S 1243 Session 110 (1993-1994)
S 1243 General Bill, By Reese
A Bill to enact the "Fast Food Franchise Practices Act".
03/09/94 Senate Introduced and read first time SJ-2
03/09/94 Senate Referred to Committee on Judiciary SJ-2
A BILL
TO ENACT THE "FAST FOOD FRANCHISE PRACTICES
ACT".
Be it enacted by the General Assembly of the State of South Carolina:
SECTION 1. This act may be cited as the "Fast Food
Franchise Practices Act".
SECTION 2. (1) The General Assembly finds that the fast food
franchise business in this State is a growing part of the service
economy of this State and that many of the existing franchise
agreements do not fully cover all essential elements of the business
relationship of the parties, including such key elements as terms of
renewal, transfer of interest, the right of succession, service areas,
amendments to the franchise agreements, and good faith performance
of the terms of the agreement.
(2) The General Assembly also finds that the fast food franchise
business relationship is often subject to disparity of bargaining power
and disproportionate risk of forfeiture after a franchisee has made a
substantial investment because of the franchisor's economic and
market power in the industry relative to that of individual franchisees.
The General Assembly finds that widespread abuse in the business
relationship between franchisor and franchisees is not adequately
addressed by existing law, that broad societal interests, including the
interests of small and growing franchisors and the interests of the
people of South Carolina in a healthy climate that fosters business
creation and job growth, are served by protecting the investment-backed expectations of the parties to a fast food franchise agreement,
and that conflict and litigation in this area can be reduced by
clarifying the respective rights and duties of franchisor and franchisee.
(3) It is the intent of the General Assembly to protect the public
health, safety, and welfare of the citizens of this State by the
regulation of the business relationship between fast food franchisors
and franchisees to the extent constitutionally permissible. It is also the
intent of the General Assembly that the provisions of this act codify
the covenant of good faith and fair dealing recognized by the common
law of this State as an implied term of every contract.
SECTION 3. To the full extent consistent with the United States
Constitution and the state Constitution, including the provisions of
such constitutions prohibiting laws impairing the obligation of
contracts, this act shall apply to all existing fast food restaurant
franchises and to fast food restaurant franchises granted, amended,
renewed, or transferred after the effective date of this act.
SECTION 4. For purposes of this act:
(1) "Affiliate" means a natural person or legal entity
controlling, controlled by, or under common control with a franchisor.
(2) "Fast food restaurant" means a restaurant or outlet
where food and beverages are sold for consumption on or off the
premises and served to the customer after the customer places an order
with a cashier at a counter, at a drive-through window, or by
telephone. The term does not include a restaurant where the majority
of the customers place their order with a person who serves them at
their table.
(3) "Franchise" or "franchise agreement"
means a contract or agreement between two or more persons:
(a) grants the right to distribute goods or provide services under
a marketing plan prescribed or suggested in substantial part by the
franchisor;
(b) requires payment of a franchise fee to a franchisor or its
affiliate;
(c) allows the franchise business to be substantially associated
with a trademark, service mark, trade name, logotype, advertising, or
other commercial symbol designating, owned, or licensed by the
franchisor or its affiliate.
(4) "Franchisee" means a person to whom a franchise
is offered or granted.
(5) "Franchisor" means a person, including a
subfranchisor, who grants a franchise to another person.
(6) "Good faith" means honesty in fact and the
observance of reasonable commercial standards of fair dealing in the
trade.
(7) "Outlet" means a place of business, temporary or
permanent, fixed or mobile, from which products and services are
offered for sale, owned either by a franchisee or by the franchisor.
"Outlet" includes, but is not limited to, freestanding fast
food restaurants, delivery service facilities, drive-through and carry-out
fast food restaurants, kiosks and institutional outlets at any location
including airports, shopping centers, and educational institutions, and
fast food restaurants in malls.
(8) "Person" means a natural person, partnership, joint
venture, corporation, or other entity.
SECTION 5. A franchise agreement includes an implied duty on
the part of each party to the agreement to act in good faith in the
performance and enforcement of the rights and duties established in
the franchise agreement and in the negotiation for renewal of an
existing franchise agreement. The duty of good faith obligates a party
to a fast food restaurant franchise agreement, in making a decision that
directly affects the parties to the franchise agreement, the fast food
restaurant franchise, or the business conducted under the fast food
restaurant franchise, to refrain from conduct that impairs or injures the
right of another party to the franchise agreement to receive the
reasonably anticipated benefits of the fast food restaurant franchise,
but shall not impair the right of the franchisor to terminate franchisees
for good cause in accordance with the provisions of Section 9.
