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REFERENCE TITLE: franchises; regulation |
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State of Arizona House of Representatives Fifty-sixth Legislature First Regular Session 2023
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HB 2404 |
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Introduced by Representatives Travers: Quiñonez, Sandoval, Terech
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An Act
amending title 44, Arizona Revised Statutes, by adding chapter 41; relating to franchises.
(TEXT OF BILL BEGINS ON NEXT PAGE)
Be it enacted by the Legislature of the State of Arizona:
Section 1. Title 44, Arizona Revised Statutes, is amended by adding chapter 41, to read:
CHAPTER 41
FRANCHISES
ARTICLE 1. GENERAL PROVISIONS
44-8041. Definitions
In this chapter, unless the context otherwise requires:
1. "Area franchise" means any contract or agreement between a franchisor and a subfranchisor that grants the subfranchisor the right, for consideration given in whole or in part, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.
2. "Franchise":
(a) Means a contract or agreement, either expressed or implied, oral or written, between two or more persons that does all of the following:
(i) Grants a franchisee the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor.
(ii) Provides that the operation of the franchisee's business pursuant to a marketing plan or system described in item (i) of this subdivision is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate.
(iii) Requires the franchisee to pay, directly or indirectly, a franchise fee.
(b) Includes an area franchise.
(c) Does not include any of the following:
(i) Any franchise that is governed by the Petroleum Marketing Practices Act (P.L. 95-297; 92 Stat. 322; 15 United States code sections 2801 through 2807).
(ii) Lease departments, licenses or concessions at or with a general merchandise retail establishment if the lease department, licensee or concessionaire is incidental and ancillary to the general commercial operation of the retail establishment. For the purposes of this item, sales of a leased department, license or concessionaire are incidental and ancillary to the general commercial operation of the retail establishment if they amount to less than ten percent of the establishment's sales.
3. "Franchisee" means a person to whom a franchise is granted.
4. "Franchise fee":
(a) 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 under a franchise agreement, including any payment for goods and services.
(b) Does not include:
(i) The purchase of or agreement to purchase goods at a bona fide wholesale price if an obligation is not imposed on the purchaser to purchase or pay for a quantity of goods in excess of what a reasonable businessperson normally would purchase by way of a starting inventory or supply or to maintain a going inventory or supply.
(ii) The payment of a reasonable service charge to the issuer of a credit card by an establishment accepting or honoring that credit card.
(iii) the payment, directly or indirectly, of a franchise fee that does not exceed an annual sum of $100.
(iv) The payment of a sum not exceeding $1,000 annually for the purchase price or rental of fixtures, equipment or other tangible property to be used in and that is necessary for operating the franchised business if the price or rental does not exceed the cost that the franchisee would incur if the franchisee acquires the item from other persons or in the open market.
5. "Franchisor" means a person that grants or has granted a franchise.
6. "Subfranchisor" means a person to whom an area franchise is granted.
44-8042. Waiver; void
Any condition, stipulation or provision purporting to bind any person to waive compliance with any provision of this chapter is contrary to public policy and void.
44-8043. Jurisdiction; applicability; nonprofits
A. This chapter applies to any franchise when either the franchisee is domiciled in this state or the franchised business is or has been operated in this state.
B. Any provision of a franchise agreement requiring the franchisee to waive the provisions of this chapter is contrary to public policy and is void and unenforceable.
C. This chapter does not apply to A nonprofit organization that is operated on a cooperative basis by and for independent retailers that wholesales goods and services primarily to its member retailers if all of the following apply:
1. Control and ownership of each member is substantially equal.
2. Membership is limited to those who will use the services furnished by the nonprofit organization.
3. Transfer of ownership is prohibited or limited.
4. Capital investment does not receive a return.
5. There are substantially equal benefits that pass to the members on the basis of patronage of the nonprofit organization.
6. Members are not personally liable for obligations of the nonprofit organization in the absence of a direct undertaking or authorization by the members.
7. Services of the nonprofit organization are furnished primarily for the use of the members.
8. Each member and prospective member is provided with an offering circular.
9. Receipts, income or profit of the nonprofit organization is not paid to any profitmaking entity, except for arms-length payments for necessary goods and services, and members are not required to purchase goods or services from any designated profitmaking entity.
10. The nonprofit organization is subject to an action for rescission or damages if the nonprofit organization fraudulently induces a person to join the organization.
