I

105TH CONGRESS

2D SESSION H. R. 4841

To establish minimum standards of fair conduct in franchise sales and

franchise business relationships, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

OCTOBER 14, 1998

Mr. COBLE (for himself, Mr. CONYERS, Mr. NORWOOD, Mr. TAYLOR of North

Carolina, Mr. NADLER, Mr. COBURN, Mr. ACKERMAN, Mr. DICKEY, Mr.

KING, Mr. JENKINS, and Mr. HILLEARY) 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 ‘‘Small Business Franchise Act of 1998’’.

6 (b) TABLE OF CONTENTS.—The table of contents of

7 this Act is the following:

Sec. 1. Short title; table of contents.

Sec. 2. Findings and purpose.

Sec. 3. Franchise sales practices.
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Sec. 4. Unfair franchise practices.

Sec. 5. Standards of conduct.

Sec. 6. Procedural fairness.

Sec. 7. Actions by State attorneys general.

Sec. 8. Transfer of a franchise.

Sec. 9. Transfer of franchise by franchisor.

Sec. 10. Independent sourcing of goods and services.

Sec. 11. Encroachment.

Sec. 12. Private right of action.

Sec. 13. Scope and applicability.

Sec. 14. Definitions.

1 SEC. 2. FINDINGS AND PURPOSE.

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

3 findings:

4 (1) Franchise businesses represent a large and

5 growing segment of the nation’s retail and service

6 businesses and are rapidly replacing more traditional

7 forms of small business ownership in the American

8 economy.

9 (2) Franchise businesses involve a joint enter10 prise 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,
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1 and fail to give due regard to the legitimate business

2 interests of the franchisee, as a result of the

3 franchisor reserving pervasive contractual rights over

4 the franchise relationship.

5 (5) Franchisees may suffer substantial financial

6 losses when the franchisor does not provide truthful

7 or complete information regarding the franchise op8 portunity, or where the franchisor does not act in

9 good faith in the performance of the franchise agree10 ment.

11 (6) Traditional common law doctrines have not

12 evolved sufficiently to protect franchisees adequately

13 from fraudulent or unfair practices in the sale and

14 operation of franchise businesses, and significant

15 contractual and procedural restrictions have denied

16 franchisees adequate legal recourse to protect their

17 interests in such businesses.

18 (7) A franchisee’s freedom to contract is greatly

19 limited by the disparity of bargaining power, lack of

20 consistent legal standards, and other factors de21 scribed above. This Act is necessary to restore free22 dom to contract, and to remove restrictive barriers

23 impeding entry into industries and markets domi24 nated by franchise systems.
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1 (b) PURPOSE.—It is the purpose of this Act to pro2 mote fair and equitable franchise agreements, to establish

3 uniform standards of conduct in franchise relationships

4 and to create uniform private Federal remedies for viola5 tions of Federal law.

6 SEC. 3. FRANCHISE SALES PRACTICES.

7 (a) IN GENERAL.—In connection with the advertis8 ing, offering, sale or promotion of any franchise, it shall

9 be unlawful for any person—

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

11 defraud;

12 (2) to engage in an act, practice, course of busi13 ness or pattern of conduct which operates or is in14 tended to operate as a fraud upon any prospective

15 franchisee;

16 (3) to obtain property, or assist others to obtain

17 property, by making an untrue statement of a mate18 rial fact or any failure to state a material fact;

19 (4) to discriminate among prospective

20 franchisees on the basis of race, color, sexual ori21 entation, sex, religion, disability, national origin, or

22 age—

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

24 any franchise opportunity; or
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1 (B) in the selection of any site or location

2 for a franchise business.

3 (b) MISREPRESENTATIONS IN REQUIRED DISCLO4 SURE.—

5 (1) In connection with any disclosure document,

6 notice, or report required by any law, it shall be un7 lawful for any franchisor, subfranchisor, or franchise

8 broker, either directly or indirectly through another

9 person—

10 (A) to—

11 (i) make an untrue statement of ma12 terial fact;

13 (ii) fail to state a material fact; or

14 (iii) fail to state any fact which would

15 render any required statement or disclo16 sure either untrue or misleading;

17 (B) to fail to furnish any prospective

18 franchisee with—

19 (i) all information required to be dis20 closed by law and at the time and in the

21 manner required; and

22 (ii) a written statement specifying,

23 prominently and in not less than 14-point

24 type, whether the franchise agreement in-
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1 volved contains a right to renew such

2 agreement; or

3 (C) to make any claim or representation to

4 a prospective franchisee whether orally or in

5 writing, which is inconsistent with or con6 tradicts such disclosure document.

