I

103D CONGRESS

1ST SESSION H. R. 1315

To strengthen current Federal law and regulation to protect consumers in

connection with the representation and sale of franchise businesses; to

facilitate increased public disclosure regarding franchise opportunities,

to enhance common law remedies for purchasers of franchises, and for

other purposes.

IN THE HOUSE OF REPRESENTATIVES

MARCH 11, 1993

Mr. LAFALCE introduced the following bill; which was referred jointly to the

Committees on Energy and Commerce and the Judiciary

A BILL

To strengthen current Federal law and regulation to protect

consumers in connection with the representation and sale

of franchise businesses; to facilitate increased public disclosure regarding franchise opportunities, to enhance

common law remedies for purchasers of franchises, 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.

4 This Act may be cited as the ‘‘Federal Franchise

5 Disclosure and Consumer Protection Act’’.
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1 SEC. 2. FINDINGS AND PURPOSE.

2 (a) The Congress makes the following findings:

3 (1) Franchise business relationships represent a

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

5 service businesses and are replacing more traditional

6 forms of small business ownership in the American

7 economy.

8 (2) Because franchising remains a relatively

9 new form of business relationship, existing law has

10 not evolved sufficiently to protect prospective

11 franchisees adequately from misrepresentation in the

12 sale of franchise businesses or from fraudulent or in13 adequately structured franchise opportunities.

14 (3) Most prospective franchisees lack bargain15 ing power and generally invest substantial amounts

16 to obtain a franchise business when they are unfa17 miliar with operating a business, with the business

18 being franchised and with industry practices in fran19 chising.

20 (4) Franchisees may suffer substantial losses

21 when the franchisor, or the franchisor’s representa22 tive, do not provide truthful or complete information

23 regarding the franchise opportunity, the prior busi24 ness experience of the franchisor or the details of

25 the franchisor-franchisee relationship.
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1 (5) Traditional legal remedies have proven inad2 equate to protect the legitimate interests of pur3 chasers of franchises due to the failure of some

4 courts to recognize what inducements are material in

5 the sale of a franchise and what contractual provi6 sions are material in ongoing franchise relationships.

7 (b) It is the purpose of this Act to provide prospective

8 franchisees with additional information necessary to help

9 them make an informed decision about the purchase of

10 a franchise opportunity, to protect prospective franchisees

11 from fraudulent practices, to broaden the scope and en12 hance the availability and utility of common law remedies,

13 and to promote more equitable franchise relationships.

14 SEC. 3. PROHIBITED ACTIONS.

15 (a) In connection with the advertising, offering, li16 censing, contracting, sale or other promotion in or affect17 ing commerce of any franchise, or any relationship which

18 is represented either orally or in writing to be a franchise,

19 it shall be unlawful for any person, partnership or corpora20 tion—

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

22 defraud;

23 (2) to engage in an act, practice, course of busi24 ness or pattern of conduct which operates or is in-
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1 tended to operate as a fraud or deceit upon any per2 son;

3 (3) to obtain money or property, or assist oth4 ers to obtain money or property, by means of any

5 untrue statement of a material fact, any omission to

6 state a material fact, or any omission to state a ma7 terial fact necessary in order to make the statements

8 made, in the light of the circumstances under which

9 they are made, not misleading; or

10 (4) to discriminate among prospective

11 franchisees on the basis of race, sex, religion, dis12 ability or national origin—

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

14 any franchise opportunity, except that, and

15 then only to the extent that, any discrimination

16 between franchisees is reasonable and is related

17 to a program under which franchises are made

18 available to a class of persons who may have

19 been denied franchise opportunities in the past

20 based on suspect classifications including race,

21 sex, religion, disability or national origin; or

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

23 for a franchise business; or

24 (5) to represent or imply in any manner what25 soever that such franchise has been reviewed, en-
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1 dorsed, recommended or approved by the United

2 States or any agency or officer thereof.

3 (b) In connection with any disclosure required by this

4 Act, or any disclosure document, notice or report required

5 by Federal law or regulation, it shall be unlawful for any

6 franchisor, subfranchisor or franchise broker, either di7 rectly or indirectly through any officer, employee, agent,

8 representative or attorney—

9 (1) to make or cause to be made an untrue

10 statement of material fact, omit to state a material

11 fact, or omit to state a material fact necessary in

12 order to make the statements made, in the light of

13 the circumstances under which they are made, not

14 misleading;

15 (2) to fail to furnish any prospective franchisee

16 with all information required to be disclosed by, and

17 at the time and in the manner required by the Fed18 eral Trade Commission (hereafter ‘‘the Commis19 sion’’) in its Franchise Rule;

20 (3) to fail to furnish any prospective franchisee

21 with information which is current as of the close of

22 the franchisor’s most recent fiscal year, or within

23 ninety days thereof, or which reflects any material

24 changes since the close of such fiscal year;
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1 (4) to fail to furnish any prospective franchisee

2 at the time disclosure is made copies of all collateral

3 documents, including manuals, memoranda, operat4 ing procedures and royalty schedules, where and to

5 the extent that such documents are incorporated by

6 reference into the franchise agreement, except that

7 a franchisor may require a confidentiality agreement

8 as a condition for reviewing confidential materials;

9 or

10 (5) to make any claim or representation to a

11 prospective franchisee, whether oral or in writing,

12 which is inconsistent with or contradicts any infor13 mation provided to the prospective franchisee in any

14 required disclosure.

15 (c) No provision of subsection (b) imposing any liabil16 ity shall apply to any action, statement or omission done

17 or made in good faith in conformity with any rule, regula18 tion or order of the Commission, notwithstanding that

19 such rule, regulation or order may, after such act or omis20 sion, be amended or rescinded by the Commission.

21 (d) For purposes of this section, an untrue statement

22 of material fact shall include any statement of fact which

23 has the intent or effect of misrepresenting the profitability

24 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 SEC. 4. MATERIAL OMISSIONS DEFINED.

