By: Haley S.B. No. 195
A BILL TO BE ENTITLED
AN ACT
1-1 relating to franchise agreements for fast food restaurants;
1-2 providing penalties.
1-3 BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
1-4 SECTION 1. Title 2, Business & Commerce Code, is amended by
1-5 adding Chapter 20 to read as follows:
1-6 CHAPTER 20. FAST FOOD RESTAURANT FRANCHISES
1-7 Sec. 20.01. PURPOSES. The purposes of this chapter are:
1-8 (1) to promote the public's interest in the fair,
1-9 efficient, and competitive franchising of the fast food restaurant
1-10 business within this state by establishing minimum standards of
1-11 conduct in such franchise relationships; and
1-12 (2) to acknowledge a special relationship between fast
1-13 food franchisors and franchisees since many fast food franchises
1-14 reflect a profound imbalance of contractual power in favor of the
1-15 franchisor and fail to give due regard to the legitimate business
1-16 interests of the franchisee as a result of the franchisor reserving
1-17 pervasive contractual rights over the franchise relationship.
1-18 Sec. 20.02. DEFINITIONS. In this chapter:
1-19 (1) "Affiliate" means a person controlling, controlled
1-20 by, or under common control with another person.
1-21 (2) "Fast food restaurant" means a restaurant where
1-22 food and beverages are sold for consumption on or off the premises
1-23 and delivered to the customer after the customer places an order
2-1 with a cashier at a counter, drive-through window or by telephone.
2-2 The term does not include a restaurant where a majority of the
2-3 customers are seated at tables before a person waiting on the
2-4 tables takes their orders.
2-5 (3) "Franchise" means the following:
2-6 (A) An oral or written agreement, either express
2-7 or implied, which provides all of the following:
2-8 (i) grants the right to distribute goods
2-9 or provide services under a marketing plan prescribed or suggested
2-10 in the substantial part by the franchisor;
2-11 (ii) requires payment, directly or
2-12 indirectly, of a franchise fee to a franchisor or its affiliate;
2-13 and
2-14 (iii) allows the franchise business to be
2-15 substantially associated with the franchisor's trademark, service
2-16 mark, trade name, logotype, advertisement, or other commercial
2-17 symbol of or designating the franchisor or its affiliate.
2-18 (4) "Franchisee" means a person to whom a franchise is
2-19 offered or granted.
2-20 (5) "Franchisor" means a person who offers or grants a
2-21 franchise to another person.
2-22 (6) "Franchise fee" means a direct or indirect payment
2-23 to purchase or operate a franchise. Franchise fee does not include
2-24 any of the following:
2-25 (A) payment of a reasonable service charge to
3-1 the issuer of a credit card by an establishment accepting the
3-2 credit card;
3-3 (B) an agreement to purchase at a bona fide
3-4 wholesale price a reasonable quantity of tangible goods for resale;
3-5 (C) payment of rent which reflects payment for
3-6 the economic value of leased real or personal property;
3-7 (D) the purchase or agreement to purchase a
3-8 reasonable quantity of promotional or demonstration supplies,
3-9 materials, or equipment furnished at fair market value and not
3-10 intended for resale; or
3-11 (E) the purchase or agreement to purchase, at a
3-12 fair market value, any fixtures, equipment, leasehold improvements,
3-13 real property, supplies, or other materials reasonably necessary to
3-14 enter into or continue a business.
3-15 (7) "Good faith" means that a franchise contract
3-16 imposes on each party thereto a duty to act in good faith in its
3-17 performance and enforcement. This duty of good faith obligates a
3-18 party to a franchise, in making a decision that directly affects
3-19 the franchise or the business conducted under the franchise, to
3-20 give fair regard for the interests of the other party or parties
3-21 that are likely to be affected by the decision and to refrain from
3-22 conduct that may impair or injure the right of the other party or
3-23 parties to receive the reasonably anticipated benefits of the
3-24 franchise.
3-25 (8) "Trade secret" has the meaning assigned by Section
4-1 31.05, Penal Code.
