I
103D CONGRESS
1ST SESSION
H. R. 1315
To strengthen current Federal law and regulation to protect consumers in
connection with the representation and sale of franchise businesses; to
facilitate increased public disclosure regarding franchise opportunities,
to enhance common law remedies for purchasers of franchises, and for
other purposes.
IN THE HOUSE OF REPRESENTATIVES
MARCH 11, 1993
Mr. LAFALCE introduced the following bill; which was referred jointly to the
Committees on Energy and Commerce and the Judiciary
A BILL
To strengthen current Federal law and regulation to protect
consumers in connection with the representation and sale
of franchise businesses; to facilitate increased public dis-
closure 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 Representa-
tives 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’’.
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(5) Traditional legal remedies have proven inad-
equate to protect the legitimate interests of pur-
chasers of franchises due to the failure of some
courts to recognize what inducements are material in
the sale of a franchise and what contractual provi-
sions 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 en-
hance 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, li-
censing, contracting, sale or other promotion in or affect-
ing 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 corpora-
tion—
(1) to employ a device, scheme, or artifice to
defraud;
(2) to engage in an act, practice, course of busi-
ness or pattern of conduct which operates or is in-
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tended to operate as a fraud or deceit upon any per-
son;
(3) to obtain money or property, or assist oth-
ers 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 ma-
terial 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, dis-
ability 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 what-
soever that such franchise has been reviewed, en-
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dorsed, 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 di-
rectly 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 Fed-
eral Trade Commission (hereafter ‘‘the Commis-
sion’’) 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;
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(4) to fail to furnish any prospective franchisee
at the time disclosure is made copies of all collateral
documents, including manuals, memoranda, operat-
ing 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 infor-
mation provided to the prospective franchisee in any
required disclosure.
(c) No provision of subsection (b) imposing any liabil-
ity shall apply to any action, statement or omission done
or made in good faith in conformity with any rule, regula-
tion or order of the Commission, notwithstanding that
such rule, regulation or order may, after such act or omis-
sion, 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 fran-
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chises or franchisees associated with a franchise oppor-
tunity, 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 di-
rectly or indirectly through any officer, employee, agent,
representative or attorney, to fail to furnish any prospec-
tive 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 en-
gaged in franchising or providing services or as-
sistance 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 ap-
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plicable, other executives or subfranchisors who
will have management responsibility in connec-
tion with the operation of the franchisor’s busi-
ness 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, fraud-
ulent 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 re-
sulting in a final judgment, or has settled out
of court any claim, including complaints, cross
claims, counterclaims, and third party com-
plaints, in a judicial proceeding and their
equivalents in an arbitration proceeding—
(i) involving allegations of fraud, em-
bezzlement, fraudulent conversion, mis-
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ture of the claim; the date of conviction, judgment
or decision; the penalty imposed or the damages as-
sessed; 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 allega-
tions of fraud, embezzlement, fraudulent conversion,
misappropriation of property, restraint of trade or
comparable allegations, or complaints or counter-
claims involving franchise sales or the franchise rela-
tionship. Such statement shall set forth the identity
and location of the court or forum in which each ad-
ministrative 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 im-
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pact 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 rea-
sonable prospective franchisee would consider
important in making a decision regarding enter-
ing 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 prin-
cipal, 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 pe-
riod 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 col-
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lects 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 fran-
chise operation, including, but not limited
to, franchise fees, deposits, down pay-
ments, 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 pur-
chases;
(B) a description of any real estate, serv-
ices, supplies, products, inventories, signs, fix-
tures, or equipment relating to the establish-
ment or the operation of the franchise business
which the franchisee is directly or indirectly re-
quired 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;
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(C) a description of the basis for calculat-
ing, and actual amounts, where available, of
any revenue or other consideration to be re-
ceived 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 pur-
chases, 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 fol-
lowing the opening of the franchise busi-
ness, including an estimate of loan repay-
ments, including interest, if part of the
franchisee’s initial investment may be fi-
nanced.
