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Small Business Franchise Act

 Representative Coble's Introduction of SBFA


HON. HOWARD COBLE

OF NORTH CAROLINA
IN THE HOUSE OF REPRESENTATIVES
Wednesday, November 10, 1999

  • Mr. COBLE. Mr. Speaker, I rise today to reintroduce the Small Business Franchise Act of 1999.
  • In the closing days of the 105th Congress, Congressman CONYERS and I introduced similar legislation aimed at leveling the playing field in the business relationship between corporations that sell franchises and the small businessmen and women who invest in them. Franchise businesses represent a large and growing segment of our nation's retail and service businesses and are rapidly replacing more traditional forms of small business ownership in our economy. As a result, franchise owners have become the heart and soul of America's economic engine and the backbone of local commerce.
  • The franchisor/franchisee relationship is fundamentally an economic one where the objective of each party is to make money. Capitalism at its best one would think. Unfortunately, that is where the mutuality ends. In the context of a means to an end, the interests of the franchisee and franchisor are not always the same. For instance, because the parent corporations collect royalties on sales, not profits, it is in the economic interest of the corporate franchisor to open more outlets, even if it is at the expense of an existing franchisee. It is exactly this type of activity that has brought us here today.
  • As a conservative Republican who supports smaller government and less regulation, many people have asked why I support franchise legislation. First of all, this legislation is not about bigger government and more regulation--it is about protecting freedom. The freedom for small business entrepreneurs to contract fairly, honestly, and without fear of retribution. Second, the Constitution provides Congress with the authority to regulate interstate commerce which Congress has already done for some franchisees by enacting the Petroleum Marketers Act and the Automobile Dealers Day in Court Act . I believe the time has come to apply these same standards to all franchise business relationships.
  • One of the key provisions of this legislation applies the Duty of Good Faith and Fair Dealing to the franchise relationship. One would think that this obligation is inherent in all contractual relationships, however, because there has been inconsistency in judicial interpretation, clarification is needed. The Duty of Good Faith provision requires both the franchisor and the franchisee to act in good faith in its performance and enforcement of the contract. 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. If the franchisees are willing to apply this provision to themselves, why are the farnchisors unwilling to do the same?
  • There is also great concern among franchisees about monopolistic behavior among franchisors with respect to sourcing requirements. Many franchise contracts require franchisees to purchase equipment, fixture, supplies, goods and services directly from the franchisor or its subsidiary, thus eliminating competition from the system and driving up costs for the franchisees and ultimately the consumer. Under this legislation, competition would be injected into the procurement process, ultimately lowering costs for everyone. Along these same lines, franchisors would also be required to disclose any rebates, commissions, payments or other benefits resulting from the mandated sourcing requirement imposed on the franchisees. These kinds of ``kickback'' have been illegal in other industries for years, and the time has come to shine the light of day on these long-standing franchisor abuses.
  • During the past 20 years, there has been tremendous change in the franchising industry, and as a result, I believe the time has come for Congress to examine this issue and level the playing field for small business franchisees across our great nation. The legislation that I introduce today, along with my distinguished colleague from Michigan, Congressman JOHN CONYERS, addresses the fundamental and necessary safeguards that this industry so desperately needs. This legislation, like the Automobile Dealers Day in Court Act and the Petroleum Marketing Practices Act , rights the imbalance that has existed for too long in the franchisor/franchisee relationship.
     

 Representative Conyers' Introduction of SBFA


HON. JOHN CONYERS, JR.

