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

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.

What Do Franchisees Do? Vertical Restraints as Workplace Fissuring and Labor Discipline Devices

“…From the beginning, franchisors looked on vertical restraints as a substitute for formal vertical integration and a mechanism to enable workplace fissuring (Callaci 2021a). Vertical restraints allowed them to centrally command economic activity similar to fully vertically integrated chains, but without the risks, costs, and legal obligations that went with formal integration, ownership of assets, and employment of workers.…”

“…This article also contributes to the literature on vertical restraints, those competition restrictions in agreements between firms or individuals at different levels of the production and distribution process, such as price, supplier, and customer restrictions. Callaci (2021a) and Hafiz (2021) implicate the relaxation of antitrust prohibitions on vertical restraints since the 1960s as a key policy mechanism enabling the creation of franchised businesses. As Callaci shows, franchisors led the efforts to legalize vertical restraints under antitrust law.…”

Intellectual property, technorents and the labour share of production

“…The Reagan administration weakened protections for unions after 1980 (Lichtenstein, 2013). Second, the International Franchise Association won court, Federal Trade Commission and National Labor Relations Board decisions that enabled franchisors to license brands and trademarks to their franchisees, to tightly control the nature of their operations and to supply critical inputs while avoiding legal responsibility for their workforce and anti-trust litigation (Callaci, 2018).…”

“…In the early 1960s – well before the ICT revolution – franchise firms in the US restaurant and hospitality sectors created the International Franchise Association, which lobbied to legalize the franchising business model. Franchising per se was illegal under 1960s US anti-trust law, as it involved a corporation (the franchisor) dictating prices and business practices to franchised resellers; these are classical vertical restraints on trade (Callaci, 2018). If the franchisor effectively controlled the franchisee and its employees, then it would be a Fordist-style integrated firm, making it legally responsible for providing employment benefits and liable for labour law violations.…”

Discrimination and Monopsony Power

“…For example, the federal real minimum wage has been allowed to decrease considerably from its high in the late 1960s. Franchise law has been remade to allow franchisors to exert more power on franchises and ultimately the workers at the ground level (Callaci, 2021), and antitrust laws have been increasingly used against workers instead of businesses—even though firm concentration has increased dramatically over the last four decades and labor unions and strikes have plummeted (Vaheesan, 2018).…”