Sec. 2. Findings and purpose
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Congress finds the following: Franchise businesses represent a large and growing segment of the Nation’s retail and service businesses and are rapidly replacing more traditional forms of small business ownership in the American economy. Franchise businesses involve a joint enterprise between the franchisor and franchisees in which each party has a vested interest in the success of the franchised business. Most prospective franchisees lack bargaining power and generally invest substantial amounts to obtain a franchise business when they are unfamiliar with operating a business, with the business being franchised, and with industry practices in franchising.
Franchisees invest a substantial amount of their own money, take loans (often secured by their own home and retirement accounts, and the American taxpayer via loans guaranteed by the Small Business Administration), and enter into long-term commercial leases and other obligations for the franchise businesses in order to support themselves and their families. Franchise agreements reflect a profound imbalance of contractual power in favor of the franchisor, and fail to give due regard to the legitimate business interests of the franchisee, as a result of the franchisor reserving one-sided and pervasive contractual rights over the franchise relationship.
Franchisees may suffer substantial financial losses when the franchisor does not provide truthful or complete information regarding the franchise opportunity, or where the franchisor does not act in good faith or in a commercially reasonable manner in the performance of the franchise agreement. Unlike investments in securities, an investment in a franchise may lead to substantial additional losses well beyond the initial capital investment. Unlike employment, due to long-term contractual and lease obligations, franchisees generally cannot simply resign and leave the franchised business without substantial liabilities.
Traditional common law doctrines have not evolved sufficiently to protect franchisees adequately from fraudulent or unfair practices in the sale and operation of franchise businesses, and significant contractual and procedural restrictions have denied franchisees adequate legal recourse to protect their interests in such businesses. Contractual obligations of the franchisee to the franchisor may create an environment that makes it difficult to pay workers significantly above minimum wage or provide reasonable benefits to workers.
A franchisee’s freedom to achieve a contract negotiated at arm’s length is greatly limited by the disparity of bargaining power, lack of consistent legal standards, and other factors described above. This Act is necessary to restore true freedom to contract, and to improve the living standards of employees of franchises. The Federal Government has had a significant interest in regulating franchising and has regulated franchising for over 40 years through the Federal Trade Commission and its Franchise Rule.
It is the purpose of this Act to— promote the compelling interest of the public in fair business relations between franchisees and franchisors; protect franchisees against unfair treatment by franchisors, who inherently have superior economic power and superior bargaining power in the negotiation of the terms and conditions of the franchise relationship; provide franchisees with rights and remedies in addition to those existing by contract or common law; govern franchise agreements, including any renewals or amendments, to the full extent consistent with the Constitution of the United States; and create an environment that gives franchisees opportunity to thrive, therefore having the opportunity to provide better wages and benefits to their employees.