[Congressional Bills 105th Congress]
[From the U.S. Government Publishing Office]
[H.R. 4841 Introduced in House (IH)]







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 Representatives 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 enterprise between 
        the franchisor and franchisees in which each party has a vested 
        interest in the franchised business.
            (3) Most prospective franchisees lack bargaining power and 
        generally invest substantial amounts to obtain a franchise 
        business when they are unfamiliar with operating a business, 
        with the business being franchised and with industry practices 
        in franchising.
            (4) 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.
            (5) Franchisees may suffer substantial financial losses 
        when the franchisor does not provide truthful or complete 
        information regarding the franchise opportunity, or where the 
        franchisor does not act in good faith in the performance of the 
        franchise agreement.
            (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 described above. This Act is 
        necessary to restore freedom to contract, and to remove 
        restrictive barriers impeding entry into industries and markets 
        dominated by franchise systems.
    (b) Purpose.--It is the purpose of this Act to promote fair and 
equitable franchise agreements, to establish uniform standards of 
conduct in franchise relationships and to create uniform private 
Federal remedies for violations of Federal law.

SEC. 3. FRANCHISE SALES PRACTICES.

    (a) In General.--In connection with the advertising, 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 business or 
        pattern of conduct which operates or is intended 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 material fact or 
        any failure to state a material fact;
            (4) to discriminate among prospective franchisees on the 
        basis of race, color, sexual orientation, 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 Disclosure.--
            (1) In connection with any disclosure document, notice, or 
        report required by any law, it shall be unlawful for any 
        franchisor, subfranchisor, or franchise broker, either directly 
        or indirectly through another person--
                    (A) to--
                            (i) make an untrue statement of material 
                        fact;
                            (ii) fail to state a material fact; or
                            (iii) fail to state any fact which would 
                        render any required statement or disclosure 
                        either untrue or misleading;
                    (B) to fail to furnish any prospective franchisee 
                with--
                            (i) all information required to be 
                        disclosed 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 involved 
                        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 contradicts such 
                disclosure document.
            (2) For purposes of this subsection, the term ``disclosure 
        document'' means either the disclosure statement required by 
        the Federal Trade Commission in Trade Regulation Rule 436 (16 
        C.F.R. Sec. 436) as amended from time to time, or any offering 
        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 unlawful for a franchisor or subfranchisor, 
either directly or indirectly through another person--
            (1) to engage in an act, practice, course of business, 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 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 of associations of 
        franchises; or
            (4) to discriminate against a franchisee by imposing 
        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 termination.
            (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 continuing action to cure 
                the default;
                    (B) the franchisee, without the requirement 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 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 felony, for which 
                        imprisonment of 1 year or more can be imposed, 
                        which substantially impairs the good will 
                        associated with the franchisor's trade mark, 
                        service mark, trade name, logotype, 
                        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 enforcement 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 location.
    (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 interpreted to 
        prohibit enforcement of any provision of a franchise contract 
        obligating a franchisee after expiration or termination of a 
        franchise--
                    (A) 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;
                    (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 business 
                operations so as to avoid any substantial confusion 
                with the manner or mode of operations which are unique 
                to the franchisor and commonly in practice by other 
                franchisees using the same name or trademarks within 
                the proximate 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 performance 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 obtain and receive the 
                expected fruits of the contract 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 otherwise allow a disparate result in the 
        franchise relationship.
    (b) Duty of Due Care.--
            (1) A franchise agreement imposes on the franchisor a duty 
        of due care. Unless a franchisor represents that it has greater 
        skill or knowledge in its undertaking with its franchisees, or 
        conspicuously disclaims that it has skill or knowledge, the 
        franchisor is required to exercise the skill and knowledge 
        normally possessed by franchisors in good standing in the same 
        or similar types of business.
            (2) For purposes of this subsection--
                    (A) the term ``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--
                            (i) which is the result of acquired 
                        learning and aptitude developed by special 
                        training and experience in the business to be 
                        licensed under the franchise agreement, or the 
                        result of extensive use and experience with the 
                        goods or services or the operating system of 
                        such business;
                            (ii) which is the result of experience in 
                        organizing a franchise system and in providing 
                        training, assistance and services to 
                        franchisees; and
                            (iii) which a prospective franchisee would 
                        expect in reasonable reliance on the written 
                        and oral commitments and representations 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 requirements of this 
                subsection and that such expertise was incorporated in 
                the franchise or communicated 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 
        inconsistent 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 fiduciary duty to its franchisees and is 
        obligated to exercise the highest standard of care for 
        franchisee interests where the franchisor--
                    (A) undertakes to perform bookkeeping, collection, 
                payroll, or accounting services on behalf of the 
                franchisee; or
                    (B) administers, controls or supervises (either 
                directly or through any subsidiary or affiliate) any 
                advertising, marketing, or promotional fund or program 
                to which franchisees are required 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 include 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 directly or 
indirectly through another person, 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 this 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; 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 operation of a franchise 
        business, in any agreement or document relating to the 
        termination, cancellation, forfeiture, repurchase, or resale of 
        a franchise business 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 written 
        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 agreement, or of an 
agreement ancillary or collateral to a franchise, 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 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 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 Federal 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 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 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 provision of this Act, the State, as parens patriae, may 
bring a civil action on behalf of its residents in an appropriate 
district court of the United States to enjoin such violations, to 
obtain damages, restitution or other compensation on behalf of 
residents of such State or to obtain such further and other relief as 
the court may deem appropriate.
    (b) 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 
witnesses or the production of documentary and other evidence.
    (c) Venue.--Any civil action brought under subsection (a) in a 
district court of the United States may be brought in the district in 
which the defendant is found, is an 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 proceeding 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 interest in a 
franchised business or in a franchise to a transferee provided the 
transferee satisfies the reasonable qualifications then generally 
applied by the franchisor in determining 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 
required to satisfy the reasonable conditions generally applied 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 refusal 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 request shall provide in writing the 
ownership interests of all persons holding or claiming an equitable or 
beneficial interest in the franchise subsequent to the transfer or the 
franchisee, as appropriate.
    (c) Consent to Proposed Transfer.--A transfer by a franchisee is 
deemed to have been approved 30 days after the franchisee submits the 
request for permission to transfer the franchise involved unless, 
within that time the franchisor refuses to consent to the transfer as 
evidenced in writing in accordance with subsection (a). A statement of 
the grounds for refusal to consent to the transfer is privileged 
against a claim of defamation.
    (d) Conditions of Transfer.--
            (1) Permissible conditions.--A franchisor may require as a 
        condition of a transfer that--
                    (A) the transferee successfully complete a 
                reasonable training program;
                    (B) a reasonable transfer fee be paid to reimburse 
                the franchisor for the franchisor's reasonable and 
                actual expenses directly attributable to the transfer;
                    (C) the franchisee pay or make reasonable provision 
                to pay any amount due the franchisor or the 
                franchisor's affiliate; or
                    (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 improvements, 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 consent 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 
obligations 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 matter:
            (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 surviving spouse, heir, or 
        partner active in the management of the franchise unless the 
        successor objectively 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 
        reasonable 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 ownership interest in 
        the franchisee, if the security agreement establishes an 
        obligation on the part of the secured 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 opportunity to 
        redeem the interest of the secured party and recover the 
        secured party's interest in the franchise or franchised 
        business by satisfying the secured obligation.
            (6) A franchisor may not exercise any purported 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 described 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 
        occupation 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 substantially 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 SERVICES.

