Formula Business Restrictions

A growing number of cities and towns are enacting policies that restrict the proliferation of "formula businesses" — stores and restaurants that have standardized services, décor, methods of operation, and other features that make them virtually identical to businesses elsewhere.

Having saturated malls and other shopping areas, many formula retailers and restaurants are increasingly locating in downtowns and neighborhood business districts. Because they all like to follow one another, it's not uncommon for formula businesses to arrive in an area en masse, squeezing out independents and causing a speculative run-up in rents that results in the wholesale transformation of a business district almost overnight.

This can have long-term economic consequences as the downtown or neighborhood business district loses its distinctive appeal and no longer offers opportunities for independent entrepreneurs.  Low-margin businesses that meet the basic needs of surrounding neighborhoods, such as grocers and pharmacies, may be pushed out as rents rise and the area attracts more formula restaurants and apparel stores.  Perhaps of greatest concern, formula businesses tend to be fair-weather friends and can disappear quickly when the economy contracts or their corporate strategy shifts.

To prevent and mitigate these problems, some cities and towns have adopted ordinances that prohibit formula businesses, cap their total number, or require that they meet certain conditions to open.  A ban on formula businesses does not prevent a chain such as Starbucks from coming in, but it does require that Starbucks open a coffee shop that is distinct — in name, operations, and appearance — from all of its other outlets.  Although there are a few examples of a chain complying with a formula business ordinance by opening a unique outlet, in most cases, they refuse to veer from their cookie-cutter formula and opt not to open.

Key Decisions in Drafting a Formula Business Ordinance

1. Will the ordinance apply only to certain zones or be citywide?
   
   Many formula business ordinances are citywide measures, but they may also be written to apply only to a specific area within the community. Fredericksburg, Texas, and Bristol, Rhode Island, regulate formula businesses in their downtowns. San Francisco restricts formula businesses in all of its neighborhood business districts, but not in its downtown core and tourist areas. Port Townsend, Washington, and Chesapeake City, Maryland, prohibit formula businesses everywhere except a single highway commercial zone on the outskirts of town.


2. What types of formula businesses should be regulated?

Some cities prohibit only formula restaurants. Others have placed restrictions on both formula restaurants and retail stores.


3. Should the measure prohibit formula businesses altogether, cap their number, or make them a conditional use subject to case-by-case review and approval?

About half the policy examples included below ban formula businesses outright.  Others cap their number. Arcata, California, for example, allows no more than nine formula restaurants in the city at any one time.  McCall, Idaho, limits formula businesses to no more than 10 percent of the total number of "like businesses" in town (i.e., no more than 10 percent of restaurants, 10 percent of clothing stores, etc.).

Still another approach is to designate formula businesses as a conditional use subject to case-by-case review by either the planning board or the city council.  A formula business that wishes to open in any of San Francisco's neighborhood business districts, for example, must obtain approval from the planning commission.  The law states that, in making its decision, the commission must consider: the existing concentration of formula businesses within the neighborhood, whether similar goods or services are already available, compatibility with the character of the neighborhood, retail vacancy rates, and the balance of neighborhood-serving versus citywide or regional-serving businesses.

Cities may combine these approaches.  Coronado, California, for example, caps the number of formula restaurants (no more than 10 at one time) and treats formula retail stores as a conditional use.  Bristol, Rhode Island, bars formula businesses larger than 2,500 square feet from its downtown. Smaller formula businesses are allowed provided the town determines they will not detract from the district's uniqueness or contribute to the "nationwide trend of standardized downtown offerings." Port Townsend, Washington, restricts formula businesses to a single highway commercial zone and, within that zone, limits them to no more than 3,000 square feet.

