New Jersey-2022-S425-Introduced

An Act concerning franchises and amending and supplementing P.L.1971, c.356.

Be It Enacted by the Senate and General Assembly of the State of New Jersey:

1. Section 4 of P.L.1971, c.356 (C.56:10-4) is amended to read as follows:

4. This act applies only:

a. to a franchise (1) the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the State of New Jersey, and (2) [where gross sales of products or services between the franchisor and franchisee covered by such franchise shall have exceeded $35,000.00 for the 12 months next preceding the institution of suit pursuant to this act, and (3)] where more than 20% of the franchisee's gross sales are intended to be or are derived from such franchise; or

b. to a franchise for the sale of new motor vehicles as defined in R.S.39:10-2, the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the State of New Jersey.

(cf: P.L.1993, c.189, s.1)

2. Section 5 of P.L.1971, c.356 (C.56:10-5) is amended to read as follows:

5. a. It shall be a violation of this act for any franchisor directly or indirectly through any officer, agent, or employee to terminate, cancel, or fail to renew a franchise without having first given written notice setting forth all the reasons for such termination, cancellation, or intent not to renew to the franchisee at least 60 days in advance of such termination, cancellation, or failure to renew, except (1) where the alleged grounds are voluntary abandonment by the franchisee of the franchise relationship in which event the aforementioned written notice may be given 15 days in advance of such termination, cancellation, or failure to renew; and (2) where the alleged grounds are the conviction of the franchisee in a court of competent jurisdiction of an indictable offense directly related to the business conducted pursuant to the franchise in which event the aforementioned termination, cancellation or failure to renew may be effective immediately upon the delivery and receipt of written notice of same at any time following the aforementioned conviction. It shall be a violation of this act for a franchisor to terminate, cancel or fail to renew a franchise without good cause. For the purposes of this act, good cause for terminating, canceling, or failing to renew a franchise shall be limited to failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.

b. It shall be a violation of this act for any franchisor directly or indirectly through any officer, agent, or employee to restrict or prohibit a franchisee from terminating, cancelling, or not renewing a franchise provided the franchisee provides the franchisor with at least 60 days notice of that termination, cancellation, or failure to renew.

c. It shall be a violation of P.L.1971, c.356 (C.56:10-1 et seq.) for a franchisor, after termination, cancellation or non-renewal of a franchise pursuant to this section, to:

(1) require a franchisee to pay excessive damages;

(2) require a franchisee to personally guarantee the debts of the franchise to the franchisor; and

(3) impose any employment restriction on the owner or employees of the franchise that exceeds six months duration and restricts employment outside the county in which the franchise is located.

(cf: P.L.1971, c.356, s.5)

3. Section 7 of P.L.1971, c.356 (C.56:10-7) is amended to read as follows:

7. It shall be a violation of this act for any franchisor, directly or indirectly, through any officer, agent or employee, to engage in any of the following practices:

a. To require a franchisee at time of entering into a franchise arrangement to assent to a release, assignment, novation, waiver or estoppel which would relieve any person from liability imposed by this act.

b. To prohibit directly or indirectly the right of free association among franchisees for any lawful purpose.

c. To require or prohibit any change in management of any franchisee unless such requirement or prohibition of change shall be for good cause, which cause shall be stated in writing by the franchisor.

d. To restrict the sale of any equity or debenture issue or the transfer of any securities of a franchise or in any way prevent or attempt to prevent the transfer, sale or issuance of equity securities or debentures to employees, personnel of the franchisee, or spouse, child or heir of an owner, as long as basic financial requirements of the franchisor are complied with, and provided any such sale, transfer or issuance does not have the effect of accomplishing a sale or transfer of control, including, but not limited to, change in the persons holding the majority voting power of the franchise. Nothing contained in this subsection shall excuse a franchisee's obligation to provide prior written notice of any change of ownership to the franchisor if that notice is required by the franchise.

e. To impose unreasonable standards of performance upon a franchisee.

f. To provide any term or condition in any lease or other agreement ancillary or collateral to a franchise, which term or condition directly or indirectly violates this act.

g. To impose unreasonable facilities, financial, operating or other requirements upon a franchisee.

h. To require or attempt to require a franchisee to relocate a franchise or to implement any facility or operational modification more than once every five years, unless the franchisor can demonstrate that the franchisee will be able, in the ordinary course of business as conducted by that franchisee, to earn a reasonable return on the total investment in that facility or from that operational modification, and the full return of the total investment in that facility or from operational modifications within 10 years. This subsection shall not be construed as requiring a franchisor to guarantee that the return as provided in this paragraph will be realized.

i. To receive a commission or any other payment from any vendor that sells goods or services to franchisees of the franchisor.

j. To require any franchisee to purchase goods or services from a vendor if the franchisor has not taken reasonable steps to secure the best possible price for the goods and services from the vendor.

k. To require a franchisee, as a condition for the approval of a renewal or transfer of a franchise, to assent to a general release from liability for the franchisor.

l. If the franchise agreement provides that the franchisee has an exclusive territory, which exclusive territory shall be specified in the franchise agreement, for the franchisor to compete with the franchisee in an exclusive territory or to grant competitive franchises in the exclusive territory area previously granted to another franchisee.

