When you walk into a McDonald’s, it looks like one company. But legally, the person making your fries probably doesn’t work for McDonald’s at all. Brian Callaci, Chief Economist at the Open Markets Institute and author of Chains of Command, joins Nick and Goldy to explain how franchising became a blueprint for corporate control without responsibility — shifting risk, liability, and labor costs onto franchisees and workers while profits flow upward.
Brian Callaci is the chief economist at the Open Markets Institute and author of Chains of Command: The Rise and Cruel Reign of the Franchise Economy.
Social Media:
Further reading:
Chains of Command: The Rise and Cruel Reign of the Franchise Economy
Franchise: The Golden Arches in Black America by Marcia Chatelain
Sectoral bargaining FAQ: Collective bargaining, sectoral wage and standards boards, and worker power
Continental T.V., Inc. v. GTE Sylvania, Inc., 433 U.S. 36 (1977)
Website: http://pitchforkeconomics.com
Facebook: Pitchfork Economics Podcast
Bluesky: @pitchforkeconomics.bsky.social
Instagram: @pitchforkeconomics
Threads: pitchforkeconomics
TikTok: @pitchfork_econ
YouTube: @pitchforkeconomics
LinkedIn: Pitchfork Economics
Twitter: @PitchforkEcon, @NickHanauer
Substack: The Pitch
Nick Hanauer:
The rising inequality and growing political instability that we see today are the direct result of decades of bad economic theory.
Goldy:
The last five decades of trickle-down economics haven’t worked, but what’s the alternative?
Nick Hanauer:
Middle out economics is the answer.
Goldy:
Because the middle class is the source of growth, not its consequence.
Nick Hanauer:
That’s right.
Announcer:
This is Pitchfork Economics with Nick Hanauer, a podcast about how to build the economy from the middle out. Welcome to the show.
Goldy:
I think, Nick, one of the big differences between the two of us is that whereas I’ve never worked at a franchise like a fast food restaurant, you’ve actually been a franchisor.
Nick Hanauer:
It’s true. It is true. It is true. Yeah, my family-
Goldy:
Class difference here.
Nick Hanauer:
Yeah, it is. This is probably why I have lots of hair and you don’t, please.
Goldy:
Yeah, that’s right.
Nick Hanauer:
Today on the pod, we’re going to talk about franchising with a guy who knows a lot about it. Brian Callaci is a chief economist at the Open Markets Institute, and he has a new book out on franchising called Chains of Command, and he has a lot of really mean things to say about franchising and franchisors.
Goldy:
People like you.
Nick Hanauer:
Like me.
Goldy:
Right?
Nick Hanauer:
Yeah. So I’m feeling a little bit defensive.
Goldy:
Okay.
Nick Hanauer:
And just to be clear, so in the distant past, when I was working full-time for my family’s bed pillow and down comforter business, we owned part of, or partners with, a company called Scandia Down, and we sold high-end down comforters and pillows via franchised stores around the country. And so I didn’t run the company. I think we had a small piece of it, but it was an important part of the family business. It was something I knew a lot about. And I definitely didn’t think that we were being evil back then. I don’t have any memories of being evil. I may have repressed the bad parts, but-
Goldy:
Because America has no history of pillow magnets being evil.
Nick Hanauer:
Except for one. Yeah. Why did that fucking guy have to be in the pillow business, right? Most of us pillow people are decent people.
Anyway, and yet at the same time, Brian’s book points out a lot of problematic aspects of this business model, and a lot of it is very, very sobering. I think we should talk to Brian about the pluses and minuses of it and learn what we can about the evils of franchising.
Goldy:
Yeah. Okay, great. Let’s talk to Brian.
Brian Callaci:
Thanks for having me. My name’s Brian Callaci. I’m the chief economist at the Open Markets Institute. It’s an anti-monopoly focused think tank based in Washington, DC, although I live in Peekskill, New York. And I just wrote a book called Chains of Command: The Rise and Cruel Reign of the Franchise Economy, which is out now at bookstores and online at bookshop.org from University of Chicago Press.
Nick Hanauer:
Great. That’s fantastic.
Goldy:
That word cruel seems like some editorializing.
Brian Callaci:
Yeah. Yeah.
Nick Hanauer:
Let me start out by saying that I’m a recovering franchisor.
Brian Callaci:
Oh.
Nick Hanauer:
As you may know, I’ve helped run a million different businesses, but in my early years, we had a franchise business called Scandia Down Corporation, and we sold down comforters and pillows and so on and so forth through a network of franchisees across the United States, and I don’t recall us being evil.
