[Congressional Bills 114th Congress]
[From the U.S. Government Publishing Office]
[H.R. 3196 Introduced in House (IH)]
114th CONGRESS
1st Session
H. R. 3196
To establish minimum standards of fair conduct in franchise sales and
franchise business relationships, and for other purposes.
_______________________________________________________________________
IN THE HOUSE OF REPRESENTATIVES
July 23, 2015
Mr. Ellison (for himself, Mr. Conyers, and Mr. Huffman) 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 ``Fair Franchise Act
of 2015''.
(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. Unfair franchise practices.
Sec. 4. Standards of conduct.
Sec. 5. Procedural fairness.
Sec. 6. Transfer of a franchise.
Sec. 7. Renewal of the franchise; notice.
Sec. 8. Termination; good cause; notice; opportunity to cure.
Sec. 9. Effect of termination.
Sec. 10. Transfer of franchise by franchisor.
Sec. 11. Private right of action.
Sec. 12. Scope and applicability.
Sec. 13. Definitions.
Sec. 14. Severability.
Sec. 15. State attorneys general.
SEC. 2. FINDINGS AND PURPOSE.
(a) Findings.--Congress finds the following:
(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 success of 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) Franchisees invest a substantial amount of their own
money, take loans (often secured by their own home and
retirement accounts, and the American taxpayer via loans
guaranteed by the Small Business Administration), and enter
into long-term commercial leases and other obligations for the
franchise businesses in order to support themselves and their
families.
(5) Franchise agreements 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 one-sided
and pervasive contractual rights over the franchise
relationship.
(6) 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 or in a commercially
reasonable manner in the performance of the franchise
agreement.
(7) Unlike investments in securities, an investment in a
franchise may lead to substantial additional losses well beyond
the initial capital investment. Unlike employment, due to long-
term contractual and lease obligations, franchisees generally
cannot simply resign and leave the franchised business without
substantial liabilities.
(8) 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.
(9) Contractual obligations of the franchisee to the
franchisor may create an environment that makes it difficult to
pay workers significantly above minimum wage or provide
reasonable benefits to workers.
(10) A franchisee's freedom to achieve a contract
negotiated at arm's length 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
true freedom to contract, and to improve the living standards
of employees of franchises.
(11) The Federal Government has had a significant interest
in regulating franchising and has regulated franchising for
over 40 years through the Federal Trade Commission and its
Franchise Rule.
(b) Purpose.--It is the purpose of this Act to--
(1) promote the compelling interest of the public in fair
business relations between franchisees and franchisors;
(2) protect franchisees against unfair treatment by
franchisors, who inherently have superior economic power and
superior bargaining power in the negotiation of the terms and
conditions of the franchise relationship;
(3) provide franchisees with rights and remedies in
addition to those existing by contract or common law;
(4) govern franchise agreements, including any renewals or
amendments, to the full extent consistent with the Constitution
of the United States; and
(5) create an environment that gives franchisees
opportunity to thrive, therefore having the opportunity to
provide better wages and benefits to their employees.
SEC. 3. UNFAIR FRANCHISE PRACTICES.
(a) Misrepresentations in Required Disclosure.--In connection with
any disclosure document, notice, or report required by any Federal,
State, or local law, it shall be unlawful for any franchise seller,
either directly or indirectly through another person--
(1) to--
(A) make an untrue statement of material fact;
(B) fail to state a material fact; or
(C) fail to state any fact which would render any
required statement or disclosure either untrue or
misleading; and
(2) fail to furnish any prospective franchisee with--
(A) all information required to be disclosed by law
and at the time and in the manner required;
(B) 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; and
(C) historical financial performance data including
sales, expenses, and profitability data, in the
disclosure document or to make any claim or
representation to a prospective franchisee whether
orally or in writing, which is inconsistent with, or
which contradicts, the franchisor's disclosure
document.
(b) 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, to do any of the
following:
(1) To engage in an act, practice, course of business, or
pattern of conduct which operates as a fraud upon any person.
(2) 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
franchisees.
(3) To discriminate against a franchisee by imposing
requirements not imposed on other similarly situated
franchisees.
(4) To otherwise retaliate, directly or indirectly, against
any franchisee for membership or participation in a franchisee
association.