OF MICHIGAN
IN THE HOUSE OF REPRESENTATIVES
Tuesday, November 9, 1999

  • Mr. CONYERS. Mr. Speaker, today I am proud to reintroduce, with my good friend from North Carolina, Mr. COBLE, the Small Business Franchise Act . This legislation represents hard work, and a good faith effort to strike an appropriate, bipartisan balance between the rights of franchisors and franchisees. These issues have been the subject of a hearing in this Judiciary Committee earlier this year, and the issues merit action by this Congress.
  • Protecting the rights of franchisees is ultimately about protecting the rights of small business . They often face enormous odds and a daunting inequality of bargaining power when dealing with national franchisors. Unfortunately, the law often offers little recourse in the face of great harm.
  • There is currently no federal law establishing standards of conduct for parties to a franchise contract. The Federal Trade Commission rule promulgated in 1979, (16 CFR §436), was designed to deter fraud and misrepresentation in the re-sales process and provide disclosure requirements and prohibitions concerning franchise agreements. The FTC maintains, however, that it has no jurisdiction after the franchise agreement is signed.
  • As a result, in the absence of any Federal regulation, a number of complaints have been lodged in recent years, principally stemming from the fact that franchisees do not have equal bargaining power with large franchisors. The concerns include the following:
  • (1) Taking of Property without Compensation. Franchise agreements generally include a covenant not-to-compete that prohibits the franchisee from becoming an independent business owner in a similar business upon expiration of the contract. This can appropriate to the franchisor all of the equity built up by the franchisee without compensation.
  • (2) Devaluation of Assets. Franchisors often induce a franchisee to invest in creating a business and then establish a competing outlet in such proximity to the franchisee that the franchisee suffers economic harm.
  • (3) Restraint of Trade. Most franchise relationships mandate that franchisees purchase supplies, furniture, etc. from the franchisor or sources approved by the franchisor. While it may be appropriate for franchisors to exercise some control concerning the products or services offered to franchisees, tying franchisees to certain vendors can cost franchisees millions of dollars, prevents competition among vendors, and can have an adverse impact upon consumers.
  • (4) Inflated Pricing. Many franchise agreements specify that the franchisor has the right to enter into contractual arrangements with vendors who sell goods and services to franchisees that are mandated by the franchise agreement. It has been alleged that these vendors often provide kickbacks and commissions to the franchisor in return for being allowed to sell their products and services to a captive market. Instead of passing these kickbacks and commissions on to the franchisee to reduce their cost of goods sold and increase their margin, these payments, it is asserted, benefit the franchisor.
  • While our nation has enjoyed an unprecedented economic boom, it is essential that Congress ensure that prosperity reaches down to the small businesses that make up the heart and soul of our economy. We have an obligation to ensure that the law governing this segment of the economy, which every American patronizes routinely is fair and balanced. I urge my colleagues to join with me and the gentleman from North Carolina in supporting this overdue and needed reform.
 Testimony of a Franchisee


HON. HOWARD P. "BUCK" McKEON

OF CALIFORNIA
IN THE HOUSE OF REPRESENTATIVES
Thursday, November 18, 1999

Mr. MCKEON. Mr. Speaker, I am a recent cosponsor of H.R. 3308, the Small Business Franchise Act introduced by Representative HOWARD COBLE. Today, I include for the RECORD testimony from a recent Judiciary Commercial and Administrative Law Subcommittee hearing on this legislation. During this hearing a constituent of mine, Patrick Leddy, testified about his dealings as a franchise owner. Because of his very moving testimony, I became a cosponsor of this legislation. I wish to thank him for his words and include them in the RECORD today.

STATEMENT OF PATRICK JAMES LEDDY, JR.

My name is Patrick James Leddy Jr. I have owned and operated a Baskin-Robbins 31 Flavors franchise in Newhall, California since August 1, 1986, a total of 13 years. I am also a 26 year veteran firefighter with the Los Angeles City Fire Department. I purchased my franchised business to supplement my income, and to prepare my wife and I for our retirement. In 1996 my wife and I became very discouraged with the manner in which our Franchisor, which is a wholely owned subsidiary of a foreign corporation, was treating its franchisees. After careful consideration and after seeing sales at our fellow franchisee's stores plummet as a result of the placement of new stores and drastic changes to the system which we had originally purchased, we decided to sell our store.

In February of 1997, three months after notifying Baskin-Robbins that we were interested in selling our store, we received a notification that Baskin-Robbins was considering a location for a new store located in a shopping mall, a mere two miles from my store and well within the market from which we draw a large number of our customers.

Later that month my wife and I met with our district manager to discuss our ability to sell our store and the tremendous impact the new store would have on our existing store. To our surprise the representative from Baskin-Robbins agreed with us, and suggested that if Baskin-Robbins were to go forward with this plan, how would we feel if they were to purchase our store, and then sell both our store and the new store as a package to a new buyer? We agreed that this would be acceptable to us. Whereafter, the Baskin-Robbins representative offered us $40,000 dollars less than what I had paid for this store seven years earlier, and after an additional $70,000 dollars I paid for improvements which were required by Baskin-Robbins. We were appalled at this offer, but were advised by the Baskin-Robbins representative that we really should considert his offer, because if Baskin-Robbins does elect to place this new store at the proposed location, our store wouldn't even be worth that amount.

Thereafter in April of 1997, and pursuant to an internal policy of Baskin-Robbins, which is not binding on Baskin-Robbins, and which is rarely followed by the company, I submitted to my district manager my response to this Baskin-Robbins proposed new location. He assured me that he would notify me of any developments as they occur, and that we would be notified promptly, once a determination had been made.

