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[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2596 Introduced in House (IH)]

103d CONGRESS
  1st Session
                                H. R. 2596

 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

                              July 1, 1993

Mr. LaFalce (for himself, Mr. Dickey, Mr. Mfume, Mr. Wyden, Ms. Danner, 
  Mr. Towns, Mrs. Meek, Mr. McDermott, Mrs. Clayton, Mr. Torres, Mr. 
  Oberstar, Mr. Engle, Mr. Romero-Barcelo, Ms. Roybal-Allard, and Mr. 
Shays) introduced the following bill; which was referred jointly to the 
           Committee on the Judiciary and Energy and Commerce

_______________________________________________________________________

                                 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.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Federal Franchise Disclosure and 
Consumer Protection Act''.

SEC. 2. FINDINGS AND PURPOSE.

    (a) The Congress makes the following findings:
            (1) Franchise business relationships represent a large and 
        growing segment of the nation's retail and service businesses 
        and are replacing more traditional forms of small business 
        ownership in the American economy.
            (2) Because franchising remains a relatively new form of 
        business relationship, existing law has not evolved 
        sufficiently to protect prospective franchisees adequately from 
        misrepresentation in the sale of franchise businesses or from 
        fraudulent or inadequately structured franchise opportunities.
            (3) Most prospective franchisees lack bargaining power and 
        generally invest substantial amounts to obtain a franchise 
        business when they are unfamiliar with operating a business, 
        with the business being franchised and with industry practices 
        in franchising.
            (4) Franchisees may suffer substantial losses when the 
        franchisor, or the franchisor's representative, do not provide 
        truthful or complete information regarding the franchise 
        opportunity, the prior business experience of the franchisor or 
        the details of the franchisor-franchisee relationship.
            (5) Traditional legal remedies have proven inadequate to 
        protect the legitimate interests of purchasers of franchises 
        due to the failure of some courts to recognize what inducements 
        are material in the sale of a franchise and what contractual 
        provisions are material in ongoing franchise relationships.
    (b) It is the purpose of this Act to provide prospective 
franchisees with additional information necessary to help them make an 
informed decision about the purchase of a franchise opportunity, to 
protect prospective franchisees from fraudulent practices, to broaden 
the scope and enhance the availability and utility of common law 
remedies, and to promote more equitable franchise relationships.

SEC. 3. PROHIBITED ACTIONS.

    (a) In connection with the advertising, offering, licensing, 
contracting, sale or other promotion in or affecting commerce of any 
franchise, or any relationship which is represented either orally or in 
writing to be a franchise, it shall be unlawful for any person, 
partnership or corporation--
            (1) to employ a device, scheme, or artifice to defraud;
            (2) to engage in an act, practice, course of business or 
        pattern of conduct which operates or is intended to operate as 
        a fraud or deceit upon any person;
            (3) to obtain money or property, or assist others to obtain 
        money or property, by means of any untrue statement of a 
        material fact, any omission to state a material fact, or any 
        omission to state a material fact necessary in order to make 
        the statements made, in the light of the circumstances under 
        which they are made, not misleading; or
            (4) to discriminate among prospective franchisees on the 
        basis of race, sex, religion, disability or national origin--
                    (A) in the solicitation, offering or sale of any 
                franchise opportunity, except that, and then only to 
                the extent that, any discrimination between franchisees 
                is reasonable and is related to a program under which 
                franchises are made available to a class of persons who 
                may have been denied franchise opportunities in the 
                past based on suspect classifications including race, 
                sex, religion, disability or national origin; or
                    (B) in the selection of any site or location for a 
                franchise business; or
            (5) to represent or imply in any manner whatsoever that 
        such franchise has been reviewed, endorsed, recommended or 
        approved by the United States or any agency or officer thereof.
    (b) In connection with any disclosure required by this Act, or any 
disclosure document, notice or report required by Federal law or 
regulation, it shall be unlawful for any franchisor, subfranchisor or 
franchise broker, either directly or indirectly through any officer, 
employee, agent, representative or attorney--
            (1) to make or cause to be made an untrue statement of 
        material fact, omit to state a material fact, or omit to state 
        a material fact necessary in order to make the statements made, 
        in the light of the circumstances under which they are made, 
        not misleading;
            (2) to fail to furnish any prospective franchisee with all 
        information required to be disclosed by, and at the time and in 
        the manner required by the Federal Trade Commission (hereafter 
        ``the Commission'') in its Franchise Rule;
            (3) to fail to furnish any prospective franchisee with 
        information which is current as of the close of the 
        franchisor's most recent fiscal year, or within ninety days 
        thereof, or which reflects any material changes since the close 
        of such fiscal year;
            (4) to fail to furnish any prospective franchisee at the 
        time disclosure is made copies of all collateral documents, 
        including manuals, memoranda, operating procedures and royalty 
        schedules, where and to the extent that such documents are 
        incorporated by reference into the franchise agreement, except 
        that a franchisor may require a confidentiality agreement as a 
        condition for reviewing confidential materials; or
            (5) to make any claim or representation to a prospective 
        franchisee, whether oral or in writing, which is inconsistent 
        with or contradicts any information provided to the prospective 
        franchisee in any required disclosure.
    (c) No provision of subsection (b) imposing any liability shall 
apply to any action, statement or omission done or made in good faith 
in conformity with any rule, regulation or order of the Commission, 
notwithstanding that such rule, regulation or order may, after such act 
or omission, be amended or rescinded by the Commission.
    (d) For purposes of this section, an untrue statement of material 
fact shall include any statement of fact which has the intent or effect 
of misrepresenting the profitability of a franchise opportunity, the 
rate of success of franchises or franchisees associated with a 
franchise opportunity, or the rate of success of franchises generally.

