I

104TH CONGRESS

1ST SESSION H. R. 1717

To establish minimum standards of fair conduct in franchise sales and

franchise business relationships, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MAY 25, 1995

Mr. LAFALCE 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.

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; TABLE OF CONTENTS.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Federal Fair Franchise Practices Act’’.

6 (b) TABLE OF CONTENTS.—

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. Franchisee associations.

Sec. 7. Acquisition of franchise systems.
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Sec. 8. Franchisor encroachment.

Sec. 9. Procedural fairness.

Sec. 10. Actions by private persons.

Sec. 11. Actions by state attorneys general.

Sec. 12. Effect on other law.

Sec. 13. Census data on franchise businesses.

Sec. 14. Scope and applicability.

Sec. 15. Definitions.

1 SEC. 2. FINDINGS AND PURPOSE.

2 (a) FINDINGS.—The Congress makes the following

3 findings:

4 (1) Franchise business relationships represent a

5 large and growing segment of the nation’s retail and

6 service businesses and are rapidly replacing more

7 traditional forms of small business ownership in the

8 American economy.

9 (2) Franchise relationships involve a joint en10 terprise between the franchisor and franchisees in

11 which each party has a vested interest in the fran12 chised business.

13 (3) Most prospective franchisees lack bargain14 ing power and generally invest substantial amounts

15 to obtain a franchise business when they are unfa16 miliar with operating a business, with the business

17 being franchised and with industry practices in fran18 chising.

19 (4) Many franchises reflect a profound imbal20 ance of contractual power in favor of the franchisor,

21 and fail to give due regard to the legitimate business
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1 interests of the franchisee, as a result of the

2 franchisor reserving pervasive contractual rights over

3 the franchise relationship.

4 (5) Franchisees may suffer substantial financial

5 losses when the franchisor does not provide truthful

6 or complete information regarding the franchise op7 portunity, or where the franchisor does not act in

8 good faith or with due care in the performance of

9 the franchise contract.

10 (6) Traditional common law doctrines have not

11 evolved sufficiently to protect franchisees adequately

12 from fraudulent or unfair practices in the sale and

13 operation of franchise businesses, and significant

14 contractual and procedural restrictions have denied

15 franchisees viable legal recourse to protect their in16 terests in such businesses.

17 (b) PURPOSE.—It is the purpose of this Act to pro18 mote greater fairness and equity in franchise relation19 ships, to protect prospective franchises from fraudulent

20 sales practices, to establish minimum standards of conduct

21 in franchise practices, to strengthen private remedies

22 against fraudulent or unlawful actions, to provide the pub23 lic with more reliable information regarding franchising,

24 and to provide to consumers the greater benefits which

25 would flow from more equitable franchise relationships.
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1 SEC. 3. FRANCHISE SALES PRACTICES.

2 (a) IN GENERAL.—In connection with the advertis3 ing, offering, licensing, contracting, sale or other pro4 motion in or affecting commerce of any franchise, or any

5 relationship which is represented either orally or in writing

6 to be a franchise, it shall be unlawful for any person, part7 nership or corporation—

8 (1) to employ a device, scheme, or artifice to

9 defraud;

10 (2) to engage in an act, practice, course of busi11 ness or pattern of conduct which operates or is in12 tended to operate as a fraud or deceit upon any per13 son;

14 (3) to obtain money or property, or assist oth15 ers to obtain money or property, by means of any

16 untrue statement of a material fact, any omission to

17 state a material fact, or any omission to state a ma18 terial fact necessary in order to make the statements

19 made, in the light of the circumstances under which

20 they are made, not misleading; or

21 (4) to discriminate among prospective

22 franchisees on the basis of race, sex, religion, dis23 ability or national origin—

24 (A) in the solicitation, offering or sale of

25 any franchise opportunity, except that, and

26 then only to the extent that, any discrimination
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1 between franchisees is reasonable and is related

2 to a program under which franchises are made

3 available to a class of persons who may have

4 been denied franchise opportunities in the past

5 based on suspect classifications including race,

6 sex, religion, disability or national origin; or

7 (B) in the selection of any site or location

8 for a franchise business; or

9 (5) to represent or imply in any manner what10 soever that a franchise has been reviewed, endorsed,

11 recommended or approved by the United States or

12 any agency or officer thereof.

