South Carolina General Assembly
110th Session, 1993-1994

Bill 1243

Indicates Matter Stricken
Indicates New Matter

                    Current Status

Introducing Body:               Senate
Bill Number:                    1243
Primary Sponsor:                Reese
Committee Number:               11
Type of Legislation:            GB
Subject:                        Fast Food Franchise Practices
Residing Body:                  Senate
Current Committee:              Judiciary
Computer Document Number:       BBM/10988JM.94
Introduced Date:                19940309    
Last History Body:              Senate
Last History Date:              19940309    
Last History Type:              Introduced, read first time,
                                referred to Committee
Scope of Legislation:           Statewide
All Sponsors:                   Reese
Type of Legislation:            General Bill


Bill  Body    Date          Action Description              CMN  Leg Involved
____  ______  ____________  ______________________________  ___  ____________

1243  Senate  19940309      Introduced, read first time,    11
                            referred to Committee

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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.