I
103D CONGRESS
1ST SESSION
H. R. 448
To establish certain uniform rights, duties, and enforcement procedures
relating to franchise agreements.
IN THE HOUSE OF REPRESENTATIVES
JANUARY 6, 1993
Mr. ACKERMAN introduced the following bill; which was referred to the
Committee on Energy and Commerce
A BILL
To establish certain uniform rights, duties, and enforcement
procedures relating to franchise agreements.
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 Franchis-
ing Practices Act of 1993’’.
SEC. 2. DUTY OF GOOD FAITH.
(a) IN GENERAL.—A franchise shall include an im-
plied duty on the part of a party to the franchise to act
in good faith in the performance and the enforcement of
the rights and duties established in the franchise.
(b) INTERESTS OF OTHER PARTIES.—The duty de-
scribed in subsection (a) shall include an obligation on the
part of a party to a franchise, in making a decision or
in exercising a power that directly affects the franchise
or the franchised business concerned, to give due and
equal regard to an interest of any other such party that
is likely to be affected by the decision made or the power
exercised.
SEC. 3. DUTY OF COMPETENCE.
(a) IN GENERAL.—In a franchisor’s undertaking
with a franchisee, the franchisor shall exercise the skill
and knowledge normally possessed by franchisors in good
standing in similar communities or trade areas, unless the
franchisor—
(1) represents that it has greater skill or knowl-
edge; or
(2) conspicuously disclaims that it has the nor-
mal skill or knowledge.
(b) EFFECT OF DISCLAIMER.—The duty described in
subsection (a) may not be disclaimed or qualified by agree-
ment or by conduct, but a franchisor may by written
agreement define specifically the nature and scope of its
skill or knowledge and of its undertaking with a
franchisee.
SEC. 4. NEGOTIATED CHANGES.
A franchisor that has delivered to a prospective
franchisee a valid offering circular may negotiate with the
prospective franchisee concerning the terms of a franchise
and may execute with the prospective franchisee a fran-
chise whose terms reflect negotiated changes from the ini-
tial offering.
SEC. 5. INDEPENDENT SOURCING.
(a) IN GENERAL.—A franchisee may obtain equip-
ment, fixtures, supplies, and services used in the establish-
ment and operation of a franchised business from any
source, if the goods and services meet any reasonable
standard regarding their nature and quality that may be
promulgated by the franchisor concerned.
(b) EXCEPTION.—Subsection (a) shall not apply to
a reasonable quantity of inventory goods or services, in-
cluding display and sample items, that—
(1) a franchisor requires a franchisee to obtain
from the franchisor or its affiliate;
(2) are a central feature of the franchised busi-
ness concerned; and
(3) are manufactured or produced—
(A) by the franchisor or its affiliate; or
(B) solely for the account of the franchisor
or its affiliate and incorporate a trade secret of
the franchisor or its affiliate.
SEC. 6. TERMINATION AND NONRENEWAL.
A franchisor may not terminate or refuse to renew
a franchise whose term is indeterminate without good
cause.
SEC. 7. TRANSFER.
(a) IN GENERAL.—A franchisee may transfer a
transferable interest to a transferee who meets a
franchisor’s reasonable, essential, and nondiscriminatory
standards for new franchisees or transferees, as the stand-
ards are in effect on the date the franchisee and the trans-
feree agree to the transfer. A franchisor may not withhold
its consent to such a transfer without good cause.
(b) NOTICE OF PROPOSED TRANSFER.—A franchisee
shall give a franchisor not less than 30 days written notice
of a proposed transfer of a transferable interest, and on
request shall advise the franchisor in writing of the owner-
ship interests of all persons holding or claiming an equi-
table or beneficial interest in the franchise, the franchised
business, or the franchisee.