    (a) In General.--Except as provided in subsection (e) a franchisor, 
either directly or indirectly through any affiliate, officer, employee, 
agent, representative or attorney, shall not prohibit or restrict a 
franchisee from obtaining equipment, fixtures, supplies, goods, 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 reasonable established 
uniform system-wide quality standards promulgated 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, supplies, goods, or services used in the 
establishment or operation of the franchised business, the franchisor 
shall provide 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 approve not fewer than 2 vendors for 
each piece of equipment, each fixture, each supply, good, or service.
    (c) Benefits.--A franchisor, and its affiliates, shall fully 
disclose whether or not it receives any rebates, commissions, 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 benefits shall be distributed directly to such franchisees.
    (d) Reporting.--A franchisor shall report not less frequently than 
annually, using generally accepted accounting 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 license another to 
place, 1 or more new outlets for a franchised business in unreasonable 
proximity to an established 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 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 with respect to an 
established outlet if, before a new outlet described 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 subsection (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 injured by a 
violation or threatened violation of this Act, or of section 438.1 of 
title 16, Code of Federal Regulations (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 witness fees, 
against any person found to be liable for such violation.
    (b) Liability.--Every person who directly or indirectly 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 occupying 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, mediation, 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 nonjudicial 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 action, 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 provided 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 provided in subsection (b), 
the requirements of this Act shall apply to franchise agreements 
entered into, amended, exchanged, 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 effect 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 Practices Act (15 U.S.C. 2801 et. seq.) 
        except as to franchise relationships that do not involve the 
        sale of petroleum products.
            (3) The term ``franchise broker'' has the meaning 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 conditions 
                which a reasonable franchisee or a reasonable 
                prospective franchisee would consider important in 
                making a significant decision relating to entering 
                into, remaining in, or abandoning a franchise 
                relationship; and
                    (B) any fact, circumstance, or set of conditions 
                which has, or may have, any significant financial 
                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 District 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 information, including 
        a formula, pattern, compilation, program, 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 obtain economic value from its 
                disclosure or use; and
                    (B) is the subject of efforts that are reasonable 
                under the circumstances to maintain its secrecy.
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