44-8044. Grounds for termination before term expiration; good cause
Except as otherwise provided by this chapter, a franchisor may not terminate a franchise before the expiration of its term except for good cause. Except as provided in section 44-8045, good cause is limited to the failure of the franchisee to substantially comply with the lawful requirements imposed on the franchisee by the franchise agreement after being given notice at least sixty days before the termination and an opportunity to cure the failure within sixty days after the date of the notice of noncompliance. The period to exercise the right to cure may not exceed seventy-five days unless there is a separate agreement between the franchisor and franchisee to extend the time.
44-8045. Grounds for immediate notice of termination without opportunity to cure
A. Immediate notice of termination without an opportunity to cure is reasonable if during the period in which the franchise is in effect any of the following occurs that is relevant to the franchise:
1. The franchisee or the business to which the franchise relates is the subject of an order for relief in bankruptcy or has been judicially determined to be insolvent and either:
(a) All or a substantial part of the assets are assigned to or for the benefit of any creditor.
(b) The franchisee admits the franchisee's inability to pay the franchisee's debts as the debts come due.
2. The franchisee abandons the franchise by failing to operate the business for five consecutive days during which the franchisee is required to operate the business under the terms of the franchise or any shorter period after which it is reasonable under the facts and circumstances for the franchisor to conclude that the franchisee does not intend to continue to operate the franchise, unless the failure to operate is due to a fire, a flood, an earthquake, a public health emergency or other similar causes beyond the franchisee's control.
3. The franchisor and franchisee agree in writing to terminate the franchise.
4. The franchisee makes any material misrepresentations relating to the acquisition of the franchise business, or the franchisee engages in conduct that reflects materially and unfavorably on the operation and reputation of the franchise business or system.
5. For a period of ten days after a notification of noncompliance, The franchisee fails to comply with any federal, state or local law, including all health, safety, building and labor laws applicable to the operation of the franchise.
6. After curing any failure pursuant to section 44-8044, The franchisee engages in the same noncompliance whether or not the noncompliance is corrected after notice.
7. The franchisee repeatedly fails to comply with one or more requirements of the franchise, whether or not corrected after a notification of noncompliance.
8. The franchised business or business premises of the franchise is seized, taken over or foreclosed by a government official in the exercise of the government official's duties or seized, taken over or foreclosed by a creditor, lienholder or lessor if either:
(a) a final judgment against the franchisee remains unsatisfied for thirty days unless a supersedeas or other appeal bond has been filed.
(b) A levy of execution has been made on the license granted by the franchise agreement or on any property used in the franchised business and it is not discharged within five days of the levy.
9. The franchisee is convicted of a felony or any other criminal misconduct that is relevant to operating the franchise.
10. The franchisee fails to pay any franchise fees or other amounts due to the franchisor or its affiliate within five days after receiving written notice that the fees are overdue.
11. The franchisor makes a reasonable determination that continued operation of the franchise by the franchisee will result in an imminent danger to public health or safety.
B. If the franchise expressly allows termination for a reason described in subsection A of this section, there is a lawful termination or nonrenewal of a separate motor fuel franchise governed by provisions of the Petroleum Marketing Practices Act (P.L. 95-297; 92 Stat. 322; 15 United States Code sections 2801 through 2807) that is operated by the franchisee or affiliate of the franchisee located at the same business premises if both franchises are granted by the same franchisor or an affiliate of the franchisor.
44-8046. Lawful termination or nonrenewal
A. Except as provided in subsection B of this section, on a lawful termination or nonrenewal of a franchisee, the franchisor shall purchase from the franchisee, at the value of the price paid minus depreciation, all inventory, supplies, equipment, fixtures and furnishings purchased or paid for under the terms of the franchise agreement or any ancillary or collateral agreement between the franchisee and the franchisor or its approved suppliers and sources that are, at the time of the notice of termination or nonrenewal, in the franchisee's possession or used by the franchisee in the franchise business. The franchisor may receive clear title to and possession of all items purchased from the franchisee under this subsection.
B. This section does not require the franchisor to purchase any personalized items, inventory, supplies, equipment, fixtures or furnishings if either:
1. The inventory, supplies, equipment, fixtures or furnishings are not reasonably required to conduct the operation of the franchise business in accordance with the franchise agreement or any ancillary or collateral agreement.
