Thursday, January 18, 2007

Franchise Relationship/Termination Law Proposed in Massachusetts

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

A proposal has been filed in the Massachusetts legislature that would prohibit a franchisor from terminating, canceling, or failing to renew a franchise without “good cause.” The legislation also defines what a “franchise” is and, like state relationship/termination laws of other states, prohibits franchisors from taking certain actions against their franchisees. The measure, currently designated Senate Draft No. 1981, was filed January 10, 2007, by state Senator Patricia Jehlen. It has yet to be formally introduced or referred to a committee.

“Franchise” Definition

Under the proposal, a “franchise” is defined as any oral or written agreement, either express or implied, “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 or system prescribed or suggested in substantial part by a franchisor; and (b) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate.”

“Good Cause” for Termination

The draft defines “good cause” for termination or nonrenewal as including, but not limited to, “the franchisee’s refusal or failure to comply substantially with any material and reasonable obligation of the franchise agreement,” with certain exceptions. Those exceptions include the franchisee’s “(1) refusal to take part in promotional campaigns of the franchisor’s products; (2) failure to meet sales quotas suggested by the franchisor; (3) refusal to sell any products at a price suggested by the franchisor or supplier; (4) refusal to keep the premises open and operating during those hours which are documented by the franchisee to be unprofitable to the franchisee or to preclude the franchisee from establishing his own hours of operation beyond the hour of 10:00 p.m. and prior to 6:00 a.m.; or (5) refusal to give the franchisor or supplier financial records of the operation of the franchise which are not related or unnecessary to the franchisee’s obligations under the franchise agreement.”

In addition, a franchisor would be prohibited from terminating or canceling a franchise that involved a lease of the franchised premises under certain circumstances. Any franchisor or franchisee would have the right to have the question of “good cause” submitted to arbitration and the right to appeal the arbitration decision to a court, according to the measure.

Notice of Termination

The measure would require franchisors to give 60 days’ advance written notice of any termination or nonrenewal, and at least 6 months’ advance written notice of its intent not to renew an agreement that involved a lease of the franchised premises. Specific exceptions to the notice requirement are provided for instances of voluntary abandonment by the franchisee of the franchise relationship and a conviction of the franchisee for certain crimes.

Franchise Relationship Provisions

Franchisors would be required by the proposal, except in cases of voluntary abandonment of the franchise by a franchisee, to fairly compensate terminated franchisees for the fair market value of the inventory, supplies, and equipment purchased from the franchisor or its approved sources, and for goodwill. A franchisor would not be required to compensate a franchisee for goodwill if the franchisor provided the franchisee with one year’s notice of nonrenewal and agreed not to enforce any noncompete provision in the parties’ agreement.

The measure would restrict certain conduct on the part of franchisors, including: (1) prohibiting the right of free association among franchisees; (2) imposing unreasonable standards of performance on a franchisee; (3) failing to deal in good faith with a franchisee; and (4) discriminating between franchisees.

Additionally, the draft would require franchisors to protect and save harmless their franchisees from financial loss arising out of any claim of defect in merchandise or methods prescribed by the franchisor, and to reimburse franchisees at the prevailing retail price for warranty work.

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