Mar 29, 2013 - Litalien's presentation examined several situations where he and others have used what they call "social
Social Franchising: Beyond Traditional Commerce New York Law Journal March 29, 2013 Rupert M. Barkoff In the last year or so, "social franchising" has been the subject of study and discussion in academic circles. At the International Society of Franchising's 27th Annual Conference, the subject of social franchising was discussed in two presentations, one by Elizabeth Crawford Spencer, an associate 1 2 professor at Australia's Bond University, and the other by Benjamin Litalien, an assistant adjunct professor at the University of Maryland. Litalien's presentation examined several situations where he and others have used what they call "social franchising" to achieve their clients' goals, which are of an educational, religious, charitable, scientific, or literary nature, or otherwise intended to improve the world we live in. While the term social franchising is difficult to define, it applies to organizations and entities, such as nonprofits, in existence to achieve social benefits, not purely commercial profit. It is advantageous to nonprofits because it allows for a licensorlicensee relationship rather than creating a governance structure over local chapters that could expose it to third-party liability. Spencer's approach at the conference was more analytical, addressing the dual questions of how to define "social franchising," and in what situations it has been, or could be, applied in the real world. As Spencer noted in her presentation, it is a concept that is not well defined. One might even say that it almost means whatever one wants it to mean. Spencer has come across many definitions of this term in her research. To discuss the term "social franchising" meaningfully, the proper starting point, I believe, is to determine what it is that most believe it is and is not. I think the term clearly excludes what I characterize as pure commercial franchising, where the profits and goodwill of a business relationship between two parties accrue only to the benefit of individuals and profit-seeking business enterprises. I also believe there would be agreement among Spencer, Litalien, and me on this point. In this model, it is all about profit. As we all know, there are thousands of systems in the United States and abroad that utilize franchising to make money for the franchisor and franchisee. But there are at least three other models, each of which might be considered as social franchising arrangements.
Model 1 In the first of these models, we have a nonprofit enterprise, the "parent," entering into an arrangement with another nonprofit, the "licensee." Profit and economic interests are not the primary objective of either of the participants in this arrangement. Historically, nonprofit enterprises tried to spread their message and activities using a "chapter" model—in which the parent would establish local chapters that carried out its objectives, usually within a defined territory or market. The arrangement typically would be memorialized in constitutional documents, such as charters or bylaws. These documents made the licensee a part of the parent organization and spelled out the rights and obligations of the chapter and its members within the parent organization. Recently, it has occurred to some of us that using a framework based on franchising may be a better way to achieve the goals of many nonprofit organizations than a "chapter" model. In the franchise model, rather than having the arrangement be a matter of internal governance, the relationship is defined by a licensing agreement or, essentially, a franchise agreement. Just as in a commercial franchise
relationship, this document would grant the licensee the right to use the parent's trademarks and system. The parent would have the right to control, to a degree greater than the control level necessary for maintenance of trademark protection, the activities of the licensee, and could provide various types of assistance to the licensee in establishing and maintaining its operations. There might be a fee charged, but usually this fee would be intended primarily to cover costs. This might not be the case in a chapter model. The advantages of Model 1 over the chapter model are threefold. First, the legal document could spell out in greater detail what would be expected of the parties vis-à-vis each other and would constitute a formal, legal and enforceable contract, rather than a mere internal governance document. It would, most likely, be unchangeable without the consent of both parties, giving the licensee a greater level of input in the relationship. Second, this arrangement would give a licensee a higher level of independence, which should have more appeal to the licensee's stakeholders. I conceive that under this model, a licensee would have its own board of directors, establish its own rules of internal governance, and handle its own financial affairs. Third, the arrangement could better insulate the parent from third-party liability than would the old chapter model, in which the "licensee" is typically not a legal entity. This benefit, to some degree, would depend upon how much control a parent would assert over the licensee. The more control, the less protection a parent would have from third-party claims. Note that the chapter model can be engineered to give a "licensee" equal, and possibly greater, benefits than those described above and appear very close to resembling a franchise.
Models 2 and 3 The structures of Models 2 and 3 are essentially identical to that of Model 1, but the stakeholders are notably different. In Model 2, the licensee is, again, a nonprofit organization, but in this model, the parent is, directly or indirectly, an individual or for-profit organization. Actually, the franchisor could be a nonprofit entity, but typically it would be controlled by a profit-oriented group. Why does this arrangement have appeal? Because of the advantages of Model 1. Only here, the purposes of the parent would not be purely focused on social benefit. Take, for example, an organization like the Ronald McDonald House, whose purpose—to provide housing for parents of seriously ill children who are hospitalized—to be a benefit to the communities where these facilities are located. At the same time, it would be naïve to think that the sponsor is not enhanced by its affiliation with these facilities. It is said in some religions and cultures that the best form of charity is that which is given anonymously. This is true perhaps, but examples like the Ronald McDonald House are not a bad second. And that brings us to Model 3, in which the parent is a nonprofit, but its licensee is not. Litalien gives as an example of one of his nonprofit clients, which purchased franchising rights within the confines of a major state from a growing franchisor. My understanding is that the profits of this business would be used to further the purposes of the nonprofit parent. Is Model 3 really social franchising? Does it benefit society in a noneconomic way? Is this the test for whether an activity constitutes social franchising? Litalien argues that frequently these arrangements promote employment that furthers the purposes of the nonprofit, such as in the case of Goodwill Industries. And in other circumstances, the parent has excess funds that need to be invested rather than lay idle. Should the nonprofit only invest in very safe opportunities like blue chip stocks and bonds? Why should a nonprofit be restricted from making more radical investments, especially those that require a parent to provide active management. I do not want to put words into Litalien's mouth, but I believe he would put his imprimatur on such aggressive investment strategies for nonprofits. I suspect Spencer would be more suspect, as am I, as to whether such arrangements are "social franchising." I can't exactly put my finger on why I am cold to aggressive investment strategies. However, I suspect that, deep within me, I sense that such arrangements affect competition in the marketplace, and I am not sure I would condone using funds
donated for a worthy cause to give one competitor an advantage over another. Is such an advantage consistent with a nonprofit's raison d'étre? But, in the end, the important question is: Can franchising be used to make nonprofits better contributors to society? The answer is "Yes." Is it important what moniker we put on this phenomenon? I think the answer here is "No." To paraphrase Shakespeare, we want the rose, and should not care that much what we call it. Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Townsend & Stockton where he chairs the firm's franchise practice. He is coeditor of the American Bar Association's Forum on Franchising's "Fundamentals of Franchising" book, a primer on franchise law. Endnotes: 1. E.C. Spencer, "Deriving Meaning for Social Franchising from Commercial Franchising and Social Enterprise," International Society of Franchising, 27th Conference (2013). 2. B. Litalien, "Social Franchising: A New Paradigm for a Global Change," International Society of Franchising, 27th Conference (2013). Reprinted with permission from the March 29, 2013 edition of The New York Law Journal ©2013 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.