2. The franchisee, at the cessation of operation of the franchise business by the franchisee, cannot lawfully grant or does not grant the franchisor clear title and possession when the franchisor pays the franchisee for the inventory, supplies, equipment, fixtures or furnishings.
c. This section does not apply:
1. If the franchisee declines a bona fide offer of renewal from the franchisor.
2. If the franchisor does not prevent the franchisee from retaining control of the principal place of the franchise business.
3. To any termination or nonrenewal of a franchise due to a publicly announced and nondiscriminatory decision by the franchisor to completely withdraw from all franchise activity within the relevant geographic market area in which the franchise is located.
4. If the franchisor and franchisee mutually agree in writing to terminate or not renew the franchise.
5. To any inventory, supplies, equipment, fixtures or furnishings that are sold by the franchisee between the date of the notice of termination or nonrenewal and the cessation of operation of the franchise business by the franchisee pursuant to the termination or nonrenewal.
D. On the termination or nonrenewal of a franchise, a franchisor may offset against the amounts owed to a franchisee under subsection A of this section any amounts owed by the franchisee to the franchisor if the franchisee agrees to the amount owed or the franchisor has received a final adjudication of any amounts owed.
44-8047. Notice of intention not to renew; sale of business
A. A franchisor must renew a franchise unless the franchisor provides the franchisee with a written notice of its intention not to renew at least one hundred eighty days before the end of the franchise agreement and any of the following applies:
1. During the one hundred eighty-day period the franchisor allows the franchisee to sell the franchisee's business to a purchaser that meets the franchisor's then current requirements for granting new franchises or if the franchisor is not granting a significant number of new franchises, the then current requirements for granting renewal franchises.
2. The refusal to renew is not for the purpose of converting the franchisee's business premises to operation by employees or agents of the franchisor for the franchisor's own account. on expiration of the franchise, the franchisor agrees not to seek to enforce any covenant of the nonrenewed franchisee not to compete with the franchisor or franchisees of the franchisor. This paragraph does not prohibit a franchisor from exercising a right of first refusal to purchase the franchisee's business.
3. Termination would be allowed pursuant to section 44-8044 or 44-8045.
4. The franchisee and the franchisor agree not to renew the franchise.
5. The franchisor withdraws from distributing its products or services through franchises in the geographic market served by the franchisee, if all of the following occur:
(a) On expiration of the franchise, the franchisor agrees not to seek to enforce any covenant of the nonrenewed franchisee not to compete with the franchisor or franchisees of the franchisor.
(b) The failure to renew is not for the purpose of converting the business conducted by the franchisee pursuant to the franchise agreement to operation by employees or agents of the franchisor for the franchisor's own account.
(c) If the franchisor determines to sell, transfer or assign its interest in a marketing premises occupied by a franchisee whose franchise agreement is not renewed pursuant to this paragraph, either:
(i) During the one hundred eighty-day period after giving notice, The franchisor offers the franchisee a right of first refusal of a bona fide offer made by another to purchase the franchisor's interest in the premises. THe right of first refusal under this item shall be at least a thirty-day period.
(ii) In the case of the sale, transfer or assignment to another person of the franchisor's interest in one or more other controlled marketing premises, the other person in good faith offers the franchisee a franchise on substantially the same terms and conditions currently being offered by the other person to other franchisees.
6. The franchisor and the franchisee fail to agree to changes or additions to the terms and conditions of the franchise agreement, if the changes or additions would result in renewal of the franchise agreement on substantially the same terms and conditions on which the franchisor is then customarily granting renewal franchises, or if the franchisor is not then granting a significant number of renewal franchises, the terms and conditions on which the franchisor is then customarily granting original franchises. The franchisor may give the franchisee written notice of a date at least thirty days after the date of the notice, on or before which a proposed written agreement of the terms and conditions of the renewal franchise shall be accepted in writing by the franchisee. THe notice, when given at least one hundred eighty days before the end of the franchise term, may state that if the franchisee fails to accept, the notice is deemed a notice of intention not to renew at the end of the franchise term.
B. This Section does not prohibit a franchisor from offering or agreeing before the expiration of the current franchise term to extend the term of the franchise for a limited period in order to satisfy the time of notice of nonrenewal requirement of that franchise.
