May Be Responsible for Franchisee Wage/Hour Violations—How Much Control Is Too Much?” IFA Legal Bulletin, 12, no. 9 (1978): 10–17.Google Scholar
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Zeidman, Philip F. “Things Go Even Better for Coca-Cola: Territorial Restriction Verdict Set Aside.” IFA Current Legal Digest, 10, no. 7 (1976): 11–13.Google Scholar
Zeidman, Philip F. “Supreme Court Adopts View Urged by IFA in Sylvania Case: Franchisors Can Now Try to Justify Territorial Restrictions.” IFA Current Legal Digest, 11, no. 8 (1977): 10–18.Google Scholar
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U.S. Congress, House. Subcommittee on Consumer Protection and Finance. Hearings on the Franchising Termination Practices Reform Act. 94th Cong., 2nd sess., March 9–11, 1976.Google Scholar
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Federal Trade Commission Public Records Request. Documents in possession of the author.Google Scholar
Small Business Administration Archive. Record Group 309. National Archives Building, College Park, MD.Google Scholar
Baldwin, Debra Lee. Taco Titan: The Glen Bell Story. Arlington: Summit Publishing, 1999.Google Scholar
Barkoff, Rupert M., and Seldern, Andrew C.. Fundamentals of Franchising. Chicago: American Bar Association, 2004.Google Scholar
Bean, Jonathan. Big Government and Affirmative Action: The Scandalous History of the Small Business Administration. Lexington: University of Kentucky Press, 2001.Google Scholar
Birkeland, Peter M. Franchising Dreams: The Lure of Entrepreneurship in America. Chicago: University of Chicago Press, 2002.CrossRefGoogle Scholar
Blair, Roger D., and Lafontaine, Francine. The Economics of Franchising. New York: Cambridge University Press, 2010.Google Scholar
Bork, Robert H. The Antitrust Paradox: A Policy at War with Itself. New York: Basic Books, 1978.Google Scholar
Chandler, Alfred D.. The Visible Hand: The Managerial Revolution in American Business. New York: Belknap Press, 1977.Google Scholar
Dicke, Thomas S. Franchising in America: The Development of a Business Method, 1840–1980. Chapel Hill: University of North Carolina Press, 1992.Google Scholar
Eisner, Marc Allen. Antitrust and the Triumph of Economics: Institutions, Expertise, and Policy Change. Chapel Hill: University of North Carolina Press, 1991.Google Scholar
International Franchise Association. Official Transcript, Symposium: Franchising and Antitrust. Washington, DC: International Franchise Association, 1968.Google Scholar
International Franchise Association. Official Transcript, Third Annual Symposium: The Government and Franchising. Washington, DC: Association, International Franchise, 1970.Google Scholar
International Franchise Association. Official Transcript, Fourth Annual Franchising and Government Symposium. Washington, DC: Association, International Franchise, 1971.Google Scholar
International Franchise Association. Official Transcript, Fifth Annual Legal and Government Affairs Symposium: Legal Aspects of Franchising. Washington, DC: Association, International Franchise, 1972.Google Scholar
International Franchise Association. Official Transcript, Sixth Annual Legal and Government Affairs Symposium: The Antitrust Problems and Solutions of Distribution Through Franchisee-owned Outlets. Washington, DC: International Franchise Association, 1973.Google Scholar
International Franchise Association. Official Transcript of Proceedings, Eighth Annual Legal and Government Affairs Symposium, Growing with Antitrust: Practical Advice on Adapting Successfully to Antitrust Limitations on Franchising and Licensed Distribution. Washington, DC: International Franchise Association, 1975.Google Scholar