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

8 ‘‘disclosure document’’ means either the disclosure

9 statement required by the Federal Trade Commis10 sion in Trade Regulation Rule 436 (16 C.F.R.

11 § 436) as amended from time to time, or any offer12 ing format allowed or required by State law.

13 SEC. 4. UNFAIR FRANCHISE PRACTICES.

14 (a) DECEPTIVE AND DISCRIMINATORY PRACTICES.—

15 In connection with the performance, enforcement, renewal,

16 or termination of any franchise agreement, it shall be un17 lawful for a franchisor or subfranchisor, either directly or

18 indirectly through another person—

19 (1) to engage in an act, practice, course of busi20 ness, or pattern of conduct which operates as a

21 fraud upon any person;

22 (2) to discriminate among franchisees on the

23 basis of race, color, sexual orientation, sex, religion,

24 disability, national origin, or age;
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1 (3) to hinder, prohibit, or penalize (or threaten

2 to hinder, prohibit, or penalize), directly or indi3 rectly, the free association of franchisees for any

4 lawful purpose, including the formation of or partici5 pation in any trade association made up of

6 franchisees or of associations of franchises; or

7 (4) to discriminate against a franchisee by im8 posing requirements not imposed on other similarly

9 situated franchisees or otherwise retaliate, directly

10 or indirectly, against any franchisee for membership

11 or participation in a franchisee association.

12 (b) TERMINATION WITHOUT GOOD CAUSE.—

13 (1) It shall be unlawful for a franchisor, either

14 directly or indirectly through an affiliate or another

15 person, to terminate a franchise agreement prior to

16 its expiration without good cause for such termi17 nation.

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

19 shall exist only where—

20 (A)(i) the franchisee fails to comply with a

21 material provision of the franchise agreement

22 after receiving notice that specifies the precise

23 basis for the default, each material term of the

24 franchise agreement with which the franchise is
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1 not in compliance, and a 30-day period to cure

2 the default; and

3 (ii) if the nature of the default is such that

4 it cannot be cured through reasonably diligent

5 conduct, the franchisee fails to initiate within

6 30 days, and diligently pursue substantial con7 tinuing action to cure the default;

8 (B) the franchisee, without the require9 ment of notice and opportunity to cure—

10 (i) voluntarily abandons the business

11 licensed by the franchise agreement, except

12 that loss or termination of a leasehold for

13 the business prior to the term of a fran14 chise agreement by reason of eminent do15 main, foreclosure sale, natural disaster or

16 other termination not the fault of the

17 franchisee shall not be considered abandon18 ment by the franchisee;

19 (ii) is convicted of a felony, for which

20 imprisonment of 1 year or more can be im21 posed, which substantially impairs the

22 good will associated with the franchisor’s

23 trade mark, service mark, trade name, log24 otype, advertising, or other commercial

25 symbol;
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1 (iii) is repeatedly in default of the

2 same material provision of the franchise

3 agreement, where the enforcement of such

4 provision is substantially similar to en5 forcement of that provision with other

6 franchisees; or

7 (iv) operates the business licensed by

8 the franchise agreement in a manner that

9 creates an imminent danger to public

10 health or safety; or

11 (C) the franchisor withdraws from the

12 marketing area of the business licensed by the

13 franchise agreement and pays the franchisee

14 reasonable compensation for damages incurred

15 from the shortened term of the agreement and

16 agrees in writing not to enforce any contractual

17 prohibition against the franchisee continuing to

18 engage in the business at the franchised loca19 tion.

