Small Business Franchise Act
|Representative Coble's Introduction of SBFA|
OF NORTH CAROLINA
1ST SESSION H. R. 3308
To establish minimum standards of fair conduct in franchise sales and franchise business relationships, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
NOVEMBER 10, 1999
Mr. COBLE (for himself, Mr. CONYERS, Mr. JONES of North Carolina, Mr. ANDREWS, Mr. JENKINS, Mr. PICKERING, Mr. JOHN, Mr. TOWNS, Mr. WAMP, Mr. DICKEY, Mr. COBURN, Mr. LATOURETTE, Mr. NORWOOD, Mr. HILLEARY, Mr. ROTHMAN, Mr. GRAHAM, Mr. CANNON, Ms. ESHOO, Mr. CRAMER, Mr. GALLEGLY, Mr. PHELPS, Mr. SPENCE, and Mr. HERGER) introduced the following bill; which was referred to the Committee on the Judiciary
To establish minimum standards of fair conduct in franchise sales and franchise business relationships, and for other purposes.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE; TABLE OF CONTENTS.
(a) SHORT TITLE. — This Act may be cited as the ‘‘Small Business Franchise Act of 1999’’.
(b) TABLE OF CONTENTS. — The table of contents of this Act is the following:
Sec. 1. Short title; table of contents.
SEC. 2. FINDINGS AND PURPOSE.
(a) FINDINGS.—The Congress makes the following findings:
(1) Franchise businesses represent a large and growing segment of the nation’s retail and service businesses and are rapidly replacing more traditional forms of small business ownership in the American economy.
(2) Franchise businesses involve a joint enterprise between the franchisor and franchisees in which each party has a vested interest in the franchised business.
(3) Most prospective franchisees lack bargaining power and generally invest substantial amounts to obtain a franchise business when they are unfamiliar with operating a business, with the business being franchised and with industry practices in franchising.
(b) PURPOSE. It is the purpose of this Act to promote fair and equitable franchise agreements, to establish uniform standards of conduct in franchise relationships and to create uniform private Federal remedies for violations of Federal law.
SEC. 3. FRANCHISE SALES PRACTICES.
(a) IN GENERAL. — In connection with the advertising, offering, sale or promotion of any franchise, it shall be unlawful for any person —
(1) to employ a device, scheme, or artifice to defraud;
(2) to engage in an act, practice, course of business or pattern of conduct which operates or is intended to operate as a fraud upon any prospective franchisee; or
(3) to obtain property, or assist others to obtain property, by making an untrue statement of a material fact or any failure to state a material fact.
(b) MISREPRESENTATIONS IN REQUIRED DISCLOSURE. —
(1) In connection with any disclosure document, notice, or report required by any law, it shall be unlawful for any franchisor, subfranchisor, or franchise broker, either directly or indirectly through another person —
SEC. 4. UNFAIR FRANCHISE PRACTICES.
(a) DECEPTIVE AND DISCRIMINATORY PRACTICES. — In connection with the performance, enforcement, renewal, or termination of any franchise agreement, it shall be unlawful for a franchisor or subfranchisor, either directly or indirectly through another person —
(1) to engage in an act, practice, course of business, or pattern of conduct which operates as a fraud upon any person;
(2) to hinder, prohibit, or penalize (or threaten to hinder, prohibit, or penalize), 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 of associations of franchises; or
(3) to discriminate against a franchisee by imposing requirements not imposed on other similarly situated franchisees or otherwise retaliate, directly or indirectly, against any franchisee for membership or participation in a franchisee association.
(b) Termination Without Good Cause. —
(c) POST-TERM RESTRICTIONS ON COMPETITION.—
(1) A franchisor shall not prohibit, or enforce a prohibition against, any franchisee from engaging in any business at any location after expiration of a franchise agreement.
