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The Committee that acted for the National Conference of Commissioners on Uniform State Laws in preparing the Uniform Franchise and Business Opportunities Act was as follows:
JACK DAVIES, William Mitchell College of Law, 875 Summit Avenue, St. Paul,
MN 55105, Chairman
JAMES C. McKAY, JR., Office of the Corporation Counsel, Room 343,
1350 Pennsylvania Avenue, N.W., Washington, DC 20004, Drafting Liaison
LIONEL H. FRANKEL, The University of Utah, College of Law, Salt Lake City,
UT 84112
STEPHEN G. JOHNAKIN, P.O. Box 14515, Richmond, VA 23221
BENNY L. KASS, Suite 1100, 1050 Seventeenth Street, N.W., Washington, DC 20036
JOHN L. McCLAUGHERTY, P.O. Box 553, Charleston, WV 25322
DONALD E. MIELKE, Suite 300, 1726 Cole Boulevard, Golden, CO 80401
HOWARD T. ROSEN, 23rd Floor, 80 Park Plaza, Newark, NJ 07102
ANDREW C. SELDEN, 2400 IDS Center, Minneapolis, MN 55402, Reporter
PHILLIP CARROLL, 120 East Fourth Street, Little Rock, AR 72201, President
(Member Ex Officio)
WILLIAM J. PIERCE, University of Michigan Law School, Ann Arbor, MI 48109,
Executive Director
WINDSOR DEAN CALKINS, 1163 Olive Street, Eugene, OR 97401, Chairman,
Division G (Member Ex Officio)
WILLIAM C. HILLMAN, 403 South Main Street, Providence, RI 02903, Chairman
PETER J. DYKMAN, Room 217 North, State Capitol Building, Madison, WI 53702
FREDERICK P. O'CONNELL, 74 Winthrop Street, P.O. Box R, Augusta, ME 04330
RUPERT M. BARKOFF, American Bar Association
ANDREW CAFFEY, International Franchise Association
TIMOTHY FINE, National Alliance of Franchisees
ALAN E. KORPADY, North American Securities Administrators Association, Inc.
Final, approved copies of this Act and copies of all Uniform and Model Acts and other printed matter issued by the Conference may be obtained from:
PREFATORY NOTE 1
SECTION 101. DEFINITIONS 6
SECTION 102. TERRITORIAL APPLICABILITY 11
SECTION 103. WAIVER VOID 12
SECTION 104. NONJUDICIAL RESOLUTION OF DISPUTES 13
SECTION 105. OTHER LAW 13
SECTION 106. UNCONSCIONABILITY 13
SECTION 107. NONRETROACTIVITY 14
SECTION 108. SHORT TITLE 14
SECTION 109. APPLICATION AND CONSTRUCTION 14
SECTION 110. EFFECTIVE DATE 14
SECTION 111. SEVERABILITY 15
SECTION 112. REPEALS 15
SECTION 201. DUTY OF GOOD FAITH 15
SECTION 202. RIGHT OF FREE ASSOCIATION 18
SECTION 301. EXEMPTIONS 19
SECTION 302. PRECOMMITMENT DISCLOSURE 20
SECTION 303. OFFERING CIRCULAR 22
SECTION 304. CHANGES 23
SECTION 305. NOTICE TO [ADMINISTRATOR] 24
SECTION 306. NEGOTIATED CHANGE PERMITTED 24
SECTION 401. EXEMPTIONS 25
SECTION 402. REGISTRATION REQUIRED 26
SECTION 403. DISCLOSURE DOCUMENT 27
SECTION 404. FURNISHING DISCLOSURE DOCUMENT 28
SECTION 405. DENIAL, SUSPENSION, OR CANCELLATION OF REGISTRATION 29
SECTION 406. EFFECT OF REGISTRATION 30
SECTION 407. CHANGES IN REGISTRATION AND DISCLOSURE DOCUMENT 30
SECTION 408. MINIMUM STANDARDS 31
SECTION 409. FINANCIAL ASSURANCE 32
SECTION 410. CERTAIN PRACTICES PROHIBITED 33
SECTION 411. REQUIREMENTS FOR AGREEMENT 34
SECTION 412. PRESERVATION OF RIGHTS 36
SECTION 413. PURCHASER'S RIGHT TO CANCEL 36
ARTICLE V. ADMINISTRATION; PROHIBITED PRACTICES; REMEDIES
SECTION 501. RULEMAKING 37
SECTION 502. SERVICE OF PROCESS 37
SECTION 503. RECORDS 38
SECTION 504. ACCESS TO INFORMATION 38
SECTION 505. MISREPRESENTATION PROHIBITED 38
SECTION 506. CIVIL LIABILITY 38
SECTION 507. BURDEN OF PROVING EXEMPTION 39
SECTION 508. LIMITATION OF ACTIONS 39
SECTION 509. JURISDICTION 40
SECTION 510. ACTION BY [ADMINISTRATOR] 40
SECTION 511. FEES 41
SECTION 512. CRIMINAL LIABILITY 42
Procedural History
The National Conference of Commissioners on Uniform State Laws (NCCUSL) decided in the summer of l983 to undertake the drafting of a Uniform Act in the field of franchising. The decision to make this Act part of the Conference program followed a year of work by a study committee that explored the need for and feasibility of such an Act.
The drafting effort moved ahead with one drafting meeting in 1983, two in 1984, four in 1985, two in 1986, and two in 1987. Successive drafts of the Act were considered line-by-line at each of these meetings. Drafts were also considered line-by-line by the Commissioners sitting in Committee on the Whole at Annual Meetings of the NCCUSL in August of 1985 and 1986. The Conference promulgated the Act at its annual meeting in August, 1987 after a third line-by-line reading.
The Need for a Uniform Act
The NCCUSL starts each drafting project expecting to produce an Act that will be useful to its legislator constituents. Four elements especially seem to point toward a successful NCCUSL project. First, the Conference has had its greatest success in commercial law. Second, the Conference has done well with Acts that set rules governing long-term business relationships. A third factor identifying the most successful NCCUSL undertakings is complexity, for when a project is complex, legislatures welcome the help offered by the NCCUSL, a group that is willing to study a thorny subject in great detail over several years.
Finally, the Conference does best when the need for uniformity of law among the states is manifest. Legislators understand the legal hazards that arise whenever business affairs flow across state lines while the law does not. Legislators then see the value of enacting a uniform act that minimizes the aggravation of shifting legal rules.
Applying these four criteria to the law of franchising and business opportunities, we find that on this topic the Conference has addressed legal rules that: affect commercial life, regulate long-term relationships, involve complex policy judgments, and cover activities that, although interstate, are now controlled by state laws of great variety. Promulgating a Uniform Act on franchises and business opportunities, therefore, is an undertaking within the profile of NCCUSL success.
Franchising plays a major role in the distribution of goods and services in the American economy. Many franchisors operate nationally and franchisees may do business in more than one state. Legislative consideration of bills affecting the field of franchising has been continuous for a decade and a half. Twelve states regulate franchise offerings with registration laws enacted in the early 1970s (New York's law was enacted in 1980). The Federal Trade Commission promulgated a Trade Regulation Rule on Franchising and Business Opportunities in 1979. Twenty-three states regulate "business opportunities" to some degree. Legislative activity continues to the present time, as illustrated by the bills introduced in legislatures around the nation during 1985 and 1986.
During those two years, bills on dealer relationships in the field of distribution, usually including franchise relationships, were introduced (but not enacted) in Alaska, Arizona, California, Connecticut, Iowa, Massachusetts, Minnesota, Missouri, Nebraska, Nevada, New York, Rhode Island, and Tennessee. Legislation (minor corrective amendments to an older statute) was enacted in Connecticut. In 1984, Michigan repealed its franchise registration statute in favor of a simple disclosure and anti-fraud requirement.
Bills amending franchise sales practices laws were introduced in California, Illinois, Indiana, and Minnesota.
Bills on business opportunities were introduced in Indiana, Maine, New York, Ohio, Oklahoma, South Dakota, South Carolina, and Texas. Amendments to older statutes were enacted in Indiana, Maine, and South Carolina.
Legislative activity in these areas may be expected to continue.
The Draft
The NCCUSL Drafting Committee worked to construct an act that balances the interests of franchisors, franchisees, and the public - an act that provides sensible law for franchising arrangements. Too many state laws now in effect have arisen out of political power struggles; the statutes in many cases represent a legislative victory for one side or the other based on political strength, rather than being the considered outcome of an effort to produce efficient, fair, and balanced law. Current law, in many instances, misses a fair balance between the interests of franchisor and franchisee and often ignores altogether the interests of consumers, other franchisees in the particular franchise system, or prospective franchisees in that system.
The Uniform Franchise and Business Opportunities Act contains five Articles. The first Article includes definitions and other general provisions. The second Article codifies certain minimum standards of conduct in franchise and business opportunity relationships. The third Article covers franchise sales practices. The fourth Article covers business opportunities sold on the strength of representations of near certain profitability. The business opportunities Article is subject to extensive exceptions, however, including an exception for businesses that meet the franchise criteria. The fifth Article includes the administrative provisions of the Act, as well as sanctions for violations of its provisions. Discussion of the main substantive themes of Articles II, III, IV, and V follow.
Article II
Article II imposes a general duty of good faith on parties to a franchise or business opportunity relationship. The duty is derived from the common law, Section 205 of the Restatement (Second) of Contracts, and the Uniform Commercial Code. Article II generally reflects current case law. It makes no unwarranted economic or political assumptions. It prevents surprise and, in combination with Sections 105 and 106, enhances the likelihood that the justified expectations of parties to a franchise or business opportunity will be fulfilled.
