S 717 Session 112 (1997-1998)
S 0717 General Bill, By Reese
A BILL TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA, 1976, BY ADDING CHAPTER 75
TO TITLE 39 SO AS TO ENACT THE "RESPONSIBLE FRANCHISE PRACTICES ACT",
INCLUDING THE ESTABLISHMENT OF CERTAIN MISDEMEANOR OFFENSES AND CRIMINAL
PENALTIES AND THE ESTABLISHMENT OF CIVIL PENALTIES.
04/30/97 Senate Introduced and read first time SJ-3
04/30/97 Senate Referred to Committee on Judiciary SJ-3
A BILL
TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA,
1976, BY ADDING CHAPTER 75 TO TITLE 39 SO AS TO
ENACT THE "RESPONSIBLE FRANCHISE PRACTICES ACT",
INCLUDING THE ESTABLISHMENT OF CERTAIN
MISDEMEANOR OFFENSES AND CRIMINAL PENALTIES
AND THE ESTABLISHMENT OF CIVIL PENALTIES.
Be it enacted by the General Assembly of the State of South
Carolina:
SECTION 1. Title 39 of the 1976 Code is amended by adding:
"CHAPTER 75
Responsible Franchise Practices
Section 39-75-10. This chapter is known and may be cited as the
'Responsible Franchise Practices Act'.
Section 39-75-20. It is the purpose of this chapter to promote the
vitality of franchising through fair, equitable, and responsible
franchise practices. Franchising has matured into a significant and
competitive mode of product and service distribution in our national
economy. Traditional common law doctrines have not evolved
sufficiently to protect franchisees adequately from fraudulent or
unfair practices in the sale and operation of franchised businesses;
significant contractual and procedural restrictions have denied
franchisees viable legal recourse to protect their interests in such
businesses.
For all parties to a franchise, having disputes settled under
inconsistent and widely varying state laws provides little
predictability and consistency in how the issue will be treated by the
courts. A uniform set of standards would ensure that all franchisees
and franchisors will be treated the same on a particular issue, no
matter what state they do business in.
Section 39-75-30. As used in this chapter:
(1) 'Chapter' means the 'Responsible Franchise Practices Act'.
(2) 'Advertisement' means an oral or written communication
disseminated by mail, print, or electronic media, or otherwise, to the
public, in connection with an offer or sale of a franchise.
(3) 'Business days' are all days other than Saturday, Sunday, and
federal and state holidays.
(4) 'Franchise' means:
(a) an express or implied agreement, whether oral or written, by
which:
(i) a party is granted the right to offer, sell, or distribute
goods or services under a marketing plan or system prescribed or
suggested in substantial part by a franchisor;
(ii) the operation of the business is allowed to be substantially
associated with a trademark, service mark, trade name, logotype,
advertising, or other commercial symbol owned, controlled, or used
by the franchisor or its affiliate; and
(iii) the franchisee is required to pay, directly or indirectly, a
franchise fee;
(b) an area franchise, unless specifically stated otherwise in this
section;
(c) a subfranchise, unless specifically stated otherwise in this
section;
(d) any commercial relationship entered into in reasonable
reliance on representations, either oral or written, that the criteria of
paragraph (a) of this item (4) will be met; or
(e) any commercial relationship explicitly referred to as a
franchise by the seller.
(5) The term 'franchise' does not include a nonprofit organization
operated on a cooperative basis, by and for independent retailers,
which wholesales goods and services primarily to its member
retailers and to which all of the following are applicable:
(a) each member has substantially the same control and
ownership of the cooperative, or such control and ownership as is
apportioned by number of retail units owned;
(b) only those who will avail themselves of the services
furnished by the organization may be members;
(c) transfer of ownership is prohibited or limited;
(d) capital investment receives no return;
(e) any benefits to the members are made on the basis of
patronage of the cooperative or on the basis of retail units owned;
(f) members are not personally liable for obligations of the
organization in the absence of a direct undertaking or authorization
by them;
(g) services of the organization are furnished primarily for the
use of the members; and
(h) no part of the receipts, income, or profit of the organization
is paid to any profit-making entity, except for arms-length payments
for necessary goods and services, and members are not required to
purchase goods or services from any designated profit-making entity,
other than approved suppliers selected on an objective basis. The
nonprofit organization is subject to an action for rescission or
damages if the organization fraudulently induced the plaintiff to join
the organization.
