“Proposed Bill Threatens Franchising In Florida”
Law360 02/24/17 By S. Douglas Knox, David A. Beyer, and Zac Foster
A bill recently introduced in the Florida Legislature proposes a fundamental alteration of franchise relationships in the Sunshine State. Although Florida currently regulates franchising through its antifraud, unfair trade practices laws, and creating rights for violations of federal franchise disclosure laws, it has no franchise relationship law except for a few special industries, respecting the rights of private parties to contract freely. However, if passed, the misleadingly named Protect Florida Small Business Act (SB 750) would constitute the most invasive, onerous and intrusive state franchise relationship law ever enacted in the United States, if not in the world. the act contains numerous provisions harmful to franchising, franchisors, franchisees and the public alike. But the act particularly targets franchisors, drastically restricting their ability to protect their brands and customer goodwill associated with them. In turn, the act's restrictions would impair franchisees as the brands they are associated with are impaired. The following is just a brief summary of those provisions of the act that should be of most concern to businesses that franchise in Florida.
While focusing mostly on franchise terminations, non-renewals and transfers, like franchise relationship laws in other states, the act would regulate virtually all aspects of the franchise relationship.
Except for a handful of limited exceptions, a franchisee can only be terminated for “good cause,” which is limited to the “failure of the franchisee to substantially comply with the reasonable and material requirements imposed upon the franchisee by the franchise agreement.” the act provides no guidance on assessing what failures are "substantial," "reasonable" or "material," giving litigators and courts wide room to maneuver given the act's express directive that its "provisions … shall be liberally construed." The franchisor must give 90 days’ advance notice of termination and must provide the franchisee 60 days to cure defaults. This notice period exceeds most contractual notice periods, and those of most state franchise laws.
The act would also severely limit a franchisor's right not to renew a franchise. Unless both parties agree otherwise, the act requires renewal of all franchises unless: (1) the franchisor otherwise has grounds to terminate the franchise under the act (severely restricted as stated above); or (2) the franchisor completely withdraws from the geographic market served by the franchisee (presumably both via franchise and company-owned). (Section 686.105(2)(b)(1)–(3)). If a franchisor does not renew a franchisee, then the franchisor loses its right to enforce the franchise agreement's noncompetition provisions and any rights to convert the franchised business to an affiliated operation. (Section 686.105(2)(c)(d)). The franchisor must give the franchisee 180-days’ notice of its intent not to renew. (Section 686.105(2)(a)). During that period, the franchisee can file an arbitration action to contest whether the nonrenewal was proper. (Section 686.105(4)). Pending that determination, the franchise agreement remains in effect. (Section 686.105(4)).
Although hidden under a caption innocuously referencing only the repurchase of inventory, the act requires franchisors to purchase at fair market value virtually all of the assets of a franchisee's business including the “goodwill” on any franchise termination, or non-renewal, regardless of whether or not the franchisor had the right to do so under the act. (Section 686.107(1)(a)).
The act also would regulate the franchise transfer process when potential franchisees want to sell or transfer their franchised business, the act imposes various informational and notice requirements on both franchisors and franchisees. the act requires the franchisor to approve any franchisee's sale to any person that meets its reasonable qualifications and to create a list of qualifications for franchise ownership. (Section 686.106(2)(b)). Franchisors have 60 days from receiving the information about the prospect to approve or reject the transfer and must specify all reasons for disapproval (albeit, according to the act, the disapproval can only be based on the transferee's qualifications). (Section 686.106(3)(c)(1)). Failure to timely do so constitutes deemed approval of the transfer. (Section 686.106(3)(c)(1)). Other reasonable considerations for evaluating a transfer carry no weight under the act.
A franchisor could not deny a transfer to a surviving spouse, heir, estate or sale to a proposed transferee if the transferee meets the qualifications. (Section 686.106). In the case of transfers due to the death of a franchisee or its owner, the successor may maintain the franchise for a minimum of 180 days. (Section 686.106(1)). the act awards the successor a 1 year option to sell all of the assets of the franchised business, including goodwill, to the franchisor at fair market value. (Section 686.108(1)). Otherwise, the successor's transfer of the franchised business to a purchaser is otherwise subject to the act's transfer restrictions on the franchisor's judgment and criteria.
Unlike any other state law, the act requires a franchisor to "fully indemnify and hold harmless its franchisee against any loss … or damages" arising out of any claim involving negligence, breach of warranty, design of goods or services, or "to other functions of the franchisor which are beyond the control of franchisee". (Section 686.109). The open ended nature of this new indemnification obligation of franchisors seems to have few, if any, limits, and will certainly serve as fodder for the courts.