Article III
Article III governs offers and sales of franchises. It requires the franchisor to disclose material information so that a person who is considering the purchase of a franchise may make an informed investment decision. The Act provides a private right of action and strong public agency enforcement power to encourage compliance in lieu of the regulatory regime under the 12 state laws that now regulate franchise sales through a presale registration process.
Franchise law currently in place varies from a self-implementing disclosure requirement under a 1979 Federal Trade Commission Rule, to similar disclosure requirements under state law in Oregon and Michigan, to full presale registration requirements in 12 states (California, Illinois, Indiana, Maryland, Minnesota, North Dakota, New York, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin). All but the New York statute were enacted in the early 1970's. Hawaii has a filing and disclosure requirement. Michigan repealed its registration law in 1984 but retained presale disclosure and anti-fraud requirements. The remaining 35 states have no franchise registration or disclosure law of general applicability. The registration process in the 12 states constitutes a review of the disclosure document and in some states includes a screen for forbidden contract terms. Unlike state securities regulation, states currently do not conduct "merit" evaluation of proposed franchise offerings.
Varying regulatory attitudes in the registration states combined with varying state policies on such subjects as choice of law and choice of forum clauses, post-termination covenants not to compete, flexible franchise fee structures, etc., result in an inability of multistate franchisors to administer uniform franchise offerings across some state lines. "Red tape" in one or two states adds needless delay and expense to franchise offerings. This Act does away with the regulatory burden of registration in the maturing area of franchising, while preserving the process in the much newer area of "business opportunities."
Article IV
Article IV, the business opportunity article, should have a salutary effect in controlling the purveyors of various get-rich-quick schemes. It is designed to have relatively little impact on mainstream commercial enterprises.
Article IV relies for its effectiveness primarily on a requirement of presale registration by the promoter/seller of a business opportunity. Experience has demonstrated that shady operators do not in fact register, but nonregistration provides the means by which the enforcement authorities can force fraudulent promoters out of the market immediately upon discovery. That is, nonregistration provides a basis for a cease and desist order and there is then no need actually to show the fraudulent nature of the particular business opportunity.
The second control device is a requirement that the promoter maintain a bond, escrow deposit, or letter of credit to back up any promise to buy-back goods or to guarantee profit. The promoter can avoid this requirement by refraining from making the kind of representation that is the hallmark of offensive practices in the sale of business opportunities.
Article V
Remedies and administrative provisions are collected in Article V. The rationale for reducing the regulatory barrier to entry to the use of franchising as a method of distribution is the ready availability of effective private and public recourse against transgressions. Article V provides a clear and straightforward civil right of action and powerful public investigatory and enforcement power. The remedial provisions should provide both substantial deterrence against business opportunities abuses and modest hope for recovery from violators, but without establishing insurmountable barriers for legitimate users of distribution techniques that may also fall under the definition of "business opportunities." The private right of action makes up for the most glaring shortcoming of the FTC Trade Regulation Rule, the long-recognized absence of a private cause of action for violation of the Federal Trade Commission Act or rules promulgated thereunder.
The illogic and impracticality of operating national distribution systems under widely varying state laws should be obvious. The Conference believes that this Act represents a middle ground of thoughtful accommodation to competing interests. It is a forward step for the law.
Advisors
The Committee had assistance from a number of advisors throughout its work.
Official liaisons to the Committee from the American Bar Association were Martin Fern, Los Angeles, and Rupert Barkoff, Atlanta.
In addition, Byron E. Fox of New York served as liaison from the ABA Forum Committee on Franchising.
Andrew A. Caffey of Washington was official advisor to the committee from the International Franchise Association, a trade association representing franchisors.
Timothy Fine of San Francisco was the official advisor to the committee on behalf of the National Association of Franchisees and Dealers.
Alan Korpady of Wisconsin was the official advisor to the committee on behalf of the North American Securities Administrators Association, Inc., the securities commissioners and other officials who regulate franchising and business opportunities in the various states. Early in the project Cheryl Friedman of Iowa served in that advisory role.
In addition to these official advisors, the committee had the assistance of numerous observers who participated in advising the committee. Particularly active were:
John Baer, John Brown, Brian Butler, Ray Edwards, Michael Eisenberg, Myron Gordon, Robert Joseph, Simon Lazarus, H. Bret Lowell, Michael Lundsford, Quinn Martin, Lewis Rudnick, George Rummel, Neil Simon, and Richard Superfine.
Although divided into separate Articles for ease of reference and understanding, no part of the Act is intended for separate enactment.
SECTION 101. DEFINITIONS. As used in this [Act]:
(1) "[Administrator]" means the [title of enforcement official].
(2) "Advertisement" means information published in connection with an offer or sale of a franchise or business opportunity.
(3) "Affiliate" means a person controlling, controlled by, or under common control with another person.
(4) "Business day" means a day other than a Saturday, Sunday, or legal holiday under the laws of this State.
(5) "Business opportunity:"
(i) means a plan, agreement, or transaction, oral or written, between two or more persons, under which:
(A) a purchaser pays or agrees to pay an initial payment of $500 or more;
(B) a promoter or its affiliate or designee disposes, or offers or attempts to dispose, of goods or services to the purchaser, whether or not for resale, to assist the purchaser to begin a business; and
(C) the promoter or its affiliate or designee represents that:
(I) the promoter or its affiliate or designee will refund all or a substantial part of the purchaser's initial payment if the purchaser is unsuccessful or dissatisfied with the business opportunity;
(II) the promoter or its affiliate or designee will reimburse the purchaser for, or will purchase from the purchaser, goods the purchaser produces, grows, or modifies, or services the purchaser performs, using goods or services supplied by the promoter or its affiliate or designee, or resulting from those goods or services;
(III) the purchaser's success with the business opportunity is ensured because the promoter or its affiliate will provide, or will assist the purchaser in finding, locations or accounts for the use, operation, or placement of vending machines, racks, display cases, or similar devices, on premises the purchaser does not own or lease;
(IV) the purchaser's success with the business opportunity is ensured by a marketing plan prescribed in substantial part by the promoter or its affiliate under which the promoter or its affiliate will provide to the purchaser training, or marketing assistance, in the purchaser's method of operation; or
(V) the business opportunity is free from risk or certain to produce profits, which representation may arise from all of the assurances taken as a whole; but
(ii) the term does not include:
(A) a franchise;
(B) a security or a transaction in a security that is registered or qualified under or otherwise complies with [state securities act];
(C) a plan by a retailer of goods or services for the operation of a leased department within premises controlled by the retailer;
(D) a bona fide liquidation of a business; or
(E) a disposition of an interest in real property.
(6) "Designee" means a person whom a promoter designates as a source of goods or services to be used by a purchaser of a business opportunity and who gives consideration to the promoter or its affiliate in connection with either the designation or the disposition of goods or services to the purchaser.
(7) "Franchise" means:
(i) an agreement, express or implied, oral or written, between two or more persons by which:
(A) a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan prescribed in substantial part by the franchisor;
(B) operation of the franchisee's business pursuant to the marketing plan is substantially associated with a trademark, service mark, trade name, advertising, or other commercial symbol designating, owned by, or licensed by the franchisor or its affiliate; and
(C) the franchisee pays, agrees to pay, or is required to pay, directly or indirectly, a franchise fee; or
(ii) a master franchise.
(8) "Franchise fee" means a fee or charge for the right to enter into or maintain a business under a franchise, including a payment or deposit for goods, services, rights, or training, but not including:
(i) payment for a reasonable quantity of inventory goods at a bona fide wholesale price;
(ii) payment at fair market value for purchase or lease of real property, fixtures, equipment, or supplies necessary to enter into or to maintain a business;
(iii) payment for goods on consignment, if the proceeds remitted by the consignee from sale of the goods constitute only the bona fide wholesale price of the goods;
(iv) payment of a reasonable service charge or discount to the issuer of a credit card by a person honoring the credit card or to a trading stamp company by a person issuing trading stamps;
(v) payment of a commission or compensation in a transaction constituting in substance only a bona fide wholesale transaction;
(vi) repayment of a bona fide loan;
(vii) payment of a bona fide security deposit for real or personal property; or
(viii) payment of a bona fide rental or cooperative advertising charge by a tenant in a shopping center to the shopping center or to a person designated by the operator of the shopping center.
(9) "Franchisee" means a person to whom a franchise is granted.
(10) "Franchisor" means a person who grants a franchise and includes a subfranchisor with respect to a franchise the subfranchisor offers or sells.
(11) "Initial payment" means an amount the purchaser of a business opportunity pays or is obligated to pay to the promoter or its affiliate or designee before the end of the sixth month after the date of the business opportunity agreement, but does not include:
(i) payment for a reasonable quantity of inventory goods at a bona fide wholesale price;
(ii) payment of a bona fide security deposit in connection with the bailment of goods for demonstration, sample, or similar purposes, in an amount not in excess of the greater of the fair market value or reasonably anticipated replacement cost of the goods; or
(iii) payment of a bona fide rental or cooperative advertising charge by a tenant in a shopping center to the shopping center or to a person designated by the operator of the shopping center.