SECTION 6. (1) The franchiser shall exercise the skill and
knowledge possessed by franchisors in good standing in similar
businesses, communities, and trade areas including, but not limited to,
offering ongoing training, technical assistance, and marketing support
to the franchisee.
(2) It is a violation of this act for any franchisor, directly or
indirectly, to:
(a) impose any condition, stipulation, or provision which would
attempt to bind the franchisee to waive compliance with any provision
of this act;
(b) prohibit or penalize, directly or indirectly, the right of free
association among franchisees for any lawful purpose;
(c) discriminate unfairly among its franchisees in the charges
made for royalties, goods, services, equipment, rents, advertising, or
remodeling, or in any other business dealing. However, this
subsection does not preclude the franchisor from making special
arrangement with a franchisee or group of franchisees for special-help
programs or rent-relief programs under certain circumstances;
(d) unreasonably withhold consent at the end of the term of the
franchise agreement for the franchisee to relocate to a more
advantageous property for the term of the successor franchise
agreements;
(e) collect a percentage of the franchisee's sales as an
advertising fee or for any other stated purpose and not use these funds
for the purpose stated or refuse to account to the franchisee on a
regular basis, no less than annually, for the collection and expenditure
of these funds in a manner that complies with generally accepted
accounting principles;
(f) require the franchisee to participate in an advertising or
promotional campaign or to purchase promotional materials, display
decorations, or materials at the expense of the franchisee above the
maximum percentage of gross monthly sales or the maximum sum
required to be spent by the franchisee as provided in the franchise
agreement; or
(g) obtain money, goods, services, or any other benefit from any
other person with whom the franchisee does business on account of,
or in relation to, the transaction between the franchisee and the other
person, other than reasonable compensation for genuine services
actually rendered by the franchisor, unless such benefit is promptly
accounted for and remitted to the franchisee.
SECTION 7. (1) For purposes of this section,
"transfer" means any change in ownership or control of a
franchise, franchised business, or franchisee.
(2) A franchisee may transfer a franchise or interest therein to a
transferee who meets the franchisor's objectively reasonable current
qualifications for new franchisees. A franchisee shall give the
franchisor thirty days' written notice of a proposed transfer and, on
request, shall advise the franchisor in writing of the ownership
interests of all persons holding or claiming an equitable or beneficial
interest in the franchise subsequent to the transfer. A franchisor may
not unreasonably withhold its consent to a proposed transfer. A
transfer is considered approved thirty days after a franchisee submits
the proposed transaction for consent, unless the franchisor submits a
written disapproval within the same thirty-day period specifying the
basis for the disapproval. Except as otherwise provided in this
section, a franchisor may exercise a right of first refusal contained in
a franchise agreement if exercised within the thirty-day period after
the receipt of a proposal from the franchisee to transfer the franchise.
A franchisor may condition its consent to the proposed transfer on the
transferee's successful completion of a reasonable training program,
the payment of a transfer fee to reimburse the franchisor for its
reasonable, out-of-pocket expenses directly related to the transfer, or
the payment of any amount the franchisee owes to the franchisor. A
franchisor may not condition its consent to a transfer on a transferor
franchisee or transferee franchisee undertaking new or different
obligations than those contained in the franchise agreement or forgoing
existing rights contained in the franchise agreement.
(3) When a franchise has been transferred with the consent of the
franchisor, a franchise agreement may require the transferor franchisee
of a franchise to remain personally liable to the franchisor under the
franchise agreement or related documents only for lease payments for
the duration of the term of the lease. Copies of all notices or other
written communications sent to the transferee indicating a past due
sum must be sent to the transferor franchisee simultaneously with the
sending of the notice to the transferee. If the franchisor makes
demand upon a transferor franchisee to cure a default by the
transferee, the transferor franchisee, upon curing the default, shall have
the option to reenter the property and reclaim the lease upon default
by the transferee franchisee and use the property for any lawful
purpose. If, during the two-year period following the transfer of the
franchise, the transferee franchisee is in default on royalty and
advertising payments that would allow the franchisor to cancel the
franchise, the franchisor shall give the transferor franchisee reasonable
notice and an opportunity to cure the default and regain the franchise.