13 (b) MISREPRESENTATIONS IN REQUIRED DISCLO14 SURE.—

15 (1) In connection with any disclosure document,

16 notice or report required by law or regulation, it

17 shall be unlawful for any franchisor, subfranchisor

18 or franchise broker, either directly or indirectly

19 through any officer, employee, agent, representative

20 or attorney—

21 (A) to make or cause to be made an un22 true statement of material fact, omit to state a

23 material fact, or omit to state a material fact

24 necessary in order to make the statements
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1 made, in the light of the circumstances under

2 which they are made, not misleading;

3 (B) to fail to furnish any prospective

4 franchisee with all information required to be

5 disclosed and at the time and in the manner re6 quired; and

7 (C) to make any claim or representation to

8 a prospective franchisee, whether orally or in

9 writing, which is inconsistent with or con10 tradicts any information provided to the pro11 spective franchisee in any required disclosure.

12 (2) For purposes of this subsection, the term

13 disclosure document means either the disclosure

14 statement required by the Federal Trade Commis15 sion in Trade Regulation Rule 436 (16 CFR 436)

16 as it may be amended, or an offering circular pre17 pared in accordance with Uniform Franchise Offer18 ing Circular guidelines as adopted and amended by

19 the North American Securities Administrators Asso20 ciation, Inc., or its successor.

21 (c) MISREPRESENTATION OF EARNINGS AND FAIL22 URES.—For purposes of this section, an untrue statement

23 of material fact shall include any statement of fact which

24 has the intent or effect of misrepresenting the profitability

25 of a franchise opportunity, the rate of success of fran-
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1 chises or franchisees associated with a franchise oppor2 tunity, or the rate of success of franchises generally.

3 (d) BURDEN OF PROOF.—For purposes of this sec4 tion, the burden of proof shall be on the franchisor to show

5 that any claim, statement or representation, either made

6 orally or in writing as part of an advertisement, sales pres7 entation, marketing document or required disclosure in

8 connection with the offering or sale of a franchise, is accu9 rate and not misleading, and that such claim, statement

10 or representation had a reasonable basis in fact at the

11 time it was made.

12 (e) EFFECTIVE DATE.—The requirements of this sec13 tion shall take effect sixty days after the date of enactment

14 of this Act and shall apply only to actions, practices, dis15 closures and statements occurring on or after such date.

16 SEC. 4. UNFAIR FRANCHISE PRACTICES.

17 (a) DECEPTIVE AND DISCRIMINATORY PRACTICES.—

18 In connection with the operation of a franchise system or

19 the performance, enforcement, renewal and termination of

20 any franchise agreement, or of an agreement for any rela21 tionship which is represented either orally or in writing

22 to be a franchise, it shall be unlawful for a franchisor or

23 subfranchisor, either directly or indirectly through any of24 ficer, employee, agent, representative or attorney—
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1 (1) to engage in an act, practice, course of busi2 ness, or pattern of conduct which operates or is in3 tended to operate as a fraud or deceit upon any per4 son;

5 (2) to employ unlawful or deceptive acts or

6 practices in the operation of the franchisor’s enter7 prise or method of business; or

8 (3) to discriminate among franchisees on the

9 basis of race, sex, religion, disability or national ori10 gin.

11 (b) TERMINATION WITHOUT GOOD CAUSE.—

12 (1) It shall be unlawful for a franchisor or

13 subfranchisor, either directly or indirectly through

14 any officer, employee, agent or attorney, to termi15 nate or otherwise cancel a franchise prior to its expi16 ration without good cause for such termination or

17 cancellation.

18 (2) For purposes of this subsection, good cause

19 shall exist only where—

20 (A) the franchisee fails to comply with a

21 material provision of the franchise agreement

22 after notice specifying the default and a thirty23 day period to cure the default, or if the default

24 can not be cured within thirty days, the

25 franchisee fails to initiate within thirty days
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1 and diligently pursue substantial continuing ac2 tion to cure the default;

3 (B) the franchisee, without the require4 ment of notice and opportunity to cure—

5 (i) voluntarily abandons the franchise

6 business, except that loss or termination of

7 a leasehold for the franchise business prior

8 to the term of a franchise agreement by

9 reason of eminent domain, foreclosure sale,

10 natural disaster or other termination not

11 the fault of the franchisee shall not be con12 sidered abandonment by the franchisee;

13 (ii) is convicted of a crime that sub14 stantially impairs the good will associated

15 with the franchisor’s trade mark, service

16 mark, trade name, logotype, advertising or

17 other commercial symbol;

18 (iii) repeatedly fails to comply with

19 the same material provision of the fran20 chise agreement, where the enforcement of

21 such provision is substantially similar to

22 enforcement of that provision with other

23 franchisees; or
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1 (iv) operates the franchised business

2 in a manner that creates an imminent dan3 ger to public health or safety; and

4 (C) the franchisor, whether or not as a re5 sult of bankruptcy or reorganization, withdraws

6 from a marketing area, provided the franchisor

7 pays the franchisee reasonable compensation for

8 damages incurred from the shortened term of

9 the franchise, or agrees not to enforce any con10 tractual prohibition against the franchisee con11 tinuing to engage in the business at the licensed

12 location, except as provided in subsection (d)(3)

13 of this section.

