By Bomer H.B. No. 2027 A BILL TO BE ENTITLED 1-1 AN ACT 1-2 relating to franchise agreements for fast food restaurants; 1-3 providing penalties. 1-4 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: 1-5 SECTION 1. Title 2, Business & Commerce Code, is amended by 1-6 adding Chapter 20 to read as follows: 1-7 CHAPTER 20. FAST FOOD RESTAURANT FRANCHISES 1-8 Sec. 20.01. PURPOSES. The purposes of this chapter are: 1-9 (1) to promote the public's interest in the fair, 1-10 efficient, and competitive franchising of the fast food restaurant 1-11 business within this state by establishing minimum standards of 1-12 conduct in such franchise relationships; and 1-13 (2) to acknowledge a special relationship between fast 1-14 food franchisors and franchisees since many fast food franchises 1-15 reflect a profound imbalance of contractual power in favor of the 1-16 franchisor and fail to give due regard to the legitimate business 1-17 interests of the franchisee as a result of the franchisor reserving 1-18 pervasive contractual rights over the franchise relationship. 1-19 Sec. 20.02. DEFINITIONS. In this chapter: 1-20 (1) "Affiliate" means a person controlling, controlled 1-21 by, or under common control with another person. 1-22 (2) "Fast food restaurant" means a restaurant where 1-23 food and beverages are sold for consumption on or off the premises 2-1 and delivered to the customer after the customer places an order 2-2 with a cashier at a counter, drive-through window or by telephone. 2-3 The term does not include a restaurant where a majority of the 2-4 customers are seated at tables before a person waiting on the 2-5 tables takes their orders. 2-6 (3) "Franchise" means the following: 2-7 (A) An oral or written agreement, either express 2-8 or implied, which provides all of the following: 2-9 (i) grants the right to distribute goods 2-10 or provide services under a marketing plan prescribed or suggested 2-11 in substantial part by the franchisor; 2-12 (ii) requires payment, directly or 2-13 indirectly, of a franchise fee to a franchisor or its affiliate; 2-14 and 2-15 (iii) allows the franchise business to be 2-16 substantially associated with the franchisor's trademark, service 2-17 mark, trade name, logotype, advertisement, or other commercial 2-18 symbol of or designating the franchisor or its affiliate. 2-19 (4) "Franchisee" means a person to whom a franchise is 2-20 offered or granted. 2-21 (5) "Franchisor" means a person who offers or grants a 2-22 franchise to another person. 2-23 (6) "Franchise fee" means a direct or indirect payment 2-24 to purchase or operate a franchise. Franchise fee does not include 2-25 any of the following: 3-1 (A) payment of a reasonable service charge to 3-2 the issuer of a credit card by an establishment accepting the 3-3 credit card; 3-4 (B) an agreement to purchase at a bona fide 3-5 wholesale price a reasonable quantity of tangible goods for resale; 3-6 (C) payment of rent which reflects payment for 3-7 the economic value of leased real or personal property; 3-8 (D) the purchase or agreement to purchase a 3-9 reasonable quantity of promotional or demonstration supplies, 3-10 materials, or equipment furnished at fair market value and not 3-11 intended for resale; or 3-12 (E) the purchase or agreement to purchase, at a 3-13 fair market value, any fixtures, equipment, leasehold improvements, 3-14 real property, supplies, or other materials reasonably necessary to 3-15 enter into or continue a business. 3-16 (7) "Good faith" means that a franchise contract 3-17 imposes on each party thereto a duty to act in good faith in its 3-18 performance and enforcement. This duty of good faith obligates a 3-19 party to a franchise, in making a decision that directly affects 3-20 the franchise or the business conducted under the franchise, to 3-21 give fair regard for the interests of the other party or parties 3-22 that are likely to be affected by the decision and to refrain from 3-23 conduct that may impair or injure the right of the other party or 3-24 parties to receive the reasonably anticipated benefits of the 3-25 franchise. 