(12) "Master franchise" means an agreement in which a franchisor, for consideration given for the right, grants a subfranchisor a right to offer or sell franchises for the subfranchisor's account. A franchise is not a master franchise solely because the franchise grants a person a right to receive compensation for making referrals to a franchisor or subfranchisor. A relationship between a franchisor and a broker, agent, or sales representative who does not have an ongoing relationship with franchisees of the franchisor is not a master franchise unless the broker, agent, or sales representative gives consideration to the franchisor or its affiliate in exchange for a right to offer franchises.
(13) "Offer" or "offer to sell" means an offer, or an attempt to offer, to dispose of, or a solicitation of an offer to obtain, an interest in a franchise or business opportunity, but does not include (i) renegotiation or other conduct in anticipation of renewal, replacement, or extension of an existing franchise or business opportunity, whether or not the existing agreement is to be modified or replaced, or (ii) an offer to acquire an interest in a franchise or business opportunity.
(14) "Order" means an action of the [Administrator] applicable to a particular matter.
(15) "Person" means an individual, corporation, business trust, estate, trust, partnership, joint venture, association, government, governmental subdivision or agency, any other legal or commercial entity, or the [Administrator].
(16) "Promoter" means a person who offers or sells a business opportunity or an agent of that person.
(17) "Publish" means to disseminate information to the public or to a segment of the public.
(18) "Rule" means a regulation or standard of general application promulgated by the [Administrator] under this [Act].
(19) "Sell" means to dispose, or to agree to dispose, of an interest in a franchise or business opportunity, but does not include renegotiation or other conduct in anticipation of renewal, replacement, or extension of an existing franchise or business opportunity, whether or not the existing agreement is to be modified or replaced.
(20) "State" means a state, territory, or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico.
(21) "Subfranchisor" means a person who acquires a master franchise.
1. Paragraph (1): The designation of the official who is to be the Administrator of this Act is discretionary with the enacting state. The Administrator should be an official with law enforcement authority, such as an attorney general or commissioner of commerce. States are strongly encouraged, however, to employ the uniform designation of "Administrator" to enhance uniformity of usage and facilitate understanding of and compliance with this Act in enacting states.
2. Paragraph (5): The definition of a "business opportunity", and the scope of coverage and substantive requirements of Article IV, differ materially in certain respects from the corresponding provisions of the FTC Rule (16 CFR Part 436). Under the FTC Rule, state law may afford equal or greater protection than the Rule to prospective purchasers of business opportunities but compliance with the FTC Rule may not be excused where the state law does not provide the same degree of protection. The definition is also subject to certain exemptions (Section 401).
3. Paragraph (5)(i)(C): A mere warranty of the quality or performance of goods or services, or other customary warranties, expressed or implied, do not come within subparagraph (5)(i)(C). A refund provision described in subparagraph (5)(i)(C)(I) is, rather, an assurance that the buyer faces no risk with the business opportunity venture.
4. Subparagraph 7(i)(B) is not satisfied merely because a person sells a branded product or service.
5. Subparagraphs (8)(viii) and (11)(iii) reject the conclusion in Fisherman's Net, Inc. v. Weiner, 608 F. Supp. 1283 (D. Me. 1985) (bona fide shopping center rental or cooperative advertising charges can constitute an "initial payment" or its equivalent under Maine business opportunity law).
6. Paragraph (12): The phrase "for the subfranchisor's account" implies that the subfranchisor retains some residual equity interest in the resulting subfranchise relationship. The phrase excludes from the definition an agreement that in substance is an agreement merely to be a commissioned sales representative.
7. Paragraph (21): A subfranchisor is a "franchisor" (paragraph (10)) in respect to a franchise it offers or sells.
SECTION 102. TERRITORIAL APPLICABILITY.
(a) This [Act] applies to a franchise or business opportunity that is offered or sold in this State after the effective date of this [Act]. Article II of this [Act] also applies to a franchise or business opportunity that is operated in this State by the franchisee or purchaser if it is renewed by agreement of the parties to the relationship after the effective date of this [Act].
(b) A franchise or business opportunity is offered or sold in this State if an offer to sell is made or accepted in this State or an offer to buy is accepted in this State.
(c) An offer to sell is made in this State if the offer is directed by the offeror into this State from within or from outside this State and is received where it is directed. An offer to sell is accepted in this State if the offeree communicates acceptance to the offeror in this State and acceptance is received where it is directed.
(d) This [Act], except Sections 501(a), 502(a), and 503, also applies to a franchise or business opportunity offered or sold outside this State if it is offered or sold to a resident of this State and is to be conducted in this State.
(e) If a franchise is subject to this [Act] under subsection (d), Sections 302 through 305 are satisfied if the franchisor, at the time specified either in Section 302(b) or the franchise disclosure law of the other state, delivers to the offeree an offering circular substantially complying with Section 303 or with the franchise disclosure law of the other state.
(f) If a business opportunity is subject to this [Act] under subsection (d), Sections 402 through 404 are satisfied if the promoter at the time specified either in Section 404(b) or the business opportunity law of the other state delivers to the offeree a disclosure document substantially complying with Section 403 or with the business opportunity law of the other state.
(g) An offer to sell is not made in this State solely because the offer appears in a newspaper or other publication of general and regular circulation if the publication has had more than two-thirds of its circulation outside this State during the 12 months before the offer is published or the offer appears in a broadcast or transmission originating outside this State.
Subsection (e): A person offering or selling a franchise outside this State to a resident of this State for operation in this State must deliver a complete offering circular under the corresponding franchise law of the sister state to avoid the applicability of Sections 302 through 305 under subsection (d).
SECTION 103. WAIVER VOID. A party to a franchise or business opportunity may not waive a right or benefit conferred, or avoid a duty imposed, by this [Act] or by a rule or order under this [Act] except to settle a bona fide dispute or claim asserted under this [Act], or as permitted by Section 306. A settlement of an actual or potential dispute or claim may include a general release.
An individually negotiated modification to a franchise, permitted under Section 306, is not in violation of Section 103. A standard "integration" clause of a franchise agreement cannot negate a material misrepresentation made to induce the purchase of the franchise and would be a violation of Section 103.
SECTION 104. NONJUDICIAL RESOLUTION OF DISPUTES. Parties to a franchise or business opportunity may agree to arbitration, mediation, or other nonjudicial resolution of an existing or future dispute.
SECTION 105. OTHER LAW.
(a) Principles of law and equity, including capacity to contract, estoppel, fraud, misrepresentation, duress, coercion, and mistake, supplement this [Act].
(b) This [Act] does not limit (i) rights, privileges, remedies, or duties that may exist under other law, or (ii) the power of this State to punish a person for conduct constituting a crime under other law.
Over the course of a long-term business relationship, the terms of the parties' written agreement can be modified by subsequent conduct. Subsection (a), accordingly, preserves such doctrines as oral modification and practical construction of contracts, tolling, promissory estoppel, and forum non conveniens. See, e.g., Williston on Contracts, Third Edition, Sections 1828 (Written Contracts May Be Varied By Subsequent Oral Agreement) and 1880 (Cancellation Of Contracts Enforced By Equity); Huver v. Opatz, 392 N.W.2d 237 (Minn. 1986). Compare UCC § 2-208.
SECTION 106. UNCONSCIONABILITY.
(a) If a court, as a matter of law, finds a franchise or business opportunity or a provision of either to have been unconscionable when it was made, the court may so limit the application of the unconscionable provision as to avoid an unconscionable result, or it may enforce the remainder of the agreement without the unconscionable provision, or if necessary it may refuse to enforce the agreement.
(b) Before making a finding of unconscionability under subsection (a), the court, on motion of a party or its own motion, shall afford the parties a reasonable opportunity to present evidence as to the setting, purpose, application, and effect of the agreement, provision, or conduct complained of.
1. This section does not prevent a court from granting preliminary injunctive relief. Subsection (b) requires a court to take evidence only as a prerequisite to finding a contract term to be unconscionable. A summary finding that a provision of a franchise or business opportunity is not unconscionable is permitted by Section 106.
2. Section 106 is based upon the corresponding provisions of Article 2 of the Uniform Commercial Code. The standard of unconscionability, articulated in subsection (a), is applied as of the time of the formation of the contract, but may be established by evidence that includes subsequent conduct. Frivolous or groundless claims of unconscionability are not addressed by this Act but may be dealt with under general rules of civil procedure.
SECTION 107. NONRETROACTIVITY. This [Act] does not apply to a claim for relief arising before the effective date of this [Act].
SECTION 108. SHORT TITLE. This [Act] may be cited as the "Uniform Franchise and Business Opportunities Act".
SECTION 109. APPLICATION AND CONSTRUCTION. This [Act] shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this [Act] among states enacting it. This [Act] shall be liberally construed to effectuate its purposes.
SECTION 110. EFFECTIVE DATE. This [Act] takes effect on [________________, _____, 19__].
At least 180 days should be allowed from enactment before the Act takes effect. The effective date should be stated as a date certain.
SECTION 111. SEVERABILITY. If a provision of this [Act] or its application to a person or circumstance is held invalid, the invalidity does not affect other provisions or applications of this [Act] that can be given effect without the invalid provision or application, and to that end the provisions of this [Act] are severable.
SECTION 112. REPEALS. The following acts and parts of acts are repealed:
(1)
(2)
(3)
Section 112 repeals are appropriate for states with existing franchise registration or disclosure laws, business opportunities laws, or franchise relationship regulation laws. Existing state law regarding registration or disclosure in connection with offers or sales of franchises and business opportunities, and relationship laws of general applicability, should be repealed. Conforming cross-references and coordinating language and exemptions should be enacted in state securities law, unfair trade practices law, and similar enactments. Existing law applicable only to specific industries or types of distribution relationships should be reexamined and either repealed or coordinated with this Act where appropriate, especially Articles II and III.
