Bill Text: NY A06115 | 2019-2020 | General Assembly | Introduced

Bill Title: Relates to requiring fair business practices in franchises.

Spectrum: Partisan Bill (Republican 4-0)

Status: (Introduced) 2019-02-28 - referred to economic development [A06115 Detail]

Download: New_York-2019-A06115-Introduced.html

                STATE OF NEW YORK
                               2019-2020 Regular Sessions
                   IN ASSEMBLY
                                    February 28, 2019
        Introduced  by  M.  of  A.  DeSTEFANO  --  read once and referred to the
          Committee on Economic Development
        AN ACT to amend the general business law, in relation to requiring  fair
          business practices in franchises
          The  People of the State of New York, represented in Senate and Assem-
        bly, do enact as follows:
     1    Section 1. The general business law is amended by adding a new article
     2  33-C to read as follows:
     3                                ARTICLE 33-C
     4                       FAIR FRANCHISING PRACTICES ACT
     5  Section 698.   Short title.
     6          698-a. Definitions.
     7          698-b. Procedural fairness.
     8          698-c. Private right of action.
     9          698-d. Duty of good faith.
    10          698-e. Duty of competence.
    11          698-f. Negotiated changes permitted.
    12          698-g. Independent sourcing.
    13          698-h. Termination and non-renewal.
    14          698-i. Transfer of a franchise.
    15          698-j. Anti-competitive covenants.
    16          698-k. Freedom of association.
    17          698-l. Encroachment.
    18          698-m. Discrimination prohibited.
    19    § 698. Short title. This article shall be known and may  be  cited  as
    20  the "fair franchising practices act".
    21    § 698-a. Definitions. As used in this article:
    22    1.  "Affiliate"  shall  mean  any natural or legal person controlling,
    23  controlled by or under common control with a franchisor.
         EXPLANATION--Matter in italics (underscored) is new; matter in brackets
                              [ ] is old law to be omitted.

        A. 6115                             2
     1    2. "Franchise" shall mean a contract or agreement,  whether  expressed
     2  or  implied, and whether written or oral, between two or more persons by
     3  which:
     4    (a)  a  franchisee  is  granted the right to engage in the business of
     5  offering, selling or  distributing  goods  or  services  pursuant  to  a
     6  marketing plan or system prescribed in substantial part by a franchisor;
     7    (b)  operation  of  the franchisee's business pursuant to such plan or
     8  system is substantially related to the franchisor's  trademark,  service
     9  mark,  trade  name,  logotype,  advertising  or  other commercial symbol
    10  designating the franchisor or its affiliate; and
    11    (c) the franchisee pays or is required to pay, directly or indirectly,
    12  a franchise fee.
    13    3. "Franchise fee" shall mean a fee or charge for the right  to  enter
    14  into  or  maintain  a  franchise,  including  any  payment  for goods or
    15  services, but not including:
    16    (a) payment, at a bona fide wholesale price, for a reasonable quantity
    17  of inventory;
    18    (b) payment of a reasonable service charge to the issuer of  a  credit
    19  or debit card by a person accepting or honoring such a card; and
    20    (c)  payment  at  fair  market value for a reasonable quantity of real
    21  estate, fixtures, equipment or other tangible personal  property  to  be
    22  utilized in and necessary for the operation of a franchised business.
    23    4. "Franchisee" shall mean a person to whom a franchise is granted.
    24    5.  "Franchisor" shall mean a person who grants or has granted a fran-
    25  chise.
    26    6. "Good cause" shall mean the failure by a party to  a  franchise  to
    27  correct a default of a material provision of the franchise within thirty
    28  days of receipt of a written notice from the other party which specifies
    29  the  default, or within forty-eight hours of receipt of a written notice
    30  which specifies a default constituting a clear and present danger to the
    31  public health, welfare or safety, and in either instance  describes  the
    32  corrective action required to be taken. Such term shall also include the
    33  complete  withdrawal  of the franchisor from conducting business in this
    34  state.
    35    7. "Good faith" shall mean honesty  in  fact  and  the  observance  of
    36  reasonable standards of fair dealing in the trade.
    37    8.  "Outlet"  shall  mean  a  place  of business, whether temporary or
    38  permanent, fixed or mobile, from which goods or services are offered for
    39  sale.
    40    9.  "Trade  secret"  shall  mean  information,  including  a  formula,
    41  pattern,  compilation,  program,  devise,  method, technique or process,
    42  which:
    43    (a) derives independent economic value, actual or potential, from  not
    44  being  generally  known to and not being readily ascertainable by proper
    45  means by other persons who can obtain economic value from its disclosure
    46  or use; and
    47    (b) is the subject of efforts which are reasonable under  the  circum-
    48  stances to maintain its secrecy.
    49    §  698-b. Procedural fairness. 1. The provisions of this article shall
    50  apply to any franchise any part of the performance of which is to  occur
    51  in  this  state, or to be operated in whole or in part in this state and
    52  to the parties to such franchise. These provisions shall not be  waived,
    53  and  their  application  to  a franchise or a party thereto shall not be
    54  avoided, in whole or in part by agreement or by conduct, except pursuant
    55  to a settlement of a bona fide dispute.