4-2 Sec. 20.03. APPLICATION. This chapter applies only to a
4-3 franchise for a fast food restaurant, but, except for Sec. 20.10,
4-4 does not apply to a franchise for a fast food restaurant:
4-5 (1) in which the franchisor owns the real estate and
4-6 improvements upon which the franchised business is operated;
4-7 (2) if the franchisor owns and operates fewer than 35
4-8 percent of the total number of fast food restaurants identified
4-9 with the franchisor's trademark, service mark, trade name,
4-10 logotype, advertisement, or other commercial symbol of or
4-11 designating the franchisor or its affiliate; or
4-12 (3) which includes specific territorial protection for
4-13 the restaurant.
4-14 Sec. 20.04. NO WAIVER. This chapter applies notwithstanding
4-15 any contrary or conflicting provision in a franchise. The parties
4-16 to a franchise may not waive any of the provisions of this chapter,
4-17 except as part of a settlement of a bona fide dispute.
4-18 Sec. 20.05. DUTY OF GOOD FAITH. Each franchise subject to
4-19 this chapter includes an implied duty of good faith in its
4-20 performance and enforcement.
4-21 Sec. 20.06. TRANSFERABILITY. (a) A franchisee may transfer
4-22 the franchised business and franchise or an interest in a
4-23 franchised business and franchise to a transferee, provided the
4-24 transferee satisfies the reasonable, current qualifications of the
4-25 franchisors for new franchisees. For purposes of this section, a
5-1 reasonable, current qualification for a new franchisee is a
5-2 qualification based upon a legitimate business reason. If the
5-3 proposed transferee does not meet the reasonable, current
5-4 qualifications of the franchisor, the franchisor may refuse to
5-5 permit the transfer, provided that the refusal of the franchisor to
5-6 consent to the transfer is not arbitrary or capricious when
5-7 compared to the actions of the franchisor in other similar
5-8 circumstances.
5-9 (b) Except as otherwise provided in this section, a
5-10 franchisor may exercise a right of first refusal contained in a
5-11 franchise agreement after receipt of a proposal from the franchisee
5-12 to transfer the franchise.
5-13 (c) A franchisor may require as a condition of a transfer
5-14 any of the following:
5-15 (1) that the transferee successfully complete a
5-16 reasonable training program;
5-17 (2) that a reasonable transfer fee be paid to
5-18 reimburse the franchisor for the franchisor's reasonable and actual
5-19 expenses directly attributable to the transfer; or
5-20 (3) that the franchisee pay or make provision
5-21 reasonably acceptable to the franchisor to pay any amount due the
5-22 franchisor or the franchisor's affiliate.
5-23 (d) A franchisor shall not withhold consent to a franchisee
5-24 making a public offering of the franchisee's securities without
5-25 good cause, provided the franchisee or the owners of the franchise
6-1 retain control of more than 50 percent of the voting power in the
6-2 franchise.
6-3 (e) A franchisee may transfer the franchisee's interest in
6-4 the franchise, for the unexpired term of the franchise agreement,
6-5 and a franchisor shall not require the franchisee or the transferee
6-6 to enter into a new or different franchise agreement as a condition
6-7 of the transfer.
6-8 (f) A franchisee shall give the franchisor no less than 30
6-9 days written notice of a transfer which is subject to the
6-10 provisions of this section, and on request from the franchisor
6-11 shall provide in writing the ownership interests of all persons
6-12 holding or claiming an equitable or beneficial interest in the
6-13 franchise subsequent to the transfer of the franchisee, as
6-14 appropriate. A franchisee shall not circumvent the intended effect
6-15 of a contractual provision governing the transfer of the franchise
6-16 or an interest in the franchise or an interest in the franchise by
6-17 means of a management agreement, lease, profit-sharing agreement,
6-18 conditional assignment, or other similar device.
