I

103D CONGRESS

1ST SESSION H. R. 448

To establish certain uniform rights, duties, and enforcement procedures

relating to franchise agreements.

IN THE HOUSE OF REPRESENTATIVES

JANUARY 6, 1993

Mr. ACKERMAN introduced the following bill; which was referred to the

Committee on Energy and Commerce

A BILL

To establish certain uniform rights, duties, and enforcement

procedures relating to franchise agreements.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Federal Fair Franchis5 ing Practices Act of 1993’’.

6 SEC. 2. DUTY OF GOOD FAITH.

7 (a) IN GENERAL.—A franchise shall include an im8 plied duty on the part of a party to the franchise to act

9 in good faith in the performance and the enforcement of

10 the rights and duties established in the franchise.
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1 (b) INTERESTS OF OTHER PARTIES.—The duty de2 scribed in subsection (a) shall include an obligation on the

3 part of a party to a franchise, in making a decision or

4 in exercising a power that directly affects the franchise

5 or the franchised business concerned, to give due and

6 equal regard to an interest of any other such party that

7 is likely to be affected by the decision made or the power

8 exercised.

9 SEC. 3. DUTY OF COMPETENCE.

10 (a) IN GENERAL.—In a franchisor’s undertaking

11 with a franchisee, the franchisor shall exercise the skill

12 and knowledge normally possessed by franchisors in good

13 standing in similar communities or trade areas, unless the

14 franchisor—

15 (1) represents that it has greater skill or knowl16 edge; or

17 (2) conspicuously disclaims that it has the nor18 mal skill or knowledge.

19 (b) EFFECT OF DISCLAIMER.—The duty described in

20 subsection (a) may not be disclaimed or qualified by agree21 ment or by conduct, but a franchisor may by written

22 agreement define specifically the nature and scope of its

23 skill or knowledge and of its undertaking with a

24 franchisee.
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1 SEC. 4. NEGOTIATED CHANGES.

2 A franchisor that has delivered to a prospective

3 franchisee a valid offering circular may negotiate with the

4 prospective franchisee concerning the terms of a franchise

5 and may execute with the prospective franchisee a fran6 chise whose terms reflect negotiated changes from the ini7 tial offering.

8 SEC. 5. INDEPENDENT SOURCING.

9 (a) IN GENERAL.—A franchisee may obtain equip10 ment, fixtures, supplies, and services used in the establish11 ment and operation of a franchised business from any

12 source, if the goods and services meet any reasonable

13 standard regarding their nature and quality that may be

14 promulgated by the franchisor concerned.

15 (b) EXCEPTION.—Subsection (a) shall not apply to

16 a reasonable quantity of inventory goods or services, in17 cluding display and sample items, that—

18 (1) a franchisor requires a franchisee to obtain

19 from the franchisor or its affiliate;

20 (2) are a central feature of the franchised busi21 ness concerned; and

22 (3) are manufactured or produced—

23 (A) by the franchisor or its affiliate; or

24 (B) solely for the account of the franchisor

25 or its affiliate and incorporate a trade secret of

26 the franchisor or its affiliate.
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1 SEC. 6. TERMINATION AND NONRENEWAL.

2 A franchisor may not terminate or refuse to renew

3 a franchise whose term is indeterminate without good

4 cause.

5 SEC. 7. TRANSFER.

6 (a) IN GENERAL.—A franchisee may transfer a

7 transferable interest to a transferee who meets a

8 franchisor’s reasonable, essential, and nondiscriminatory

9 standards for new franchisees or transferees, as the stand10 ards are in effect on the date the franchisee and the trans11 feree agree to the transfer. A franchisor may not withhold

12 its consent to such a transfer without good cause.

13 (b) NOTICE OF PROPOSED TRANSFER.—A franchisee

14 shall give a franchisor not less than 30 days written notice

15 of a proposed transfer of a transferable interest, and on

16 request shall advise the franchisor in writing of the owner17 ship interests of all persons holding or claiming an equi18 table or beneficial interest in the franchise, the franchised

19 business, or the franchisee.

20 (c) CONSENT TO PROPOSED TRANSFER.—A

21 franchisor may not unreasonably withhold its consent to

22 a proposed transfer of a transferable interest. A transfer

23 is deemed approved 30 days after a franchisee submits

24 the proposed transaction for consent, unless the franchisor

25 earlier disapproves the transaction by written notice speci26 fying each basis for the disapproval or exercises a right
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1 of 1st refusal. Such a notice is privileged against a claim

2 of defamation.