(7) A statement describing the services and as-
sistance which the franchisor, persons affiliated with
the franchisor, or third parties designated by the
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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 lan-
guage stating that the franchisor is not obli-
gated under the franchise agreement, or any
other agreement, to provide any additional serv-
ices 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
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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, op-
position 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 lo-
cated; and
(D) the franchisor is obligated by the fran-
chise 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 an-
cillary or corollary to the franchise, or any other de-
vice or practice—
(A) the franchisee is to be limited in any
manner—
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(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 re-
spect to such territory or area, the franchisor—
(i) will not establish another, or more
than a fixed number of, franchises or com-
pany-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 trade-
mark; or
(iii) will not otherwise market the
same or similar products or services under
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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 con-
tractually precluded from marketing, through
arrangements other than a franchise or a com-
pany-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 dif-
ferent trademark or trade name, in the pro-
tected 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 busi-
ness, 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 ex-
pression of intention, made by the franchisor, any
officer of the franchisor, or the franchisor’s parent
firm or ultimate controlling person, if any, to dis-
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pose of the corporation or partnership, or the major-
ity (controlling) interest of such corporation or part-
nership, which is identified in subsection (1) of this
section as the franchisor of the business being of-
fered 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 fran-
chise 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), ex-
cept 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
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a basis for such operating data, or an es-
tablished franchisor offering a new, sepa-
rate franchise concept, for which there are
no more than ten franchise or nonfranchise
outlets to provide a basis for such operat-
ing data, is not required to make such a
statement; and
(ii) a franchisor providing representa-
tions 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 in-
formation 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,
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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 fran-
chises and nonfranchise outlets. At mini-
mum, 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 informa-
tion is known to the franchisor, can rea-
sonably 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.
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(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 ac-
curate or reflective of the operating experience
of franchised units; and
(G) include a statement that substan-
tiation of the data used in preparing the state-
ment 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 lo-
cated, provided that there are at least
twenty-five such franchisees;
(ii) all franchisees in the State in
which the proposed franchise is to be lo-
cated and all franchisees in States geo-
graphically contiguous to such State, pro-
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vided 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 list-
ing 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 docu-
ment.
(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
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(v) left the franchise system or ceased
to do business under the franchise agree-
ment;
(C) the name, last known address and tele-
phone number and location of franchise(s) of
every franchisee who voluntarily or involuntarily
left the franchise system or ceased doing busi-
ness 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 re-
cent fiscal year only, or for the franchisor’s first
complete fiscal year only, and shall make appro-
priate disclosure following each succeeding fis-
cal 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, disclo-
sure shall be provided for not less than five
years thereafter;
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(D) the number of all previous owners of
a specific franchise outlet to be resold, or the
number of previous owners of franchise busi-
nesses 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 mar-
ket area in which a franchise business is to be
located. The franchisor shall—
(i) provide such number in a supple-
mental written statement to potential pur-
chasers of such outlet, or to potential pur-
chasers 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, associa-
tions, advisory councils or other organizations
of franchise owners of the business being of-
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fered that are organized to promote the inter-
ests 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, associa-
tions, 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.
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(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 account-
ant, 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 inde-
pendent certified or licensed public accountant,
and are accompanied by a clear and conspicu-
ous disclosure that they are unaudited; and
(B) include a separate, concise and con-
spicuous 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 an-
nual revenues of such franchisor attributed to
each of the following categories or sources of
revenue—
(i) pre-opening fees;
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(ii) royalty payments;
(iii) 
pre-opening 
purchases 
by
franchisees of equipment, inventory or sup-
plies;
(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 sup-
plies, 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 dif-
ferent trade name or trademark.
A franchisor may substitute, in lieu of the bal-
ance sheet and income statements under sub-
paragraph (A), the consolidated financial state-
ments of the franchisor’s parent company which
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include the franchisor’s financial results, pro-
vided such parent company guarantees the
franchisor’s financial performance and, provided
further, that such financial statement shall in-
clude a separate summary of the revenue
sources of the franchisor pursuant to subpara-
graph (B).
(b) Standards of material omissions set forth in sub-
section (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 docu-
ments by use of a clearly and concisely written statement
which fully incorporates all information required to be dis-
closed.
(d) Information required to be disclosed in supple-
mental 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 sub-
section 436.2(g) of the Franchise Rule.
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(e) Information required to be presented to prospec-
tive 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 re-
quired 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 avail-
able to permit disclosure pursuant to subsection (a)(11)
of this section and to establish procedures for timely col-
lection 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
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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 ex-
planations relating to required disclosures under sub-
sections (a)(11)(B)(ii) and (a)(11)(B)(iii), within two hun-
dred 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 ef-
fective 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 of-
ficer, employee, broker, agent or attorney, except as per-
mitted by rule, regulation or order of the Commission,
willfully to destroy, mutilate or alter any disclosure docu-
ment, account, book, record, receipt or other document re-
quired to be maintained and preserved pursuant to sub-
section (b) of this section.
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(b) A franchisor, subfranchisor or franchise broker,
where applicable, shall maintain and preserve for such pe-
riod or periods as the Commission may prescribe by rule
or regulation, such disclosure documents, account, books,
records, receipts or other documents pertaining to any in-
formation required to be disclosed pursuant to section 4
of this Act, or which are necessary and appropriate to con-
stitute—
(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 finan-
cial statement and any earnings representation re-
quired 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
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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 under-
taken 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 Fed-
eral 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.