Goldy:
Or cruel, Nick?
Nick Hanauer:
Yeah.
Goldy:
Are you telling me that you-
Nick Hanauer:
I don’t-
Goldy:
… didn’t sell cruel comforters?
Nick Hanauer:
Yeah. No, I don’t remember being racked with guilt about what we were up to. It seemed like the best way to build a retail presence around the country, and the franchise construct, from our point of view, made a lot of sense. You have independent business people who make investments, which means you don’t need the capital to expand. And obviously, you engage their intense interest in the success of the enterprise, for better or worse, sometimes worse, sometimes better, and their knowledge of their local market and so on and so forth. And I do remember having the occasional conflict with the franchisees over processes and procedures and what’s appropriate and what’s not and what prices you can sell things at, like stuff that you worry about if you’re trying to build a national brand, but I don’t recall any of the evil practices that you elaborate.
So I guess my question is, just to kick off the conversation, is franchising intrinsically evil? Which is kind of where you end up where if you read your book, or is it like everything else in American life, it just got corrupted over time?
Brian Callaci:
Yeah. So the word cruel is in the title, but what’s cruel is the franchise economy, not individual franchisors who have built their businesses on this legal structure. So as a social scientist and economist, I try to focus on these systemic issues, and some of the worst abuses that we find in franchising are really more…
So you have these two layers, you’ve got the franchisor who owns a brand and licenses the use of that brand to the proprietary, the franchisee, and then you’ve got workers. And there is in my… This is a little bit outside the book, but in my other econometrics sort of type research, we do find some heterogeneity or variety between industries and between franchisors and how the model is run. So I don’t think the answer is to fix the hearts of good franchisors and that kind of thing. It’s more of that there is this legal structure that is just an open door for avoiding the whole apparatus of particularly labor and employment, but liability and other types of regulations that we have to hold corporate actors accountable for the consequences of their actions, good or bad.
That was, it wasn’t every franchisor, but there was a group of them, they’re still around today, called the International Franchise Association, the Trade Association, who did through a concerted and very, have to give them credit for it, imaginative and sharp elbowed effort of litigation and lobbying, created this loophole in between our various bodies of law that allowed their business model to exist and enable the abuses. And I would say, we can get to this later, but a lot of other business models have been built on that legal architecture, including Amazon with their outsource delivery program all the way up to Uber and Lyft. And the key there is that franchising allowed these business models where you get all of this intense control if they want it. Not every franchisor does exercise that kind of minute, even up-to-the-minute control over their so-called independent franchisees, but many of them do. That structure was not legal until franchisors created it in the 1960s and 1970s.
Nick Hanauer:
Okay.
Goldy:
Yeah. You remember the International Franchise Association, Nick. They’re the ones who sued-
Nick Hanauer:
That’s right.
Goldy:
… to block Seattle’s minimum wage.
Nick Hanauer:
That’s right. Our old friends at the IFA. Yeah, I remember that. Oh my God, you’re bringing back happy memories. We crushed those bastards.
Goldy:
Yeah, we did crush them.
Nick Hanauer:
Yeah.
Brian Callaci:
Love to see it.
Nick Hanauer:
Yeah. Okay. Taking you a little bit off track or the interview a little bit off track, let’s back up. And why don’t you… Not everybody listening to this podcast has been a franchisor or a franchisee. Let’s start at the beginning and just explain, what is the construct? Where did it come from and what are the problems with it?
Goldy:
Yeah, and importantly, everybody purchases goods and services from franchisees without knowing it often. So get a little definitional here and lay out what it is and how large a part of the retail economy it is.
Brian Callaci:
So franchising, the basic structure is you’ve got a company that has some intellectual property, a trademark, in this case, that they then license to a independent proprietor to operate an outlet and establishment under that brand name, and in exchange for that, they have to follow the detailed rules and prescriptions of the franchisor, which we can get into how intense those are, but they can be quite minute and intense.
Nick Hanauer:
Okay. But just to be clear, I’m just feeling a little defensive.
Goldy:
Will somebody just pity the poor billionaires? Oh my God, it’s really tough on them these days. Massage his ego a little bit, Brian.
Nick Hanauer:
Shut up.
I mean, the franchisor has to have a little bit more than a trademark, right? I mean, what the franchisor is selling is a product or a service. And that product is, if it’s worth buying a franchise for, is going to be a unique product. And associated with that product are going to be a lot of processes that enable an independent operator to deliver that product in a way and at a service and quality level, which is consistent with that trademark and brand, right? So that’s what you’re buying. You’re not buying a logo, you’re buying effectively a business model.