3 (d) CONDITIONS ON TRANSFER.—

4 (1) PERMISSIBLE CONDITIONS.—A franchisor

5 may condition its consent to a proposed transfer by

6 a franchisee of a transferable interest on—

7 (A) the transferee’s successful completion

8 of a reasonable, essential, and nondiscrim9 inatory training program;

10 (B) the payment of a transfer fee to the

11 franchisor to reimburse it for its reasonable, ac12 tual, out-of-pocket expenses directly related to

13 the transfer; or

14 (C) the payment of any amount the

15 franchisee owes to the franchisor or its affiliate.

16 (2) IMPERMISSIBLE CONDITIONS.—A franchisor

17 may not condition its consent to a transfer described

18 in paragraph (1) on a franchisee—

19 (A) undertaking new or different obliga20 tions than those contained in the franchise con21 cerned;

22 (B) forgoing existing rights other than

23 those contained in the franchise concerned; or
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1 (C) entering into a release of claims broad2 er in scope than a counterpart release of claims

3 offered by the franchisor to the franchisee.

4 (e) RIGHT OF 1ST REFUSAL.—A franchisor may exer5 cise a right of 1st refusal in connection with a proposed

6 transfer by a franchisee of a transferable interest, if such

7 right is reserved in the franchise. A franchisor may not

8 exercise such right more than 30 days after the date it

9 receives a franchisee’s request for consent to the proposed

10 transfer. A franchisor may not exercise such right if doing

11 so would result in it holding a minority ownership interest

12 in the franchised business or the franchisee concerned. A

13 franchisor may determine whether to exercise such right

14 based only on the merits and circumstances of the pro15 posed transfer.

16 (f) CONSENT TO PUBLIC OFFERING.—A franchisor

17 may not withhold its consent to a franchisee making a

18 public offering of its securities without good cause, if the

19 franchisee or the owner of the franchisee’s interest in the

20 franchise retains control over more than 50 percent of the

21 voting power in the franchisee.

22 (g) CONSENT TO POOLING OR EXCHANGE.—A

23 franchisor may not withhold its consent to a pooling of

24 interests or an exchange of assets by its existing

25 franchisees.
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1 (h) ASSIGNMENT.—A franchisee may assign its inter2 est in a franchise for the unexpired term of the franchise.

3 A franchisor may not require the franchisee or the as4 signee to enter into a new or different franchise as a result

5 of the assignment.

6 (i) NONINTERFERENCE.—A franchisor may not

7 interfere with—

8 (1) the succession to ownership or management

9 of a franchisee or a franchised business upon the

10 death or disability of a franchisee, or of an owner,

11 officer, or director of a franchisee, by a spouse,

12 child, fellow shareholder or partner of the deceased

13 or disabled franchisee, owner, officer, or director;

14 (2) incorporation of a proprietorship franchisee

15 or franchised business;

16 (3) transfers within an existing ownership

17 group of a franchisee or franchised business of less

18 than a controlling interest in the franchisee or fran19 chised business;

20 (4) transfers of less than a controlling interest

21 in a franchisee or franchised business to the

22 franchisee’s (or its owners’) spouse or child;

23 (5) transfers of less than a controlling interest

24 in a franchisee or a franchised business to an em-
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1 ployee stock ownership plan or employee incentive

2 compensation or deferred benefit plan;

3 (6) a grant or retention of a security interest

4 in a franchise, a security or ownership interest in a

5 franchised business or its assets, or a security or

6 ownership interest in a franchisee, if the agreement

7 that governs the grant or retention is a franchisor8 notice security agreement; or

9 (7) the use of management consultant or hiring

10 of a professional manager by a franchisee or a fran11 chised business.

12 (j) SECURITY INTEREST OF FRANCHISEE.—A

13 franchisor may not prevent a franchisee that transfers a

14 transferable interest from retaining or foreclosing a secu15 rity interest in any asset transferred, including a fran16 chise, if—

17 (1) the security interest is created to secure ob18 ligations of the transferee to the franchisee; and

19 (2) the security agreement that governs the se20 curity interest is a franchisor-notice security agree21 ment.

22 (k) EFFECT OF CERTAIN COVENANTS.—

23 (1) IN GENERAL.—After the transfer of a

24 transferor’s complete interest in a franchise, a

25 franchisor may not enforce against the transferor
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1 any covenant of the franchise purporting to prohibit

2 the transferor from engaging in any lawful occupa3 tion or enterprise.

