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FRANCHISE LEGISLATION

TUESDAY, OCTOBER 10, 1967

U.S. SENATE,
SUBCOMMITTEE ON ANTITRUST AND MONOPOLY,

COMMITTEE ON THE JUDICIARY,

Washington, D.C. The subcommittee met, pursuant to recess, at 9:40 a.m.,

in room 1318, New Senate Office Building, Senator Philip A. Hart (chairman) presiding

Present: Senator Hart. Also present: S. Jerry Cohen, staff director and chief counsel; Charles E. Bangert, assistant counsel; Peter N. Chumbris, chief counsel for minority; and Kirkley Coulter, economist for the minority.

Senator HART. The committee will be in order.

First, permit me a brief opening statement. This is the first of a series of hearings on two franchising bills, S. 2507, which the chairman of the Judiciary Committee, Mr. Eastland, introduced, and S. 2321, which I introduced.

Both aim at correcting an imbalance of power now apparently weighted in favor of the franchiser.

The bills would attempt to instill more independence for the franchisee into the franchise system. We know that franchising has assumed an important role in the distribution of goods in the marketplace. Indeed, franchising accounts for 10 percent of the gross national product and 25 percent of all retail sales. Today 400,000 businessmen are franchisees. So, these bills do have far-reaching consequences.

The bill I introduced represents the culmination of 3 years of hearings by this subcommittee into the area of distribution practices, including franchising and dual distribution problems. It is based on a principle established centuries ago in the English common law: fair compensation for moneys spent on behalf of and benefits conferred on another.

S. 2321 does not forbid a franchisor from terminating his agreement with his distributor. But it does require fair compensation for equipment and inventory used in selling the franchisor's products. And it does require fair compensation for the franchisee's efforts to the extent that goodwill has been increased. The bill also provides for compensation for the franchisee who has developed an account only to have the franchisor take it over himself.

If the parties to the franchise agreement include an arbitration arrangement in their contract covering the items of fair compensation reached by the bill, the provisions of the law would not apply. In short, the bill has within it the seeds of a self-enforcing arrangement that would encourage the growth of a free and competitive distribution system.

In a society increasingly concerned with economic concentration and its effect both on democratic institutions and consumer prices, the bill, I think, is a step forward. It will help maintain an independent distribution system with all its benefits not only for consumers, but for small- and medium-size producers and manufacturers who must depend on an open system of distribution to effectively compete with their large and better financed competitors.

Admittedly, the legislation as introduced has flaws which these hearings should assist in correcting.

But I would hope that the urgency for legislation of this type will be clear to all of my colleagues by the time these hearings are concluded.

I would ask if there is no objection that the two bills, S. 2507 and S. 2321 be placed in the record at this point.

(S. 2507 and S. 2321 follow :)

[S. 2507, 90th Cong., first sess.) A BILL Relating to dealings between parties to franchise agreements Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as "The Franchise Distribution Act of 1967”.

FINDINGS AND DECLARATION OF POLICY

SEC. 2. (a) The Congress hereby finds that because of the substantial growth in the distribution of goods and services through utilization of the franchise system, in industries engaged in commerce or activities affecting commerce, which system is presently estimated to account for 10 per centum of the Nation's gross national product and 25 per centum of all retail sales that the interest of approximately four hundred thousand small franchisees requires that the great disparity in economic power

now heavily weighted in the favor of franchisors, be reduced by providing that the franchisor must deal in a fair and equitable manner with its franchisees as to all aspects of the franchise relationship; and that the existing judicial remedies to afford relief to franchisees from injurious practices or franchisors are limited, ineffective, and too costly and franchisees should be provided with a means of simple, direct, and full legal relief against fran. chisors failing to deal in a fair and equitable manner.

(b) It is hereby declared to be the policy of this Act, through the exercise by Congress of its power to regulate commerce among the several States and with foreign nations, to correct as rapidly as practical the inequities in the franchise system in such industries so as to establish a more equitable balance of power between franchisors and franchisees, to require franchisors to deal fairly and equitably with their franchisees with reference to all aspects of the franchise relationship and to provide franchisees direct, simple, and full judicial relief against franchisors who fail to deal fairly and equitably with franchisees.

DEFINITIONS Sec. 3. As used in this Act

(a) The term "franchise" means every aspect of the relationship created between a franchisor and franchisee by an oral or written agreement or understanding or series of agreements, understandings, or transactions which involve or result in continuing commercial relationship by which a franchisee is granted or permitted to offer, sell, or distribute the goods or commodities manufactured, processed, or distributed by the franchisor, or the right to offer or sell services established, organized, directed, or approved by the franchisor.

(b) The term “franchisor" means any person who enters into or maintains a franchise with a franchisee, and shall include any person who acts for the franchisor in connection with the distribution of the goods or commodities of the franchisor or services established, organized, directed, or approved by the franchisor.

