S 490 Session 111 (1995-1996)
S 0490 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 "Fast Food Franchise Practices Act".
02/09/95 Senate Introduced and read first time SJ-6
02/09/95 Senate Referred to Committee on Labor, Commerce and
Industry SJ-6
A BILL
TO AMEND THE CODE OF LAWS OF SOUTH CAROLINA,
1976, BY ADDING CHAPTER 75 TO TITLE 39 SO AS TO
ENACT THE "FAST FOOD FRANCHISE PRACTICES
ACT".
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
Fast Food Franchise Practices
Section 39-75-10. This chapter may be cited as the `Fast Food
Franchise Practices Act'.
Section 39-75-20. (A) 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.
(B) 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.
(C) 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
chapter 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 39-75-30. To the full extent consistent with the United
States Constitution and the state Constitution, including the
provisions of these constitutions prohibiting laws impairing the
obligation of contracts, this chapter applies to all existing fast food
restaurant franchises and to fast food restaurant franchises granted,
amended, renewed, or transferred after the effective date of this
chapter.
Section 39-75-40. For purposes of this chapter:
(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) granting the right to distribute goods or provide services
under a marketing plan prescribed or suggested in substantial part
by the franchisor;
(b) requiring payment of a franchise fee to a franchisor or its
affiliate;
(c) allowing 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 39-75-50. 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 does not impair the right of
the franchisor to terminate franchisees for good cause in accordance
with the provisions of Section 39-75-90.
Section 39-75-60. (A) 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.
(B) It is a violation of this chapter for any franchisor, directly or
indirectly, to:
(1) impose any condition, stipulation, or provision which
would attempt to bind the franchisee to waive compliance with any
provision of this chapter;
(2) prohibit or penalize, directly or indirectly, the right of
free association among franchisees for any lawful purpose;
(3) 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;
(4) 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;
(5) 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;
(6) 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
(7) 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 THE
benefit is promptly accounted for and remitted to the franchisee.
Section 39-75-70. (A) For purposes of this section, `transfer'
means any change in ownership or control of a franchise, franchised
business, or franchisee.
(B) A franchisee may transfer a franchise or interest in the
franchise 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.
(C) 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 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.
(D) 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 additional financial or
other requirements 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 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;
(2) 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;
(3) 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;
(4) 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
(5) 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.
(E) 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 a proposed transfer at the time the notice is
required under applicable securities laws if interests in the
franchisor are publicly traded or, if not publicly traded, at the time
such disclosure would be required if the franchisor were publicly
traded.
Section 39-75-80. (A) 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.
(B) 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:
(1) a three-mile radius from the center of an already existing
franchised outlet; or
(2) 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.
(C) 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.
(D) If the franchisee within unreasonable proximity of the
proposed outlet chooses not to accept the offer of the new franchise,
the new outlet must not be established.
Section 39-75-90. (A) Except as otherwise provided by this
chapter, 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.
(B) 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 must not be less than thirty days, except in
circumstances described in subsection (C), 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 the default.
(C) If any of the following apply, the franchisor may terminate
a franchise upon written notice without allowing the franchisee an
opportunity to cure:
(1) 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;
(2) 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;
(3) the franchisee is convicted of a felony or another 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;
(4) the franchisor and franchisee agree in writing to terminate
the franchise; or
(5) 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.
(D) 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 39-75-100. (A) A franchisor shall not refuse to renew a
franchise unless the franchisee has been notified of the franchisor's
intent not to renew at least 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
(C) of Section 39-78-90, or either of the following:
(1) an agreement by the franchisor and franchisee not to
renew the franchise; or
(2) the franchisor's complete withdrawal from directly or
indirectly distributing its services in the geographic market area
served by the franchisee.
(B) A franchisor shall not condition renewal of the agreement
upon imposition of terms less favorable than those offered to new
franchisees.
(C) 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.
(D) 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 another agreement with the
franchisee against the franchisee's operation of any lawful business
at the location of the expired franchise.
Section 39-75-110. In granting franchises, considering approval
of transfers of transferable interests, or administering its franchise
system, a franchisor shall not discriminate against a person on the
basis of race, color, religion, national origin, sex, marital status, or
physical handicap.
Section 39-75-111. A condition, stipulation, or provision of a
franchise agreement requiring the application of the law of another
state in lieu of this chapter 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 39-75-120. (A) 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 chapter.
(B) A civil action or proceeding arising out of a franchise may
be commenced wherever jurisdiction over the parties and the subject
matter exist, even if the agreement limits actions or proceedings to
a designated jurisdiction.
Section 39-75-130. If a court, as a matter of law, finds a
provision of the franchise agreement to be unconscionable, the court
may 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 39-75-140. (A) A franchisee who is injured or likely to
be injured by a violation of the provisions of this chapter 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 an action may recover its costs, including
reasonable attorneys' fees.
(B) Nothing contained in this chapter limits the right of the
franchisor and franchisee to agree before or after a dispute has
arisen to binding arbitration of claims under this chapter provided
that:
(1) The standards of arbitration are not less than the
requirements specified in this chapter.
(2) The arbitrator or arbitrators employed are chosen from a
list of impartial arbitrators supplied by the American Arbitration
Association or other impartial person.
Section 39-75-150. If a provision of this chapter or the
application of a provision to a person or circumstance is held
invalid, the invalidity does not affect other provisions or
applications of the chapter which can be given effect without the
invalid provision or application, and, to this end, the provisions of
this chapter are declared severable."
SECTION 2. This act takes effect upon approval by the
Governor.
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