I

103D CONGRESS

1ST SESSION H. R. 1316

To establish minimum standards of fair conduct in franchise business

relationships, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

MARCH 11, 1993

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

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.

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

5 Practices Act’’.

6 SEC. 2. FINDINGS AND PURPOSE.

7 (a) The Congress makes the following findings:

8 (1) Franchise business relationships represent a

9 large and growing segment of the Nation’s retail and

10 service businesses and are rapidly replacing more
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1 traditional forms of small business ownership in the

2 American economy.

3 (2) Franchise relationships involve a joint en4 terprise between the franchisor and franchisees and

5 each party has a vested interest in the franchised

6 business.

7 (3) Many franchises reflect a profound imbal8 ance of contractual power in favor of the franchisor,

9 and fail to give due regard to the legitimate business

10 interests of the franchisee, as a result of the

11 franchisor reserving pervasive contractual rights over

12 the franchise relationship.

13 (4) Franchisees may suffer substantial financial

14 losses where the franchisor does not act in good

15 faith, or with due care.

16 (5) Traditional common law doctrines have not

17 evolved sufficiently to protect franchisees adequately

18 from fraudulent or unfair practices, and significant

19 contractual and procedural restrictions have denied

20 franchisees viable legal recourse against franchisors.

21 (b) It is the purpose of this Act to promote greater

22 fairness and equity in franchise relationships, to establish

23 minimum standards of conduct in franchise practices, to

24 strengthen private remedies against fraudulent or unlaw25 ful actions, and to provide to consumers the greater bene-
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1 fits which would flow from equitable franchise relation2 ships.

3 SEC. 3. PROHIBITED ACTIONS.

4 (a) In connection with the promotion, sale, licensing,

5 performance, enforcement and termination of any fran6 chise agreement, or of an agreement for any relationship

7 which is represented either orally or in writing to be a

8 franchise, it shall be unlawful for a franchisor or

9 subfranchisor, either directly or indirectly through any of10 ficer, employee, agent, representative or attorney:

11 (1) to engage in an act, practice, course of busi12 ness, or pattern of conduct which operates or is in13 tended to operate as a fraud or deceit upon any per14 son;

15 (2) to employ unlawful or deceptive acts or

16 practices in the operation of the franchisor’s enter17 prise or method of business;

18 (3) to discriminate among franchisees on the

19 basis of race, sex, religion, disability or national ori20 gin, except that, and then only to the extent that,

21 any discrimination between franchisees is reasonable

22 and is related to a program under which franchises

23 are made available to a class of persons who may

24 have been denied franchise opportunities in the past
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1 based on suspect classifications including race, sex,

2 religion or national origin;

3 (b) It shall be unlawful for any franchisor or

4 subfranchisor, either directly or indirectly through any of5 ficer, employee, agent, representative or attorney:

6 (1) to prohibit a franchisee from obtaining

7 equipment, fixtures, supplies or services used in the

8 establishment or operation of the franchised business

9 from sources of the franchisee’s choosing, except

10 that such goods or services may be required to meet

11 uniform system-wide quality standards which are not

12 arbitrarily promulgated or enforced by the

13 franchisor. This paragraph shall not apply to reason14 able quantities of inventory of goods or services (in15 cluding display and sample items) that the

16 franchisee is required to obtain from the franchisor

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

18 are integrally related to a trademark, trade name,

19 trade secret or patent owned by or licensed to the

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

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

22 goods and services without providing a notice of de23 fault and a thirty-day period to cure the default;

24 (2) to terminate or otherwise cancel a franchise

25 prior to its expiration without good cause for such
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1 termination or cancellation. For purposes of this

2 paragraph, good cause shall exist only where:

3 (A) the franchisee fails to comply with a

4 material provision of the franchise agreement

5 after notice specifying the default and a thirty6 day period to cure the default, or if the default

7 can not be cured within thirty days, the

8 franchisee fails to initiate within thirty days

9 and diligently pursue substantial continuing ac10 tion to cure the default;

11 (B) the franchisee, without the require12 ment of notice and opportunity to cure—

