Good Cause Statues Revisited: an Empirical Assessment
Abstract: One of the most vital debates in franchise law focuses on whether states or federal law should adopt “good cause statutes” (GCSs), which require franchisors to show “good cause” before terminating contractual relations with a franchisee. The traditional law and economics analysis suggests that GCSs are inefficient. This inefficiency argument is based upon one central hypothesis: GCSs increase franchisee free riding since they limit the franchisor’s ability to terminate the franchise contract easily. The free riding hypothesis has been significantly influential in the development of franchise law, as is evident in state and federal statutory regimes. To date, the majority of states and the Federal government have refused to adopt GCSs. This paper investigates the free-riding hypothesis empirically, and finds it wanting. Direct examination of consumer satisfaction in one of the industries most notoriously susceptible to free-riding, hotels serving non-repeat travelers, shows no significant differences between franchises subject to ‘at will’ laws and those subject to a GCS. We gathered a sample of 3,442 franchised hotels, measured each one along several dimensions of quality, and assessed potential differences using multiple econometric methods. In none did the ‘at will’ states outperform the ‘good cause’ ones. Implications of our empirical results on the debate over GCSs are discussed. We suggest a more nuanced approach to the enactment of GCSs and the debates surrounding it. In any case, one argument can no longer be made: that GCSs increase franchisee free-riding. The customers of hotels in our sample say otherwise.