4 (a) It shall be an omission of material fact for a

5 franchisor, subfranchisor or franchise broker, either di6 rectly or indirectly through any officer, employee, agent,

7 representative or attorney, to fail to furnish any prospec8 tive franchisee with the following information at the time

9 and in the manner set forth by the Commission under the

10 Franchise Rule:

11 (1) The name and principal place of business of

12 the franchisor, its predecessor, parent firm, holding

13 company or other controlling entity of the

14 franchisor, if any, and the name under which the

15 franchisor is doing or intends to do business;

16 (2) A statement identifying—

17 (A) any parent or affiliate of the

18 franchisor or other related entity that is en19 gaged in franchising or providing services or as20 sistance to franchisees; and

21 (B) the name and position held of each of

22 the franchisor’s current general partners or

23 principal officers (including the chief executive

24 and chief operating officer, financial, franchise

25 marketing, training and service officers), as ap-
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1 plicable, other executives or subfranchisors who

2 will have management responsibility in connec3 tion with the operation of the franchisor’s busi4 ness relating to the franchise business offered,

5 and all franchise brokers.

6 (3) A statement disclosing whether the

7 franchisor or any person identified in subsection

8 (2)—

9 (A) has, at any time during the previous

10 ten fiscal years, been convicted of a felony or

11 pleaded nolo contendere to a felony charge if

12 the felony involved fraud, embezzlement, fraud13 ulent conversion, misappropriation of property,

14 restraint of trade, violation of a Federal or

15 State tax law or violation of a State franchise

16 statute;

17 (B) has, at any time during the previous

18 ten years, been held liable in a civil action re19 sulting in a final judgment, or has settled out

20 of court any claim, including complaints, cross

21 claims, counterclaims, and third party com22 plaints, in a judicial proceeding and their

23 equivalents in an arbitration proceeding—

24 (i) involving allegations of fraud, em25 bezzlement, fraudulent conversion, mis-
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1 appropriation of property, restraint of

2 trade or comparable allegations; or

3 (ii) involving a present or former

4 franchisee and which involved or involves

5 the franchisor-franchisee relationship; ex6 cept that such statement may omit ref7 erence to such actions which were dis8 missed by final judgment or settlement

9 without payment or liability by the

10 franchisor or entry of an adverse order

11 against the franchisor in which the

12 franchisor is bound to obligations which

13 are material either to the franchisor or

14 franchisee; and

15 (C) is subject to any currently effective

16 State or Federal agency or court injunctive or

17 restrictive order, has been subject to any such

18 order during the previous ten years, relating to

19 or affecting franchise activities or the

20 franchisor-franchisee relationship or involving

21 fraud, embezzlement, fraudulent conversion

22 misappropriation of property, restraint of trade

23 or violation of a Federal or State tax law.

24 Such statement shall set forth the identity and loca25 tion of the court or agency; a description of the na-
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1 ture of the claim; the date of conviction, judgment

2 or decision; the penalty imposed or the damages as3 sessed; any payments made; the terms of settlement,

4 order or arbitrator’s decision; and the date, nature

5 and issuer of each such order or ruling.

6 (4) A statement disclosing whether the

7 franchisor or any person identified in subsection (2)

8 is a party to any pending administrative, criminal or

9 material civil action or arbitration involving allega10 tions of fraud, embezzlement, fraudulent conversion,

11 misappropriation of property, restraint of trade or

12 comparable allegations, or complaints or counter13 claims involving franchise sales or the franchise rela14 tionship. Such statement shall set forth the identity

15 and location of the court or forum in which each ad16 ministrative action, civil action or arbitration is filed,

17 the date of such filing and a summary of the nature

18 of the allegations. For purposes of this subsection,

19 a civil action or arbitration is material if such action

20 or arbitration involves—

21 (A) a significant financial impact on a

22 franchisee or a former franchisee;

23 (B) any group of civil actions, irrespective

24 of the financial impact of any single action,

25 which in the aggregate have a significant im-
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1 pact on the franchise system in seeking fifteen

2 percent or more of the current assets of the

3 franchisor or any affiliate of the fanchisor;

4 (C) a current or former supplier or lessor

5 who supplied more than 5 percent of an item to

6 the franchise system; and

7 (D) claims or counterclaims which a rea8 sonable prospective franchisee would consider

9 important in making a decision regarding enter10 ing into a franchise relationship.

11 (5) A statement disclosing whether the

12 franchisor or any person identified in subsection (2)

13 have at any time during the previous seven fiscal

14 years filed in bankruptcy, been adjudged bankrupt,

15 been reorganized due to insolvency, or been a prin16 cipal, director, executive officer, or partner of any

17 other person that has so filed or was so adjudged or

18 reorganized, during or within one year after the pe19 riod that such person held such position in such

20 other person.

21 (6) A statement of the total funds which must

22 be paid by the franchisee to the franchisor or to any

23 person affiliated with the franchisor, or which the

24 franchisor or such affiliated person imposes or col-
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1 lects in whole or in part on behalf of a third party.