13 (i) voluntarily abandons the franchise

14 business, except that loss or termination of

15 a leasehold for the franchise business prior

16 to the term of a franchise agreement by

17 reason of eminent domain, foreclosure sale,

18 natural disaster or other termination not

19 the fault of the franchisee shall not be con20 sidered abandonment by the franchisee;

21 (ii) is convicted of a crime that sub22 stantially impairs the good will associated

23 with the franchisor’s trade mark, service

24 mark, trade name, logotype, advertising or

25 other commercial symbol;
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1 (iii) repeatedly fails to comply with

2 the same material provision of the fran3 chise agreement, where the enforcement of

4 such provision is substantially similar to

5 enforcement of that provision with other

6 franchisees; or

7 (iv) operates the franchised business

8 in a manner that creates an imminent dan9 ger to public health or safety; and

10 (C) the franchisor, whether or not as a re11 sult of bankruptcy or reorganization, withdraws

12 from a marketing area, provided the franchisor

13 pays the franchisee reasonable compensation for

14 damages incurred from the shortened term of

15 the franchise, or agrees not to enforce any con16 tractual prohibition against the franchisee con17 tinuing to engage in the business at the licensed

18 location, except as provided in subsection

19 (3)(B) of this section.

20 (3) to prohibit, or enforce a prohibition against,

21 any franchisee from engaging in any business at any

22 location after expiration of a franchise or after ter23 mination of the franchise prior to its expiration for

24 good cause. This paragraph shall not:
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1 (A) apply to enforcement of any such pro2 hibition where the franchisor, not less than ten

3 days before the effective date of such termi4 nation or expiration, offers in writing to pur5 chase the assets of the franchised business for

6 its fair market value as a going concern, pro7 vided that:

8 (i) the fair market value of such busi9 ness be determined as if it were to be re10 sold or renewed for a period of years equal

11 to the contract term being offered by the

12 franchisor for new or renewed franchises;

13 (ii) the fair market value of such busi14 ness is ascertained by an impartial ap15 praiser, whose appointment is acceptable to

16 both parties; and

17 (iii) forgiveness of debt shall not be

18 considered a purchase of assets by the

19 franchisor for purposes of this section.

20 (B) prohibit enforcement of any provisions

21 of a franchise obligating a franchisee after expi22 ration or termination of a franchise—

23 (i) to cease or refrain from using a

24 trademark, trade secret or other intellec25 tual property owned by the franchisor or
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1 its affiliate, except that the existence of

2 language in the franchise agreement pur3 porting to determine ownership of a trade4 mark, trade secret or other intellectual

5 property shall not be binding upon any

6 court or forum for purposes of this para7 graph, but may be considered by such

8 court or forum as evidence of such owner9 ship; or

10 (ii) to alter the appearance of the

11 premises and the manner of operation of

12 the franchised business to avoid any likeli13 hood of confusion as to the affiliation of

14 the business with its former franchisor.

15 (4) to hinder or prohibit, directly or indirectly,

16 the free association of franchisees for any lawful

17 purpose, including the formation of or participation

18 in any trade association made up of franchisees, or

19 to discriminate by imposing requirements not im20 posed on other similarly situated franchisees, or re21 taliate, directly or indirectly, against any franchisee

22 for membership or participation in a franchisee asso23 ciation.
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1 SEC. 4. ENCROACHMENT.

2 (a) A franchisor shall not establish a new outlet or

3 point of sale of goods or services similar to that offered

4 by a franchisee and identified by the same trade name

5 or trademark or advertising used by a franchisee, in such

6 unreasonable proximity to an outlet or business owned or

7 licensed to such franchisee that the effect or probable ef8 fect of establishing such new outlet or point of sale is to

9 cause a reduction in gross sales of the existing franchise

10 of more than 10 percent during the twelve month period

11 immediately following establishment of the new outlet or

12 point of sale.

13 (b) Where a franchisor has established a new outlet

14 or point of sale in such unreasonable proximity to an exist15 ing franchise, the franchisor shall—

16 (1) compensate the franchisee for lost sales

17 caused by the new outlet or point of sale in an

18 amount equal to the loss of sales in excess of 10 per19 cent for any period in which the new outlet or point

20 of sale has been open for business and remains open

21 for business;

22 (2) change the location or manner of operation

23 of the new outlet or point of sale to mitigate its im24 pact upon the franchise business to diminish the di25 version of sales to less than 10 percent during any
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1 period in which the new outlet or point of sale is

2 open for business; or

3 (3) close the new outlet or point of sale.

