California Legislature resolves fast food franchise battle but another industry still rages

The California Legislature devoted much of its time this year to a battle over regulating wages and working conditions of fast food workers.

Last year, legislators and Gov. Gavin Newsom created a state agency that would oversee the fast food industry, which fought back with a referendum asking voters to overturn the new law, arguing that it would undermine the franchise business model.

With the referendum qualified for the ballot, the battle was rejoined this year with a proposal to make parent companies liable for labor law violations, further eroding the franchise model.

Ultimately, the clash was resolved with a compromise that gave sponsors of the legislation, unions mostly, what they wanted, including a new $20 minimum wage, but removed the threat to the franchise system. Newsom signed the compromise legislation, Assembly Bill 1228, last week, and the fast food industry will remove its referendum from the 2024 ballot.

“Signature of AB 1228 preserves the franchise business model in the state and solidifies the best possible outcome for workers, local restaurant owners, and brands,” Matt Haller, president of the International Franchise Association, said in a statement.

While the fast food battle drew much media attention, there was another, much quieter clash over the franchise business model, involving a much more important segment of the consumer economy: new car sales.

This one, however, pitted auto manufacturers against their own franchised dealers in California and it’s still underway as each side tries to persuade Newsom to favor its position.

During the 1930s, as the nation’s auto industry consolidated into a few major manufacturers, they created a system for selling their vehicles through local franchised dealers.

When European and Asian automakers began peddling their vehicles in the United States after World War II, they also adopted the franchise system.

Dealerships often became major businesses unto themselves, particularly when corporations acquired multiple franchises. And it is common knowledge that dealerships profit handsomely from after-sale maintenance and repair work for their new car customers, as well as used car sales.

In many states, holders of valuable new car franchises bolstered their monopolies by persuading legislatures to pass laws making it illegal for anyone other than franchised dealers to sell new cars.

Relationships between automakers and their franchisees haven’t always been smooth and their clashes have often reached the political arena, but the underlying system has remained intact.

Then Elon Musk and Tesla came along.

Musk refused to sell his revolutionary, battery-powered cars through franchised dealers and set up his own dealerships, incurring the wrath of franchisees. Tesla waged legal battles in states that had barred or limited its direct sales to customers.

By and by, however, as major manufacturers began making their own electric cars, they began toying with the notion of emulating Tesla and bypassing franchises in favor of direct sales.

Franchised dealerships see that as a threat to their place in the multibillion-dollar business of selling and servicing new cars. In California alone, upwards of 2 million new cars and light trucks are sold each year.

Enter Assembly Bill 473, introduced at the behest of the state’s franchised new car dealers. It would put some tight restrictions on the ability of automakers to bypass the franchise system and also deals with other aspects of the business such as construction of electric car chargers and subscription services to new car owners.

The automakers mounted a lobbying campaign to block the bill but it survived committee and floor votes and has landed on Newsom’s desk.