SEC. 4. MATERIAL OMISSIONS DEFINED.

    (a) It shall be an omission of material fact for a franchisor, 
subfranchisor or franchise broker, either directly or indirectly 
through any officer, employee, agent, representative or attorney, to 
fail to furnish any prospective franchisee with the following 
information at the time and in the manner set forth by the Commission 
under the Franchise Rule:
            (1) The name and principal place of business of the 
        franchisor, its predecessor, parent firm, holding company or 
        other controlling entity of the franchisor, if any, and the 
        name under which the franchisor is doing or intends to do 
        business;
            (2) A statement identifying--
                    (A) any parent or affiliate of the franchisor or 
                other related entity that is engaged in franchising or 
                providing services or assistance to franchisees; and
                    (B) the name and position held of each of the 
                franchisor's current general partners or principal 
                officers (including the chief executive and chief 
                operating officer, financial, franchise marketing, 
                training and service officers), as applicable, other 
                executives or subfranchisors who will have management 
                responsibility in connection with the operation of the 
                franchisor's business relating to the franchise 
                business offered, and all franchise brokers.
            (3) A statement disclosing whether the franchisor or any 
        person identified in subsection (2)--
                    (A) has, at any time during the previous ten fiscal 
                years, been convicted of a felony or pleaded nolo 
                contendere to a felony charge if the felony involved 
                fraud, embezzlement, fraudulent conversion, 
                misappropriation of property, restraint of trade, 
                violation of a Federal or State tax law or violation of 
                a State franchise statute;
                    (B) has, at any time during the previous ten years, 
                been held liable in a civil action resulting in a final 
                judgment, or has settled out of court any claim, 
                including complaints, cross claims, counterclaims, and 
                third party complaints, in a judicial proceeding and 
                their equivalents in an arbitration proceeding--
                            (i) involving allegations of fraud, 
                        embezzlement, fraudulent conversion, 
                        misappropriation of property, restraint of 
                        trade or comparable allegations; or
                            (ii) involving a present or former 
                        franchisee and which involved or involves the 
                        franchisor-franchisee relationship; except that 
                        such statement may omit reference to such 
                        actions which were dismissed by final judgment 
                        or settlement without payment or liability by 
                        the franchisor or entry of an adverse order 
                        against the franchisor in which the franchisor 
                        is bound to obligations which are material 
                        either to the franchisor or franchisee; and
                    (C) is subject to any currently effective State or 
                Federal agency or court injunctive or restrictive 
                order, has been subject to any such order during the 
                previous ten years, relating to or affecting franchise 
                activities or the franchisor-franchisee relationship or 
                involving fraud, embezzlement, fraudulent conversion 
                misappropriation of property, restraint of trade or 
                violation of a Federal or State tax law.
        Such statement shall set forth the identity and location of the 
        court or agency; a description of the nature of the claim; the 
        date of conviction, judgment or decision; the penalty imposed 
        or the damages assessed; any payments made; the terms of 
        settlement, order or arbitrator's decision; and the date, 
        nature and issuer of each such order or ruling.
            (4) A statement disclosing whether the franchisor or any 
        person identified in subsection (2) is a party to any pending 
        administrative, criminal or material civil action or 
        arbitration involving allegations of fraud, embezzlement, 
        fraudulent conversion, misappropriation of property, restraint 
        of trade or comparable allegations, or complaints or 
        counterclaims involving franchise sales or the franchise 
        relationship. Such statement shall set forth the identity and 
        location of the court or forum in which each administrative 
        action, civil action or arbitration is filed, the date of such 
        filing and a summary of the nature of the allegations. For 
        purposes of this subsection, a civil action or arbitration is 
        material if such action or arbitration involves--
                    (A) a significant financial impact on a franchisee 
                or a former franchisee;
                    (B) any group of civil actions, irrespective of the 
                financial impact of any single action, which in the 
                aggregate have a significant impact on the franchise 
                system in seeking fifteen percent or more of the 
                current assets of the franchisor or any affiliate of 
                the fanchisor;
                    (C) a current or former supplier or lessor who 
                supplied more than 5 percent of an item to the 
                franchise system; and
                    (D) claims or counterclaims which a reasonable 
                prospective franchisee would consider important in 
                making a decision regarding entering into a franchise 
                relationship.
            (5) A statement disclosing whether the franchisor or any 
        person identified in subsection (2) have at any time during the 
        previous seven fiscal years filed in bankruptcy, been adjudged 
        bankrupt, been reorganized due to insolvency, or been a 
        principal, director, executive officer, or partner of any other 
        person that has so filed or was so adjudged or reorganized, 
        during or within one year after the period that such person 
        held such position in such other person.
            (6) A statement of the total funds which must be paid by 
        the franchisee to the franchisor or to any person affiliated 
        with the franchisor, or which the franchisor or such affiliated 
        person imposes or collects in whole or in part on behalf of a 
        third party. Such statement shall include:
                    (A) a description of all funds which must be paid--
                            (i) to obtain or commence the franchise 
                        operation, including, but not limited to, 
                        franchise fees, deposits, down payments, 
                        prepaid rent, and equipment and inventory 
                        purchases, and
                            (ii) to carry on the franchise business, 
                        including, but not limited to, royalty, lease, 
                        advertising, training, insurance, sign rental 
                        fees, and equipment or inventory purchases;
                    (B) a description of any real estate, services, 
                supplies, products, inventories, signs, fixtures, or 
                equipment relating to the establishment or the 
                operation of the franchise business which the 
                franchisee is directly or indirectly required by the 
                franchisor to purchase, lease or rent, and, if such 
                purchases, leases or rental are required from specific 
                persons (including the franchisor), the names and 
                address of each such person;
                    (C) a description of the basis for calculating, and 
                actual amounts, where available, of any revenue or 
                other consideration to be received by the franchisor, 
                the franchisor's parent firm, if any, or any person 
                affiliated with the franchisor, from each such person 
                with whom the franchisee is required to make such 
                purchases, leases or rentals; and
                    (D) an estimate of the total investment to be paid 
                by the franchisee, irrespective of the type of 
                expenditure and to whether payment is made to the 
                franchisor, to any person affiliated with the 
                franchisor, or to any third party--
                            (i) to obtain and commence operations of 
                        the franchise business; and
                            (ii) to carry on the franchise business 
                        during the initial twelve-month period 
                        following the opening of the franchise 
                        business, including an estimate of loan 
                        repayments, including interest, if part of the 
                        franchisee's initial investment may be 
                        financed.
            (7) A statement describing the services and assistance 
        which the franchisor, persons affiliated with the franchisor, 
        or third parties designated by the franchisor, are obligated to 
        provide to the franchisee, under the terms of the franchise 
        agreement or any agreement ancillary or collateral to a 
        franchise:
                    (A) to obtain or commence the franchise operation; 
                and
                    (B) to carry on the franchise business. Such 
                statement shall include cautionary language stating 
                that the franchisor is not obligated under the 
                franchise agreement, or any other agreement, to provide 
                any additional services or assistance to the franchisee 
                other than the services disclosed.
            (8) A statement describing the trade names, trademarks, 
        service marks, logotypes, advertising or other commercial 
        symbols (hereafter ``trade names and trademarks'') which are to 
        be licensed to the prospective franchisee, or which are owned 
        or used by the franchisor to identify the goods or services to 
        be offered, sold, or distributed by the prospective franchisee. 
        Such statement shall indicate whether--
                    (A) such trade names or trademarks have been 
                registered with the United States Patent and Trademark 
                Office, or registered with the State in which the 
                franchise business is located or is to be located, and 
                the date and number of any such registrations;
                    (B) there are any material restrictions on the 
                franchisor's right to license or the franchisee's right 
                to use such trade names or trademarks;
                    (C) there are any pending interference, opposition 
                or cancellation proceeding, or any pending material 
                litigation involving such trade names or trademarks of 
                relevance to the state in which a franchise is located 
                or will be located; and
                    (D) the franchisor is obligated by the franchise 
                agreement to protect the franchisee's right to use such 
                trade names or trademarks and to protect the franchisee 