(2) Nothing in this subsection shall be interpreted to prohibit enforcement of any provision of a franchise contract obligating a franchisee after expiration or termination of a franchise —
(A) to cease or refrain from using a trade mark, trade secret, or other intellectual property owned by the franchisor or its affiliate;
(B) to alter the appearance of the business premises so that it is not substantially similar to the standard design, decor criteria, or motif in use by other franchisees using the same name or trademarks within the proximate trade or market area of the business; or
SEC. 5. STANDARDS OF CONDUCT.
(a) DUTY OF GOOD FAITH. —
(1) A franchise contract imposes on each party thereto a duty to act in good faith in its performance and enforcement.
(2) As used in this subsection, a duty of good faith shall—
(A) obligate a party to a franchise to do nothing that will have the effect of destroying
or injuring the right of the other party to obtain and receive the expected fruits of the contract and to do everything required under the contract to accomplish such purpose; and
(B) require honesty of fact and observance of reasonable standards of fair dealing in the trade.
(3) No provision of any franchise agreement, express or implied, shall be interpreted or enforced
(b) DUTY OF DUE CARE. —
(1) 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 its franchisees, or conspicuously disclaims that it has skill or knowledge, the franchisor is required to exercise the skill and knowledge normally possessed by franchisors in good standing in the same or similar types of business.
(2) For purposes of this subsection—
(A) the term ‘‘skill or knowledge’’ means something more than the mere minimum level of skill or knowledge required of any person engaging in a service or business and involves a special level of expertise—
(i) which is the result of acquired learning and aptitude developed by special training and experience in the business to be licensed under the franchise agreement, or the result of extensive use and experience with the goods or services or the operating system of such business;
(ii) which is the result of experience in organizing a franchise system and in providing training, assistance and services to franchisees; and
(iii) which a prospective franchisee would expect in reasonable reliance on the written and oral commitments and representations of the franchisor; and
(B) a franchisor shall be permitted to show that it contracted for, hired or purchased the expertise necessary to comply with the requirements of this subsection and that such expertise was incorporated in the franchise or communicated or provided to the franchisee.
(3) The requirement of this subsection may not be waived by agreement or by conduct, but the franchisor may limit in writing the nature and scope of its skill and knowledge, and of its undertaking with a prospective franchisee, provided that no inconsistent representation, whether written or oral, is made to the prospective franchisee irrespective of any merger or integration clause in the franchise agreement.
(c) LIMITED FIDUCIARY DUTY.—
(1) Without regard to whether a fiduciary duty is imposed generally on the franchisor by virtue of a franchise agreement, the franchisor owes a fiduciary duty to its franchisees and is obligated to exercise the highest standard of care for franchisee interests where the franchisor—
(A) undertakes to perform bookkeeping, collection, payroll, or accounting services on be
half of the franchisee; or
(B) administers, controls or supervises (either directly or through any subsidiary or affiliate) any advertising, marketing, or promotional fund or program to which franchisees are required to, or routinely, contribute.
(2) A franchisor that administers or supervises the administration of any fund or program described in paragraph (1)(B) shall—
(B) provide an independent certified audit of such fund within 60 days following the close of the franchisor s fiscal year, which shall include full disclosure of all fees, expenses, or other payments from the account to the franchisor or to any subsidiary, affiliate, or other entity controlled in whole or in part by the franchisor; and
(3) While not limiting the ability of any court to identify other circumstances for which a fiduciary duty may also exist, this subsection does not create or extend a fiduciary duty by implication to other aspects of a franchise.
SEC. 6. PROCEDURAL FAIRNESS.