(5) To charge excessive and unreasonable renewal fees. Fees
shall not be deemed excessive and unreasonable if they do not
exceed 50 percent of the amount of the average initial
franchise fee or other required payments then being charged to
all franchisees in the market.
(6) To enforce a clause or provision in a franchise
agreement requiring the parties to submit to arbitration unless
the parties, each being represented by counsel, have
voluntarily entered into an agreement after the dispute arises
to submit the dispute to arbitration, and then only if the
arbitration is conducted at a location reasonably convenient to
the franchisee; provided, however, that the provisions of this
subsection shall not prohibit the enforceability of a clause or
provision in a franchise agreement which requires the parties
to submit to non-binding mediation conducted at a location
reasonably convenient to the franchisee.
(7) To terminate, cancel, or fail to renew a franchise for
the failure or refusal of the franchisee to do any of the
following:
(A) Refusal to take part in any promotional
campaign which is not reasonable, implemented in good
faith, and expected to promote the profitability of the
franchisee's business.
(B) Failure to meet sales quotas suggested or
required by the franchisor not expressly set forth in
the franchise agreement.
(C) Failure or refusal to sell any products or
services at a price suggested or required by the
franchisor, an affiliate of the franchisor, or any
supplier approved by the franchisor.
(D) Refusal to keep the franchised premises open
and operating during hours which are unprofitable to
the franchisee or to preclude the franchisee from
establishing its own hours of operation or nonoperation
for the period between the hours of 10 p.m. and 6 a.m.,
unless said business is commonly recognized as an
extended hour business or the initial signed franchise
agreement required operating during these hours.
(E) Refusal to give the franchisor or any supplier
financial records of the operation of the franchise
which are not related or unnecessary to the performance
of franchisee's express obligations under the franchise
agreement or records unrelated to the franchise
business.
(8) To restrict a franchisee from associating with other
franchisees or from joining, leading, or otherwise
participating in a trade or other association, or retaliate
against a franchisee for engaging in these activities.
(9) To require or prohibit any change in management of any
franchise unless the requirement or prohibition of the change
shall be for good cause, which cause shall be stated in writing
by the franchisor and be based on violations of material,
reasonable and reasonably required express provisions of the
franchise agreement. Good cause shall include requiring that
management of the franchise be conducted by--
(A) personnel who have been trained in the manner
required of all franchise managers in the system; and
(B) personnel who are legally eligible for
employment in the United States of America.
(10) To impose on a franchisee by contract, rule, or
regulation, whether written or oral, a standard of conduct or
performance unless the franchisor, its agents or
representatives, sustain the burden of proving the standard to
be reasonable, necessary, and uniformly enforced and applied
throughout its system of franchisees, franchisor-owned units
and licensees. The following are examples of unreasonable
conduct:
(A) To fail to deal fairly and in good faith or
fail to exercise due care with a franchisee or any
association or other aggregation or incorporation of
franchisees in all business matters, including--
(i) proposed and actual transfer of the
franchise;
(ii) administration of advertising funds,
rewards programs, and marketing funds; and
(iii) the interpretation, administration,
and performance of franchise agreements and
area development or territory agreements.
(B) To sell, rent, or offer to sell to a franchisee
or require a franchisee to buy any product or service
for more than a fair and reasonable price or without
the reasonable expectation that the sale or rental
transaction itself will be profitable for the
franchisee's business.
(C) To discriminate between franchisees in the
charges offered or made for royalties, goods, services,
equipment, rentals, advertising services, or in any
other business dealing, unless that discrimination
between franchisees--
(i) would be necessary to allow a
particular franchisee to fairly meet
competition in the open market;
(ii) does not adversely affect the business
of any existing franchisee; and
(iii) to the extent that the franchisor
satisfies the burden of proving that any
classification of or discrimination between
franchisees is reasonable, the discrimination
is based on franchises granted at materially
different times and the discrimination is
reasonably related to the difference in time or
on other proper and justifiable distinctions,
and is not arbitrary or intended to be for the
benefit of the franchisor at the expense of any
franchisee. Nothing in this subsection shall be
construed as granting to a franchisor any right
which may be limited by any other State or
Federal statute.
(D) To notify the franchisee of a claimed breach of
the franchise agreement no later than 180 days from the
date the breach arises or 180 days after the franchisor
knew or in the exercise of reasonable care should have
known of the claimed breach.