20 (c) POST-TERM RESTRICTIONS ON COMPETITION.—

21 (1) A franchisor shall not prohibit, or enforce

22 a prohibition against, any franchisee from engaging

23 in any business at any location after expiration of a

24 franchise agreement.
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1 (2) Nothing in this subsection shall be inter2 preted to prohibit enforcement of any provision of a

3 franchise contract obligating a franchisee after expi4 ration or termination of a franchise—

5 (A) to cease or refrain from using a trade6 mark, trade secret, or other intellectual prop7 erty owned by the franchisor or its affiliate, ex8 cept that the existence of language in the fran9 chise agreement purporting to determine owner10 ship of a trademark, trade secret, or other in11 tellectual property shall not be binding upon

12 any court or forum for purposes of this para13 graph, but may be considered by such court or

14 forum as evidence of such ownership;

15 (B) to alter the appearance of the business

16 premises so that it is not substantially similar

17 to the standard design, decor criteria, or motif

18 in use by other franchisees using the same

19 name or trademarks within the proximate trade

20 or market area of the business; or

21 (C) to modify the manner or mode of busi22 ness operations so as to avoid any substantial

23 confusion with the manner or mode of oper24 ations which are unique to the franchisor and

25 commonly in practice by other franchisees using
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1 the same name or trademarks within the proxi2 mate trade or market area of the business.

3 SEC. 5. STANDARDS OF CONDUCT.

4 (a) DUTY OF GOOD FAITH.—

5 (1) A franchise contract imposes on each party

6 thereto a duty to act in good faith in its perform7 ance and enforcement.

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

9 faith shall—

10 (A) obligate a party to a franchise to do

11 nothing that will have the effect of destroying

12 or injuring the right of the other party to ob13 tain and receive the expected fruits of the con14 tract and to do everything required under the

15 contract to accomplish such purpose; and

16 (B) require honesty of fact and observance

17 of reasonable standards of fair dealing in the

18 trade.

19 (3) No provision of any franchise agreement,

20 express or implied, shall be interpreted or enforced

21 in such a way as to obfuscate a party’s duty to act

22 reasonably and in good faith with the other, or oth23 erwise allow a disparate result in the franchise rela24 tionship.

25 (b) DUTY OF DUE CARE.—
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1 (1) A franchise agreement imposes on the

2 franchisor a duty of due care. Unless a franchisor

3 represents that it has greater skill or knowledge in

4 its undertaking with its franchisees, or conspicuously

5 disclaims that it has skill or knowledge, the

6 franchisor is required to exercise the skill and knowl7 edge normally possessed by franchisors in good

8 standing in the same or similar types of business.

9 (2) For purposes of this subsection—

10 (A) the term ‘‘skill or knowledge’’ means

11 something more than the mere minimum level

12 of skill or knowledge required of any person en13 gaging in a service or business and involves a

14 special level of expertise—

15 (i) which is the result of acquired

16 learning and aptitude developed by special

17 training and experience in the business to

18 be licensed under the franchise agreement,

19 or the result of extensive use and experi20 ence with the goods or services or the oper21 ating system of such business;

22 (ii) which is the result of experience in

23 organizing a franchise system and in pro24 viding training, assistance and services to

25 franchisees; and
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1 (iii) which a prospective franchisee

2 would expect in reasonable reliance on the

3 written and oral commitments and rep4 resentations of the franchisor; and

5 (B) a franchisor shall be permitted to show

6 that it contracted for, hired or purchased the

7 expertise necessary to comply with the require8 ments of this subsection and that such expertise

9 was incorporated in the franchise or commu10 nicated or provided to the franchisee.

11 (3) The requirement of this subsection may not

12 be waived by agreement or by conduct, but the

13 franchisor may limit in writing the nature and scope

14 of its skill and knowledge, and of its undertaking

15 with a prospective franchisee, provided that no in16 consistent representation, whether written or oral, is

17 made to the prospective franchisee irrespective of

18 any merger or integration clause in the franchise

19 agreement.

20 (c) LIMITED FIDUCIARY DUTY.—

21 (1) Without regard to whether a fiduciary duty

22 is imposed generally on the franchisor by virtue of

23 a franchise agreement, the franchisor owes a fidu24 ciary duty to its franchisees and is obligated to exer-
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1 cise the highest standard of care for franchisee in2 terests where the franchisor—

3 (A) undertakes to perform bookkeeping,

4 collection, payroll, or accounting services on be5 half of the franchisee; or

6 (B) administers, controls or supervises (ei7 ther directly or through any subsidiary or affili8 ate) any advertising, marketing, or promotional

9 fund or program to which franchisees are re10 quired to, or routinely, contribute.