(a) It shall be unlawful for any franchisor, either directly or indirectly through another person, to—
(1) require any term or condition in a franchise agreement, or in any agreement ancillary or collateral to a franchise, which directly or indirectly violates any provision of this Act; or
(2) require a franchisee to assent to any disclaimer, waiver, release, stipulation or other provision which would purport—
(A) to relieve any person from a duty imposed by this Act, except as part of a settlement of a bona fide dispute; or
(B) to protect any person against any liability to which he would otherwise be subject under this Act by reason of willful misfeasance, bad faith, or gross negligence in the performance of duties, or by reason of reckless disregard of obligations and duties under the franchise agreement; or
(3) require a franchisee to assent to any waiver, release, stipulation, or other provision, either as part of any agreement or document relating to the operation of a franchise business, in any agreement or document relating to the termination, cancellation, forfeiture, repurchase, or resale of a franchise business or as a condition for permitting a franchisee to leave the franchise system, which would purport to prevent the franchisee from making any oral or written statement relating to the franchise business, to the operation of the franchise system or to the franchisee’s experience with the franchise business.
(c) No stipulation or provision of a franchise agreement, or of an agreement ancillary or collateral to a franchise, shall—
(d) Compliance with this Act or with an applicable State franchise law is not waived, excused, or avoided, and evidence of violation of this Act or of such State law shall not be excluded, by virtue of an integration clause, any provision of a franchise agreement, or an agreement ancillary or collateral to a franchise, the parol evidence rule, or any other rule of evidence purporting to exclude consideration of matters outside the franchise agreement.
SEC. 7. ACTIONS BY STATE ATTORNEYS GENERAL.
(a) CIVIL ACTION.—Whenever an attorney general of any State has reason to believe that the interests of the residents of that State have been or are being threatened or adversely affected because any person has engaged or is engaging in a pattern or practice which violates any provision of this Act, the State, as parens patriae, may bring a civil action on behalf of its residents in an appropriate district court of the United States to enjoin such violations, to obtain damages, restitution or other compensation on behalf of residents of such State or to obtain such further and other relief as the court may deem appropriate.
(b) PRESERVATION OF POWER.—For purposes of bringing any civil action under subsection (a), nothing in this Act shall prevent an attorney general from exercising the powers conferred on the attorney general by the laws of such State to conduct investigations or to administer oaths or affirmations or to compel the attendance of witnesses or the production of documentary and other evidence.
(c) VENUE. Any civil action brought under subsection (a) in a district court of the United States may be brought in the district in which the defendant is found, is an inhabitant, or transacts business or wherever venue is proper under section 1391 of title 28, United States Code. Process in such action may be served in any district in which the defendant is an inhabitant or in which the defendant may be found.
(d) NO PREEMPTION.—Nothing contained in this section shall prohibit an authorized State official from proceeding in State court on the basis of an alleged violation of any civil or criminal statute of such State.
SEC. 8. TRANSFER OF A FRANCHISE.
(a) IN GENERAL. A franchisee may assign an interest in a franchised business or in a franchise to a transferee provided the transferee satisfies the reasonable qualifications then generally applied by the franchisor in determining whether or not a current franchisee is eligible for renewal. If the franchisor does not renew a significant number of its franchisees, then the transferee may be required to satisfy the reasonable conditions generally applied to new franchisees. For the purpose of this section, a reasonable current qualification for a new franchisee is a qualification based upon a legitimate business reason. If the proposed transferee does not meet the reasonable current qualifications of the franchisor, the franchisor may refuse to permit the transfer, provided that the refusal of the franchisor to consent to the transfer is not arbitrary or capricious and the franchisor states the grounds for its refusal in writing to the franchisee.
(b) NOTICE OF PROPOSED TRANSFER.—A franchisee shall give a franchisor not less than 30 days written notice of a proposed transfer of a transferable interest, and on request shall provide in writing the ownership interests of all persons holding or claiming an equitable or beneficial interest in the franchise subsequent to the transfer or the franchisee, as appropriate.
(c) CONSENT TO PROPOSED TRANSFER.—A transfer by a franchisee is deemed to have been approved 30 days after the franchisee submits the request for permission to transfer the franchise involved unless, within that time the franchisor refuses to consent to the transfer as evidenced in writing in accordance with subsection (a). A statement of the grounds for refusal to consent to the transfer is privileged against a claim of defamation.