Goldy:
Business in a box plus the marketing and the-
Nick Hanauer:
Yeah, the brand associated with it, the supply chain. You’re buying almost certainly-
Goldy:
You’re McDonald’s, you’re not sourcing your own french fries.
Nick Hanauer:
No. Definitely not. And if you were buying a Scandia Down franchise, you were buying down comforters and pillows from us to our specifications and exactly what we wanted you to sell. And I think it’s important just to say because-
Goldy:
Man, you are defensive today.
Nick Hanauer:
Yeah. Well, I mean, there are good reasons for that because you can’t build a good national brand any other way.
Brian Callaci:
And that was one of the attractions for these franchisees who bought franchises, but a lot of it was, particularly in the early days, is the national brand names also meant there’s market power with that.
Nick Hanauer:
Of course.
Brian Callaci:
And you could know, you see over and over again in historical record franchisees saying, particularly Black franchisees who were frozen out of these opportunities in the initial years. It was a wonderful book by Marcia Chatelain called Franchise that goes into that, but they would say, “Yeah, I would’ve loved to open Brian’s donut shop, but I couldn’t compete with Dunkin’ Donuts, so I had to buy the brand name.” And not to say anything about your franchise business-
Nick Hanauer:
It’s okay.
Brian Callaci:
… which I’m sure was a wonderful one, but there’s a wonderful movie about this actually called The Founder about McDonald’s.
Nick Hanauer:
Oh, yeah, yeah. It’s a great movie.
Brian Callaci:
Ray Kroc was a famously vindictive guy. And he basically… They agreed to sell it to him, but once he had the McDonald’s name, the McDonald’s brothers thought they could even operating the restaurant, the model, the business model that they had invented, just keep doing it under a different name. I think it was called Big M’s or something, and Ray Kroc opened a McDonald’s right next to their business and put it out of business. It was more than just the operational prowess. The brand name really counted for something.
Nick Hanauer:
Of course.
Brian Callaci:
But yeah, to your point about why this sort of arose, I think you explained it at the beginning very well, which is that the founding generation of franchisors, and they were very impressive entrepreneurs and visionaries. I wouldn’t take that away from them. Ray Kroc at McDonald’s, Bill Rosenberg of Dunkin’ Donuts and so forth, they had the ambition to build out national chains of restaurants. And those already existed, things like White Castle, but White Castle owned the restaurants, they employed the workers, and that grows a little more slowly than a franchise model, where-
Nick Hanauer:
Yes, it does. It’s much harder.
Brian Callaci:
… you tap the capital of these investors who also work. They supply capital and labor and you don’t have to take out bank loans or equity. And so franchising solved those problems. So franchisees put up their own capital and they fork over a percentage of their sales. It’s usually between 10 and 20% to the trademark owner and they keep what’s left, and that of course motivates them and incentivize them to work pretty hard and to follow the rules unless they use access to that system and intellectual property.
Nick Hanauer:
Correct. Yeah.
Brian Callaci:
It did also allow franchisors to sidestep the New Deal era regulatory apparatus that guaranteed worker rights and protected independent business proprietors from control by large corporations. And they were explicit about this, “We want to have White Castle, but we don’t want the legal liabilities that White Castle faces if their workers want to unionize, if their workers want to file a wage and hour claim against us, or if coffee’s too hot, as a famous case and it burns a customer. We don’t want any of that. We just want the national branded chain aspects of it.” And they got that. They succeeded in getting that.
Goldy:
And that was very explicit. A lot of these franchise founders were very anti-labor and the franchise system was a way to get around these labor regulations and make it hard to unionize. We see this today with people trying to unionize individual stores. You can’t unionize McDonald’s because there’s all these different… It’s not a McDonald’s. You’re unionizing a franchisee who may own a store or-
Nick Hanauer:
Three employees.
Goldy:
Maybe a dozen or whatever.
Nick Hanauer:
Yeah. Yeah.
Brian Callaci:
Yeah, and that’s absolutely part of what happened, and that was part of the appeal of the business model. And again, none of this stuff was secret. This is what they said they were trying to do and they achieved it. I think that what franchising does is there’s sort of two mechanisms going on with that sort of legal separation. First of all, there’s the exclusion. Just those legal lines act as barriers of exclusion. So you think about how we had a mid-century middle class, General Motors was a vertically integrated corporation and it employed a lot of people, not much was subcontracted. So whether you were a janitor at General Motors or a production worker or a secretary, you had both a moral social claim and a legal claim as a member of the United Auto Workers on all those profits of General Motors, and McDonald’s did not want that. They wanted to be able to exclude workers from being able to access those rents, we call them in economics, but all those profits.