4-1 (8) "Trade secret" has the meaning assigned by Section 4-2 31.05, Penal Code. 4-3 Sec. 20.03. APPLICATION. This chapter applies only to a 4-4 franchise for a fast food restaurant, but, except for Sec. 20.10, 4-5 does not apply to a franchise for a fast food restaurant: 4-6 (1) in which the franchisor owns the real estate and 4-7 improvements upon which the franchised business is operated; 4-8 (2) if the franchisor owns and operates fewer than 35 4-9 percent of the total number of fast food restaurants identified 4-10 with the franchisor's trademark, service mark, trade name, 4-11 logotype, advertisement, or other commercial symbol of or 4-12 designating the franchisor or its affiliate; or 4-13 (3) which includes specific territorial protection for 4-14 the restaurant. 4-15 Sec. 20.04. NO WAIVER. This chapter applies notwithstanding 4-16 any contrary or conflicting provision in a franchise. The parties 4-17 to a franchise may not waive any of the provisions of this chapter, 4-18 except as part of a settlement of a bona fide dispute. 4-19 Sec. 20.05. DUTY OF GOOD FAITH. Each franchise subject to 4-20 this chapter includes an implied duty of good faith in its 4-21 performance and enforcement. 4-22 Sec. 20.06. TRANSFERABILITY. (a) A franchisee may transfer 4-23 the franchised business and franchise or an interest in a 4-24 franchised business and franchise to a transferee, provided the 4-25 transferee satisfies the reasonable, current qualifications of the 5-1 franchisors for new franchisees. For purposes of this section, a 5-2 reasonable, current qualification for a new franchisee is a 5-3 qualification based upon a legitimate business reason. If the 5-4 proposed transferee does not meet the reasonable, current 5-5 qualifications of the franchisor, the franchisor may refuse to 5-6 permit the transfer, provided that the refusal of the franchisor to 5-7 consent to the transfer is not arbitrary or capricious when 5-8 compared to the actions of the franchisor in other similar 5-9 circumstances. 5-10 (b) Except as otherwise provided in this section, a 5-11 franchisor may exercise a right of first refusal contained in a 5-12 franchise agreement after receipt of a proposal from the franchisee 5-13 to transfer the franchise. 5-14 (c) A franchisor may require as a condition of a transfer 5-15 any of the following: 5-16 (1) that the transferee successfully complete a 5-17 reasonable training program; 5-18 (2) that a reasonable transfer fee be paid to 5-19 reimburse the franchisor for the franchisor's reasonable and actual 5-20 expenses directly attributable to the transfer; or 5-21 (3) that the franchisee pay or make provision 5-22 reasonably acceptable to the franchisor to pay any amount due the 5-23 franchisor or the franchisor's affiliate. 5-24 (d) A franchisor shall not withhold consent to a franchisee 5-25 making a public offering of the franchisee's securities without 6-1 good cause, provided the franchisee or the owners of the franchise 6-2 retain control of more than 50 percent of the voting power in the 6-3 franchise. 6-4 (e) A franchisee may transfer the franchisee's interest in 6-5 the franchise, for the unexpired term of the franchise agreement, 6-6 and a franchisor shall not require the franchisee or the transferee 6-7 to enter into a new or different franchise agreement as a condition 6-8 of the transfer. 6-9 (f) A franchisee shall give the franchisor no less than 30 6-10 days written notice of a transfer which is subject to the 6-11 provisions of this section, and on request from the franchisor 6-12 shall provide in writing the ownership interests of all persons 6-13 holding or claiming an equitable or beneficial interest in the 6-14 franchise subsequent to the transfer of the franchisee, as 6-15 appropriate. A franchisee shall not circumvent the intended effect 6-16 of a contractual provision governing the transfer of the franchise 6-17 or an interest in the franchise or an interest in the franchise by 6-18 means of a management agreement, lease, profit-sharing agreement, 6-19 conditional assignment, or other similar device. 6-20 (g) A franchisor shall not transfer its interest in a 6-21 franchise unless the franchisor makes reasonable provision for the 6-22 performance of the franchisor's obligations under the franchise 6-23 agreement by the transferee. A franchisor shall provide the 6-24 franchisee notice of a proposed transfer of the franchisor's 6-25 interest in the franchise at the time the disclosure is required of 7-1 the franchisor under applicable securities laws if interests in the 7-2 franchisor are publicly traded, or if not publicly traded, at the 7-3 time such disclosure would be required if the interests in the 7-4 franchisor were publicly traded. 