(d) CONDITIONS OF TRANSFER.—
(1) PERMISSIBLE CONDITIONS.—A franchisor may require as a condition of a transfer that—
(A) the transferee successfully complete a reasonable training program;
(e) ASSIGNMENT.—A franchisee may assign the franchisee’s interest in the franchise for the unexpired term of the franchise agreement, and a franchisor shall not require the franchisee or the transferee to enter into a franchise agreement that has different material terms or financial requirements as a condition of the transfer.
(f) CONSENT TO PUBLIC OFFERING.—A franchisor may not withhold its consent to a franchisee’s making a public offering of its securities without good cause if the franchisee, or the owner of the franchisee’s interest in the franchise, retains control over more than 25 percent of the voting power as the franchisee.
(g) CONSENT TO POOLING INTERESTS, OR TO SALE OR EXCHANGE. A franchisor may not withhold its consent to a pooling of interests, to a sale or exchange of assets or securities, or to any other business consolidation amongst its existing franchisees, provided the constituents are each in material compliance with their respective obligations to the franchisor.
(h) NONINTERFERENCE.—The following occurrences shall not be considered transfers requiring the consent of the franchisor under a franchise agreement, and a franchisor shall not impose any fees, payments, or charges in excess of a franchisor s cost to review the relevant matter:
(1) The succession of ownership or management of a franchise upon the death or disability of a franchisee, or of an owner of a franchise, to the surviving spouse, heir, or partner active in the management of the franchise unless the successor objectively fails to meet within 1 year or the then current reasonable qualifications of the franchisor for franchisees.
(2) Incorporation of a proprietorship franchisee, provided that the franchisor may require a personal guarantee by the franchisee of obligations related to the franchise.
(3) A transfer within an existing ownership group of a franchise provided that more than 50 percent of the franchise is held by persons who meet the franchisor’s reasonable current qualifications for franchisees. If less than 50 percent of the franchise would be owned by persons who objectively meet the franchisor’s reasonable current qualifications, the franchisor may refuse to authorize the transfer.
(4) A transfer of less than a controlling interest in the franchise to the franchisee’s spouse or child or children, provided that more than 50 percent of the entire franchise is held by those who meet the franchisor’s reasonable current qualifications. If less than 50 percent of the franchise would be owned by persons who objectively meet the franchisor s reasonable current qualifications, the franchisor may refuse to authorize the transfer.
(1) IN GENERAL.—After the transfer of a transferor’s complete interest in a franchise, a franchisor may not enforce against the transferor any covenant of the franchise purporting to prohibit the transferor from engaging in any lawful occupation or enterprise.
(2) EXCEPTION.—This subsection shall not limit the franchisor from enforcing a contractual covenant against the transferor not to exploit the franchisor’s trade secrets or intellectual property rights (including protection of trade dress) except by agreement with the franchisor.
SEC. 9. TRANSFER OF FRANCHISE BY FRANCHISOR.
A franchisor shall not transfer, by sale or otherwise, its interest in a franchise unless—
(1) the franchisor provides, not less than 30 days before the effective date of transfer, notice to every franchisee of the intent to transfer the franchisor’s interest in the franchise or of substantially all of the franchises held by the franchisor;
(2) such notice is accompanied by a complete description of the business and financial terms of the proposed transfer or transfers; and
(3) upon the transfer, the entity assuming the franchisor’s obligations has the business experience
and financial means to perform all of the franchisor’s obligations in the ordinary course of business.
SEC. 10. INDEPENDENT SOURCING OF GOODS AND SERVICES.
(a) IN GENERAL.—Except as provided in subsection (e) a franchisor, either directly or indirectly through any affiliate, officer, employee, agent, representative or attorney, shall not prohibit or restrict a franchisee from obtaining equipment, fixtures, supplies, goods, or services used in the establishment or operation of the franchised business from sources of the franchisee’s choosing, except that such goods or services may be required to meet reasonable established uniform systemwide quality standards promulgated or enforced by the franchisor.
