Bi-Partisan Franchise Bill Introduced

On Wednesday, October 14, 1998, Congressman Howard Coble (R-NC) and Congressman John Conyers (D-MI) introduced HR 4841, the “Small Business Franchise Act of 1998.” Nine Republicans and three Democrats, including   Mssrs. Coble and Conyers, were initial co-sponsors.

Congressman Coble said that while he realized no action would occur in the closing days of the 105th Congress, he wanted to signal his intentions to make a major push for changes in 1999. ”This bill is not an intrusion of the federal government into the private sector,” Coble said. “I don’t know of a single member of Congress who would stand by while their hard-working small business owners are left buck naked and defenseless against bad faith tactics which have been used by a host of corporations.”

HR 4841 comes as a result of over five year’s effort by the American Franchisee Association (AFA), working with Members of Congress and others, to introduce bi-partisan legislation to create a safe small  business climate for franchisees. The AFA was formed in 1993 by the leadership of ten different franchisee associations who sought to change  the fundamental structure of the rules and laws that now govern  franchising.

By 1995 the AFA had organized franchisees and dealers in 32 states, attaining the election of 137 of its members as delegates to the White House Conference on Small Business (WHCSB) in Washington, DC. At the 1995 WHCSB the issue of franchisee legal rights was among the final 60 issues recommended by over 1700 small business delegates for immediate
action by the President and Congress.

In 1996 franchisees from 30 different chains worked for one year to develop the AFA’s ‘Model Responsible Franchise Practices Ac’. The ‘Model Act’  was the starting point which Congress-ional aides used to draft HR 4841. 

In the past, franchise legislation has been consistently introduced by Democrats. AFA members were particularly pleased to see the strong support for fundamental changes in franchising by conservative Republican Members of Congress.

“HR 4841 is a national solution to many of the issues franchisees have faced for years with their franchisors,” stated Susan P. Kezios, President of the American Franchisee Association. “They’re not Democratic issues—they’re not Republican issues—they’re small business issues.”

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Summary of HR 4841

Statement of Purpose: To promote fair and equitable franchise agreements, to establish uniform standards of conduct n franchise relationships, to create uniform private Federal remedies for violations of federal law and to restore freedom  to contract.

Franchise Sales Practices: It is unlawful in the connection with the advertising, offering or sale of any franchise to engage in an act, practice, course of business or pattern of conduct which operates or is intended to operate as a fraud or make an untrue statement of material fact or fail to state a material fact.

Unfair Franchise Practices: It is unlawful to hinder, prohibit or penalize, either directly or indirectly, the free association of franchisees for any lawful purpose, including the formation of or participation in any trade association made up of franchisees or associations of franchisees.

A franchisor cannot terminate a franchise agreement prior to its expiration date without good cause and cannot prohibit a franchisee from engaging in any business at any location after expiration of a franchise agreement. Good Faith and Fair Dealing: A franchise contract imposes on each party a duty to act in good faith in its performance and enforcement. A duty of good faith obligates each party to do nothing that would have the effect of destroying or injuring the right of the other party to obtain and receive the expected fruits of the contract.

Duty of Due Care: A franchise agreement imposes on the franchisor a duty of due care. Unless a franchisor represents that it has greater skill or knowledge in its undertaking with franchisees or conspicuously disclaims that it has skill or knowledge, a franchisor is required to exercise the skill or knowledge normally possessed by franchisors in good standing in the same or similar type of business. Limited Fiduciary Duty: Imposes a fiduciary duty on the franchisor when the franchisor undertakes to perform bookkeeping, collection, payroll or accounting services on behalf of its franchisees or when the franchisor requires franchisees to make contributions to any pooled advertising, marketing or promotional fund which is administered, controlled or
supervised by the franchisor.

Procedural Fairness: A franchisor cannot require any term or condition in a franchise agreement which violates this Act. A franchisee cannot be required to relieve any person from a duty imposed by the Act. Nor may a franchisee be prohibited from making any oral or written statement relating to the franchised business, operation of the franchise system or the franchisee’s experience with the franchised business.