(6) A 'franchise' does not include any contract regulated by the
Federal Petroleum Marketing Practices Act, 15 U.S.C. 2801 et seq.
(7) A 'franchisee' is a person to whom a franchise is granted.
'Franchisee' includes the following:
(a) a subfranchisor with regard to its relationship with a
franchisor; and
(b) a subfranchisee with regard to its relationship with a
subfranchisor.
(8) A 'franchisor' means a person who grants or has granted a
franchise, area franchise, or subfranchise, or an affiliate of such a
person. 'Franchisor' also includes a subfranchisor with regard to its
relationship with a franchisee, unless stated otherwise in this chapter.
(9) An 'area franchise' means any franchise between a franchisor
and a franchisee whereby the franchisee is granted the right to operate
more than one unit within a specified geographic area.
(10) A 'subfranchise' means any agreement where a franchisor
gives another person the right to sell or negotiate the sale of
franchises. A contract or agreement which is a franchise does not
become a subfranchise merely because under its terms a person is
granted the right to receive compensation for referrals to a franchisor
or subfranchisor or to receive compensation for acting as a sales
representatives on their behalf.
(11) A 'subfranchisee' means a person who is granted a franchise
from a subfranchisor.
(12) A 'subfranchisor' means a person to whom a subfranchise is
granted from a franchisor.
(13) A 'franchise fee' means any payment or agreement to pay for
the right to enter into or continue in a franchise including, but not
limited, any payment for goods or services. However, the following
are not considered the payment of a franchise fee:
(a) the purchase or agreement to purchase goods at a bonafide
wholesale price if the purchaser has no obligation to purchase more
goods than a reasonable person normally would purchase as a starting
inventory or to maintain a going inventory or supply;
(b) the payment of a reasonable service charge to the issuer of
a credit card by an establishment accepting or honoring such credit
card; or
(c) payment to a trading stamp company by a person issuing
trading stamps in connection with a retail sale.
(14) 'Fraud' and 'deceit' are not limited to common law fraud or
deceit.
(15) 'Offer' or 'offer to sell' includes every attempt to offer to
dispose of, or to solicit an offer to buy, a franchise or interest in a
franchise for value.
(16) 'Sale' or 'sell' includes every express or implied, written or
oral agreement of sale of, contract to sell, or disposition of, a
franchise or interest in a franchise for value.
(17) 'Person' means an individual or any other legal or commercial
entity.
(18) 'Rule' means any published regulation or standard of general
application issued by the Federal Trade Commission relating to
franchising.
(19) 'Affiliate' means a person controlling, controlled by, or under
common control with another person, every officer or director of
such a person, and every person occupying a similar status or
performing similar functions.
(20) 'Franchise broker' means a person, other than a franchisor or
franchisee, or an employee thereof, who sells, offers for sale, or
arranges for the sale of a franchise.
(21) 'Marketing plan' means a plan or system concerning a material
aspect of conducting business. Indicia of a marketing plan include
any of the following:
(a) price specification, special pricing system, or discount plans;
(b) sales or display equipment or merchandising devices;
(c) sales techniques;
(d) promotional or advertising materials or cooperative
advertising;
(e) training regarding the promotion, operation, or management
of the business;
(f) operational, managerial, technical, or financial guidelines or
assistance;
(22) The terms 'material' and 'material fact' include:
(a) any fact, circumstances, or set of conditions which a
reasonable individual would consider important in making a decision
relating to, entering into, remaining in, or abandoning a franchise
relationship; or
(b) any fact, circumstances, or set of conditions which has, or
may have, any significant financial impact on a franchisor,
franchisee, or a prospective franchisee.
Section 39-75-40. The terms defined in Section 39-75-30 do not
include the renewal or extension of an existing franchise where there
is no interruption in the operation of the franchised business by the
franchisee, except that a material modification of an existing
franchise, whether upon renewal or otherwise, is a 'sale' within the
meaning of Section 39-75-30. However, the sale of an existing
franchise by the franchisee is not a 'sale' within the meaning of that
section, if all of the following are applicable:
(1) neither the franchisor nor any of its owners or affiliates have
any ownership interest in the selling party; and
(2) the sale is not effected by or through the franchisor or its
affiliates. A sale is not effected through a franchisor if the
franchisor's involvement in it is limited to approving the prospective
new franchisee.