6-19 (g) A franchisor shall not transfer its interest in a
6-20 franchise unless the franchisor makes reasonable provision for the
6-21 performance of the franchisor's obligations under the franchise
6-22 agreement by the transferee. A franchisor shall provide the
6-23 franchisee notice of a proposed transfer of the franchisor's
6-24 interest in the franchise at the time the disclosure is required of
6-25 the franchisor under applicable securities laws if interests in the
7-1 franchisor are publicly traded, or if not publicly traded, at the
7-2 time such disclosure would be required if the interests in the
7-3 franchisor were publicly traded.
7-4 (h) A transfer by a franchisee is deemed to be approved 30
7-5 days after the franchisee submits the request for consent to the
7-6 transfer unless the franchisor withholds consent to the transfer as
7-7 evidenced in writing, specifying the reason or reasons for
7-8 withholding the consent. The written notice must be delivered to
7-9 the franchisee prior to the expiration of the 30 day period. Any
7-10 such notice is privileged and is not actionable based upon a claim
7-11 of defamation.
7-12 (i) A franchisor shall not discriminate against a proposed
7-13 transferee of a franchise on the basis of race, color, national
7-14 origin, sex, or physical handicap.
7-15 (j) A franchisor, as a condition to a transfer of a
7-16 franchise, shall not obligate a franchisee to undertake obligations
7-17 or relinquish any rights unrelated to the franchise proposed to be
7-18 transferred, or to enter into a release of claims broader than a
7-19 similar release of claims by the franchisor against the franchisee
7-20 which is entered into by the franchisor.
7-21 (k) A franchisor, after a transfer of a franchise, shall not
7-22 seek to enforce any covenant of the transferred franchise against
7-23 the transferor which prohibits the transferor from engaging in any
7-24 lawful occupation or enterprise. However, this subsection does not
7-25 prohibit the franchisor from enforcing a contractual covenant
8-1 against the transferor not to exploit the franchisor's trade
8-2 secrets or intellectual property rights, unless otherwise agreed to
8-3 by the parties.
8-4 (l) For purposes of this section, "transfer" means any
8-5 change in ownership or control of a franchise, franchised business,
8-6 or a franchisee.
8-7 (m) The following occurrences shall not be considered
8-8 transfers requiring the consent of the franchisor under a franchise
8-9 agreement, and shall not result in the imposition of any penalties
8-10 or make applicable any right of first refusal by the franchisor:
8-11 (1) the succession of ownership of a franchise upon
8-12 the death or disability of a franchisee, or of an owner of a
8-13 franchise, to the franchisee's spouse, child or children, or a
8-14 partner of the franchisee unless the successor fails to meet the
8-15 then reasonable, current qualifications of the franchisor for
8-16 franchisees and the enforcement of the reasonable, current
8-17 qualifications is not arbitrary or capricious when compared to
8-18 actions of the franchisor in other similar circumstances;
8-19 (2) the succession of a spouse, child, partner, or
8-20 other owner as operating manager upon the death or disability of
8-21 the operating manager, unless the successor fails to meet the then
8-22 reasonable, current qualifications of the franchisor for an
8-23 operating manager, and enforcement of the reasonable current
8-24 qualifications is not arbitrary or capricious when compared to
8-25 actions of the franchisor in other similar circumstances;
9-1 (3) incorporation of a proprietorship franchisee,
9-2 provided that such incorporation does not prohibit a franchisor
9-3 from requiring a personal guaranty by the franchisee of obligations
9-4 related to the franchise;
9-5 (4) a transfer within an existing ownership group of a
9-6 franchise provided that more than 50 percent of the franchise is
9-7 held by persons who meet the franchisor's reasonable, current
9-8 standards for franchisees. If less than 50 percent of the
9-9 franchise would be owned by persons who meet the franchisor's
9-10 reasonable, current qualifications, the franchisor may refuse to