11 (2) A franchisor that administers or supervises

12 the administration of any fund or program described

13 in paragraph (1)(B) shall—

14 (A) keep all moneys contributed to such

15 fund or program in a separate account;

16 (B) provide an independent certified audit

17 of such fund within 60 days following the close

18 of the franchisor’s fiscal year, which shall in19 clude full disclosure of all fees, expenses, or

20 other payments from the account to the

21 franchisor or to any subsidiary, affiliate, or

22 other entity controlled in whole or in part by

23 the franchisor; and

24 (C) disclose the source and amount of, and

25 deliver to such fund or program, any discount,
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1 rebate, compensation, or payment of any kind

2 from any person or entity with whom such fund

3 or program transacts.

4 (3) While not limiting the ability of any court

5 to identify other circumstances for which a fiduciary

6 duty may also exist, this subsection does not create

7 or extend a fiduciary duty by implication to other

8 aspects of a franchise.

9 SEC. 6. PROCEDURAL FAIRNESS.

10 (a) It shall be unlawful for any franchisor, either di11 rectly or indirectly through another person, to—

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

13 agreement, or in any agreement ancillary or collat14 eral to a franchise, which directly or indirectly vio15 lates any provision of this Act; or

16 (2) require a franchisee to assent to any dis17 claimer, waiver, release, stipulation or other provi18 sion which would purport—

19 (A) to relieve any person from a duty im20 posed by this Act, except as part of a settle21 ment of a bona fide dispute; or

22 (B) to protect any person against any li23 ability to which he would otherwise be subject

24 under this Act by reason of willful misfeasance,

25 bad faith, or gross negligence in the perform-
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1 ance of duties, or by reason of reckless dis2 regard of obligations and duties under the fran3 chise agreement; or

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

5 release, stipulation, or other provision, either as part

6 of any agreement or document relating to the oper7 ation of a franchise business, in any agreement or

8 document relating to the termination, cancellation,

9 forfeiture, repurchase, or resale of a franchise busi10 ness or as a condition for permitting a franchisee to

11 leave the franchise system, which would purport to

12 prevent the franchisee from making any oral or writ13 ten statement relating to the franchise business, to

14 the operation of the franchise system or to the

15 franchisee’s experience with the franchise business.

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

17 any franchise agreement, or any agreement ancillary or

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

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

20 unenforceable.

21 (c) No stipulation or provision of a franchise agree22 ment, or of an agreement ancillary or collateral to a fran23 chise, shall—

24 (1) deprive a franchisee of the application and

25 benefits of this Act, of any other Federal law, or of
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1 the law of the State in which the franchisee’s prin2 cipal place of business is located;

3 (2) deprive a franchisee of the right to com4 mence an action (or, if the franchise provides for ar5 bitration, initiate an arbitration) against the

6 franchisor for violation of this Act, or for breach of

7 the franchise agreement, or of any agreement or

8 stipulation ancillary or collateral to the franchise, in

9 a court (or arbitration forum) in the State of the

10 franchisee’s principal place of business; or

11 (3) prevent a franchisee from participating as a

12 member of a class permitted by Rule 23 of the Fed13 eral Rules of Civil Procedure or applicable State law.

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

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

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

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

18 provision of a franchise agreement, or an agreement ancil19 lary or collateral to a franchise, the parol evidence rule,

20 or any other rule of evidence purporting to exclude consid21 eration of matters outside the franchise agreement.

22 SEC. 7. ACTIONS BY STATE ATTORNEYS GENERAL.

23 (a) CIVIL ACTION.—Whenever an attorney general of

24 any State has reason to believe that the interests of the

25 residents of that State have been or are being threatened
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1 or adversely affected because any person has engaged or

2 is engaging in a pattern or practice which violates any pro3 vision of this Act, the State, as parens patriae, may bring

4 a civil action on behalf of its residents in an appropriate

5 district court of the United States to enjoin such viola6 tions, to obtain damages, restitution or other compensa7 tion on behalf of residents of such State or to obtain such

8 further and other relief as the court may deem appro9 priate.

