Read first time 01/13/12.   Referred to Committee on Financial Institutions, Housing & Insurance.

     AN ACT Relating to franchise investment protection; and amending RCW 19.100.010, 19.100.020, 19.100.030, 19.100.040, 19.100.070, 19.100.080, 19.100.090, 19.100.184, 19.100.130, and 19.100.248.

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF WASHINGTON:

Sec. 1   RCW 19.100.010 and 1994 c 92 s 3 are each amended to read as follows:
     When used in this chapter, unless the context otherwise requires:
     (1) "Advertisement" means any written or printed communication or any communication by means of recorded telephone messages or spoken on radio, television, or similar communication media published in connection with an offer or sale of a franchise.
     (2) "Affiliate" means a person controlling, controlled by, or under common control with another person, every officer or director of such person, and every person occupying a similar status or performing similar functions.
     (3) "Director" means the director of financial institutions.
     (4) "Franchise" means:
     (a) An agreement, express or implied, oral or written, by which:
     (i) A person is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan prescribed or suggested in substantial part by the grantor or its affiliate;
     (ii) The operation of the business is substantially associated with a trademark, service mark, trade name, advertising, or other commercial symbol designating, owned by, or licensed by the grantor or its affiliate; and
     (iii) The person pays, agrees to pay, or is required to pay, directly or indirectly, a franchise fee.
     (b) The following shall not be construed as a franchise within the meaning of this chapter:
     (i) The payment of a reasonable service charge to the issuer of a credit card by an establishment accepting or honoring such credit card or any transaction relating to a bank credit card plan;
     (ii) Actions or transactions otherwise permitted, prohibited or regulated under laws administered by the insurance commissioner of this state;
     (iii) Any motor vehicle dealer franchise subject to the provisions of chapter 46.70 RCW.
     (5) "Marketing plan" means a plan or system concerning an aspect of conducting business. A marketing plan may include one or more of the following:
     (a) Price specifications, special pricing systems or discount plans;
     (b) Sales or display equipment or merchandising devices;
     (c) Sales techniques;
     (d) Promotional or advertising materials or cooperative advertising;
     (e) Training regarding the promotion, operation, or management of the business; or
     (f) Operational, managerial, technical, or financial guidelines or assistance.
     (6) "Bank credit card plan" means a credit card plan in which the issuer of credit cards is a national bank, state bank, trust company or any other banking institution subject to the supervision of the director of financial institutions of this state or any parent or subsidiary of such bank.
     (7) "Franchisee" means a person to whom a franchise is offered or granted.
     (8) "Franchisor" means a person who grants a franchise to another person.
     (9) "Subfranchise" means an agreement, express or implied, oral or written, by which a person pays or agrees to pay, directly or indirectly, a franchisor or affiliate for the right to grant, sell or negotiate the sale of a franchise.
     (10) "Subfranchisor" means a person to whom a subfranchise is granted.
     (11) "Franchise broker" means a person who directly or indirectly engages in the business of the offer or sale of franchises. The term does not include a franchisor, subfranchisor, or their officers, directors, or employees.
     (12) "Franchise fee" means any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement, including, but not limited to, the payment either in lump sum or by installments of an initial capital investment fee, any fee or charges based upon a percentage of gross or net sales whether or not referred to as royalty fees, any payment for the mandatory purchase of goods or services or any payment for goods or services available only from the franchisor, or any training fees or training school fees or charges; however, the following shall not be considered payment of a franchise fee: (a) the purchase or agreement to purchase goods at a bona fide wholesale price; (b) the purchase or agreement to purchase goods by consignment; if, and only if the proceeds remitted by the franchisee from any such sale shall reflect only the bona fide wholesale price of such goods; (c) a bona fide loan to the franchisee from the franchisor; (d) the purchase or agreement to purchase goods at a bona fide retail price subject to a bona fide commission or compensation plan that in substance reflects only a bona fide wholesale transaction; (e) the purchase or lease or agreement to purchase or lease supplies or fixtures necessary to enter into the business or to continue the business under the franchise agreement at their fair market or rental value; (f) the purchase or lease or agreement to purchase or lease real property necessary to enter into the business or to continue the business under the franchise agreement at the fair market or rental value; (g) amounts paid for trading stamps redeemable in cash only; (h) amounts paid for trading stamps to be used as incentives only and not to be used in, with, or for the sale of any goods.
     (13) "Person" means a natural person, corporation, partnership, trust, or other entity and in the case of an entity, it shall include any other entity which has a majority interest in such an entity or effectively controls such other entity as well as the individual officers, directors, and other persons in act of control of the activities of each such entity.
     (14) "Publish" means publicly to issue or circulate by newspaper, mail, radio, or television or otherwise to disseminate to the public.
     (15) "Sale" or "sell" includes every contract of sale, contract to sell, or disposition of a franchise.
     (16) "Offer" or "offer to sell" includes every attempt or offer to dispose of or solicitation of an offer to buy a franchise or an interest in a franchise.
     (17) "File," "filed," or "filing," except in the phrase "filed with and subject to the approval of the superior court," means the receipt under this chapter of a record by the director or a designee of the director.
     (18) "Record" means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.
     (19) "Prospective franchisee" means any person, including any agent, representative, or employee, who approaches or is approached by a franchise seller to discuss the possible establishment of a franchise relationship.