4 (2) EXCEPTION.—This subsection shall not

5 limit the right of a franchisor to enforce contractual

6 covenants of a transferor not to exploit the

7 franchisor’s trade secrets or intellectual property

8 rights (including protection of trade dress) except by

9 agreement with the franchisor.

10 (l) TRANSFER BY FRANCHISOR.—A franchisor, or its

11 owner, may not transfer a transferable interest unless it

12 takes reasonable steps to ensure that the transferee, the

13 franchisor, or the owner will perform the franchisor’s obli14 gations under the franchise concerned. A franchisor, or

15 its owner, shall give a franchisee notice of such a proposed

16 transfer at the time the notice is required to be given by

17 the franchisor, or its owner, under applicable securities

18 laws, if the franchisor or its owner is publicly traded. If

19 the franchisor or its owner is not publicly traded, then

20 the notice shall be given at the time the notice would be

21 required if the franchisor or its owner were publicly trad22 ed.
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1 SEC. 8. ANTICOMPETITIVE COVENANTS.

2 (a) IN GENERAL.—A franchisor may not prohibit, or

3 enforce a prohibition against, a franchisee engaging in any

4 lawful business at any location—

5 (1) after expiration of the term of the franchise

6 concerned;

7 (2) after termination of the franchise by the

8 franchisee for good cause; or

9 (3) after a transfer by the franchisee of its full

10 interest in the franchise.

11 (b) EXCEPTION.—Subsection (a) shall not apply if 10

12 or more days before the effective date of an expiration,

13 termination, or transfer described in such subsection, a

14 franchisor offers in writing to purchase the franchised

15 business concerned for its fair market value as a going

16 concern. Such offer may be conditioned upon the ascer17 tainment of the fair market value by an impartial ap18 praiser.

19 (c) ENFORCEMENT OF CERTAIN FRANCHISE PROVI20 SIONS.—This section shall not prohibit a franchisor from

21 enforcing provisions of a franchise obligating a franchisee

22 after expiration or termination of the franchise—

23 (1) to alter the appearance of the premises and

24 the manner of operation of the franchised business

25 concerned to avoid the likelihood of confusion as to

26 the affiliation of the business with its former
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1 franchisor or the origin of goods or services it offers;

2 or

3 (2) to cease and refrain from using a trade se4 cret of the franchisor or of its affiliate.

5 SEC. 9. FREEDOM OF ASSOCIATION.

6 (a) ASSOCIATION OF FRANCHISEES.—A franchisor

7 may not directly or indirectly inhibit its franchisees from

8 forming an association or from associating with other

9 franchisees for any lawful purpose. A franchisor may not

10 directly or indirectly penalize a franchisee for organizing

11 or participating in an association of franchisees.

12 (b) COLLECTIVE BARGAINING.—A franchisor that

13 has more than 500 franchises outstanding, or more than

14 300 franchisees, in the United States, shall bargain in

15 good faith with an organization of its franchisees that—

16 (1) represents generally, or on a specific issue

17 or set of issues, a majority of its franchisees in the

18 United States; and

19 (2) requests such bargaining.

20 SEC. 10. ENCROACHMENT.

21 (a) IN GENERAL.—A franchisor may not place, or li22 cense another to place, a new outlet in unreasonable prox23 imity to an established franchised outlet, if—

24 (1) the intent or probable effect of establishing

25 the new outlet is to cause a diminution of gross sales
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1 by the established outlet of more than 10 percent in

2 the 12 months immediately following establishment

3 of the new outlet; and

4 (2) the established outlet—

5 (A) offers goods or services identified by

6 the same trademark as those offered from the

7 new outlet; or

8 (B) has premises that are identified by the

9 same trademark as the new outlet.

10 (b) EXCEPTION.—This section shall not apply if, be11 fore a new outlet described in subsection (a) opens for

12 business, a franchisor offers in writing to each franchisee

13 of an established outlet concerned to pay to the franchisee

14 an amount equal to 10 percent of the gross sales (net of

15 sales taxes, returns, and allowances) of the new outlet for

16 the 1st 24 months of the new outlet’s operation, if the

17 sales of the established outlet decline by more than 10 per18 cent in the 12 months immediately following establishment

19 of the new outlet as a consequence of the opening such

20 outlet.

21 (c) BURDEN OF PROOF.—A franchisor shall have the

22 burden of proof to show that, or the extent to which, a

23 decline in sales of an established franchised outlet de24 scribed in subsection (a) occurred for reasons other than

25 the opening of the new outlet concerned—
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1 (1) if the franchisor makes a written offer

2 under subsection (b); or

3 (2) in an action or proceeding brought under

4 section 12.