2 Such statement shall include:

3 (A) a description of all funds which must

4 be paid—

5 (i) to obtain or commence the fran6 chise operation, including, but not limited

7 to, franchise fees, deposits, down pay8 ments, prepaid rent, and equipment and

9 inventory purchases, and

10 (ii) to carry on the franchise business,

11 including, but not limited to, royalty, lease,

12 advertising, training, insurance, sign rental

13 fees, and equipment or inventory pur14 chases;

15 (B) a description of any real estate, serv16 ices, supplies, products, inventories, signs, fix17 tures, or equipment relating to the establish18 ment or the operation of the franchise business

19 which the franchisee is directly or indirectly re20 quired by the franchisor to purchase, lease or

21 rent, and, if such purchases, leases or rental

22 are required from specific persons (including

23 the franchisor), the names and address of each

24 such person;
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1 (C) a description of the basis for calculat2 ing, and actual amounts, where available, of

3 any revenue or other consideration to be re4 ceived by the franchisor, the franchisor’s parent

5 firm, if any, or any person affiliated with the

6 franchisor, from each such person with whom

7 the franchisee is required to make such pur8 chases, leases or rentals; and

9 (D) an estimate of the total investment to

10 be paid by the franchisee, irrespective of the

11 type of expenditure and to whether payment is

12 made to the franchisor, to any person affiliated

13 with the franchisor, or to any third party—

14 (i) to obtain and commence operations

15 of the franchise business; and

16 (ii) to carry on the franchise business

17 during the initial twelve-month period fol18 lowing the opening of the franchise busi19 ness, including an estimate of loan repay20 ments, including interest, if part of the

21 franchisee’s initial investment may be fi22 nanced.

23 (7) A statement describing the services and as24 sistance which the franchisor, persons affiliated with

25 the franchisor, or third parties designated by the
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1 franchisor, are obligated to provide to the franchisee,

2 under the terms of the franchise agreement or any

3 agreement ancillary or collateral to a franchise:

4 (A) to obtain or commence the franchise

5 operation; and

6 (B) to carry on the franchise business.

7 Such statement shall include cautionary lan8 guage stating that the franchisor is not obli9 gated under the franchise agreement, or any

10 other agreement, to provide any additional serv11 ices or assistance to the franchisee other than

12 the services disclosed.

13 (8) A statement describing the trade names,

14 trademarks, service marks, logotypes, advertising or

15 other commercial symbols (hereafter ‘‘trade names

16 and trademarks’’) which are to be licensed to the

17 prospective franchisee, or which are owned or used

18 by the franchisor to identify the goods or services to

19 be offered, sold, or distributed by the prospective

20 franchisee. Such statement shall indicate whether—

21 (A) such trade names or trademarks have

22 been registered with the United States Patent

23 and Trademark Office, or registered with the

24 State in which the franchise business is located
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1 or is to be located, and the date and number of

2 any such registrations;

3 (B) there are any material restrictions on

4 the franchisor’s right to license or the

5 franchisee’s right to use such trade names or

6 trademarks;

7 (C) there are any pending interference, op8 position or cancellation proceeding, or any

9 pending material litigation involving such trade

10 names or trademarks of relevance to the state

11 in which a franchise is located or will be lo12 cated; and

13 (D) the franchisor is obligated by the fran14 chise agreement to protect the franchisee’s

15 right to use such trade names or trademarks

16 and to protect the franchisee against claims of

17 infringement or unfair competition with respect

18 to such trade names and trademarks.

19 (9) A statement disclosing whether, by the

20 terms of the franchise agreement, any agreement an21 cillary or corollary to the franchise, or any other de22 vice or practice—

23 (A) the franchisee is to be limited in any

24 manner—
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1 (i) in the goods or services he or she

2 may offer for sale;

3 (ii) in the customers to whom he or

4 she may sell such goods or services; or

5 (iii) in the geographic areas in which

6 he or she may offer for sale or sell goods

7 or services;

8 (B) the franchisee is granted territorial

9 protection by the franchisor, by which, with re10 spect to such territory or area, the franchisor—

11 (i) will not establish another, or more

12 than a fixed number of, franchises or com13 pany-owned outlets either operating under,

14 or selling, offering, or distributing goods or

15 services, identified by any trade name or

16 trademark set forth in subsection (8) of

17 this section;

18 (ii) will not establish other franchises

19 or company-owned outlets selling or leasing

20 the same or similar products or services

21 under a different trade name or trade22 mark; or

23 (iii) will not otherwise market the

24 same or similar products or services under
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1 the same, similar or different trade name

2 or trademark; and

3 (C) the franchisor is marketing, intends to

4 market, reserves the right to market, or is con5 tractually precluded from marketing, through

6 arrangements other than a franchise or a com7 pany-owned outlet, the same or similar products

8 or services to be offered for sale by the

9 franchisee, whether under the trade name or

10 trademark set forth in subsection (8) or a dif11 ferent trademark or trade name, in the pro12 tected territory granted to the franchisee or, if

13 no such territory is granted, within a market

14 area defined as the larger of—

15 (i) the area in which the franchise is

16 expected to draw 80 percent of its busi17 ness, or

18 (ii) the area defined in the franchise

19 agreement for purposes of a

20 noncompetition covenant.

21 (10) A statement disclosing the existence of any

22 written agreement or commitment, or any public ex23 pression of intention, made by the franchisor, any

24 officer of the franchisor, or the franchisor’s parent

25 firm or ultimate controlling person, if any, to dis-
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1 pose of the corporation or partnership, or the major2 ity (controlling) interest of such corporation or part3 nership, which is identified in subsection (1) of this

4 section as the franchisor of the business being of5 fered for sale. Where an agreement or commitment

6 has been made, such statement shall include the

7 name and address of the person(s) or corporation

8 which has committed to purchase the franchisor

9 company or a majority interest in such company.

