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A09933 Summary:

Add Art 33-C 698 - 698-m, Gen Bus L
Relates to requiring fair business practices in franchises.
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A09933 Actions:

02/27/2018referred to economic development
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A09933 Memo:

submitted in accordance with Assembly Rule III, Sec 1(f)
  TITLE OF BILL: An act to amend the general business law, in relation to requiring fair business practices in franchises   PURPOSE: This bill is to ensure continued fair practices and good faith dealings between a franchise and a franchisee.   SUMMARY OF PROVISIONS: Section 1. The general business law is amended by adding a new article, 33-C.   JUSTIFICATION: The relationship between a franchise and a franchisee is governed by their franchise agreements. However, there is very little recourse for franchisees should they feel that the agreements are no longer viable for their business to prosper. This bill provides basic parameters to ensure fairness and good faith dealings for both the franchisee and the franchise.   LEGISLATIVE HISTORY: New Bill   FISCAL IMPLICATIONS: None to the state   EFFECTIVE DATE: This act shall take effect on the thirteenth day after it shall have become a law.
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A09933 Text:

                STATE OF NEW YORK
                   IN ASSEMBLY
                                    February 27, 2018
        Introduced by M. of A. MURRAY -- read once and referred to the Committee
          on Economic Development
        AN  ACT to amend the general business law, in relation to requiring fair
          business practices in franchises
          The People of the State of New York, represented in Senate and  Assem-
        bly, do enact as follows:
     1    Section 1. The general business law is amended by adding a new article
     2  33-C to read as follows:
     3                                ARTICLE 33-C
     4                       FAIR FRANCHISING PRACTICES ACT
     5  Section 698.   Short title.
     6          698-a. Definitions.
     7          698-b. Procedural fairness.
     8          698-c. Private right of action.
     9          698-d. Duty of good faith.
    10          698-e. Duty of competence.
    11          698-f. Negotiated changes permitted.
    12          698-g. Independent sourcing.
    13          698-h. Termination and non-renewal.
    14          698-i. Transfer of a franchise.
    15          698-j. Anti-competitive covenants.
    16          698-k. Freedom of association.
    17          698-l. Encroachment.
    18          698-m. Discrimination prohibited.
    19    §  698.  Short  title. This article shall be known and may be cited as
    20  the "fair franchising practices act".
    21    § 698-a. Definitions. As used in this article:
    22    1. "Affiliate" shall mean any natural  or  legal  person  controlling,
    23  controlled by or under common control with a franchisor.
    24    2.  "Franchise"  shall mean a contract or agreement, whether expressed
    25  or implied, and whether written or oral, between two or more persons  by
    26  which:
         EXPLANATION--Matter in italics (underscored) is new; matter in brackets
                              [ ] is old law to be omitted.