5 SEC. 11. PROHIBITION ON DISCRIMINATION.

6 In granting franchises, considering approval of trans7 fers of transferable interests, and in administering its

8 franchise system, a franchisor shall not discriminate

9 against any person on the basis of race, color, religion,

10 national origin, sex, or physical handicap.

11 SEC. 12. PRIVATE RIGHT OF ACTION.

12 (a) IN GENERAL.—A party to a franchise who is in13 jured or likely to be injured by a violation or impending

14 violation of this Act or of section 436.1 of title 16, Code

15 of Federal Regulations (relating to disclosure require16 ments and prohibitions concerning franchising and busi17 ness opportunity ventures), as the section may from time

18 to time be amended, may bring an action for rescission,

19 damages, injunctive relief, or other appropriate relief in

20 a court of competent jurisdiction.

21 (b) COST RECOVERY.—The prevailing party in an ac22 tion brought under subsection (a) may recover its costs,

23 including its reasonable attorneys’ fees.

24 (c) INJUNCTIVE RELIEF.—For purposes of determin25 ing whether to issue an injunction or a restraining order,
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1 a court may presume irreparable harm from a violation

2 of this Act or of section 436.1 of title 16, Code of Federal

3 Regulations, as the section may from time to time be

4 amended. Notwithstanding rule 65(c) of the Federal Rules

5 of Civil Procedure or any other provision of law, a court

6 of the United States may award preliminary injunctive re7 lief without bond or other financial security in an action

8 brought under subsection (a).

9 SEC. 13. PROCEDURAL FAIRNESS.

10 (a) IN GENERAL.—This Act shall apply to a fran11 chised business that is operated in whole or in part in the

12 United States, to a franchise that grants the right to en13 gage in such a franchised business, and to the parties to

14 such a franchise.

15 (b) WAIVER OR AVOIDANCE.—This Act may not be

16 waived, and its application may not be avoided in whole

17 or in part, by agreement or by conduct, except as part

18 of a settlement of a bona fide dispute.

19 (c) EFFECT OF CHOICE-OF-LAW PROVISIONS.—A

20 franchisee may not be deprived of the application and ben21 efits of this Act by a provision of a franchise purporting

22 to designate the law of a country other than the United

23 States as governing the franchise or the interpretation of

24 the franchise, or to designate a venue outside of the Unit25 ed States for the resolution of disputes.
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1 (d) EFFECT OF EXCLUSIONARY PROVISIONS.—A per2 son’s obligation to comply with this Act may not be ex3 cused or avoided, and evidence of a violation of this Act

4 may not be excluded from evidence, because of a provision

5 of a franchise, the parol evidence rule, or any other rule

6 of law purporting to prohibit a factfinder from considering

7 matters other than the text of a franchise.

8 (e) EFFECT OF CERTAIN STIPULATIONS.—A liq9 uidated damages provision, a confession of judgment pro10 vision, or any other provision in a franchise pursuant to

11 which a party to the franchise is or would be deprived of

12 an opportunity to prove or contest a fact that is relevant

13 to this Act shall be unenforceable.

14 SEC. 14. DEFINITIONS.

15 For purposes of this Act:

16 (1) AFFILIATE.—The term ‘‘affiliate’’ means a

17 person who controls, is controlled by, or is under

18 common control with, a franchisor.

19 (2) FRANCHISE.—The term ‘‘franchise’’ means

20 a contract or agreement between 2 or more persons

21 by which—

22 (A) a franchisee is granted the right to en23 gage in a franchised business;

24 (B) operation of the franchised business is

25 substantially associated with the franchisor’s
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1 trademark, service mark, trade name, logotype,

2 advertising, or other commercial symbol des3 ignating the franchisor or the franchisor’s affili4 ate; and

5 (C) the franchisee pays or is required to

6 pay, directly or indirectly, a franchise fee.

7 (3) FRANCHISE FEE.—

8 (A) IN GENERAL.—The term ‘‘franchise

9 fee’’ means a fee or charge for the right to

10 enter into or maintain a franchise, including

11 any payment for goods or services.

