I
103D CONGRESS
1ST SESSION
H. R. 1316
To establish minimum standards of fair conduct in franchise business
relationships, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
MARCH 11, 1993
Mr. LAFALCE introduced the following bill; which was referred to the
Committee on the Judiciary
A BILL
To establish minimum standards of fair conduct in franchise
business relationships, and for other purposes.
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 Fair Franchise
Practices 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 rapidly replacing more
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traditional forms of small business ownership in the
American economy.
(2) Franchise relationships involve a joint en-
terprise between the franchisor and franchisees and
each party has a vested interest in the franchised
business.
(3) Many franchises reflect a profound imbal-
ance of contractual power in favor of the franchisor,
and fail to give due regard to the legitimate business
interests of the franchisee, as a result of the
franchisor reserving pervasive contractual rights over
the franchise relationship.
(4) Franchisees may suffer substantial financial
losses where the franchisor does not act in good
faith, or with due care.
(5) Traditional common law doctrines have not
evolved sufficiently to protect franchisees adequately
from fraudulent or unfair practices, and significant
contractual and procedural restrictions have denied
franchisees viable legal recourse against franchisors.
(b) It is the purpose of this Act to promote greater
fairness and equity in franchise relationships, to establish
minimum standards of conduct in franchise practices, to
strengthen private remedies against fraudulent or unlaw-
ful actions, and to provide to consumers the greater bene-
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based on suspect classifications including race, sex,
religion or national origin;
(b) It shall be unlawful for any franchisor or
subfranchisor, either directly or indirectly through any of-
ficer, employee, agent, representative or attorney:
(1) to prohibit a franchisee from obtaining
equipment, fixtures, supplies or services used in the
establishment or operation of the franchised business
from sources of the franchisee’s choosing, except
that such goods or services may be required to meet
uniform system-wide quality standards which are not
arbitrarily 
promulgated 
or 
enforced 
by 
the
franchisor. This paragraph shall not apply to reason-
able quantities of inventory of goods or services (in-
cluding display and sample items) that the
franchisee is required to obtain from the franchisor
and/or its affiliate(s), where such goods or services
are integrally related to a trademark, trade name,
trade secret or patent owned by or licensed to the
franchisor or its affiliate(s), provided the franchisor
shall not withhold a franchisee’s right to obtain such
goods and services without providing a notice of de-
fault and a thirty-day period to cure the default;
(2) to terminate or otherwise cancel a franchise
prior to its expiration without good cause for such
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termination or cancellation. For purposes of this
paragraph, good cause shall exist only where:
(A) the franchisee fails to comply with a
material provision of the franchise agreement
after notice specifying the default and a thirty-
day period to cure the default, or if the default
can not be cured within thirty days, the
franchisee fails to initiate within thirty days
and diligently pursue substantial continuing ac-
tion to cure the default;
(B) the franchisee, without the require-
ment of notice and opportunity to cure—
(i) voluntarily abandons the franchise
business, except that loss or termination of
a leasehold for the franchise business prior
to the term of a franchise agreement by
reason of eminent domain, foreclosure sale,
natural disaster or other termination not
the fault of the franchisee shall not be con-
sidered abandonment by the franchisee;
(ii) is convicted of a crime that sub-
stantially impairs the good will associated
with the franchisor’s trade mark, service
mark, trade name, logotype, advertising or
other commercial symbol;
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(iii) repeatedly fails to comply with
the same material provision of the fran-
chise agreement, where the enforcement of
such provision is substantially similar to
enforcement of that provision with other
franchisees; or
(iv) operates the franchised business
in a manner that creates an imminent dan-
ger to public health or safety; and
(C) the franchisor, whether or not as a re-
sult of bankruptcy or reorganization, withdraws
from a marketing area, provided the franchisor
pays the franchisee reasonable compensation for
damages incurred from the shortened term of
the franchise, or agrees not to enforce any con-
tractual prohibition against the franchisee con-
tinuing to engage in the business at the licensed
location, except as provided in subsection
(3)(B) of this section.