14 (d) MANDATORY SOURCING OF SUPPLIES.—

15 (1) It shall be unlawful for any franchisor or

16 subfranchisor, either directly or indirectly through

17 any officer, employee, agent, representative or attor18 ney, to prohibit a franchisee from obtaining equip19 ment, fixtures, supplies or services sued in the estab20 lishment or operation of the franchised business

21 from sources of the franchisee’s choosing, except

22 that such goods or services may be required to meet

23 uniform system-wide quality standards which are not

24 arbitrarily promulgated or enforced by the

25 franchisor.
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1 (2) This subsection shall not apply to reason2 able quantities of inventory of goods or services (in3 cluding display and sample items) that the

4 franchisee is required to obtain from the franchisor

5 and/or its affiliate(s), where such goods or services

6 are integrally related to a trademark, trade name,

7 trade secret or patent owned by or licensed to the

8 franchisor or its affiliate(s), provided the franchisor

9 shall not withhold a franchisee’s right to obtain such

10 goods and services without providing a notice of de11 fault and a thirty-day period to cure the default.

12 (e) POST-TERM RESTRICTIONS ON COMPETITION.—

13 (1) A franchisor shall not, either directly or in14 directly through any officer, employee, agent, rep15 resentative or attorney, prohibit, or enforce a prohi16 bition against, any franchisee from engaging in any

17 business at any location after expiration of a fran18 chise or after termination of the franchise prior to

19 its expiration for good cause.

20 (2) This subsection shall not apply to enforce21 ment of any such prohibition where the franchisor,

22 not less than ten days before the effective date of

23 such termination or expiration, offers in writing to

24 purchase the assets of the franchised business for its
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1 fair market value as a going concern, provided

2 that—

3 (A) the fair market value of such business

4 be determined as if it were to be resold or re5 newed for a period of years equal to the con6 tract term being offered by the franchisor for

7 new or renewed franchises;

8 (B) the fair market value of such business

9 is ascertained by an impartial appraiser, whose

10 appointment is acceptable to both parties; and

11 (C) any forgiveness of debt shall not be

12 considered a purchase of assets by the

13 franchisor for purposes of this section; and

14 (3) Nothing in this subsection shall be inter15 preted to prohibit enforcement of any provisions of

16 a franchise contract obligating a franchisee after ex17 piration or termination of a franchise—

18 (A) to cease or refrain from using a trade19 mark, trade secret or other intellectual property

20 owned by the franchisor or its affiliate, except

21 that the existence of language in the franchise

22 agreement purporting to determine ownership

23 of a trademark, trade secret or other intellec24 tual property shall not be binding upon any

25 court or forum for purposes of this paragraph,
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1 but may be considered by such court or forum

2 as evidence of such ownership; or

3 (B) to alter the appearance of the premises

4 and the manner of operation of the franchised

5 business to avoid any likelihood of confusion as

6 to the affiliation of the business with its former

7 franchisor.

8 SEC. 5. STANDARDS OF CONDUCT.

9 (a) DUTY OF GOOD FAITH.—

10 (1) A franchise contract imposes on each party

11 thereto a duty to act in good faith in its perform12 ance and enforcement.

13 (2) As used in this subsection, a duty of good

14 faith shall obligate a party to a franchise to do noth15 ing that will have the effect of destroying or injuring

16 the right of the other party to receive the fruits of

17 the contract and to do everything required under the

18 contract to accomplish such purpose.

19 (b) DUTY OF DUE CARE.—

20 (1) A franchise relationship imposes on the

21 franchisor a duty of due care. Unless a franchisor

22 represents that it has greater skill or knowledge in

23 its undertaking with its franchisees, or conspicuously

24 disclaims that it has skill or knowledge, the

25 franchisor is required to exercise the skill and knowl-
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1 edge normally possessed by franchisors in good

2 standing in the same or similar types of business.

3 (2) For purposes of this subsection—

4 (A) the phrase ‘‘skill or knowledge’’ means

5 something more than the mere minimum level

6 of skill or knowledge required of any person en7 gaging in a service or business and involves a

8 special level of expertise—

9 (i) which is the result of acquired

10 learning and aptitude developed by special

11 training and experience in the business to

12 be conducted under the franchise, or the

13 result of extensive use and experience with

14 the products or services or the operating

15 system of the franchise;

16 (ii) which is the result of experience in

17 organizing a franchise system and in pro18 viding training, assistance and services to

19 franchisees; and

20 (iii) which a prospective franchisee

21 would expect in reasonable reliance on the

22 written and oral commitments and rep23 resentations of the franchisor; and

24 (B) a franchisor shall be permitted to show

25 that it contracted for, hired or purchased the
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1 expertise necessary to comply with the require2 ments of this subsection and that such expertise

3 was incorporated in the franchise or commu4 nicated or provided to the franchisee.

