I
105TH CONGRESS
1ST SESSION
H. R. 2954
To establish minimum standards of fair conduct in franchise sales and
franchise business relationships, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
NOVEMBER 8, 1997
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
sales and 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; TABLE OF CONTENTS.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Federal Fair Franchise Practices Act of 1997’’.
(b) TABLE OF CONTENTS.—
Sec. 1. Short title; table of contents.
Sec. 2. Findings and purpose.
Sec. 3. Franchise sales practices.
Sec. 4. Unfair franchise practices.
Sec. 5. Standards of conduct.
Sec. 6. Procedural Fairness.
Sec. 7. Actions by Private Persons.
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Sec. 8. Actions by State Attorneys General.
Sec. 9. Effect on Other Law.
Sec. 10. Scope and Applicability.
Sec. 11. Definitions.
SEC. 2. FINDINGS AND PURPOSE.
(a) FINDINGS.—The Congress makes the following
findings:
(1) Franchise businesses represent a large and
growing segment of the nation’s retail and service
businesses and are rapidly replacing more traditional
forms of small business ownership in the American
economy.
(2) Franchise businesses involve a joint enter-
prise between the franchisor and franchisees in
which each party has a vested interest in the fran-
chised business.
(3) Most prospective franchisees lack bargain-
ing power and generally invest substantial amounts
to obtain a franchise business when they are unfa-
miliar with operating a business, with the business
being franchised and with industry practices in fran-
chising.
(4) 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
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franchisor reserving pervasive contractual rights over
the franchise relationship.
(5) Franchisees may suffer substantial financial
losses when the franchisor does not provide truthful
or complete information regarding the franchise op-
portunity, or where the franchisor does not act in
good faith in the performance of the franchise agree-
ment.
(6) Traditional common law doctrines have not
evolved sufficiently to protect franchisees adequately
from fraudulent or unfair practices in the sale and
operation of franchise businesses, and significant
contractual and procedural restrictions have denied
franchisees adequate legal recourse to protect their
interests in such businesses.
(b) PURPOSE.—It is the purpose of this Act to pro-
mote fair and equitable franchise agreements, to establish
uniform standards of conduct in franchise relationships
and to create uniform private Federal remedies for viola-
tions of Federal law.
SEC. 3. FRANCHISE SALES PRACTICES.
(a) IN GENERAL.—In connection with the advertis-
ing, offering, sale or promotion of any franchise, it shall
be unlawful for any person—
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(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-
tended to operate as a fraud upon any prospective
franchisee;
(3) to obtain property, or assist others to obtain
property, by negligently making an untrue statement
of a material fact or any failure to state a material
fact;
(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, unless any distinc-
tion between prospective franchisees 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.
(b) MISREPRESENTATIONS
IN REQUIRED DISCLO-
SURE.—
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(1) In connection with any disclosure document,
notice or report required by any law, it shall be un-
lawful for any franchisor, subfranchisor or franchise
broker, either directly or indirectly through another
person—
(A) to make an untrue statement of mate-
rial fact or fail to state a material fact; or
(B) to fail to furnish any prospective
franchisee with all information required to be
disclosed by law and at the time and in the
manner required.
(2) For purposes of this subsection, the term
disclosure document means either the disclosure
statement required by the Federal Trade Commis-
sion in Trade Regulation Rule 436 (16 CFR 436)
as it may be amended, or an offering circular pre-
pared in accordance with Uniform Franchise Offer-
ing Circular guidelines as adopted and amended by
the North American Securities Administrators Asso-
ciation, Inc., or its successor.
SEC. 4. UNFAIR FRANCHISE PRACTICES.
(a) DECEPTIVE AND DISCRIMINATORY PRACTICES.—
In connection with the performance, enforcement, renewal
and termination of any franchise agreement, it shall be
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unlawful for a franchisor or subfranchisor, either directly
or indirectly through another person—
(1) to engage in an act, practice, course of busi-
ness, or pattern of conduct which operates as a
fraud upon any person;
(2) to discriminate among franchisees on the
basis of race, sex, religion, disability or national ori-
gin;
(3) 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; and
(4) to discriminate against a franchisee by im-
posing requirements not imposed on other similarly
situated franchisees or otherwise retaliate, directly
or indirectly, against any franchisee for membership
or participation in a franchisee association.