10 (11) A statement of a specific level, average or

11 range of sales, earnings, profit or loss for franchises

12 of the franchisor, which shall—

13 (A) have a factual basis in operating data

14 for sales, earnings, profits or losses from fran15 chise or nonfranchise outlets of the franchisor

16 and/or of its affiliates which offer for sale the

17 same or similar products and services, and

18 which are operated under the same trade name

19 or trademark as set forth in subsection (8), ex20 cept that—

21 (i) a franchisor which has offered/sold

22 franchises for less than two years, a

23 franchisor which has not more than ten

24 franchise and nonfranchise outlets, or no

25 more than five franchise outlets, to provide
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1 a basis for such operating data, or an es2 tablished franchisor offering a new, sepa3 rate franchise concept, for which there are

4 no more than ten franchise or nonfranchise

5 outlets to provide a basis for such operat6 ing data, is not required to make such a

7 statement; and

8 (ii) a franchisor providing representa9 tions limited solely to the actual operating

10 results of a specific outlet offered for sale

11 is not required to make such a statement,

12 provided such representation is in writing,

13 is given only to potential purchasers of

14 such outlet, and is accompanied by the

15 names and last known addresses of each

16 owner of such outlet during the previous

17 five years;

18 (B) be derived from the most current in19 formation available to the franchisor, and/or to

20 its affiliates, pertaining to—

21 (i) gross sales of franchise and

22 nonfranchise outlets;

23 (ii) operating costs of franchise and

24 nonfranchise outlets, to the extent that

25 such costs are known to the franchisor,
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1 can be estimated reasonably by the

2 franchisor or are discoverable by the

3 franchisor through exercise of reasonable

4 diligence, provided that where information

5 on operating costs of nonfranchise outlets

6 is used, appropriate adjustment shall be

7 made to reflect additional costs that will be

8 incurred by franchisees, to the extent that

9 such additional costs are known; and

10 (iii) the net profit or net loss of fran11 chises and nonfranchise outlets. At mini12 mum, a franchisor may identify the fiscal

13 year of such data and whether, on average,

14 a profit or loss occurred for franchise and

15 nonfranchised outlets, where such informa16 tion is known to the franchisor, can rea17 sonably be estimated by the franchisor or

18 is discoverable by the franchisor through

19 exercise of reasonable diligence; except that

20 the franchisor must include a statement

21 describing net losses or average net losses

22 of franchise and nonfranchised outlets

23 where the franchisor knows or should know

24 that such losses have occurred.
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1 Where information relating to costs and net

2 profit or loss are not known to the franchisor

3 or can not be estimated or discovered through

4 reasonable diligence, the franchisor shall include

5 a conspicuous statement that such information

6 cannot be provided to prospective franchisees

7 and shall describe in detail the information that

8 is not disclosed, the reasons why such informa9 tion is not known or can not be obtained by the

10 franchisor, and the actions or procedures un11 dertaken by the franchisor, where applicable, to

12 obtain such information;

13 (C) have a reasonable basis for all claims

14 or representations, for which the burden shall

15 be upon the franchisor to show that it had a

16 reasonable basis at the time such representa17 tions were made;

18 (D) be included in full in the written dis19 closure document which is provided by the

20 franchisor to the prospective franchisee at the

21 time of making disclosure. A franchisor shall

22 make no additional information or representa23 tions regarding actual or potential sales, costs,

24 income or profits available to the potential

25 franchisee, or to any agent, attorney or lender
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1 of the prospective franchisee, other than that

2 contained in such statement or elsewhere in the

3 disclosure document, except that a supple4 mental statement of actual operating results re5 lating to a specific outlet, or a statement di6 rected to the particular circumstances of a spe7 cific location may be made available to a pro8 spective franchisee interested in such outlet or

9 location, provided any supplemental statement

10 be made in writing and explain any departure

11 from the statement provided in the disclosure

12 document and the reasons for such departure;

13 (E) include a concise description of the

14 factual basis and the material assumptions un15 derlying its preparation and presentation. Such

16 description shall include a statement of whether

17 the representations made are based on operat18 ing data of franchised or nonfranchised outlets

19 of the franchisor, the number of such outlets

20 constituting the basis for such data, and the

21 number and percentage of franchised outlets of

22 the franchisor in operation during the period

23 covered by such representation that are known

24 to have attained or surpassed the results stated;
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1 (F) be updated at least annually by the

2 franchisor and amended as necessary to reflect

3 changed material facts or to incorporate

4 changes which the franchisor knows, or should

5 have known, make such statement no longer ac6 curate or reflective of the operating experience

7 of franchised units; and

8 (G) include a statement that substan9 tiation of the data used in preparing the state10 ment shall be made available to the prospective

11 franchisee upon request.

12 (12) A statement disclosing, with respect to the

13 franchisor and as to the particular named business

14 being offered:

15 (A) the names, addresses, and telephone

16 numbers of—

17 (i) all franchisees in the State in

18 which the proposed franchise is to be lo19 cated, provided that there are at least

20 twenty-five such franchisees;

21 (ii) all franchisees in the State in

22 which the proposed franchise is to be lo23 cated and all franchisees in States geo24 graphically contiguous to such State, pro-
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1 vided that there are at least twenty-five

2 franchisees in such States; or

3 (iii) all franchisees of the franchisor.

4 Where the number of franchisees to be disclosed

5 under this subparagraph exceeds fifty, such list6 ing may be in a separate document presented to

7 the franchisee with the disclosure document,

8 provided that the existence of such separate

9 document is disclosed in the disclosure docu10 ment.

11 (B) the number of franchisees with outlets

12 in the following categories that, within the

13 three-year period immediately before the close

14 of the franchisor’s most recent fiscal year,

15 have—

16 (i) been canceled or terminated by the

17 franchisor;

18 (ii) not been renewed by the

19 franchisor;

20 (iii) been reacquired through purchase

21 by the franchisor;

22 (iv) been otherwise reacquired by the

23 franchisor; and
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1 (v) left the franchise system or ceased

2 to do business under the franchise agree3 ment;

4 (C) the name, last known address and tele5 phone number and location of franchise(s) of

6 every franchisee who voluntarily or involuntarily

7 left the franchise system or ceased doing busi8 ness under the franchise agreement during the

9 five-year period immediately before the close of

10 the franchisor’s most recent fiscal year.