5 (3) The requirement of this subsection may not

6 be waived by agreement or by conduct, but the

7 franchisor may limit in writing the nature and scope

8 of its skill and knowledge, and of its undertaking

9 with a prospective franchisee, provided that no in10 consistent representation, whether written or oral, is

11 made to the prospective franchisee.

12 (c) LIMITED FIDUCIARY DUTY.—

13 (1) Without regard to whether a fiduciary duty

14 is imposed generally on the franchisor by virtue of

15 a franchise relationship, the franchisor owes a fidu16 ciary duty to its franchisees and is obligated to exer17 cise the highest standard of care for franchisee in18 terests where the franchisor—

19 (A) undertakes to perform bookkeeping,

20 collection, payroll or accounting services on be21 half of the franchisee; or

22 (B) requires franchisees to make contribu23 tions to any pooled advertising or promotional

24 fund to be administered or supervised by the

25 franchisor.
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1 (2) While not limiting the ability of any court

2 to identify other circumstances for which a fiduciary

3 duty may also exist, this subsection does not create

4 or extend a fiduciary duty by implication to other

5 aspects of a franchise.

6 SEC. 6. FRANCHISEE ASSOCIATIONS.

7 (a) RIGHT OF ASSOCIATION.—It shall be unlawful for

8 any franchisor or subfranchisor, either directly or indi9 rectly through any officer, employee, agent representative

10 or attorney—

11 (1) to hinder or prohibit, directly or indirectly,

12 the free association of franchisees for any lawful

13 purpose, including the formation of or participation

14 in any trade association made up of franchisees; and

15 (2) to discriminate against a franchisee by im16 posing requirements not imposed on other similarly

17 situated franchisees or otherwise retaliate, directly

18 or indirectly, against any franchisee for membership

19 or participation in a franchisee association.

20 (b) ANTITRUST EXEMPTION.—The Clayton Antitrust

21 Act (15 U.S.C. 12 et seq.) is amended by adding after

22 section 27, the following new section:

23 ‘‘ANTITRUST LAWS NOT APPLICABLE TO FRANCHISEE

24 ASSOCIATIONS

25 ‘‘SEC. 28. Nothing contained in the antitrust laws

26 shall be construed to prohibit the existence and operation
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1 of associations of owners of franchise businesses, insti2 tuted for the purposes of mutual help, and not having cap3 ital stock or conducted for profit, or to prohibit or restrain

4 individual members of such associations from lawfully car5 rying out the legitimate objects thereof; nor shall such as6 sociations, or the members thereof, be held or construed

7 to be illegal combinations or conspiracies in restraint of

8 trade, under the antitrust laws.’’.

9 SEC. 7. ACQUISITION OF FRANCHISE SYSTEMS.

10 (a) IN GENERAL.—Whenever all or a major portion

11 of the franchise system is acquired by another person

12 through purchase, merger, consolidation, acquisition of as13 sets or through the bankruptcy court, any foreclosure or

14 judicial order, or otherwise, the person acquiring the fran15 chise system shall assume the obligations agreed to by the

16 predecessor franchisor in contracts with franchisees and

17 the franchisees shall be entitled to hold such transferee

18 legally responsible for the duties and responsibilities of the

19 predecessor franchisor.

20 (b) MUTUAL RELEASE OF OBLIGATIONS.—Unless

21 the person acquiring a franchise system expressly under22 takes such obligations, or acts in good faith to renegotiate

23 such obligations with franchisees, the franchisees shall be

24 entitled to reject their contractual duties and responsibil25 ities to the franchisor, including any noncompetition cov-
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1 enant and post-term obligations, provided that upon such

2 rejection, the franchisees cease from using the franchisor’s

3 trademarks, logos and other express identification, and

4 otherwise alter the appearance of the premises and the

5 manner of operation of the franchise business to avoid any

6 likelihood of confusion as to the affiliation of the business

7 with the franchise system.

8 SEC. 8. FRANCHISOR ENCROACHMENT.

9 (a) IN GENERAL.—A franchisor shall not grant or

10 license a new franchise, or otherwise establish a new outlet

11 or one or more points of sale of goods or services similar

12 to that offered by a franchisee and identified by the same

13 trade name, trademark, logotype, commercial system or

14 advertising used by a franchisee in unreasonable proximity

15 to an outlet or business owned or licensed to such

16 franchisee so that the effect or probable effect of granting

17 or establishing such new franchise, outlet or point(s) of

18 sale is to cause a reduction in gross sales of the existing

19 franchise.