Sec. 2   RCW 19.100.020 and 1991 c 226 s 2 are each amended to read as follows:
     (1) It is unlawful for any franchisor or subfranchisor to sell or offer to sell any franchise in this state unless the offer of the franchise has been registered under this chapter or exempted under RCW 19.100.030.
     (2) For the purpose of this section, an offer to sell a franchise is made in this state when: (a) The offer is directed by the offeror into this state from within or outside this state and is received where it is directed, (b) the offer originates from this state and violates the franchise or business opportunity law of the state or foreign jurisdiction into which it is directed, (c) the ((offeree)) prospective franchisee is a resident of this state, or (d) the franchise business that is the subject of the offer is to be located or operated, wholly or partly, in this state.
     (3) For the purpose of this section, a sale of any franchise is made in this state when: (a) An offer to sell is accepted in this state, (b) an offer originating from this state is accepted and violates the franchise or business opportunity law of the state or foreign jurisdiction in which it is accepted, (c) the purchaser of the franchise is a resident of this state, or (d) the franchise business that is the subject of the sale is to be located or operated, wholly or partly, in this state.
     (4) For the purpose of this section, an offer to sell is not made in this state solely because the offer appears: (a) In a newspaper or other publication of general and regular circulation if the publication has had more than two-thirds of its circulation outside this state during the twelve months before the offer is published, or (b) in a broadcast or transmission originating outside this state.