11 Franchisors subject to the requirements of this

12 section upon the effective date of this Act, and

13 franchisors which shall commence franchising

14 after such date, may make disclosure pursuant

15 to this paragraph for the franchisor’s most re16 cent fiscal year only, or for the franchisor’s first

17 complete fiscal year only, and shall make appro18 priate disclosure following each succeeding fis19 cal year so that, after the close of the

20 franchisor’s fourth fiscal year following such

21 date of enactment, or after the close of a

22 franchisor’s fifth fiscal year of operation, disclo23 sure shall be provided for not less than five

24 years thereafter;
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1 (D) the number of all previous owners of

2 a specific franchise outlet to be resold, or the

3 number of previous owners of franchise busi4 nesses or outlets of the same franchise system

5 who conducted business during the previous

6 seven years in the protected market area to be

7 granted to a franchise, or within the same mar8 ket area in which a franchise business is to be

9 located. The franchisor shall—

10 (i) provide such number in a supple11 mental written statement to potential pur12 chasers of such outlet, or to potential pur13 chasers of franchises in such market area;

14 (ii) maintain updated listings of all

15 such previous owners, which shall include

16 the name, last known addresses, business

17 locations, dates of ownership and reasons

18 for terminating the franchise relationship

19 for each owner; and

20 (iii) disclose that such listing shall be

21 made available to prospective franchisees

22 upon request; and

23 (E) the identity of any association, associa24 tions, advisory councils or other organizations

25 of franchise owners of the business being of-
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1 fered that are organized to promote the inter2 ests of franchises in their relationship with the

3 franchisor, and the name, current address and

4 telephone number of any officer or designated

5 contact person for such association, associa6 tions, advisory council or other organizations

7 from whom a prospective franchisee may seek

8 additional information. The franchisor shall

9 identify all such organizations affiliated with, or

10 recognized by the franchisor and independent

11 associations or organizations not affiliated with,

12 or directed in any manner by the franchisor,

13 and shall indicate for each such association or

14 organization whether it is affiliated with, or

15 independent of the franchisor, except that, the

16 franchisor shall identify only organizations

17 which have identified themselves to the

18 franchisor and which—

19 (i) have been in operation not less

20 than one hundred eighty days prior to the

21 time disclosure is made; and

22 (ii) represent not less than the lesser

23 of either fifty franchisees, or 25 percent of

24 the franchise outlets of the franchise

25 system.
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1 (13) A balance sheet for the franchisor for the

2 most recent fiscal year, and an income statement

3 and statement of changes in financial position for

4 the franchisor for the most recent three fiscal years,

5 which shall:

6 (A) have been examined in accordance with

7 generally accepted auditing standards by an

8 independent certified or licensed public account9 ant, except that, unaudited statements may be

10 used only to the extent that audited statements

11 cannot be prepared under generally accepted

12 auditing standards, are prepared by an inde13 pendent certified or licensed public accountant,

14 and are accompanied by a clear and conspicu15 ous disclosure that they are unaudited; and

16 (B) include a separate, concise and con17 spicuous summary, prepared by an independent

18 certified or licensed public accountant, of the

19 sources of revenues of the franchisor for each

20 the franchisor’s most recent three fiscal years,

21 stated in terms of the percentage of total an22 nual revenues of such franchisor attributed to

23 each of the following categories or sources of

24 revenue—

25 (i) pre-opening fees;
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1 (ii) royalty payments;

2 (iii) pre-opening purchases by

3 franchisees of equipment, inventory or sup4 plies;

5 (iv) net rental income from real estate

6 leases or rental of real estate, fixtures or

7 equipment;

8 (v) post-opening purchases by

9 franchisees of equipment, inventory of sup10 plies, including goods and services sold to

11 franchisees for resale and payments to the

12 franchisor by suppliers with whom

13 franchisees are required to purchase goods

14 or services;

15 (vi) nonfranchised or company-owned

16 outlets; and

17 (vii) sales of goods and services to the

18 public through means of distribution other

19 than franchise and nonfranchised outlets,

20 whether under the same, similar or dif21 ferent trade name or trademark.

22 A franchisor may substitute, in lieu of the bal23 ance sheet and income statements under sub24 paragraph (A), the consolidated financial state25 ments of the franchisor’s parent company which
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1 include the franchisor’s financial results, pro2 vided such parent company guarantees the

3 franchisor’s financial performance and, provided

4 further, that such financial statement shall in5 clude a separate summary of the revenue

6 sources of the franchisor pursuant to subpara7 graph (B).

8 (b) Standards of material omissions set forth in sub9 section (a) are in addition to other facts, circumstances,

10 or sets of conditions which may be material under Federal

11 or State law or regulation.

12 (c) Each disclosure required in paragraphs (1)

13 through (13) of subsection (a) shall be commented upon

14 either positively or negatively in required disclosure docu15 ments by use of a clearly and concisely written statement

16 which fully incorporates all information required to be dis17 closed.

18 (d) Information required to be disclosed in supple19 mental statements in subsections (a)(11)(A)(ii) and

20 (a)(12)(D) of this section, and which relate to specific

21 franchise outlets or market areas offered for sale, shall

22 be presented to the prospective franchisee at the time of

23 making disclosure, as defined by the Commission in sub24 section 436.2(g) of the Franchise Rule.
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1 (e) Information required to be presented to prospec2 tive franchisees upon request, pursuant to subsections

3 (a)(11)(F) and (a)(12)(C)(iii) of this section, where such

4 request is made in timely fashion, shall be made available

5 at the time the prospective franchisee is presented with

6 a copy of the franchisor’s completed franchise and related

7 agreements to be executed by the parties, or not later than

8 five business days prior to the date that such agreements

9 are to be executed and the prospective franchisee is re10 quired to pay any consideration in connection with the sale

11 or proposed sale of the franchise.