                against claims of infringement or unfair competition 
                with respect to such trade names and trademarks.
            (9) A statement disclosing whether, by the terms of the 
        franchise agreement, any agreement ancillary or corollary to 
        the franchise, or any other device or practice--
                    (A) the franchisee is to be limited in any manner--
                            (i) in the goods or services he or she may 
                        offer for sale;
                            (ii) in the customers to whom he or she may 
                        sell such goods or services; or
                            (iii) in the geographic areas in which he 
                        or she may offer for sale or sell goods or 
                        services;
                    (B) the franchisee is granted territorial 
                protection by the franchisor, by which, with respect to 
                such territory or area, the franchisor--
                            (i) will not establish another, or more 
                        than a fixed number of, franchises or company-
                        owned outlets either operating under, or 
                        selling, offering, or distributing goods or 
                        services, identified by any trade name or 
                        trademark set forth in subsection (8) of this 
                        section;
                            (ii) will not establish other franchises or 
                        company-owned outlets selling or leasing the 
                        same or similar products or services under a 
                        different trade name or trademark; or
                            (iii) will not otherwise market the same or 
                        similar products or services under the same, 
                        similar or different trade name or trademark; 
                        and
                    (C) the franchisor is marketing, intends to market, 
                reserves the right to market, or is contractually 
                precluded from marketing, through arrangements other 
                than a franchise or a company-owned outlet, the same or 
                similar products or services to be offered for sale by 
                the franchisee, whether under the trade name or 
                trademark set forth in subsection (8) or a different 
                trademark or trade name, in the protected territory 
                granted to the franchisee or, if no such territory is 
                granted, within a market area defined as the larger 
                of--
                            (i) the area in which the franchise is 
                        expected to draw 80 percent of its business, or
                            (ii) the area defined in the franchise 
                        agreement for purposes of a noncompetition 
                        covenant.
            (10) A statement disclosing the existence of any written 
        agreement or commitment, or any public expression of intention, 
        made by the franchisor, any officer of the franchisor, or the 
        franchisor's parent firm or ultimate controlling person, if 
        any, to dispose of the corporation or partnership, or the 
        majority (controlling) interest of such corporation or 
        partnership, which is identified in subsection (1) of this 
        section as the franchisor of the business being offered for 
        sale. Where an agreement or commitment has been made, such 
        statement shall include the name and address of the person(s) 
        or corporation which has committed to purchase the franchisor 
        company or a majority interest in such company.
            (11) A statement of a specific level, average or range of 
        sales, earnings, profit or loss for franchises of the 
        franchisor, which shall--
                    (A) have a factual basis in operating data for 
                sales, earnings, profits or losses from franchise or 
                nonfranchise outlets of the franchisor and/or of its 
                affiliates which offer for sale the same or similar 
                products and services, and which are operated under the 
                same trade name or trademark as set forth in subsection 
                (8), except that--
                            (i) a franchisor which has offered/sold 
                        franchises for less than two years, a 
                        franchisor which has not more than ten 
                        franchise and nonfranchise outlets, or no more 
                        than five franchise outlets, to provide a basis 
                        for such operating data, or an established 
                        franchisor offering a new, separate franchise 
                        concept, for which there are no more than ten 
                        franchise or nonfranchise outlets to provide a 
                        basis for such operating data, is not required 
                        to make such a statement; and
                            (ii) a franchisor providing representations 
                        limited solely to the actual operating results 
                        of a specific outlet offered for sale is not 
                        required to make such a statement, provided 
                        such representation is in writing, is given 
                        only to potential purchasers of such outlet, 
                        and is accompanied by the names and last known 
                        addresses of each owner of such outlet during 
                        the previous five years;
                    (B) be derived from the most current information 
                available to the franchisor, and/or to its affiliates, 
                pertaining to--
                            (i) gross sales of franchise and 
                        nonfranchise outlets;
                            (ii) operating costs of franchise and 
                        nonfranchise outlets, to the extent that such 
                        costs are known to the franchisor, can be 
                        estimated reasonably by the franchisor or are 
                        discoverable by the franchisor through exercise 
                        of reasonable diligence, provided that where 
                        information on operating costs of nonfranchise 
                        outlets is used, appropriate adjustment shall 
                        be made to reflect additional costs that will 
                        be incurred by franchisees, to the extent that 
                        such additional costs are known; and
                            (iii) the net profit or net loss of 
                        franchises and nonfranchise outlets. At 
                        minimum, a franchisor may identify the fiscal 
                        year of such data and whether, on average, a 
                        profit or loss occurred for franchise and 
                        nonfranchised outlets, where such information 
                        is known to the franchisor, can reasonably be 
                        estimated by the franchisor or is discoverable 
                        by the franchisor through exercise of 
                        reasonable diligence; except that the 
                        franchisor must include a statement describing 
                        net losses or average net losses of franchise 
                        and nonfranchised outlets where the franchisor 
                        knows or should know that such losses have 
                        occurred.
                Where information relating to costs and net profit or 
                loss are not known to the franchisor or can not be 
                estimated or discovered through reasonable diligence, 
                the franchisor shall include a conspicuous statement 
                that such information cannot be provided to prospective 
                franchisees and shall describe in detail the 
                information that is not disclosed, the reasons why such 
                information is not known or can not be obtained by the 
                franchisor, and the actions or procedures undertaken by 
                the franchisor, where applicable, to obtain such 
                information;
                    (C) have a reasonable basis for all claims or 
                representations, for which the burden shall be upon the 
                franchisor to show that it had a reasonable basis at 
                the time such representations were made;
                    (D) be included in full in the written disclosure 
                document which is provided by the franchisor to the 
                prospective franchisee at the time of making 
                disclosure. A franchisor shall make no additional 
                information or representations regarding actual or 
                potential sales, costs, income or profits available to 
                the potential franchisee, or to any agent, attorney or 
                lender of the prospective franchisee, other than that 
                contained in such statement or elsewhere in the 
                disclosure document, except that a supplemental 
                statement of actual operating results relating to a 
                specific outlet, or a statement directed to the 
                particular circumstances of a specific location may be 
                made available to a prospective franchisee interested 
                in such outlet or location, provided any supplemental 
                statement be made in writing and explain any departure 
                from the statement provided in the disclosure document 
                and the reasons for such departure;
                    (E) include a concise description of the factual 
                basis and the material assumptions underlying its 
                preparation and presentation. Such description shall 
                include a statement of whether the representations made 
                are based on operating data of franchised or 
                nonfranchised outlets of the franchisor, the number of 
                such outlets constituting the basis for such data, and 
                the number and percentage of franchised outlets of the 
                franchisor in operation during the period covered by 
                such representation that are known to have attained or 
                surpassed the results stated;
                    (F) be updated at least annually by the franchisor 
                and amended as necessary to reflect changed material 
                facts or to incorporate changes which the franchisor 
                knows, or should have known, make such statement no 
                longer accurate or reflective of the operating 
                experience of franchised units; and
                    (G) include a statement that substantiation of the 
                data used in preparing the statement shall be made 
                available to the prospective franchisee upon request.
            (12) A statement disclosing, with respect to the franchisor 
        and as to the particular named business being offered:
                    (A) the names, addresses, and telephone numbers 
                of--
                            (i) all franchisees in the State in which 
                        the proposed franchise is to be located, 
                        provided that there are at least twenty-five 
                        such franchisees;
                            (ii) all franchisees in the State in which 
                        the proposed franchise is to be located and all 