9-11 authorize the transfer, provided that enforcement of the
9-12 reasonable, current qualifications is not arbitrary or capricious
9-13 when compared to actions of the franchisor in other similar
9-14 circumstances;
9-15 (5) a transfer of less than a controlling interest in
9-16 the franchise to the franchisee's spouse or child or children,
9-17 provided that more than 50 percent of the entire franchise is held
9-18 by those who meet the franchisor's reasonable, current
9-19 qualifications. If less than 50 percent of the franchise would be
9-20 owned by persons who meet the franchisor's reasonable, current
9-21 qualifications, the franchisor may refuse to authorize the
9-22 transfer, provided that enforcement of the reasonable, current
9-23 qualifications is not arbitrary or capricious when compared to
9-24 actions of other franchisor in other similar circumstances;
9-25 (6) a transfer of less than a controlling interest in
10-1 the franchise of an employee stock ownership plan, or employee
10-2 incentive plan, provided that more than 50 percent of the entire
10-3 franchise is held by those who meet the franchisor's reasonable,
10-4 current qualifications for franchisees. If less than 50 percent
10-5 would be owned by persons who meet the franchisor's reasonable,
10-6 current qualifications, the franchisor may refuse to authorize the
10-7 transfer, provided that enforcement of the reasonable, current
10-8 qualifications is not arbitrary or capricious when compared to
10-9 actions of the franchisor in other similar circumstances; and
10-10 (7) a grant or retention of a security interest in the
10-11 franchised business or its assets, or an ownership interest in the
10-12 franchisee, provided the security agreement establishes an
10-13 obligation on the part of the secured party enforceable by the
10-14 franchisor to give the franchisor notice of the secured party's
10-15 intent to foreclose on the collateral simultaneously with notice to
10-16 the franchisee, and a reasonable opportunity to redeem the
10-17 interests of the secured party and recover the collateral by paying
10-18 the secured obligation.
10-19 (n) A franchisor shall not interfere or attempt to interfere
10-20 with any disposition of an interest in a franchise or franchised
10-21 business as described in subsection (m), paragraphs (1) through
10-22 (7).
10-23 Sec. 20.07. TERMINATION OR NONRENEWAL. (a) A franchisor
10-24 may not terminate or fail to renew a franchise unless the
10-25 franchisor has good cause for the termination or failure to renew.
11-1 For purposes of this section, "good cause" is cause based upon a
11-2 legitimate business reason and shall include, without limitation,
11-3 the failure of a franchisee to comply with lawful material
11-4 provisions of the franchise or other agreement between the
11-5 franchisor and the franchisee, provided that termination or failure
11-6 to renew is not arbitrary or capricious when compared to the
11-7 actions of the franchisor in other similar circumstances.
11-8 (b) Prior to termination of a franchise for good cause, a
11-9 franchisor shall provide a franchisee with at least 60 days prior
11-10 written notice stating the basis for the proposed termination.
11-11 After service of written notice, the franchisee shall have a
11-12 reasonable period of time to cure the default, which in no event
11-13 shall be less than 30 days. If franchisee's default can not
11-14 reasonably be cured in 30 days, the franchisee must demonstrate
11-15 substantial and continuing action toward cure of the default in
11-16 order to avoid termination.
11-17 (c) Prior to the failure to renew a franchisee for good
11-18 cause, a franchisor shall provide a franchisee with at least 180
11-19 days prior written notice stating the basis for the proposed
11-20 failure to renew. After service of written notice, the franchisee
11-21 shall have a reasonable period of time to cure the default, which
11-22 in no event shall be less than 60 days. If the franchisee's
11-23 default can not reasonably be cured in 60 days, the franchisee must
11-24 demonstrate substantial and continuing action toward cure of the
11-25 default in order to avoid the failure to renew.