        A. 9933                             2

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

        A. 9933                             3
     1    3.  No  franchisee  shall  be  deprived  of  the  application  of  the
     2  provisions of this article by any provision of a franchise which  desig-
     3  nates  the  law  of  another jurisdiction as governing the provisions of
     4  such franchise, or designating a venue outside of  this  state  for  the
     5  resolution of disputes.
     6    4.  Provisions  of  a  franchise  providing  for  liquidated  damages,
     7  confessions of judgment or like provisions shall be unenforceable.
     8    5. The provisions of this article are declaratory of the public policy
     9  and law of the state of New York. To the extent permitted by the consti-
    10  tution of the United States and of this state, this article shall  apply
    11  to  franchises  granted,  transferred,  renewed, amended, replaced or in
    12  existence after the effective date of this article.  A  provision  of  a
    13  franchise  designating the law of the state of New York as governing the
    14  franchise, or by which the franchise is to be interpreted  or  construed
    15  shall  be  construed as incorporating the law of this state as in effect
    16  from time to time during the term of the franchise.
    17    § 698-c. Private right of action. Any party  to  a  franchise  who  is
    18  injured or likely to be injured by a violation or impending violation of
    19  this article or any rules or regulations of the Federal Trade Commission
    20  shall  have  a cause of action for rescission of the franchise, damages,
    21  injunctive relief or other appropriate relief. The prevailing party  may
    22  recover  its  costs,  including  reasonable attorney's fees, in any such
    23  action or proceeding. The court shall presume the existence of irrepara-
    24  ble harm based on a violation of the provisions of this  article  or  of
    25  any  rule  or  regulation of the Federal Trade Commission, and may award
    26  preliminary injunctive relief without bond or other financial security.
    27    § 698-d. Duty of good faith. Every franchise shall include an  implied
    28  duty  upon  all  parties  to  exercise good faith in the performance and
    29  enforcement of the terms of the franchise. Such duty of good faith obli-
    30  gates each party to a franchise, when making a decision or exercising  a
    31  reserved  power  or  discretion  which directly affects the interests of
    32  another party or parties to the franchise, to give due and equal  regard
    33  to  the  interests of such other party or parties to the franchises that
    34  are likely to be affected.
    35    § 698-e. Duty of competence. Unless a franchisor  represents  that  it
    36  has  greater  skill or knowledge, or conspicuously disclaims that it has
    37  such skill or knowledge, the franchisor shall, in its  undertaking  with
    38  the franchisee, be required to exercise the skill and knowledge normally
    39  possessed  by  franchisors  in  good  standing in similar communities or
    40  trade areas. The provisions of this section shall not be waived or qual-
    41  ified by agreement or by conduct; provided, however, that the franchisor
    42  may by written agreement particularly define the nature and scope of its
    43  skill and knowledge, and of its undertaking with the franchisee.
    44    § 698-f. Negotiated changes permitted. A franchisor, who has  lawfully
    45  delivered  an  offering  to  a prospective franchisee, may negotiate the
    46  terms of a franchise with such prospective franchisee, and may execute a
    47  franchise containing negotiated  terms  which  are  different  from  the
    48  initial offering.
    49    §  698-g.  Independent  sourcing.  1.  Except as otherwise provided in
    50  subdivision two of this section,  a  franchisee  may  obtain  equipment,
    51  fixtures,  supplies and services used in the establishment and operation
    52  of a franchised business from sources of the franchisee's own  choosing,
    53  provided  that  such goods and services shall meet reasonable standards,
    54  as to their nature and quality, as promulgated by the franchisor.
    55    2. Subdivision one of this section shall not apply to a requirement by
    56  a franchisor that reasonable quantities of inventory goods  or  services

        A. 9933                             4
     1  (including  display and sample items) be obtained from the franchisor or
     2  its affiliate, if such goods or services are a central  feature  of  the
     3  franchise business and:
     4    (a)  are  actually  manufactured  or produced by the franchisor or its
     5  affiliate; or
     6    (b) are manufactured solely on behalf of the franchisor or its  affil-
     7  iate  and  incorporate  a  trade  secret  owned by the franchisor or its
     8  affiliate.
     9    § 698-h. Termination and non-renewal. No franchisor shall terminate or
    10  refuse to renew a franchise without good cause.
    11    § 698-i. Transfer of a franchise. 1. A franchisee shall have the right
    12  to transfer the franchised business and the franchise to another  person
    13  who  meets the franchisor's current reasonable, essential and nondiscri-
    14  minatory standards for new franchisees or transferees. A franchisor  may
    15  not  withhold  its  consent  to  a  transfer of a franchise without good
    16  cause.
    17    2. A franchisor may exercise a right of first refusal in relation to a
    18  proposed transfer, if the franchisor has  reserved  such  right  in  the
    19  franchise.  However,  a right of first refusal shall not be invoked more
    20  than thirty days after receipt of the franchisee's request  for  consent
    21  to  the  transfer.   Such right of first refusal may not be exercised if
    22  the result would be to leave the franchisor holding a partial  ownership
    23  interest  in  the  franchise or franchisee. A franchisor shall only base
    24  its decision to exercise a right of first refusal in a proposed transfer
    25  of a franchise, upon the merits of the proposed transfer and the partic-
    26  ular circumstances of the proposed transfer.
    27    3. A franchisor may require as conditions of a transfer that:
    28    (a) the transferee successfully completes a reasonable, essential  and
    29  nondiscriminatory training program;
    30    (b)  a reasonable transfer fee be paid to reimburse the franchisor for
    31  its reasonable and actual expenses directly related to the transfer; and
    32    (c) the franchisee pay or make reasonable provisions to pay any amount
    33  due the franchisor or its affiliate.
    34    4. A franchisor shall not withhold its consent to a public offering by
    35  a franchisee of its securities, provided that the franchisee  or  owners
    36  of  the  franchise retain more than fifty percent of the voting power in
    37  the franchise. A franchisor shall not withhold its consent to a  pooling
    38  of interests or exchange of assets of its existing franchisees.
    39    5. A franchisee may assign its interest in its franchise for the unex-
    40  pired  term  of  the  franchise  without any change in the terms of such
    41  franchise. Furthermore, the franchisor shall not require the  franchisee
    42  or  the  transferee  to enter into any new or different terms during the
    43  unexpired term of the franchise.
    44    6. For the purposes of this section the following shall not constitute
    45  a transfer and a franchisor shall not interfere with:
    46    (a) the succession to ownership or management of a franchise upon  the
    47  death or disability of a franchisee, or an owner, officer or director of
    48  a  franchisee,  by the spouse, children, partners or fellow shareholders
    49  of such deceased or disabled person;
    50    (b) incorporation by a franchisee;
    51    (c) transfer of interests within an existing  group  of  owners  of  a
    52  franchisee when such transfers do not result in a change in the control-
    53  ling interest in the franchise;
    54    (d)  transfers of less than a controlling interest in the franchise to
    55  the spouse or children of the franchisee, or owners, officers or  direc-
    56  tors of the franchisee;