        A. 6115                             3
     1    2. Any party to a franchise may commence a civil action or, if  agreed
     2  to by the parties, initiate an arbitration proceeding for a violation of
     3  any provision of this article.
     4    3.  No  franchisee  shall  be  deprived  of  the  application  of  the
     5  provisions of this article by any provision of a franchise which  desig-
     6  nates  the  law  of  another jurisdiction as governing the provisions of
     7  such franchise, or designating a venue outside of  this  state  for  the
     8  resolution of disputes.
     9    4.  Provisions  of  a  franchise  providing  for  liquidated  damages,
    10  confessions of judgment or like provisions shall be unenforceable.
    11    5. The provisions of this article are declaratory of the public policy
    12  and law of the state of New York. To the extent permitted by the consti-
    13  tution of the United States and of this state, this article shall  apply
    14  to  franchises  granted,  transferred,  renewed, amended, replaced or in
    15  existence after the effective date of this article.  A  provision  of  a
    16  franchise  designating the law of the state of New York as governing the
    17  franchise, or by which the franchise is to be interpreted  or  construed
    18  shall  be  construed as incorporating the law of this state as in effect
    19  from time to time during the term of the franchise.
    20    § 698-c. Private right of action. Any party  to  a  franchise  who  is
    21  injured or likely to be injured by a violation or impending violation of
    22  this article or any rules or regulations of the Federal Trade Commission
    23  shall  have  a cause of action for rescission of the franchise, damages,
    24  injunctive relief or other appropriate relief. The prevailing party  may
    25  recover  its  costs,  including  reasonable attorney's fees, in any such
    26  action or proceeding. The court shall presume the existence of irrepara-
    27  ble harm based on a violation of the provisions of this  article  or  of
    28  any  rule  or  regulation of the Federal Trade Commission, and may award
    29  preliminary injunctive relief without bond or other financial security.
    30    § 698-d. Duty of good faith. Every franchise shall include an  implied
    31  duty  upon  all  parties  to  exercise good faith in the performance and
    32  enforcement of the terms of the franchise. Such duty of good faith obli-
    33  gates each party to a franchise, when making a decision or exercising  a
    34  reserved  power  or  discretion  which directly affects the interests of
    35  another party or parties to the franchise, to give due and equal  regard
    36  to  the  interests of such other party or parties to the franchises that
    37  are likely to be affected.
    38    § 698-e. Duty of competence. Unless a franchisor  represents  that  it
    39  has  greater  skill or knowledge, or conspicuously disclaims that it has
    40  such skill or knowledge, the franchisor shall, in its  undertaking  with
    41  the franchisee, be required to exercise the skill and knowledge normally
    42  possessed  by  franchisors  in  good  standing in similar communities or
    43  trade areas. The provisions of this section shall not be waived or qual-
    44  ified by agreement or by conduct; provided, however, that the franchisor
    45  may by written agreement particularly define the nature and scope of its
    46  skill and knowledge, and of its undertaking with the franchisee.
    47    § 698-f. Negotiated changes permitted. A franchisor, who has  lawfully
    48  delivered  an  offering  to  a prospective franchisee, may negotiate the
    49  terms of a franchise with such prospective franchisee, and may execute a
    50  franchise containing negotiated  terms  which  are  different  from  the
    51  initial offering.
    52    §  698-g.  Independent  sourcing.  1.  Except as otherwise provided in
    53  subdivision two of this section,  a  franchisee  may  obtain  equipment,
    54  fixtures,  supplies and services used in the establishment and operation
    55  of a franchised business from sources of the franchisee's own  choosing,