(b) TERMINATION WITHOUT GOOD CAUSE.—
(1) It shall be unlawful for a franchisor, either
directly or indirectly through another person, to ter-
minate a franchise agreement prior to its expiration
without good cause for such termination.
(2) For purposes of this subsection, good cause
shall exist only where—
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(A) the franchisee fails to comply with a
material provision of the franchise agreement
after notice specifying the default and a 30-day
period to cure the default, or if the default can
not be cured within 30 days, the franchisee fails
to initiate within 30 days, and diligently pursue
substantial continuing action to cure the de-
fault;
(B) the franchisee, without the require-
ment of notice and opportunity to cure—
(i) voluntarily abandons the business
licensed by the franchise agreement, except
that loss or termination of a leasehold for
the business prior to the term of a fran-
chise agreement by reason of eminent do-
main, foreclosure sale, natural disaster or
other termination not the fault of the
franchisee shall not be considered abandon-
ment by the franchisee;
(ii) is convicted of a felony, for which
imprisonment of one year or more can be
imposed, which substantially impairs the
good will associated with the franchisor’s
trade mark, service mark, trade name, log-
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otype, advertising or other commercial
symbol;
(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 business licensed by
the franchise agreement in a manner that
creates a danger to public health or safety;
or
(C) the franchisor withdraws from the
marketing area of the business licensed by the
franchise agreement and pays the franchisee
reasonable compensation for damages incurred
from the shortened term of the agreement and
agrees not to enforce any contractual prohibi-
tion against the franchisee continuing to engage
in the business at the licensed location.
(c) MANDATORY SOURCING OF SUPPLIES.—
(1) It shall be unlawful for a franchisor, either
directly or indirectly through another person, to pro-
hibit a franchisee from obtaining equipment, fix-
tures, supplies or services used in the establishment
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or operation of the business licensed by the franchise
agreement from sources of the franchisee’s choosing,
except that such goods or services may be required
to meet uniform quality standards which are not ar-
bitrarily promulgated or enforced by the franchisor.
(2) This subsection shall not apply to supplies
or services (including display and sample items) that
the franchisee is required to obtain from the
franchisor or its affiliate, where such goods or serv-
ices are integrally related to a trademark, trade
name, trade secret or patent owned by or licensed to
the franchisor or its affiliate, provided that—
(A) the supplies or services required are
not in excess of the amount the franchisee can
reasonably be expected to use or sell in the op-
eration of the business; and
(B) the franchisor shall not withhold a
franchisee’s right to obtain such goods and
services without providing a notice of default
and a 30-day period to cure the default.
(d) POST-TERM RESTRICTIONS ON COMPETITION.—
(1) A franchisor shall not prohibit, or enforce
a prohibition against, any franchisee from engaging
in any business at any location after expiration of a
franchise agreement or after termination of the fran-
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chise agreement prior to its expiration for good
cause.
(2) This subsection shall not apply to enforce-
ment of any such prohibition where the franchisor,
not less than ten days before the effective date of
such termination or expiration, offers in writing to
purchase the assets of the business licensed by the
franchise agreement for its fair market value as a
going concern, provided that—
(A) the fair market value of such business
be determined as if it were to be resold or re-
newed for a period of years equal to the con-
tract term being offered by the franchisor for
new or renewed franchises;
(B) the fair market value of such business
is ascertained by an impartial appraiser, whose
appointment is acceptable to both parties; and
(C) any forgiveness of debt shall not be
considered a purchase of assets by the
franchisor for purposes of this section.
(3) Nothing in this subsection shall be inter-
preted to prohibit enforcement of any provisions of
a franchise contract obligating a franchisee after ex-
piration or termination of a franchise—
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(A) to cease or refrain from using a trade-
mark, trade secret or other intellectual property
owned by the franchisor or its affiliate, except
that the existence of language in the franchise
agreement purporting to determine ownership
of a trademark, trade secret or other intellec-
tual property shall not be binding upon any
court or forum for purposes of this paragraph,
but may be considered by such court or forum
as evidence of such ownership; or
(B) to alter the appearance of the premises
and the manner of operation of the franchised
business to avoid any likelihood of confusion as
to the affiliation of the business with its former
franchisor.