(b) APPROVED VENDORS.—Without limiting the rights of the franchisee under subsection (a), if the franchisor approves vendors of equipment, fixtures, supplies, goods, or services used in the establishment or operation of the franchised business, the franchisor shall provide and continuously update an inclusive list of approved vendors and shall promptly and objectively evaluate and respond to reasonable requests by franchisees for approval of competitive sources of supply. In order to promote competition, the franchisor shall approve not fewer than 2 vendors for each piece of equipment, each fixture, each supply, good, or service unless otherwise agreed to by both the franchisor and a majority of the franchisees.
(c) BENEFITS.—A franchisor, and its affiliates, shall fully disclose whether or not it receives any rebates, commissions, payments, or other benefits from vendors as a result of the purchase of goods or services by franchisees. All such rebates, commissions, payments, and other benefits shall be distributed directly to such franchisees.
(d) REPORTING.—A franchisor shall report not less frequently than annually, using generally accepted accounting principles, the amount of revenue and profit it earns from the sale of equipment, fixtures, supplies, goods, or services to the franchisees of the franchisor.
(e) EXCEPTION.—Subsection (a) does not apply to reasonable quantities of equipment, fixtures, supplies, goods, or services, including display and sample items, that the franchisor requires the franchisee to obtain from the franchisor or its affiliate, but only if the equipment, fixtures, supplies, goods, or services are central to the franchised business and incorporate a trade secret, patent, copyright, or other intellectual property owned by the franchisor or its affiliate.
SEC. 11. ENCROACHMENT.
(a) IN GENERAL. A franchisor may not place, or license another to place, 1 or more new outlets for a franchised business in unreasonable proximity to an established outlet of a similar kind of franchised business, if—
(1) the intent or probable effect of establishing the new outlets is to cause a diminution of gross sales by the established outlet of more than 5 percent in the 12 months immediately following establishment of the new outlet; and
(2) the established outlet—
(A) offers goods or services identified by the same trademark as those offered from the new outlet; or
(B) has premises that are identified by the same trademark as the new outlet.
(b) EXCEPTION.—This section shall not apply with respect to an established outlet if, before a new outlet described in subsection (a) opens for business, a franchisor offers in writing to each franchisee of the franchisor of an established outlet to pay to the franchisee involved an amount equal to 50 percent of the gross sales (net of sales taxes, returns, and allowances) of the new outlet for the 1st 24 months of operation of the new outlet if the sales of the established outlet decline by more than 5 percent in the 12 months immediately following establishment of the new outlet as a consequence of the opening of the new outlet.
(c) BURDEN OF PROOF.—A franchisor shall have the burden of proof to show that, or the extent to which, a decline in sales of an established outlet described in subsection (a) occurred for reasons other than the opening of the new outlet for goods or services concerned—
(1) if the franchisor makes a written offer under subsection (b); or
(2) in an action or proceeding brought under section 12.
SEC. 12. PRIVATE RIGHT OF ACTION.
(a) IN GENERAL.—A party to a franchise who is injured by a violation or threatened violation of this Act, or of section 438.1 of title 16, Code of Federal Regulations (relating to disclosure requirements and prohibitions concerning franchising and business opportunity ventures) as in effect on the date of the enactment of this Act, shall have a right of action for recission and restitution, as well as for all damages and injunctive relief, including costs of litigation and reasonable attorney s fees and expert witness fees, against any person found to be liable for such violation.
(b) LIABILITY. Every person who directly or indirectly controls a person liable under subsection (a), every partner in a firm so liable, every principal executive officer or director of a corporation so liable, every person occupying a similar status or performing similar functions and every employee of a person so liable who materially aids in the act or transaction constituting the violation is also liable jointly and severally with and to the same extent as such person, unless the person who would otherwise be liable hereunder had no knowledge of or reasonable grounds to know of the existence of the facts by reason of which the liability is alleged to exist.