And the second advantage of franchising is again, those incentives, and those incentives can be… There can be good things about having an independent franchisee under a franchise contract, having skin in the game. More than a salaried manager, they are going to be extra motivated to do a really good job, to work hard, to do all of those things, and that’s aligning incentives. That’s how a good business should run. But the problem comes into what are they incentivized to do. And in the case… I particularly focus on fast food because that’s a very labor-intensive industry, and what those franchisees are incentivized to do, because they don’t control their own prices, they don’t control the hours they operate, they don’t control their suppliers. They don’t control, if I mentioned prices yet, but they don’t control their own prices in many cases. The only thing that really is left for them to control is their labor costs.
Nick Hanauer:
Yes, correct.
Brian Callaci:
So they are basically labor supervisors. They’re middle managers, they’re the line supervisors, and they are very focused on both driving wages down as low as possible and on working those workers as much as possible. Saying everyone who has worked with fast food has heard, “If you can lean, you can clean.” These are unlike salaried managers, there’s really no downtime. And it’s also, it’s not designed for productive, harmonious, mutually respectful labor relations. Those franchisees are under intense pressure to keep those labor costs down. And it’s not a model for harmonious small business labor.
Goldy:
I mean, because to be clear, it’s one of the few things they can control. They’re business owners, because you use this phrase in control without responsibility. That’s the franchisor. That’s Nick. He had control without responsibility, especially in that cost.
Nick Hanauer:
Living the dream.
Goldy:
But the franchisee themselves has very little control. Even like with McDonald’s, they don’t get to choose their location. They’re leasing from McDonald’s. McDonald’s builds the rest-
Nick Hanauer:
McDonald’s is basically a real estate company, isn’t it?
Goldy:
Yes.
Nick Hanauer:
Yeah.
Goldy:
Right. So they’re also locked into a lease with McDonald’s as well as the franchise contract.
Nick Hanauer:
So can I just zoom in on this? Because I think you make a good point, which I’d never considered, which is that, look, every business is trying to control its labor costs, right? You try to control what you can control. But in the case of franchises, you are right. If you take away the need to control your inputs and you don’t need to control your advertising and you don’t need to control your location, all you’re controlling really is your workers. I acknowledge that that must put extra pressure on that element of it.
Okay, so tell us more.
Brian Callaci:
Sure. Yeah. So the history here is sort of when franchisers first got this started, their concern was actually not labor law. I mean it was, but they were much more concerned about antitrust law, which blew my mind when I first started digging into this. I’m an economist, but I decided for some reason to go into some of the legislative and litigation history. And thankfully for me, the International Franchise Association had a very robust publishing policy in the 1960s. So all these discussions were happening out loud. And so the issue here was that… And they pioneered the model that we hear about now is move fast and break things business model. Franchises were doing this in the 1950s and 1960s where they knew what they were doing was not really legal. They did it anyway, and then that would trigger litigation and then they would help with the…
Nick Hanauer:
What element of it was not legal? I don’t understand.
Goldy:
Well, a lot of states had restrictions on chains, right?
Nick Hanauer:
Yeah. That was in the good old days before Bork. Right?
Brian Callaci:
Right. Yes.
Nick Hanauer:
Yeah. I mean, we used to live in a world which affirmatively advantaged small business.
Goldy:
But not being corporate-owned, did they go into these states that had limits on chains and said, “Oh no, these are locally owned businesses.” Is that part of their argument?
Brian Callaci:
Well, the chain store tax issue is an interesting one. It is part of the impetus for the invention of franchising with chainstore taxes. And a lot of the innovators here were actually petroleum companies who created sort of the first franchise models, Shell, Texaco, I mean oil-
Goldy:
The gas station.
Brian Callaci:
Yeah, gas stations. And they also pioneered the McDonald’s model of owing the real estate under the dealership or the gas station. And the reason for that is not just trying to make money from rent, but you can evict the so-called independent business owner from their own business, and so you don’t have to worry about triggering a chain store tax, which is based on control, not just ownership. I’m not telling what price to charge. He just knows that if he doesn’t charge the price that I want him to charge, I’m going to evict him and there goes his business.
