I
105TH CONGRESS
2D SESSION
H. R. 4841
To establish minimum standards of fair conduct in franchise sales and
franchise business relationships, and for other purposes.
IN THE HOUSE OF REPRESENTATIVES
OCTOBER 14, 1998
Mr. COBLE (for himself, Mr. CONYERS, Mr. NORWOOD, Mr. TAYLOR of North
Carolina, Mr. NADLER, Mr. COBURN, Mr. ACKERMAN, Mr. DICKEY, Mr.
KING, Mr. JENKINS, and Mr. HILLEARY) 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
‘‘Small Business Franchise Act of 1998’’.
(b) TABLE OF CONTENTS.—The table of contents of
this Act is the following:
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 State attorneys general.
Sec. 8. Transfer of a franchise.
Sec. 9. Transfer of franchise by franchisor.
Sec. 10. Independent sourcing of goods and services.
Sec. 11. Encroachment.
Sec. 12. Private right of action.
Sec. 13. Scope and applicability.
Sec. 14. 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
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.
(7) A franchisee’s freedom to contract is greatly
limited by the disparity of bargaining power, lack of
consistent legal standards, and other factors de-
scribed above. This Act is necessary to restore free-
dom to contract, and to remove restrictive barriers
impeding entry into industries and markets domi-
nated by franchise systems.
(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—
(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 making an untrue statement of a mate-
rial fact or any failure to state a material fact;
(4) 
to 
discriminate 
among 
prospective
franchisees on the basis of race, color, sexual ori-
entation, sex, religion, disability, national origin, or
age—
(A) in the solicitation, offering or sale of
any franchise opportunity; or
(B) in the selection of any site or location
for a franchise business.
(b) MISREPRESENTATIONS
IN REQUIRED DISCLO-
SURE.—
(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—
(i) make an untrue statement of ma-
terial fact;
(ii) fail to state a material fact; or
(iii) fail to state any fact which would
render any required statement or disclo-
sure either untrue or misleading;
(B) to fail to furnish any prospective
franchisee with—
(i) all information required to be dis-
closed by law and at the time and in the
manner required; and
(ii) a written statement specifying,
prominently and in not less than 14-point
type, whether the franchise agreement in-
volved contains a right to renew such
agreement; or
(C) to make any claim or representation to
a prospective franchisee whether orally or in
writing, which is inconsistent with or con-
tradicts such disclosure document.
(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 C.F.R.
§ 436) as amended from time to time, or any offer-
ing format allowed or required by State law.
SEC. 4. UNFAIR FRANCHISE PRACTICES.
(a) DECEPTIVE AND DISCRIMINATORY PRACTICES.—
In connection with the performance, enforcement, renewal,
or termination of any franchise agreement, it shall be un-
lawful 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, color, sexual orientation, sex, religion,
disability, national origin, or age;
(3) to hinder, prohibit, or penalize (or threaten
to hinder, prohibit, or penalize), directly or indi-
rectly, the free association of franchisees for any
lawful purpose, including the formation of or partici-
pation in any trade association made up of
franchisees or of associations of franchises; or
(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 an affiliate or another
person, to terminate a franchise agreement prior to
its expiration without good cause for such termi-
nation.
(2) For purposes of this subsection, good cause
shall exist only where—
(A)(i) the franchisee fails to comply with a
material provision of the franchise agreement
after receiving notice that specifies the precise
basis for the default, each material term of the
franchise agreement with which the franchise is
not in compliance, and a 30-day period to cure
the default; and
(ii) if the nature of the default is such that
it cannot be cured through reasonably diligent
conduct, the franchisee fails to initiate within
30 days, and diligently pursue substantial con-
tinuing action to cure the default;
(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 1 year or more can be im-
posed, which substantially impairs the
good will associated with the franchisor’s
trade mark, service mark, trade name, log-
otype, advertising, or other commercial
symbol;
(iii) is repeatedly in default of the
same material provision of the franchise
agreement, where the enforcement of such
provision is substantially similar to en-
forcement of that provision with other
franchisees; or
(iv) operates the business licensed by
the franchise agreement in a manner that
creates an imminent 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 in writing not to enforce any contractual
prohibition against the franchisee continuing to
engage in the business at the franchised loca-
tion.
(c) 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.