The act contains numerous prohibitions on franchisors that are deemed to be unfair or deceptive acts or practices and unconscionable. These include:
- Coercing or attempting to compel a franchisee to enter into any agreement by threatening to cancel the franchise. (Section 686.111(4)(a)).
- Using any false or misleading advertisement in connection with franchising its business (whether or not in relation to that particular franchisee). (Section 686.111(4)(g)).
- Discriminating in price, programs or terms of sale offered to a franchisee, or give any franchisee an economic, business or competitive advantage not offered to other franchisees. (Section 686.111(4)(h)).
- Obtain any money or other consideration from a supplier or another person on account of or in relation to transactions with the franchisee without prior written disclosure. This prohibition applies without providing any guidance on the nature or scope of the disclosure or whether disclosures currently made in franchise disclosure documents will suffice. (Section 686.111(4)(j)).
- Requiring franchisees to sign disclaimers or checklists if in doing so would avoid a protection under the act. (Section 686.111(4)(k)).
- Compete with a franchisee within a franchisee's "exclusive territory" or otherwise grant a franchise to another to be located within the "exclusive territory." Of course, the act gives no consideration to different channels of distribution; leaving it an open question as to what constitutes competition with franchisees even when other channels of distribution or the operation of different brands was expressly reserved in the underlying franchise agreements. (Section 686.111(4)(n)).
- Imposing on a franchisee "any unreasonable standard of conduct"; again an open-ended phrase open to considerable interpretation. (Section 686.111(4)(o)).
While the substantive provisions of the act are unreasonably onerous, it backs those with penalties and remedies unheard of in any other state law. Franchisors face significant liability for any violation of the act. Specifically, a franchisee who shows a violation of the act “shall” receive “all money invested in the franchise and all of the franchise business’s losses and other damages incurred while running the franchise business” plus attorneys’ fees.(Section 686.111(6)). Franchise agreements in violation of the act are rendered void and unenforceable. (Section 686.112). Punitive damages are expressly authorized by the act for "malicious" acts. (Section 686.116(4)). Not only are aggrieved franchisees awarded with numerous remedies for alleged violations of the act, but the act empowers the U.S. Department of Legal Affairs and other state agencies the right to separate bring actions for injunctive relief, damages and other remedies against any franchisor that it believes is in violation of the act. (Section 686.116(5)). Furthermore, any person who willfully or intentionally violates the act is guilty of a second degree misdemeanor, possibility resulting in incarceration. (Section 686.111(5)).
It is not clear whether the act applies to franchise agreements that predate its effective date. On the one hand, the act states that it applies to any “franchise entered into, renewed, amended, or revised” after the act’s effective date. (Section 686.117(2)(b)). On the other hand, the act also applies to “any written or oral agreement between a franchisor and franchisee,” regardless of when the parties executed the agreement, and to “any existing franchise of an indefinite duration which may be terminated by the franchisee or franchisor without cause.” (Section 686.117(2)(a), (c)). Such patent ambiguities create extreme uncertainty regarding the validity of current franchise agreements and will undoubtedly spawn a host of costly litigation. At the very least, franchisors must carefully consider any pending renewals or amendments because the act will drastically alter renewed or modified franchises after passage.
The act applies to any franchise whose franchisee is a Florida resident, domiciled in Florida or whose franchise business is operated in Florida. But the act has broader application and appears to apply to any franchisee of a franchisor that is headquartered or otherwise has its principal place of business in Florida since it applies to any "franchisor who engages … in an agreement or contract within this state in connection with a franchise …". (Section 686.117(1)). Thus, if this act passes, a franchisor headquartered in Florida may see all of its franchise agreements throughout the country, if not worldwide, subject to the act's onerous provisions. Since most Florida franchisors, like all U.S. franchisors qualify as small business, this bill is the antithesis of small business protection: a true "wolf in sheep's clothing".
The act also conceivably applies to area representatives and even franchise brokers. The term area franchise, which is also defined as franchise under the act, includes persons who are granted the right "to sell or negotiate the sale of a franchise in the name and on behalf of the franchisor." (Section 686.103(2)(a)). How numerous provisions of the act could be interpreted in the franchise broker or area representative context when there may be no underlying franchised business involved, stretches the imagination.
International Franchise Association president and CEO Robert Cresanti has stated that the IFA is reviewing the act and called it “unnecessary overreach and intrusion into private contract negotiations.” The act was introduced by Senator Jack Latvala (R-Clearwater) and Representative Jason Brodeur (R-Sanford).
—By S. Douglas Knox, Zachary Foster and David A. Beyer, Quarles & Brady LLP
Douglas Knox and David Beyer are partners with Quarles & Brady LLP in Tampa, Florida. Zachary Foster is an associate.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.