(cf: P.L.1999, c.45, s.1)

4. (New section) A franchisor shall have a fiduciary duty to their franchisees concerning any funds collected by the franchisor from the franchisee to be used for advertising. With respect to any funds collected from franchisees by the franchisor to be used for advertising, the franchisor shall provide a report to the franchisee annually detailing how the funds were used.

5. (New section) It shall be a violation of the "Franchise Practices Act," P.L.1971, c.356 (C.56:10-1 et seq.) for a franchisor to require a franchisee to agree to a term or condition in a franchise, or in any lease or agreement ancillary or collateral to a franchise, which specifies the court in which a claim may be brought regarding disputes arising with respect to the franchise, lease or agreement or otherwise prohibits a franchisee from bringing an action in a particular court otherwise available under the law of this State.

6. This act shall take effect immediately.

STATEMENT

This bill revises the "Franchise Practices Act" (the "Act") to increase protections for franchisees. Specifically, the bill removes a provision from the act that limits the act's application to a franchise where gross sales of products or services between the franchisor and franchisee covered by the franchise exceed $35,000 in the 12 months preceding a suit instituted under the act. Therefore, under the bill, the act would now apply to more franchise arrangements including "business format" or "package" franchises where the franchisor provides the franchisee with the business system, trade names, trademarks and advertising, but no sales occur between the franchisor and franchisee.

Additionally, the bill provides certain rights and protections to franchisees that terminate or do not renew a franchise. Specifically, the bill provides that it is a violation of the act for any franchisor to restrict or prohibit a franchisee from terminating, cancelling, or not renewing a franchise provided the franchisee provides the franchisor with at least 60 days notice of such termination, cancellation, or failure to renew. In addition, the bill provides that it is a violation of the act for a franchisor, after termination, cancellation or non-renewal of a franchise, to:

(1) require a franchisee to pay excessive damages;

(2) require the franchisee to personally guarantee the debts of the franchise to the franchisor; and

(3) impose any employment restriction on the owner or employees of the franchisee that exceeds six months duration and restricts employment outside the county in which the franchise is located.

The bill also places a restriction on the ability of a franchisor to impose unreasonable facilities, financial, operating or other requirements upon a franchisee. A franchisor is also prohibited from requiring a franchisee to relocate his franchise or to implement any facility or operational modification more than once every five years, unless the franchisor can demonstrate that the franchisee will be able, in the ordinary course of business as conducted by such franchisee, to earn a reasonable return on the total investment in such facility or from such operational modification, and the full return of the total investment in such facility or from such operational modifications within 10 years.

In some cases franchisors create relationships with third-party vendors that benefit the franchisor at the expense of the franchisee. The bill addresses this by restricting a franchisor from:

(1) receiving a commission or any other payment from any vendor that sells goods or services to franchisees of the franchisor; and

(2) requiring any franchisee to purchase goods or services from a vendor if the franchisor has not taken reasonable steps to secure the best possible price for the goods and services from the vendor.

The bill also prohibits a franchisor from requiring a franchisee, as a condition for the approval of a renewal or transfer of a franchise, to assent to a general release from liability for the franchisor.

In addition, the bill provides that if the franchise agreement provides that the franchisee has an exclusive territory, the franchisor is prohibited from competing with the franchisee in the exclusive territory or granting competitive franchises in the exclusive territory area previously granted to another franchisee.

With respect to court claims regarding disputes arising with respect to the franchise, the bill prohibits a franchisor from requiring a franchisee to agree to a term or condition in a franchise, or in any lease or agreement ancillary or collateral to a franchise, which specifies the court in which a claim may be brought or otherwise prohibits a franchisee from bringing an action in a particular court otherwise available under the law of this State.

Finally, the bill places a fiduciary duty on a franchisor to their franchisees concerning any funds collected by the franchisor from the franchisee to be used for advertising. The bill also requires franchisors to provide a report to the franchisee annually detailing how the advertising funds were used.