So there was a bunch of cases like that up through the 1960s and ’70s where courts up to the Supreme Court looked at franchisees and enforced this notion that has deep roots in American antitrust and anti-monopoly, that there has to be some meaning to being an independent business owner. That comes with autonomy and the right to, not unlimited, but rights to run your business as an independent business, and what franchisors were doing was conflicting with that because in antitrust parlance, they’re called vertical restraints, but McDonald’s is telling the franchisee in very minute detail, “Again, this is the price, these are the suppliers you’re going to use, this is the hours you’re going to operate.” And the franchisees who are promised independent business like, “Wait a minute, I thought I was independent.” So they filed lawsuits under antitrust laws, and in some cases they won.
So the franchisors, that put them into a bit of a panic, “Well, we need to stop this.” And they were allied with the University of Chicago intellectuals like Bork. Bork spoke. He was a featured guest at the very first legal strategy meeting that the International Franchise Association held in 1962 before he was Robert Bork. And yeah, so there was this effort to overturn those laws. And then once they got this right to control, this right to control with this 1977, the famous case, Continental TV… Famous in antitrust, but Continental TV versus GTE Sylvania, then because they won that control, they started to face all of these other dangers to them of work because in most bodies of employment and labor law, it’s the control that makes you an employee. Employee is the person who obeys. If you are ordered around, that makes you an employee.
And franchisors had won the right through antitrust to order people around. They had overcome this antitrust anxiety about corporate control over independent, the yeoman farmer, the small gas station dealer, et cetera. And now they had that control. Now we have this whole issue of labor rights. The reason why we started this was to not have those burdens and regulatory complaints. So they opened this loophole and they’ve been defending and expanding it ever since through the 1980s, 1990s up to the present.
Goldy:
Man, how did we ever win that minimum wage case? Because the issue in Seattle was we had a different rate for large businesses and we counted-
Nick Hanauer:
Franchises as large businesses.
Goldy:
… franchises as the size of the franchisor, not the franchisee, and we won.
Brian Callaci:
Yeah. So you made the correct argument and you were able to win and I was thrilled to see it.
Nick Hanauer:
Yeah, they screamed bloody murder.
Brian Callaci:
Yeah, it would ruin them. And guess what?
Goldy:
It was hilarious.
Brian Callaci:
And there are still plenty of fast food restaurants in Seattle, I believe. I’ve been there for a while.
Goldy:
Oh, yeah. Yeah. Yes. This is not a wasteland of shuttered fast food restaurants.
Nick Hanauer:
Okay. So if you were in charge, what would you do? Do you believe that the construct is that we should just get rid of franchises? Or again, I’m being defensive because I do think that there’s validity to this business model. And I do agree that the franchisor needs some control. You can’t build a national brand if everybody’s out doing whatever the hell they want. The number one feature of a brand is consistency. Can’t be one thing one day and another thing another day. Is there a way that we could organize this so you keep the good and get rid of the bad? I mean, what is your view? How should we proceed?
Brian Callaci:
Yeah, I think that there is a way for this to work out, for it to be mutually beneficial rather than exploitative. And the phrase that I used in this book and in previous work is “control without responsibility.” Just like having your cake and eating it too. And that’s the problem, is that there is this control without the corresponding responsibility, and there are numerous ways you can fix that. One of them, they’re not mutually exclusive. A higher minimum wage for workers and franchises, particularly fast food, a very low wage industry will help make sure that those profits are shared with workers. McDonald’s will have to allow the franchisees to keep more of the money to give to the franchisees.
My co-author on some papers, Marshall Steinbaum and Sergio Pinto, have some new research where they look at a huge body of franchise contracts. And they do find that, for example, when franchisors leave some profits downstream, for example, by giving a franchisee a protected territory, those franchisees tend to pay higher wages. So not trying to squeeze every penny out of the franchisees.
The basic problem is the control without responsibility. So I think things like that Seattle model where franchisors are held accountable for the low wages that their policies cause is a major way out. There’s something called joint employer in both employment and labor law that holds the franchisor accountable if they exercise sufficient control, and such that the economic realities of the situation require workers to bargain with McDonald’s, for example, in a union context, rather than with a franchisee who doesn’t have the money. The money goes to the top. So those kinds of policies.
And then on the antitrust front, to me, the problem is not so much the control. The problem is the control without responsibility. So the fact that franchisors are allowed to impose these contracts isn’t the most important thing. But if we roll back some of those Chicago school antitrust victories through the 1970s up to the present where they really allow controls, including over what used to be a third rail of antitrust, things like vertical price fixing, McDonald’s setting prices downstream, let’s just imagine a world where the franchisors had not won those battles if they couldn’t minutely control franchisees, just set sort of quality standards to a lesser extent. We would see more corporate-owned chains, which I don’t think is the end of the world. We’d see more Chipotles and Starbucks, which tend to pay higher wages than your McDonald’s or your Taco Bells. And then you might see more truly independent restaurants rather than just that sort of monotony of strip malls. They would be more truly independent businesses. So I think there’s those sorts of things.