(2) Nothing in this subsection shall be inter-
preted to prohibit enforcement of any provision of a
franchise contract obligating a franchisee after expi-
ration or termination of a franchise—
(A) to cease or refrain from using a trade-
mark, trade secret, or other intellectual prop-
erty owned by the franchisor or its affiliate, ex-
cept that the existence of language in the fran-
chise agreement purporting to determine owner-
ship of a trademark, trade secret, or other in-
tellectual 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 ownership;
(B) to alter the appearance of the business
premises so that it is not substantially similar
to the standard design, decor criteria, or motif
in use by other franchisees using the same
name or trademarks within the proximate trade
or market area of the business; or
(C) to modify the manner or mode of busi-
ness operations so as to avoid any substantial
confusion with the manner or mode of oper-
ations which are unique to the franchisor and
commonly in practice by other franchisees using
the same name or trademarks within the proxi-
mate trade or market area of the business.
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 ob-
tain and receive the expected fruits of the con-
tract and to do everything required under the
contract to accomplish such purpose; and
(B) require honesty of fact and observance
of reasonable standards of fair dealing in the
trade.
(3) No provision of any franchise agreement,
express or implied, shall be interpreted or enforced
in such a way as to obfuscate a party’s duty to act
reasonably and in good faith with the other, or oth-
erwise allow a disparate result in the franchise rela-
tionship.
(b) DUTY OF DUE CARE.—
(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 irrespective of
any merger or integration clause in the franchise
agreement.
(c) LIMITED FIDUCIARY DUTY.—
(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) administers, controls or supervises (ei-
ther directly or through any subsidiary or affili-
ate) any advertising, marketing, or promotional
fund or program to which franchisees are re-
quired to, or routinely, contribute.
(2) A franchisor that administers or supervises
the administration of any fund or program described
in paragraph (1)(B) shall—
(A) keep all moneys contributed to such
fund or program in a separate account;
(B) provide an independent certified audit
of such fund within 60 days following the close
of the franchisor’s fiscal year, which shall in-
clude full disclosure of all fees, expenses, or
other payments from the account to the
franchisor or to any subsidiary, affiliate, or
other entity controlled in whole or in part by
the franchisor; and
(C) disclose the source and amount of, and
deliver to such fund or program, any discount,
rebate, compensation, or payment of any kind
from any person or entity with whom such fund
or program transacts.
(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 this 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; 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.
(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, of any other Federal law, or of
the law of the State in which the franchisee’s prin-
cipal 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 this Act, or for breach of
the franchise agreement, or of any agreement or
stipulation 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) prevent a franchisee from participating as a
member of a class permitted by Rule 23 of the Fed-
eral Rules of Civil Procedure or applicable State law.
(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 STATE ATTORNEYS GENERAL.
(a) CIVIL ACTION.—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 affected because any person has engaged or
is engaging in a pattern or practice which violates any pro-
vision 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 viola-
tions, to obtain damages, restitution or other compensa-
tion on behalf of residents of such State or to obtain such
further and other relief as the court may deem appro-
priate.
(b) PRESERVATION
OF POWER.—For purposes of
bringing any civil action under subsection (a), nothing in
this Act shall prevent an attorney general from exercising
the powers conferred on the attorney general by the laws
of such State to conduct investigations or to administer
oaths or affirmations or to compel the attendance of wit-
nesses or the production of documentary and other evi-
dence.
(c) VENUE.—Any civil action brought under sub-
section (a) in a district court of the United States may
be brought in the district in which the defendant is found,
is an inhabitant, or transacts business or wherever venue
is proper under section 1391 of title 28, United States
Code. Process 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) NO PREEMPTION.—Nothing contained in this
section shall prohibit an authorized State official from pro-
ceeding in State court on the basis of an alleged violation
of any civil or criminal statute of such State.
SEC. 8. TRANSFER OF A FRANCHISE.
(a) IN GENERAL.—A franchisee may assign an inter-
est in a franchised business or in a franchise to a trans-
feree provided the transferee satisfies the reasonable quali-
fications then generally applied by the franchisor in deter-
mining whether or not a current franchisee is eligible for
renewal. If the franchisor does not renew a significant
number of its franchisees, then the transferee may be re-
quired to satisfy the reasonable conditions generally ap-
plied to new franchisees. For the purpose of this section,
a reasonable current qualification for a new franchisee is
a qualification based upon a legitimate business reason.