20 (b) LIABILITY FOR MONETARY DAMAGES.—Where a

21 franchisor has granted a new franchise or established a

22 new outlet or point of sale in such unreasonable proximity

23 to an existing franchise, the owner of the existing fran24 chise shall have cause of action for monetary damages,

25 including, but not limited to, actual loss of income result-
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1 ing from the reduction in gross sales caused by the open2 ing and operation of the new franchise, outlet or point of

3 sale, anticipated loss of income caused by the continued

4 operation of such franchise, outlet or point of sale and

5 costs of litigation and reasonable attorney’s fees.

6 (c) EXCEPTIONS FROM LIABILITY.—This section

7 shall not apply where—

8 (1) the reduction in gross sales for an existing

9 franchise caused by the opening and operation of the

10 new franchise, outlet or one or more points of sale,

11 based on a comparison to annual gross sales from

12 the same franchise location during the twelve-month

13 period immediately preceding the opening of the new

14 franchise, outlet or point(s) of sale, is determined to

15 have been less than 5 percent during the first twelve

16 months following the opening of such new franchise,

17 outlet or points of sale;

18 (2) the franchisor, prior to offering the new

19 franchise to another owner, has provided the existing

20 franchisee a right of first refusal for the new fran21 chise location on, at least, the same terms and con22 ditions available to the other potential franchisee, or,

23 if the new location is an outlet to be owned by the

24 franchisor, or one or more points of sale to be owned

25 or controlled by the franchisor, the existing
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1 franchisee is provided a right of first refusal on the

2 terms and conditions that would ordinarily be of3 fered to a franchisee or other licensee for similarly

4 situated outlet, location or point of sale;

5 (3) the franchisor does not offer a right of first

6 refusal, but agrees to compensate the existing

7 franchisee or franchisees for market sales diverted

8 by the opening of a new franchise, outlet or points

9 of sale, provided that the franchisor and franchisee

10 agree upon the proper amount of such compensation

11 to be provided, or, if the franchisor and franchisee

12 cannot agree to the proper amount of such com13 pensation—

14 (A) each party shall appoint an independ15 ent appraiser to determine the amount of such

16 compensation;

17 (B) if the independent appraisers are un18 able to agree on the appropriate amount of

19 such compensation, the independent appraisers

20 shall appoint a third appraiser to determine the

21 level of compensation; and

22 (C) the determination of the independent

23 appraiser shall be final and binding; and
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1 (4) the franchisor, prior to granting or licensing

2 a new franchise or opening a new outlet or one or

3 more points of sale—

4 (A) provides reasonable notice to all

5 franchisees in proximity of the proposed fran6 chise, outlet or point of sale to determine if a

7 franchisee objects to the proposed franchise,

8 outlet or point of sale as having an adverse im9 pact on sales of an existing franchise; and

10 (B) agrees that, upon receiving an objec11 tion in writing from an existing franchisee, the

12 matter will be submitted for resolution by an

13 impartial arbitrator, provided—

14 (i) the selection of an arbitrator and

15 the time and location of any arbitration

16 proceeding are determined by agreement of

17 the parties or their counsel;

18 (ii) the burden of proof is on the

19 franchisor to show that the market area of

20 the proposed franchise, outlet or point of

21 sale is not being served by any existing

22 franchise and that the proposed franchise,

23 outlet or point of sale will not unduly re24 duce sales of existing franchises; and
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1 (iii) the decision of the arbitrator shall

2 be binding, to the effect that if the arbitra3 tor rules against the franchisor, the pro4 posed franchise, outlet or point of sale can5 not be granted or opened.

6 (d) BURDEN OF PROOF.—With regard to any civil

7 action brought under subsection (a)—

8 (1) the franchisee shall have the burden of

9 proof to document the amount of any reduction in

10 gross sales and income resulting from the opening

11 and operation in unreasonable proximity to an exist12 ing franchise of the new franchise, outlet or point of

13 sale; and

14 (2) the franchisor shall have the burden of

15 proof to show that, or the extent to which, a decline

16 in sales of an existing franchise or franchises oc17 curred for reason other than the opening and oper18 ation in unreasonable proximity to the existing fran19 chise of the new franchise, outlet or point of sale.

20 (e) FILING LIMITATION.—Notwithstanding the provi21 sions of section 10(a)(2) of this Act, any civil action

22 brought under this section shall be filed within eighteen

23 months following the opening and operation of the new

24 franchise, outlet or point of sale.
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1 SEC. 9. PROCEDURAL FAIRNESS.