SECTION 201. DUTY OF GOOD FAITH. A franchise or business opportunity imposes on the parties a duty of good faith in its performance and enforcement. "Good faith" means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.
1. Section 201 follows Restatement (Second) of Contracts Section 205 and the Uniform Commercial Code Section 2-103. It imposes a contractual duty upon parties to a franchise or business opportunity, and arises upon the formation of the agreement. The section is intended to prevent arbitrary, malicious, or abusive conduct, or conduct that deprives the other contracting party of the benefit of the bargain, and to preserve the justifiable expectations of the parties to a franchise or business opportunity relationship. It does not apply in the give and take of bargaining preceding the formation of the agreement. It is not intended to eliminate risk.
Section 201 establishes an obligation on all parties to a franchise or business opportunity when dealing with other parties to the relationship to act in a manner that is commercially reasonable in the particular trade. This section does not create a fiduciary standard. A franchise is a business arrangement. See Bain v. Champlain Petroleum Co., 692 F. 2d 43 (8th Cir. 1982), and Picture Lake Campground, Inc. v. Holiday Inns, Inc., 497 F. Supp. 858 (E.D. Va., 1980). The duty of good faith is based upon the common law principle authoritatively articulated in Kirke Lashelle Co. v. Paul Armstrong Co., 88 N.E. 163 (NY 1933), and more recently reaffirmed in Division of Triple T Service, Inc. v. Mobil Oil Corp., 311 N.Y.S. 2d 961 (1970). See also Pappas Co. v. E. & J. Gallo Winery, 610 F. Supp. 662 (E.D. Cal. 1985). The duty is imposed to modify and limit the exercise of discretion or power reserved in a contract, rather than to add to or override substantive provisions of a contract, especially in longer term relational contracts which must, by their nature, reserve significant discretionary authority to provide marketing flexibility over the term of the arrangement. It precludes a party from recapturing economic benefits forgone in the process of contracting. See Goetz and Scott, "Principles of Relational Contracts," 67 Virginia L.R. 1089 (1981) and Burton, "Breach of Contract and the Common Law Duty to Perform in Good Faith," 94 Harvard L.R. 369 (1980).
The duty prohibits one contracting party from depriving another of the benefit of the bargain. American Business Interiors, Inc. v. Haworth, Inc., 798 F. 2d 1135 (8th Cir. 1986); Conoco, Inc. v. Inman Oil Co., Inc., 774 F. 2d 895 (8th Cir. 1985).
The Act relies on the duty of good faith rather than offering a code of prohibited or mandatory substantive actions or practices to govern the business relationship of parties to a franchise or business opportunity. More than two years of intense study and debate by the Drafting Committee, which considered all existing statutes on termination, nonrenewal, and related issues, as well as several original drafts that attempted to list prohibited and mandatory practices, led the NCCUSL to the conclusion that a list of prohibitions could not be expressed in a manner that was evenhanded, economically efficient, or responsive to the interests of consumers and of other franchisees or business opportunity operators. The NCCUSL also was concerned that the Act remain sufficiently flexible to be fair and appropriate over the enormous range of industrial sectors and geographic markets in which franchising is being employed and in which business opportunities may come to be employed as a legitimate production or distribution technique. Precommitment disclosure of contract terms under Articles III and IV combined with Sections 505 and 506 will substantially reduce the risks of overreaching and surprise in franchise and business opportunity relationships, further reducing the need for a code of prohibited practices.
Section 201 does not abrogate, or codify, principles of promissory estoppel, oral modification, or other legal or equitable doctrines affecting the formation, performance, or enforcement of contracts. See Section 105(a). Specific facts and circumstances may give rise to other duties not stated in Section 201. Matter of Sbarro Holding, Inc. (Yuan), 445 N.Y.S. 2d 911 (N.Y. Sup. Ct. 1981).
2. Parties to a franchise or business opportunity may not waive or exclude the duty of good faith by agreement or by conduct. See Section 103.
3. Courts are expected and encouraged to apply Section 201 flexibly in accordance with evolving standards of commercial behavior. See Sections 105 and 106.
4. The principles underlying Section 201 are reflected in the results of such cases as Photovest Corp. v. Photomat Corp., 606 F. 2d 704 (7th Cir. 1979) (predatory conduct taken to destroy a business operated pursuant to a franchise actionable under federal antitrust law and a common law duty of good faith); Larese v. Creamland Dairies, Inc., 767 F. 2d 716 (10th Cir. 1985) (a contractually reserved discretion may not be exercised arbitrarily if the power to act arbitrarily has not been expressly reserved by the contract); Conoco, Inc. v. Inman Oil Co., Inc., 774 F. 2d 895 (8th Cir. 1985) (duty of good faith precludes conduct that unjustifiably deprives the other party to a contract of the benefit of its bargain); and Atlantic Richfield Co. v. Razumic, 480 Pa. 366, 390 A. 2d 736 (1978) ("reasonable expectations" of parties and "principles of good faith and commercial reasonableness" invoked to prevent "arbitrary" termination-nonrenewal of dealer franchise that was silent regarding franchisor's right to terminate at will). Amoco Oil Co. v. Burns, 496 Pa. 336, 437 A. 2d 381 (1981) and Zapatha v. Dairy Mart, Inc., 408 N.E. 2d 1370 (Mass. 1980) (express contractual right to terminate at will upheld in the absence of showing of surprise, usurpation of funds, loss of investment, or other overreaching or unfair or deceptive practices) are consistent with Section 201.
Section 201 is also consistent with the analysis in Kestenbaum v. Falstaff Brewing Corp., 514 F. 2d 690 (5th Cir. 1975), at 696, of a producer's right to restrict the class of those it will accept as assignees of its dealers, and therefore limit the selling price of one of its dealerships, in a sale by an existing dealer, to provide the buyer a chance to realize a return on its investment.
While this Act does not apply to dealerships that are not "franchises," Section 201 also reflects the legal principles developed in a line of common law cases relating to termination of dealerships, represented by: de Treville v. Outboard Marine Corp., 439 F. 2d 1099 (4th Cir. 1971) (principles of equity and good conscience, broader than principles of fraud or duress, limit a contractually reserved right to terminate at will); Tele-Controls, Inc. v. Ford Industries, Inc., 388 F. 2d 48 (7th Cir. 1967) (duty of good faith applies to contractual right to terminate at will); Alpha Distrib. Co. of California, Inc. v. Jack Daniel Distillery, Inc., 454 F. 2d 442 (9th Cir. 1972) (at will termination of oral distributorship for an indefinite term permitted absent fraud, threats of violence, or defamation); Randolph v. New England Mutual Life Insurance Co., 526 F. 2d 1383 (6th Cir. 1975) (contract clause allowing at will termination of a fixed term agency contract cannot be exercised in "bad faith").
5. Section 201 does not establish a "good cause" rule. Compare Kealey Pharmacy and Home Care Service, Inc. v. Walgreen Co., 761 F. 2d 345 (7th Cir. 1985) (nondiscriminatory termination of all dealerships while preserving corporate outlets, pursuant to a right expressly reserved in a written contract, held to violate statutory "good cause" standard for termination).
SECTION 202. RIGHT OF FREE ASSOCIATION. A party to a franchise or business opportunity has a right to form or join a trade or other lawful association whose purposes are related to the business of the franchise or business opportunity.
A party to a franchise or business opportunity has a right to associate with other members of the same system or others similarly situated to advance their common business interests, and may not be penalized for doing so. This section does not insulate conduct that is anticompetitive, or detrimental to the goodwill of a trademark licensed in the relationship, and it does not create independent substantive contractual rights or a duty to bargain.
SECTION 301. EXEMPTIONS.
(a) An offer or sale of a franchise is exempt from Sections 302 through 305 if it is:
(1) by a franchisor and (i) the franchisor has sold no more than three franchises in all states within the preceding 12 months, (ii) the franchisor does not publish an advertisement for that franchise, and (iii) the buyer is represented in the transaction by legal counsel, or a certified public accountant, independent of the franchisor;
(2) by a franchisor and (i) the purchaser, or one of the purchaser's officers, directors, partners, or principals, has had two or more years of experience in the line of business in which the franchise will be operated, and (ii) the purchaser and the franchisor reasonably expect that sales derived by the franchisee from the franchise will constitute less than 20 percent of the franchisee's total sales in all lines of business during the first 12 months of operation of the franchise;
(3) to an officer, director, partner, principal, or affiliate of the franchisor, and the offer is not pursuant to a public offering;
(4) in exchange for one or more existing franchises and the terms and conditions of the exchange are approved by a court pursuant to the United States Bankruptcy Code;
(5) by or to a state or a subdivision of a state or other governmental agency; or
(6) by a franchisee, including a subfranchisor selling the entire master franchise, for the franchisee's account and the sale is not effected by or through the franchisor.
(b) A sale for purposes of subsection (a)(6) is not effected by or through the franchisor solely because the franchisor has or exercises a right to consent to the transaction, to approve or disapprove a proposed buyer of the franchise, or to charge a transfer fee under the franchise.
1. Caution should be exercised in transactions that may be exempt under Section 301 but not under the FTC Rule (16 CFR Part 436).