In June of 1997, after several unsuccesfull attempts to learn whether Baskin-Robbins would proceed with the new store my wife called our district manager and explained to him that we needed immediate information on what the company intends to do about this new site, because we have had several prospective buyers for our store that were disinterested once we disclosed to them Baskin-Robbin's plan. The Baskin-Robbins representative advised us not to disclose the information about the new store to our prospective buyers.

In July of 1997, our local neighborhood magazine publications reported that a new Baskin-Robbins would be open two miles from our store. We were shocked. Two days after this news story appeared, and after numerous telephone calls to Baskin-Robbins on our part, we finally received official notification from Baskin-Robbins about the new store.

We later learned that Baskin-Robbins signed the lease for this new store on May 13, 1997.

On August 5, 1997, after the underhandedness that we had felt from Baskin-Robbins, my wife and I decided that in our best interest we should retain legal representation to help us resolve the matter with Baskin-Robbins regarding the encroachment issue and the subsequent issue of our inability to sell our store.

In June of 1998 the new store opened, with their grand opening celebration following in August. As you can see on the enclosed charts, sales at our store have drastically declined as a result, and have effectively terminated our ability to sell the store at a reasonable price.

While attempting to resolve matters through our attorney, Baskin-Robbins has become increasingly hostile towards us. They have begun arbitrarily rating us as "C" franchisees, when in the past, we had always maintained an "A" or "B" rating. In addition, they have brought against us a lawsuit, contending that we were poor operators. One week before the inspection that is the basis for their lawsuit however, a mystery shopper trained and employed by Baskin-Robbins rated our operation superior, as did the LA county Health Inspector.

In closing, I would ask your full support in addressing the obvious imbalance in the relationship between franchisor and franchisee through legislation. I am one Franchisee of many that are so frustrated in the way that we are literally forced to do business . Many franchisees I now that have lost their businesses, are going to lose their businesses, or are just plain hanging in there because there's nothing else they can do. I am extremely fortunate that I have another profession to fall back onto, while others suffer from intimidation, or being afraid to stand up and say anything, for fear that they will be strong-armed into submission, as Baskin-Robbins has attempted to do me. Please give us the tools that we need to survive in this giant corporate world, so that us little guys can continue making those big guys who they are. Thank you.

106TH CONGRESS

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

A BILL

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.
Sec. 3. Franchise sales practices.
Sec. 4. Unfair franchise practices.
Sec. 5. Standards of conduct.
Sec. 6. Procedural fairness.
Sec. 7. Actions by State attorneys general.
Sec. 8. Transfer of a franchise.
Sec. 9. Transfer of franchise by franchisor.
Sec. 10. Independent sourcing of goods and services.
Sec. 11. Encroachment.
Sec. 12. Private right of action.
Sec. 13. Scope and applicability.
Sec. 14. Definitions.

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.

(4) Many franchises reflect a profound imbalance of contractual power in favor of the franchisor, and fail to give due regard to the legitimate business interests of the franchisee, as a result of the franchisor reserving pervasive contractual rights over the franchise relationship.

(5) Franchisees may suffer substantial financial losses when the franchisor does not provide truthful or complete information regarding the franchise opportunity, or where the franchisor does not act in good faith in the performance of the franchise agreement.

(6) Traditional common law doctrines have not evolved sufficiently to protect franchisees adequately from fraudulent or unfair practices in the sale and operation of franchise businesses, and significant contractual and procedural restrictions have denied franchisees adequate legal recourse to protect their interests in such businesses.

(7) A franchisee’s freedom to contract is greatly limited by the disparity of bargaining power, lack of consistent legal standards, and other factors described above. This Act is necessary to restore freedom to contract, and to remove restrictive barriers impeding entry into industries and markets dominated by franchise systems.

(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 —

(A) to —

(i) make an untrue statement of material fact;

(ii) fail to state a material fact; or

(iii) fail to state any fact which would render any required statement or disclosure either untrue or misleading;

 (B) to fail to furnish any prospective franchisee with —

(i) all information required to be disclosed by law and at the time and in the manner required; and

(ii) a written statement specifying, prominently and in not less than 14-point type, whether the franchise agreement involved contains a right to renew such agreement; or

(C) to make any claim or representation to a prospective franchisee whether orally or in writing, which is inconsistent with or contradicts such disclosure document.

 

 (2) For purposes of this subsection, the term ‘‘disclosure document’’ means either the disclosure statement required by the Federal Trade Commission in Trade Regulation Rule 436 (16 C.F.R. 436) as amended from time to time, or any offering format allowed or required by State law.

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. —

(1) It shall be unlawful for a franchisor, either directly or indirectly through an affiliate or another person, to terminate a franchise agreement prior to its expiration without good cause for such termination.