2 (a) It shall be unlawful for any franchisor or

3 subfranchisor, either directly or indirectly through any of4 ficer, employee, agent, representative or attorney to—

5 (1) require any term or condition in a franchise

6 agreement, or in any agreement ancillary or collat7 eral to a franchise, which directly or indirectly vio8 lates any provision of this Act;

9 (2) require a franchisee to assent to any dis10 claimer, waiver, release, stipulation or other provi11 sion which would purport—

12 (A) to relieve any person from a duty im13 posed by this Act, except as part of a settle14 ment of an bona fide dispute; or

15 (B) to protect any person against any li16 ability to which he would otherwise be subject

17 under the Act by reason of willful misfeasance,

18 bad faith, or gross negligence in the perform19 ance of duties, or by reason of reckless dis20 regard of obligations and duties under the fran21 chise agreement; or

22 (3) require a franchisee to assent to any waiver,

23 release, stipulation or other provision, either as part

24 of any agreement or document relating to the oper25 ation of a franchise business, in any agreement or

26 document relating to the termination, cancellation,
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1 forfeiture, repurchase or resale of a franchise busi2 ness or as a condition for permitting a franchisee to

3 leave the franchise system, which would purport to

4 prevent the franchisee from making any oral or writ5 ten statement relating to the franchise business, to

6 the operation of the franchise system or to the

7 franchisee’s experience with the franchise business;

8 except that, and only to the extend that, such waiver

9 or release is required as part of the settlement of a

10 bona fide dispute and relates only to the terms of

11 such settlement and to the negotiation of such set12 tlement.

13 (b) Any condition, stipulation, provision, or term of

14 any franchise agreement, or any agreement ancillary or

15 collateral to a franchise, which would purport to waive or

16 restrict any right granted under this Act shall be void and

17 unenforceable.

18 (c) No stipulation or provision of a franchise agree19 ment or of an agreement ancillary or collateral to a fran20 chise shall—

21 (1) deprive a franchisee of the application and

22 benefits of this Act or of any Federal law or the law

23 of the State in which the franchisee’s principal place

24 of business is located;
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1 (2) deprive a franchisee of the right to com2 mence an action (or, if the franchise provides for ar3 bitration, initiate an arbitration) against the

4 franchisor for violation of the Act, or for breach of

5 the franchise agreement or of any agreement or stip6 ulation ancillary or collateral to the franchise, in a

7 court (or arbitration forum) in the state of the

8 franchisee’s principal place of business; or

9 (3) exclude collective action by franchisees to

10 settle like disputes arising from violation of this Act

11 either by civil action or arbitration.

12 (d) Compliance with this Act or with an applicable

13 State franchise law is not waived, excused or avoided, and

14 evidence of violation of this Act or of such State law shall

15 not be excluded, by virtue of an integration clause, any

16 provision of a franchise agreement or an agreement ancil17 lary or collateral to a franchise, the parol evidence rule,

18 or any other rule of evidence purporting to exclude consid19 eration of matters outside the franchise agreement.

20 SEC. 10. ACTIONS BY PRIVATE PERSONS.

21 (a)(1) Any person injured by a violation of any provi22 sion or standard of this Act shall have a right of action

23 for all damages caused by the violation, including costs

24 of litigation and reasonable attorney’s fees, against any

25 person found to be liable for such violation.
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1 (2) An action may be brought, without regard to the

2 amount in controversy, in any United States district court,

3 in any State court, or in any other court of competent

4 jurisdiction, before the later of:

5 (A) Five years after the date on which the vio6 lation occurred.

7 (B) Three years after the date on which the

8 violation was discovered or should have been discov9 ered through exercise of reasonable diligence.

10 (b) Any person injured by a violation of this Act, or

11 threatened with injury by an impending violation of this

12 Act, may bring an action in a United States district court,

13 in any State court or in any other court of competent ju14 risdiction to obtain a declaratory judgment that an act or

15 conduct constitutes or would constitute a violation of this

16 Act and to enjoin a person who has violated, is violating,

17 or who is otherwise likely to violate any provision of this

18 Act. In such actions, the court may issue a temporary re19 straining order or preliminary injunction to protect the

20 public interest by halting a recurring or likely violation

21 of this Act, prior to a final determination on the merits,

22 in conformity with the principles governing the granting

23 of preliminary relief in other civil actions, except that no

24 showing of special or irreparable damage to such person

25 shall have to be made.
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1 (c)(1) In any action brought under subsections (a)

2 or (b) of this section, a court shall have the power to inter3 pret any benefit conferred, duty imposed, or restriction ap4 plied in favor of or against any party to a franchise agree5 ment as reciprocal and equally applicable to the other

6 party to the agreement and to provide an identical or simi7 lar benefit, impose an identical or similar duty, or apply

8 an identical or similar restriction on such other party to

9 the agreement, provided that such reciprocal application

10 is consistent with the laws of the State in which the fran11 chise business is located.