44-8048. Death of franchisee or majority shareholder; rights of surviving spouse, heirs or estate
A. A franchisor may not deny the surviving spouse, heirs or estate of a deceased franchisee or the majority shareholder of the franchisee the opportunity to participate in the ownership of the franchise under a valid franchise agreement for a reasonable time after the death of the franchisee or majority shareholder of the franchisee. During that time, the surviving spouse, heirs or estate of the deceased shall either satisfy all of the then current qualifications for a purchaser of a franchise or sell, transfer or assign the franchise to a person that satisfies the franchisor's then current standards for new franchisees. The rights granted pursuant to this franchise shall be granted subject to the surviving spouse, heirs or estate of the deceased maintaining all standards and obligations of the franchise.
b. This section does not prohibit a franchisor from exercising the right of first refusal to purchase a franchise after receiving a bona fide offer to purchase the franchise by a proposed purchaser of the franchise.
44-8049. Franchise prohibited from preventing sale or transfer of franchise to qualified person; franchisor consent required; right of first refusal; definition
A. It is unlawful for a franchisor to prevent a franchisee from selling or transferring a franchise, all or substantially all of the assets of the franchise business or a controlling or noncontrolling interest in the franchise business to another person if the person is qualified under the franchisor's then existing standards for the approval of new or renewing franchisees. The franchisor shall disclose these standards to the franchisee pursuant to section 44-8050, and the standard shall be consistently applied to similarly situated franchisees operating within the franchise brand, and the franchisee and the buyer, transferee or assignee shall comply with the transfer conditions specified in the franchise agreement.
B. Notwithstanding subsection A of this section, a franchisee does not have the right to sell, transfer or assign the franchise all or substantially all of the assets of the franchise business or a controlling or noncontrolling interest in the franchise business without the written consent of the franchisor. The consent may be withheld only if the buyer, transferee or assignee does not meet the standards for new or renewing franchisees described in subsection A of this section or the franchisee and the buyer, transferee or assignee do not comply with the transfer conditions specified in the franchise agreement.
C. This section does not prohibit a franchisor from exercising the contractual right of first refusal to purchase a franchise, all or substantially all of the assets of a franchise business or a controlling or noncontrolling interest in a franchise business after receiving a bona fide offer from a proposed purchaser to purchase the franchise, assets or interest. A franchisor exercising the contractual right of first refusal shall offer the seller payment that is at least equal to the value offered in the bona fide offer.
D. For the purposes of this section, "franchise business" includes a legal entity that is a party to a franchise agreement.
44-8050. Notice of franchisee's intent to sell, assign or transfer; requirements; notice of approval or disapproval; franchisor's right of first refusal; definition
A. Before the sale, assignment or transfer of a franchise, all or substantially all of the assets of a franchise business or a controlling or noncontrolling interest in the franchise business, the franchisee shall notify the franchisor of the franchisee's intent to sell, assign or transfer the franchise, all or substantially all of the assets of the franchise business or the controlling or noncontrolling interest in the franchise business. The notice must be in writing, be delivered to the franchisor by business courier or by certified mail and include all of the following:
1. The proposed transferee's name and address.
2. A copy of all agreements related to the sale, assignment or transfer of the franchise, the assets of the franchise business or the interest in the franchise business.
3. The proposed transferee's application for approval to become the successor franchisee. The application shall include all forms, financial disclosures and related information that the franchisor uses in reviewing prospective new franchisees, if those forms are readily made available to the existing franchisee. If the forms are not readily available, the franchisee shall request and the franchisor shall deliver the forms to the franchisee by business courier or certified mail within fifteen calendar days. As soon as practicable after receiving the proposed transferee's application, the franchisor shall notify in writing the franchisee and the proposed transferee of any additional information or documentation necessary to complete the transfer application. If the franchisor's then existing standards for the approval of new or renewing franchisees are not readily available to the franchisee when the franchisee notifies the franchisor of the franchisee's intent to sell, transfer or assign the franchise, the assets of the franchise business or the controlling or noncontrolling interest in the franchise business, the franchisor shall communicate the standards to the franchisee within fifteen calendar days.
B. Within sixty days after receiving all of the necessary information and documentation required pursuant to subsection A of this section or as specified by written agreement between the franchisor and the franchisee, the franchisor shall notify the franchisee of the approval or disapproval of the proposed sale, assignment or transfer. The notice shall be in writing and shall be delivered to the franchisee by business courier or certified mail. A proposed sale, assignment or transfer is deemed approved unless disapproved by the franchisor in the manner provided by this section. If the proposed sale, assignment or transfer is disapproved, the franchisor must include in the notice of disapproval a statement stating the reasons for the disapproval.