(2) For purposes of this subsection, good cause shall exist only where —

(A)

(i) the franchisee fails to comply with a material provision of the franchise agreement after receiving notice that specifies the precise basis for the default, each material term of the franchise agreement with which the franchise is not in compliance, and a 30-day period to cure the default; and

(ii) if the nature of the default is such that it cannot be cured through reasonably diligent conduct, the franchisee fails to initiate within 30 days, and diligently pursue substantial continuing action to cure the default;

(B) the franchisee, without the requirement of notice and opportunity to cure —

(i) voluntarily abandons the business licensed by the franchise agreement, except

that loss or termination of a leasehold for the business prior to the term of a franchise agreement by reason of eminent domain, foreclosure sale, natural disaster or other termination not the fault of the franchisee shall not be considered abandonment by the franchisee;

(ii) is convicted of a felony, for which imprisonment of 1 year or more can be imposed, which substantially impairs the good will associated with the franchisor’s trade mark, service mark, trade name, logotype, advertising, or other commercial symbol;

(iii) is repeatedly in default of the same material provision of the franchise agreement, where the enforcement of such provision is substantially similar to enforcement of that provision with other franchisees; or

(iv) operates the business licensed by the franchise agreement in a manner that creates an imminent danger to public health or safety; or

(C) the franchisor withdraws from the marketing area of the business licensed by the  franchise agreement and pays the franchisee reasonable compensation for damages incurred from the shortened term of the agreement and agrees in writing not to enforce any contractual prohibition against the franchisee continuing to engage in the business at the franchised location.

(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

(C) to modify the manner or mode of business operations so as to avoid any substantial

confusion with the manner or mode of operations which are unique to the franchisor and

commonly in practice by other franchisees using the same name or trademarks within the proximate trade or market area of the business.

 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

in such a way as to obfuscate a party’s duty to act reasonably and in good faith with the other, or otherwise allow a disparate result in the franchise relationship.

(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—

(A) keep all moneys contributed to such fund or program in a separate account;

(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

(C) disclose the source and amount of, and deliver to such fund or program, any discount, rebate, compensation, or payment of any kind from any person or entity with whom such fund or program transacts.

(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.

(b) Any condition, stipulation, provision, or term of any franchise agreement, or any agreement ancillary or collateral to a franchise, which would purport to waive or restrict any right granted under this Act shall be void and unenforceable.

(c) No stipulation or provision of a franchise agreement, or of an agreement ancillary or collateral to a franchise, shall—

(1) deprive a franchisee of the application and benefits of this Act, of any other Federal law, or of the law of the State in which the franchisee’s principal place of business is located;

(2) deprive a franchisee of the right to commence an action (or, if the franchise provides for arbitration, initiate an arbitration) against the franchisor for violation of this Act, or for breach of the franchise agreement, or of any agreement or stipulation ancillary or collateral to the franchise, in a court (or arbitration forum) in the State of the franchisee’s principal place of business; or

(3) prevent a franchisee from participating as a member of a class permitted by Rule 23 of the Federal Rules of Civil Procedure or applicable State law.

(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;

(B) a reasonable transfer fee be paid to reimburse the franchisor for the franchisor s reasonable and actual expenses directly attributable to the transfer;

(C) the franchisee pay or make reasonable provision to pay any amount due the franchisor or the franchisor’s affiliate; or

(D) the financial terms of the transfer at the time of the transfer, comply with the franchisor’s current financial requirements for franchisees.

(2) IMPERMISSIBLE CONDITIONS.—A franchisor may not condition its consent to a transfer described in paragraph (1) on—

(A) a franchisee’s forgoing existing rights other than those contained in the franchise agreement;

(B) a franchisee’s entering into a release of claims broader in scope than a counterpart release of claims offered by the franchisor to the franchisee; or

(C) requiring the franchisee or transferee 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.

(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.

(5) A grant or retention of a security interest in the franchised business or its assets, or an ownership interest in the franchisee, if the security agreement establishes an obligation on the part of the secured party enforceable by the franchisor to give the franchisor simultaneously with notice to the franchisee, notice of the secured party’s intent to foreclose on the collateral, and a reasonable opportunity to redeem the interest of the secured party and recover the secured party s interest in the franchise or franchised business by satisfying the secured obligation.

(6) A franchisor may not exercise any purported right of first refusal or right to purchase with regard to any franchise, or interest or assets of a franchisee, upon the happening of any event described in paragraphs (1) through (5).

 

(i) EFFECT OF CERTAIN COVENANTS.—

(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.