12-1 (d) Notwithstanding subsection (b), a franchisor may
12-2 terminate a franchise upon written notice and without giving the
12-3 franchisee an opportunity to cure if any of the following apply:
12-4 (1) the franchisee or the business to which the
12-5 franchise relates is declared bankrupt or judicially determined to
12-6 be insolvent;
12-7 (2) the franchisee voluntarily abandons the franchise
12-8 by failing to operate the business for five consecutive business
12-9 days during which the franchisee is required to operate the
12-10 business under the terms of the franchise, or any shorter period
12-11 after which it is not unreasonable under the facts and
12-12 circumstances for the franchisor to conclude that the franchisee
12-13 does not intend to continue to operate the franchise, unless the
12-14 failure to operate is due to circumstances beyond the control of
12-15 the franchisee;
12-16 (3) the franchisor and franchisee agree in writing to
12-17 terminate the franchise;
12-18 (4) the franchisee knowingly makes any material
12-19 misrepresentations or knowingly omits to state any material facts
12-20 relating to the acquisition or ownership or operation of the
12-21 franchised business;
12-22 (5) the franchisee willfully fails to comply with the
12-23 same material provision of a franchise agreement three separate
12-24 times within a 12 month period, when the enforcement of the
12-25 material provision by the franchisor is not arbitrary or capricious
13-1 when compared to the actions of the franchisor in other similar
13-2 circumstances;
13-3 (6) the franchised business or business premises of
13-4 the franchisee are lawfully seized, taken over, or foreclosed by a
13-5 government authority or official;
13-6 (7) the franchisee is convicted of a felony or any
13-7 other criminal misconduct which materially and adversely affects
13-8 the operation, maintenance, or goodwill of the franchise in the
13-9 relevant market; or
13-10 (8) the franchisee operates the franchised business in
13-11 a manner that imminently endangers the public health and safety and
13-12 fails to rectify the basis of the endangerment within 24 hours of
13-13 notice from the franchisor specifying the hazard to be corrected.
13-14 Sec. 20.08. ENCROACHMENT. A franchisor shall not establish
13-15 a new point of sale of goods or services identified by the same
13-16 name, brand, or advertising used by a franchisee, in such proximity
13-17 to the franchised business that the new point of sale causes a
13-18 reduction in gross sales of the franchised business of eight
13-19 percent or more in any month during the first 24 consecutive months
13-20 after the new point of sale opens for business. If a new point of
13-21 sale causes a reduction in sales by the franchised outlet of eight
13-22 percent or more, the franchisor shall:
13-23 (1) close the new point of sale;
13-24 (2) change the location or manner of operation of the
13-25 new point of sale to mitigate its impact upon the franchised
14-1 business to diminish the diversion of sales to less than eight
14-2 percent for each month during the first 24 consecutive months; or
14-3 (3) compensate the franchisee for lost sales caused by
14-4 the new point of sale in an amount equal to the loss of sales in
14-5 excess of eight percent for each month during the first 24
14-6 consecutive months the new point of sale is open for business.
14-7 Sec. 20.09. SOURCES OF SUPPLIES AND SERVICES. (a) Except
14-8 as provided by Subsection (b) of this section, a franchisee may
14-9 obtain equipment, fixtures, supplies, and services used in the
14-10 establishment and operation of the franchised business from sources
14-11 of the franchisee's choosing if the goods and services meet
14-12 reasonable standards adopted by the franchisor concerning the
14-13 nature and quality of the goods and services.
14-14 (b) Subsection (a) of this section does not apply to
14-15 reasonable quantities of inventory goods or services, including
14-16 display and sample items, that the franchisor requires the
14-17 franchisee to obtain from the franchisor or its affiliate if the
14-18 goods or services are a central feature of the franchised business
14-19 and are:
14-20 (1) actually manufactured or produced by the
14-21 franchisor or its affiliate; or
14-22 (2) manufactured solely for the account of the
14-23 franchisor or its affiliate and incorporate a trade secret owned by
14-24 the franchisor or its affiliate.
14-25 Sec. 20.10. RIGHT OF FREE ASSOCIATION; CRIMINAL OFFENSE;
15-1 PENALTY. (a) A franchisor commits an offense if the franchisor:
15-2 (1) restricts or inhibits, or attempts to restrict or
15-3 inhibit, directly or indirectly, the right of a franchisee to seek
15-4 legislative redress or to freely associate with other franchisees
15-5 for any lawful purpose; or
15-6 (2) retaliates against a franchisee for seeking
15-7 legislative redress or participating in a trade association for a
15-8 lawful purpose.