Section 39-75-50. (A) In connection with the advertising,
offering, sale, or other promotion of any franchise, it is unlawful for
any person:
(1) to employ any 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 or
deceit upon any person;
(3) to make an untrue statement of a material fact or any
omission to state a material fact, or any omission to state a material
fact necessary in order to make the statements made, in the light of
the circumstances under which they are made, not misleading;
(4) to represent or imply in any manner that a franchise has been
endorsed, recommended, or approved by any agency or officer of any
state or of the United States.
(B) In connection with any presale franchise disclosure document,
notice, or report required by law or regulation, it is unlawful for any
franchisor or franchise broker, either directly or indirectly through
any officer, employee, agent, representative, or affiliate:
(1) to make or cause to be made an untrue statement of material
fact, omit to state a material fact, or omit to state a material fact
necessary in order to make the statements made, in the light of the
circumstances under which they are made, not misleading;
(2) to fail to furnish any prospective franchisee with all
information required to be disclosed at the time and in the manner
required by rule or other applicable law;
(3) to make any claim or representation to a prospective
franchisee, whether orally or in writing, which is inconsistent with or
contradicts any information provided to the prospective franchisee in
any required disclosure;
(4) to make a statement of fact which has the intent or effect of
misrepresenting the profitability of a franchise opportunity, the rate
of success of franchises or franchisees associated with a franchise
opportunity, the expected market value of the franchise, the equity
the franchisee will accumulate in the franchised business, or the rate
of success of franchises generally.
(C) For the purposes of this section, the burden of proof is upon
the franchisor to show that any claim, statement, or representation
made orally or in writing in connection with the advertising, offering,
sale, or other promotion of a franchise is accurate and not misleading
and that there was a reasonable basis in fact for each such claim,
statement, or representation at the time it was made.
Section 39-75-60. (A) A franchisee may transfer the franchised
business and franchise to a transferee, provided that the transferee
satisfies the reasonable current qualifications of the franchisor for
new franchisees. For the purposes of this section, reasonable current
qualifications for a new franchisee are qualifications based upon
legitimate business reasons. 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.
(B) A franchisor may require as a condition of a transfer any of the
following:
(1) that the transferee successfully complete a reasonable
training program;
(2) that a reasonable transfer fee be paid to reimburse the
franchisor for the franchisor's reasonable and actual expenses directly
attributable to the transfer;
(3) that the franchisee pay or make provision reasonably
acceptable to the franchisor to pay any amount due the franchisor or
the franchisor's affiliate; and
(4) that the financial terms of the transfer comply at the time of
the transfer with the franchisor's current financial requirements for
franchisees.
(C) A franchisee may transfer the franchisee's interest in the
franchise for the unexpired term of the franchise agreement, and a
franchisor may not require the franchisee or the transferee to enter
into a new or different franchise agreement as a condition of the
transfer.
(D) A franchisee shall give the franchisor no less than thirty days'
written notice of a transfer which is subject to the provisions of this
section, which notice shall include a statement of the proposed
transferee's financial qualifications and business experience.
(E) A transfer by a franchisee is deemed to be approved thirty days
after the franchisee submits the request for consent to the transfer
unless, within that time, the franchisor withholds consent to the
transfer as evidenced in writing, specifying the reason or reasons for
withholding the consent. Any such notice is privileged and is not
actionable based upon a claim of defamation.