If the proposed transferee does not meet the reasonable
current qualifications of the franchisor, the franchisor
may refuse to permit the transfer, provided that the re-
fusal of the franchisor to consent to the transfer is not
arbitrary or capricious and the franchisor states the
grounds for its refusal in writing to the franchisee.
(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
(D) the financial terms of the transfer at
the time of the transfer, comply with the
franchisor’s current financial requirements for
franchisees.
(2) IMPERMISSIBLE CONDITIONS.—A franchisor
may not condition its consent to a transfer described
in paragraph (1) on—
(A) a franchisee’s forgoing existing rights
other than those contained in the franchise
agreement;
(B) a franchisee’s entering into a release
of claims broader in scope than a counterpart
release of claims offered by the franchisor to
the franchisee; or
(C) requiring the franchisee or transferee
to make, or agree to make, capital improve-
ments, reinvestments, or purchases in an
amount greater than the franchisor could have
reasonably required under the terms of the
franchisee’s existing franchise agreement.
(e) ASSIGNMENT.—A franchisee may assign the
franchisee’s interest in the franchise for the unexpired
term of the franchise agreement, and a franchisor shall
not require the franchisee or the transferee to enter into
a franchise agreement that has different material terms
or financial requirements as a condition of the transfer.
(f) CONSENT TO PUBLIC OFFERING.—A franchisor
may not withhold its consent to a franchisee’s 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 25 percent of
the voting power as the franchisee.
(g) CONSENT TO POOLING INTERESTS, OR TO SALE
OR EXCHANGE.—A franchisor may not withhold its con-
sent to a pooling of interests, to a sale or exchange of
assets or securities, or to any other business consolidation
amongst its existing franchisees, provided the constituents
are each in material compliance with their respective obli-
gations to the franchisor.
(h) NONINTERFERENCE.—The following occurrences
shall not be considered transfers requiring the consent of
the franchisor under a franchise agreement, and a
franchisor shall not impose any fees, payments, or charges
in excess of a franchisor’s cost to review the relevant mat-
ter:
(1) The succession of ownership or management
of a franchise upon the death or disability of a
franchisee, or of an owner of a franchise, to the sur-
viving spouse, heir, or partner active in the manage-
ment of the franchise unless the successor objec-
tively fails to meet within 1 year or the then current
reasonable qualifications of the franchisor for
franchisees.
(2) Incorporation of a proprietorship franchisee,
provided that the franchisor may require a personal
guarantee by the franchisee of obligations related to
the franchise.
(3) A transfer within an existing ownership
group of a franchise provided that more than 50
percent of the franchise is held by persons who meet
the franchisor’s reasonable current qualifications for
franchisees. If less than 50 percent of the franchise
would be owned by persons who objectively meet the
franchisor’s reasonable current qualifications, the
franchisor may refuse to authorize the transfer.
(4) A transfer of less than a controlling interest
in the franchise to the franchisee’s spouse or child
or children, provided that more than 50 percent of
the entire franchise is held by those who meet the
franchisor’s reasonable current qualifications. If less
than 50 percent of the franchise would be owned by
persons who objectively meet the franchisor’s reason-
able current qualifications, the franchisor may refuse
to authorize the transfer.
(5) A grant or retention of a security interest
in the franchised business or its assets, or an owner-
ship interest in the franchisee, if the security agree-
ment establishes an obligation on the part of the se-
cured party enforceable by the franchisor to give the
franchisor 
simultaneously 
with 
notice 
to 
the
franchisee, notice of the secured party’s intent to
foreclose on the collateral, and a reasonable oppor-
tunity to redeem the interest of the secured party
and recover the secured party’s interest in the fran-
chise or franchised business by satisfying the se-
cured obligation.
(6) A franchisor may not exercise any pur-
ported right of first refusal or right to purchase with
regard to any franchise, or interest or assets of a
franchisee, upon the happening of any event de-
scribed in paragraphs (1) through (5).
(i) 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 franchisor from enforcing a contractual
covenant against the transferor not to exploit the
franchisor’s trade secrets or intellectual property
rights (including protection of trade dress) except by
agreement with the franchisor.