(c) 
CONSENT
TO
PROPOSED
TRANSFER.—A
franchisor may not unreasonably withhold its consent to
a proposed transfer of a transferable interest. A transfer
is deemed approved 30 days after a franchisee submits
the proposed transaction for consent, unless the franchisor
earlier disapproves the transaction by written notice speci-
fying each basis for the disapproval or exercises a right
of 1st refusal. Such a notice is privileged against a claim
of defamation.
(d) CONDITIONS ON TRANSFER.—
(1) PERMISSIBLE
CONDITIONS.—A franchisor
may condition its consent to a proposed transfer by
a franchisee of a transferable interest on—
(A) the transferee’s successful completion
of a reasonable, essential, and nondiscrim-
inatory training program;
(B) the payment of a transfer fee to the
franchisor to reimburse it for its reasonable, ac-
tual, out-of-pocket expenses directly related to
the transfer; or
(C) the payment of any amount the
franchisee owes to the franchisor or its affiliate.
(2) IMPERMISSIBLE CONDITIONS.—A franchisor
may not condition its consent to a transfer described
in paragraph (1) on a franchisee—
(A) undertaking new or different obliga-
tions than those contained in the franchise con-
cerned;
(B) forgoing existing rights other than
those contained in the franchise concerned; or
(C) entering into a release of claims broad-
er in scope than a counterpart release of claims
offered by the franchisor to the franchisee.
(e) RIGHT OF 1ST REFUSAL.—A franchisor may exer-
cise a right of 1st refusal in connection with a proposed
transfer by a franchisee of a transferable interest, if such
right is reserved in the franchise. A franchisor may not
exercise such right more than 30 days after the date it
receives a franchisee’s request for consent to the proposed
transfer. A franchisor may not exercise such right if doing
so would result in it holding a minority ownership interest
in the franchised business or the franchisee concerned. A
franchisor may determine whether to exercise such right
based only on the merits and circumstances of the pro-
posed transfer.
(f) CONSENT TO PUBLIC OFFERING.—A franchisor
may not withhold its consent to a franchisee making a
public offering of its securities without good cause, if the
franchisee or the owner of the franchisee’s interest in the
franchise retains control over more than 50 percent of the
voting power in the franchisee.
(g) CONSENT
TO
POOLING
OR
EXCHANGE.—A
franchisor may not withhold its consent to a pooling of
interests or an exchange of assets by its existing
franchisees.
(h) ASSIGNMENT.—A franchisee may assign its inter-
est in a franchise for the unexpired term of the franchise.
A franchisor may not require the franchisee or the as-
signee to enter into a new or different franchise as a result
of the assignment.
(i) NONINTERFERENCE.—A franchisor may not
interfere with—
(1) the succession to ownership or management
of a franchisee or a franchised business upon the
death or disability of a franchisee, or of an owner,
officer, or director of a franchisee, by a spouse,
child, fellow shareholder or partner of the deceased
or disabled franchisee, owner, officer, or director;
(2) incorporation of a proprietorship franchisee
or franchised business;
(3) transfers within an existing ownership
group of a franchisee or franchised business of less
than a controlling interest in the franchisee or fran-
chised business;
(4) transfers of less than a controlling interest
in a franchisee or franchised business to the
franchisee’s (or its owners’) spouse or child;
(5) transfers of less than a controlling interest
in a franchisee or a franchised business to an em-
ployee stock ownership plan or employee incentive
compensation or deferred benefit plan;
(6) a grant or retention of a security interest
in a franchise, a security or ownership interest in a
franchised business or its assets, or a security or
ownership interest in a franchisee, if the agreement
that governs the grant or retention is a franchisor-
notice security agreement; or
(7) the use of management consultant or hiring
of a professional manager by a franchisee or a fran-
chised business.
(j) 
SECURITY
INTEREST
OF
FRANCHISEE.—A
franchisor may not prevent a franchisee that transfers a
transferable interest from retaining or foreclosing a secu-
rity interest in any asset transferred, including a fran-
chise, if—
(1) the security interest is created to secure ob-
ligations of the transferee to the franchisee; and
(2) the security agreement that governs the se-
curity interest is a franchisor-notice security agree-
ment.