Nick Hanauer:
Yeah. For sure. I mean, I think both Goldy and I would be in violent agreement with the general sentiment that the world would be a better place with less corporate concentration.
Goldy:
And more truly independent business ownership.
Nick Hanauer:
Truly independent businesses.
Goldy:
And communities would be better because-
Nick Hanauer:
Yeah, everybody would be better.
Goldy:
… there’s lots of evidence that shows that that keeps more money in the community than being extracted out to distant corporate headquarters.
Nick Hanauer:
Right. Right.
Brian Callaci:
Totally.
Nick Hanauer:
What are the three biggest things you would change if you had to try to fix this thing?
Brian Callaci:
So joint employer is the big one. I mentioned that’s the legal doctrine where workers have both rights under wage and hour law and under unionization laws against their franchisor. And it’s very interesting the way that the franchisors, particularly their trade association, responded to stronger joint employer rules under, first, the Obama, and then the Biden administration, was to sort of admit that the whole purpose of their business model was to thwart workers’ legal rights under the National Relations Act.
The law of the land still since 1935 is that it is the policy of Congress that worker is to promote collective bargaining. Promote, not just allow. And franchisors say, “Well, if we allow joint employer, that’s going to open the door to unions to unionize our industries.” That is the point of the law, and the fact that they resist joint employers, that’s the main one.
The second one is to roll back some of the particularly restrictive vertical laws, antitrust. These are all judge created legal doctrines. That has nothing to do with Congress. Some of those decisions have really opened the door to… I mean, nowadays, particularly with technology, McDonald’s knows which employee, at the 42nd Street location, it was Greg who was five seconds too slow in servicing that customer. They tell the franchisee, “Do something about that.” And of course the franchisee without being told to will terminate the worker. So those kinds of minute controls.We should return to the sort of 1960s, 1970s doctrines of, there has to be a really good reason for you to impose those kinds of strict contractual controls.
And then third, more experimentally, we could try things like in California, there’s this sectoral bargaining structure where they bring together workers, franchisors, and franchisees all around the same table, including of course representatives appointed by the governor who stand for the public interest as well, but let’s get all sides of the market together and work out a way where this can work for everybody rather than right now where franchisors just have the right to get everything they want without any of the corresponding risks, costs, and responsibilities.
Goldy:
We tend to think of this, or at least I tend to think of this, as trying to address the needs of workers who are exploited under this situation. Obviously, some of the franchisees do very well, else they wouldn’t be doing this. It wouldn’t be such a popular business model, but I presume there’s support amongst franchisees for addressing this imbalance of power within the industry, that this would actually be good for these so-called independent business owners if they actually had more independence.
Brian Callaci:
Yeah. So franchisees have been fighting for rebalancing the power relationships since the very beginning up ’till… Anyway, and they’ve mostly lost, but they’ve had two main beefs with the way that franchising was set up. The first one was their promised independence and they didn’t get it. Workers also accepted a minimum wage employment contract, but the power imbalance means that the better contracts or you don’t have the bargaining power available to you. And it’s also illegal for franchisees to try to collectively bargain. There’s an antitrust, very strict antitrust prohibition.
The way antitrust works is after the Chicago school is anything McDonald’s does unilaterally against its franchisees, that’s legal, but if franchisees try to do anything together the other way, that’s strictly illegal. So reversing that kind of dynamic a little bit on the antitrust side would be helpful.
And I’ll say, I sort of memorized this passage, but there was I think a really illustrative case from… This is 1965, the Senate Antitrust Committee is having a hearing on franchising and the general counsel for the committee, a guy named Jerry S. Cohen, is questioning the chair of the president of the International Franchise Association who’s saying, “We should be able to control everything, especially prices.” And this antitrust lawyer can’t believe his ears. “Well, wait a minute. If you’re telling this franchisee exactly what prices he has to charge, what supplies he has to use, what business he has to operate in, he’s not independent, is he? He’s really more like a manager, a part of your integrated operation.” So franchisees have been fighting, first of all, for a little more autonomy, particularly in things that aren’t that kind of crucial. Franchises are not asking for, “We want to use grade B or whatever beef in the Big Mac.” They want things like-
Nick Hanauer:
Oh, they do it in a minute. Just to be clear, they would do it in a minute if they get away with it.