Sec. 3   RCW 19.100.030 and 1991 c 226 s 3 are each amended to read as follows:
     The registration requirements of this chapter shall not apply to:
     (1) The offer or sale or transfer of a franchise by a franchisee who is not an affiliate of the franchisor for the franchisee's own account if the franchisee's entire franchise is sold and the sale is not effected by or through the franchisor. A sale is not effected by or through a franchisor merely because a franchisor has a right to approve or disapprove the sale or requires payment of a reasonable transfer fee. Such right to approve or disapprove the sale shall be exercised in a reasonable manner.
     (2) The offer or sale of a franchise by an executor, administrator, sheriff, marshal, receiver, trustee in bankruptcy, guardian, conservator, or pursuant to a court-approved offer or sale, on behalf of a person other than the franchisor or the estate of the franchisor.
     (3) The offer or sale of a franchise to a bank, savings institution, trust company, insurance company, investment company as defined in the Investment Company Act of 1940, pension or profit sharing trust, or other financial institution or institutional buyer or to a broker dealer where the purchaser is acting for itself or in some fiduciary capacity.
     (4) The offer or sale of a franchise by a franchisor:
     (a) Who has delivered in writing to each prospective franchisee, at least ((ten business)) fourteen calendar days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least ((ten business)) fourteen calendar days prior to the receipt of any consideration, whichever occurs first, ((an offering circular)) a disclosure document complying with guidelines adopted by rule of the director. The director shall be guided in adopting such a rule by the guidelines for the preparation of the ((Uniform Franchise Offering Circular)) disclosure document adopted by the federal trade commission or the North American Securities Administrators Association, Inc., or its successor, as such guidelines may be revised from time to time; and
     (b) Who either:
     (i)(A) Has a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than five million dollars or who has a net worth, according to its most recent audited financial statement, of not less than one million dollars and is at least eighty percent owned by a corporation which has a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than five million dollars; and
     (B) Has had at least twenty-five franchisees conducting business at all times during the five-year period immediately preceding the offer or sale or has conducted business which is the subject of the franchise continuously for not less than five years preceding the offer or sale or if any corporation which owns at least eighty percent of the franchisor, has had at least twenty-five franchisees conducting business at all times during the five-year period immediately preceding the offer or sale or such corporation has conducted business which is the subject of the franchise continuously for not less than five years preceding the offer or sale; and
     (C) Requires an initial investment by the franchisee of more than one hundred thousand dollars; and
     (D) Files annually with the director a statement prescribed by rule of the director giving notice of such claim, and pays a filing fee as set forth in RCW 19.100.240; or
     (ii)(A) Has no outstanding franchises granted for businesses located or to be located outside the state of Washington; and
     (B) Has granted and grants no more than three franchises for franchise businesses to be situated within the state of Washington; and
     (C) Does not publish an advertisement or engage in general solicitation for the franchise offering; and
     (D) The buyer is represented or advised in the transaction by independent legal counsel or certified public accountant; or
     (iii) Does not charge a franchise fee, as defined in RCW 19.100.010(12), in excess of five hundred dollars; and
     (c) Who has not been found by a court of competent jurisdiction to have been in violation of this chapter, chapter 19.86 RCW, or any of the various federal statutes dealing with the same or similar matters, within seven years of any sale or offer to sell franchise business under franchise agreement in the state of Washington.
     (5) The offer or sale of a franchise to an accredited investor, as defined by rule adopted by the director. The director shall be guided in adopting such a rule by the rules defining accredited investor promulgated by the federal securities and exchange commission.
     (6) The offer or sale of an additional franchise to an existing franchisee of the franchisor for the franchisee's own account that is substantially the same as the franchise that the franchisee has operated for at least two years at the time of the offer or sale, provided the prior sale to the franchisee was pursuant to a franchise offering that was registered in the state of Washington.

Sec. 4   RCW 19.100.040 and 1991 c 226 s 4 are each amended to read as follows:
     (1) The application for registration of the offer, signed by the franchisor, subfranchisor, or by any person on whose behalf the offering is to be made, must be filed with the director and shall contain:
     (a) A copy of the franchisor's or subfranchisor's ((offering circular)) disclosure document which shall be prepared in compliance with guidelines adopted by rule of the director. The director shall be guided in adopting such rule by the guidelines for the preparation of the ((Uniform Franchise Offering Circular)) disclosure document adopted by the federal trade commission or the North American Securities Administrators Association, Inc., or its successor, as such guidelines may be revised from time to time;
     (b) A copy of all agreements to be proposed to franchisees;
     (c) A consent to service of process as required by RCW 19.100.160;
     (d) The application for registration of a franchise broker, if any;
     (e) The applicable filing fee; and
     (f) Such other information as the director determines, by rule or order, to be necessary or appropriate to facilitate the administration of this chapter.
     (2) The director may require the filing of financial statements of the franchisor or subfranchisor audited by an independent certified public accountant and prepared in accordance with generally accepted accounting principles.
     When the person filing the application for registration is a subfranchisor, the application shall also include the same information concerning the subfranchisor as is required from the franchisor pursuant to this section.

Sec. 5   RCW 19.100.070 and 1991 c 226 s 5 are each amended to read as follows:
     (1) A franchise offering shall be deemed duly registered, and a claim of exemption under RCW 19.100.030(4)(b)(i) shall be duly filed, for a period of one year from the effective date of registration or filing unless the director by rule or order specifies a different period.
     (2) Registration of a franchise offer may be renewed for additional periods of one year each, unless the director by rule or order specifies a different period, by filing with the director no later than ((fifteen business)) twenty calendar days prior to the expiration thereof a renewal application containing such information as the director may require to indicate any substantial changes in the information contained in the original application or the previous renewal application and payment of the prescribed fee.
     (3) If a material adverse change in the condition of the franchisor or the subfranchisor or any material change in the information contained in its ((offering circular)) disclosure document should occur the franchisor or subfranchisor shall so amend the registration on file with the director as soon as reasonably possible and in any case, before the further sale of any franchise.

