Tennessee Senate Passes "Franchise Disclosure Act of 2007"

If House Passes, Bill Could be Law as Early as July 1, 2007

NASHVILLE, Tenn (Blue MauMau) - On March 6, 2007, the Tennessee Senate passed the “Tennessee Franchise Disclosure Act of 2007” without any changes or amendments.  Tennessee joins the growing number of states in 2007 addressing fair franchise regulation with the simultaneous introduction of Senate Bill 367 by Senator Steve Southerland and House Bill 322 by Representative John Litz.

Mary Ann Doty, staff member for State Representative John Litz, confirmed that House Bill 322 was introduced and referred to the Commerce Committee last month to await action on the Senate side.  Now that the Senate had passed their bill, House Bill 322 will be placed on the House’s agenda for the week of March 19, 2007.  Should the House also pass the bill, it will become law, effective July 1, 2007.

In addition to requiring franchise companies to register with the state, this bill addresses many common problems associated with the franchise industry, such as prohibiting franchise termination except for “good cause” and the right of franchisees to join trade associations. It also prohibits a franchisor from refusing to renew a franchise that would be barred from continuing the same business under a different trademark, without appropriate compensation.

Recent news headlines have focused on the vulnerability and problems resulting from franchisors not fulfilling their obligations regarding site selection and other support issues.  Section 16 of this bill could provide recourse in the future for such problems.  It states:

SECTION 16. If the administrator finds that a franchisor has failed to demonstrate that adequate financial arrangements have been made to fulfill obligations to provide real estate, improvements, equipment, inventory, training, or other items to be included in the establishment and opening of the franchise business being offered, the administrator may by rule or order require the escrow or impoundment of franchise fees and other funds paid by the franchisee until such obligations have been fulfilled, or, at the option of the franchisor, the furnishing of a surety bond as provided by rule of the administrator, if the administrator finds that such requirement is necessary and appropriate to protect prospective franchisees.

Although the Federal Trade Commission (FTC) addresses franchise disclosure regulations, there is little federal regulation of after-sale issues. For this reason, many states have enacted what’s become known as “Little FTC’s” providing registration requirements and regulating both pre-sale and after-sale issues.

What could be seen as one of the most important new legislative trends addresses the enforcement of franchise regulation. The Tennessee Franchise Disclosure Act of 2007 addresses this real-world issue with the following:

(b) The administrator, with such assistance as the administrator may from time to time request of the district attorneys general in the several counties, may institute proceedings in the circuit court to prevent and restrain violations of this part or of any rule or order prescribed or issued under this part. In such a proceeding, the court shall determine whether a violation has been committed, and shall enter such judgment or decree as it considers necessary to remove the effects of any violation and to prevent such violation from continuing or from being renewed in the future. The court, in its discretion, may exercise all powers necessary for this purpose, including, but not limited to, injunction, revocation, forfeiture or suspension of the charter, franchise, certificate of authority or privileges of any corporation, association, limited partnership or other business organization operating under the laws of this state, dissolution of domestic corporations or associations, suspension or termination of the right of foreign corporations or associations to do business in this state, or restitution or payment of damages by a franchisor to persons injured by violations of this part, including without limitation an award of reasonable attorneys fees and costs.

• View full details of Senate Bill 367 (pdf)