Brian Callaci:
Right. If they could get away with it, but they’re not pushing for the legal right to do that, I would say. So they want that kind of autonomy.
The other thing is sort of protection from unfair termination or non-renewal, the right to send it to their kids who keep the business in the family, those kinds of things. And the way that the kind of regulation that we actually got, the regulation through the Federal Trade Commission that franchisees have, none of them wanted. None of them asked for it, and it’s basically this disclosure, “As long as we tell you in advance all the ways we’re going to screw you, we’re allowed to do it”
Nick Hanauer:
“We get to screw you.”
Brian Callaci:
And it makes it very hard to sue because, “Well, we told you in advance, what’s your problem?” And the problem is not, “I was misled.” The problem is this is an unfair, unbalanced power relationship.
Goldy:
Final question, Nick
Nick Hanauer:
Yeah, absolutely fascinating conversation. Why do you do this work, Brian?
Brian Callaci:
So my first interest in franchising was not innocent and it’s not just academic interest. I am an economist, but it was because I had a very minor, and I would emphasize minor, role as a mid-level staffer on the Fight for $15, and one of the things that I was asked to do was we didn’t care about franchise. It was just this, well, we have this huge industry of low wage workers and let’s do something about it.
My boss at the time said, “Brian, I think you should look at franchising. I think that’s going to be really important.’ He and a lot of other, my mentors [inaudible 00:33:09], had come out of the garment trades, which had very similar structures. You’ve got these big, powerful brands that subcontract all the manufacturing, and it’s impossible for workers, particularly when it goes overseas, to make your immediate employer, the small garment factory, does not have the power to raise your wages. You have to take the fight to the brand owner. So yeah, that’s sort of how I got into it.
And the second half of how I got into it is when I got to grad school in economics, I realized that where I saw this mechanism of control without responsibility, the economics profession just sees efficiency.
Nick Hanauer:
I know.
Brian Callaci:
This is the best way to run this business. It aligns the incentives.
Nick Hanauer:
Create an optimal.
Brian Callaci:
I’m not saying, Nick, that that is not the case and that these are all evil, scheming, awful people, but in addition to that aligning of incentives and all those kind of efficiency things, there’s this whole other thing going on too, that at least if you listen to the franchisors themselves, they were trying to make this legal loophole the whole time.
Nick Hanauer:
Fascinating.
Goldy:
Thanks for joining us and thanks for making Nick feel a little uncomfortable about his past business activity.
Brian Callaci:
Thanks for having me. This is a great conversation. And I love having a little bit of pushback and back and forth. Yeah. So this is a lot of fun for me.
Goldy:
So Nick, did you learn anything today about your evil past?
Nick Hanauer:
Well, I think the points Brian makes on the pod in his book, I think those are very valid points. The whole control without responsibility dynamic is a very important one, and the ways in which these big franchisors have… What’s the word? Subverted? Is that the right word?
Goldy:
Mm-hmm.
Nick Hanauer:
All sorts of worker protections.
Goldy:
Exploited.
Nick Hanauer:
Yeah. Yeah, yeah. All that stuff.
Goldy:
Exploited the law. Yeah.
Nick Hanauer:
Yeah. Has to be valid. But I do think, I continue to believe, that the model itself, I mean, the fundamental model, which is, you have a brand, you want to expand, and you want to enlist other people to represent your brand in some way, shape or form around the country, around the world, I continue to believe that that’s a valid construct.
Goldy:
So what you’re saying here, Nick, is that franchises don’t kill people, franchisers do?
Nick Hanauer:
Something like that.
Goldy:
It’s just a tool like any other tool, and in the hands of a…
Nick Hanauer:
Responsible [inaudible 00:35:44].
Goldy:
The only thing that can protect you from a bad person with a franchise is a good person with a franchise.
Nick Hanauer:
A good person with a franchise. Yeah, exactly. That’s exactly what I’m saying. No, for listeners who are wondering why we have stretched this metaphor so far, it’s because when we get off the podcast, we do gun violence politics for living too.
Goldy:
Anti-gun violence.
Nick Hanauer:
Anti-gun violence politics for a living too.
Goldy:
We’re 90% income inequality, 10% responsible gun laws. That’s our advocacy in the office.
Nick Hanauer:
And thank you so much for reminding me of the fight we had with the International Franchise Association doing $15 minimum wage in Seattle. I forgot that.
Goldy:
And man, that lawsuit, remember, and this is like everybody in the office is going to drink a beer when they hear me say this, one of their arguments in their lawsuit was basically they were challenging… They wanted to go back to Lochner, right? They were challenging the ability of government to even regulate these things. They wanted to go back to the early 20th century legal doctrine that prevented even things like the minimum wage. So that’s how far the franchise association is willing to go.