(F) The following occurrences are not considered transfers
requiring the consent of the franchisor under a franchise agreement
and shall not result in the imposition of any penalties or make
applicable any right of first refusal by the franchisor:
(1) the succession of ownership of a franchise upon the death or
disability of a franchisee, or of an owner of a franchise, to the
surviving spouse, heirs, or a partner active in the management of the
franchisee unless the successor fails to meet within one year the then
current reasonable qualifications of the franchisor for franchisees and
the enforcement of the reasonable current qualifications is not
arbitrary or capricious;
(2) incorporation of a proprietorship franchisee, provided that
the incorporation does not prohibit a franchisor from requiring a
personal guaranty by the franchisee of obligations related to the
franchise;
(3) a transfer within an existing ownership group of a franchise,
provided that more than fifty percent of the franchise is held by
persons who meet the franchisor's reasonable current qualifications
for franchisees. If less than fifty percent of the franchise would be
owned by persons who meet the franchisor's reasonable current
qualifications, the franchisor may refuse to authorize the transfer,
provided that enforcement of the reasonable current qualifications is
not arbitrary or capricious;
(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 fifty percent of the entire franchise is held by those who meet
the franchisor's reasonable current qualifications. If less than fifty
percent of the franchise would be owned by persons who meet the
franchisor's reasonable current qualifications, the franchisor may
refuse to authorize the transfer, provided that enforcement of the
reasonable current qualifications is not arbitrary or capricious;
(5) a transfer of less than a control interest in the franchise to an
employee stock ownership plan, or employee incentive plan,
provided that more than fifty percent of the entire franchise is held by
those who meet the franchisor's reasonable current qualifications for
franchisees. If less than fifty percent would be owned by persons
who meet the franchisor's reasonable current qualifications, the
franchisor may refuse to authorize the transfer, provided that
enforcement of the reasonable current qualifications is not arbitrary
or capricious;
(6) a grant or retention of a security interest in the franchised
business or its assets, or an ownership interest in the franchisee,
provided that the security agreement establishes an obligation on the
part of the secured party, enforceable by the franchisor, to give the
franchisor notice of the secured party's intent to foreclose on the
collateral simultaneously with notice to the franchisee, and a
reasonable opportunity to redeem the interests of the secured party
and recover the secured party's interest in the franchise or franchised
business by paying the secured obligation.
Section 39-75-70. (A) A franchisor, either directly or indirectly
through any affiliate, officer, employer, agent, or representative, may
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
established uniform system-wide quality standards which are not
arbitrarily promulgated or enforced by the franchisor.
(B) This section applies to all goods or services that the franchisee
is required to obtain whether or not they are related to a trademark,
trade name, trade secret, or patent owned, used, or controlled by or
licensed to the franchisor or its affiliates.
(C) Without limiting the rights of the franchisee under subsection
(A) of the section, a franchisor shall provide and continuously update
an inclusive list of suggested vendors for all goods and services
related to the business.
(D) A franchisor shall fully disclose whether or not it receives any
rebates, commissions, payments, or other benefits as a result of the
purchase of goods or services by franchisees. All of these rebates or
benefits shall pass directly to the franchisee.
(E) The 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 goods and services to the
franchisee and to franchisees of the franchisor.
Section 39-75-80. Without regard to whether a fiduciary duty is
imposed generally on the franchisor by virtue of a franchise
relationship, the franchisor owes a fiduciary duty to its franchisees
and is obligated to exercise the highest standard of care when:
(1) performing bookkeeping, collections, payroll, or accounting
services on behalf of the franchisee; the franchisor only may use the
information concerning the franchised business gained while
performing such services for bona fide and legitimate business
purposes; bona fide and legitimate business purposes do not include
competition with the franchisee;
(2) administering or supervising the administration of an
advertising or promotional fund to which the franchisee is required
to make contributions; all of these pooled funds must be kept in a
segregated account and are not subject to the claims of creditors of
the franchisor; the franchisor shall, at its expense, provide an
independent certified audit of these pooled funds within sixty days
following the close of the franchisor's fiscal year; the audit shall fully
disclose all fees, expenses, or other payments from the fund to the
franchisor.
Section 39-75-90. (A) A franchisor shall not directly or indirectly
prohibit or restrict the right of franchisees to freely associate or from
forming, joining, or participating in any trade association.
(B) A franchisor shall not directly or indirectly retaliate or
discriminate against a franchisee for forming, joining, or participating
in any trade association.
(C) A trade association of franchisees is not subject to the
applicable antitrust laws, whether by statute, rule, or common law;
neither the association nor the members of it may be held or
construed to be in restraint of trade.
(D) A franchisor shall not discriminate against any franchisee or
prospective franchisee in the sale, renewal, or approval of the transfer
of a franchise on the basis of race, color, religion, gender, sexual
preference, age, national origin, or disability. However, nothing in
this chapter may be construed to prohibit or restrict the right of a
franchisor to make franchise opportunities available to persons
lacking the capital, training, business experience, or other
qualifications ordinarily required of its franchisees, pursuant to any
bona fide affirmative action or other similar program adopted by the
franchisor.
Section 39-75-100. (A) A franchisor shall not grant or license a
new franchise, or otherwise establish a new outlet, one or more points
of sale of, or a new channel of distribution for goods or services
similar to that offered by a franchisee and identified by the same
trade name, trademark, logotype, commercial system, or advertising
used by a franchise, or owned or managed by an entity related to the
franchisor, in unreasonable proximity to an outlet or business owned
or licensed to such franchisee so that the effect or probable effect of
granting or establishing the new franchise, outlet, or point or points
of sale is to cause a reduction in gross sales of the existing franchise.
