Buying a Franchise

Franchisee Protection Bills in Congress

Franchisee protection bills have been introduced in some states, but now there are two in Congress. Both were introduced by Keith Ellison, a Democratic Congressman from Minnesota.

The Fair Franchise Act of 2015, H.R. 3196, is intended to provide minimum standards for “fair conduct” and to add a requirement of “good faith,” as the Australian franchise code recently did.

HR 3196 has been referred to the Judicial Committee. At this writing, it has two cosponsors, both Democrats.

The bill is said to “build on” HR 3308, the Small Business Franchise Act of 1999,which died in committee. However, HR 1717, an act with the same title as HR 3196, was introduced in 1995 and also died in committee. HR 1717 was a reintroduction of HR 1316, which was introduced in 1993. It also died in committee. The text of HR 3196 is not yet available at this writing, but these earlier bills provide more freedom for former franchisees to speak up about their experiences and stricter controls over how franchisors can describe their offerings.

HR 1717 also requires, as the California Franchisee “Bill of Rights” legislation does, that franchisees have more time to fix problems at a franchise before they can be terminated for having broken the agreement. A franchisee can only be terminated if

the franchisee fails to comply with a material provision of the franchise agreement after notice specifying the default and a thirty-day period to cure the default, or if the default can not be cured within thirty days, the franchisee fails to initiate within thirty days and diligently pursue substantial continuing action to cure the default;

The earlier laws also specified more relaxed rules on mandatory sourcing from the franchisor or companies chosen by the franchisor, and looser rules on non-compete requirements.

SBA Franchise Loan Transparency Act, H.R. 3195 requires extra disclosure when a franchisee gains a loan guaranteed by the Small Business Administration. Noting that franchisees can’t always get reliable figures on first-year revenue of franchises, Ellison proposes to require that the average revenue earned by franchises be reported for a period of five years in the Franchise Disclosure Document. Since this data would have to be collected and analyzed in some specific ways to meet the requirements of the law, the practical effect would be to make all franchisors gather and prepare the data in case they need to provide it for an SBA-guaranteed loan situation that might come up in the future.

HR3196 was referred to the House Committee on Energy and Commerce. It has one cosponsor.

Opponents of the bills worry that the additional regulations will harm the franchise business model. The reporting requirements for the SBA Franchise Loan Transparency Act, for example, might discourage SBA-guaranteed funding or keep franchisors from accepting franchisees using this type of funding.

The Fair Franchise Act of 2015, even if it is substantially the same bill that has been periodically introduced for more than a decade, might make it difficult form a franchisor to protect a brand.

Or the bills might — if they are enacted — give franchisees more power in the relationship. Time will tell.

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