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.