(3) to prohibit, or enforce a prohibition against,
any franchisee from engaging in any business at any
location after expiration of a franchise or after ter-
mination of the franchise prior to its expiration for
good cause. This paragraph shall not:
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(A) apply to enforcement of any such pro-
hibition where the franchisor, not less than ten
days before the effective date of such termi-
nation or expiration, offers in writing to pur-
chase the assets of the franchised business for
its fair market value as a going concern, pro-
vided that:
(i) the fair market value of such busi-
ness be determined as if it were to be re-
sold or renewed for a period of years equal
to the contract term being offered by the
franchisor for new or renewed franchises;
(ii) the fair market value of such busi-
ness is ascertained by an impartial ap-
praiser, whose appointment is acceptable to
both parties; and
(iii) forgiveness of debt shall not be
considered a purchase of assets by the
franchisor for purposes of this section.
(B) prohibit enforcement of any provisions
of a franchise obligating a franchisee after expi-
ration or termination of a franchise—
(i) to cease or refrain from using a
trademark, trade secret or other intellec-
tual property owned by the franchisor or
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its affiliate, except that the existence of
language in the franchise agreement pur-
porting to determine ownership of a trade-
mark, trade secret or other intellectual
property shall not be binding upon any
court or forum for purposes of this para-
graph, but may be considered by such
court or forum as evidence of such owner-
ship; or
(ii) to alter the appearance of the
premises and the manner of operation of
the franchised business to avoid any likeli-
hood of confusion as to the affiliation of
the business with its former franchisor.
(4) to hinder or prohibit, directly or indirectly,
the free association of franchisees for any lawful
purpose, including the formation of or participation
in any trade association made up of franchisees, or
to discriminate by imposing requirements not im-
posed on other similarly situated franchisees, or re-
taliate, directly or indirectly, against any franchisee
for membership or participation in a franchisee asso-
ciation.
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SEC. 4. ENCROACHMENT.
(a) A franchisor shall not establish a new outlet or
point of sale of goods or services similar to that offered
by a franchisee and identified by the same trade name
or trademark or advertising used by a franchisee, in such
unreasonable proximity to an outlet or business owned or
licensed to such franchisee that the effect or probable ef-
fect of establishing such new outlet or point of sale is to
cause a reduction in gross sales of the existing franchise
of more than 10 percent during the twelve month period
immediately following establishment of the new outlet or
point of sale.
(b) Where a franchisor has established a new outlet
or point of sale in such unreasonable proximity to an exist-
ing franchise, the franchisor shall—
(1) compensate the franchisee for lost sales
caused by the new outlet or point of sale in an
amount equal to the loss of sales in excess of 10 per-
cent for any period in which the new outlet or point
of sale has been open for business and remains open
for business;
(2) change the location or manner of operation
of the new outlet or point of sale to mitigate its im-
pact upon the franchise business to diminish the di-
version of sales to less than 10 percent during any
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period in which the new outlet or point of sale is
open for business; or
(3) close the new outlet or point of sale.
(c) This section shall not apply if, before a new outlet
or point of sale is opened for business, a franchisor offers
in writing to each franchisee which owns or licenses a
franchise in close proximity to the site of such new outlet
or point of sale to pay to such franchisee or franchisees
an amount equal to 10 percent of the gross sales (net of
sales taxes, returns and allowances) of the new outlet or
point of sale for the first twenty-four months of operation
of such new outlet or point of sale, if the sales of such
existing franchises are reduced by more than 10 percent
during the twelve month period immediately following es-
tablishment of the new outlet or point of sale as a con-
sequence of the opening of such outlet or point of sale.
(d) A franchisor shall have the burden of proof to
show that, or the extent to which, a decline in sales of
an existing franchise occurred for reason other than the
establishment in close proximity to the franchise of the
new outlet or point of sale.
SEC. 5. STANDARDS OF CONDUCT.
(a) DUTY OF GOOD FAITH.—A franchise contract
imposes on each party thereto a duty to act in good faith
in its performance and enforcement. This duty of good
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faith obligates a party to a franchise to do nothing that
will have the effect of destroying or injuring the right of
the other party to receive the fruits of the contract and
to do everything required under the contract to accomplish
such purpose.