                        franchisees in States geographically contiguous 
                        to such State, provided that there are at least 
                        twenty-five franchisees in such States; or
                            (iii) all franchisees of the franchisor.
                Where the number of franchisees to be disclosed under 
                this subparagraph exceeds fifty, such listing may be in 
                a separate document presented to the franchisee with 
                the disclosure document, provided that the existence of 
                such separate document is disclosed in the disclosure 
                document.
                    (B) the number of franchisees with outlets in the 
                following categories that, within the three-year period 
                immediately before the close of the franchisor's most 
                recent fiscal year, have--
                            (i) been canceled or terminated by the 
                        franchisor;
                            (ii) not been renewed by the franchisor;
                            (iii) been reacquired through purchase by 
                        the franchisor;
                            (iv) been otherwise reacquired by the 
                        franchisor; and
                            (v) left the franchise system or ceased to 
                        do business under the franchise agreement;
                    (C) the name, last known address and telephone 
                number and location of franchise(s) of every franchisee 
                who voluntarily or involuntarily left the franchise 
                system or ceased doing business under the franchise 
                agreement during the five-year period immediately 
                before the close of the franchisor's most recent fiscal 
                year. Franchisors subject to the requirements of this 
                section upon the effective date of this Act, and 
                franchisors which shall commence franchising after such 
                date, may make disclosure pursuant to this paragraph 
                for the franchisor's most recent fiscal year only, or 
                for the franchisor's first complete fiscal year only, 
                and shall make appropriate disclosure following each 
                succeeding fiscal year so that, after the close of the 
                franchisor's fourth fiscal year following such date of 
                enactment, or after the close of a franchisor's fifth 
                fiscal year of operation, disclosure shall be provided 
                for not less than five years thereafter;
                    (D) the number of all previous owners of a specific 
                franchise outlet to be resold, or the number of 
                previous owners of franchise businesses or outlets of 
                the same franchise system who conducted business during 
                the previous seven years in the protected market area 
                to be granted to a franchise, or within the same market 
                area in which a franchise business is to be located. 
                The franchisor shall--
                            (i) provide such number in a supplemental 
                        written statement to potential purchasers of 
                        such outlet, or to potential purchasers of 
                        franchises in such market area;
                            (ii) maintain updated listings of all such 
                        previous owners, which shall include the name, 
                        last known addresses, business locations, dates 
                        of ownership and reasons for terminating the 
                        franchise relationship for each owner; and
                            (iii) disclose that such listing shall be 
                        made available to prospective franchisees upon 
                        request; and
                    (E) the identity of any association, associations, 
                advisory councils or other organizations of franchise 
                owners of the business being offered that are organized 
                to promote the interests of franchises in their 
                relationship with the franchisor, and the name, current 
                address and telephone number of any officer or 
                designated contact person for such association, 
                associations, advisory council or other organizations 
                from whom a prospective franchisee may seek additional 
                information. The franchisor shall identify all such 
                organizations affiliated with, or recognized by the 
                franchisor and independent associations or 
                organizations not affiliated with, or directed in any 
                manner by the franchisor, and shall indicate for each 
                such association or organization whether it is 
                affiliated with, or independent of the franchisor, 
                except that, the franchisor shall identify only 
                organizations which have identified themselves to the 
                franchisor and which--
                            (i) have been in operation not less than 
                        one hundred eighty days prior to the time 
                        disclosure is made; and
                            (ii) represent not less than the lesser of 
                        either fifty franchisees, or 25 percent of the 
                        franchise outlets of the franchise system.
            (13) A balance sheet for the franchisor for the most recent 
        fiscal year, and an income statement and statement of changes 
        in financial position for the franchisor for the most recent 
        three fiscal years, which shall:
                    (A) have been examined in accordance with generally 
                accepted auditing standards by an independent certified 
                or licensed public accountant, except that, unaudited 
                statements may be used only to the extent that audited 
                statements cannot be prepared under generally accepted 
                auditing standards, are prepared by an independent 
                certified or licensed public accountant, and are 
                accompanied by a clear and conspicuous disclosure that 
                they are unaudited; and
                    (B) include a separate, concise and conspicuous 
                summary, prepared by an independent certified or 
                licensed public accountant, of the sources of revenues 
                of the franchisor for each the franchisor's most recent 
                three fiscal years, stated in terms of the percentage 
                of total annual revenues of such franchisor attributed 
                to each of the following categories or sources of 
                revenue--
                            (i) pre-opening fees;
                            (ii) royalty payments;
                            (iii) pre-opening purchases by franchisees 
                        of equipment, inventory or supplies;
                            (iv) net rental income from real estate 
                        leases or rental of real estate, fixtures or 
                        equipment;
                            (v) post-opening purchases by franchisees 
                        of equipment, inventory of supplies, including 
                        goods and services sold to franchisees for 
                        resale and payments to the franchisor by 
                        suppliers with whom franchisees are required to 
                        purchase goods or services;
                            (vi) nonfranchised or company-owned 
                        outlets; and
                            (vii) sales of goods and services to the 
                        public through means of distribution other than 
                        franchise and nonfranchised outlets, whether 
                        under the same, similar or different trade name 
                        or trademark.
                A franchisor may substitute, in lieu of the balance 
                sheet and income statements under subparagraph (A), the 
                consolidated financial statements of the franchisor's 
                parent company which include the franchisor's financial 
                results, provided such parent company guarantees the 
                franchisor's financial performance and, provided 
                further, that such financial statement shall include a 
                separate summary of the revenue sources of the 
                franchisor pursuant to subparagraph (B).
    (b) Standards of material omissions set forth in subsection (a) are 
in addition to other facts, circumstances, or sets of conditions which 
may be material under Federal or State law or regulation.
    (c) Each disclosure required in paragraphs (1) through (13) of 
subsection (a) shall be commented upon either positively or negatively 
in required disclosure documents by use of a clearly and concisely 
written statement which fully incorporates all information required to 
be disclosed.
    (d) Information required to be disclosed in supplemental statements 
in subsections (a)(11)(A)(ii) and (a)(12)(D) of this section, and which 
relate to specific franchise outlets or market areas offered for sale, 
shall be presented to the prospective franchisee at the time of making 
disclosure, as defined by the Commission in subsection 436.2(g) of the 
Franchise Rule.
    (e) Information required to be presented to prospective franchisees 
upon request, pursuant to subsections (a)(11)(F) and (a)(12)(C)(iii) of 
this section, where such request is made in timely fashion, shall be 
made available at the time the prospective franchisee is presented with 
a copy of the franchisor's completed franchise and related agreements 
to be executed by the parties, or not later than five business days 
prior to the date that such agreements are to be executed and the 
prospective franchisee is required to pay any consideration in 
connection with the sale or proposed sale of the franchise.
    (f) The franchisor shall exercise diligent efforts to collect all 
relevant information relating to sales, costs and operating profits 
and/or losses of franchise and/or nonfranchise outlets from its own 
files and databases, franchisees, subsidiaries, affiliates, employees, 
suppliers and any other source from which such information is available 
to permit disclosure pursuant to subsection (a)(11) of this section and 
to establish procedures for timely collection of such information. The 
Commission shall set forth in regulation the criteria with which it may 
consider granting full or partial exemption from disclosure under this 
subsection. Except where exempted under subsection (a)(11)(A), or 
otherwise exempted by the Commission, a franchisor shall be deemed to 
have made an omission of material fact under this Act where disclosure 
pursuant to subsection (a)(11) is not provided to prospective 
franchisees, either in full or in part with appropriate explanations 
relating to required disclosures under subsections (a)(11)(B)(ii) and 
(a)(11)(B)(iii), within two hundred and forty days following the date 
of enactment of this section. Not later than ninety days after the end 
of the franchisor's first complete fiscal year following the effective 
date of this Act, the franchisor, except as otherwise exempted, shall 
comply fully with subsection (a)(11) and shall be required to exercise 
reasonable diligence to obtain and/or discover the information relating 
to sales, costs, profits or losses of franchise and/or nonfranchise 
outlets necessary to establish a reasonable basis for disclosure under 
such subsection.