Nick Hanauer:
That’s right. Anyway, we did beat them, which means they’re beatable. And probably they need to get beat again.
Goldy:
I think one of the thing that stands out for me, which I think needs to be emphasized, and this is something we’ve talked about before more explicitly on the podcast, is there’s nothing natural about this franchising model. It is a legal construct. It is entirely a legal construct. And like much of the modern capitalist world we live in, most of that legal construct is not created in law by legislators. It’s not like we’ve passed… Some of it is.
Nick Hanauer:
No.
Goldy:
We have passed laws that facilitate this, just like a corporation.
Nick Hanauer:
Yeah. But most of it’s made up by judges.
Goldy:
Right. And Brian emphasizes that these are judge-created legal doctrines that have evolved over the past several decades that are not written in law, and so there’s two ways you can change this. One is different judges can make different rulings and we can overturn these doctrines. Our current Supreme Court is very intent on doing that.
Nick Hanauer:
No, I mean, the court is a trickle down court, right?
Goldy:
In the other way. And the other thing is we could legislate the fuck out of the franchise model. If we want these protections, and what particularly stands out, obviously the joint employer model, but I think I’ve been coming around to this more and more. And again, we’ve talked about it for years, Nick, sectoral bargaining.
Nick Hanauer:
Yes.
Goldy:
On something like this, it makes sense to have sectoral bargaining in the fast food industry, for example, and not just labor versus management. It is there are three parties here, two of which are aggrieved to some extent. Labor, obviously, who are the most exploited out of this, but also the franchisees. A lot of franchisees have very legitimate complaints with how they are treated by the parent corporation, by the franchisor, and would love to see reforms that gave them more independence. And in the end, we know independent businesses tend to treat their employees better. And we also know that they keep more money within the local economy-
Nick Hanauer:
Yes, that’s for sure.
Goldy:
… instead of just sucking it all out to a distant corporate headquarters and the shareholders who are largely giant funds on Wall Street.
Nick Hanauer:
Yeah, for sure.
Goldy:
So it seems like the easiest approach to this is some sort of, again, legislatively-imposed sectoral bargaining. And then we let the three parties work it out at the table with some moderators there to help settle all this. And that would be… I don’t know what that would’ve done to your pillow business, your pillow franchise.
Nick Hanauer:
I just don’t think… I mean, again, our business was not very labor-intensive.
Goldy:
Right. Yeah.
Nick Hanauer:
It didn’t matter. It never came up.
Goldy:
Right.
Nick Hanauer:
It just never came up.
Goldy:
It’s not like the fast food industry, which is-
Nick Hanauer:
No, no.
Goldy:
… very labor-intensive.
Nick Hanauer:
You’re selling thousand dollar comforters to rich people, right?
Goldy:
Well, it’s got the word Scandia or something in it. We know that means it’s expensive.
Nick Hanauer:
Yes, exactly.
Goldy:
Because Nordic things are always expensive. Anyway, if you want to learn more, we highly recommend Brian’s book, Chains of Command: The Rise and Cruel Reign of the Franchise Economy. And of course, we will provide a link in the show notes.
Nick Hanauer:
Hey gang, if you like Pitchfork Economics, I recently joined a four-part IDEAS documentary series called The Billionaire Age about how extreme wealth is shaping our economy and democracy. Three episodes are out now, and we’ll include a link in the show notes. Please take a listen.
Promo Announcer:
Today, there are more than 3,000 billionaires with a combined worth of $25 trillion surpassing the GDP of every country except the United States. I’m Mary Lynk with IDEAS, and I’ve been looking into the impact of this record-breaking level of wealth concentration at the very tippy top, including a deteriorating middle class and the expectation that there will be five trillionaires within a decade. To understand why this is happening, listen to my series, The Billionaire Age on IDEAS, wherever you get your podcasts.
Freddy:
Pitchfork Economics is produced by Civic Ventures. If you like the show, make sure to follow, rate, and review us wherever you get your podcasts. Find us on other platforms like Twitter, Facebook, Instagram, and threads @pitchforkeconomics. Nick’s on Twitter and Facebook as well @NickHanauer. For more content from us, you can subscribe to our weekly newsletter, The Pitch, over on Substack. And for links to everything we just mentioned, plus transcripts and more, visit our website, pitchforkeconomics.com. As always, from our team at Civic Ventures, thanks for listening. See you next week.