(k) EFFECT OF CERTAIN COVENANTS.—
(1) IN
GENERAL.—After the transfer of a
transferor’s complete interest in a franchise, a
franchisor may not enforce against the transferor
any covenant of the franchise purporting to prohibit
the transferor from engaging in any lawful occupa-
tion or enterprise.
(2) EXCEPTION.—This subsection shall not
limit the right of a franchisor to enforce contractual
covenants of a transferor not to exploit the
franchisor’s trade secrets or intellectual property
rights (including protection of trade dress) except by
agreement with the franchisor.
(l) TRANSFER BY FRANCHISOR.—A franchisor, or its
owner, may not transfer a transferable interest unless it
takes reasonable steps to ensure that the transferee, the
franchisor, or the owner will perform the franchisor’s obli-
gations under the franchise concerned. A franchisor, or
its owner, shall give a franchisee notice of such a proposed
transfer at the time the notice is required to be given by
the franchisor, or its owner, under applicable securities
laws, if the franchisor or its owner is publicly traded. If
the franchisor or its owner is not publicly traded, then
the notice shall be given at the time the notice would be
required if the franchisor or its owner were publicly trad-
ed.
SEC. 8. ANTICOMPETITIVE COVENANTS.
(a) IN GENERAL.—A franchisor may not prohibit, or
enforce a prohibition against, a franchisee engaging in any
lawful business at any location—
(1) after expiration of the term of the franchise
concerned;
(2) after termination of the franchise by the
franchisee for good cause; or
(3) after a transfer by the franchisee of its full
interest in the franchise.
(b) EXCEPTION.—Subsection (a) shall not apply if 10
or more days before the effective date of an expiration,
termination, or transfer described in such subsection, a
franchisor offers in writing to purchase the franchised
business concerned for its fair market value as a going
concern. Such offer may be conditioned upon the ascer-
tainment of the fair market value by an impartial ap-
praiser.
(c) ENFORCEMENT OF CERTAIN FRANCHISE PROVI-
SIONS.—This section shall not prohibit a franchisor from
enforcing provisions of a franchise obligating a franchisee
after expiration or termination of the franchise—
(1) to alter the appearance of the premises and
the manner of operation of the franchised business
concerned to avoid the likelihood of confusion as to
the affiliation of the business with its former
franchisor or the origin of goods or services it offers;
or
(2) to cease and refrain from using a trade se-
cret of the franchisor or of its affiliate.
SEC. 9. FREEDOM OF ASSOCIATION.
(a) ASSOCIATION OF FRANCHISEES.—A franchisor
may not directly or indirectly inhibit its franchisees from
forming an association or from associating with other
franchisees for any lawful purpose. A franchisor may not
directly or indirectly penalize a franchisee for organizing
or participating in an association of franchisees.
(b) COLLECTIVE BARGAINING.—A franchisor that
has more than 500 franchises outstanding, or more than
300 franchisees, in the United States, shall bargain in
good faith with an organization of its franchisees that—
(1) represents generally, or on a specific issue
or set of issues, a majority of its franchisees in the
United States; and
(2) requests such bargaining.
SEC. 10. ENCROACHMENT.
(a) IN GENERAL.—A franchisor may not place, or li-
cense another to place, a new outlet in unreasonable prox-
imity to an established franchised outlet, if—
(1) the intent or probable effect of establishing
the new outlet is to cause a diminution of gross sales
(1) if the franchisor makes a written offer
under subsection (b); or
(2) in an action or proceeding brought under
section 12.
SEC. 11. PROHIBITION ON DISCRIMINATION.
In granting franchises, considering approval of trans-
fers of transferable interests, and in administering its
franchise system, a franchisor shall not discriminate
against any person on the basis of race, color, religion,
national origin, sex, or physical handicap.