(B) The franchisor, before granting or licensing a new franchise or
opening a new outlet or one or more points of sale, shall provide not
less than one hundred twenty days' written notice to all franchisees
in proximity of the proposed franchise, outlet, or point of sale.
(C)(1) Where a franchisor has granted a new franchise or
established a new outlet or point of sale in such unreasonable
proximity to an existing franchise, the owner of the existing franchise
has a cause of action for monetary damages including, but not limited
to, actual loss of income resulting from the reduction in gross sales
caused by the opening and operation of the new franchise, outlet, or
point of sale, anticipated loss of income caused by the continued
operation of that franchise, outlet, or point of sale, the loss or
reduction in the value of the franchised business, and all costs of
litigation including reasonable attorney's and expert witness fees.
(2) This section does not apply where:
(a) the reduction in gross sales for an existing franchise
caused by the opening and operation of the new franchise, outlet, or
one or more points of sale, based on a comparison to annual gross
sales from the same franchise location during the twelve-month
period immediately preceding the opening of the new franchise,
outlet, or point of sale, is determined to have been less than ten
percent during the first twelve months following the opening of the
new franchise, outlet, or point of sale;
(b) the franchisor agrees to compensate the existing
franchisee or franchisees for market sales diverted by the opening of
a new franchise, outlet, or points of sale, provided that the franchisor
and franchisee agree upon the proper amount of the compensation to
be provided, or if the franchisor and franchisee cannot agree on the
proper amount of the compensation:
(i) each party shall appoint an independent appraiser to
determine the amount of the compensation;
(ii) if the independent appraisers are unable to agree on the
appropriate amount of the compensation, the independent appraisers
shall appoint a third appraiser to determine the level of compensation;
and
(iii) the determination of the independent appraiser is final
and binding.
(D) The franchisor has the burden of proof to show that a decline
in sales of an existing franchise or franchises occurred because of a
reason other than the opening and operation in unreasonable
proximity to the existing franchise of the new franchise, outlet, or
point of sale.
(E) Upon petition by the franchisee, a court of competent
jurisdiction may grant a permanent or preliminary injunction to
prevent injury or threatened injury for a violation of this section or to
preserve the status quo pending the outcome of the formal procedure.
Section 39-75-110. (A) A franchise contract imposes on each party
a duty to act in good faith in its performance and enforcement.
(B) The duty of good faith obligates each party to a franchise to do
nothing that will have the effect of destroying or injuring the right of
the other party to receive the full expected benefit and fruits of the
contract, and to do everything required under the contract to
accomplish that purpose.
(C) Any action that prevents such enjoyment, even if not
prohibited by the letter of the contract, is prohibited.
(D) Franchisors and franchisees shall act in a fair and equitable
manner toward each other so as to guarantee freedom from
wrongfulness, arbitrariness, coercion, or duress by the other party.
(E) Good faith includes honesty of fact and the observance of
reasonable standards of fair dealing.
(F) A franchisor that simply acts in compliance with the terms of
its franchise agreement with a franchise is not necessarily dealing
with its franchisee fairly and in good faith.
(G) The courts have the authority to refuse to enforce
unconscionable contract provisions, including those unfairly imposed
on the franchisee by reason of the superior bargaining position of the
franchisor.
Section 39-75-120. (A) 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.
(B) Franchisors and franchisees are mutually accountable to
conform to clearly established system-wide standards of operation
which are not arbitrarily promulgated or enforced.
(C) Franchisors shall provide individual franchisees with initial
training and continuing commercial or technical assistance during the
entire life of the agreement.
(D) For purposes of this section:
(1) the phrase 'skill or knowledge' means something more than
the mere minimum level of skill or knowledge required of any person
engaging in a service or business and involves a special level of
expertise:
(a) which is the result of acquired learning and aptitude
developed by special training and experience in the business to be
conducted under the franchise, or the result of extensive use and
experience with the products or services or the operating system of
the franchise;
(b) which is the result of experience in organizing a franchise
system and in providing training, assistance, and services to
franchisees; and
(c) which a prospective franchisee would expect in
reasonable reliance on the written and oral commitments and
representations of the franchisor; and
(2) a franchisor must 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.