Sec. 6   RCW 19.100.080 and 1991 c 226 s 6 are each amended to read as follows:
     (1) It is unlawful for any person to sell a franchise that is registered or required to be registered under this chapter without first ((delivering)) furnishing to the ((offeree)) prospective franchisee a copy of the franchisor's current disclosure document, as described in RCW 19.100.040 and 19.100.070, at least ((ten business)) fourteen calendar days prior to the execution by the ((offeree)) prospective franchisee of any binding franchise or other agreement, or at least ((ten business)) fourteen calendar days ((prior to the receipt of any consideration, whichever occurs first, a copy of the offering circular required under RCW 19.100.040, with any addition or amendment to the offering circular required by RCW 19.100.070, together with a copy of the proposed agreements relating to the sale of the franchise)) before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.
     (2) It is unlawful for any franchisor to alter unilaterally and materially the terms and conditions of the basic franchise agreement or any related agreements attached to the disclosure document without furnishing the prospective franchisee with a copy of each revised agreement at least seven calendar days before the prospective franchisee signs the revised agreement. Changes to an agreement that arise out of negotiations initiated by the prospective franchisee do not trigger this seven calendar day period.

Sec. 7   RCW 19.100.090 and 1971 ex.s. c 252 s 9 are each amended to read as follows:
     (1) Neither (a) the fact that application for registration under this law has been filed nor (b) the fact that such registration has become effective constitutes a finding by the director that any document filed under this law is true, complete, or not misleading. Neither any such fact or the fact that an exemption is available for a transaction means that the director has passed in any way on the merit or qualifications of or recommended or given approval to any person, franchise, or transaction.
     (2) It is unlawful to make or cause to be made to any prospective ((purchaser or offeree)) franchisee any representation inconsistent with this section.

Sec. 8   RCW 19.100.184 and 1991 c 226 s 12 are each amended to read as follows:
     This chapter does not preclude negotiation of the terms and conditions of a franchise at the initiative of the franchisee, provided that such negotiated terms and conditions do not violate any provision of this chapter. After the initial offer to a franchisee using the ((offering circular)) disclosure document required by RCW 19.100.030, 19.100.040, or 19.100.070 a franchisor need not provide an amended ((offering circular)) disclosure document to that franchisee by reason of a change in the terms and conditions of a franchise being negotiated at the initiative of that franchisee or amend the registration by reason of such change.

Sec. 9   RCW 19.100.130 and 2011 c 336 s 560 are each amended to read as follows:
     Upon the entry of a stop order under any part of RCW 19.100.120, the director shall promptly notify the applicant that the order has been entered and that the reasons therefor and that within fifteen days after receipt of a written request, the matter will be set down for hearing. If no hearing is requested within ((fifteen)) twenty calendar days and none is ordered by the director, the director shall enter his or her written findings of fact and conclusions of law and the order will remain in effect until it is modified or vacated by the director. If a hearing is requested or ordered, the director after notice of an opportunity for hearings to the issuer and to the applicant or registrant shall enter his or her written findings of fact and conclusions of law and may modify or vacate the order. The director may modify or vacate a stop order if he or she finds that the conditions which prompted his or her entry have changed or that it is otherwise in the public interest to do so.

Sec. 10   RCW 19.100.248 and 1979 ex.s. c 13 s 4 are each amended to read as follows:
     If it appears to the director that a person has engaged or is about to engage in an act or practice constituting a violation of a provision of this chapter or a rule adopted or order issued under this chapter, the director may, in the director's discretion, issue an order directing the person to cease and desist from continuing the act or practice. Reasonable notice of and opportunity for a hearing shall be given. The director may issue a temporary order pending the hearing, which shall remain in effect until ten days after the hearing is held and which shall become final if the person to whom notice is addressed does not request a hearing within ((fifteen)) twenty calendar days after the receipt of the notice.