7-5 (h) A transfer by a franchisee is deemed to be approved 30 7-6 days after the franchisee submits the request for consent to the 7-7 transfer unless the franchisor withholds consent to the transfer as 7-8 evidenced in writing, specifying the reason or reasons for 7-9 withholding the consent. The written notice must be delivered to 7-10 the franchisee prior to the expiration of the 30 day period. Any 7-11 such notice is privileged and is not actionable based upon a claim 7-12 of defamation. 7-13 (i) A franchisor shall not discriminate against a proposed 7-14 transferee of a franchise on the basis of race, color, national 7-15 origin, sex, or physical handicap. 7-16 (j) A franchisor, as a condition to a transfer of a 7-17 franchise, shall not obligate a franchisee to undertake obligations 7-18 or relinquish any rights unrelated to the franchise proposed to be 7-19 transferred, or to enter into a release of claims broader than a 7-20 similar release of claims by the franchisor against the franchisee 7-21 which is entered into by the franchisor. 7-22 (k) A franchisor, after a transfer of a franchise, shall not 7-23 seek to enforce any covenant of the transferred franchise against 7-24 the transferor which prohibits the transferor from engaging in any 7-25 lawful occupation or enterprise. However, this subsection does 8-1 not prohibit the franchisor from enforcing a contractual covenant 8-2 against the transferor not to exploit the franchisor's trade 8-3 secrets or intellectual property rights, unless otherwise agreed to 8-4 by the parties. 8-5 (l) For purposes of this section, "transfer" means any 8-6 change in ownership or control of a franchise, franchised business, 8-7 or a franchisee. 8-8 (m) The following occurrences shall not be considered 8-9 transfers requiring the consent of the franchisor under a franchise 8-10 agreement, and shall not result in the imposition of any penalties 8-11 or make applicable any right of first refusal by the franchisor: 8-12 (1) the succession of ownership of a franchise upon 8-13 the death or disability of a franchisee, or of an owner of a 8-14 franchise, to the franchisee's spouse, child or children, or a 8-15 partner of the franchisee unless the successor fails to meet the 8-16 then reasonable, current qualifications of the franchisor for 8-17 franchisees and the enforcement of the reasonable, current 8-18 qualifications is not arbitrary or capricious when compared to 8-19 actions of the franchisor in other similar circumstances; 8-20 (2) the succession of a spouse, child, partner, or 8-21 other owner as operating manager upon the death or disability of 8-22 the operating manager, unless the successor fails to meet the then 8-23 reasonable, current qualifications of the franchisor for an 8-24 operating manager, and enforcement of the reasonable current 8-25 qualifications is not arbitrary or capricious when compared to 9-1 actions of the franchisor in other similar circumstances; 9-2 (3) incorporation of a proprietorship franchisee, 9-3 provided that such incorporation does not prohibit a franchisor 9-4 from requiring a personal guaranty by the franchisee of obligations 9-5 related to the franchise; 9-6 (4) a transfer within an existing ownership group of a 9-7 franchise provided that more than 50 percent of the franchise is 9-8 held by persons who meet the franchisor's reasonable, current 9-9 standards for franchisees. If less than 50 percent of the 9-10 franchise would be owned by persons who meet the franchisor's 9-11 reasonable, current qualifications, the franchisor may refuse to 9-12 authorize the transfer, provided that enforcement of the 9-13 reasonable, current qualifications is not arbitrary or capricious 9-14 when compared to actions of the franchisor in other similar 9-15 circumstances; 9-16 (5) a transfer of less than a controlling interest in 9-17 the franchise to the franchisee's spouse or child or children, 9-18 provided that more than 50 percent of the entire franchise is held 9-19 by those who meet the franchisor's reasonable, current 