SEC. 12. PRIVATE RIGHT OF ACTION.
(a) IN GENERAL.—A party to a franchise who is in-
jured or likely to be injured by a violation or impending
violation of this Act or of section 436.1 of title 16, Code
of Federal Regulations (relating to disclosure require-
ments and prohibitions concerning franchising and busi-
ness opportunity ventures), as the section may from time
to time be amended, may bring an action for rescission,
damages, injunctive relief, or other appropriate relief in
a court of competent jurisdiction.
(b) COST RECOVERY.—The prevailing party in an ac-
tion brought under subsection (a) may recover its costs,
including its reasonable attorneys’ fees.
(c) INJUNCTIVE RELIEF.—For purposes of determin-
ing whether to issue an injunction or a restraining order,
a court may presume irreparable harm from a violation
of this Act or of section 436.1 of title 16, Code of Federal
Regulations, as the section may from time to time be
amended. Notwithstanding rule 65(c) of the Federal Rules
of Civil Procedure or any other provision of law, a court
of the United States may award preliminary injunctive re-
lief without bond or other financial security in an action
brought under subsection (a).
SEC. 13. PROCEDURAL FAIRNESS.
(a) IN GENERAL.—This Act shall apply to a fran-
chised business that is operated in whole or in part in the
United States, to a franchise that grants the right to en-
gage in such a franchised business, and to the parties to
such a franchise.
(b) WAIVER OR AVOIDANCE.—This Act may not be
waived, and its application may not be avoided in whole
or in part, by agreement or by conduct, except as part
of a settlement of a bona fide dispute.
(c) EFFECT
OF CHOICE-OF-LAW PROVISIONS.—A
franchisee may not be deprived of the application and ben-
efits of this Act by a provision of a franchise purporting
to designate the law of a country other than the United
States as governing the franchise or the interpretation of
the franchise, or to designate a venue outside of the Unit-
ed States for the resolution of disputes.
(d) EFFECT OF EXCLUSIONARY PROVISIONS.—A per-
son’s obligation to comply with this Act may not be ex-
cused or avoided, and evidence of a violation of this Act
may not be excluded from evidence, because of a provision
of a franchise, the parol evidence rule, or any other rule
of law purporting to prohibit a factfinder from considering
matters other than the text of a franchise.
(e) EFFECT
OF CERTAIN STIPULATIONS.—A liq-
uidated damages provision, a confession of judgment pro-
vision, or any other provision in a franchise pursuant to
which a party to the franchise is or would be deprived of
an opportunity to prove or contest a fact that is relevant
to this Act shall be unenforceable.
SEC. 14. DEFINITIONS.
For purposes of this Act:
(1) AFFILIATE.—The term ‘‘affiliate’’ means a
person who controls, is controlled by, or is under
common control with, a franchisor.
(2) FRANCHISE.—The term ‘‘franchise’’ means
a contract or agreement between 2 or more persons
by which—
(A) a franchisee is granted the right to en-
gage in a franchised business;
(B) operation of the franchised business is
substantially associated with the franchisor’s
trademark, service mark, trade name, logotype,
advertising, or other commercial symbol des-
ignating the franchisor or the franchisor’s affili-
ate; and
(C) the franchisee pays or is required to
pay, directly or indirectly, a franchise fee.
(3) FRANCHISE FEE.—
(A) IN
GENERAL.—The term ‘‘franchise
fee’’ means a fee or charge for the right to
enter into or maintain a franchise, including
any payment for goods or services.
(B) EXCEPTION.—The term ‘‘franchise
fee’’ shall not include—
(i) a payment at a bona fide wholesale
price for a reasonable quantity of inven-
tory;
(ii) a payment of a reasonable service
charge to the issuer of a credit or debit
card by a person accepting or honoring
such card; or
(iii) a payment at fair market value
for a reasonable quantity of real estate,
fixtures, equipment, or other tangible prop-
erty to be used in, and necessary for, the
operation of the franchisee’s business.