Transfer of a Franchise: A franchisee can assign an interest for the unexpired term of a franchise agreement to a transferee provided the transferee satisfies the reasonable qualifications generally applied in determining whether or not a current franchisee is eligible for renewal. The qualifications must be based on legitimate business reasons.

A franchisor may not condition its consent to a transfer on a franchisee 1) forgoing existing rights; 2) entering into a release of claims broader in scope than a counterpart release of claims offered by the franchisor to the franchisee; or 3) requiring the franchisee or transferree to make or agree to make, capital improvements, reinvestments or purchases in an amount greater than the franchisor could have reasonably required under the terms of the franchisee’s existing franchise agreement. A franchisor cannot consider certain occurences transfers requiring the franchisor’s consent. These include 1) the succession of ownership or management of a franchise upon the death or disability of a franchisee to the surviving spouse, heir or partner active in the management of the franchise and 2) incorporation of a proprietorship franchise.

Transfer of Franchise by Franchisor: A franchisor can transfer, by sale or otherwise, its interest in a franchise, so long as franchisees are given 30 days notice to each franchisee prior to the effective date of the transfer. The notice given to franchisees must contain a complete description of the business and financial terms of the proposed transfer. The entity assuming the franchisor’s obligations must have the business experience and financial means necessary to perform the franchisor’s obligations.

Independent Sourcing of Goods and Services: A franchisor cannot prohibit or restrict a franchisee from obtaining equipment, fixtures, supplies, goods or services used in the establishment or operation of a franchised business from sources of the franchisee’s choosing.

Encroachment/Impact: A franchisor cannot place or license another to place one or more new outlets in unreasonable proximity to an established outlet if the intent or probable effect is to cause a diminution of gross sales by the established outlet of more than five percent in the twelve months immediately following establishment of the new outlet(s). The burden of proof is on the franchisor to show that a decline in sales of an established outlet occurred for reasons other than the opening of the new outlet(s).

Private Right of Action: A franchisee injured by a violation of this Act has a right of action for all damages caused by the violation including costs of litigation and reasonable attorney’s fees. Nothing in the Act limits the rights of the franchisor and franchisee to engage in arbitration or mediation either in advance or after a dispute  arises, provided that the standards and protections applied are not less than the protections set forth in this Act.

Scope and Applicability: The Act affects franchise agreements entered into, amended, exchanged or renewed after the date of enactment

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Calendar of Events

February 18-21, 1999 Carefree, AZ
Multi-Unit Operators Retreat (MORE) at the The Boulders Resort

May 5, 1999 Hilton Head Island, SC
Franchisee Leadership Summit at the Holiday Inn Oceanfront Resort

May 6-7, 1999 Hilton Head Island, SC
1999 Legal Symposium at the Holiday Inn Oceanfront Resort
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Welcome!
Newest Association Members
W.W. (Weight Watchers) Franchisee Association, Inc.
National A & W Franchisees Association
Figaro’s Franchisee Association
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Legal Briefs

Fiat Dealers Win in Arbitration
An arbitrator in Philadelphia has awarded approximately $1.4 million (including attorneys’ fees) to six former Fiat tractor dealers  in their arbitration against Fiat. The claim arose from Fiat’s acquisition of the farm equipment business of Ford Motor Company and its  subsequent attempt to reduce the number of Fiat dealers, including the claimants. The arbitrator determined that Fiat had breached the dealership agreements and its duty of good faith and fair dealing by supporting its new distributors at the expense of its old distributors (the claimants). The arbitrator also determined that dealership and franchise statutes in several states had been violated when Fiat terminated its distributors without good cause. The arbitrator also found that the one-sided nature of the relationship between Fiat and the dealers as well as Fiat’s overwhelming bargaining power made the parties’ agreements adhesion contracts.

Damages were based on lost profits for both the contract and statutory claims and counsel fees and expenses were awarded for the claimants in accordance with the statutory claims.

