Arizona considers regulating franchise relationships and providing franchisees a private right of action for violations of the FTC Franchise Rule
On January 25, 2023, the Arizona House of Representatives introduced HB2404, a proposed law to regulate franchise relationships in Arizona, much like neighboring California and the 22 other states with franchise specific regulatory frameworks. However, unlike the other state laws, the proposed Arizona franchise law would establish a private right of action for violation of the Federal Trade Commission (FTC) Franchise Rule.
During the House’s Commerce Committee hearing about HB2404 on February 14, 2023, the sponsor of the bill, Representative Stacey Travers, explained that HB2404 was drafted by a franchise lawyer, who modeled it after California’s Franchise Relation Act (CFRA). According to Representative Travers, HB2404 is intended to be a scaled-down version of the CFRA, with fewer regulatory burdens placed on the franchisors. She largely deferred questions on the impetus for the bill to a former Maryland franchisee of a national youth enrichment brand, not the drafter of the bill.
That former franchisee explained the impetus for the bill is to protect franchisees in Arizona, who, she claimed, currently have no legal protections and are being harmed by out-of-state franchisors, by establishing a private right of action in Arizona against franchisors who provide false or inaccurate information in their franchise disclosure documents. She further explained (incorrectly, we believe) that the bill is meant to prevent the arbitration of franchise disputes. HB2404, as written, however, does not address arbitration.
No one appeared at the hearing to speak in opposition to the bill, and the Commerce Committee had not yet had time to fully review it. Therefore, they relied on Representative Travers and the former franchisee’s statements about HB2404 to make a “do pass” recommendation with a vote of 9-1. But this vote was not without hesitation, as the Committee had limited information about the bill. Many members reserved their right to vote against it on the House floor and expressed skepticism that the bill would move forward in its current form. Further, the International Franchise Association, the Arizona Chamber of Commerce, and the Arizona Lodging and Tourism Association all have expressed their opposition to HB2404.
If Arizona decides to adopt HB2404, it would regulate franchise relationships by imposing certain restrictions, including:
- Prohibiting a franchisor from terminating a franchise except for good cause
- Requiring a franchisor to provide 60 days’ notice and an opportunity to cure prior to termination, with limited exceptions
- Requiring a franchisor to provide 180 days’ notice to not renew a franchise
- Delineating what (and when) a franchisor must re-purchase from a terminated franchisee
- Requiring a franchisee to notify the franchisor prior to transfer of the franchised business
- Prohibiting a franchisor from withholding consent to the transfer of a franchise to a qualified operator
- Outlining the process for a franchisee to obtain consent to a transfer from the franchisor and
- Precluding a franchisor from restricting a franchisee’s participation in trade associations.
Additionally, and most unprecedentedly, it would provide a franchisee with a private right of action for a franchisor’s alleged violations of the FTC Franchise Rule, which requires a franchisor to give potential franchisees a franchise disclosure document containing 23 specific items of information about the offered franchise, its officers and other franchisees. In short, under HB2404, violating the FTC Franchise Rule would become a violation of Arizona law, entitling a franchisee to recover damages or rescission of its franchise agreement.
These new regulations would apply to any franchise when the franchisee is domiciled in Arizona or the franchised business is or has been operated in Arizona.
HB2404 is now pending before the Arizona House Rules Committee for further consideration. If it passes the Rules Committee, it will proceed to discussion and a vote from the full House.