12 (f) The franchisor shall exercise diligent efforts to

13 collect all relevant information relating to sales, costs and

14 operating profits and/or losses of franchise and/or

15 nonfranchise outlets from its own files and databases,

16 franchisees, subsidiaries, affiliates, employees, suppliers

17 and any other source from which such information is avail18 able to permit disclosure pursuant to subsection (a)(11)

19 of this section and to establish procedures for timely col20 lection of such information. The Commission shall set

21 forth in regulation the criteria with which it may consider

22 granting full or partial exemption from disclosure under

23 this subsection. Except where exempted under subsection

24 (a)(11)(A), or otherwise exempted by the Commission, a

25 franchisor shall be deemed to have made an omission of
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1 material fact under this Act where disclosure pursuant to

2 subsection (a)(11) is not provided to prospective

3 franchisees, either in full or in part with appropriate ex4 planations relating to required disclosures under sub5 sections (a)(11)(B)(ii) and (a)(11)(B)(iii), within two hun6 dred and forty days following the date of enactment of

7 this section. Not later than ninety days after the end of

8 the franchisor’s first complete fiscal year following the ef9 fective date of this Act, the franchisor, except as otherwise

10 exempted, shall comply fully with subsection (a)(11) and

11 shall be required to exercise reasonable diligence to obtain

12 and/or discover the information relating to sales, costs,

13 profits or losses of franchise and/or nonfranchise outlets

14 necessary to establish a reasonable basis for disclosure

15 under such subsection.

16 SEC. 5. ACCOUNTS AND RECORDS.

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

18 subfranchisor, either directly or indirectly through any of19 ficer, employee, broker, agent or attorney, except as per20 mitted by rule, regulation or order of the Commission,

21 willfully to destroy, mutilate or alter any disclosure docu22 ment, account, book, record, receipt or other document re23 quired to be maintained and preserved pursuant to sub24 section (b) of this section.
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1 (b) A franchisor, subfranchisor or franchise broker,

2 where applicable, shall maintain and preserve for such pe3 riod or periods as the Commission may prescribe by rule

4 or regulation, such disclosure documents, account, books,

5 records, receipts or other documents pertaining to any in6 formation required to be disclosed pursuant to section 4

7 of this Act, or which are necessary and appropriate to con8 stitute—

9 (1) the record of any transaction involving the

10 offering, negotiation, sale or resale of a franchise, or

11 of any relationship which is represented by the

12 franchisor to be a franchise; and

13 (2) the record forming the basis for any finan14 cial statement and any earnings representation re15 quired to be disclosed under section 4.

16 (c) The Commission shall set forth by regulation, as

17 appropriate, the manner in which all documents, accounts

18 and records are to be maintained and the period or periods

19 for which such documents, accounts and records are to

20 be preserved, except that no account, record or document

21 required to be maintained and preserved pursuant to this

22 section shall be preserved for a period of less than seven

23 years.

24 (d) All accounts, books, records and other documents

25 required to be maintained and preserved by any person
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1 pursuant to subsection (b) shall be subject to examination

2 by the Commission, or any member or representative

3 thereof, either upon written request of the Commission or

4 upon subpoena as part of any enforcement action under5 taken by the Commission pursuant to section 6 of this

6 Act.

7 SEC. 6. ENFORCEMENT.

8 (a) Enforcement by Federal Trade Commission:

9 (1) The Commission is authorized and directed

10 to prevent any person from violating the provisions

11 of this Act in the same manner, by the same means,

12 and with the same jurisdiction, powers, and duties

13 as though all applicable terms and provisions of the

14 Federal Trade Commission Act (15 U.S.C. 41 et

15 seq.) were incorporated into and made a part of this

16 Act.

17 (2) Any person who violates the provisions of

18 this Act, or any rule of the Commission under this

19 Act, shall be subject to the penalties and entitled to

20 the privileges and immunities provided in the Fed21 eral Trade Commission Act in the same manner, by

22 the same means, and with the same jurisdiction,

23 power and duties as though all applicable terms and

24 provisions of the Federal Trade Commission Act

25 were incorporated into and made a part of this Act.
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1 (3)(A) For purposes of section 3(b) of this Act,

2 the Commission shall have the authority to enforce

3 compliance with disclosure standards by means of

4 the disclosure statement required by the Commission

5 in its Franchise Rule or the Uniform Franchise Of6 fering Circular of the North American Securities Ad7 ministrators Association, Inc.

8 (B) Where the guidelines for preparation of the

9 Uniform Franchise Offering Circular are amended

10 by the North American Securities Administrators’

11 Association, or its successor, disclosures prepared in

12 compliance with the amended guidelines shall be pre13 sumed to comply with the requirements of the Com14 mission’s Franchise Rule unless, within one hundred

15 and eighty days of formal notification of such

16 amendments by the North American Securities Ad17 ministrators’ Association, or its successor, the Com18 mission responds in writing that it has determined

19 that the amended requirements do not provide equal

20 or greater protection to prospective franchisees than

21 the Commission’s Franchise Rule.

22 (b) Civil actions by the Commission:

23 (1) Except as otherwise provided in subsection

24 (2), the Commission may commence a civil action in

25 a district court of the United States or in any court
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1 of competent jurisdiction of a State to recover a civil

2 penalty or obtain appropriate relief against any per3 son, partnership, or corporation which violates any

4 provision of this Act, or any rule of the Commission

5 under this Act, in the same manner, by the same

6 means, and with the same jurisdiction, powers, and

7 duties as provided in sections 5(m), 13(b) and 19 of

8 the Federal Trade Commission Act (15 U.S.C.

9 45(m), 53(b) and 57b).

10 (2) Notwithstanding the three-year statute of

11 limitations provisions of section 19b of the Federal

12 Trade Commission Act (15 U.S.C. 57b(d)), any civil

13 action arising from a violation of this Act, or any

14 rule of the Commission under this Act, shall be

15 brought by the Commission before the later of—

16 (A) five years after the date on which such

17 violation occurred; or

18 (B) three years after the date on which the

19 violation was discovered or should have been

20 discovered through exercise of reasonable dili21 gence.