(E) To require a franchisee to keep the franchised
premises open and operating during hours which are
unprofitable to the franchisee or to preclude the
franchisee from establishing its own hours of operation
or nonoperation between the hours of 10 p.m. and 6
a.m., unless said business is commonly recognized as an
extended hour business, or the initial signed franchise
agreement required operating during these hours.
(F) To require a franchisee to include noncompete
language in employment contracts with its employees.
(G) To fail to, without charge, make readily
available to franchisees, and provide a physical copy
of true, accurate, and complete copies of all records
and accountings of marketing, rewards programs,
advertising funds, and fees that have been paid by
franchisees, vendors, suppliers, and licensees.
(H) To impose performance standards on franchises
unless the franchisor proves the performance standards
are reasonable, necessary, and uniformly enforced.
(I) To require or request a franchisee to assent to
a release, assignment, novation, waiver, or estoppel
which would prospectively relieve any person from
liability imposed by this chapter.
(J) To require or demand that a franchisee pay
liquidated or other posttermination damages in excess
of the average monthly royalty fees paid by the
franchisee during the prior 12 full calendar months (or
the shorter time that the franchised location has been
in the system), multiplied by the lesser of 6 months or
the number of months remaining in the term of the
franchise agreement.
(K) To act to accomplish, either directly or
indirectly through any parent company, subsidiary,
affiliate, or agent, what would otherwise be prohibited
under this chapter on the part of the manufacturer or
distributor.
SEC. 4. 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;
(B) obligate a party to do everything required
under the contract to accomplish the purposes of the
contract; and
(C) require honesty in 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 or avoid 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 any 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, by stating that
it claims no skill or knowledge in a particular area, 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.
SEC. 5. PROCEDURAL FAIRNESS.
(a) In General.--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
preexisting 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) Terms of Agreement.--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. 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 any State
in which the franchisee is a resident, or in which the
franchisee's place of business is located;
(2) deprive a franchisee of the right to commence an action
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 in the
State of the franchisee's principal place of business; or
(3) prevent a franchisee from bringing or participating in
any of the following actions:
(A) A consolidated action or consolidated
arbitration.
(B) A mass action or mass arbitration.
(C) A class action under Rule 23 of the Federal
Rules of Civil Procedure.
(D) A class arbitration as authorized by the
American Arbitration Association Supplementary Rules
for Class Arbitrations.
(E) A similar consolidated, mass, or class
proceeding permissible under State or Federal statutory
or common law, or under the rules of any other
arbitration association.
(c) No Waivers.--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 choice-of-law, choice-of-venue or
any other 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. 6. TRANSFER OF A FRANCHISE.
(a) Transfer of Interest.--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 the offer and sale of franchises. 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.--A franchisee shall give a franchisor not less than 60
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 Implied.--A transfer by a franchisee is considered to
have been approved 60 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).
(d) Conditions.--A franchisor may require as a condition of a
transfer that--
(1) the transferee successfully complete a reasonable
training program;
(2) a reasonable transfer fee be paid to reimburse the
franchisor for the franchisor's reasonable and actual expenses
directly attributable to the transfer;
(3) the transferring franchisee pay or make reasonable
provision to pay any amount due the franchisor or the
franchisor's affiliate; or
(4) the financial terms of the transfer at the time of the
transfer, comply with the franchisor's current financial
requirements for franchisees.
(e) Prohibited Conditions.--A franchisor may not condition its
consent to a transfer described in subsection (a) on--
(1) franchisee's forgoing existing rights other than those
contained in the franchise agreement;
(2) 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
(3) 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.
(f) No Additional Agreement Required After Transfer.--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.
(g) Public Offerings.--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.
(h) Other Consolidation.--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.
(i) Occurences Not Considered Transfers.--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 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).
(j) Certain Covenants Unenforceable.--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 agreement
purporting to prohibit the transferor from engaging in any lawful
occupation or enterprise. 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. 7. RENEWAL OF THE FRANCHISE; NOTICE.
(a) In General.--A franchisor shall not, directly or through an
officer, agent, or employee, fail to renew a franchise, except for good
cause shown.
(b) Fees.--Renewals shall not be subject to unreasonable fees. Fees
shall not be deemed unreasonable if they do not exceed 50 percent of
the amount of the average initial franchise fee or other required
payments then being charged to all franchisees.