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(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 Of-
fering Circular of the North American Securities Ad-
ministrators 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 pre-
sumed to comply with the requirements of the Com-
mission’s Franchise Rule unless, within one hundred
and eighty days of formal notification of such
amendments by the North American Securities Ad-
ministrators’ Association, or its successor, the Com-
mission 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
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cedures 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 imple-
ment the provisions of this Act.
SEC. 7. ACTIONS BY PRIVATE PERSONS.
(a)(1) Any person injured by a violation of any provi-
sion 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 viola-
tion occurred; or
(B) three years after the date on which the vio-
lation was discovered or should have been discovered
through exercise of reasonable diligence.
(3) Nothing in this Act or the Federal Trade Com-
mission 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.
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(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 re-
straining 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 inter-
pret any benefit conferred, duty imposed, or restriction ap-
plied in favor of or against any party to a franchise agree-
ment as reciprocal and equally applicable to the other
party to the agreement and to provide an identical or simi-
lar benefit, impose an identical or similar duty, or apply
an identical or similar restriction on such other party, pro-
vided that such reciprocal application is consistent with
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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 arbi-
tration, mediation, or other nonjudicial resolution of a dis-
pute, 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 agree-
ment requiring use of arbitration to resolve disputes aris-
ing 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 LIABIL-
ITY.
(a) It shall be unlawful for any franchisor or
subfranchisor, either directly or indirectly through any of-
ficer employee, agent, representative or attorney to—
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(1) Require any term or condition in a fran-
chise 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 dis-
claimer, waiver, release or other provision of a fran-
chise agreement, or in any document relating to the
sale of a franchise, which would purport—
(A) to relieve any person from a duty im-
posed by this Act, any rule of the Commission
under this Act, or any provision of the Fran-
chise Rule; or
(B) to protect any person against any li-
ability to which he would otherwise be subject
under the Act, or any rule of the Commission
under the Act, either by reason of willful mis-
feasance, 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
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restrict any right granted under this Act shall be void and
unenforceable.
(c) No stipulation or provision of a franchise agree-
ment or of an agreement ancillary or collateral to a fran-
chise 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 juris-
diction as governing or interpreting the franchise or
disclosure relating to such franchise;
(2) deprive a franchisee of the right to com-
mence 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 col-
lateral to a franchise, the parol evidence rule, or any other
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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 per-
son subject to the provisions of this Act from the ob-
ligation to comply with the laws of any State with
respect to franchise disclosure and registration, ex-
cept 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
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to prevent evasions or violations of the requirements of
this Act or to strengthen disclosure of pertinent informa-
tion to prospective franchisees. In examining such addi-
tional 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 addi-
tional reports to the Congress as are merited by later find-
ings 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 control-
ling, controlled by, or under common control with a
franchisor;
(2) the term ‘‘advertisement’’ means a commu-
nication circulated generally by mail, or print media
or electronic media, or otherwise disseminated gen-
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erally to the public, in connection with an offer or
sale of a franchise;
(3) the term ‘‘commerce’’ has the same mean-
ing 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 ei-
ther the disclosure statement required by the Com-
mission in Trade Regulation Rule 436 (16 CFR s
436) as it may be amended, or an offering circular
prepared in accordance with Uniform Franchise Of-
fering 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 ex-
press 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—
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(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 com-
mercial symbol owned or used by the
franchisor; or
(II) the franchisee must conform
to quality standards established by
the franchisor for the goods or serv-
ices to be offered, sold or distributed,
and operate under a name that in-
cludes, 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, ex-
pertise, know-how, trade secrets or
other nonpatented information, re-
gardless of whether it is proprietary
or confidential;
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(II) provides significant assist-
ance in the franchisee’s method of op-
eration; or
(III) exercises significant controls
over the franchisee’s method of oper-
ation of the business; and
(iii) the franchisee, as a condition for
obtaining or commencing operation of a
franchise, is required to make, or to com-
mit to make, payment or other consider-
ation 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 sub-
section (A) will be met.
(7) The term ‘‘franchise broker’’ means a per-
son, other than a franchisor or franchisee, who sells,
offers for sale or arranges for the sale of a fran-
chise.
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(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 condi-
tions which a reasonable franchisee or a reason-
able prospective franchisee would consider im-
portant in making a significant decision relat-
ing to entering into, remaining in, or abandon-
ing a franchise relationship; and
(B) any fact, circumstance, or set of condi-
tions which has, or may have, any significant fi-
nancial 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.
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(13) The term ‘‘outlet’’ means a place of busi-
ness, temporary or permanent, fixed or mobile, from
which products or services are offered for sale.
(14) The term ‘‘person’’ means a natural per-
son or any legal entity recognized in law.
(15) The term ‘‘State’’ means a State, the Dis-
trict 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 ar-
range 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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