Oregon considers new franchise relationship law

Last week, Representative Janelle Bynum of the Oregon House of Representatives introduced House Bill 2946 to amend Oregon Revised Statute 650.005 by adding new rules for franchisors doing business in the state. If passed, bill 2946 (which appears to be largely modeled on California and Washington’s existing franchise relationship laws) would impose several new requirements on franchisors. Some of the more notable requirements include:

  • Good Faith Requirement: An explicit requirement that parties to a franchise agreement deal with one another in good faith and in a commercially reasonable manner.
  • Right of Association: Prohibiting franchisors from limiting or conditioning a franchisee’s right to freely associate with other franchisees.
  • Required Purchases: Prohibiting franchisors from:
    • Requiring franchisees to buy or lease goods and services from the franchisor or an approved supplier unless the franchisor “certifies in writing that the requirement is reasonably necessary to further the business purposes of the franchise and does not substantially affect competition for the goods or services;”
    • Charging franchisees to different prices for the same or similar goods and services;
    • Charging a franchisee “more than a fair and reasonable market price for goods or services from a franchisor or an approved supplier;” or
    • Requiring a franchisee to sell goods or services at a loss or at a price not “reasonably acceptable to the franchisee;”
  • Dispute Resolution. Prohibiting franchisors from requiring a franchisee to arbitrate a dispute or limiting their ability to bring legal claims in an Oregon forum.
  • Termination. A franchisor is permitted to terminate a franchise prior to the expiration of its term only where the franchisee fails to substantially comply with the terms and conditions of the franchise agreement after being given notice and an opportunity to cure the failure. The franchisee must be given at least 60 days to cure a material default under the franchise agreement after receiving notice of the default from the franchisor. Importantly, this 60 day period would not apply, and the law would continue to permit immediate termination without the franchisee having further opportunity to cure, where the franchisee fails to pay amounts due to the franchisor or its affiliate within five days after receiving notice that the fees are overdue.
  • Right of Sale. A franchisor would be prohibited from withholding its consent to the sale of an existing franchise except where: (a) the buyer does not meet the franchisor’s standards for new or renewing franchisees; or (b) the parties fail to comply with the transfer provisions specified in the franchise agreement.
  • Notification of Approval / Disapproval of Proposed Sale. A franchisor would be required to notify the requesting franchisee of its approval or disapproval of a contemplated sale of a franchise within 60 days of receiving from the franchisee certain mandated forms and information regarding the sale. The franchisor would further be required to communicate to the selling franchisee its standards for approval of new or renewing franchisees, as well as the reasons for disapproval if the sale is not approved. If a franchisor does not provide its written approval or disapproval with the 60 day period, the sale will be deemed to have been approved by the franchisor.
  • Payment of Fair Market Value for Franchised Business, Plus Damages. In the event a franchisor terminates or fails to renew a franchisee in violation of the law, the franchisor will be required to pay the franchisee “the fair market value of the franchised business and franchise assets ” by the franchisor’s violation of the law.

In summary the bill would create sweeping changes to the franchise relationship in Oregon if passed, and would substantially increase the transaction costs for franchising on franchisors that choose to do business there.

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