The Small Business Franchise Act was an attempt by the U.S. House of Representatives in 1999 as a sweeping federal bill meant to diminish fraud and franchisor abuse in exploiting franchise buyers and owners. The Bill, H.R. 3308, was not passed by the Senate.
Here were some of the Act's highlights.
- Franchisees can form trade associations without repercussion from franchisers. Franchisers can not prevent their franchisees from freely banding together by creating or joining trade associations.
- Franchisers cannot terminate franchisees without good cause. A franchisee must be given 30-days to cure any defaults in following a franchisor’s system standards.
- Franchisees can independently source goods and services. Some franchisors have been accused in the past of forcing its franchisees through contract to purchase materials from corporate headquarters at an inflated price. The SBFA allows franchisees to purchase goods and services from vendors of its choosing, provided they are in compliance with the franchisor’s established system-wide quality standards.
- Franchisees can continue their business at their location after the expiration of the franchise agreement. However, they cannot continue the use of the franchisor’s intellectual property, trademark or trade secrets.
- Franchisers cannot place or license another franchise or outlet in an unreasonably close proximity to an established outlet. This applies if the intent or probable effect is to reduce the gross sales of the established outlet of more than 5% after the establishment of the new outlet.
The SBFA went much further than the FTC’s Franchise Rule which covered mainly disclosure to potential franchise buyers.
Under the Franchise Rule, there has been little if any private right of action. In contrast, the SBFA attempted to give the franchisee a private right of action in federal courts when a franchisor had breached the FTC’s franchise rule or provision in the SBFA. Furthermore, the state attorney general was allowed to step in if they felt their state adversely affected because a franchisor engaged in a pattern of violating the SBFA.
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