C. In any action in which the franchisor's disapproval of a sale, assignment or transfer pursuant to this section is an issue, the reasonableness of the franchisor's decision is a question of fact requiring consideration of all existing circumstances. For the purposes of this subsection, the finder of fact may be an arbitrator specified in the franchise agreement. This subsection does not prohibit summary judgment when the reasonableness of transfer approval or disapproval can be decided as a matter of law.
D. This section does not do either of the following:
1. Require a franchisor to exercise a contractual right of first refusal.
2. Prohibit a franchisor from exercising the contractual right of first refusal to purchase a franchise, all or substantially all of the assets of a franchise business or a controlling or noncontrolling interest in a franchise business after receiving a bona fide offer from a proposed purchaser to purchase the franchise, assets or interest. Any franchisor exercising the contractual right of first refusal shall offer the seller payment that is at least equal to the value offered in the bona fide offer.
E. For the purposes of this section, "franchise business" includes a legal entity that is a party to a franchise agreement.
44-8051. Notices of termination or nonrenewal
All notices of termination or nonrenewal required by this chapter must:
1. Be in writing.
2. Be posted by certified mail, delivered by telegram or personally delivered to the franchisee.
3. Contain a statement of intent to terminate or not renew the franchise that contains both:
(a) The reasons for the termination or nonrenewal.
(b) The effective date of the termination or nonrenewal or expiration.
44-8052. Remedies
A. If a franchisor terminates or fails to renew a franchisee in violation of this chapter, the franchisee is entitled to receive from the franchisor the fair market value of the franchised business and franchise assets and any other damages caused by the violation.
B. A court may grant preliminary and permanent injunctions for a violation or threatened violation of this chapter.
44-8053. Offset of prior recovery by franchisee and monies owed franchisor or subsidiaries
The franchisor may offset against any remedies made pursuant to Section 44-8052 any prior recovery by the franchisee and any sums that the franchisee owes the franchisor or its subsidiaries pursuant to the franchise or any ancillary agreement.
44-8054. Violation of federal rule; remedy
If a franchisor violates 16 Code of federal regulations section 436, A franchisee that purchases a franchise from the franchisor is entitled to all damages flowing from the purchase or to rescission of the franchise agreement and ancillary damages.
44-8055. Franchisee right to sue
Except as expressly provided in this chapter, this chapter does not abrogate the right of a franchisee to sue under any other law.
44-8056. Rights of association
A franchisor, directly or indirectly, through any officer, agent or employee, may not restrict or inhibit the right of franchisees to join a trade association or to prohibit the right of free association among franchisees for any lawful purposes. A violation of this section is not a crime.
44-8057. Enforcement of rights of association
A. A person who violates Section 44-8056 may be sued in the county in which the person resides or where a franchise affected by the violation does business. The cause of action may include a demand for temporary and permanent injunctive relief and damages, if any, and the costs of the litigation, including reasonable attorney fees. A person who brings a cause of action under this subsection is not required to allege or prove that actual damages have been suffered in order to obtain injunctive relief.
B. A cause of action may not be brought to enforce a violation of Section 44-8056 unless it is brought within three years after the violation occurs or within one year after a person discovers the facts constituting the violation, whichever occurs first.
44-8058. Venue restriction; void
A provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within this state.
44-8059. Applicability
This chapter applies only to:
1. Except as provided in paragraph 3 of this section, franchises granted or renewed on or after January 1, 2024 or to franchises of an indefinite duration that may be terminated by the franchisee or franchisor without cause.
2. Except as provided in paragraph 3 of this section, franchise agreements entered into or renewed on or after January 1, 2024 or to franchises of an indefinite duration that may be terminated by the franchisee or franchisor without cause.
3. A franchise agreement amended after January 1, 2024 is not subject to this chapter if the amendment to the franchise agreement was initiated by the franchisee and did not substantially and adversely impact the franchisee's rights, benefits, privileges, duties, obligations or responsibilities under the franchise agreement.
44-8060. Modifications
A franchisor may not modify a franchise agreement or require a general release in exchange for any assistance related to a declared state or federal emergency.
Sec. 2. Severability
If a provision of this act or its application to any person or circumstance is held invalid, the invalidity does not affect other provisions or applications of the act that can be given effect without the invalid provision or application, and to this end the provisions of this act are severable.