2. The exemption in subparagraph (a)(2) is based upon the "fractional franchise" exemption from the FTC Rule, which assumes that investors with the prescribed level of experience and lack of dependence on the franchise do not need customary precommitment disclosure. All business interests of the franchisee are to be taken into account in determining the universe against which the 20% standard is to be applied.
3. The bankruptcy exemption is based on the idea that contractual exchanges supervised by a bankruptcy court do not require the precommitment disclosure required under other circumstances.
SECTION 302. PRECOMMITMENT DISCLOSURE.
(a) A person may not offer or sell a franchise in this State without furnishing the prospective franchisee at the time required by subsection (b) an offering circular complying with Section 303.
(b) A franchisor shall furnish an offering circular to a prospective franchisee at the earliest of (i) ten business days before the prospective franchisee executes an enforceable agreement relating to the franchise, (ii) ten business days before the franchisor receives consideration for the franchise, or (iii) the first personal meeting held with the prospective franchisee for the purpose of discussing the offer or sale of the franchise.
(c) A signature on an acknowledgment of receipt for an offering circular by an officer or agent of a corporation or by a general partner in a partnership is effective as against the corporation and its shareholders or the partnership and its partners.
(d) The franchisor shall furnish to the prospective franchisee a completed copy of the franchise agreement and each related agreement not later than five business days before its execution. This subsection does not require postponement of execution of the agreements if changes in the agreements are made at the request of the prospective franchisee.
(e) A franchisor who receives from a prospective franchisee consideration or a signed document relating to the franchise earlier than is permitted by subsection (b) does not violate this section if the franchisor immediately and unconditionally returns the consideration or document.
(f) Furnishing an offering circular complying with Section 303 not less than ten business days before the franchisor accepts consideration or an enforceable agreement from a prospective franchisee cures (i) a previous inadvertent failure to furnish to the prospective franchisee an offering circular complying with Section 303 or (ii) an inadvertent failure to furnish an offering circular at the time required by this section.
(g) Subsections (b) and (d) are satisfied if the offering circular and agreements are furnished in compliance with applicable requirements of the Federal Trade Commission Trade Regulation Rule on Franchising and Business Opportunity Ventures. [A change in delivery requirements under the Federal Trade Commission Rule which is promulgated after the effective date of this [Act] becomes effective for purposes of this Article 90 days after its promulgation, unless the [Administrator] by rule earlier finds the change to be inconsistent with this [Act].]
1. Subsection (b) is based upon the Federal Trade Commission Trade Regulation Rule on Franchising and Business Opportunity Ventures (16 CFR Part 436). The "first personal meeting" rule of subsection (b) is a variation of the parallel requirement of the FTC Rule.
2. The first sentence of subsection (d) is based on the parallel requirement of the Federal Trade Commission Rule (16 CFR Part 436). The requirement as to related agreements applies to agreements to be entered into essentially contemporaneously with the franchise and does not apply to agreements entered into later during the term of the franchise.
3. Subsection (f) rejects the holding of Ciampi v. Red Carpet Corp. of America, et al., 167 Cal. App. 3d 336 (Cal. Ct. App. 1985), to the effect that erroneous disclosures that violated the state franchise disclosure law could not be corrected by a subsequent accurate disclosure that preceded the purchaser's payment of a fee or execution of an enforceable agreement. Because this section applies only to inadvertent errors, it does not permit rectification of knowing or intentional violation of this Article.
4. The bracketed language in subsection (g) is only for states where automatic acceptance of future revisions in the FTC Rule might constitute an unconstitutional delegation of legislative or administrative authority. To enhance uniformity, Administrators should follow a strong presumption against modifying or rejecting changes.
SECTION 303. OFFERING CIRCULAR.
(a) The offering circular required by Section 302(a) must contain:
(1) a statement of all material information relating to the franchise, the franchisor, and the circumstances of the offering;
(2) except as provided in subsection (d), a copy of the franchisor's most recent audited financial statements, including statements of income and loss for the franchisor's most recent three fiscal years;
(3) a specimen of each agreement proposed for use in connection with the franchise; and
(4) duplicate acknowledgment of receipt pages to be signed and dated by the prospective franchisee, one of which, when completed, must be detached and retained by the franchisor.
(b) The cover of the offering circular must state conspicuously that the [Administrator] has not approved, recommended, or endorsed the franchise described in the offering circular and that the [Administrator] has not reviewed the offering circular or the adequacy or accuracy of the information contained in the offering circular.
(c) A franchisor that is a subsidiary of another person may use the audited financial statements of the other person to satisfy subsection (a)(2) if (i) the person whose audited financial statements are used has unconditionally guaranteed in writing all franchise obligations of the franchisor and the offering circular so states, and (ii) the franchisor also includes in the offering circular its balance sheet, which may be unaudited, as of a date within 90 days before the date of the offering circular.
(d) Unaudited statements of income and loss may be used under subsection (a)(2), but only to the extent audited statements have not been made. If an unaudited statement of income and loss is used, it must be clearly and conspicuously labeled as unaudited. Audited statements of income and loss must be used as soon as practicable but not later than 120 days after the end of the franchisor's first full fiscal year after the date on which the franchisor must comply with this Article.
(e) This section is satisfied by a Uniform Franchise Offering Circular prepared in accordance with the Guidelines for the Preparation of the Uniform Franchise Offering Circular promulgated by the North American Securities Administrators Association or its successor, or by a disclosure document prepared in accordance with the content and format requirements of the Federal Trade Commission Trade Regulation Rule on Franchising and Business Opportunity Ventures. [A change in the requirements for the Uniform Franchise Offering Circular or for disclosure documents under the Federal Trade Commission Rule which is promulgated after the effective date of this [Act] becomes effective for purposes of this Article 90 days after its promulgation, unless the [Administrator] by rule earlier finds the change to be inconsistent with this [Act].]
(f) This section is satisfied by delivery of a single offering circular complying substantially with this section or with the franchise disclosure law of another state if this [Act] and the similar laws of the other state have concurrent application.
1. Subsection (a)(3): The requirement as to each agreement proposed for use in connection with the franchise applies to agreements to be entered into essentially contemporaneously with the franchise, and does not apply to agreements entered into later during the term of the franchise.
2. Subsections (c) and (d): The term "financial statements" is used in its common accounting sense, denoting a balance sheet, a statement of income and loss, a statement of changes in financial condition, and notes. The term "audited" means examination of the financial statements in accordance with generally accepted auditing standards, and expression of an opinion on the financial statements, by an independent certified or licensed public accountant.
3. Subsection (d) is based upon the "phase-in" rule for audited financial statements under the Federal Trade Commission Rule (16 CFR Part 436).
4. The bracketed language in subsection (e) is only for states where automatic acceptance of future revisions in either disclosure format by its promulgating agency might constitute an unconstitutional delegation of legislative or administrative authority. Administrators should use a strong presumption against modifying or rejecting changes.
SECTION 304. CHANGES. A franchisor shall promptly revise its offering circular to reflect a material change in the information it contains. If an offering circular is revised under this section, the franchisor, before selling a franchise to a prospective franchisee who received an earlier version of the offering circular, shall deliver a revised offering circular to the prospective franchisee not later than two business days before the franchisor accepts consideration or an enforceable agreement from the prospective franchisee. The prospective franchisee, on the advice of its legal counsel, may waive the two-business-day requirement.
SECTION 305. NOTICE TO [ADMINISTRATOR].
(a) Before offering or selling a franchise in this State, a franchisor or subfranchisor shall file with the [Administrator] a notice that states the name of the franchisor, the name under which the franchisor conducts business, and the franchisor's telephone number and principal business street address.
(b) While a franchisor continues to offer or sell franchises in this State, the franchisor shall immediately notify the [Administrator] of any change in the information contained in the franchisor's notice on file with the [Administrator].
(c) A notice filed under subsection (a) remains in effect until modified or withdrawn by the franchisor or canceled by the [Administrator].
(d) The [Administrator] may cancel a notice filed under subsection (a) upon finding that the franchisor cannot be located at the address or telephone number stated in the notice. Cancellation is without prejudice to the franchisor's right to file a new notice and does not invalidate an offer or sale made before the franchisor receives notice of the cancellation. The [Administrator] shall notify a franchisor that its notice has been canceled by mailing a notice of cancellation stating the factual grounds for the cancellation to the address stated in the franchisor's notice and to another address, if any, at which the [Administrator] has reason to believe the franchisor is more likely to receive the notice.
In addition to filing a notice under subsection (a), a franchisor must file a consent to service of process under Section 502(a) and pay the filing fee under Section 511.
SECTION 306. NEGOTIATED CHANGE PERMITTED. This Article does not preclude negotiation of the terms and conditions of a franchise before or after it is sold. A franchisor need not amend its offering circular to negotiate with an offeree, or make supplementary disclosure to that offeree, by reason of a change negotiated in the terms and conditions of a franchise.
1. This section rejects the policies adopted by some state franchise administrators that the terms of franchise agreements cannot be negotiated to differ from what was presented in the offering circular, or cannot be negotiated without a cumbersome amendment and redisclosure process. One of the principal purposes of precommitment disclosure is to give a prospective investor information to make an informed investment decision, and to bargain for the best and most suitable terms available. Such negotiation in individual cases does not require separate, prior, or serial disclosures to the offeree. The franchisor's willingness to bargain on certain terms of the offering may itself be material information that should be disclosed in the offering circular.