15-9 (b) An offense under this section is a Class A misdemeanor.
15-10 Sec. 20.11. COVENANTS NOT TO COMPETE. (a) Notwithstanding
15-11 Subchapter E, Chapter 15, of this code, a franchisor may not
15-12 prohibit a franchisee from engaging in any lawful business at any
15-13 location after termination or expiration of a franchise, under an
15-14 expired franchise or any other contract, unless ten or more days
15-15 before the effective date of the termination or expiration the
15-16 franchisor offers in writing to purchase the franchised business
15-17 for its fair market value as a going concern without regard to
15-18 termination or expiration. The offer may be conditioned on
15-19 ascertainment of fair market value by an impartial appraiser.
15-20 (b) This section does not prohibit enforcement of a
15-21 provision of a franchise obligating a franchisee after termination
15-22 or expiration of the franchise to:
15-23 (1) alter the appearance of the premises and the
15-24 manner of operation of the franchised business to avoid the
15-25 likelihood of confusion as to the affiliation of the business with
16-1 its former franchisor or the origin of goods or services it offers;
16-2 or
16-3 (2) not use a trade secret of the franchisor or its
16-4 affiliate.
16-5 Sec. 20.12. PRICING COERCION. A franchisor may not fix or
16-6 maintain the price at which a franchisee may sell goods or services
16-7 under the franchise, nor may a franchisor coerce a franchisee into
16-8 selling goods or services under the franchise at a certain price.
16-9 Sec. 20.13. CHOICE OF LAW. The law of this state applies in
16-10 all actions and proceedings concerning a franchise for which the
16-11 franchisee's business is located in this state.
16-12 Sec. 20.14. JUDICIAL REMEDIES. (a) If a franchisor or
16-13 franchisee violates this chapter and the matter is not submitted to
16-14 arbitration, the aggrieved party may maintain a civil action in a
16-15 court in the county in which the franchisee's franchised outlet is
16-16 located. If the franchisee has outlets in more than one county,
16-17 the action must be brought in the county in which an outlet
16-18 relating to the violation or disagreement is located.
16-19 (b) In an action under Subsection (a) of this section, the
16-20 court may grant any relief the court determines necessary or
16-21 appropriate considering the purposes of this chapter, including
16-22 specific performance.
16-23 (c) The prevailing party in an action under Subsection (a)
16-24 of this section is entitled to actual damages, which may include
16-25 the value of the franchisee's business as determined by an
17-1 independent appraiser, reasonable attorney's fees, and court costs.
17-2 Sec. 20.15. REMEDY FOR FRANCHISOR'S FAILURE TO COMPLY WITH
17-3 UNITED STATES FEDERAL TRADE COMMISSION DISCLOSURE REQUIREMENTS. A
17-4 franchisee or prospective franchisee who is injured as a
17-5 consequence of a franchisor's failure to comply with the
17-6 requirements of the United States Federal Trade Commission Trade
17-7 Regulation Rule, entitled "Disclosure Requirements and Prohibitions
17-8 Concerning Franchising and Business Opportunity Venture," 16 C.F.R.
17-9 Part 436, as now established or hereafter amended may bring an
17-10 action for damages, or other appropriate relief, together with
17-11 costs and attorney's fees.
17-12 SECTION 2. This Act applies to a franchise (as defined by
17-13 Section 20.02, Business & Commerce Code, as added by this Act) for
17-14 a fast food restaurant that is entered into, renewed, amended, or
17-15 replaced before, on, or after the effective date of this Act, but
17-16 this Act does not apply to acts, omission or transactions concluded
17-17 before the effective date of this Act.
17-18 SECTION 3. The importance of this legislation and the
17-19 crowded condition of the calendars in both houses create an
17-20 emergency and an imperative public necessity that the
17-21 constitutional rule requiring bills to be read on three several
17-22 days in each house be suspended, and this rule is hereby suspended,
17-23 and that this Act take effect and be in force from and after its
17-24 passage, and it is so enacted.