Section 39-75-130. Recognizing the needs of both the franchisor
and the franchisee to make reasonable changes to the franchise
system to incorporate new and mutually advantageous products,
technologies, and methods of doing business and to accommodate
and meet competitive challenges in the industry, field, or market in
which franchisees operate, no change to the operating manuals or
other ancillary documents, or to the form of the renewal franchise
agreement offered to a franchisee, shall:
(1) change the franchisee fee, royalty rates, or other material
financial terms of the franchise relationship; or
(2) operate to materially change, abrogate, or deprive the
franchisee of the intended fruits of the franchise agreement.
Section 39-75-140. (A) A franchisor may not refuse to renew a
franchise agreement for the purpose of converting the franchisee's
business to operation by the franchisor or by any employee, agent, or
affiliate of the franchisor.
(B) A franchisor may not refuse to renew a franchise agreement
unless the franchisor provides at least six months' prior written notice
of its intent not to renew, and
(1) termination of the franchise agreement would be permitted
under Section 39-75-170;
(2) the franchisee and the franchisor agree in writing not to
renew the franchise agreement;
(3) the franchisor withdraws from distributing its products or
services through franchises in the geographic market served by the
franchisee, or ceases to offer new franchises, in which event, upon
expiration, any noncompetition covenant is null and void.
(C) A franchisor may not impose as a condition of renewal that the
franchisee ceases to own or operate an independent business not
within an unreasonable proximity of the franchised business.
Section 38-75-150. (A) A franchisor may not, either directly or
indirectly through any officer, employee, agent, representative, or
affiliate, prohibit or enforce a prohibition against any franchisee from
engaging in any business at any location after expiration of a
franchise or after termination of the franchise before its expiration for
good cause.
(B) This section does not apply to enforcement of the prohibition
in subsection (A) where the franchisor, not less than thirty days
before the effective date of the termination or expiration, offers in
writing to, and does purchase the assets of the franchised business for
its fair market value as a going concern, provided that:
(1) the fair market value of that business is determined as if it
were to be resold or renewed for a period of years equal to the
contract term being offered by the franchisor for new or renewed
franchisees;
(2) the fair market value of that business is ascertained by an
impartial appraiser whose appointment is acceptable to both parties;
and
(3) any forgiveness of debt may not be considered a purchase
of assets by the franchisor for purposes of this section.
(C) Nothing in this section may be interpreted to prohibit
enforcement of any provisions of a franchise contract obligating a
franchisee after expiration, termination, or transfer of a franchise:
(1) 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 is not binding upon any court or forum for
purposes of this paragraph but may be considered by the court or
forum as evidence of the ownership; or
(2) to alter the appearance of the premises and the manner of
operation of the franchise business to avoid any likelihood of
confusion as to the affiliation of the business with its former
franchisor.
Section 39-75-160. (A) Whenever all or a major portion of the
franchise system is acquired by another person through purchase,
merger, consolidation, acquisition of assets, bankruptcy proceedings,
any foreclosure or judicial order, or otherwise, the person acquiring
the franchise system shall assume the obligations agreed to by the
predecessor franchise in contracts with franchises, and the franchisees
are entitled to hold that transferee legally responsible for the duties
and responsibilities of, and all then-existing claims against, the
predecessor franchisor.
(B) A franchisor may not transfer its interest in a franchise unless:
(1) the franchisor provides not less than thirty days' advance
notice to every franchisee of the intent to transfer its interest in the
franchise or of substantially all of the franchises held by the
franchisor;
(2) the notice is accompanied by a complete description of the
business and financial terms of the proposed transfer; 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.
(C) If a person acquiring a franchise system fails to expressly
undertake the obligations, or fails to act in good faith to renegotiate
the obligations with franchisees, the franchisees are entitled to reject
their contractual duties and responsibilities to the franchisor,
including any noncompetition covenant and post-term obligations,
provided that, upon the rejection, the franchisees cease from using the
franchisor's trademarks, logos, and other express identification, and
otherwise alter the appearance of the premises and the manner of
operation of the franchised business to avoid any likelihood of
confusion as to the affiliation of the business with the franchise
system.
Section 39-75-170. (A) A franchisor shall not cancel or
terminate a franchise agreement or substantially change the
competitive circumstances of the franchise before the expiration of
its terms except for good cause based on a legitimate and good faith
business reason.
(B) Any termination for good cause may not be arbitrary or
capricious when compared with the acts and practices of, and the
requirements imposed by, the franchisor in other similar
circumstances.