9-20 qualifications. If less than 50 percent of the franchise would be 9-21 owned by persons who meet the franchisor's reasonable, current 9-22 qualifications, the franchisor may refuse to authorize the 9-23 transfer, provided that enforcement of the reasonable, current 9-24 qualifications is not arbitrary or capricious when compared to 9-25 actions of other franchisor in other similar circumstances; 10-1 (6) a transfer of less than a controlling interest in 10-2 the franchise of an employee stock ownership plan, or employee 10-3 incentive plan, provided that more than 50 percent of the entire 10-4 franchise is held by those who meet the franchisor's reasonable, 10-5 current qualifications for franchisees. If less than 50 percent 10-6 would be owned by persons who meet the franchisor's reasonable, 10-7 current qualifications, the franchisory may refuse to authorize the 10-8 transfer, provided that enforcement of the reasonable, current 10-9 qualifications is not arbitrary or capricious when compared to 10-10 actions of the franchisor in other similar circumstances; and 10-11 (7) a grant or retention of a security interest in the 10-12 franchised business or its assets, or an ownership interest in the 10-13 franchisee, provided the security agreement establishes an 10-14 obligation on the part of the secured party enforceable by the 10-15 franchisor to give the franchisor notice of the secured party's 10-16 intent to foreclose on the collateral simultaneously with notice to 10-17 the franchisee, and a reasonable opportunity to redeem the interest 10-18 of the secured party and recover the collateral by paying the 10-19 secured obligation. 10-20 (n) A franchisor shall not interfere or attempt to interfere 10-21 with any disposition of an interest in a franchise or franchised 10-22 business as described in subsection (m), paragraphs (1) through 10-23 (7). 10-24 Sec. 20.07. TERMINATION OR NONRENEWAL. (a) A franchisor 10-25 may not terminate or fail to renew a franchise unless the 11-1 franchisor has good cause for the termination or failure to renew. 11-2 For purposes of this section, "good cause" is cause based upon a 11-3 legitimate business reason and shall include, without limitation, 11-4 the failure of a franchisee to comply with lawful material 11-5 provisions of the franchise or other agreement between the 11-6 franchisor and the franchisee, provided that termination or failure 11-7 to renew is not arbitrary or capricious when compared to the 11-8 actions of the franchisor in other similar circumstances. 11-9 (b) Prior to termination of a franchise for good cause, a 11-10 franchisor shall provide a franchisee with at least 60 days prior 11-11 written notice stating the basis for the proposed termination. 11-12 After service of written notice, the franchisee shall have a 11-13 reasonable period of time to cure the default, which in no event 11-14 shall be less than 30 days. If franchisee's default can not 11-15 reasonably be cured in 30 days, the franchisee must demonstrate 11-16 substantial and continuing action toward cure of the default in 11-17 order to avoid termination. 11-18 (c) Prior to the failure to renew a franchisee for good 11-19 cause, a franchisor shall provide a franchisee with at least 180 11-20 days prior written notice stating the basis for the proposed 11-21 failure to renew. After service of written notice, the franchisee 11-22 shall have a reasonable period of time to cure the default, which 11-23 in no event shall be less than 60 days. If the franchisee's 11-24 default can not reasonably be cured in 60 days, the franchisee must 11-25 demonstrate substantial and continuing action toward cure of the 12-1 default in order to avoid the failure to renew. 