        A. 9933                             5
     1    (e)  transfers  of  less  than a controlling interest in the franchise
     2  pursuant to an employee stock ownership plan, employee incentive compen-
     3  sation plan or deferred benefit plan;
     4    (f)  a grant or retention of a security interest in the franchise, the
     5  franchised business or its assets, or an ownership interest in the fran-
     6  chisee, provided that the security agreement creates  an  obligation  on
     7  the  part  of the secured party, which is enforceable by the franchisor,
     8  to give notice to the franchisor simultaneously with notice to the fran-
     9  chisee of the secured party's intention to foreclose on the  collateral,
    10  and  granting  a  reasonable  opportunity  to redeem the interest of the
    11  secured party and release the secured party's lien  upon  the  franchise
    12  and  the  franchised business by satisfying the franchisee's obligations
    13  to the secured party; or
    14    (g) the franchisee's use of management  consultants  or  hiring  of  a
    15  professional manager.
    16    7.  Subject  to  the provisions of paragraph (f) of subdivision six of
    17  this section, no franchisor shall prevent a franchisee, who  has  trans-
    18  ferred  the  franchise,  from  retaining  or foreclosing upon a security
    19  interest in one or more assets  transferred,  including  the  franchise,
    20  created to secure the obligations of the transferee to the transferor.
    21    8.  Every  franchisee  shall  give its franchisor not less than thirty
    22  days' notice of a proposed transfer and upon request  shall  advise  the
    23  franchisor,  in writing, of the ownership interests of all persons hold-
    24  ing or claiming an equitable or beneficial interest in the franchise  or
    25  the franchisee.
    26    9.  No franchisor shall transfer its interest in a franchise unless it
    27  makes reasonable provision for the performance by the transferee of  its
    28  obligations  pursuant  to  the franchise. A franchisor shall provide its
    29  franchisees with notice of the proposed transfer at such  time  as  such
    30  disclosure  would  be  required  pursuant  to  applicable securities and
    31  exchange laws, if securities of the franchisor were publicly traded.
    32    10. A franchisor shall be objectively  reasonable  in  determining  to
    33  withhold its consent to a proposed transfer of a franchise. Every trans-
    34  fer  shall  be  deemed approved thirty days after the franchisee submits
    35  the proposed transfer for consent to the franchisor, unless the franchi-
    36  sor shall earlier provide written notice of its disapproval, or exercise
    37  of right of first refusal. All such notices stating the bases of  disap-
    38  proval shall be privileged against claims of defamation.
    39    11.  No franchisor shall discriminate against a proposed transferee of
    40  a franchise on the basis of race, color, national origin, religion, sex,
    41  or disability.
    42    12. As a condition of a transfer of a franchise, no  franchisor  shall
    43  obligate  a  franchisee  to  undertake  other obligations or forgo other
    44  rights outside the scope of the franchise proposed to be transferred, or
    45  to enter into release of claims broader  in  scope  than  a  counterpart
    46  release of claims offered by the franchisor to the franchisee.
    47    13.  No franchisor shall enforce against the transferor of a franchise
    48  after a transfer, any covenant in the transferred franchise  prohibiting
    49  the  transferor  from  engaging  in any lawful occupation or enterprise.
    50  However, the provisions of this subdivision shall not limit the right of
    51  the franchisor to enforce contractual covenants prohibiting the transfe-
    52  ror from exploiting the franchisor's trade secrets or intellectual prop-
    53  erty rights.
    54    14. For the purposes of this section:
    55    (a) "Transfer" shall mean any change in  ownership  or  control  of  a
    56  franchise, franchised business or franchisee.