SEC. 9. TRANSFER OF FRANCHISE BY FRANCHISOR.
A franchisor shall not transfer, by sale or otherwise,
its interest in a franchise unless—
(1) the franchisor provides, not less than 30
days before the effective date of transfer, notice to
every franchisee of the intent to transfer the
franchisor’s interest in the franchise or of substan-
tially all of the franchises held by the franchisor;
(2) such notice is accompanied by a complete
description of the business and financial terms of
the proposed transfer or transfers; and
(3) upon the transfer, the entity assuming the
franchisor’s obligations has the business experience
and financial means to perform all of the
franchisor’s obligations in the ordinary course of
business.
SEC. 10. INDEPENDENT SOURCING OF GOODS AND SERV-
ICES.
(a) IN GENERAL.—Except as provided in subsection
(e) a franchisor, either directly or indirectly through any
affiliate, officer, employee, agent, representative or attor-
ney, shall not prohibit or restrict a franchisee from obtain-
ing equipment, fixtures, supplies, goods, or services used
in the establishment or operation of the franchised busi-
ness from sources of the franchisee’s choosing, except that
such goods or services may be required to meet reasonable
established uniform system-wide quality standards pro-
mulgated or enforced by the franchisor.
(b) APPROVED
VENDORS.—Without limiting the
rights of the franchisee under subsection (a), if the
franchisor approves vendors of equipment, fixtures, sup-
plies, goods, or services used in the establishment or oper-
ation of the franchised business, the franchisor shall pro-
vide and continuously update an inclusive list of approved
vendors and shall promptly and objectively evaluate and
respond to reasonable requests by franchisees for approval
of competitive sources of supply. The franchisor shall ap-
prove not fewer than 2 vendors for each piece of equip-
ment, each fixture, each supply, good, or service.
(c) BENEFITS.—A franchisor, and its affiliates, shall
fully disclose whether or not it receives any rebates, com-
missions, payments, or other benefits from vendors as a
result of the purchase of goods or services by franchisees.
All such rebates, commissions, payments, and other bene-
fits shall be distributed directly to such franchisees.
(d) REPORTING.—A franchisor shall report not less
frequently than annually, using generally accepted ac-
counting principles, the amount of revenue and profit it
earns from the sale of equipment, fixtures, supplies, goods,
or services to the franchisees of the franchisor.
(e) EXCEPTION.—Subsection (a) does not apply to
reasonable quantities of equipment, fixtures, supplies,
goods, or services, including display and sample items,
that the franchisor requires the franchisee to obtain from
the franchisor or its affiliate, but only if the equipment,
fixtures, supplies, goods, or services are central to the
franchised business and incorporate a trade secret, patent,
or copyright owned by the franchisor or its affiliate.
SEC. 11. ENCROACHMENT.
(a) IN GENERAL.—A franchisor may not place, or li-
cense another to place, 1 or more new outlets for a fran-
chised business in unreasonable proximity to an estab-
lished outlet of a similar kind of franchised business, if—
(1) the intent or probable effect of establishing
the new outlets is to cause a diminution of gross
sales by the established outlet of more than 5 per-
cent in the 12 months immediately following estab-
lishment of the new outlet; and
(2) the established outlet—
(A) offers goods or services identified by
the same trademark as those offered from the
new outlet; or
(B) has premises that are identified by the
same trademark as the new outlet.
(b) EXCEPTION.—This section shall not apply with
respect to an established outlet if, before a new outlet de-
scribed in subsection (a) opens for business, a franchisor
offers in writing to each franchisee of the franchisor of
an established outlet to pay to the franchisee involved an
amount equal to 50 percent of the gross sales (net of sales
taxes, returns, and allowances) of the new outlet for the
1st 24 months of operation of the new outlet if the sales
of the established outlet decline by more than 5 percent
in the 12 months immediately following establishment of
the new outlet as a consequence of the opening of the new
outlet.
(c) BURDEN OF PROOF.—A franchisor shall have the
burden of proof to show that, or the extent to which, a
decline in sales of an established outlet described in sub-
section (a) occurred for reasons other than the opening
of the new outlet for goods or services concerned—
(1) if the franchisor makes a written offer
under subsection (b); or
(2) in an action or proceeding brought under
section 12.
