[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1083 Introduced in House (IH)]







105th CONGRESS
  1st Session
                                H. R. 1083

To establish certain uniform rights, duties, and enforcement procedures 
                   relating to franchise agreements.


_______________________________________________________________________


                    IN THE HOUSE OF REPRESENTATIVES

                             March 17, 1997

 Mr. Ackerman introduced the following bill; which was referred to the 
                         Committee on 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 Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``Federal Fair Franchising Practices 
Act of 1997''.

SEC. 2. DUTY OF GOOD FAITH.

    (a) In General.--A franchise shall include an implied 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 described 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 knowledge; or
            (2) conspicuously disclaims that it has the normal skill or 
        knowledge.
    (b) Effect of Disclaimer.--The duty described in subsection (a) may 
not be disclaimed or qualified by agreement 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 franchise whose terms reflect negotiated 
changes from the initial offering.

SEC. 5. INDEPENDENT SOURCING.

    (a) In General.--A franchisee may obtain equipment, fixtures, 
supplies, and services used in the establishment 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, including 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 business 
        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 
standards are in effect on the date the franchisee and the transferee 
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 ownership interests of all persons holding or 
claiming an equitable 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 
specifying 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 nondiscriminatory training 
                program;
                    (B) the payment of a transfer fee to the franchisor 
                to reimburse it for its reasonable, actual, 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 obligations than 
                those contained in the franchise concerned;
                    (B) forgoing existing rights other than those 
                contained in the franchise concerned; or
                    (C) entering into a release of claims broader in 
                scope than a counterpart release of claims offered by 
                the franchisor to the franchisee.
    (e) Right of 1st Refusal.--A franchisor may exercise 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 proposed 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 interest in a 
franchise for the unexpired term of the franchise. A franchisor may not 
require the franchisee or the assignee 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 franchised 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 employee 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 a management consultant or hiring of a 
        professional manager by a franchisee or a franchised business.
    (j) Security Interest of Franchisee.--A franchisor may not prevent 
a franchisee that transfers a transferable interest from retaining or 
foreclosing a security interest in any asset transferred, including a 
franchise, if--
            (1) the security interest is created to secure obligations 
        of the transferee to the franchisee; and
            (2) the security agreement that governs the security 
        interest is a franchisor-notice security agreement.
    (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 
        occupation 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 obligations 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 traded.

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 ascertainment 
of the fair market value by an impartial appraiser.
    (c) Enforcement of Certain Franchise Provisions.--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 secret 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 license another to 
place, a new outlet in unreasonable proximity 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 by the 
        established outlet of more than 10 percent in the 12 months 
        immediately following establishment 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 if, before a new 
outlet described in subsection (a) opens for business, a franchisor 
offers in writing to each franchisee of an established outlet concerned 
to pay to the franchisee an amount equal to 10 percent of the gross 
sales (net of sales taxes, returns, and allowances) of the new outlet 
for the 1st 24 months of the new outlet's operation, if the sales of 
the established outlet decline by more than 10 percent in the 12 months 
immediately following establishment of the new outlet as a consequence 
of the opening such 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 franchised outlet described in subsection (a) occurred for 
reasons other than the opening of the new outlet concerned--
            (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 transfers 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, physical handicap, or 
sexual preference.

SEC. 12. PRIVATE RIGHT OF ACTION.

    (a) In General.--A party to a franchise who is 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 
requirements and prohibitions concerning franchising and business 
opportunity ventures) may bring an action for rescission, damages, or 
other appropriate relief in a court of competent jurisdiction.
    (b) Cost Recovery.--The prevailing party in an action brought under 
subsection (a) may recover its costs, including its reasonable 
attorneys' fees.
    (c) Injunctive Relief.--A party to a franchise may bring an action 
to enjoin a violation of this Act. For purposes of determining 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. 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 relief 
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 franchised business that 
is operated in whole or in part in the United States, to a franchise 
that grants the right to engage 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 benefits 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 United States for the 
resolution of disputes.
    (d) Effect of Exclusionary Provisions.--A person's obligation to 
comply with this Act may not be excused 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 liquidated damages 
provision, a confession of judgment provision, 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 engage 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 designating the 
                franchisor or the franchisor's affiliate; 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 inventory;
                            (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 property to be 
                        used in, and necessary for, the operation of 
                        the franchisee's business.
            (4) Franchised business.--The term ``franchised business'' 
        means a business of offering, selling, or distributing goods or 
        services under a marketing 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 agreement.--The term 
        ``franchisor-notice security agreement'' means a security 
        agreement that creates an obligation on the part of a secured 
        party that is enforceable 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 concerned 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 franchised 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 
                        notice, 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 reasonable standards of fair dealing 
        in the trade.
            (10) Outlet.--The term ``outlet'' means a place of business 
        from which a person offers products or services for sale to 
        another person.
            (11) Trade secret.--The term ``trade secret'' means 
        information known to a franchisor or its affiliate, including a 
        formula, pattern, compilation, program, 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 proper 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 circumstances.
            (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 enactment 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 business, or other 
        person subject to a franchise described in paragraph (1) or 
        (2).

SEC. 16. NONPREEMPTION.

    This Act shall not prevent the establishment, continuing 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.
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