        A. 6115                             4
     1  provided  that  such goods and services shall meet reasonable standards,
     2  as to their nature and quality, as promulgated by the franchisor.
     3    2. Subdivision one of this section shall not apply to a requirement by
     4  a  franchisor  that reasonable quantities of inventory goods or services
     5  (including display and sample items) be obtained from the franchisor  or
     6  its  affiliate,  if  such goods or services are a central feature of the
     7  franchise business and:
     8    (a) are actually manufactured or produced by  the  franchisor  or  its
     9  affiliate; or
    10    (b)  are manufactured solely on behalf of the franchisor or its affil-
    11  iate and incorporate a trade secret  owned  by  the  franchisor  or  its
    12  affiliate.
    13    § 698-h. Termination and non-renewal. No franchisor shall terminate or
    14  refuse to renew a franchise without good cause.
    15    § 698-i. Transfer of a franchise. 1. A franchisee shall have the right
    16  to  transfer the franchised business and the franchise to another person
    17  who meets the franchisor's current reasonable, essential and  nondiscri-
    18  minatory  standards for new franchisees or transferees. A franchisor may
    19  not withhold its consent to a  transfer  of  a  franchise  without  good
    20  cause.
    21    2. A franchisor may exercise a right of first refusal in relation to a
    22  proposed  transfer,  if  the  franchisor  has reserved such right in the
    23  franchise. However, a right of first refusal shall not be  invoked  more
    24  than  thirty  days after receipt of the franchisee's request for consent
    25  to the transfer.  Such right of first refusal may not  be  exercised  if
    26  the  result would be to leave the franchisor holding a partial ownership
    27  interest in the franchise or franchisee. A franchisor  shall  only  base
    28  its decision to exercise a right of first refusal in a proposed transfer
    29  of a franchise, upon the merits of the proposed transfer and the partic-
    30  ular circumstances of the proposed transfer.
    31    3. A franchisor may require as conditions of a transfer that:
    32    (a)  the transferee successfully completes a reasonable, essential and
    33  nondiscriminatory training program;
    34    (b) a reasonable transfer fee be paid to reimburse the franchisor  for
    35  its reasonable and actual expenses directly related to the transfer; and
    36    (c) the franchisee pay or make reasonable provisions to pay any amount
    37  due the franchisor or its affiliate.
    38    4. A franchisor shall not withhold its consent to a public offering by
    39  a  franchisee  of its securities, provided that the franchisee or owners
    40  of the franchise retain more than fifty percent of the voting  power  in
    41  the  franchise. A franchisor shall not withhold its consent to a pooling
    42  of interests or exchange of assets of its existing franchisees.
    43    5. A franchisee may assign its interest in its franchise for the unex-
    44  pired term of the franchise without any change  in  the  terms  of  such
    45  franchise.  Furthermore, the franchisor shall not require the franchisee
    46  or the transferee to enter into any new or different  terms  during  the
    47  unexpired term of the franchise.
    48    6. For the purposes of this section the following shall not constitute
    49  a transfer and a franchisor shall not interfere with:
    50    (a)  the succession to ownership or management of a franchise upon the
    51  death or disability of a franchisee, or an owner, officer or director of
    52  a franchisee, by the spouse, children, partners or  fellow  shareholders
    53  of such deceased or disabled person;
    54    (b) incorporation by a franchisee;