Legal Issues

When enacting a formula business ordinance, a city should articulate within the ordinance and its legislative history the public purposes the law will serve and specify how the restrictions will fulfill those purposes. This is key to crafting a sound ordinance that will not be susceptible to legal challenges. The ordinance should reference the city's comprehensive plan, identifying goals within the plan that a formula business restriction will help to fulfill.  These commonly include: 

• Maintaining the unique character of the community and the appeal of its commercial district
• Protecting the community's economic vitality by ensuring a diversity of businesses with sufficient opportunities for independent entrepreneurs
• Fostering businesses that serve the basic needs of the surrounding neighborhood, rather than those oriented toward tourists or regional shoppers

There have been two court challenges to formula business ordinances.

A California Appeals Court decision upheld Coronado's formula retail ordinance in June 2003 after several property owners challenged the law.  The court ruled that the ordinance does not violate the US Constitution's commerce and equal protection clauses, and is a valid use of municipal authority under California state law.

Most of the decision deals with the property owners' contention that the law discriminates against out-of-state companies and thereby violates the Constitution's dormant commerce clause. The court found that the law does not in fact "impose different regulations on interstate as opposed to intrastate businesses, nor does it distinguish between those businesses that are locally owned and those that are owned by out-of-state interests." The court noted the law focuses on whether the store is contractually required to have standardized features, regardless of whether it is part of a national chain or owned by a California resident. 

The court also ruled that the law did not have a discriminatory purpose. The ordinance's lengthy preamble states that the city seeks to maintain a vibrant and diverse commercial district, and that the unregulated proliferation of formula businesses would frustrate this goal and lessen the commercial district's appeal. The court concludes that this is a legitimate purpose, noting that "the objective of promoting a diversity of retail activity to prevent the city's business district from being taken over exclusively by generic chain stores is not a discriminatory purpose under the commerce clause."

The court also dismissed the equal protection and state law challenges, stating that the ordinance is rationally related to a legitimate public purpose.

In 2008, a federal district court overturned a formula business ordinance adopted by the town of Islamorada, Florida. The ruling was subsequently confirmed by an 11th Circuit Court decision. Islamorada's ordinance limited formula businesses to no more than 2,000 square feet and 50 linear feet of storefront. Although the court said that preserving distinctive community character was a legitimate public purpose for enacting a formula business ordinance, it ruled that Islamorada had not demonstrated that this was in fact the purpose of the law. Local officials had instead revealed that the true purpose was protecting particular local businesses.

Moreover, the court noted that Islamorada, which has no downtown or other historic commercial district and consists instead of strip development along U.S. Highway 1, had taken no other steps to develop or protect its distinctive character. Sites already occupied by formula businesses have been redeveloped as new formula businesses with no objection from city officials.

Thinking about proposing a formula business ordinance in your community?  Contact us for tips and guidance, or to review your draft.

More Information:

• Legal Review from the Massachusetts Office of the Attorney General
  This April 23, 2010 letter is a legal determination that approves a formula business ordinance adopted in the town of Chatham.  The attorney general finds that the ordinance does not violate the state's constitution or its laws. 

• Protecting Locally Owned Retail: Planning Tools for Curbing Chains and Nurturing Homegrown Businesses
  by Stacy Mitchell, Main Street News, February 2004

• Related news stories from the Hometown Advantage Bulletin:
  • Chicago Measure would let Neighborhoods Ban Formula Businesses, Oct. 11, 2006
  • Washington Town Limits 'Formula' Businesses, Oct. 19, 2005
  • Chains Are Taking Over Britain, Survey Finds, June 8, 2005
  • Bristol, RI, Bans Large "Formula" Businesses, Aug. 6, 2004

• Saving Banff
  Op-ed by Stacy Mitchell, Calgary Herald, June 27, 2003

• Tackling the Problem of Commercial Gentrification, Nov. 1, 2002

• The Impact of Chain Stores on Community
  A speech by ILSR's Stacy Mitchell delivered at the annual conference of the American Planning Association, April 2000.

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Massachusetts Office of the Attorney General: Approval of a Formula Business Ordinance