12 (2) A court shall apply any provision contained in a

13 franchise agreement which purports to restrict the ability

14 of one party to compete with the other party during the

15 term of the franchise agreement reciprocally to the extent

16 deemed fair and appropriate.

17 (d)(1) Except as otherwise provided in paragraph (2)

18 of this subsection, nothing contained in this Act shall limit

19 the right of a franchisor and a franchisee to agree to arbi20 tration, mediation or other nonjudicial resolution of a dis21 pute, either in advance or after a dispute arises, provided

22 that the standards and protections applied in any binding

23 nonjudicial procedure agreed to by the parties are not less

24 than the requirements set forth in this Act.
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1 (2) Any stipulation or provision of a franchise agree2 ment requiring use of arbitration or other nonjudicial res3 olution to resolve disputes arising under the agreement

4 shall not apply to bar an action brought in a United States

5 district court or in any other court of competent jurisdic6 tion pursuant to this section involving a request for dam7 ages and/or equitable relief for an alleged violation of any

8 provision of this Act, except where such request is frivo9 lous or insubstantial. A determination of whether a re10 quest for damages and/or equitable relief is frivolous or

11 insubstantial shall be made by the court in which the ac12 tion is filed at any hearing at which all parties are present

13 or represented by counsel.

14 (e) The private rights provided in this section are in

15 addition to, and no in lieu of other rights or remedies cre16 ated by Federal or State law or regulation.

17 SEC. 11. ACTIONS BY STATE ATTORNEYS GENERAL.

18 (a) Whenever an attorney general of any State has

19 reason to believe that the interests of the residents of that

20 State have been or are being threatened or adversely af21 fected because any person has engaged or is engaging in

22 a pattern or practice which violates any provision of this

23 Act, the State, as parens patriae, may bring a civil action

24 on behalf of its residents in an appropriate district court

25 of the United States to enjoin such violations, to obtain
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1 damages, restitution, or other compensation on behalf of

2 residents of such State or to obtain such further and other

3 relief as the court may deem appropriate.

4 (b) For purposes of bringing any civil action under

5 subsection (a), nothing in this Act shall prevent an attor6 ney general from exercising the powers conferred on the

7 attorney general by the laws of such State to conduct in8 vestigations or to administer oaths or affirmations or to

9 compel the attendance of witnesses or the production of

10 documentary and other evidence.

11 (c) Any civil action brought under subsection (a) in

12 a district court of the United States may be brought in

13 the district in which the defendant is found, is an inhab14 itant, or transacts business or wherever venue is proper

15 under section 1391 of title 28, United States Code. Proc16 ess in such action may be served in any district in which

17 the defendant is an inhabitant or in which the defendant

18 may be found.

19 (d) Nothing contained in this section shall prohibit

20 an authorized State official from proceeding in State court

21 on the basis of an alleged violation of any civil or criminal

22 statute of such State.

23 SEC. 12. EFFECT ON OTHER LAW.

24 (a) This Act preempts State law only to the extent

25 that State law is inconsistent with any provision of this
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1 Act, in terms of providing less protection to the franchisee

2 than provided by this Act, and then only to the extent

3 of such inconsistency.

4 (b) Nothing in this Act shall be interpreted—

5 (1) to alter or relieve any franchisor or

6 subfranchisor from the obligation to comply with the

7 laws of any State, except to the extent that such

8 laws are inconsistent with any provision of this Act;

9 or

10 (2) to preclude a State from enacting any law

11 or regulation that affords a greater level or broader

12 range of protections to franchisees.

13 SEC. 13. CENSUS DATA ON FRANCHISE BUSINESSES.

14 (a) The Bureau of the Census of the Department of

15 Commerce (hereafter, the ‘‘Bureau of the Census’’) shall

16 include in its Business Census for 1997, and in each such

17 succeeding census, statistical information on the number,

18 ownership and operation of franchise businesses.

19 (b) The Bureau of the Census shall—

20 (1) consult with the Federal Trade Commission

21 to establish criteria and procedures to identify fran22 chise businesses to be included in the Business Cen23 sus; and

24 (2) consult with the Congress, the Federal

25 Trade Commission and other interested organiza-
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1 tions in establishing categories of statistical informa2 tion to be collected in the Business Census relating

3 to the number, ownership and operation of franchise

4 businesses.

5 (c) Not later than two hundred eighty days after the

6 date of enactment of this section, the Bureau of the Cen7 sus shall submit a report to the Congress which shall de8 scribe the most cost effective and accurate means to gath9 er and present the statistical information required to be

10 collected pursuant to this section and identify the cat11 egories of data relating to franchise businesses to be in12 cluded in the Business Census.