SEC. 5. ACCOUNTS AND RECORDS.

    (a) It shall be unlawful for any franchisor or subfranchisor, 
either directly or indirectly through any officer, employee, broker, 
agent or attorney, except as permitted by rule, regulation or order of 
the Commission, willfully to destroy, mutilate or alter any disclosure 
document, account, book, record, receipt or other document required to 
be maintained and preserved pursuant to subsection (b) of this section.
    (b) A franchisor, subfranchisor or franchise broker, where 
applicable, shall maintain and preserve for such period or periods as 
the Commission may prescribe by rule or regulation, such disclosure 
documents, account, books, records, receipts or other documents 
pertaining to any information required to be disclosed pursuant to 
section 4 of this Act, or which are necessary and appropriate to 
constitute--
            (1) the record of any transaction involving the offering, 
        negotiation, sale or resale of a franchise, or of any 
        relationship which is represented by the franchisor to be a 
        franchise; and
            (2) the record forming the basis for any financial 
        statement and any earnings representation required to be 
        disclosed under section 4.
    (c) The Commission shall set forth by regulation, as appropriate, 
the manner in which all documents, accounts and records are to be 
maintained and the period or periods for which such documents, accounts 
and records are to be preserved, except that no account, record or 
document required to be maintained and preserved pursuant to this 
section shall be preserved for a period of less than seven years.
    (d) All accounts, books, records and other documents required to be 
maintained and preserved by any person pursuant to subsection (b) shall 
be subject to examination by the Commission, or any member or 
representative thereof, either upon written request of the Commission 
or upon subpoena as part of any enforcement action undertaken by the 
Commission pursuant to section 6 of this Act.

