[Congressional Bills 103th Congress]
[From the U.S. Government Publishing Office]
[H.R. 2593 Introduced in House (IH)]

103d CONGRESS
  1st Session
                                H. R. 2593

 To establish minimum standards of fair conduct in franchise business 
                 relationships, and for other purposes.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                              July 1, 1993

   Mr. LaFalce  (for himself, Mr. Dickey, Mr. Mfume, Mr. Wyden, Ms. 
Danner, Mr. Towns, Mrs. Meek, Mr. McDermott, Mrs. Clayton, Mr. Torres, 
  Mr. Oberstar, Mr. Engel, Mr. Romero-Barcelo, and Ms. Roybal-Allard) 
 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 Representatives 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 traditional forms of small 
        business ownership in the American economy.
            (2) Franchise relationships involve a joint enterprise 
        between the franchisor and franchisees and each party has a 
        vested interest in the franchised business.
            (3) Many franchises reflect a profound imbalance 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 unlawful actions, and to provide to consumers the greater 
benefits which would flow from equitable franchise relationships.

SEC. 3. PROHIBITED ACTIONS.

    (a) In connection with the promotion, sale, licensing, performance, 
enforcement and termination of any franchise agreement, or of an 
agreement for any relationship which is represented either orally or in 
writing to be a franchise, it shall be unlawful for a franchisor or 
subfranchisor, either directly or indirectly through any officer, 
employee, agent, representative or attorney--
            (1) to engage in an act, practice, course of business, or 
        pattern of conduct which operates or is intended to operate as 
        a fraud or deceit upon any person;
            (2) to employ unlawful or deceptive acts or practices in 
        the operation of the franchisor's enterprise or method of 
        business; or
            (3) to discriminate among franchisees on the basis of race, 
        sex, religion, disability or national origin, except that, and 
        then only to the extent that, any discrimination between 
        franchisees is reasonable and is related to a program under 
        which franchises are made available to a class of persons who 
        may have been denied franchise opportunities in the past based 
        on suspect classifications including race, sex, religion or 
        national origin.
    (b) It shall be unlawful for any franchisor or subfranchisor, 
either directly or indirectly through any officer, 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 reasonable quantities of 
        inventory of goods or services (including 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 default 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 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 action to cure the default;
                    (B) the franchisee, without the requirement 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 considered 
                        abandonment by the franchisee;
                            (ii) is convicted of a crime that 
                        substantially impairs the good will associated 
                        with the franchisor's trade mark, service mark, 
                        trade name, logotype, advertising or other 
                        commercial symbol;
                            (iii) repeatedly fails to comply with the 
                        same material provision of the franchise 
                        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 danger to 
                        public health or safety; and
                    (C) the franchisor, whether or not as a result 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 contractual prohibition against the 
                franchisee continuing 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 termination of the franchise 
        prior to its expiration for good cause. This paragraph shall 
        not--
                    (A) apply to enforcement 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 
                franchised business for its fair market value as a 
                going concern: Provided, That--
                            (i) the fair market value of such business 
                        be determined as if it were to be resold 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 business 
                        is ascertained by an impartial appraiser, 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) To prohibit enforcement of any provisions of a 
                franchise obligating a franchisee after expiration or 
                termination of a franchise--
                            (i) to cease or refrain from using a 
                        trademark, 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 intellectual 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
                            (ii) 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.
            (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 imposed on other similarly situated franchisees, or 
        retaliate, directly or indirectly, against any franchisee for 
        membership or participation in a franchisee association.