22 (c) The powers, duties, remedies and procedures set

23 forth in this section shall be in addition to, and not in

24 limitation of, any other powers, duties, remedies and pro-
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1 cedures otherwise provided the Commission by the Federal

2 Trade Commission Act and other laws.

3 (d) The Commission is authorized to make such rules

4 and regulations as are necessary and appropriate to imple5 ment the provisions of this Act.

6 SEC. 7. ACTIONS BY PRIVATE PERSONS.

7 (a)(1) Any person injured by a violation of any provi8 sion of this Act, or any rule or order of the Commission

9 under this Act, shall have a right of action for all damages

10 caused by the violation, including costs of litigation and

11 reasonable attorney’s fees, against any person found to be

12 liable for such violation.

13 (2) An action may be brought, without regard to the

14 amount in controversy, in any United States district court

15 or in any other court of competent jurisdiction before the

16 later of—

17 (A) five years after the date on which the viola18 tion occurred; or

19 (B) three years after the date on which the vio20 lation was discovered or should have been discovered

21 through exercise of reasonable diligence.

22 (3) Nothing in this Act or the Federal Trade Com23 mission Act shall be construed as creating any obligation

24 on the part of any injured person to seek relief from the

25 Commission prior to bringing an action under this section.
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1 (b) Any person injured by a violation of this Act, or

2 threatened with injury by an impending violation of this

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

4 to obtain a declaratory judgment that an act, omission or

5 conduct constitutes or would constitute a violation of this

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

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

8 Act. In such actions, the court may issue a temporary re9 straining order or preliminary injunction to protect the

10 public interest by halting a recurring or likely violation

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

12 in conformity with the principles governing the granting

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

14 showing of special or irreparable damage to such person

15 shall have to be made.

16 (c) In any action brought under subsections (a) or

17 (b) of this section, a court shall have the power to inter18 pret any benefit conferred, duty imposed, or restriction ap19 plied in favor of or against any party to a franchise agree20 ment as reciprocal and equally applicable to the other

21 party to the agreement and to provide an identical or simi22 lar benefit, impose an identical or similar duty, or apply

23 an identical or similar restriction on such other party, pro24 vided that such reciprocal application is consistent with
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1 the laws of the State in which the franchise business is

2 located.

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

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

5 the right of a franchisor and a franchisee to agree to arbi6 tration, mediation, or other nonjudicial resolution of a dis7 pute, either in advance or after a dispute arises, provided

8 that the standards and protections applied in any binding

9 nonjudicial procedure agreed to by the parties are not less

10 than the requirements set forth in this Act; and

11 (2) Any stipulation or provision of a franchise agree12 ment requiring use of arbitration to resolve disputes aris13 ing under the agreement shall not apply to bar any action

14 brought in a United States district court or in any other

15 court of competent jurisdiction pursuant to this section

16 involving a request for damages and/or equitable relief

17 caused by a violation of section 3 of this Act.

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

19 addition to, and not in lieu of other rights or remedies

20 created by Federal or State law or regulation.

21 SEC. 8. PROHIBITION ON WAIVER OF RIGHTS AND LIABIL22 ITY.

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

24 subfranchisor, either directly or indirectly through any of25 ficer employee, agent, representative or attorney to—
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1 (1) Require any term or condition in a fran2 chise agreement, or in any agreement ancillary or

3 collateral to a franchise, which directly or indirectly

4 violates any provision of this Act, and rule of the

5 Commission under this Act, or any provision of the

6 Franchise Rule; or

7 (2) Require a franchise to assent to any dis8 claimer, waiver, release or other provision of a fran9 chise agreement, or in any document relating to the

10 sale of a franchise, which would purport—

11 (A) to relieve any person from a duty im12 posed by this Act, any rule of the Commission

13 under this Act, or any provision of the Fran14 chise Rule; or

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

17 under the Act, or any rule of the Commission

18 under the Act, either by reason of willful mis19 feasance, bad faith, or gross negligence in the

20 performance of disclosure and other duties, or

21 by reason of reckless disregard of obligation

22 and duties under the franchise agreement.

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

24 any franchise agreement, or any agreement ancillary or

25 collateral to a franchise, which would purport to waive or
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1 restrict any right granted under this Act shall be void and

2 unenforceable.

3 (c) No stipulation or provision of a franchise agree4 ment or of an agreement ancillary or collateral to a fran5 chise shall—

6 (1) deprive a franchise of the application and

7 benefits of this Act or of a law of the State in which

8 the franchisee’s principal place of business is located

9 by purporting to designate the law of another juris10 diction as governing or interpreting the franchise or

11 disclosure relating to such franchise;

12 (2) deprive a franchisee of the right to com13 mence an action against the franchisor for violation

14 of this Act, any rule of the Commission under this

15 Act, in a court or forum in the state of the

16 franchisee’s principal place of business; and

17 (3) exclude collective action by franchisees to

18 settle like disputes arising from violations of this

19 Act, or any rule of the Commission under this Act.

20 (d) Compliance with this Act is not waived, excused

21 or avoided, and evidence of a violation of this Act or of

22 any rule of the Commission under this Act shall not be

23 excluded, by virtue of an integration clause, any provision

24 of a franchise agreement or an agreement ancillary or col25 lateral to a franchise, the parol evidence rule, or any other
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1 rule of evidence purporting to exclude consideration of

2 matters outside the franchise agreement.

3 (e) The requirements of this section shall apply to

4 franchise agreements entered into, amended or renewed

5 on or after the date of enactment of this Act.

6 SEC. 9. EFFECT ON STATE LAW.

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

8 that State law is inconsistent with any provision of this

9 Act, in terms of providing less protection to prospective

10 franchisees than provided by this Act, and then only to

11 the extent of such inconsistency.