(4) FRANCHISED BUSINESS.—The term ‘‘fran-
chised business’’ means a business of offering, sell-
ing, or distributing goods or services under a mar-
keting plan or system prescribed in substantial part
by a franchisor.
(5) 
FRANCHISEE.—The 
term 
‘‘franchisee’’
means a person to whom a franchise is granted.
(6) 
FRANCHISOR.—The 
term 
‘‘franchisor’’
means a person who grants a franchise.
(7) FRANCHISOR-NOTICE
SECURITY
AGREE-
MENT.—The term ‘‘franchisor-notice security agree-
ment’’ means a security agreement that creates an
obligation on the part of a secured party that is en-
forceable by a franchisor to give the franchisor—
(A) notice of the secured party’s intent to
foreclose on collateral described in the security
agreement at the same time as the secured
party gives such notice to the franchisee con-
cerned or, if the secured party is the franchisee
concerned, at a reasonable time; and
(B) a reasonable opportunity to redeem the
interest of the secured party and to recover the
secured party’s interest in the franchise or fran-
chised business concerned by paying the secured
obligations (or the fair market value of secured
obligations not stated as amount payable in
cash).
(8) GOOD
CAUSE.—The term ‘‘good cause’’
means—
(A) a complete withdrawal by a franchisor
from the conduct of business in a State or in
the District of Columbia; or
(B) a failure by a party to a franchise who
has received a written notice from another such
party that describes corrective action that must
be taken, and the time period within which such
action must be taken to prevent termination of
the franchise, to correct a default of a provision
of the franchise—
(i) within 30 days of receipt of the no-
tice, if the notice specifies a default of a
material provision of the franchise; or
(ii) within 48 hours of receipt of the
notice, if the notice specifies a default of a
material provision of the franchise that
constitutes a clear and present danger to
public health or safety.
(9) GOOD
FAITH.—The term ‘‘good faith’’
means honesty in fact and the observance of reason-
able standards of fair dealing in the trade.
(10) OUTLET.—The term ‘‘outlet’’ means a
place of business from which a person offers prod-
ucts or services for sale to another person.
(11) TRADE SECRET.—The term ‘‘trade secret’’
means information known to a franchisor or its affil-
iate, including a formula, pattern, compilation, pro-
gram, device, method, technique, or process, that—
(A) derives actual or potential independent
economic value from not being generally known
to, and not being readily ascertainable by prop-
er means by, another person who can obtain
economic value from its disclosure or use; and
(B) is the subject of efforts to maintain its
secrecy that are reasonable under the cir-
cumstances.
(12) TRANSFER.—The term ‘‘transfer’’ refers
to a change in ownership or control. Such term shall
not include any of the events in which a franchisor
is prohibited from interfering by section 7(i).
(13) TRANSFERABLE
INTEREST.—The term
‘‘transferable interest’’ means—
(A) an interest in a franchisee or a
franchisor that is not an individual;
(B) a franchisee’s or a franchisor’s interest
in a franchised business; or
(C) a franchisee’s or a franchisor’s interest
in a franchise.
(14) UNITED
STATES.—The term ‘‘United
States’’, when used in geographical sense, means the
several States and the District of Columbia.
SEC. 15. APPLICABILITY.
This Act shall apply to—
(1) a franchise or an interest in a franchise
that is entered into, renewed, transferred, assigned,
amended, or replaced on or after the date of the en-
actment of this Act;
(2) a franchise of indefinite duration that is in
existence on the date of the enactment of this Act;
and
(3) a franchisee, franchisor, franchised busi-
ness, or other person subject to a franchise described
in paragraph (1) or (2).
SEC. 16. NONPREEMPTION.
This Act shall not prevent the establishment, continu-
ing in effect, or enforcement of a law of any of the several
States or the District of Columbia, except to the extent
the law is inconsistent with this Act.
Æ
HR 448 IH——