2. A pattern of negotiating variations of the same terms may call into question the accuracy of the offering circular's disclosure of the terms of the offering. Where a disclosure item is required to reflect whether certain features of franchises offered contemporaneously are uniform, such as in the area of initial and continuing franchise fees, an individual negotiation may give rise to a duty to modify the offering circular subsequently provided to others.
3. No inference should be drawn from the absence from Article IV of a counterpart to Section 306.
See Comment to Section 101(5), regarding the differing definition in this Act of "business opportunity" from that in the FTC Rule (16 CFR Part 436). The exemptions provided in Section 401 and the exclusions provided in Section 101(5) do not correspond precisely to those in the FTC Rule.
SECTION 401. EXEMPTIONS.
(a) The following are exempt from this Article:
(1) a disposition of goods or services to a business that has been engaged for at least six months in distributing other goods or services not supplied by or through the promoter or its affiliate or designee, if the parties reasonably expect the goods or services supplied by the promoter or its affiliate or designee to constitute less than one-third of total sales by the purchaser during the first 24 months after the disposition;
(2) a disposition of goods or services in connection with the sale of an ongoing business or segment of a business that has actively conducted the business for six months next preceding the disposition; or
(3) an offer or sale of a business opportunity by or to a state or a subdivision of a state or other governmental agency.
(b) A business opportunity is exempt from Sections 402 through 409 and Section 411 if (i) it is offered by a promoter whose net worth exceeds $5,000,000 according to the promoter's most recent audited balance sheet as of a date within 15 months before the transaction, or (ii) the promoter is 80 percent or more owned by another person whose net worth exceeds $5,000,000 according to its most recent audited balance sheet as of a date within 15 months before the transaction and that person in writing unconditionally guarantees the promoter's performance.
1. Exemption under subsection (a) is only from Article IV, and not from other provisions of the Act, including Section 505.
2. Businesses that are subject to comprehensive regulation under other statutes may petition the Administrator under Section 501 for exemption from all or part of Article IV.
SECTION 402. REGISTRATION REQUIRED.
(a) A promoter who proposes to offer or sell a business opportunity in this State shall first register the offering with the [Administrator].
(b) The promoter shall file with the [Administrator] an application for registration. The [Administrator] by rule shall prescribe the form for the application. The form must require the promoter to state the promoter's name, the name under which the promoter conducts business, the promoter's organizational form and the jurisdiction in which it is organized if the promoter is not an individual, the promoter's telephone number, the promoter's business street address, the name and address of each person who offers the business opportunity, and a brief description of the business opportunity being offered. The application must be accompanied by a specimen of a proposed disclosure document complying with Section 403, a consent to service of process required under Section 502(a), and the filing fee prescribed by Section 511, and other information the [Administrator] requires by rule or order.
(c) If the [Administrator] finds the filing to be complete and has no reason to believe the disclosure document is in violation of Section 403 or 505(a) and there is no order outstanding under Section 405(a), the [Administrator] shall issue an order of registration of the business opportunity offering. The business opportunity offering becomes registered automatically on the 22nd day after the application for registration is filed if the [Administrator] has not issued an order granting or denying registration. The [Administrator] may not routinely ask applicants for registration to waive or defer the automatic registration of an offering.
(d) Registration remains effective until it is canceled by the promoter or canceled or suspended by the [Administrator]. A promoter may withdraw its application or cancel its registration by notice to the [Administrator].
The effectiveness of Article IV rests primarily on the requirement of pre-offer registration by the promoter of the business opportunity offering. Experience demonstrates that irresponsible or dishonest operators in fact do not register, but the failure to do so provides a ready, unambiguous ground upon which the Administrator may move against fraudulent promoters. The Administrator in such cases is not put to the burden of showing the fraudulent nature of the particular offering. Registration review by the Administrator does not constitute merit review of the offering.
SECTION 403. DISCLOSURE DOCUMENT.
(a) The disclosure document required under Section 404 must set forth all material facts and circumstances relating to the business opportunity, the identity and background of the promoter and its directors, officers, general partners, affiliates and designees, and the circumstances of the offering. The disclosure document must contain the most recent audited financial statements of the promoter as of a date within 15 months before the offering is registered, and a specimen of each agreement proposed for use in connection with the business opportunity.
(b) The [Administrator] by order may require that additional information be contained in a disclosure document or filed with the [Administrator].
(c) The [Administrator] shall accept as complying with this section as to format (i) a disclosure document prepared in accordance with the requirements of the Federal Trade Commission Trade Regulation Rule on Franchising and Business Opportunity Ventures, (ii) a disclosure document prepared in accordance with a uniform disclosure format promulgated by the North American Securities Administrators Association or its successor, or (iii) a disclosure format approved for use by five or more states. [A change in the requirements for disclosure under the Federal Trade Commission Rule or the North American Securities Administrators Association or state-approved disclosure format which is promulgated after the effective date of this [Act] becomes effective for purposes of this Article 90 days after its promulgation unless the [Administrator] by rule earlier finds the change to be inconsistent with this [Act].]
(d) The disclosure document must set forth conspicuously on its cover a statement substantially reproducing Section 406(a).
(e) The disclosure document must contain duplicate acknowledgment of receipt pages to be signed and dated by the prospective purchaser, one of which, when completed, must be detached and retained by the promoter.
1. The bracketed language in subsection (c) is for states where automatic acceptance of future revisions in a disclosure format by its promulgating agency might constitute an unconstitutional delegation of legislative or administrative authority. Administrators should use a strong presumption against modifying or rejecting changes.
2. No inference should be drawn from the absence of a counterpart in Article IV to Section 306. See Sections 103 and 411.
SECTION 404. FURNISHING DISCLOSURE DOCUMENT.
(a) A person may not offer or sell a business opportunity in this State without furnishing to the prospective purchaser at the time required under subsection (b) a copy of a disclosure document on file under Section 402 and complying with Section 403.
(b) The promoter shall furnish the disclosure document to the prospective purchaser at the earliest of (i) ten business days before the prospective purchaser executes an enforceable business opportunity agreement, (ii) ten business days before the promoter or its affiliate or designee receives consideration for the business opportunity, or (iii) the first personal meeting held with the prospective purchaser for the purpose of discussing the offer or sale of the business opportunity.
(c) Subsection (b) is satisfied if the disclosure document is delivered in accordance with the requirements relating to the time for making disclosure in the Federal Trade Commission Trade Regulation Rule on Franchising and Business Opportunity Ventures. [A change in the delivery requirements under the Federal Trade Commission Rule which is promulgated after the effective date of this [Act] becomes effective for purposes of this Article 90 days after its promulgation, unless the [Administrator] by rule earlier finds the change to be inconsistent with this [Act].]
1. The "first personal meeting" rule of Section 404(b) is a variation of the parallel requirement of the Federal Trade Commission Trade Regulation Rule (16 CFR Part 436).
2. The bracketed language in subsection (c) is only for states where automatic acceptance of future revisions in the FTC Rule might constitute an unconstitutional delegation of legislative or administrative authority. To enhance uniformity, Administrators should follow a strong presumption against modifying or rejecting changes.
SECTION 405. DENIAL, SUSPENSION, OR CANCELLATION OF REGISTRATION.
(a) The [Administrator] may issue an order denying, suspending, or canceling a registration under Section 402 if the [Administrator] reasonably believes that (i) the registration filing or disclosure document is incomplete or contains a false or misleading statement or omits material information, or (ii) the applicant or its affiliate has violated or is about to violate this Article. The order must state the factual grounds for its issuance.
(b) The [Administrator] may vacate or modify an order if conditions that led to its issuance have changed or the action is otherwise in the public interest. The [Administrator] shall state the factual grounds for the vacation or modification.
Subsection (b) does not authorize the Administrator to conduct merit review of business opportunity offerings. The reference to the public interest facilitates changes in administrative policy independent of the facts of a particular matter. See Comment to Section 509(d).
SECTION 406. EFFECT OF REGISTRATION.
(a) Registration under this Article does not mean that a document or application filed under this Article is true, complete, or not misleading, or that the [Administrator] has approved, recommended, or endorsed the business opportunity, or reviewed the disclosure document or the adequacy or accuracy of the information contained in the disclosure document.
(b) A person may not make a representation inconsistent with subsection (a).
(c) A promoter may not refer to its compliance with this Article in connection with an offer or sale of a business opportunity, except to state that the offering of the business opportunity is registered in this State.
Subsection (c) should be interpreted to prohibit a promoter from employing a representation concerning the provision of financial assurance under Section 408(a)(3) or 409.
SECTION 407. CHANGES IN REGISTRATION AND DISCLOSURE DOCUMENT.
(a) A promoter of a registered business opportunity offering shall promptly notify the [Administrator] of (i) a material change in information contained in the promoter's application for registration or disclosure document and (ii) information necessary to make statements in the application or disclosure document true, complete, and not misleading in the circumstances or context in which they are made. Notification must be made by an application to amend the disclosure document or the application for registration, accompanied by the filing fee required by Section 511 and a revised application or disclosure document.
(b) A promoter shall promptly revise its disclosure document to reflect any material change in the information it contains. A promoter shall revise its disclosure document by substituting new audited financial statements in the disclosure document not later than 120 days after the end of the promoter's fiscal year.
(c) If the [Administrator] finds the application to amend to be complete and has no reason to believe the amended disclosure document is in violation of Sections 403 or 505(a) and there is no order outstanding under Section 405(a), the [Administrator] shall issue an order of amended registration. The amended registration and disclosure document become effective automatically on the 15th day after the application to amend is filed if the [Administrator] has not issued an order granting or denying the application. The [Administrator] may not routinely ask applicants for amendment to registration to waive or defer the automatic registration of an amendment.