(c) The term “franchisee" means any person who enters into or maintains a franchise with a franchisor, and shall include any person who acts for the franchisor in connection with the distribution of the goods or commodities of the franchisor or who renders services established, organized, directed, or approved by the franchisor.

(d) The term "commerce" means commerce among the several States or between any State and any place outside thereof, including foreign countries.

(e) The term "affecting commerce" means in commerce or burdening or obstructing commerce or the free flow of commerce.

(f) The term "State” means any State of the United States or the District of Columbia or any territory, associated Commonwealth, or possession of the United States.

(g) The term "goods or commodities” means any article or thing, tangible or intangible, without limitation, including goods or commodities held for resale, and any part of such article or thing including any article or thing used or consumed by a franchisee in rendering a service established, organized, directed, or approved by a franchisor.

(h) The term “unfair competition" means the sale by a franchisor of goods or commodities or the rendering of services by the franchisor unfairly or inequitably at the same level of competition with a franchisee, and also means managing or controlling the sales or service policies of any other person, including a franchisee, so that such person acts as the instrumentality of the franchisor in making such sale or rendering such service.

(i) The term “person" means any individual, partnership, corporation, association, business trust, legal representative, organized group of persons, or any other form of business enterprise.

(j) The term "sale” or “sell” includes any sale, exchange, contract to sell, consignment for sale, shipment for sale, lease, or other disposition.

UNLAWFUL ACTS

SEC. 4. Notwithstanding the terms, provisions, or conditions of any franchise, it shall be unlawful for any franchisor which is engaged in commerce or in any activity affecting commerce, or the officers, agents, and employees of any such franchisor, in performing or complying with the terms, provisions, or conditions aban of a franchise, or in terminating, canceling, or failing to renew a franchise, to

(a) fail to act in a fair, equitable, and nondiscriminatory manner; or
(b) coerce, intimidate, threaten, or restrain any franchisee; or
(c) act dishonestly; or

(d) fail to act in accordance with reasonable standards of fair dealing. SEC. 5. All actions of a franchisor which is engaged in commerce or in any activity affecting commerce or of the officers, agents, or employees of such franchisor with respect to the creation, modification, interpretation, and termination of the franchise, the investment by franchisee in franchise and its facilities, purchases of goods or commodities by the franchisee from the franchisor, the sufficiency of franchisee's performance as a franchisee, advertising and promotional activity by the franchisee and the franchisee's right to sell, assign, or transfer or otherwise dispose of his business, shall be in writing and signed by the authorized representative of the franchisor. Failure to comply with the provisions of this section shall be an unlawful act under this Act.

SEC. 6. It shall be unlawful for any franchisor, who is engaged in commerce or in any activity affecting commerce, or for its officers, employees, or agents, directly or indirectly, to sell goods or commodities or render services in unfair competition with any franchisee.

SEC. 7. It shall be unlawful for any franchisor, who is engaged in commerce or in any activity affecting commerce, or for its officers, employees, or agents, to sell goods or commodities to one franchisee unless goods or commodities of like grade and quality are offered for sale to any franchisee at the same price and on the same terms, whether or not said goods or commodities are intended for resale by a franchisee to any particular purchaser.

SEC. 8. It shall be unlawful for any franchisor, who is engaged in commerce or in any activity affecting commerce, or for its officers, employees, or agents, to sell goods or commodities of like grade and quality to anyone for a lesser price than to a franchisee, or to utilize any device which results in such lesser price to anyone than to a franchisee.

Sec. 9. (a) Notwithstanding the provisions, terms, or conditions of any franchise it shall be the duty of the franchisor to act in a fair, equitable, and nondiscriminatory manner, to refrain from coercion, intimidation, threats, or re

'me enfeln straint of any franchisee and to act honestly and in accordance with reasonable standards for fair dealing with respect to the franchisee's right to sell, assign, transfer, or otherwise dispose of his business.

(b) It shall be unlawful for any franchisor, who is engaged in commerce or in any activity affecting commerce, upon termination, cancellation, or failure to. renew a franchise without the consent of the franchise, to fail, notwithstanding the terms, provisions, or conditions of the franchise, and if so requested by the franchisee

(1) to purchase from the franchisee, at full and fair market value, all

or any portion of the land, buildings, machinery, materials, facilities, equipProp ment, and leasehold interests of the franchisee utilized in the marketing of

the franchisor's goods, commodities, or services, and

(2) to purchase from the franchisee all or any portion of the franchisee's inventory of goods and commodities purchased by the franchisee in accordance with the requirements of the franchisor, at fair market value plus freight and cartage, and

(3) to pay to the franchisee a sum equal to the full and fair market value of the franchise, including good will. Sec. 10. Sections 4, 5, 6, 7, 8, and 9 state separate and independent unlawful acts and are not in limitation of each other.