10 (b) PRESERVATION OF POWER.—For purposes of

11 bringing any civil action under subsection (a), nothing in

12 this Act shall prevent an attorney general from exercising

13 the powers conferred on the attorney general by the laws

14 of such State to conduct investigations or to administer

15 oaths or affirmations or to compel the attendance of wit16 nesses or the production of documentary and other evi17 dence.

18 (c) VENUE.—Any civil action brought under sub19 section (a) in a district court of the United States may

20 be brought in the district in which the defendant is found,

21 is an inhabitant, or transacts business or wherever venue

22 is proper under section 1391 of title 28, United States

23 Code. Process in such action may be served in any district

24 in which the defendant is an inhabitant or in which the

25 defendant may be found.
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1 (d) NO PREEMPTION.—Nothing contained in this

2 section shall prohibit an authorized State official from pro3 ceeding in State court on the basis of an alleged violation

4 of any civil or criminal statute of such State.

5 SEC. 8. TRANSFER OF A FRANCHISE.

6 (a) IN GENERAL.—A franchisee may assign an inter7 est in a franchised business or in a franchise to a trans8 feree provided the transferee satisfies the reasonable quali9 fications then generally applied by the franchisor in deter10 mining whether or not a current franchisee is eligible for

11 renewal. If the franchisor does not renew a significant

12 number of its franchisees, then the transferee may be re13 quired to satisfy the reasonable conditions generally ap14 plied to new franchisees. For the purpose of this section,

15 a reasonable current qualification for a new franchisee is

16 a qualification based upon a legitimate business reason.

17 If the proposed transferee does not meet the reasonable

18 current qualifications of the franchisor, the franchisor

19 may refuse to permit the transfer, provided that the re20 fusal of the franchisor to consent to the transfer is not

21 arbitrary or capricious and the franchisor states the

22 grounds for its refusal in writing to the franchisee.

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

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

25 of a proposed transfer of a transferable interest, and on
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1 request shall provide in writing the ownership interests of

2 all persons holding or claiming an equitable or beneficial

3 interest in the franchise subsequent to the transfer or the

4 franchisee, as appropriate.

5 (c) CONSENT TO PROPOSED TRANSFER.—A transfer

6 by a franchisee is deemed to have been approved 30 days

7 after the franchisee submits the request for permission to

8 transfer the franchise involved unless, within that time the

9 franchisor refuses to consent to the transfer as evidenced

10 in writing in accordance with subsection (a). A statement

11 of the grounds for refusal to consent to the transfer is

12 privileged against a claim of defamation.

13 (d) CONDITIONS OF TRANSFER.—

14 (1) PERMISSIBLE CONDITIONS.—A franchisor

15 may require as a condition of a transfer that—

16 (A) the transferee successfully complete a

17 reasonable training program;

18 (B) a reasonable transfer fee be paid to re19 imburse the franchisor for the franchisor’s rea20 sonable and actual expenses directly attrib21 utable to the transfer;

22 (C) the franchisee pay or make reasonable

23 provision to pay any amount due the franchisor

24 or the franchisor’s affiliate; or
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1 (D) the financial terms of the transfer at

2 the time of the transfer, comply with the

3 franchisor’s current financial requirements for

4 franchisees.

5 (2) IMPERMISSIBLE CONDITIONS.—A franchisor

6 may not condition its consent to a transfer described

7 in paragraph (1) on—

8 (A) a franchisee’s forgoing existing rights

9 other than those contained in the franchise

10 agreement;

11 (B) a franchisee’s entering into a release

12 of claims broader in scope than a counterpart

13 release of claims offered by the franchisor to

14 the franchisee; or

15 (C) requiring the franchisee or transferee

16 to make, or agree to make, capital improve17 ments, reinvestments, or purchases in an

18 amount greater than the franchisor could have

19 reasonably required under the terms of the

20 franchisee’s existing franchise agreement.

21 (e) ASSIGNMENT.—A franchisee may assign the

22 franchisee’s interest in the franchise for the unexpired

23 term of the franchise agreement, and a franchisor shall

24 not require the franchisee or the transferee to enter into
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1 a franchise agreement that has different material terms

2 or financial requirements as a condition of the transfer.