4 (c) This section shall not apply if, before a new outlet

5 or point of sale is opened for business, a franchisor offers

6 in writing to each franchisee which owns or licenses a

7 franchise in close proximity to the site of such new outlet

8 or point of sale to pay to such franchisee or franchisees

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

10 sales taxes, returns and allowances) of the new outlet or

11 point of sale for the first twenty-four months of operation

12 of such new outlet or point of sale, if the sales of such

13 existing franchises are reduced by more than 10 percent

14 during the twelve month period immediately following es15 tablishment of the new outlet or point of sale as a con16 sequence of the opening of such outlet or point of sale.

17 (d) A franchisor shall have the burden of proof to

18 show that, or the extent to which, a decline in sales of

19 an existing franchise occurred for reason other than the

20 establishment in close proximity to the franchise of the

21 new outlet or point of sale.

22 SEC. 5. STANDARDS OF CONDUCT.

23 (a) DUTY OF GOOD FAITH.—A franchise contract

24 imposes on each party thereto a duty to act in good faith

25 in its performance and enforcement. This duty of good
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1 faith obligates a party to a franchise to do nothing that

2 will have the effect of destroying or injuring the right of

3 the other party to receive the fruits of the contract and

4 to do everything required under the contract to accomplish

5 such purpose.

6 (b) DUTY OF DUE CARE.—A franchise relationship

7 imposes on the franchisor a duty of due care. Unless a

8 franchisor represents that it has greater skill or knowledge

9 in its undertaking with its franchisees, or conspicuously

10 disclaims that it has skill or knowledge, the franchisor is

11 required to exercise the skill and knowledge normally pos12 sessed by franchisors in good standing in the same or simi13 lar types of business. For purposes of this subsection—

14 (1) the phrase ‘‘skill or knowledge’’ means

15 something more than the mere minimum level of

16 skill or knowledge required of any person engaging

17 in a service or business and involves a special level

18 of expertise—

19 (A) which is the result of acquired learning

20 and aptitude developed by special training and

21 experience in the business to be conducted

22 under the franchise, or the result of extensive

23 use and experience with the products or services

24 or the operating system of the franchise;
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1 (B) which is the result of experience in or2 ganizing a franchise system and in providing

3 training, assistance and services to franchisees;

4 and

5 (C) which a prospective franchisee would

6 expect in reasonable reliance on the written and

7 oral commitments and representations of the

8 franchisor; and

9 (2) a franchisor shall be permitted to show that

10 it contracted for, hired or purchased the expertise

11 necessary to comply with the requirements of this

12 subsection and that such expertise was incorporated

13 in the franchise or communicated or provided to the

14 franchisee.

15 The requirement of this subsection may not be waived by

16 agreement or by conduct, but the franchisor may limit in

17 writing the nature and scope of its skill and knowledge,

18 and of its undertaking with a prospective franchisee: Pro19 vided, That no inconsistent representation, whether writ20 ten or oral, is made to the prospective franchisee.

21 (c) LIMITED FIDUCIARY DUTY.—Without regard to

22 whether a fiduciary duty is imposed generally on the

23 franchisor by virtue of a franchise relationship, the

24 franchisor owes a fiduciary duty to its franchisees and is
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1 obligated to exercise the highest standard of care for

2 franchisee interests where the franchisor:

3 (1) undertakes to perform bookkeeping, collec4 tion, payroll or accounting services on behalf of the

5 franchisee; or

6 (2) requires franchisees to make contributions

7 to any pooled advertising or promotional fund to be

8 administered or supervised by the franchisor.

9 While not limiting the ability of any court to identify other

10 circumstances for which a fiduciary duty may also exist,

11 this subsection does not create or extend a fiduciary duty

12 by implication to other aspects of a franchise.