(C) Before termination for good cause, the franchisor shall provide
a written notice to the franchisee which:
(1) specifies the precise basis for the proposed termination,
including a description of those material terms of the franchise
agreement with which the franchisee is not in compliance;
(2) provides to the franchisee a reasonable period of time to
cure any nonfinancial events of default, which period shall be not less
than thirty but need not be more than ninety days;
(3) provides to the franchisee a reasonable period of time to
cure any failure to pay monies due to the franchisor or its affiliate,
which period need not be more than thirty days; and
(4) includes an offer to purchase from the franchisee the
franchisee's current inventory meeting the franchisor's then present
standards and held for sale in accordance with the franchise
agreement, at the higher of wholesale value or franchisee's cost.
(D) A franchisor need not provide an opportunity to cure if any one
of the following apply:
(1) the franchisee is declared bankrupt, is judicially determined
to be insolvent, or makes or suffers an assignment for the benefit of
creditors;
(2) the franchisee voluntarily abandons the franchised business
for five consecutive days, unless the result of natural disaster or other
cause beyond the control of the franchisee;
(3) after reasonable notice the franchisee operates the franchised
business in a manner that imminently endangers the public health and
safety; or
(4) the franchisee is convicted of a felony which materially and
adversely affects the operation, maintenance, and goodwill of the
franchised business in the relevant market, provided the franchisee is
permitted not less than ninety days to transfer the franchise, subject
to the provisions of Section 39-75-60.
Section 39-75-180. Any provision in a franchise agreement or
ancillary document which obligates a franchisee to mediate, arbitrate,
or litigate any claim or controversy in a forum outside the state in
which the franchised business is located is in violation of the
purposes of this chapter as set forth in Section 39-75-20 and is null
and void.
Section 39-75-190. (A) A person who violates any provision of
this chapter or any rule is liable to the franchisee who may sue for
damages caused thereby, for recission, or other relief as the court
considers appropriate.
(B) 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) Any suit authorized under this section may be brought to
recover the actual damages sustained by the plaintiff together with
costs and disbursements plus reasonable attorney's and expert
witness fees. The remedies provided in this chapter and this section
are in addition to all other remedies at law and in equity.
(D) No action may be commenced pursuant to this section or this
chapter more than four years after the cause of action accrues.
Section 39-75-200. Any provision in a franchise agreement or
ancillary document which requires a franchisee or prospective
franchisee, upon the purchase, renewal, or transfer of a franchise, or
at any other time, to (a) assent to a release, assignment, novation, or
waiver which would relieve any person from liability under this
chapter or (b) waive compliance by the franchisor with any provision
of this chapter is null and void.
Section 39-75-210. (A) The provisions of this chapter apply to
the franchise agreement as well as all ancillary documents and
agreements including, but not limited to, the franchise offering
circular, sales of goods and services, operating manuals and policies,
leases and mortgages of real or personal property, promissory notes,
pledge and security agreements, insurance and advertising contracts,
installation or construction contracts, and any other arrangement in
which the franchisor has a direct or indirect interest or over which the
franchisor exercises material supervision or control.
(B) The provisions of this chapter apply to all franchise
agreements and ancillary agreements entered into, renewed, amended,
or transferred on or after the effective date of the chapter.
(C) The provisions of this chapter apply to all franchise
agreements which require or contemplate the operation of a
franchised business or location in the United States.
Section 39-75-220. (A) Any person who violates any provision
of this chapter or who violates any rule is liable for a civil penalty of
at least two thousand five hundred dollars for each violation, which
amount must be assessed and recovered in a civil action brought in
any court of competent jurisdiction.
(B) Any person wilfully violating any provision of this chapter is
guilty of a misdemeanor and, upon conviction, must be fined not
more than ten thousand dollars for each violation or imprisoned for
not more than five years for each violation, or both.
(C) As applied to the penalties for acts in violation of this chapter,
the remedies provided by this section and by other sections of this
chapter are not exclusive and may be sought and employed in any
combination to enforce the provisions of this chapter.
Section 39-75-230. (A) This chapter must be liberally interpreted
so as to effectuate its purposes as set forth in Section 39-75-20.
(B) The provisions of this chapter are severable. If any provision
of this chapter or its application to any person or circumstance is held
invalid, that invalidity does not affect other provisions or their
application which can be given effect without the invalid provision
or application."
SECTION 2. This act takes effect upon approval by the Governor.
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