Michael Dady, an AFA affiliate member from the Minneapolis firm of Dady & Garner P.A., represented the claimants.

Court Grants Summary Judgment in Favor of Franchisor
In Lang, Lang & Suhor Investors, L.L.C. v. The American Bagel Company, the U.S. District Court for the District of Maryland granted the franchisor’s motion for summary judgment dismissing the complaint filed by three Ohio investors and their limited liability company, which sought damages for fraud based on earnings claims allegedly made by the franchisor and the company it retained to market its franchises.

The court first held that the franchisees’ company could not assert any claims because it was formed after the execution of one of two development agreements and was not a party to any of the franchise agreements at issue and because it was not a ‘purchase’ under the applicable Ohio fraud statute. As to the fraud claims, which were governed by Virginia law, the court held that the franchisees, who each had significant business experience, could not prove that their reliance on the franchisor’s statements was reasonable. This holding was based on the presence of an integration clause in each of the franchise
agreements, which stated that they constituted the parties’ entire agreement and that they superseded all other agreements, and on disclaimers contained in both the franchise agreements and the UFOC. The court also held that the franchisees’ reliance on statements contained in the franchisor’s brochure and the statement of an officer of the franchisor was not reasonable.

In dismissing the claims under the Ohio fraud statute, the court noted that it had previously held that the franchisor and its officer were not subject to that statute but held that the other defendants, whose company was retained to market the franchises, were
potentially liable under that statute as brokers. The court held, however, that the franchisees could not show that their reliance on any earnings claims allegedly made by these defendants was reasonable.

The court also dismissed the franchisees’ breach of contract claim, denied the franchisees’ motion to amend the complaint and granted summary judgment in favor of the franchisor on its counterclaim for wrongful termination of the franchise agreements.

Court Declines to Dismiss a Variety of Claims Asserted by Franchisees
The U.S. District Court for the Western District of Missouri, in two related cases in Dunafon v. Taco Bell Corp., denied the franchisor’s application for partial summary judgment in one case and denied in part and granted in part its application to dismiss in the other.

The franchisee brought these actions in response to Taco Bell’s refusal to allow him to expand one franchise and to renew another. In the first case, which involved the refusal to expand, Taco Bell sought summary judgment dismissing the franchisee’s claims for breach of an agreement to permit expansion, breach of the implied covenant of good faith and fair dealing and for tortious interference with prospective contractual relations.

In discussing the first claim, the court held that under Missouri law, there were factual issues for the jury to decide regarding whether the parties had agreed on expansion and whether evidence of the parties’course of dealing would demonstrate that Taco Bell followed its expansion procedures. With respect to the claim for breach of the  covenant of good faith and fair dealing, the court held that under California law, which governed the franchise agreement, summary judgment was not proper because of the existence of factual issues regarding Taco Bell’s bad faith exercise of its discretion.

Finally, as to the claim for tortious interference, the court held that under Missouri law, the claim was viable even if Taco Bell had discretion in deciding whether to permit the franchisee to expand and rejected Taco Bell’s argument that the franchisee’s sole remedy was for breach of contract. In the second case, which was based on Taco Bell’s failure to renew a franchise, the court denied Taco Bell’s motion to dismiss several of the claims because it had already  decided a motion addressing the same arguments in the first case.

As to the motion to dismiss the claims for unjust enrichment and recoupment, the court held that the franchisee alleged sufficient facts to state a claim for unjust enrichment under Missouri law. Because the doctrine of recoupment applies only to contracts that are terminable at will and the franchise agreements were for a definite period, that claim was dismissed. The court also dismissed the franchisee’s claim for de facto termination because it was redundant of previous counts and the claim for promissory estoppel because monetary damages were available.

Michael Dady, an AFA affiliate member from the Minneapolis firm of Dady & Garner P.A., represented the claimants. LEGAL BRIEFS was prepared by AFA Affiliate Member Michael Einbinder.

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