13 SEC. 6. PROCEDURAL FAIRNESS.

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

15 subfranchisor, either directly or indirectly through any of16 ficer, employee, agent, representative or attorney to:

17 (1) Require any term or condition in a fran18 chise agreement, or in any agreement ancillary or

19 collateral to a franchise, which directly or indirectly

20 violates any provision of this Act; or

21 (2) Require a franchisee to assent to any dis22 claimer, waiver, release, stipulation or other provi23 sion which would purport—
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1 (A) to relieve any person from a duty im2 posed by this Act, except as part of a settle3 ment of a bona fide dispute; or

4 (B) to protect any person against any li5 ability to which he would otherwise be subject

6 under the Act by reason of willful misfeasance,

7 bad faith, or gross negligence in the perform8 ance of duties, or by reason of reckless dis9 regard of obligations and duties under the fran10 chise agreement.

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

12 any franchise agreement, or any agreement ancillary or

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

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

15 unenforceable.

16 (c) No stipulation or provision of a franchise agree17 ment or of an agreement ancillary or collateral to a fran18 chise shall—

19 (1) deprive a franchisee of the application and

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

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

22 of business is located;

23 (2) deprive a franchisee of the right to com24 mence an action (or, if the franchise provides for ar25 bitration, initiate an arbitration) against the
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1 franchisor for violation of the Act, or for breach of

2 the franchise agreement or of any agreement or stip3 ulation ancillary or collateral to the franchise, in a

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

5 franchisee’s principal place of business; or

6 (3) exclude collective action by franchisees to

7 settle like disputes arising from violation of this Act

8 either by civil action or arbitration.

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

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

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

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

13 provision of a franchise agreement or an agreement ancil14 lary or collateral to a franchise, the parol evidence rule,

15 or any other rule of evidence purporting to exclude consid16 eration of matters outside the franchise agreement.

17 SEC. 7. ACTIONS BY PRIVATE PERSONS.

18 (a)(1) Any person injured by a violation of any provision

19 or standard of this Act shall have a right of action for

20 all damages caused by the violation, including costs of liti21 gation and reasonable attorney’s fees, against any person

22 found to be liable for such violation.

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

24 amount in controversy, in any United States district court
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1 or in any other court of competent jurisdiction, before the

2 later of:

3 (A) Five years after the date on which the vio4 lation occurred; or

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

6 violation was discovered or should have been discov7 ered through exercise of reasonable diligence.

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

9 threatened with injury by an impending violation of this

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

11 to obtain a declaratory judgement that an act or conduct

12 constitutes or would constitute a violation of this Act and

13 to enjoin a person who has violated, is violating, or who

14 is otherwise likely to violate any provision of this Act. In

15 such actions, the court may issue a temporary restraining

16 order or preliminary injunction to protect the public inter17 est by halting a recurring or likely violation of this Act,

18 prior to a final determination on the merits, in conformity

19 with the principles governing the granting of preliminary

20 relief in other civil actions, except that no showing of spe21 cial or irreparable damage to such person shall have to

22 be made.

23 (c)(1) In any action brought under subsection (a) or

24 (b) of this section, a court shall have the power to inter25 pret any benefit conferred, duty imposed, or restriction ap-
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1 plied in favor of or against any party to a franchise agree2 ment as reciprocal and equally applicable to the other

3 party to the agreement and to provide an identical or simi4 lar benefit, impose an identical or similar duty, or apply

5 an identical or similar restriction on such other party to

6 the agreement, provided that such reciprocal application

7 is consistent with the laws of the State in which the fran8 chise business is located.

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

10 franchise agreement which purports to restrict the ability

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

12 term of the franchise agreement reciprocally to the extent

13 deemed fair and appropriate.

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

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

16 the right of a franchisor and a franchisee to agree to arbi17 tration, mediation or other nonjudicial resolution of a dis18 pute, either in advance or after a dispute arises: Provided,

19 That the standards and protections applied in any binding

20 nonjudicial procedure agreed to by the parties are not less

21 than the requirements set forth in this Act.

22 (2) Any stipulation or provision of a franchise agree23 ment requiring use of arbitration or other nonjudicial res24 olution to resolve disputes arising under the agreement

25 shall not apply to bar an action brought in a United States
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1 district court or in any other court of competent jurisdic2 tion pursuant to this section involving a request for dam3 ages and/or equitable relief for an alleged violation of any

4 provision of this Act, except where such request is frivo5 lous or insubstantial. A determination of whether a re6 quest for damages and/or equitable relief is frivolous or

7 insubstantial shall be made by the court in which the ac8 tion is filed at any hearing at which all parties are present

9 or represented by counsel.