International Franchise Association. Official Transcript, Ninth Annual Legal and Government Affairs Symposium, International Franchise Association. Washington, DC: International Franchise Association, 1976.Google Scholar
International Franchise Association. Official Transcript of Proceedings, Eleventh Annual Legal and Government Affairs Symposium. Washington, DC: International Franchise Association, 1978.Google Scholar
International Franchise Association. Annual Report. Washington, DC: International Franchise Association, , 2016. www.franchise.org/sites/default/files/AnnualReport2016.pdf.Google Scholar
Jou, Chin. Supersizing Urban America: How Inner Cities Got Fast Food with Government Help. Chicago: University of Chicago Press, 2017.CrossRefGoogle Scholar
Kroc, Ray, and Anderson, Robert. Grinding It Out: The Making of McDonald’s. Chicago: Regnery, 1992.Google Scholar
Lamoreaux, Naomi. The Great Merger Movement in American Business: 1895–1904. New York: Cambridge University Press, 1988.Google Scholar
Love, John F. McDonald’s: Behind the Arches. New York: Bantam, 1995.Google Scholar
Luxenberg, Stan. Roadside Empires. New York: Penguin, 1986.Google Scholar
Plitt, Jane R. Martha Matilda Harper and the American Dream: How One Woman Changed the Face of Modern Business. Syracuse: Syracuse University Press, 2000.Google Scholar
Posner, Richard A. Economic Analysis of Law. New York: Little, Brown, 1973.Google Scholar
Rosenberg, William, and Keener, Jessica Brilliant. Time to Make the Donuts. New York: Lebhar-Friedman, 2001.Google Scholar
Roy, William G. Socializing Capital: The Rise of the Large Industrial Corporation in America. Princeton, NJ: Princeton University Press, 1997.CrossRefGoogle Scholar
Sammarco, Anthony Mitchell. A History of Howard Johnson’s: How a Massachusetts Soda Fountain Became an American Icon. Charleston, SC: American Palate, 2013.Google Scholar
Shook, Carrie, and Shook, Robert L.. Franchising: The Business Strategy That Changed the World. New York: Prentice Hall, 1993.Google Scholar
Weil, David. The Fissured Workplace: How Work Became So Bad for So Many and What Can Be Done to Improve It. Cambridge: Harvard University Press, 2014.CrossRefGoogle Scholar
Williamson, Oliver E. The Economic Institutions of Capitalism. New York: Free Press, 1985.Google Scholar
Bork, Robert H. “The Rule of Reason and the Per Se Concept: Price Fixing and Market Division.” Yale Law Journal, 75, no. 3 (1966): 373–474.CrossRefGoogle Scholar
International Franchise Association. “Statement of the International Franchise Association Regarding S. 2321.” IFA Legal Bulletin, 1, no. 2 (1967): 65–72.Google Scholar
Killion, William L. “The History of Franchising.” In Franchising: Cases, Materials, and Problems, edited by Meiklejohn, Alexander M., 1–27. Chicago: American Bar Association, 2013.Google Scholar
Lamoreaux, Naomi, Raff, Daniel, and Temin, Peter. “Beyond Markets and Hierarchies: Toward a New Synthesis of American Business History.” American Historical Review, 108, no. 2 (2003): 404–433.CrossRefGoogle Scholar
Levey, Daniel, and Young, Andrew T.. “The Real Thing: Nominal Price Rigidity of the Nickel Coke, 1886–1959.” Journal of Money, Credit, and Banking, 36, no. 4 (2004): 765–799.CrossRefGoogle Scholar
Lichtenstein, Nelson. “Two Cheers for Vertical Integration: Corporate Governance in a World of Global Supply Chains.” In Corporations and American Democracy, edited by Lamoreaux, Naomi and Novak, William, 329–358. Cambridge: Harvard University Press, 2017.Google Scholar
McCurdy, Charles W. “American Law and the Marketing Structure of the Large Corporation, 1875–1890.” Journal of Economic History, 38, no. 3 (1978): 631–649.CrossRefGoogle Scholar
Paul, Sanjukta. “Antitrust as Allocator of Coordination Rights.” UCLA Law Review, 67, no. 2 (2019): 1–64.Google Scholar