(4) The following occurrences shall not be considered transfers
requiring the consent of the franchisor under a franchise agreement
and shall not result in the imposition of any additional financial or
other requirements or make applicable any right of first refusal by the
franchisor:
(a) the succession of ownership of a franchise upon the death
or disability of a franchisee or the majority shareholder of the
franchisee to the franchisee's or majority shareholder's surviving
spouse, heirs, or estate, partner, or a shareholder owning at least
twenty-five percent of the stock of the franchisee, unless the successor
fails to meet the franchisor's current objectively reasonable
qualifications for new franchisees and provided that the enforcement
of the current objectively reasonable qualifications is not arbitrary or
capricious when compared to actions of the franchisor in other similar
circumstances;
(b) 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 current objectively reasonable
qualifications for new franchisees and provided that the enforcement
of the current objectively reasonable qualifications is not arbitrary or
capricious when compared to actions of the franchisor in other similar
circumstances;
(c) a transfer of less than a controlling interest in the franchise
to the franchisee's spouse, child, or children, provided that more than
fifty percent of the entire franchise is held by those who meet the
franchisor's current objectively reasonable qualifications for new
franchisees and provided that the enforcement of the current
objectively reasonable qualifications is not arbitrary or capricious
when compared to actions of the franchisor in other similar
circumstances;
(d) a transfer of less than a controlling 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 current objectively reasonable
qualifications for new franchisees and provided that the enforcement
of the current objectively reasonable qualifications is not arbitrary or
capricious when compared to actions of the franchisor in other similar
circumstances; or
(e) a grant or retention of a security interest in the franchised
business, 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 establishes a
reasonable opportunity for the franchisor to redeem the interest of the
secured party and recover the secured party's interest in the franchisee
or franchised business by paying the secured obligation.
(5) A franchisor may not transfer its interest unless it makes
reasonable provision for the performance of the franchisor's
obligations under the franchise agreement by the transferee and for
continuance of the franchise system. A franchisor shall give all
franchisees notice of such a proposed transfer at the time the notice is
required under applicable securities laws if interests in the franchisor
are publicly traded or, if no publicly traded, at the time such
disclosure would be required if the franchisor were publicly traded.
SECTION 8. (1) A franchisor may not place, or license another
to place, a new outlet in a location that will substantially change the
competitive circumstances of an established franchised outlet at the
time the new outlet becomes operational.
(2) Notwithstanding the terms of a franchise agreement, if a
franchisor seeks to establish a new outlet within unreasonable
proximity of an established franchise outlet, the franchisor shall offer
the franchise for the proposed new outlet to the existing franchisee.
For purposes of this section, "unreasonable proximity"
includes the shortest distance as measured by the following methods:
(a) a three-mile radius from the center of an already existing
franchised outlet; or
(b) a radius which contains a census population of thirty
thousand or more.
The franchisor shall offer the new outlet to the established
franchisee on the same terms and conditions offered to new
franchisees in similar locations.
(3) If two or more established franchises are located with an
unreasonable proximity to the proposed outlet, the closest franchisee
must be offered the new franchise and, if declined, the offer shall pass
to the next closest franchisee.
(4) If the franchisee within unreasonable proximity of the proposed
outlet chooses not to accept the offer of the new franchise, the new
outlet shall not be established.
SECTION 9. (1) Except as otherwise provided by this act, a
franchisor shall not terminate a franchise before the expiration of its
term except for good cause. For purposes of this section, "good
cause" means the failure of the franchisee to comply with any
material lawful requirement of the franchise agreement, provided that
the termination by the franchisor is not arbitrary or capricious when
compared to the actions of the franchisor in other similar
circumstances.
(2) Before termination of a franchise for good cause, a franchisor
shall provide a franchisee with written notice specifying the grounds
for terminating the franchise. After receipt of written notice from the
franchisor, the franchisee shall have a reasonable period of time,
which shall not be less than thirty days, except in circumstances
described in subsection (3), to cure any default. If the default cannot
be cured within thirty days, the default cure period must be extended
for a reasonable period of time, if the franchisee initiates substantial
and continuing action within the thirty-day period to cure such default.
(3) If any of the following apply, the franchisor may terminate a
franchise upon written notice without allowing the franchisee an
opportunity to cure:
(a) the franchisee voluntarily abandons the franchise by failing
to operate the business for five consecutive business days during
which the franchisee is required to operate the business under the
terms of the franchise, or any shorter period after which is not
unreasonable under the facts and circumstances for the franchisor to
conclude that the franchisee does not intend to continue the operation
of the franchise, unless the failure to operate is due to a natural
disaster or other circumstance beyond the control of the franchisee;
(b) the franchisee repeatedly fails to comply with the same
material provision of the franchise agreement, when the enforcement
of that material provision by the franchisor is not arbitrary or
capricious when compared to the enforcement in other similar
circumstances.