(c) Good Cause for Nonrenewal.--Good cause as described in
subsection (a) shall be based upon legitimate business reason which
shall include, the franchisee's refusal or failure to substantially
comply with any material, reasonable and reasonably necessary express
obligation of the franchise agreement within the one year period prior
to renewal, including repeated and intentional nonpayment of royalties,
advertising or marketing fees clearly required by the franchise
agreement.
(d) Notice of Nonrenewal.--Before nonrenewal of the franchise, the
franchisor shall give the franchisee written notice at least 90 days in
advance of the nonrenewal. The notice shall state all of the reasons
constituting good cause for the nonrenewal and shall provide that the
franchisee has 60 days in which to rectify any claimed discrepancy and
reinstate its right to renew the franchise.
(e) Preservation of Fees.--If the franchisor requires the
franchisee to sign a new franchise agreement as a condition of renewal,
such franchise agreement shall contain the same royalties, advertising
fees, and other fees as the expiring agreement, no new fees and any
protected territory in the expiring agreement shall be the same in the
renewal franchise.
(f) Prohibited Actions.--A franchisor shall not prohibit, or
enforce a prohibition against, any franchisee from--
(1) engaging in any business at any location after
expiration of a franchise agreement; or
(2) using the customer list and telephone numbers
associated with the franchise business.
(g) Rule of Construction.--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--
(1) to cease or refrain from using a trademark, other trade
secret, or other intellectual property owned by the franchisor
or its affiliate;
(2) to alter the appearance of the business premises so
that it is not substantially similar to the standard design,
decor criteria, trade dress or motif in use by other
franchisees using the same name or trademarks within the
proximate trade or market area of the business; or
(3) 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. 8. TERMINATION; GOOD CAUSE; NOTICE; OPPORTUNITY TO CURE.
(a) In General.--A franchisor shall not, directly or through an
officer, agent, or employee, terminate or cancel a franchise, or
substantially change the competitive circumstances of the franchisee,
except for good cause shown.
(b) Default Provisions.--A default under one franchise agreement
shall not in and of itself constitute a default under another franchise
agreement to which the franchisee or an affiliate of the franchisee is
a party. Any cross-default provisions are null and void.
(c) Notice.--Prior to termination or cancellation of the franchise,
the franchisor shall give the franchisee written notice at least 90
days in advance of the termination. The notice shall state all of the
reasons constituting good cause for termination or cancellation and
shall provide that the franchisee has 60 days in which to rectify any
claimed defaults.
(d) Exception to Notice Requirement.--The requirement for 90 days
advance written notice for termination shall not apply if the reason
for termination is because--
(1) the alleged grounds are voluntary abandonment by the
franchisee of the franchise relationship, in which event, such
notice may be given 15 days in advance of the termination or
cancellation; or
(2) the conviction of the franchisee in a court of
competent jurisdiction of an offense, where the conviction is
no longer appealable and the offense is--
(A) punishable by a term of imprisonment in excess
of 1 year;
(B) directly related to the business conduct
pursuant to the franchise; or
(C) materially impairs the goodwill value of the
franchise or the franchised trademark. In that event,
such notice may be given at any time following the date
on which the conviction is no longer appealable and
shall be effective upon delivery and written receipt of
the notice. In no event shall any franchisor collect
any financial penalty or fee, however delineated, as a
consequence of such conviction.
(e) Additional Notice.--If the reason for termination or
cancellation is nonpayment of sums due under the franchise agreement,
the franchisee shall be entitled to written notice of such default, and
shall have 15 days in which to cure such default from the date of such
notice. For such non-payment defaults a franchisee has the right to
cure 3 times in any 12 month period during the period of the franchise
agreement.
(f) Notice of Imminent Danger.--If the reason for termination or
cancellation is violation of any law or regulation relating to an
imminent danger to public health or safety the franchisee shall be
entitled to immediate written notice and shall have 24 hours following
receipt of such notice to cure such violation.
(g) Good Cause.--A franchisee may terminate a franchise agreement
for good cause shown, without any further liability to the franchisor.
Good cause shall include changes to the franchise system or the
competitive circumstances of the franchise business, which would cause
substantial negative impact or substantial financial hardship to the
franchisee in the operation of its franchise.