SEC. 6. ENFORCEMENT.

    (a) Enforcement by Federal Trade Commission:
            (1) The Commission is authorized and directed to prevent 
        any person from violating the provisions of this Act in the 
        same manner, by the same means, and with the same jurisdiction, 
        powers, and duties as though all applicable terms and 
        provisions of the Federal Trade Commission Act (15 U.S.C. 41 et 
        seq.) were incorporated into and made a part of this Act.
            (2) Any person who violates the provisions of this Act, or 
        any rule of the Commission under this Act, shall be subject to 
        the penalties and entitled to the privileges and immunities 
        provided in the Federal Trade Commission Act in the same 
        manner, by the same means, and with the same jurisdiction, 
        power and duties as though all applicable terms and provisions 
        of the Federal Trade Commission Act were incorporated into and 
        made a part of this Act.
            (3)(A) For purposes of section 3(b) of this Act, the 
        Commission shall have the authority to enforce compliance with 
        disclosure standards by means of the disclosure statement 
        required by the Commission in its Franchise Rule or the Uniform 
        Franchise Offering Circular of the North American Securities 
        Administrators Association, Inc.
            (B) Where the guidelines for preparation of the Uniform 
        Franchise Offering Circular are amended by the North American 
        Securities Administrators' Association, or its successor, 
        disclosures prepared in compliance with the amended guidelines 
        shall be presumed to comply with the requirements of the 
        Commission's Franchise Rule unless, within one hundred and 
        eighty days of formal notification of such amendments by the 
        North American Securities Administrators' Association, or its 
        successor, the Commission responds in writing that it has 
        determined that the amended requirements do not provide equal 
        or greater protection to prospective franchisees than the 
        Commission's Franchise Rule.
    (b) Civil actions by the Commission:
            (1) Except as otherwise provided in subsection (2), the 
        Commission may commence a civil action in a district court of 
        the United States or in any court of competent jurisdiction of 
        a State to recover a civil penalty or obtain appropriate relief 
        against any person, partnership, or corporation which violates 
        any provision of this Act, or any rule of the Commission under 
        this Act, in the same manner, by the same means, and with the 
        same jurisdiction, powers, and duties as provided in sections 
        5(m), 13(b) and 19 of the Federal Trade Commission Act (15 
        U.S.C. 45(m), 53(b) and 57b).
            (2) Notwithstanding the three-year statute of limitations 
        provisions of section 19b of the Federal Trade Commission Act 
        (15 U.S.C. 57b(d)), any civil action arising from a violation 
        of this Act, or any rule of the Commission under this Act, 
        shall be brought by the Commission before the later of--
                    (A) five years after the date on which such 
                violation occurred; or
                    (B) three years after the date on which the 
                violation was discovered or should have been discovered 
                through exercise of reasonable diligence.
    (c) The powers, duties, remedies and procedures set forth in this 
section shall be in addition to, and not in limitation of, any other 
powers, duties, remedies and procedures otherwise provided the 
Commission by the Federal Trade Commission Act and other laws.
    (d) The Commission is authorized to make such rules and regulations 
as are necessary and appropriate to implement the provisions of this 
Act.