        A. 9933                             6
     1    (b) "Franchise" shall include franchisee as appropriate in context.
     2    §  698-j.  Anti-competitive covenants. No franchisor shall prohibit or
     3  enforce a prohibition against a franchisee from engaging in  any  lawful
     4  business at any location after expiration, termination for good cause or
     5  transfer of a franchise, unless not less than ten days before such expi-
     6  ration,  termination  or  transfer  the  franchisor offers in writing to
     7  purchase the franchised business for its fair market value  as  a  going
     8  concern. Such an offer may be conditioned upon ascertainment of the fair
     9  market  value  by an impartial appraiser. The provisions of this section
    10  shall not prohibit enforcement of provisions of a franchise requiring  a
    11  franchisee, after expiration or termination of the franchise to:
    12    1. Alter the appearance of the premises and the manner of operation of
    13  the formerly franchised business to avoid the likelihood of confusion as
    14  to  the  affiliation  of  the business with its former franchisor or the
    15  origin of the goods or services it offers; or
    16    2. Cease and refrain from using a trade secret of  the  franchisor  or
    17  its affiliate.
    18    §  698-k.  Freedom  of association. 1. No franchisor shall directly or
    19  indirectly inhibit its franchisees from forming an association  or  from
    20  associating with other franchisees for any lawful purpose. Nor shall any
    21  franchisor penalize, in any way, its franchisees for such activities.
    22    2.  Every  franchisor  which  has more than five hundred franchises or
    23  more than three hundred franchisees, within  the  United  States,  shall
    24  have  a  duty to bargain in good faith with an organization of its fran-
    25  chisees which represents in general or on a specific  issue  or  set  of
    26  issues a majority of its franchisees in this state.
    27    §  698-l.  Encroachment.  1.  Subject to the provisions of subdivision
    28  three of this section, no franchisor shall place or license  another  to
    29  place  a new outlet in an unreasonable proximity to an established fran-
    30  chised outlet which offers goods or  services  identified  by  the  same
    31  trademark  as the new outlet, if the intent or probable effect of estab-
    32  lishing the new outlet is to cause a diminution of gross  sales  by  the
    33  existing  outlet of more than ten percent in the twelve months following
    34  the establishment of the new outlet.
    35    2. A franchisee injured or likely to be injured by  violation  of  the
    36  provisions of this section may enjoin the violation or pending violation
    37  and recover damages caused by the violation, which may include a reason-
    38  able  estimation of the plaintiff's profits lost as a consequence of the
    39  violation, and other appropriate relief.
    40    3. The provisions of this section shall not apply to the establishment
    41  of a new outlet if, before the new outlet opens for business  the  fran-
    42  chisor  offers in writing to the franchisee of the established outlet or
    43  outlets to pay to the franchisee, if the sales of the established outlet
    44  or outlets decline by more than ten percent in the twelve months follow-
    45  ing establishment of the new outlet as a consequence of opening the  new
    46  outlet,  an amount equal to ten percent of the gross sales (net of sales
    47  taxes, returns and allowances) of the new outlet for the  first  twenty-
    48  four months of the new outlet's operation.
    49    4.  If  the  franchisor  makes a written offer under the provisions of
    50  subdivision three of this section, or in an action or  proceeding  under
    51  subdivision  two of this section, the franchisor has the burden of proof
    52  to show that, or the extent to which, a decline in sales of  the  estab-
    53  lished  franchise  outlet or outlets occurred for reasons other than the
    54  opening of the new outlet.
    55    § 698-m. Discrimination prohibited. In granting franchises,  consider-
    56  ing  approval of transfers of franchises, and in administering its fran-

        A. 9933                             7

     1  chise system, a franchisor shall not discriminate against  a  franchisee
     2  or  prospective  franchisee  on  the  basis  of  race,  color, religion,
     3  national origin, sex, or disability.
     4    §  2.  This  act shall take effect on the thirtieth day after it shall
     5  have become a law.
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