SEC. 5. STANDARDS OF CONDUCT.
(a) DUTY OF GOOD FAITH.—
(1) A franchise contract imposes on each party
thereto a duty to act in good faith in its perform-
ance and enforcement.
(2) As used in this subsection, a duty of good
faith shall—
(A) obligate a party to a franchise to do
nothing that will have the effect of destroying
or injuring the right of the other party to re-
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ceive the fruits of the contract and to do every-
thing required under the contract to accomplish
such purpose; and
(B) require honesty of fact and observance
of reasonable standards of fair dealing.
(b) DUTY OF DUE CARE.—
(1) A franchise agreement 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 knowl-
edge normally possessed by franchisors in good
standing in the same or similar types of business.
(2) For purposes of this subsection—
(A) the phrase ‘‘skill or knowledge’’ means
something more than the mere minimum level
of skill or knowledge required of any person en-
gaging in a service or business and involves a
special level of expertise—
(i) which is the result of acquired
learning and aptitude developed by special
training and experience in the business to
be licensed under the franchise agreement,
or the result of extensive use and experi-
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ence with the products or services or the
operating system of such business;
(ii) which is the result of experience in
organizing a franchise system and in pro-
viding training, assistance and services to
franchisees; and
(iii) which a prospective franchisee
would expect in reasonable reliance on the
written and oral commitments and rep-
resentations of the franchisor; and
(B) a franchisor shall be permitted to show
that it contracted for, hired or purchased the
expertise necessary to comply with the require-
ments of this subsection and that such expertise
was incorporated in the franchise or commu-
nicated or provided to the franchisee.
(3) 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, provided that no in-
consistent representation, whether written or oral, is
made to the prospective franchisee.
(c) LIMITED FIDUCIARY DUTY.—
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(1) Without regard to whether a fiduciary duty
is imposed generally on the franchisor by virtue of
a franchise agreement, the franchisor owes a fidu-
ciary duty to its franchisees and is obligated to exer-
cise the highest standard of care for franchisee in-
terests where the franchisor—
(A) undertakes to perform bookkeeping,
collection, payroll or accounting services on be-
half of the franchisee; or
(B) requires franchisees to make contribu-
tions to any pooled advertising or promotional
fund to be administered or supervised by the
franchisor.
(2) A franchisor that administers or supervises
the administration of any pooled fund described in
paragraph (1)(B) shall—
(A) keep all such pooled funds in a seg-
regated account that shall not be subject to the
claims of creditors of the franchisor; and
(B) provide an independent certified audit
of such pooled funds within sixty (60) days fol-
lowing the close of the franchisor’s fiscal year,
which shall include full disclosure of all fees, ex-
penses or other payments from the fund to the
franchisor or to any subsidiary, affiliate or
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other entity controlled in whole or in part by
the franchisor.
(3) 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, either di-
rectly or indirectly through another person, to—
(1) require any term or condition in a franchise
agreement, or in any agreement ancillary or collat-
eral to a franchise, which directly or indirectly vio-
lates 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—
(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-
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regard of obligations and duties under the fran-
chise agreement; or
(3) require a franchisee to assent to any waiver,
release, stipulation or other provision, either as part
of any agreement or document relating to the oper-
ation of a franchise business, in any agreement or
document relating to the termination, cancellation,
forfeiture, repurchase or resale of a franchise busi-
ness or as a condition for permitting a franchisee to
leave the franchise system, which would purport to
prevent the franchisee from making any oral or writ-
ten statement relating to the franchise business, to
the operation of the franchise system or to the
franchisee’s experience with the franchise business;
except that, and only to the extent that, such waiver
or release is required as part of the settlement of a
bona fide dispute and relates only to the terms of
such settlement and to the negotiation of such set-
tlement.
(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.