(c) the franchisee is convicted of a felony or any other criminal
misconduct which materially and adversely affects the operation,
maintenance, or goodwill of the franchise in the relevant market and
the conviction is upheld on appeal or the time to appeal expires;
(d) the franchisor and franchisee agree in writing to terminate
the franchise; or
(e) continued operation of the franchised business presents a
material and imminent threat to the health and safety of customers or
employees of the business which cannot be abated by immediate
corrective action.
(4) Upon termination of any franchise by the franchisor, the
franchisor shall purchase from the franchisee, at fair market value at
the time of termination, the franchisee's inventory, supplies,
equipment, and furnishings purchased from the franchisor or on its
express requirement. The franchisor may offset against amounts owed
to the franchisee under this subsection any amounts owed by the
franchisee to the franchisor.
SECTION 10. (1) A franchisor shall not refuse to renew a
franchise unless the franchisee has been notified of the franchisor's
intent not to renew at lest one hundred eighty days before the
expiration date of or any extension of the franchise agreements, and
good cause exists for nonrenewal. For purposes of this section,
"good cause" means the franchisee's default under a
material lawful requirement of the franchise, any of the circumstances
in subsection (3) of Section 9, or either of the following:
(a) an agreement by the franchisor and franchisee not to renew
the franchise; or
(b) the franchisor's complete withdrawal from directly or
indirectly distributing its services in the geographic market area served
by the franchisee.
(2) A franchisor shall not condition renewal of the agreement upon
imposition of terms less favorable than those offered to new
franchisees.
(3) If the franchise is not renewed, the franchisor shall purchase
from the franchisee at fair market value at the end of the term
inventory, supplies, equipment, and furnishings purchased from the
franchisor or on its express requirement. A franchisor may offset
against amounts owed to a franchisee under this subsection any
amounts owed by the franchisee to the franchisor.
(4) If a franchise is not renewed, the franchisor may not enforce
any covenant against conducting any lawful business at any location
and may not enforce any covenant in any other agreement with the
franchisee against the franchisee's operation of any lawful business at
the location of the expired franchise.
SECTION 11. In granting franchises, considering approval of
transfers of transferable interests, or administering its franchise system,
a franchisor shall not discriminate against any person on the basis of
race, color, religion, national origin, sex, marital status, or physical
handicap.
SECTION 12. A condition, stipulation, or provision of a franchise
agreement requiring the application of the law of another state in lieu
of this act to franchise agreements executed by franchisors who are
residents of South Carolina or to franchise agreements involving
franchise outlets located in South Carolina is void.
SECTION 13. (1) A provision in a franchise agreement restricting
jurisdiction to a forum outside this State is void with respect to a
claim otherwise enforceable under this act.
(2) A civil action or proceeding arising out of a franchise may be
commenced wherever jurisdiction over the parties and the subject
matter exists, even if the agreement limits actions or proceedings to a
designated jurisdiction.
SECTION 14. If a court, as a matter of law, finds a provision of the
franchise agreement to be unconscionable, the court may so limit the
application of the unconscionable provision to avoid an
unconscionable result, it may enforce the remainder of the agreement
without the unconscionable provision, or, if necessary, it may refuse
to enforce the agreement. Liquidated damages, confessions of
judgment, or like provisions of a franchise agreement are
unenforceable.
SECTION 15. (1) Any franchisee who is injured or likely to be
injured by a violation of the provisions of this act may bring an action
for damages, for injunctive relief, for rescission, or to reform the
franchise agreement, or for other appropriate relief. The prevailing
party in such an action may recover its costs, including reasonable
attorneys' fees.
(2) Nothing contained in this act limits the right of the franchisor
and franchisee to agree before or after a dispute has arisen to binding
arbitration of claims under this act provided that:
(a) the standards of such arbitration are not less than the
requirements specified in this act.
(b) the arbitrator or arbitrators employed are chosen from a list
of impartial arbitrators supplied by the American Arbitration
Association or other impartial person.
SECTION 16. If any provision of this act or the application thereof
to any person or circumstance is held invalid, the invalidity does not
affect other provisions or applications of the act which can be given
effect without the invalid provision or application, and, to this end, the
provisions of this act are declared severable.
SECTION 17. This act takes effect upon approval by the Governor.
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