12-2 (d) Notwithstanding subsection (b), a franchisor may 12-3 terminate a franchise upon written notice and without giving the 12-4 franchisee an opportunity to cure if any of the following apply: 12-5 (1) the franchisee or the business to which the 12-6 franchise relates is declared bankrupt or judicially determined to 12-7 be insolvent; 12-8 (2) the franchisee voluntarily abandons the franchise 12-9 by failing to operate the business for five consecutive business 12-10 days during which the franchisee is required to operate the 12-11 business under the terms of the franchise, or any shorter period 12-12 after which it is not unreasonable under the facts and 12-13 circumstances for the franchisor to conclude that the franchisee 12-14 does not intend to continue to operate the franchise, unless the 12-15 failure to operate is due to circumstances beyond the control fo 12-16 the franchisee; 12-17 (3) the franchisor and franchisee agree in writing to 12-18 terminate the franchise; 12-19 (4) the franchisee knowingly makes any material 12-20 misrepresentations or knowingly omits to state any material facts 12-21 relating to the acquisition or ownership or operation of the 12-22 franchised business; 12-23 (5) the franchisee willfully fails to comply with the 12-24 same material provision of a franchise agreement three separate 12-25 times within a 12 month period, when the enforcement of the 13-1 material provision by the franchisor is not arbitrary or capricious 13-2 when compared to the actions of the franchisor in other similar 13-3 circumstances; 13-4 (6) the franchised business or business premises of 13-5 the franchisee are lawfully seized, taken over, or foreclosed by a 13-6 government authority or official; 13-7 (7) the franchisee is convicted of a felony or any 13-8 other criminal misconduct which materially and adversely affects 13-9 the operation, maintenance, or goodwill of the franchise in the 13-10 relevant market; or 13-11 (8) the franchisee operates the franchised business in 13-12 a manner that imminently endangers the public health and safety and 13-13 fails to rectify the basis of the endangerment within 24 hours of 13-14 notice from the franchisor specifying the hazard to be corrected. 13-15 Sec. 20.08. ENCROACHMENT. A franchisor shall not establish 13-16 a new point of sale of goods or services identified by the same 13-17 name, brand, or advertising used by a franchisee, in such proximity 13-18 to the franchised business that the new point of sale causes a 13-19 reduction in gross sales of the franchised business of eight 13-20 percent or more in any month during the first 24 consecutive months 13-21 after the new point of sale opens for business. If a new point of 13-22 sale causes a reduction in sales by the franchised outlet of eight 13-23 percent or more, the franchisor shall: 13-24 (1) close the new point of sale; 13-25 (2) change the location or manner of operation of the 14-1 new point of sale to mitigate its impact upon the franchised 14-2 business to diminish the diversion of sales to less than eight 14-3 percent for each month during the first 24 consecutive month; or 14-4 (3) compensate the franchisee for lost sales caused by 14-5 the new point of sale in an amount equal to the loss of sales in 14-6 excess of eight percent for each month during the first 24 14-7 consecutive months the new point of sale is open for business. 14-8 Sec. 20.09. SOURCES OF SUPPLIES AND SERVICES. (a) Except 14-9 as provided by Subsection (b) of this section, a franchisee may 14-10 obtain equipment, fixtures, supplies, and services used in the 14-11 establishment and operation of the franchised business from sources 14-12 of the franchisee's choosing if the goods and services meet 14-13 reasonable standards adopted by the franchisor concerning the 14-14 nature and quality of the goods and service. 14-15 (b) Subsection (a) of this section does not apply to 14-16 reasonable quantities of inventory goods or services, including 14-17 display and sample items, that the franchisor requires the 14-18 franchisee to obtain from the franchisor or its affiliate if the 14-19 goods or services are a central feature of the franchised business 14-20 and are: 14-21 (1) actually manufactured or produced by the 14-22 franchisor or its affiliate; or 14-23 (2) manufactured solely for the account of the 14-24 franchisor or its affiliate and incorporate a trade secret owned by 14-25 the franchisor or its affiliate. 15-1 Sec. 20.10. RIGHT OF FREE ASSOCIATION; CRIMINAL OFFENSE; 15-2 PENALTY. (a) A franchisor commits an offense if the franchisor: 15-3 (1) restricts or inhibits, or attempts to restrict or 15-4 inhibit, directly or indirectly, the right of a franchisee to seek 15-5 legislative redress or to freely associate with other franchisees 15-6 for any lawful purpose; or 15-7 (2) retaliates against a franchisee for seeking 15-8 legislative redress or participating in a trade association for a 15-9 lawful purpose. 