12 (B) EXCEPTION.—The term ‘‘franchise

13 fee’’ shall not include—

14 (i) a payment at a bona fide wholesale

15 price for a reasonable quantity of inven16 tory;

17 (ii) a payment of a reasonable service

18 charge to the issuer of a credit or debit

19 card by a person accepting or honoring

20 such card; or

21 (iii) a payment at fair market value

22 for a reasonable quantity of real estate,

23 fixtures, equipment, or other tangible prop24 erty to be used in, and necessary for, the

25 operation of the franchisee’s business.
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1 (4) FRANCHISED BUSINESS.—The term ‘‘fran2 chised business’’ means a business of offering, sell3 ing, or distributing goods or services under a mar4 keting plan or system prescribed in substantial part

5 by a franchisor.

6 (5) FRANCHISEE.—The term ‘‘franchisee’’

7 means a person to whom a franchise is granted.

8 (6) FRANCHISOR.—The term ‘‘franchisor’’

9 means a person who grants a franchise.

10 (7) FRANCHISOR-NOTICE SECURITY AGREE11 MENT.—The term ‘‘franchisor-notice security agree12 ment’’ means a security agreement that creates an

13 obligation on the part of a secured party that is en14 forceable by a franchisor to give the franchisor—

15 (A) notice of the secured party’s intent to

16 foreclose on collateral described in the security

17 agreement at the same time as the secured

18 party gives such notice to the franchisee con19 cerned or, if the secured party is the franchisee

20 concerned, at a reasonable time; and

21 (B) a reasonable opportunity to redeem the

22 interest of the secured party and to recover the

23 secured party’s interest in the franchise or fran24 chised business concerned by paying the secured

25 obligations (or the fair market value of secured
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1 obligations not stated as amount payable in

2 cash).

3 (8) GOOD CAUSE.—The term ‘‘good cause’’

4 means—

5 (A) a complete withdrawal by a franchisor

6 from the conduct of business in a State or in

7 the District of Columbia; or

8 (B) a failure by a party to a franchise who

9 has received a written notice from another such

10 party that describes corrective action that must

11 be taken, and the time period within which such

12 action must be taken to prevent termination of

13 the franchise, to correct a default of a provision

14 of the franchise—

15 (i) within 30 days of receipt of the no16 tice, if the notice specifies a default of a

17 material provision of the franchise; or

18 (ii) within 48 hours of receipt of the

19 notice, if the notice specifies a default of a

20 material provision of the franchise that

21 constitutes a clear and present danger to

22 public health or safety.

23 (9) GOOD FAITH.—The term ‘‘good faith’’

24 means honesty in fact and the observance of reason25 able standards of fair dealing in the trade.
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1 (10) OUTLET.—The term ‘‘outlet’’ means a

2 place of business from which a person offers prod3 ucts or services for sale to another person.

4 (11) TRADE SECRET.—The term ‘‘trade secret’’

5 means information known to a franchisor or its affil6 iate, including a formula, pattern, compilation, pro7 gram, device, method, technique, or process, that—

8 (A) derives actual or potential independent

9 economic value from not being generally known

10 to, and not being readily ascertainable by prop11 er means by, another person who can obtain

12 economic value from its disclosure or use; and

13 (B) is the subject of efforts to maintain its

14 secrecy that are reasonable under the cir15 cumstances.

16 (12) TRANSFER.—The term ‘‘transfer’’ refers

17 to a change in ownership or control. Such term shall

18 not include any of the events in which a franchisor

19 is prohibited from interfering by section 7(i).

20 (13) TRANSFERABLE INTEREST.—The term

21 ‘‘transferable interest’’ means—

22 (A) an interest in a franchisee or a

23 franchisor that is not an individual;

24 (B) a franchisee’s or a franchisor’s interest

25 in a franchised business; or
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1 (C) a franchisee’s or a franchisor’s interest

2 in a franchise.

3 (14) UNITED STATES.—The term ‘‘United

4 States’’, when used in geographical sense, means the

5 several States and the District of Columbia.

6 SEC. 15. APPLICABILITY.

7 This Act shall apply to—

8 (1) a franchise or an interest in a franchise

9 that is entered into, renewed, transferred, assigned,

10 amended, or replaced on or after the date of the en11 actment of this Act;

12 (2) a franchise of indefinite duration that is in

13 existence on the date of the enactment of this Act;

14 and

15 (3) a franchisee, franchisor, franchised busi16 ness, or other person subject to a franchise described

17 in paragraph (1) or (2).

18 SEC. 16. NONPREEMPTION.

19 This Act shall not prevent the establishment, continu20 ing in effect, or enforcement of a law of any of the several

21 States or the District of Columbia, except to the extent

22 the law is inconsistent with this Act.

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