        A. 6115                             5
     1    (c)  transfer  of  interests  within  an existing group of owners of a
     2  franchisee when such transfers do not result in a change in the control-
     3  ling interest in the franchise;
     4    (d)  transfers of less than a controlling interest in the franchise to
     5  the spouse or children of the franchisee, or owners, officers or  direc-
     6  tors of the franchisee;
     7    (e)  transfers  of  less  than a controlling interest in the franchise
     8  pursuant to an employee stock ownership plan, employee incentive compen-
     9  sation plan or deferred benefit plan;
    10    (f) a grant or retention of a security interest in the franchise,  the
    11  franchised business or its assets, or an ownership interest in the fran-
    12  chisee,  provided  that  the security agreement creates an obligation on
    13  the part of the secured party, which is enforceable by  the  franchisor,
    14  to give notice to the franchisor simultaneously with notice to the fran-
    15  chisee  of the secured party's intention to foreclose on the collateral,
    16  and granting a reasonable opportunity to  redeem  the  interest  of  the
    17  secured  party  and  release the secured party's lien upon the franchise
    18  and the franchised business by satisfying the  franchisee's  obligations
    19  to the secured party; or
    20    (g)  the  franchisee's  use  of  management consultants or hiring of a
    21  professional manager.
    22    7. Subject to the provisions of paragraph (f) of  subdivision  six  of
    23  this  section,  no franchisor shall prevent a franchisee, who has trans-
    24  ferred the franchise, from retaining  or  foreclosing  upon  a  security
    25  interest  in  one  or  more assets transferred, including the franchise,
    26  created to secure the obligations of the transferee to the transferor.
    27    8. Every franchisee shall give its franchisor  not  less  than  thirty
    28  days'  notice  of  a proposed transfer and upon request shall advise the
    29  franchisor, in writing, of the ownership interests of all persons  hold-
    30  ing  or claiming an equitable or beneficial interest in the franchise or
    31  the franchisee.
    32    9. No franchisor shall transfer its interest in a franchise unless  it
    33  makes  reasonable provision for the performance by the transferee of its
    34  obligations pursuant to the franchise. A franchisor  shall  provide  its
    35  franchisees  with  notice  of the proposed transfer at such time as such
    36  disclosure would be  required  pursuant  to  applicable  securities  and
    37  exchange laws, if securities of the franchisor were publicly traded.
    38    10.  A  franchisor  shall  be objectively reasonable in determining to
    39  withhold its consent to a proposed transfer of a franchise. Every trans-
    40  fer shall be deemed approved thirty days after  the  franchisee  submits
    41  the proposed transfer for consent to the franchisor, unless the franchi-
    42  sor shall earlier provide written notice of its disapproval, or exercise
    43  of  right of first refusal. All such notices stating the bases of disap-
    44  proval shall be privileged against claims of defamation.
    45    11. No franchisor shall discriminate against a proposed transferee  of
    46  a franchise on the basis of race, color, national origin, religion, sex,
    47  or disability.
    48    12.  As  a condition of a transfer of a franchise, no franchisor shall
    49  obligate a franchisee to undertake  other  obligations  or  forgo  other
    50  rights outside the scope of the franchise proposed to be transferred, or
    51  to  enter  into  release  of  claims broader in scope than a counterpart
    52  release of claims offered by the franchisor to the franchisee.
    53    13. No franchisor shall enforce against the transferor of a  franchise
    54  after  a transfer, any covenant in the transferred franchise prohibiting
    55  the transferor from engaging in any  lawful  occupation  or  enterprise.
    56  However, the provisions of this subdivision shall not limit the right of