15-10 (b) An offense under this section is a Class A misdeameanor. 15-11 Sec. 20.11. COVENANTS NOT TO COMPETE. (a) Notwithstanding 15-12 Subchapter E, Chapter 15, of this code, a franchisor may not 15-13 prohibit a franchisee from engaging in any lawful business at any 15-14 location after termination or expiration of a franchise, under an 15-15 expired franchise or any other contract, unless ten or more days 15-16 before the effective date of the termination or expiration the 15-17 franchisor offers in writing to purchase the franchised business 15-18 for its fair market value as a going concern without regard to 15-19 termination or expiration. The offer may be conditioned on 15-20 ascertainment of fair market value by an impartial appraiser. 15-21 (b) This section does not prohibit enforcement of a 15-22 provision of a franchise obligating a franchisee after termination 15-23 or expiration of the franchise to: 15-24 (1) alter the appearance of the premises and the 15-25 manner of operation of the franchised business to avoid the 16-1 likelihood of confusion as to the affiliation of the business with 16-2 its former franchisor or the origin of goods or services it offers; 16-3 or 16-4 (2) not use a trade secret of the franchisor or its 16-5 affiliate. 16-6 Sec. 20.12. PRICING COERCION. A franchisor may not fix or 16-7 maintain the price at which a franchisee may sell goods or services 16-8 under the franchise, nor may a franchisor coerce a franchisee into 16-9 selling goods or services under the franchise at a certain price. 16-10 Sec. 20.13. CHOICE OF LAW. The law of this state applies in 16-11 all actions and proceedings concerning a franchise for which the 16-12 franchisee's business is located in this state. 16-13 Sec. 20.14. JUDICIAL REMEDIES. (a) If a franchisor or 16-14 franchisee violates this chapter and the matter is not submitted to 16-15 arbitration, the aggrieved party may maintain a civil action in a 16-16 court in the county in which the franchisee's franchised outlet is 16-17 located. If the franchisee has outlets in more than one county, 16-18 the action must be brought in the county in which an outlet 16-19 relating to the violation or disagreement is located. 16-20 (b) In an action under Subsection (a) of this section, the 16-21 court may grant any relief the court determines necessary or 16-22 appropriate considering the purposes of this chapter, including 16-23 specific performance. 16-24 (c) The prevailing party in an action under Subsection (a) 16-25 of this section is entitled to actual damages, which may include 17-1 the value of the franchisee's business as determined by an 17-2 independent appraiser, reasonable attorney's fees, and court costs. 17-3 Sec. 20.15. REMEDY FOR FRANCHISOR'S FAILURE TO COMPLY WITH 17-4 UNITED STATES FEDERAL TRADE COMMISSION DISCLOSURE REQUIREMENTS. A 17-5 franchisee or prospective franchisee who is injured as a 17-6 consequence of a franchisor's failure to comply with the 17-7 requirements of the United States Federal Trade Commission Trade 17-8 Regulation Rule, entitled "Disclosure Requirements and Prohibitions 17-9 Concerning Franchising and Business Opportunity Venture." 16 17-10 C.F.R. Part 436, as now established or hereafter amended may bring 17-11 an action for damages, or other appropriate relief, together with 17-12 costs and attorney's fees. 17-13 SECTION 2. This Act applies to a franchise (as defined by 17-14 Section 20.02, Business & Commerce Code, as added by this Act) for 17-15 a fast food restaurant that is entered into, renewed, amended, or 17-16 replaced before, on, or after the effective date of this Act, but 17-17 this Act does not apply to acts, omission or transactions concluded 17-18 before the effective date of this Act. 17-19 SECTION 3. The importance of this legislation and the 17-20 crowded condition of the calendars in both houses create an 17-21 emergency and an imperative public necessity that the 17-22 constitutional rule requiring bills to be read on three several 17-23 days in each house be suspended, and this rule is hereby suspended, 17-24 and that this Act take effect and be in force from and after its 17-25 passage, and it is so enacted.