SEC. 7. ACTIONS BY PRIVATE PERSONS.

    (a)(1) Any person injured by a violation of any provision of this 
Act, or any rule or order of the Commission under this Act, shall have 
a right of action for all damages caused by the violation, including 
costs of litigation and reasonable attorney's fees, against any person 
found to be liable for such violation.
    (2) An action may be brought, without regard to the amount in 
controversy, in any United States district court or in any other court 
of competent jurisdiction before the later of--
            (A) five years after the date on which the violation 
        occurred; or
            (B) three years after the date on which the violation was 
        discovered or should have been discovered through exercise of 
        reasonable diligence.
    (3) Nothing in this Act or the Federal Trade Commission Act shall 
be construed as creating any obligation on the part of any injured 
person to seek relief from the Commission prior to bringing an action 
under this section.
    (b) Any person injured by a violation of this Act, or threatened 
with injury by an impending violation of this Act, may bring an action 
in a United States district court to obtain a declaratory judgment that 
an act, omission or conduct constitutes or would constitute a violation 
of this Act and to enjoin a person who has violated, is violating, or 
who is otherwise likely to violate any provision of this Act. In such 
actions, the court may issue a temporary restraining order or 
preliminary injunction to protect the public interest by halting a 
recurring or likely violation of this Act, prior to a final 
determination on the merits, in conformity with the principles 
governing the granting of preliminary relief in other civil actions, 
except that no showing of special or irreparable damage to such person 
shall have to be made.
    (c) In any action brought under subsections (a) or (b) of this 
section, a court shall have the power to interpret any benefit 
conferred, duty imposed, or restriction applied in favor of or against 
any party to a franchise agreement as reciprocal and equally applicable 
to the other party to the agreement and to provide an identical or 
similar benefit, impose an identical or similar duty, or apply an 
identical or similar restriction on such other party, provided that 
such reciprocal application is consistent with the laws of the State in 
which the franchise business is located.
    (d)(1) Except as otherwise provided in paragraph (2) of this 
subsection, nothing contained in this Act shall limit the right of a 
franchisor and a franchisee to agree to arbitration, mediation, or 
other nonjudicial resolution of a dispute, either in advance or after a 
dispute arises, provided that the standards and protections applied in 
any binding nonjudicial procedure agreed to by the parties are not less 
than the requirements set forth in this Act; and
    (2) Any stipulation or provision of a franchise agreement requiring 
use of arbitration to resolve disputes arising under the agreement 
shall not apply to bar any action brought in a United States district 
court or in any other court of competent jurisdiction pursuant to this 
section involving a request for damages and/or equitable relief caused 
by a violation of section 3 of this Act.
    (e) The private rights provided in this section are in addition to, 
and not in lieu of other rights or remedies created by Federal or State 
law or regulation.

SEC. 8. PROHIBITION ON WAIVER OF RIGHTS AND LIABILITY.

    (a) It shall be unlawful for any franchisor or subfranchisor, 
either directly or indirectly through any officer employee, agent, 
representative or attorney to--
            (1) Require any term or condition in a franchise agreement, 
        or in any agreement ancillary or collateral to a franchise, 
        which directly or indirectly violates any provision of this 
        Act, and rule of the Commission under this Act, or any 
        provision of the Franchise Rule; or
            (2) Require a franchise to assent to any disclaimer, 
        waiver, release or other provision of a franchise agreement, or 
        in any document relating to the sale of a franchise, which 
        would purport--
                    (A) to relieve any person from a duty imposed by 
                this Act, any rule of the Commission under this Act, or 
                any provision of the Franchise Rule; or
                    (B) to protect any person against any liability to 
                which he would otherwise be subject under the Act, or 
                any rule of the Commission under the Act, either by 
                reason of willful misfeasance, bad faith, or gross 
                negligence in the performance of disclosure and other 
                duties, or by reason of reckless disregard of 
                obligation and duties under the franchise agreement.
    (b) Any condition, stipulation, provision, or term of any franchise 
agreement, or any agreement ancillary or collateral to a franchise, 
which would purport to waive or restrict any right granted under this 
Act shall be void and unenforceable.
    (c) No stipulation or provision of a franchise agreement or of an 
agreement ancillary or collateral to a franchise shall--
            (1) deprive a franchise of the application and benefits of 
        this Act or of a law of the State in which the franchisee's 
        principal place of business is located by purporting to 
        designate the law of another jurisdiction as governing or 
        interpreting the franchise or disclosure relating to such 
        franchise;
            (2) deprive a franchisee of the right to commence an action 
        against the franchisor for violation of this Act, any rule of 
        the Commission under this Act, in a court or forum in the state 
        of the franchisee's principal place of business; and
            (3) exclude collective action by franchisees to settle like 
        disputes arising from violations of this Act, or any rule of 
        the Commission under this Act.
    (d) Compliance with this Act is not waived, excused or avoided, and 
evidence of a violation of this Act or of any rule of the Commission 
under this Act shall not be excluded, by virtue of an integration 
clause, any provision of a franchise agreement or an agreement 
ancillary or collateral to a franchise, the parol evidence rule, or any 
other rule of evidence purporting to exclude consideration of matters 
outside the franchise agreement.
    (e) The requirements of this section shall apply to franchise 
agreements entered into, amended or renewed on or after the date of 
enactment of this Act.

SEC. 9. EFFECT ON STATE LAW.