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

4 may not withhold its consent to a franchisee’s making a

5 public offering of its securities without good cause if the

6 franchisee, or the owner of the franchisee’s interest in the

7 franchise, retains control over more than 25 percent of

8 the voting power as the franchisee.

9 (g) CONSENT TO POOLING INTERESTS, OR TO SALE

10 OR EXCHANGE.—A franchisor may not withhold its con11 sent to a pooling of interests, to a sale or exchange of

12 assets or securities, or to any other business consolidation

13 amongst its existing franchisees, provided the constituents

14 are each in material compliance with their respective obli15 gations to the franchisor.

16 (h) NONINTERFERENCE.—The following occurrences

17 shall not be considered transfers requiring the consent of

18 the franchisor under a franchise agreement, and a

19 franchisor shall not impose any fees, payments, or charges

20 in excess of a franchisor’s cost to review the relevant mat21 ter:

22 (1) The succession of ownership or management

23 of a franchise upon the death or disability of a

24 franchisee, or of an owner of a franchise, to the sur25 viving spouse, heir, or partner active in the manage-
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1 ment of the franchise unless the successor objec2 tively fails to meet within 1 year or the then current

3 reasonable qualifications of the franchisor for

4 franchisees.

5 (2) Incorporation of a proprietorship franchisee,

6 provided that the franchisor may require a personal

7 guarantee by the franchisee of obligations related to

8 the franchise.

9 (3) A transfer within an existing ownership

10 group of a franchise provided that more than 50

11 percent of the franchise is held by persons who meet

12 the franchisor’s reasonable current qualifications for

13 franchisees. If less than 50 percent of the franchise

14 would be owned by persons who objectively meet the

15 franchisor’s reasonable current qualifications, the

16 franchisor may refuse to authorize the transfer.

17 (4) A transfer of less than a controlling interest

18 in the franchise to the franchisee’s spouse or child

19 or children, provided that more than 50 percent of

20 the entire franchise is held by those who meet the

21 franchisor’s reasonable current qualifications. If less

22 than 50 percent of the franchise would be owned by

23 persons who objectively meet the franchisor’s reason24 able current qualifications, the franchisor may refuse

25 to authorize the transfer.
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1 (5) A grant or retention of a security interest

2 in the franchised business or its assets, or an owner3 ship interest in the franchisee, if the security agree4 ment establishes an obligation on the part of the se5 cured party enforceable by the franchisor to give the

6 franchisor simultaneously with notice to the

7 franchisee, notice of the secured party’s intent to

8 foreclose on the collateral, and a reasonable oppor9 tunity to redeem the interest of the secured party

10 and recover the secured party’s interest in the fran11 chise or franchised business by satisfying the se12 cured obligation.

13 (6) A franchisor may not exercise any pur14 ported right of first refusal or right to purchase with

15 regard to any franchise, or interest or assets of a

16 franchisee, upon the happening of any event de17 scribed in paragraphs (1) through (5).

18 (i) EFFECT OF CERTAIN COVENANTS.—

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

20 transferor’s complete interest in a franchise, a

21 franchisor may not enforce against the transferor

22 any covenant of the franchise purporting to prohibit

23 the transferor from engaging in any lawful occupa24 tion or enterprise.
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1 (2) EXCEPTION.—This subsection shall not

2 limit the franchisor from enforcing a contractual

3 covenant against the transferor not to exploit the

4 franchisor’s trade secrets or intellectual property

5 rights (including protection of trade dress) except by

6 agreement with the franchisor.

7 SEC. 9. TRANSFER OF FRANCHISE BY FRANCHISOR.

8 A franchisor shall not transfer, by sale or otherwise,

9 its interest in a franchise unless—

10 (1) the franchisor provides, not less than 30

11 days before the effective date of transfer, notice to

12 every franchisee of the intent to transfer the

13 franchisor’s interest in the franchise or of substan14 tially all of the franchises held by the franchisor;

15 (2) such notice is accompanied by a complete

16 description of the business and financial terms of

17 the proposed transfer or transfers; and

18 (3) upon the transfer, the entity assuming the

19 franchisor’s obligations has the business experience

20 and financial means to perform all of the

21 franchisor’s obligations in the ordinary course of

22 business.
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1 SEC. 10. INDEPENDENT SOURCING OF GOODS AND SERV2 ICES.