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 effect 
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 existing 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 percent 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 impact upon the 
        franchise business to diminish the diversion of sales to less 
        than 10 percent during any 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 establishment of the new outlet or point of sale as a 
consequence 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 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 
possessed by franchisors in good standing in the same or similar 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;
                    (B) which is the result of experience in organizing 
                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: Provided, That no inconsistent representation, whether 
written 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 obligated to exercise the highest standard of care for 
franchisee interests where the franchisor--
            (1) undertakes to perform bookkeeping, collection, 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 officer, employee, agent, 
representative or attorney to--
            (1) require any term or condition in a franchise 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 disclaimer, 
        waiver, release, stipulation or other provision which would 
        purport--
                    (A) to relieve any person from a duty imposed by 
                this Act, except as part of a settlement of a bona fide 
                dispute; or
                    (B) to protect any person against any liability to 
                which he would otherwise be subject under the Act by 
                reason of willful misfeasance, bad faith, or gross 
                negligence in the performance of duties, or by reason 
                of reckless disregard of obligations and duties under 
                the franchise agreement.
    (b) Any condition, stipulation, provision, or term of any franchise 
agreement, or any agreement ancillary or collateral to a franchise, 
which would purport to waive or restrict any right granted under this 
Act shall be void and unenforceable.
    (c) No stipulation or provision of a franchise agreement or of an 
agreement ancillary or collateral to a franchise 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 commence an action 
        (or, if the franchise provides for arbitration, initiate an 
        arbitration) against the franchisor for violation of the 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) 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 ancillary or collateral to a franchise, the parol evidence 
rule, or any other rule of evidence purporting to exclude consideration 
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 litigation and reasonable 
attorney's fees, against any person found to be liable for such 
violation.
    (2) An action may be brought, without regard to the amount in 
controversy, in any United States district court or in any other court 
of competent jurisdiction, before the later of--
            (A) five years after the date on which the violation 
        occurred; or
            (B) three years after the date on which the violation 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 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 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) In any action brought under subsection (a) or (b) of this 
section, a court shall have the power to interpret any benefit 
conferred, duty imposed, or restriction applied in favor of or against 
any party to a franchise agreement as reciprocal and equally applicable 
to the other party to the agreement and to provide an identical or 
similar benefit, impose an identical or similar duty, or apply an 
identical or similar restriction on such other party to the agreement, 
provided that such reciprocal application is consistent with the laws 
of the State in which the franchise business is located.
    (2) A court shall apply any provision contained in a franchise 
agreement which purports to restrict the ability of one party to 
compete with the other party during the term of the franchise agreement 
reciprocally to the extent deemed fair and appropriate.
    (d)(1) Except as otherwise provided in paragraph (2) of this 
subsection, nothing contained in this Act shall limit the right of a 
franchisor and a franchisee to agree to arbitration, mediation or other 
nonjudicial resolution of a dispute, 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 agreement requiring 
use of arbitration or other nonjudicial resolution 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 
jurisdiction pursuant to this section involving a request for damages 
and/or equitable relief for an alleged violation of any provision of 
this Act, except where such request is frivolous or insubstantial. A 
determination of whether a request for damages and/or equitable relief 
is frivolous or insubstantial shall be made by the court in which the 
action 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.

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 common control with a 
        franchisor.
            (2) The term ``franchise'' means--
                    (A) any continuing commercial relationship created 
                by a contract or agreement, either expressed 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 offered, 
                                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 includes, in 
                                whole or in part, the franchisor's 
                                mark;
                        (ii) the franchisor--
                                    (I) communicates to the franchisee 
                                knowledge, experience, expertise, know-
                                how, trade secrets or other non-
                                patented information, regardless of 
                                whether it is proprietary or 
                                confidential;
                                    (II) provides significant 
                                assistance to the franchisee in areas 
                                relating to the franchisee's method of 
                                operation; or
                                    (III) exercises significant 
                                controls over the franchisee's method 
                                of operation of the business; and
                            (iii) the franchisee, as a condition for 
                        obtaining or commencing operation of a 
                        franchise, is required to make, or to commit to 
                        make, payment or other consideration 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 paragraph (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 District of 
        Columbia, and any territory or possession of the United States.
             (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 information, including 
        a formula, pattern, compilation, program, device, method, 
        technique, or process, that--
                    (i) 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 obtain economic value from its 
                disclosure or use, and
                    (ii) is the subject of efforts that are reasonable 
                under the circumstances to maintain its secrecy.

                                 <all>

HR 2593 IH----2