SENATE BILL REPORT

SB 6720

BYSenators Nelson, Talmadge and Newhouse

Regarding franchise investment protection.

Senate Committee on Law & Justice

Senate Hearing Date(s):January 24, 1990; January 26, 1990

Majority Report:     That Substitute Senate Bill No. 6720 be substituted therefor, and the substitute bill do pass.

     Signed by Senators Nelson, Chairman; McCaslin, Vice Chairman; Hayner, Madsen, Newhouse, Niemi, Patrick, Rasmussen, Rinehart, Talmadge, Thorsness.

Senate Staff:Vicki E. Schur (786-7415)

                February 5, 1990

AS REPORTED BY COMMITTEE ON LAW & JUSTICE, JANUARY 26, 1990

BACKGROUND:

In 1972, the Legislature adopted the Franchise Investment Protection Act.  The act regulates franchising through mandatory registration of offerings, brokers and agents, disclosure, and providing a bill of rights for franchisees and administrative, civil and criminal remedies for violations.

Franchise is an agreement in which a franchisor grants to the franchisee a license to use a trade name or other related characteristic, in which there is a community interest in a business and for which the franchisee pays a fee.

Registration is required by franchisors, brokers and selling agents.  All franchises offered or sold in Washington must be registered in Washington with the Department of Licensing.  Washington developed its own disclosure and offering circular format.

Sales which are exempt from registration or disclosure requirements include isolated sales, sales made by an executor, trustee or similar fiduciary, sales to financial institutions, and sales by certain financially secure franchisors with specific disclosures.  There is no provision for filing an exemption claim.

The franchisee is given a 48 hour "cooling off" period between receipt of disclosure documents and the sale.  Parties must deal in good faith, and the franchisor may not discriminate between franchisees in any business dealing.  The franchisee may not waive or release any rights under the act.

Franchise law has evolved since the adoption of the act, and many states have adopted new laws or modified existing laws to keep pace with the changes.  In addition, the Federal Trade Commission has preempted certain areas of state regulation.  Washington franchise law should be brought into line with laws of other states and federal regulations.

SUMMARY:

Definition.  Franchise is an agreement by which the franchisee is granted the right to engage in a business which is substantially associated with a trademark or other commercial symbol owned or licensed by the franchisor, under a marketing plan prescribed or suggested by the franchisor, and for which the franchisee pays a fee.  The term franchise includes subfranchises.

Registration.  Franchisors and brokers are required to register; salespersons are no longer subject to registration requirements.

Registration requirements apply to offers or sales:  directed into or accepted in Washington, originating from Washington, made to or accepted by a resident of Washington, or for franchises to be located in Washington.  Registration requirements do not apply to an offer to sell if the advertising is made in other states as well.

Washington's specific disclosure format is replaced with the Uniform Franchise Offering Circular adopted by the North American Securities Administrators Association, Inc.

Exemptions.  The offer or sale of a subfranchise by the franchisee, court-approved sales made by an executor, trustee or similar fiduciary on behalf of someone other than the franchisor, and sales to financial institutions are exempt from registration and disclosure.  Exemptions apply to offers or sales for which:  a Uniform Franchise Offering Circular is provided, the franchisor claims an exemption for no more than three Washington franchises, the sales are made without advertising, and the buyer is represented by an attorney or CPA.  Exemptions are also provided for offers or sales to accredited investors or franchisees who purchased the same franchise within two years from a registered franchisor.  Exemption claims must be filed with the director of licensing.

Franchisees' Rights.  The "cooling off" period between receipt of disclosure documents and the sale is extended from 48 hours to ten days.  The parties may negotiate different provisions from the standard franchise format without violating the nondiscrimination clause.  If such negotiations are made after the initial offering circular is delivered, additional disclosure is not required.  The franchisee may waive his or her rights pursuant to settlement of a bona fide dispute.  Choice of law provisions purporting to grant jurisdiction to another state are null and void.  The statute of limitations for rescission for failure to register is two years; all other causes of action under the act have a four year statute of limitations.

EFFECT OF PROPOSED SUBSTITUTE:

Statute of limitations for rescission of a franchise agreement for failure to register is changed from two years to one year.  Statute of limitations for all other causes of action is changed from four years to three years.

The Director of Licensing has the power to deny or revoke a registration exemption or a franchise broker's registration in the case of certain violations or wrongdoing.

Technical amendments are made and redundant sections are deleted.

Appropriation:  none

Revenue:   none

Fiscal Note:    requested January 22, 1990

Senate Committee - Testified:   Gary Duvall, Washington State Bar Franchise Act Revision Committee; Kent Carlson, Washington State Bar Franchise Act Revision Committee; Mike Stevenson, Division of Securities; Duane Thompson, International Franchise Association; Jerald Farley, International Franchise Association