SEC. 9. EFFECT OF TERMINATION.
(a) In General.--Upon termination of a franchise for whatever cause
or reason, except voluntary relinquishment or abandonment of the
franchise by the franchisee or the expiration of the franchise
agreement where the franchisee does not elect to renew, the franchisor
shall fairly compensate the franchisee or franchisee's estate for the
fair market value at the time of termination of the franchise, of the
franchisee's inventory, supplies, equipment, and furnishings purchased
by the franchisee from the franchisor or its approved sources and the
fair market value of the going concern value and good will of the
business, if any, exclusive of personalized items which have no value
to the franchisor and inventory, supplies, equipment, and furnishings
not reasonably required in the conduct of the franchise business;
provided, however, that--
(1) compensation need not be made to franchisee of going
concern value and good will if the franchisor agrees in writing
not to enforce a covenant which restrains the franchisee from
competing with the franchisor in the same or substantially
similar business in the same or substantially similar manner at
the same location using the same property except the
franchisor's registered trademark or trade name; and
(2) a franchisor may offset against amounts owed to a
franchisee under this subsection any amount mutual agreed upon
and owed by the franchisee to franchisor which is not the
subject of a good faith dispute by the franchisee.
(b) Rule of Construction.--The provisions of this section shall not
be construed to permit the termination or nonrenewal of any franchise
agreement except in accordance with the express terms of the franchise
agreement and this Act.
SEC. 10. TRANSFER OF FRANCHISE BY FRANCHISOR.
A franchisor shall not transfer, by sale or otherwise, its interest
in a franchise system 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
adequately perform all of the franchisor's obligations in the
ordinary course of business.
SEC. 11. PRIVATE RIGHT OF ACTION.
(a) In General.--A franchisee who is injured by a violation or
threatened 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)
as in effect on the date of the enactment of this Act, may bring a
private right of action in any court of appropriate jurisdiction for
rescission and restitution, as well as for all damages and maybe
awarded injunctive relief against a violation or threatened violation
of this Act or such section. The franchisee shall also be entitled to
recover its costs of litigation and reasonable attorney's fees and
expert witness fees, against any entity or 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) Statute of Limitations.--No action may be commenced pursuant to
this section or this Act more than the later of--
(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.
(d) Venue.--A franchisee may commence a civil action to enforce any
provision of this Act within the jurisdiction wherein the applicable
franchisee is a resident or where the applicable business is located.
(e) 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. 12. 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. 13. DEFINITIONS.
For purposes of this Act, the following definitions apply:
(1) The term ``affiliate'' has the meaning given the term
``affiliated person'' in section 436.1(b) of title 16 of the
Code of Federal Regulations as in effect on July 1, 2007.
(2) 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 or local law.
(3) The term ``franchise'' has the meaning given such term
in section 436.1(h) of title 16 of the Code of Federal
Regulations as in effect on July 1, 2007, 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.
(4) The term ``franchise seller'' has the meaning given
such term in section 436.1(j) of title 16 of the Code of
Federal Regulations as in effect on July 1, 2007.
(5) The term ``franchisee'' has the meaning given such term
in section 436.1(i) of title 16 of the Code of Federal
Regulations as in effect on July 1, 2007.
(6) The term ``franchisor'' has the meaning given such term
in section 436.1(k) of title 16 of the Code of Federal
Regulations as in effect on July 1, 2007.
(7) The terms ``material'' and ``material fact'' include--
(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 either 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.
(15) The terms ``nonrenewal'' and ``nonrenew'' mean that
the franchisor fails or refuses to extend the franchisor-
franchisee relationship at the end of the existing term of the
franchise agreement, irrespective of whether the franchise
agreement contains any contractual right to obtain a renewal
term. Allowing a franchise agreement with no renewal term to
expire shall be considered to be a ``nonrenewal'' for purposes
of this Act.
SEC. 14. SEVERABILITY.
If any provision or clause of this section or any application of
this section to any person or circumstances is held invalid, such
invalidity shall not affect other provisions or applications of the
section which can be given effect without the invalid provision or
application, and to this end the provisions of this section are
declared to be severable.
SEC. 15. STATE ATTORNEYS GENERAL.
(a) Civil Action.--Whenever an attorney general (or similar
enforcement officer of a State, however denominated, hereinafter
``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 State court or 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.
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