(b) DUTY OF DUE CARE.—A franchise relationship
imposes on the franchisor a duty of due care. Unless a
franchisor represents that it has greater skill or knowledge
in its undertaking with its franchisees, or conspicuously
disclaims that it has skill or knowledge, the franchisor is
required to exercise the skill and knowledge normally pos-
sessed by franchisors in good standing in the same or simi-
lar types of business. For purposes of this subsection—
(1) the phrase ‘‘skill or knowledge’’ means
something more than the mere minimum level of
skill or knowledge required of any person engaging
in a service or business and involves a special level
of expertise—
(A) which is the result of acquired learning
and aptitude developed by special training and
experience in the business to be conducted
under the franchise, or the result of extensive
use and experience with the products or services
or the operating system of the franchise;
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(B) which is the result of experience in or-
ganizing a franchise system and in providing
training, assistance and services to franchisees;
and
(C) which a prospective franchisee would
expect in reasonable reliance on the written and
oral commitments and representations of the
franchisor; and
(2) a franchisor shall be permitted to show that
it contracted for, hired or purchased the expertise
necessary to comply with the requirements of this
subsection and that such expertise was incorporated
in the franchise or communicated or provided to the
franchisee.
The requirement of this subsection may not be waived by
agreement or by conduct, but the franchisor may limit in
writing the nature and scope of its skill and knowledge,
and of its undertaking with a prospective franchisee: Pro-
vided, That no inconsistent representation, whether writ-
ten or oral, is made to the prospective franchisee.
(c) LIMITED FIDUCIARY DUTY.—Without regard to
whether a fiduciary duty is imposed generally on the
franchisor by virtue of a franchise relationship, the
franchisor owes a fiduciary duty to its franchisees and is
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obligated to exercise the highest standard of care for
franchisee interests where the franchisor:
(1) undertakes to perform bookkeeping, collec-
tion, payroll or accounting services on behalf of the
franchisee; or
(2) requires franchisees to make contributions
to any pooled advertising or promotional fund to be
administered or supervised by the franchisor.
While not limiting the ability of any court to identify other
circumstances for which a fiduciary duty may also exist,
this subsection does not create or extend a fiduciary duty
by implication to other aspects of a franchise.
SEC. 6. PROCEDURAL FAIRNESS.
(a) It shall be unlawful for any franchisor or
subfranchisor, either directly or indirectly through any of-
ficer, employee, agent, representative or attorney to:
(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; or
(2) Require a franchisee to assent to any dis-
claimer, waiver, release, stipulation or other provi-
sion which would purport—
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(A) to relieve any person from a duty im-
posed by this Act, except as part of a settle-
ment of a bona fide dispute; or
(B) to protect any person against any li-
ability to which he would otherwise be subject
under the Act by reason of willful misfeasance,
bad faith, or gross negligence in the perform-
ance of duties, or by reason of reckless dis-
regard of obligations and duties under the fran-
chise 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 agree-
ment or of an agreement ancillary or collateral to a fran-
chise shall—
(1) deprive a franchisee of the application and
benefits of this Act or of any Federal law or the law
of the State in which the franchisee’s principal place
of business is located;
(2) deprive a franchisee of the right to com-
mence an action (or, if the franchise provides for ar-
bitration, initiate an arbitration) against the
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franchisor for violation of the Act, or for breach of
the franchise agreement or of any agreement or stip-
ulation ancillary or collateral to the franchise, in a
court (or arbitration forum) in the state of the
franchisee’s principal place of business; or
(3) exclude collective action by franchisees to
settle like disputes arising from violation of this Act
either by civil action or arbitration.
(d) Compliance with this Act or with an applicable
State franchise law is not waived, excused or avoided, and
evidence of violation of this Act or of such State law shall
not be excluded, by virtue of an integration clause, any
provision of a franchise agreement or an agreement ancil-
lary or collateral to a franchise, the parol evidence rule,
or any other rule of evidence purporting to exclude consid-
eration of matters outside the franchise agreement.