SECTION 408. MINIMUM STANDARDS.
(a) If a promoter or its affiliate, in connection with the offer or sale of a business opportunity, makes a representation that it will refund or repurchase, as described in Section 101(5)(i)(C)(I) or (II), the promoter shall:
(1) include the representation in the disclosure document required by Section 404;
(2) include in the business opportunity agreement required by Section 411 a specific statement of the terms and conditions of the refund or repurchase provision and of the promoter's unqualified and enforceable obligation to the purchaser to honor the provision; and
(3) provide financial assurance in conformity with Section 409.
(b) If a purchaser invokes a refund provision described in Section 101(5)(i)(C)(I), the promoter shall immediately refund the purchaser's initial payment plus the purchase price of all goods or services the purchaser obtained from the promoter or its affiliate or designee under the business opportunity which the purchaser makes available to the promoter.
(c) If the purchaser invokes a repurchase provision described in Section 101(5)(i)(C)(II), the promoter shall immediately repurchase from the purchaser (i) all items the purchaser obtained from the promoter or its affiliate or designee under the business opportunity, and (ii) all goods produced, grown, or modified, or services rendered, by the purchaser using goods or services supplied by the promoter or its affiliate or designee, in each case for the greater of its fair market value or the amount represented in the business opportunity.
SECTION 409. FINANCIAL ASSURANCE.
(a) A promoter who makes a representation that it will refund or repurchase, as described in Section 101(5)(i)(C)(I) or (II), shall obtain a bond or irrevocable letter of credit, or establish an escrow account, complying with this section. The promoter shall file with the [Administrator] a copy of the bond or letter of credit or file a notice stating the name of the depository and the account number of the escrow account.
(b) A surety bond must be written by a corporate surety authorized to do business in this State, under terms and conditions established by the [Administrator] by rule or order and be in favor of the [Administrator] for the benefit of persons damaged by failure to perform a refund or repurchase obligation as described in Section 101(5)(i)(C)(I) or (II) by the promoter or its affiliate or designee, and also directly in favor of persons so damaged.
(c) A letter of credit must be issued or confirmed by, and an escrow account must be established in, a state or national [bank] located in this State, under terms and conditions established by the [Administrator] by rule or order.
(d) In addition to the person's other rights and remedies, a person damaged by failure to perform a refund or repurchase obligation, as described in Section 101(5)(i)(C)(I) or (II), has a claim for relief against the promoter and against an affiliate or designee of the promoter who violates this Article or the business opportunity. The person damaged also has a claim for relief against the surety, issuer, or confirming [bank], or escrow agent on the bond, letter of credit, or escrow account, for an amount equal to 50 percent of the initial payment made by the person damaged. The aggregate liability of the surety, issuer, or confirming [bank], or escrow agent to all persons damaged by failure to perform a purchase or refund obligation by a promoter or its affiliate or designee is limited to the amount of the bond, letter of credit, or escrow account. The surety, issuer, or confirming [bank], or escrow agent is not liable for punitive or exemplary damages awarded against the promoter or its affiliate or designee.
(e) The amount of the bond, letter of credit, or escrow account must exceed the greater of $10,000 or 50 percent of the total amount of the initial payments under all business opportunities the promoter has entered into in this State during the preceding 12 months that include a refund or repurchase provision as described in Section 101(5)(i)(C)(I) or (II). As necessary, the promoter shall adjust the amount of financial assurance monthly during the first six months of its operations in this State and quarterly thereafter. The total amount of the financial assurance need not exceed $300,000. Except to the extent of outstanding obligations, the promoter may cancel the escrow account or terminate an outstanding bond or letter of credit [90] days after the promoter ceases to offer the business opportunity in this State, but cancellation of the account or termination of the bond or letter of credit is without prejudice to rights or claims of purchasers then accrued.
1. Subsection (c): "Bank" is bracketed to allow discretion to enacting states to add reference to savings and loan associations or to change the reference to "regulated financial institution" or similar designation as may be appropriate in that state.
2. Subsection (d): This Act takes no position on the advisability of punitive damages generally, but in no case should they be awarded against one who acts in effect as a trustee for affected investors, or from the funds held by that person.
3. Subsection (e): The $300,000 maximum amount of financial assurance relates only to the bond, letter of credit or escrow under Section 411 and does not limit the total liability or obligation of the promoter.
SECTION 410. CERTAIN PRACTICES PROHIBITED.
(a) A promoter or its affiliate may not represent that a business opportunity provides income, profit, or earning potential of any kind or amount unless the promoter has a documented reasonable basis for the representation. The promoter shall disclose information concerning the earnings claim to the purchaser in accordance with the requirements of the disclosure document format the promoter selected under Section 403(c), or a disclosure format approved by the [Administrator] by rule.
(b) A promoter or its affiliate may not use the trademark, service mark, trade name, advertising, or other commercial symbol of another person who does not either (i) own a controlling interest in the promoter or (ii) unconditionally guarantee in writing all representations made by the promoter in regard to the business opportunity, unless the nature of the promoter's relationship to that person is set forth immediately adjacent to and with equal prominence to the depiction of the commercial symbol of that person. This subsection does not prohibit a promoter from using a trademark of a trade association of which the promoter is a member or a certification mark in accordance with its requirements and federal trademark law.
(c) A promoter or its affiliate or designee may not take a negotiable instrument, other than a check, as evidence of the purchaser's obligation unless the instrument on its face negates holder in due course status of its holder.
(d) A business opportunity agreement may not require payment of more than 25 percent of the initial payment before delivery to the purchaser of the goods to be supplied by the promoter or its affiliate or designee unless the portion greater than 25 percent is placed in escrow to be held until the purchaser advises the escrow agent in writing of the delivery of the goods or the promoter presents the escrow agent with a bill of lading or receipt signed by the purchaser which proves delivery of the goods. The purchaser may not unreasonably withhold notice of delivery.
SECTION 411. REQUIREMENTS FOR AGREEMENT.
(a) The promoter shall reduce each business opportunity to a written agreement. The agreement must state legibly:
(1) the terms and conditions of the purchaser's rights and obligations, including the initial payment, additional payments, and any down payment required;
(2) a detailed description of the acts or services the promoter or its affiliate or designee undertakes to perform for the purchaser;
(3) the promoter's name, telephone number, principal business street address, and the name and address of its agent in this State authorized to receive service of process;
(4) the business form of the promoter and the jurisdiction of its incorporation or organization;
(5) the estimated delivery dates of each installment and whether the goods or services are to be furnished to the purchaser at premises owned or managed by the purchaser or at premises owned or managed by persons other than the purchaser;
(6) the terms and conditions of any refund or repurchase obligation of the promoter under Section 408(a);
(7) the name and address of the suppliers of the goods and services the promoter or its affiliate or designee is to furnish to the purchaser; and
(8) a conspicuous notice, in substantially the following form, that the purchaser has the following rights and obligations:
Cooling Off Period
If you change your mind, you have three business days in which you may cancel this agreement.
To cancel, you must mail or deliver a written notice to
______________________________________________
(Seller's name and street address)
by _____________ (last date to mail or deliver notice). If mailed, the notice must be postmarked by the above date. Or, if you deliver the notice, it must be delivered by the end of the normal business day on the above date.
If you cancel, we must promptly refund your payments, and, until the fifth business day after you receive your refund, you must allow us to pick up anything we provided to you under this agreement.
If you cancel, we may deduct from your refund the price of goods we delivered to you that you do not return or make available for us to pick up.
Other Rights
If we mislead you in connection with the offer or sale of this business opportunity, or if we fail to deliver goods or perform services promised to you, you may have certain rights, including the right to cancel. Consult a lawyer or [name of state agency].
(b) A promoter shall furnish to the purchaser when the purchaser signs them a copy of the completed agreement and all other documents the promoter requires the purchaser to sign. If the promoter or its affiliate does not sign the agreement or other documents at the same time as the purchaser, the promoter also shall furnish signed copies to the purchaser promptly after the promoter or its affiliate signs them.
A business opportunity can be created and come under the Act even if only in oral form (Section 101(5)), but it is a violation of Section 411 to fail to reduce it to a written agreement.
SECTION 412. PRESERVATION OF RIGHTS. A successor or assignee of the promoter's interest or rights in a business opportunity is subject to all rights, claims, and defenses of the purchaser against the promoter or its affiliate or designee.
SECTION 413. PURCHASER'S RIGHT TO CANCEL.
(a) A purchaser has the rights described in Section 411(a)(8), including the right to cancel described in that paragraph, whether or not they are contained in an agreement with the promoter.
(b) If a promoter or its affiliate fails to comply with this Article, or uses, in connection with the offer or sale of a business opportunity, a false or misleading statement of a material fact or omits material facts necessary to make the statements made, in the circumstances in which they are made, not misleading, a purchaser affected, within one year after the date of the business opportunity agreement, may cancel the business opportunity and related agreements by written notice to the promoter.
(c) If a promoter or its affiliate inadvertently fails to make disclosures required under this Article or inadvertently uses a business opportunity agreement that fails to comply with this Article, the promoter may furnish the purchaser with the correct disclosure statement or correct agreement and a written notice that the purchaser may cancel the agreement within 30 days after receipt of the correct disclosures or agreement. The notice must state the purchaser's right to receive a refund under subsection (e). If the purchaser does not cancel the business opportunity within the 30-day period, the purchaser may not later base cancellation of the agreement on violations corrected by the new disclosure document or agreement.