3 (a) IN GENERAL.—Except as provided in subsection

4 (e) a franchisor, either directly or indirectly through any

5 affiliate, officer, employee, agent, representative or attor6 ney, shall not prohibit or restrict a franchisee from obtain7 ing equipment, fixtures, supplies, goods, or services used

8 in the establishment or operation of the franchised busi9 ness from sources of the franchisee’s choosing, except that

10 such goods or services may be required to meet reasonable

11 established uniform system-wide quality standards pro12 mulgated or enforced by the franchisor.

13 (b) APPROVED VENDORS.—Without limiting the

14 rights of the franchisee under subsection (a), if the

15 franchisor approves vendors of equipment, fixtures, sup16 plies, goods, or services used in the establishment or oper17 ation of the franchised business, the franchisor shall pro18 vide and continuously update an inclusive list of approved

19 vendors and shall promptly and objectively evaluate and

20 respond to reasonable requests by franchisees for approval

21 of competitive sources of supply. The franchisor shall ap22 prove not fewer than 2 vendors for each piece of equip23 ment, each fixture, each supply, good, or service.

24 (c) BENEFITS.—A franchisor, and its affiliates, shall

25 fully disclose whether or not it receives any rebates, com26 missions, payments, or other benefits from vendors as a
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1 result of the purchase of goods or services by franchisees.

2 All such rebates, commissions, payments, and other bene3 fits shall be distributed directly to such franchisees.

4 (d) REPORTING.—A franchisor shall report not less

5 frequently than annually, using generally accepted ac6 counting principles, the amount of revenue and profit it

7 earns from the sale of equipment, fixtures, supplies, goods,

8 or services to the franchisees of the franchisor.

9 (e) EXCEPTION.—Subsection (a) does not apply to

10 reasonable quantities of equipment, fixtures, supplies,

11 goods, or services, including display and sample items,

12 that the franchisor requires the franchisee to obtain from

13 the franchisor or its affiliate, but only if the equipment,

14 fixtures, supplies, goods, or services are central to the

15 franchised business and incorporate a trade secret, patent,

16 or copyright owned by the franchisor or its affiliate.

17 SEC. 11. ENCROACHMENT.

18 (a) IN GENERAL.—A franchisor may not place, or li19 cense another to place, 1 or more new outlets for a fran20 chised business in unreasonable proximity to an estab21 lished outlet of a similar kind of franchised business, if—

22 (1) the intent or probable effect of establishing

23 the new outlets is to cause a diminution of gross

24 sales by the established outlet of more than 5 per-
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1 cent in the 12 months immediately following estab2 lishment of the new outlet; and

3 (2) the established outlet—

4 (A) offers goods or services identified by

5 the same trademark as those offered from the

6 new outlet; or

7 (B) has premises that are identified by the

8 same trademark as the new outlet.

9 (b) EXCEPTION.—This section shall not apply with

10 respect to an established outlet if, before a new outlet de11 scribed in subsection (a) opens for business, a franchisor

12 offers in writing to each franchisee of the franchisor of

13 an established outlet to pay to the franchisee involved an

14 amount equal to 50 percent of the gross sales (net of sales

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

16 1st 24 months of operation of the new outlet if the sales

17 of the established outlet decline by more than 5 percent

18 in the 12 months immediately following establishment of

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

20 outlet.

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

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

23 decline in sales of an established outlet described in sub24 section (a) occurred for reasons other than the opening

25 of the new outlet for goods or services concerned—
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1 (1) if the franchisor makes a written offer

2 under subsection (b); or

3 (2) in an action or proceeding brought under

4 section 12.

5 SEC. 12. PRIVATE RIGHT OF ACTION.

6 (a) IN GENERAL.—A party to a franchise who is in7 jured by a violation or threatened violation of this Act,

8 or of section 438.1 of title 16, Code of Federal Regula9 tions (relating to disclosure requirements and prohibitions

10 concerning franchising and business opportunity ventures)

11 as in effect on the date of the enactment of this Act, shall

12 have a right of action for recission and restitution, as well

13 as for all damages and injunctive relief, including costs

14 of litigation and reasonable attorney’s fees and expert wit15 ness fees, against any person found to be liable for such

16 violation.