SEC. 7. ACTIONS BY PRIVATE PERSONS.
(a)(1) Any person injured by a violation of any provision
or standard of this Act shall have a right of action for
all damages caused by the violation, including costs of liti-
gation 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
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or in any other court of competent jurisdiction, before the
later of:
(A) Five years after the date on which the vio-
lation occurred; or
(B) Three years after the date on which the
violation was discovered or should have been discov-
ered through exercise of reasonable diligence.
(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 judgement that an act 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 inter-
est 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 spe-
cial or irreparable damage to such person shall have to
be made.
(c)(1) In any action brought under subsection (a) or
(b) of this section, a court shall have the power to inter-
pret any benefit conferred, duty imposed, or restriction ap-
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district court or in any other court of competent jurisdic-
tion pursuant to this section involving a request for dam-
ages and/or equitable relief for an alleged violation of any
provision of this Act, except where such request is frivo-
lous or insubstantial. A determination of whether a re-
quest for damages and/or equitable relief is frivolous or
insubstantial shall be made by the court in which the ac-
tion is filed at any hearing at which all parties are present
or represented by counsel.
SEC. 8. EFFECT ON OTHER 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 the franchisee
than provided by this Act, and then only to the extent
of such inconsistency.
(b) Nothing in this Act shall be interpreted—
(1) to alter or relieve any franchisor or
subfranchisor from the obligation to comply with the
laws of any State, except to the extent that such
laws are inconsistent with any provision of this Act;
or
(2) to preclude a State from enacting any law
or regulation that affords a greater level or broader
range of protections to franchisees.
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SEC. 9. SCOPE AND APPLICABILITY.
The requirements of this Act shall apply to franchise
agreements entered into, amended, exchanged or renewed
after the date of enactment of this Act.
SEC. 10. DEFINITIONS.
For purposes of this Act:
(1) The term ‘‘affiliate’’ means a natural or
legal person controlling, controlled by, or under com-
mon control with a franchisor.
(2) The term ‘‘franchise’’ means—
(A) any continuing commercial relationship
created by a contract or agreement, either ex-
pressed or implied, whether 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 and services of-
fered, sold or distributed by the
franchisee are substantially associated
with the trademark, service mark,
trade name, logotype, advertising, or
other commercial symbol owned or
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used by the franchisor (hereafter ‘‘the
franchisor’s mark’’); or
(II) the franchisee must conform
to quality standards established by
the franchisor with respect to the
goods and services being distributed,
and operate under a name that in-
cludes, in whole or in part, the
franchisor’s mark;
(ii) the franchisor—
(I) 
communicates 
to 
the
franchisee knowledge, experience, ex-
pertise, know-how, trade secrets or
other non-patented information, re-
gardless of whether it is proprietary
or confidential;
(II) provides significant assist-
ance to the franchisee in areas relat-
ing to 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
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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,
either oral or written, that the criteria of para-
graph (A) of this subsection will be met.
(3) The term ‘‘franchisee’’ means a person to
whom a franchise is granted.
(4) The term ‘‘franchisor’’ means a person who
grants a franchise or a subfranchise.
(5) The term ‘‘good faith’’ means honesty in
fact and the observance of reasonable standards of
fair dealing in the trade.
(6) The term ‘‘person’’ means an individual or
any other legal or commercial entity.
(7) The term ‘‘State’’ means a State, the Dis-
trict of Columbia, and any territory or possession of
the United States.
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(8) The term ‘‘subfranchise’’ means a contract
or an agreement by which a person pays a
franchisor for the right to sell, negotiate the sale, or
provide services franchises.
(9) The term ‘‘subfranchisor’’ means a person
who is granted a subfranchise.
(10) The term ‘‘trade secret’’ means informa-
tion, including a formula, pattern, compilation, pro-
gram, device, method, technique, or process, that:
(i) derives independent economic value, ac-
tual or potential, from not being generally
known to, and not being readily ascertainable
by proper means by, other persons who can ob-
tain economic value from its disclosure or use,
and
(ii) is the subject of efforts that are rea-
sonable under the circumstances to maintain its
secrecy.
Æ
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