SEC. 12. PRIVATE RIGHT OF ACTION.
(a) IN GENERAL.—A party to a franchise who is in-
jured by a violation or threatened violation of this Act,
or of section 438.1 of title 16, Code of Federal Regula-
tions (relating to disclosure requirements and prohibitions
concerning franchising and business opportunity ventures)
as in effect on the date of the enactment of this Act, shall
have a right of action for recission and restitution, as well
as for all damages and injunctive relief, including costs
of litigation and reasonable attorney’s fees and expert wit-
ness fees, against any person found to be liable for such
violation.
(b) LIABILITY.—Every person who directly or indi-
rectly controls a person liable under subsection (a), every
partner in a firm so liable, every principal executive officer
or director of a corporation so liable, every person occupy-
ing a similar status or performing similar functions and
every employee of a person so liable who materially aids
in the act or transaction constituting the violation is also
liable jointly and severally with and to the same extent
as such person, unless the person who would otherwise be
liable hereunder had no knowledge of or reasonable
grounds to know of the existence of the facts by reason
of which the liability is alleged to exist.
(c) ALTERNATIVE DISPUTE RESOLUTION.—Except
as otherwise provided in subsection (d), nothing contained
in this Act shall be construed to limit the right of a
franchisor and a franchisee to engage in arbitration, medi-
ation, or other nonjudicial resolution of a dispute, either
in advance of after a dispute arises, provided that the
standards and protections applied in any binding non-
judicial procedure agreed to by the parties are not less
than the requirements set forth in this Act.
(d) STATUTE OF LIMITATIONS.—No action may be
commenced pursuant to this section or this Act more
than—
(1) 5 years after the date on which the violation
occurs; or
(2) 3 years after the date on which the violation
is discovered or should have been discovered through
exercise of reasonable diligence.
(e) VENUE.—A franchisee may commence a civil ac-
tion, or arbitration proceedings, to enforce any provision
of this Act within the jurisdiction wherein the applicable
franchise business is located.
(f) CUMULATIVE RIGHT.—The private rights pro-
vided for in this section are in addition to and not in lieu
of other rights or remedies created by Federal or State
law.
SEC. 13. SCOPE AND APPLICABILITY.
(a) PROSPECTIVE APPLICATION.—Except as pro-
vided in subsection (b), the requirements of this Act shall
apply to franchise agreements entered into, amended, ex-
changed, transferred, assigned, or renewed after the date
of enactment of this Act.
(b) DELAYED EFFECT.—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. 14. DEFINITIONS.
For purposes of this Act:
(1) The term ‘‘affiliate’’ has the meaning given
the term ‘‘affiliated person’’ in section 436.2(i) of
title 16 of the Code of Federal Regulations as in ef-
fect on January 1, 1998.
(2) The term ‘‘franchise’’ has the meaning
given such term in section 436.2(a) of title 16 of the
Code of Federal Regulations as in effect on January
1, 1998, but does not include any contract otherwise
regulated by the Federal Petroleum Marketing Prac-
tices Act (15 U.S.C. 2801 et. seq.) except as to fran-
chise relationships that do not involve the sale of pe-
troleum products.
(3) The term ‘‘franchise broker’’ has the mean-
ing given such term in section 436.2(j) of title 16
of the Code of Federal Regulations as in effect on
January 1, 1998.
(4) The term ‘‘franchisee’’ has the meaning
given such term in section 436.2(d) of title 16 of the
Code of Federal Regulations as in effect on January
1, 1998.
(5) The term ‘‘franchisor’’ has the meaning
given such term in section 436.2(c) of title 16 of the
Code of Federal Regulations as in effect on January
1, 1998.
(6) The term ‘‘good faith’’ means honesty in
fact and the observance of reasonable standards of
fair dealing in the trade.
(7) 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.
(8) 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.
(9) The term ‘‘outlet’’ means a point of sale,
temporary or permanent, fixed or mobile, from
which goods or services are offered for sale.
(10) The term ‘‘person’’ means an individual or
any other legal or commercial entity.
(11) The term ‘‘State’’ means a State, the Dis-
trict of Columbia, and any territory or possession of
the United States.
(12) 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.
(13) The term ‘‘subfranchisor’’ means a person
who is granted a subfranchise.
(14) 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-
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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