Federalism, Variation, and State Regulation of Franchise Termination

This article discusses and expands on our recent work examining the effects of franchise-termination laws. In a prior article, we examined empirically the effect of franchise-termination laws on the level of franchise activity. Our analysis improved upon the prior literature in two major ways. First, our work exploited two new sources of panel data to provide new empirical evidence on the effect of franchise termination laws. Second, our analysis examined variation in states’ restrictions on the ability of franchisors and franchisees to contract around a particular state’s regulation. We found that the effects of termination laws on the overall level of franchise activity are negligible when states do not limit the parties’ ability to contract around the laws, but become significant when states impose such limits. Our results show that contracting parties’ ability to exit from a state’s regulations is a significant factor in determining the effect of regulation, and should be taken into account by policy makers. It also demonstrates the importance of taking state variation into account when analyzing the effect of state regulation. This article further examines these issues. We discuss the policy issues related to contractual exit from state regulation. In addition, we present further evidence on the effects of variation in franchise regulation by examining the marginal effect of giving franchisees a right to cure violations