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(c) No stipulation or provisions 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
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,
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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 provi-
sion or standard of 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,
in any State court, or in any other court of competent
jurisdiction, before the later of—
(A) 5 years after the date on which the viola-
tion occurred; or
(B) 3 years after the date on which the viola-
tion was discovered or should have been discovered
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,
in any State court or in any other court of competent ju-
risdiction to obtain a declaratory judgment 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
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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)(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.
(2) Any stipulation or provision of a franchise agree-
ment requiring use of arbitration or other nonjudicial res-
olution to resolve disputes arising under the agreement
shall not apply to bar an action brought in a United States
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-
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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.
(d) 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. ACTIONS BY STATE ATTORNEYS GENERAL.
(a) Whenever an attorney general of any State has
reason to believe that the interests of the residents of that
State have been or are being threatened or adversely af-
fected because any person has engaged or is engaging in
a pattern or practice which violates any provision of this
Act, the State, as parens patriae, may bring a civil action
on behalf of its residents in an appropriate district court
of the United States to enjoin such violations, to obtain
damages, restitution or other compensation on behalf of
residents of such State or to obtain such further and other
relief as the court may deem appropriate.
(b) For purposes of bringing any civil action under
subsection (a), nothing in this Act shall prevent an attor-
ney general from exercising the powers conferred on the
attorney general by the laws of such State to conduct in-
vestigations or to administer oaths or affirmations or to
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compel the attendance of witnesses or the production of
documentary and other evidence.
(c) Any civil action brought under subsection (a) in
a district court of the United States may be brought in
the district in which the defendant is found, is an inhab-
itant, or transacts business or wherever venue is proper
under section 1391 of title 28, United States Code. Proc-
ess in such action may be served in any district in which
the defendant is an inhabitant or in which the defendant
may be found.
(d) Nothing contained in this section shall prohibit
an authorized State official from proceeding in State court
on the basis of an alleged violation of any civil or criminal
statute of such State.
SEC. 9. 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 or any State, except to the extent that such
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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.
SEC. 10. SCOPE AND APPLICABILITY.
(a) Except as provided in subsection (b), the require-
ments of this Act shall apply to franchise agreements en-
tered into, amended, exchanged or renewed after the date
of enactment of this Act.
(b) The requirements of section 3 of this Act shall
take effect 90 days after the date of enactment of this
Act and shall apply only to actions, practices, disclosures
and statements occurring on or after such date.
SEC. 11. DEFINITIONS.
For purposes of this Act:
(1) The term ‘‘advertisement’’ means a commu-
nication circulated generally by mail, or print media
or electronic media, or otherwise disseminated gen-
erally to the public, in connection with an offer or
sale of a franchise.
(2) The term ‘‘affiliate’’ means a natural or
legal person controlling, controlled by, or under com-
mon control with a franchisor.
(3) The term ‘‘franchise’’ means—
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(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
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—
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(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
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,
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either oral or written, that the criteria of para-
graph (A) of this subsection will be met.
(4) 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.
(5) The term ‘‘franchisee’’ means a person to
whom a franchise is granted.
(6) The term ‘‘franchisor’’ means a person who
grants a franchise or a subfranchise.
(7) The term ‘‘good faith’’ means honesty in
fact and the observance of reasonable standards of
fair dealing in the trade.
(8) 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.
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(9) 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.
(10) The term ‘‘outlet’’ means a place of busi-
ness, temporary or permanent, fixed or mobile, from
which products or services are offered for sale.
(11) The term ‘‘person’’ means an individual or
any other legal or commercial entity.
(12) The term ‘‘State’’ means a State, the Dis-
trict of Columbia, and any territory or possession of
the United States.
(13) 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 service franchises.
(14) The term ‘‘subfranchisor’’ means a person
who is granted a subfranchise.
(15) The term ‘‘trade secret’’ means informa-
tion, including a formula, pattern, compilation, pro-
gram, device, method, technique, or process, that—
(A) derives independent economic value,
actual or potential, from not being generally
known to, and not being readily ascertainable
by proper means by, other persons who can ob-
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tain economic value from its disclosure or use,
and
(B) is the subject of efforts that are rea-
sonable under the circumstances to maintain its
secrecy.
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