Arizona Bill Would Restrict Premature Franchise Terminations

Franchisees devote substantial time, money and effort into making their business a success. While each franchise agreement has its own unique elements, it is generally understood that these extensive contracts favor the franchisor. There have been cases in these relationships where large companies have pulled the plug on small business owners seemingly for no good reason. Legislation now in the Arizona House of Representatives aims to adjust the balance of power. 

The proposed law, House Bill 2038, covers a wide range of issues relating to franchise agreements, including the following:

• Limits on early termination — Under the proposed statute, a franchisor would be prohibited from terminating the business relationship prior to the contractual expiration unless they could demonstrate good cause or the existence of another exception specified in the law. Good cause is defined as the failure of the franchisee to substantially comply with terms of the franchise agreement. 
• Opportunity to cure — Even in cases where good cause for early termination is demonstrated, 90 days’ notice must be provided, and the franchisee must have the chance to correct the noncomplying condition(s). 
• Nonrenewal notice — Franchisors under the proposed law must renew the agreement unless they give written notice of intent not to renew at least 180 days before the expiration date. During the 180-day period, a business owner has the right to sell their franchise to a buyer who meets the franchisor’s requirements. 
• Restrictions on noncompete provisions — Should the franchisor elect not to renew the contract, they would not be able to enforce any noncompete covenant against their former franchisee. 
• Right of association — There are situations where franchisees for the same company form associations to discuss common concerns and raise issues with the franchisor in a unified fashion. In response, some franchise agreements barred franchisees from engaging in this type of activity. House Bill 2038 offers explicit protection for joining or forming a franchisee association without fear of retaliation or interference.

Whether no matter what side you are on in a franchising contract, it is critical to be aware of this bill and any other legal developments that will affect your rights under the agreement. 

The Law Offices of Donald W. Hudspeth, P.C. represents clients in wide range of matters relating to the negotiation and enforcement of franchise agreements. For a consultation, please call 866-696-2033 or contact us online. Our office is in Phoenix.