Power, Thomas J. “Fast Food Sweatshops: Franchisors as Employers Under the Fair Labor Standards Act.” City University of New York Law Review, 19, no. 2 (2016): 337–372.Google Scholar
Rudnick, Harry L. “General Counsel’s Report.” IFA Legal Bulletin, 1, no. 1 (1967): 25–29.Google Scholar
Rudnick, Lewis G. “The Pathology of the Franchise Relationship.” IFA Legal Bulletin, 1, no. 2 (1967): 244–57.Google Scholar
Rudnick, Lewis G., and Dickens, John F.. “Franchisors May Be Responsible for Franchisee Wage/Hour Violations—How Much Control Is Too Much?” IFA Legal Bulletin, 12, no. 9 (1978): 10–17.Google Scholar
Tomaskovic-Devey, Donald. “The Relational Generation of Workplace Inequalities.” Social Currents, 1, no. 1 (2014): 51–73.CrossRefGoogle Scholar
Zeidman, Philip F. “Things Go Even Better for Coca-Cola: Territorial Restriction Verdict Set Aside.” IFA Current Legal Digest, 10, no. 7 (1976): 11–13.Google Scholar
Zeidman, Philip F. “Supreme Court Adopts View Urged by IFA in Sylvania Case: Franchisors Can Now Try to Justify Territorial Restrictions.” IFA Current Legal Digest, 11, no. 8 (1977): 10–18.Google Scholar
Zwisler, Carl E. “New Jersey Senate Committee Agrees to Restrict Franchise Indemnification/Warranty Bill to Motor Vehicle Industries.” IFA Current Legal Digest, 10, no. 10 (1976): 1–3.Google Scholar
“Franchise Selling Catches on.” Business Week, February 6, 1960, 90–94.Google Scholar
Johnson, Darell L. “How Important Is SBA Lending to Franchising?” FranData, April 2, 2015. www.frandata.com/how-important-is-sba-lending-to-franchising-2.Google Scholar
Federal Trade Commission. Annual Report. Washington, DC: U.S. Government Printing Office, 1975.Google Scholar
Federal Trade Commission Ad Hoc Committee on Franchising. Report of the Ad Hoc Committee on Franchising, 1969. Obtained through interlibrary loan via the WorldCat library database. Also posted online as of November 14, 2019, to https://play.google.com/store/books/details?id=JwzdLLrX9E0C&rdid=book-JwzdLLrX9E0C&rdot=1.Google Scholar
Lewis, Edwin H., and Hancock, Robert S.. The Franchise System of Distribution. Prepared by the University of Minnesota under the Small Business Administration Management Research Grant Program, 1963. Obtained through interlibrary via the WorldCat library database. Also posted online as November 14, 2019, to https://babel.hathitrust.org/cgi/pt?id=uc1.b3116203&view=1up&seq=7.Google Scholar
U.S. Congress, House. Subcommittee on Commercial and Administrative Law. Hearings on the Franchise Relationship. 106th Cong., 1st sess., June 24, 1999.Google Scholar
U.S. Congress, House. Subcommittee on Consumer Protection and Finance. Hearings on the Franchising Termination Practices Reform Act. 94th Cong., 2nd sess., March 9–11, 1976.Google Scholar
U.S. Congress, House. Subcommittee on Minority Small Business Enterprise and Franchising. The Role of Small Business in Franchising. 92nd Cong., 1st sess., June 20, 1973.Google Scholar
U.S. Congress, Senate. Committee on Commerce. Hearings on the Fairness in Franchising Act. 94th Cong., 2nd sess., April 7, 1976.Google Scholar
U.S. Congress, Senate. Subcommittee on Antitrust and Monopoly. Distribution Problems Affecting Small Business. Part 1: Franchising Agreements. 89th Cong., 1st sess., March 2–4, 1965.Google Scholar
U.S. Census Bureau. “Core Business Statistics Series: Franchise Status for Selected Industries and States.” Economic Census 2012 (accessed September 18, 2019). https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk.Google Scholar
Federal Trade Commission Public Records Request. Documents in possession of the author.Google Scholar
Small Business Administration Archive. Record Group 309. National Archives Building, College Park, MD.Google Scholar