12 (b) Nothing in this Act shall—

13 (1) alter or relieve any franchisor or other per14 son subject to the provisions of this Act from the ob15 ligation to comply with the laws of any State with

16 respect to franchise disclosure and registration, ex17 cept to the extent that such laws are inconsistent

18 with any provision of this Act; and

19 (2) preclude a State from enacting any law or

20 regulation that affords a greater level or broader

21 range of protections to franchisees and prospective

22 franchisees.

23 SEC. 10. STUDY OF NEED FOR ADDITIONAL PROTECTIONS.

24 (a) The Commission shall conduct an ongoing study

25 of the need to develop and implement additional provisions
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1 to prevent evasions or violations of the requirements of

2 this Act or to strengthen disclosure of pertinent informa3 tion to prospective franchisees. In examining such addi4 tional provisions, the Commission shall consider the extent

5 to which such additional provisions may be implemented

6 under the Commission’s rulemaking authority.

7 (b) The Commission shall submit to the Congress,

8 not later than eighteen months after the date of enactment

9 of this Act, a report reviewing the implementation of this

10 Act, which shall include the results of the study required

11 by subsection (a). The Commission shall submit such addi12 tional reports to the Congress as are merited by later find13 ings of such study.

14 SEC. 11. EFFECTIVE DATE.

15 Except as otherwise provided, the provisions of this

16 Act shall take effect one hundred and eighty days after

17 the date of enactment of this Act.

18 SEC. 12. DEFINITIONS.

19 For purposes of this Act—

20 (1) the term ‘‘affiliate’’ means a person control21 ling, controlled by, or under common control with a

22 franchisor;

23 (2) the term ‘‘advertisement’’ means a commu24 nication circulated generally by mail, or print media

25 or electronic media, or otherwise disseminated gen-
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1 erally to the public, in connection with an offer or

2 sale of a franchise;

3 (3) the term ‘‘commerce’’ has the same mean4 ing as in section 4 of the Federal Trade Commission

5 Act (15 U.S.C. 44);

6 (4) the term ‘‘Commission’’ means the Federal

7 Trade Commission; and

8 (5) the term ‘‘disclosure document’’ means ei9 ther the disclosure statement required by the Com10 mission in Trade Regulation Rule 436 (16 CFR s

11 436) as it may be amended, or an offering circular

12 prepared in accordance with Uniform Franchise Of13 fering Circular guidelines as adopted and amended

14 by the North American Securities Administrators

15 Association, Inc., or its successor.

16 (6) The term ‘‘franchise’’ means—

17 (A) any continuing commercial relationship

18 created by a contract or agreement, whether ex19 press or implied, oral or written, where—

20 (i) one person (the franchisor) grants

21 to another person (the franchisee) the

22 right to engage in the business of offering,

23 selling or distributing goods or services, in

24 which—
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1 (I) the goods or services offered,

2 sold or distributed by the franchisee

3 are substantially associated with the

4 trademark, service mark, trade name,

5 logotype, advertising, or other com6 mercial symbol owned or used by the

7 franchisor; or

8 (II) the franchisee must conform

9 to quality standards established by

10 the franchisor for the goods or serv11 ices to be offered, sold or distributed,

12 and operate under a name that in13 cludes, in whole or in part, the

14 franchisor’s trademark, service mark,

15 trade name, logotype, advertising, or

16 other commercial symbol;

17 (ii) the franchisor—

18 (I) communicates to the

19 franchisee knowledge, experience, ex20 pertise, know-how, trade secrets or

21 other nonpatented information, re22 gardless of whether it is proprietary

23 or confidential;
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1 (II) provides significant assist2 ance in the franchisee’s method of op3 eration; or

4 (III) exercises significant controls

5 over the franchisee’s method of oper6 ation of the business; and

7 (iii) the franchisee, as a condition for

8 obtaining or commencing operation of a

9 franchise, is required to make, or to com10 mit to make, payment or other consider11 ation to the franchisor, or an affiliate of

12 the franchisor, other than payment for

13 commercially reasonable quantities of

14 goods for resale at a bona fide wholesale

15 price.

16 (B) a subfranchise; or

17 (C) any commercial relationship entered

18 into in reasonable reliance on representations,

19 whether oral or written, that the criteria of sub20 section (A) will be met.

21 (7) The term ‘‘franchise broker’’ means a per22 son, other than a franchisor or franchisee, who sells,

23 offers for sale or arranges for the sale of a fran24 chise.
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1 (8) The term ‘‘franchisee’’ means a person to

2 whom a franchise is granted.

3 (9) The term ‘‘Franchise Rule’’ means Trade

4 Regulation Rule 436 (16 CFR 436) as promulgated

5 and amended by the Federal Trade Commission.

6 (10) The term ‘‘franchisor’’ means a person

7 who grants a franchise or a subfranchise.

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

9 includes—

10 (A) any fact, circumstance, or set of condi11 tions which a reasonable franchisee or a reason12 able prospective franchisee would consider im13 portant in making a significant decision relat14 ing to entering into, remaining in, or abandon15 ing a franchise relationship; and

16 (B) any fact, circumstance, or set of condi17 tions which has, or may have, any significant fi18 nancial impact on a franchisor, franchisee or a

19 prospective franchisee.

20 (12) The term ‘‘offer’’ or ‘‘offering’’ means any

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

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

23 for value.
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1 (13) The term ‘‘outlet’’ means a place of busi2 ness, temporary or permanent, fixed or mobile, from

3 which products or services are offered for sale.

4 (14) The term ‘‘person’’ means a natural per5 son or any legal entity recognized in law.

6 (15) The term ‘‘State’’ means a State, the Dis7 trict of Columbia, and any territory or possession of

8 the United States.

9 (16) The term ‘‘subfranchise’’ means a contract

10 or an agreement by which a person pays a

11 franchisor for the right to sell, offer for sale or ar12 range the sale of franchises, or to provide goods or

13 services to franchisees.

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

15 who is granted a subfranchise.

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