13 SEC. 14. SCOPE AND APPLICABILITY.

14 Except as otherwise provided, the requirements of

15 this Act shall apply to franchise agreements entered into,

16 amended, exchanged or renewed after the date of enact17 ment of this Act.

18 SEC. 15. DEFINITIONS.

19 For purposes of this Act:

20 (1) The term ‘‘advertisement’’ means a commu21 nication circulated generally by mail, or print media

22 or electronic media, or otherwise disseminated gen23 erally to the public, in connection with an offer or

24 sale of a franchise.
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1 (2) The term ‘‘affiliate’’ means a natural or

2 legal person controlling, controlled by, or under com3 mon control with franchisor.

4 (3) The term ‘‘franchise’’ means—

5 (A) any continuing commercial relationship

6 created by a contract or agreement, either ex7 pressed or implied, whether oral or written,

8 where—

9 (i) one person (the franchisor) grants

10 to another person (the franchisee) the

11 right to engage in the business of offering,

12 selling or distributing goods or services, in

13 which—

14 (I) the goods and services of15 fered, sold or distributed by the

16 franchisee are substantially associated

17 with the trademark, service mark,

18 trade name, logotype, advertising, or

19 other commercial symbol owned or

20 used by the franchisor (hereafter ‘‘the

21 franchisor’s mark’’); or

22 (II) the franchisee must conform

23 to quality standards established by

24 the franchisor with respect to the

25 goods and services being distributed,
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1 and operate under a name that in2 cludes, in whole or in part, the

3 franchisor’s mark;

4 (ii) the franchisor—

5 (I) communicates to the

6 franchisee knowledge, experience, ex7 pertise, knowhow, trade secrets or

8 other non-patented information, re9 gardless of whether it is proprietary

10 or confidential;

11 (II) provides significant assist12 ance to the franchisee in areas relat13 ing to the franchisee’s method of op14 eration; or

15 (III) exercises significant controls

16 over the franchisee’s method of oper17 ation of the business; and

18 (iii) the franchisee, as a condition for

19 obtaining or commencing operation of a

20 franchise, is required to make, or to com21 mit to make, payment or other consider22 ation to the franchisor, or an affiliate of

23 the franchisor, other than payment for

24 commercially reasonable quantities of
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1 goods for resale at a bona fide wholesale

2 price;

3 (B) a subfranchise; or

4 (C) any commercial relationship entered

5 into in reasonable reliance on representations,

6 either oral or written, that the criteria of para7 graph (A) of this subsection will be met.

8 (4) The term ‘‘franchise broker’’ means a per9 son, other than a franchisor or franchisee, who sells,

10 offers for sale or arranges for the sale of a fran11 chise.

12 (5) The term ‘‘franchisee’’ means a person to

13 whom a franchise is granted.

14 (6) The term ‘‘franchisor’’ means a person who

15 grants a franchise or a subfranchise.

16 (7) The term ‘‘good faith’’ means honesty in

17 fact and the observance of reasonable standards of

18 fair dealing in the trade.

19 (8) The terms ‘‘material’’ and ‘‘material fact’’

20 includes—

21 (A) any fact, circumstance, or set of condi22 tions which a reasonable franchisee or a reason23 able prospective franchisee would consider im24 portant in making a significant decision relat-
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1 ing to entering into, remaining in, or abandon2 ing a franchise relationship; and

3 (B) any fact, circumstance, or set of condi4 tions which has, or may have, any significant fi5 nancial impact on a franchisor, franchisee or a

6 prospective franchisee.

7 (9) The term ‘‘offer’’ or ‘‘offering’’ means any

8 effort to offer or to dispose of, or solicitation of an

9 offer to buy, a franchise or interest in a franchise

10 for value.

11 (10) The term ‘‘outlet’’ means a place of busi12 ness, temporary or permanent, fixed or mobile, from

13 which products or services are offered for sale.

14 (11) The term ‘‘person’’ means an individual or

15 any other legal or commercial entity.

16 (12) The term ‘‘State’’ means a State, the Dis17 trict of Columbia, and any territory or possession of

18 the United States.

19 (13) The term ‘‘subfranchise’’ means a contract

20 or an agreement by which a person pays a

21 franchisor for the right to sell, negotiate the sale, or

22 provide services franchises.

23 (14) The term ‘‘subfranchisor’’ means a person

24 who is granted a subfranchise.
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1 (15) The term ‘‘trade secret’’ means informa2 tion, including a formula, pattern, compilation, pro3 gram, device, method, technique, or process, that—

4 (A) derives independent economic value,

5 actual or potential, from not being generally

6 known to, and not being readily ascertainable

7 by proper means by, other persons who can ob8 tain economic value from its disclosure or use,

9 and

10 (B) is the subject of efforts that are rea11 sonable under the circumstances to maintain its

12 secrecy.

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