        A. 6115                             6
     1  the franchisor to enforce contractual covenants prohibiting the transfe-
     2  ror from exploiting the franchisor's trade secrets or intellectual prop-
     3  erty rights.
     4    14. For the purposes of this section:
     5    (a)  "Transfer"  shall  mean  any  change in ownership or control of a
     6  franchise, franchised business or franchisee.
     7    (b) "Franchise" shall include franchisee as appropriate in context.
     8    § 698-j. Anti-competitive covenants. No franchisor shall  prohibit  or
     9  enforce  a  prohibition against a franchisee from engaging in any lawful
    10  business at any location after expiration, termination for good cause or
    11  transfer of a franchise, unless not less than ten days before such expi-
    12  ration, termination or transfer the  franchisor  offers  in  writing  to
    13  purchase  the  franchised  business for its fair market value as a going
    14  concern. Such an offer may be conditioned upon ascertainment of the fair
    15  market value by an impartial appraiser. The provisions of  this  section
    16  shall  not prohibit enforcement of provisions of a franchise requiring a
    17  franchisee, after expiration or termination of the franchise to:
    18    1. Alter the appearance of the premises and the manner of operation of
    19  the formerly franchised business to avoid the likelihood of confusion as
    20  to the affiliation of the business with its  former  franchisor  or  the
    21  origin of the goods or services it offers; or
    22    2.  Cease  and  refrain from using a trade secret of the franchisor or
    23  its affiliate.
    24    § 698-k. Freedom of association. 1. No franchisor  shall  directly  or
    25  indirectly  inhibit  its franchisees from forming an association or from
    26  associating with other franchisees for any lawful purpose. Nor shall any
    27  franchisor penalize, in any way, its franchisees for such activities.
    28    2. Every franchisor which has more than  five  hundred  franchises  or
    29  more  than  three  hundred  franchisees, within the United States, shall
    30  have a duty to bargain in good faith with an organization of  its  fran-
    31  chisees  which  represents  in  general or on a specific issue or set of
    32  issues a majority of its franchisees in this state.
    33    § 698-l. Encroachment. 1. Subject to  the  provisions  of  subdivision
    34  three  of  this section, no franchisor shall place or license another to
    35  place a new outlet in an unreasonable proximity to an established  fran-
    36  chised  outlet  which  offers  goods  or services identified by the same
    37  trademark as the new outlet, if the intent or probable effect of  estab-
    38  lishing  the  new  outlet is to cause a diminution of gross sales by the
    39  existing outlet of more than ten percent in the twelve months  following
    40  the establishment of the new outlet.
    41    2.  A  franchisee  injured or likely to be injured by violation of the
    42  provisions of this section may enjoin the violation or pending violation
    43  and recover damages caused by the violation, which may include a reason-
    44  able estimation of the plaintiff's profits lost as a consequence of  the
    45  violation, and other appropriate relief.
    46    3. The provisions of this section shall not apply to the establishment
    47  of  a  new outlet if, before the new outlet opens for business the fran-
    48  chisor offers in writing to the franchisee of the established outlet  or
    49  outlets to pay to the franchisee, if the sales of the established outlet
    50  or outlets decline by more than ten percent in the twelve months follow-
    51  ing  establishment of the new outlet as a consequence of opening the new
    52  outlet, an amount equal to ten percent of the gross sales (net of  sales
    53  taxes,  returns  and allowances) of the new outlet for the first twenty-
    54  four months of the new outlet's operation.
    55    4. If the franchisor makes a written offer  under  the  provisions  of
    56  subdivision  three  of this section, or in an action or proceeding under

        A. 6115                             7
     1  subdivision two of this section, the franchisor has the burden of  proof
     2  to  show  that, or the extent to which, a decline in sales of the estab-
     3  lished franchise outlet or outlets occurred for reasons other  than  the
     4  opening of the new outlet.
     5    §  698-m. Discrimination prohibited. In granting franchises, consider-
     6  ing approval of transfers of franchises, and in administering its  fran-
     7  chise  system,  a franchisor shall not discriminate against a franchisee
     8  or prospective  franchisee  on  the  basis  of  race,  color,  religion,
     9  national origin, sex, or disability.
    10    §  2.  This  act shall take effect on the thirtieth day after it shall
    11  have become a law.