    (a) This Act preempts State law only to the extent that State law 
is inconsistent with any provision of this Act, in terms of providing 
less protection to prospective franchisees than provided by this Act, 
and then only to the extent of such inconsistency.
    (b) Nothing in this Act shall--
            (1) alter or relieve any franchisor or other person subject 
        to the provisions of this Act from the obligation to comply 
        with the laws of any State with respect to franchise disclosure 
        and registration, except to the extent that such laws are 
        inconsistent with any provision of this Act; and
            (2) preclude a State from enacting any law or regulation 
        that affords a greater level or broader range of protections to 
        franchisees and prospective franchisees.

SEC. 10. STUDY OF NEED FOR ADDITIONAL PROTECTIONS.

    (a) The Commission shall conduct an ongoing study of the need to 
develop and implement additional provisions to prevent evasions or 
violations of the requirements of this Act or to strengthen disclosure 
of pertinent information to prospective franchisees. In examining such 
additional provisions, the Commission shall consider the extent to 
which such additional provisions may be implemented under the 
Commission's rulemaking authority.
    (b) The Commission shall submit to the Congress, not later than 
eighteen months after the date of enactment of this Act, a report 
reviewing the implementation of this Act, which shall include the 
results of the study required by subsection (a). The Commission shall 
submit such additional reports to the Congress as are merited by later 
findings of such study.

SEC. 11. EFFECTIVE DATE.

    Except as otherwise provided, the provisions of this Act shall take 
effect one hundred and eighty days after the date of enactment of this 
Act.

SEC. 12. DEFINITIONS.

    For purposes of this Act--
            (1) the term ``affiliate'' means a person controlling, 
        controlled by, or under common control with a franchisor;
            (2) the term ``advertisement'' means a communication 
        circulated generally by mail, or print media or electronic 
        media, or otherwise disseminated generally to the public, in 
        connection with an offer or sale of a franchise;
            (3) the term ``commerce'' has the same meaning as in 
        section 4 of the Federal Trade Commission Act (15 U.S.C. 44);
            (4) the term ``Commission'' means the Federal Trade 
        Commission; and
            (5) the term ``disclosure document'' means either the 
        disclosure statement required by the Commission in Trade 
        Regulation Rule 436 (16 CFR s 436) as it may be amended, or an 
        offering circular prepared in accordance with Uniform Franchise 
        Offering Circular guidelines as adopted and amended by the 
        North American Securities Administrators Association, Inc., or 
        its successor.
            (6) The term ``franchise'' means--
                    (A) any continuing commercial relationship created 
                by a contract or agreement, whether express or implied, 
                oral or written, where--
                            (i) one person (the franchisor) grants to 
                        another person (the franchisee) the right to 
                        engage in the business of offering, selling or 
                        distributing goods or services, in which--
                                    (I) the goods or services offered, 
                                sold or distributed by the franchisee 
                                are substantially associated with the 
                                trademark, service mark, trade name, 
                                logotype, advertising, or other 
                                commercial symbol owned or used by the 
                                franchisor; or
                                    (II) the franchisee must conform to 
                                quality standards established by the 
                                franchisor for the goods or services to 
                                be offered, sold or distributed, and 
                                operate under a name that includes, in 
                                whole or in part, the franchisor's 
                                trademark, service mark, trade name, 
                                logotype, advertising, or other 
                                commercial symbol;
                            (ii) the franchisor--
                                    (I) communicates to the franchisee 
                                knowledge, experience, expertise, know-
                                how, trade secrets or other nonpatented 
                                information, regardless of whether it 
                                is proprietary or confidential;
                                    (II) provides significant 
                                assistance in the franchisee's method 
                                of operation; or
                                    (III) exercises significant 
                                controls over the franchisee's method 
                                of operation of the business; and
                            (iii) the franchisee, as a condition for 
                        obtaining or commencing operation of a 
                        franchise, is required to make, or to commit to 
                        make, payment or other consideration to the 
                        franchisor, or an affiliate of the franchisor, 
                        other than payment for commercially reasonable 
                        quantities of goods for resale at a bona fide 
                        wholesale price.
                    (B) a subfranchise; or
                    (C) any commercial relationship entered into in 
                reasonable reliance on representations, whether oral or 
                written, that the criteria of subsection (A) will be 
                met.
            (7) The term ``franchise broker'' means a person, other 
        than a franchisor or franchisee, who sells, offers for sale or 
        arranges for the sale of a franchise.
            (8) The term ``franchisee'' means a person to whom a 
        franchise is granted.
            (9) The term ``Franchise Rule'' means Trade Regulation Rule 
        436 (16 CFR 436) as promulgated and amended by the Federal 
        Trade Commission.
            (10) The term ``franchisor'' means a person who grants a 
        franchise or a subfranchise.
            (11) The terms ``material'' and ``material fact'' 
        includes--
                    (A) any fact, circumstance, or set of conditions 
                which a reasonable franchisee or a reasonable 
                prospective franchisee would consider important in 
                making a significant decision relating to entering 
                into, remaining in, or abandoning a franchise 
                relationship; and
                    (B) any fact, circumstance, or set of conditions 
                which has, or may have, any significant financial 
                impact on a franchisor, franchisee or a prospective 
                franchisee.
            (12) The term ``offer'' or ``offering'' means any effort to 
        offer or to dispose of, or solicitation of an offer to buy, a 
        franchise or interest in a franchise for value.
            (13) The term ``outlet'' means a place of business, 
        temporary or permanent, fixed or mobile, from which products or 
        services are offered for sale.
            (14) The term ``person'' means a natural person or any 
        legal entity recognized in law.
            (15) The term ``State'' means a State, the District of 
        Columbia, and any territory or possession of the United States.
            (16) The term ``subfranchise'' means a contract or an 
        agreement by which a person pays a franchisor for the right to 
        sell, offer for sale or arrange the sale of franchises, or to 
        provide goods or services to franchisees.
            (17) The term ``subfranchisor'' means a person who is 
        granted a subfranchise.

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