Will Florida Cease to be the “Sunshine State” for Franchising? (Part 2/2)

by Fox Rothschild LLP
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Today, we continue our look at proposed changes to Florida’s franchise laws, including proposed changes in transferring franchised businesses, franchisor repurchase obligations and other miscellaneous changes

TRANSFERRING FRANCHISED BUSINESS

The Act prohibits a franchisor from restricting a franchisee’s ability to transfer its franchised business if the franchisee complies with franchisor’s “reasonable” transfer conditions, and the potential purchaser meets the qualifications for new and renewing franchisees. The Act fails to define what a “reasonable” transfer condition would be. Further, a franchisor must make the list of qualifications available to the franchisee creating an additional, unnecessary burden on franchisors.

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REPURCHASE OBLIGATIONS

If a franchisor is ends a franchise relationship via termination, non-renewal or expiration, a franchisor must repurchase at fair market value all inventory, supplies, goods, fixtures, equipment and furnishings of the franchised business. A franchisor even has to compensate the franchisee for the “goodwill” of the franchised business. Nearly all franchise agreements expressly state that any goodwill derived from the franchised business is owned by the franchisor. The Act would turn this point on its head. Further, the Act fails to define how the goodwill of the franchised business will be quantified.

These provisions would also apply if a franchisee dies or is incapacitated during the term of the franchise agreement. The successor has one year to exercise this right. Furthermore, if a franchisor fails to purchase the items required to be repurchased, the franchisor is civilly liable for the entire value of those items plus the franchisee’s reasonable attorney fees and expenses. This is a steep penalty for failure to comply with this section.

MISCELLANEOUS OBLIGATIONS

Additionally, the proposed law requires franchisors to fully indemnify franchisees against any loss or damage arising out of any claim involving misrepresentation, breach of warranty, negligence, strict liability, manufacture, assembly or design of goods or any other function which is beyond the control of franchisee. This indemnification seemingly has no limits and would likely unnecessarily burden the franchisor.

Lastly, the Act prohibits certain conduct including: (i) any effort to sell or establish more franchises than is reasonable for the market area; (ii) coercing a franchisee to enter into an agreement by threatening to cancel the franchise agreement; (iii) using false or misleading advertisement; (iv) willfully discriminating against a franchisee; (v) requiring a legal release from claims under the Act; or (vi) “competing” with a franchisee within its exclusive territory. One of the problems with these prohibitions is that the Act fails to provide a definition of what it means to “compete” with a franchisee by failing to take alternative channels of distribution into consideration.

PENALTIES AND CONCLUSION

Not only are the substantive provisions of the Act onerous and unreasonably restrictive, the penalties for failure to comply with the Act are significant. Specifically, a franchisee can receive a judgment of all of the money it invested in the franchised business, including losses and damages, as well as attorneys’ fees, if it is successful in its lawsuit under the Act. Additionally, the Florida Department of Legal Affairs may institute an action under the Act and impose fines.

If the Act is signed into law as currently written, it will likely cause a substantial influx of franchisee lawsuits.  Additionally, fewer franchisors will offer and sell franchises in Florida. The Act is in its early stages of development so it is yet to be seen what, if any at all, portions of the law will pass in Florida.

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Copyright: solerf / 123RF Stock Photo

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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