I aventry

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PENALTIES

SEC. 11. Any franchisor, or its officers, employees, or agents, who violate the provisions of sections 4, 6, 7, 8, and 9 of this Act, shall be liable to the franchisee injured in his business or property by such violation for all damage sustained by the franchisee, including, but not limited to, the loss of capital or investment, loss of past or potential profits, and increased cost of doing business, and such franchisee may recover such damage plus an equal amount as additional damages. Action to recover such damages may be maintained in any district court of the United States without respect to the amount in controversy or in an appropriate State court. The court in such action shall, in addition to any judgment awarded to the plaintiff, allow a reasonable attorney's fee to be paid by the defendant, and the costs of the action. Nothing contained herein shall prevent the removal of any such action from a State court to a district court of the United States if otherwise removable.

INJUNCTION PROCEEDINGS

SEC. 12. Any franchisee shall be entitled to sue for and have appropriate injunctive relief in any district court of the United States or in an appropriate State court against the threatened loss, damage, or injury to his business or property by violation of this Act. The court may grant such injunctive relief or temporary restraining order as it deems just and proper, notwithstanding any other provision of law. Nothing contained herein shall prevent the removal of any such action from a State court to a district court of the United States if otherwise removable.

VENUE

SEC. 13. Any action under this Act in a district court of the United States or appropriate State court against a franchisor, or its officers, employees, or agents, may be brought in any district or jurisdiction of State court wherein such franchisor, or its officers, employees, or agents, as the case may be, reside or may be found or may transact business; all process in such actions shall be addressed to and served by the United States marshal, sheriff, or other officer of any State court for the district or jurisdiction of State court wherein such franchisor, or its officers, employees, or agents, as the case may be, may be found.

STATUTE OF LIMITATIONS

SEC. 14. Any action brought pursuant to this Act shall be forever barred unless commenced within three years after the cause of action shall accrue.

RELATION TO OTHER LAWS

SEC. 15. No provision of this Act shall repeal, modify, or supersede, directly or indirectly, any provision of the antitrust laws of the United States.

PREEMPTION

SEC. 16. This Act shall not invalidate any provision of the laws of any State except insofar as there is a direct conflict between an express provision of this Act and an express provision of State law which cannot be reconciled.

REPEALER

Sec. 17. The Act approved August 8, 1956 (70 Stat. 1125; 15 U.S.C.A. 1221), is hereby repealed.

SEPARABILITY OF PROVISIONS SEC. 18. If any provision of this Act or the application of such provision to any person or circumstances is held invalid, the remainder of the Act and the application of such provision to other persons or circumstances shall not be affected thereby.

[S. 2321, 90th Cong., first sess.) A BILL To supplement the antitrust laws of the United States in order to prevent anti

competitive practices, by providing for just compensation upon termination of certain franchise relationships Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled, That this Act may be cited as the "Franchise Competitive Practice Act of 1967”. SEC. 2. As used in this Act

(a) the term “person" means a sole proprietor, partnership, corporation, or any other form of business organization;

(b) the term "franchise” means a contract, agreement, or understanding between two persons that involves a continuing commercial relationship between them and that grants to one person, hereinafter called “the franchisee”, the right to offer, sell, and distribute goods, services, or commodities manufactured, processed, distributed or (in the case of services) organized and directed by the other person, hereinafter called “the franchisor": Provided, That any commercial relationship in effect for less than twelve months or involving less than 25 per centum of the annual gross sales or receipts of the franchisee shall be exempt from the provisions of this Act :

(c) the term "terminate a franchise" means the ending of the franchise relationship by the franchisor by cancellation, within or without the provisions of the franchise, or refusal to renew the franchise upon expiration of the term thereof;

(d) the term "commerce" has the same meaning as in the antitrust laws of the United States; and

(e) the term “preempt” means the acquiring of the sale of goods or services to a customer which had for a period of at least six months prior to the

preemption been a customer of the franchisee. SEC. 3. The termination of a franchise, by a franchisor without the consent of the franchisee, notwithstanding any terms or conditions of the franchise to the contrary, except as provided in section 5, shall render. the franchisor legally liable for:

(a) the purchase from the franchisee, at full and fair market value, of all or any portion of the buildings, machinery, materials, facilities, and equipment of the franchisee utilized in the marketing of the franchisor's products or services;

(b) the purchase from the franchisee of all or any portion of franchisee's with requirements of the franchisor, at franchisee's cost plus freight and inventory of goods and materials purchased by the franchisee in accordance I 700€ tout cartage; and

(c) the payment to the franchisee of a sum equal to the reasonable value": of the franchise, including goodwill. SEC. 4. In those instances wherein the franchisor preempts the sale of goods or services to the customers previously sold by the franchisee, without the consent of the franchisee, the franchisor shall be legally liable for the payment to the franchisee of a sum equal to the reasonable value of the customers' account, including goodwill.

SEC. 5. In the case of existence of any franchise agreement between a franchisor and franchisee containing a formula for fair and equitable arbitration which i

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