(c) ALTERNATIVE DISPUTE RESOLUTION.—Except as otherwise provided in subsection (d), nothing contained in this Act shall be construed to limit the right of a franchisor and a franchisee to engage in arbitration, mediation, or other nonjudicial resolution of a dispute, either in advance or after a dispute arises, provided that the standards and protections applied in any binding nonjudicial procedure agreed to by the parties are not less than the requirements set forth in this Act.
(d) STATUTE OF LIMITATIONS.—No action may be commenced pursuant to this section or this Act more than—
(1) 5 years after the date on which the violation occurs; or
(2) 3 years after the date on which the violation is discovered or should have been discovered through exercise of reasonable diligence.
(e) VENUE. A franchisee may commence a civil action, or arbitration proceedings, to enforce any provision of this Act within the jurisdiction wherein the applicable franchise business is located.
(f) CUMULATIVE RIGHT.—The private rights provided for in this section are in addition to and not in lieu of other rights or remedies created by Federal or State law.
SEC. 13. SCOPE AND APPLICABILITY.
(a) PROSPECTIVE APPLICATION.—Except as provided in subsection (b), the requirements of this Act shall apply to franchise agreements entered into, amended, exchanged, transferred, assigned, or renewed after the date of enactment of this Act.
(b) DELAYED EFFECT.—The requirements of section 3 of this Act shall take effect 90 days after the date of enactment of this Act and shall apply only to actions, practices, disclosures, and statements occurring on or after such date.
SEC. 14. DEFINITIONS.
For purposes of this Act:
(1) The term ‘‘affiliate’’ has the meaning given the term ‘‘affiliated person’’ in section 436.2(i) of title 16 of the Code of Federal Regulations as in effect on January 1, 1998.
(2) The term ‘‘franchise’’ has the meaning given such term in section 436.2(a) of title 16 of the Code of Federal Regulations as in effect on January 1, 1998, but does not include any contract otherwise regulated by the Federal Petroleum Marketing Practices Act (15 U.S.C. 2801 et seq.) except as to franchise relationships that do not involve the sale of petroleum products.
(3) The term franchise broker has the meaning given such term in section 436.2(j) of title 16 of the Code of Federal Regulations as in effect on January 1, 1998.
(4) The term ‘‘franchisee’’ has the meaning given such term in section 436.2(d) of title 16 of the Code of Federal Regulations as in effect on January 1, 1998.
(5) The term ‘‘franchisor’’ has the meaning given such term in section 436.2(c) of title 16 of the Code of Federal Regulations as in effect on January 1, 1998.
(6) The term ‘‘good faith’’ means honesty in fact and the observance of reasonable standards of fair dealing in the trade.
(7) The terms ‘‘material’’ and ‘‘material fact’’ includes—
(A) any fact, circumstance, or set of conditions which a reasonable franchisee or a reasonable prospective franchisee would consider important in making a significant decision relating to entering into, remaining in, or abandoning a franchise relationship; and
(B) any fact, circumstance, or set of conditions which has, or may have, any significant financial impact on a franchisor, franchisee or a prospective franchisee.
(8) The term ‘‘offer’’ or ‘‘offering’’ means any effort to offer or to dispose of, or solicitation of an offer to buy, a franchise or interest in a franchise for value.
(9) The term ‘‘outlet’’ means a point of sale, temporary or permanent, fixed or mobile, from which goods or services are offered for sale.
(10) The term ‘‘person’’ means an individual or any other legal or commercial entity.
(11) The term State means a State, the District of Columbia, and any territory or possession of the United States.
(12) The term ‘‘subfranchise’’ means a contract or an agreement by which a person pays a franchisor for the right to sell, negotiate the sale, or provide service franchises.
(13) The term ‘‘subfranchisor’’ means a person who is granted a subfranchise.
(14) The term trade secret means information, including a formula, pattern, compilation, program, device, method, technique, or process, that—
(A) derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and
(B) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.