We have previously written about the development of a franchisee-friendly franchise act in Pennsylvania. Similar laws are under consideration elsewhere, possibly signaling a state-level sea change in how franchising is regulated in this country.
The legislature in Massachusetts is currently considering the Massachusetts Fair Franchise Act, an act designed to protect small business investments. The Act cites the “profound imbalance of contractual power in favor of the franchisor” as one of many reasons franchisees need the protections the Act affords. The legislation is not the first of its kind to be proposed in Massachusetts and faces strong opposition from franchisors. The Act would significantly affect the bargaining powers of franchisees in Massachusetts and would give franchisees greater input into the business decisions of the franchisor.
The Act proposes, among other things, the following:
- Franchisors are prohibited from terminating or substantially changing the competitive circumstances of a franchise agreement except for good cause shown. The burden of proof will lie with the franchisor.
- Franchisors must give 90 days’ notice of termination, with a 60 day period to cure. The only exception is when the termination is voluntary abandonment or criminal activity.
- The Act gives franchisees the right to cure a failure to pay three times in any twelve month period.
- Franchisees may terminate a franchise agreement for good cause shown, without the imposition of penalties or fees. Good cause shall include “changes to the franchise system or the competitive circumstances of the franchise agreement created or expressly required by the franchisor which would cause substantial negative impact or substantial financial hardship to the franchisee in the operation of its franchise.”
- Franchisors may not restrict franchisees from associating with other franchisees or from joining, leading or otherwise participating in a trade or other association, or retaliate against a franchisee for engaging in these activities.
- The Act imposes a duty on franchisors to deal fairly and in good faith in all aspects of the franchising agreement.
- Franchisors are prohibited from notifying franchisees of a claimed breach of franchise agreement later than 180 days from the date the good cause arises or the franchisor knew or should have known of the claimed good cause.
- The Act significantly limits the liquidated damages franchisors can impose, allowing only up to six months of the average monthly royalty payments from the previous 12 months.
- Upon termination, the franchisor is obligated to provide the franchisee with the fair market value of the franchisee’s inventory, supplies, equipment, furnishing and other items, unless the franchisor agrees in writing not to enforce a covenant not to compete.
- The Act also addresses common franchisee grievances of unfair competition in their territory from other franchisees in the same system.