Revitalizing the case for good cause statutes: the role of review sites

Good cause statutes (GCSs) require franchisors to show “good cause” (i.e. a material breach of the franchise contract) before terminating contractual relations with a franchisee. These have long been debated in franchise law, with some states adopting them, others rejecting them, and proponents of both sides arguing about accompanying federal regulation. Proponents of GCSs argue that they protect small and local franchisees from opportunistic termination by large and national chains, invoking ‘big business vs. local entrepreneur’ rhetoric and stressing the asymmetric information and inherent unequal bargaining power plaguing most such relations. The classic law and economics approach, however, opposes the adoption of GCSs. This approach relies on a central argument: GCSs disrupt an indispensable control mechanism against franchisee free riding, namely the ability of the franchisor to terminate any franchise contract at will. This article calls for a rethinking of the classic economic analysis of GCSs, in light of the revolution that review sites – namely websites which allow customers to post reviews about franchisees – have brought to the marketplace. After reviewing the classic analysis and the case or ‘at will’ termination, we show that online review sites create a novel and effective control mechanism against franchisee free-riding. Using hotel franchises as a case-study, we show that even in an industry where most customers are non-repeat travelers, unlikely to return to the same site often enough to constrain free-riding, online reviews serve as a substitute for at-will termination. More specifically, we argue that there are four interrelated conditions necessary for review sites to serve as effective control mechanisms, and all are met in this case. First, that customers are sufficiently motivated to write reviews (despite not being financially remunerated for doing so). Second, that review sites facilitate analysis of information by including active measures to reduce information overload. Third, that review sites are sufficiently trustworthy. Fourth, that review sites influence consumer purchasing decisions. With ‘at will’ termination supplanted by online review sites, the case for GCSs as franchisee-protection from franchisor opportunism is thus revitalized. ARTICLE CONTENTS**Faculty of Law, Bar-Ilan Univeristy. Phd Economics (UC Berkeley); Phd Law (BIU). **** Faculty of Law, College of Law & Business. J.S.D. (UC Berkeley); LL.M (Columbia University).1