10 SEC. 8. EFFECT ON OTHER LAW.

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

12 that State law is inconsistent with any provision of this

13 Act, in terms of providing less protection to the franchisee

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

15 of such inconsistency.

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

17 (1) to alter or relieve any franchisor or

18 subfranchisor from the obligation to comply with the

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

20 laws are inconsistent with any provision of this Act;

21 or

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

23 or regulation that affords a greater level or broader

24 range of protections to franchisees.
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1 SEC. 9. SCOPE AND APPLICABILITY.

2 The requirements of this Act shall apply to franchise

3 agreements entered into, amended, exchanged or renewed

4 after the date of enactment of this Act.

5 SEC. 10. DEFINITIONS.

6 For purposes of this Act:

7 (1) The term ‘‘affiliate’’ means a natural or

8 legal person controlling, controlled by, or under com9 mon control with a franchisor.

10 (2) The term ‘‘franchise’’ means—

11 (A) any continuing commercial relationship

12 created by a contract or agreement, either ex13 pressed or implied, whether oral or written,

14 where—

15 (i) one person (the franchisor) grants

16 to another person (the franchisee) the

17 right to engage in the business of offering,

18 selling or distributing goods or services, in

19 which—

20 (I) the goods and services of21 fered, sold or distributed by the

22 franchisee are substantially associated

23 with the trademark, service mark,

24 trade name, logotype, advertising, or

25 other commercial symbol owned or
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1 used by the franchisor (hereafter ‘‘the

2 franchisor’s mark’’); or

3 (II) the franchisee must conform

4 to quality standards established by

5 the franchisor with respect to the

6 goods and services being distributed,

7 and operate under a name that in8 cludes, in whole or in part, the

9 franchisor’s mark;

10 (ii) the franchisor—

11 (I) communicates to the

12 franchisee knowledge, experience, ex13 pertise, know-how, trade secrets or

14 other non-patented information, re15 gardless of whether it is proprietary

16 or confidential;

17 (II) provides significant assist18 ance to the franchisee in areas relat19 ing to the franchisee’s method of op20 eration; or

21 (III) exercises significant controls

22 over the franchisee’s method of oper23 ation of the business; and

24 (iii) the franchisee, as a condition for

25 obtaining or commencing operation of a
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1 franchise, is required to make, or to com2 mit to make, payment or other consider3 ation to the franchisor, or an affiliate of

4 the franchisor, other than payment for

5 commercially reasonable quantities of

6 goods for resale at a bona fide wholesale

7 price.

8 (B) a subfranchise; or

9 (C) any commercial relationship entered

10 into in reasonable reliance on representations,

11 either oral or written, that the criteria of para12 graph (A) of this subsection will be met.

13 (3) The term ‘‘franchisee’’ means a person to

14 whom a franchise is granted.

15 (4) The term ‘‘franchisor’’ means a person who

16 grants a franchise or a subfranchise.

17 (5) The term ‘‘good faith’’ means honesty in

18 fact and the observance of reasonable standards of

19 fair dealing in the trade.

20 (6) The term ‘‘person’’ means an individual or

21 any other legal or commercial entity.

22 (7) The term ‘‘State’’ means a State, the Dis23 trict of Columbia, and any territory or possession of

24 the United States.
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1 (8) The term ‘‘subfranchise’’ means a contract

2 or an agreement by which a person pays a

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

4 provide services franchises.

5 (9) The term ‘‘subfranchisor’’ means a person

6 who is granted a subfranchise.

7 (10) The term ‘‘trade secret’’ means informa8 tion, including a formula, pattern, compilation, pro9 gram, device, method, technique, or process, that:

10 (i) derives independent economic value, ac11 tual or potential, from not being generally

12 known to, and not being readily ascertainable

13 by proper means by, other persons who can ob14 tain economic value from its disclosure or use,

15 and

16 (ii) is the subject of efforts that are rea17 sonable under the circumstances to maintain its

18 secrecy.

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