17 (b) LIABILITY.—Every person who directly or indi18 rectly controls a person liable under subsection (a), every

19 partner in a firm so liable, every principal executive officer

20 or director of a corporation so liable, every person occupy21 ing a similar status or performing similar functions and

22 every employee of a person so liable who materially aids

23 in the act or transaction constituting the violation is also

24 liable jointly and severally with and to the same extent

25 as such person, unless the person who would otherwise be
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1 liable hereunder had no knowledge of or reasonable

2 grounds to know of the existence of the facts by reason

3 of which the liability is alleged to exist.

4 (c) ALTERNATIVE DISPUTE RESOLUTION.—Except

5 as otherwise provided in subsection (d), nothing contained

6 in this Act shall be construed to limit the right of a

7 franchisor and a franchisee to engage in arbitration, medi8 ation, or other nonjudicial resolution of a dispute, either

9 in advance of after a dispute arises, provided that the

10 standards and protections applied in any binding non11 judicial procedure agreed to by the parties are not less

12 than the requirements set forth in this Act.

13 (d) STATUTE OF LIMITATIONS.—No action may be

14 commenced pursuant to this section or this Act more

15 than—

16 (1) 5 years after the date on which the violation

17 occurs; or

18 (2) 3 years after the date on which the violation

19 is discovered or should have been discovered through

20 exercise of reasonable diligence.

21 (e) VENUE.—A franchisee may commence a civil ac22 tion, or arbitration proceedings, to enforce any provision

23 of this Act within the jurisdiction wherein the applicable

24 franchise business is located.
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1 (f) CUMULATIVE RIGHT.—The private rights pro2 vided for in this section are in addition to and not in lieu

3 of other rights or remedies created by Federal or State

4 law.

5 SEC. 13. SCOPE AND APPLICABILITY.

6 (a) PROSPECTIVE APPLICATION.—Except as pro7 vided in subsection (b), the requirements of this Act shall

8 apply to franchise agreements entered into, amended, ex9 changed, transferred, assigned, or renewed after the date

10 of enactment of this Act.

11 (b) DELAYED EFFECT.—The requirements of section

12 3 of this Act shall take effect 90 days after the date of

13 enactment of this Act and shall apply only to actions,

14 practices, disclosures, and statements occurring on or

15 after such date.

16 SEC. 14. DEFINITIONS.

17 For purposes of this Act:

18 (1) The term ‘‘affiliate’’ has the meaning given

19 the term ‘‘affiliated person’’ in section 436.2(i) of

20 title 16 of the Code of Federal Regulations as in ef21 fect on January 1, 1998.

22 (2) The term ‘‘franchise’’ has the meaning

23 given such term in section 436.2(a) of title 16 of the

24 Code of Federal Regulations as in effect on January

25 1, 1998, but does not include any contract otherwise
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1 regulated by the Federal Petroleum Marketing Prac2 tices Act (15 U.S.C. 2801 et. seq.) except as to fran3 chise relationships that do not involve the sale of pe4 troleum products.

5 (3) The term ‘‘franchise broker’’ has the mean6 ing given such term in section 436.2(j) of title 16

7 of the Code of Federal Regulations as in effect on

8 January 1, 1998.

9 (4) The term ‘‘franchisee’’ has the meaning

10 given such term in section 436.2(d) of title 16 of the

11 Code of Federal Regulations as in effect on January

12 1, 1998.

13 (5) The term ‘‘franchisor’’ has the meaning

14 given such term in section 436.2(c) of title 16 of the

15 Code of Federal Regulations as in effect on January

16 1, 1998.

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

18 fact and the observance of reasonable standards of

19 fair dealing in the trade.

20 (7) The terms ‘‘material’’ and ‘‘material fact’’

21 includes—

22 (A) any fact, circumstance, or set of condi23 tions which a reasonable franchisee or a reason24 able prospective franchisee would consider im25 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 (8) 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 (9) The term ‘‘outlet’’ means a point of sale,

12 temporary or permanent, fixed or mobile, from

13 which goods or services are offered for sale.

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

15 any other legal or commercial entity.

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

18 the United States.

19 (12) 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 service franchises.

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

24 who is granted a subfranchise.
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1 (14) 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.

Æ