(d) If a promoter or its affiliate or designee within one year after the date of the business opportunity agreement fails to deliver goods or perform services within 30 days after the delivery or performance date stated in the agreement, the purchaser may give notice of the failure to the promoter, and, if the delivery is not made within 30 days after the notice or the promoter fails to show that the failure to deliver was due to causes beyond its control, the purchaser may cancel the business opportunity by written notice to the promoter.
(e) If a purchaser cancels under this section, the promoter shall promptly refund all amounts paid by the purchaser under the business opportunity, less the price or fair market value, whichever is less, of goods delivered to the purchaser by the promoter or its affiliate or designee and not returned or made available to the promoter. For five days after receipt of the refund, the purchaser shall make available to the promoter the goods delivered by the promoter or its affiliate or designee.
SECTION 501. RULEMAKING.
(a) Except as limited in Section 510(d), the [Administrator] may promulgate in accordance with the [Administrative Procedure Act] rules necessary to implement this [Act]. In order to enhance uniformity among the states, the [Administrator] shall take into account the rules of other states on the same subject.
(b) The [Administrator] may exempt transactions and persons, and classes of transactions and persons, from one or more of Sections 302, 303, 304, 305, 402, 403, 404, 409, and 411 upon finding that the exemption is consistent with this [Act] and in the public interest and that compliance with those sections is not necessary for the protection of prospective franchisees or purchasers.
SECTION 502. SERVICE OF PROCESS.
(a) A person who offers or sells a franchise or business opportunity in this State shall file with the [Administrator] an irrevocable consent to service of process appointing the [Administrator] as the person's agent to receive service of process in a civil action or proceeding arising under this [Act].
(b) A person who offers or sells a franchise or business opportunity in this State without filing a consent to service of process is deemed to appoint the [Administrator] as the person's agent to receive service of process in a civil action or proceeding arising under this [Act].
(c) A person may effect service of process under this section by service on the [Administrator]. The time to respond begins to run when the person sends notice of the service and a copy of the process by certified mail to the defendant or respondent at its last address on file with the [Administrator]. If no address is on file with the [Administrator], the time to respond begins to run when the process is served on the [Administrator]. The plaintiff shall file an affidavit of compliance with this section with the court or tribunal hearing the matter.
SECTION 503. RECORDS. A person who offers or sells a franchise or business opportunity shall maintain records of sales and offers directed to specific persons made in this State and keep them for four years after the date of the offer or sale. The records must contain the signed acknowledgment of receipt for each disclosure document delivered to a prospective purchaser under Article III or IV. Those records must be made available to the [Administrator] at the office of the [Administrator] on demand of the [Administrator]. Records required by this section may be kept on photographic or electronic media but must be printed out if the [Administrator] requests.
SECTION 504. ACCESS TO INFORMATION. Documents filed with the [Administrator] under this [Act] are documents of public record.
SECTION 505. MISREPRESENTATION PROHIBITED.
(a) A person may not offer or sell a franchise or business opportunity in this State by means of a false or misleading statement of a material fact or omission of a material fact necessary to make the statements made, in the circumstances in which they are made and taking into account all information available to the prospective purchaser, not materially misleading.
(b) Information is material if it would reasonably be expected to influence a prospective purchaser of a franchise or business opportunity to purchase or forgo the purchase of the franchise or business opportunity. The determination of materiality must be made with reference to all information available to the prospective purchaser.
SECTION 506. CIVIL LIABILITY.
(a) A person injured or threatened with injury by a violation of this [Act] or a rule promulgated or order issued under this [Act] has a claim for relief for damages caused by the violation and other appropriate relief.
(b) The court may award reasonable attorney's fees to a person who prevails in an action or proceeding under this [Act].
1. Subsection (a): "Appropriate relief" may include declaratory judgment, customary forms of equitable relief, such as injunctive relief (mandatory or prohibitory), or rescission in appropriate circumstances, taking into account the duration of the relationship, the harm suffered, the wilfullness of the violation and similar factors.
2. Despite hortatory language in the FTC's Guides to the Trade Regulation Rule (16 C.F.R. Part 436), a private right of action is not available under the FTC Rule. Chelson v. Oregonian Publishing Co. 1981-1 Trade Cas. (CCH) ¶ 64,031 (D. Ore. 1981); Freedman v. Meldy's, Inc., 587 F. Supp. 658 (E.D. Pa. 1984). This section provides for private recourse, although a private cause of action may also be available under other state law such as a "little FTC" Act or other general unfair trade practices act. See Section 105.
3. A causal relationship must exist between the violation complained of and the injury alleged. This Act takes no position on whether or not punitive damages should be awarded or, except as provided in Section 507, issues relating to the burden of proof.
4. Section 506 is not the exclusive source of relief. See Section 105.
SECTION 507. BURDEN OF PROVING EXEMPTION. In a civil action or proceeding under this [Act], the burden of proving an exemption is on the person claiming it.
SECTION 508. LIMITATION OF ACTIONS. A civil action or proceeding for a violation of this [Act] may not be maintained unless commenced before the earlier of one year after the plaintiff discovers the facts constituting the violation or three years after the act or transaction constituting the violation.
1. The one year limitations period commences when the plaintiff either (i) becomes aware of facts or circumstances reasonably indicating that the plaintiff has a claim for relief against the defendant in regard to conduct governed by applicable provisions of Article II, III, or IV, rather than upon the plaintiff's mere awareness of certain facts, or (ii) reaches a specific legal conclusion that this Act has been violated.
2. This section is a statute of limitations and is subject to such doctrines as tolling, waiver, and equitable estoppel.
SECTION 509. JURISDICTION. A civil action or proceeding arising out of a franchise or business opportunity may be commenced wherever jurisdiction over the parties and subject matter exists, even if the agreement limits actions or proceedings to a designated jurisdiction or venue. The doctrine of inconvenient forum must be considered.
SECTION 510. ACTION BY [ADMINISTRATOR].
(a) If the [Administrator] reasonably believes that a person has violated or is about to violate Article III or IV or Section 505, the [Administrator] may issue an order to cease and desist from practices that violate or would violate Article III or IV or Section 505 and may [maintain an action] [request the Attorney General to maintain an action] in the [general jurisdiction] court to enjoin the acts or practices or to enforce compliance with Article III or IV or Section 505. Upon a proper showing, the court may grant a permanent or preliminary injunction, a restraining order, or other appropriate relief and may appoint a receiver or conservator for the defendant or the defendant's property. The court may not require the [Administrator] [Attorney General] to post a bond.
(b) The [Administrator] may make public or private investigations in or outside this State to aid in the enforcement of Article III or IV or Section 505 and to aid in the promulgation, amendment, or repeal of rules or issuance, modification, or vacation of orders, or to determine whether a person has violated or is about to violate Article III or IV or Section 505. The [Administrator] may subpoena persons to testify or produce evidence in connection with an investigation. The [Administrator] may share the findings of an investigation with other public agencies and officials. The [Administrator] may publish the findings of an investigation but may not be compelled to do so.
(c) The [Administrator] shall refer information or evidence concerning a violation or impending violation of Article III or IV or Section 505 to [the Attorney General] [and to] [the prosecuting attorney of the county in which the violation occurred or is about to occur]. The [Attorney General] [and the] [prosecuting attorney], with or without a reference, may commence appropriate criminal proceedings.
(d) The [Administrator] may not promulgate rules or issue orders under, or take action to enforce, Sections 105 or 106, or Article II.
[(e) The [Administrator] shall conduct investigations or proceedings in accordance with the [Administrative Procedure Act], and the [Administrator] has the powers and duties designated in the [Administrative Procedure Act].]
1. A state should select the bracketed language in subsection (a) that reflects its normal allocation of prosecutorial responsibilities.
2. A court may require a receiver or conservator to post bond as a condition to obtaining equitable relief under subsection (a).
3. The Administrator's authority to issue a cease and desist order may be exercised ex parte in emergency situations, subject to any limitations set forth in the State's Administrative Procedure Act.
4. Section 510(d) is included to prevent the Administrator from prescribing by rule a list of prohibited practices or other substantive regulation of the relationship between franchisor and franchisee, and seller and buyer of a business opportunity, which should be left to the common law and interpretations of Article II. See Comment to Section 201. The Administrator similarly has no authority to prescribe by rule substantive relationship regulations under Sections 105 and 106.
5. Subsection (e) is optional for states where application of the Administrative Procedure Act to this Act is not clear.
SECTION 511. FEES.
(a) The [Administrator] shall charge the following fees:
(1) For filing a notice under Section 305(a), $[25];
(2) For filing a change notice under Section 305(b), $[10];
(3) For filing a business opportunity registration application under Section 402, [$100]; and
(4) For filing an application to amend a business opportunity registration under Section 407, $[50].
(b) The [Administrator] may establish by rule reasonable fees to cover the actual costs of photocopying or other services under this [Act].
[SECTION 512. CRIMINAL LIABILITY. A person who violates Article III or IV or Section 505 with intent to defraud in connection with the offer or sale of a franchise or business opportunity is guilty of [insert the language for felony under applicable law].]
Section 512 is optional for states whose existing criminal law does not deal adequately with economic crime. Criminal liability, however, should attach only to conduct undertaken with an intent to defraud.