The recent wave of proposed franchise legislation has hit Pennsylvania. HB 1620, which would amend Title 12 (Commerce and Trade) of the Pennsylvania Consolidated Statutes, was introduced July 24, 2013 by Representative P. Daley. This proposed legislation contains overriding provisions relating to the standards upon which franchise relationships must be based and also specific statutes which would overwrite specific and customary provisions of a franchise agreement. As the bill is fairly long and touches on many points, I offer the following as examples:
- Section 905 imposes on each party to a franchise contract the duty to act in “good faith” in its performance and enforcement. This includes the obligation of each party to the franchise to do “everything required under the contract to accomplish the purpose”. The statute does not clarify what is this purpose. For example, I query whether a franchisee cannot terminate the agreement without the franchisor’s breach before the end of the term without paying damages to the franchisor for such premature termination as the purpose is to operate the business for the term – perhaps an unintended consequence. Also, that good faith prohibits “any action with prevents enjoyment, even if not prohibited by the express terms of the contract”. I am not aware of any guidance as to what “enjoyment” encompasses in the franchise relationship. I believe this could be the subject of numerous lawsuits.
- Section 906 creates for a franchisor a “fiduciary duty to its franchisees and [the franchisor] is obligated to the highest standard of care in all of the following[.]” The “following” includes “performing bookkeeping, collections, payroll or accounting services on behalf of the franchisee.” As franchisees are independent businesses who are generally required to employ their own staff, it is unclear why the franchisor would do their payroll. Franchisees should be responsible for their own bookkeeping and payroll, etc.
- Section 907 imposes a duty of “good care” on the franchisor. This means, under the statute, that “A franchisor is required to exercise the skill and knowledge normally possessed by franchisors in good standing in the same or similar types of business.” If a start-up fast food franchisor has to prove is has the same skill and knowledge as a internationally established fast-food chain to meet this standard, I am unsure whether a start-up would be allowed to do business in Pennsylvania if this bill passed.
- Section 908 prohibits a franchisor from mandating where a franchisee obtains its equipment, supplies, goods or services, though they may require the franchisee to meet established uniform system wide quality standards. Many franchise systems, such as coffee, yogurt or water ice franchises, rely on the product being exactly the same at each store. I believe this provision would result in many franchise systems having to withdraw from Pennsylvania.
- Other provisions include overwriting or adding of territorial exclusivity provisions, preventing post-term non-competes, adding financial reporting requirements, adding requirements to renewal provisions and termination provisions which exceed any current state legislation and prohibiting the franchisor form transferring its business unless certain conditions are met.
One thing which was very unclear to me results from the statement at the beginning of the bill that one of its purposes is to promote a uniform set of standards which would “ensure that all franchisees and franchisors be treated the same on a particular issue, regardless of the state of operation.” This bill is dramatically different than any current regulations in place. While I believe that many valid arguments exist that franchisors have an unfair advantage in the negotiation of franchise agreements with potential franchisees, franchisors also have to have the ability to protect their systems and run their businesses to the best of their ability to promote the interests of the entire franchise system, thus promoting each franchisee’s business. My opinion is this bill is vastly overreaching and vague and will mainly promote the amount of franchise litigation in the Commonwealth of Pennsylvania.