The Arizona House of Representatives recently introduced a bill, HB 2404, designed to insulate in-state dealers from market competition that, if enacted, will create a general franchise relationship law in Arizona. Currently, Arizona offers heightened protections to dealers only in specific industries, such as motor vehicles, industrial and farm equipment, and alcohol distribution. If enacted, however, HB 2404 would govern all franchise relationships meeting its definition, regardless of industry. Under the bill, a “franchise” exists when there is contract in place between two or more parties that:
- grants a franchisee the right to offer, sell, or distribute goods or services under a marketing plan prescribed in substantial part by a franchisor;
- provides that operation of the franchisee’s business under the marketing plan is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol; and
- requires the franchisee to pay either a direct or indirect franchise fee of at least $100.
Given this broad definition, manufacturers operating in Arizona should be wary not to run afoul of the lopsided protections the law would offer in-state dealers.
What Manufacturers Need to Know
HB 2404 contains an anti-waiver provision. If enacted, the law would introduce dealer-friendly restrictions on franchisors that cannot be waived by contract, including the requirement that a manufacturer needs to have good cause for terminating a dealer. As a result, manufacturers must be sure not to rely on contractual provisions that are contrary to the proposed law, despite being agreed upon between two sophisticated parties.
HB 2404 creates franchise relationships where dealers pay indirect fees of $100 or more. The proposed law establishes a low bar for the creation of franchises by requiring that franchisees only pay a meager $100 franchise fee in exchange for the right to offer, sell, or distribute under the dealer agreement. Additionally, because these fees can be indirect, manufacturers must exercise caution when requiring purchase of inventory, equipment, or software under dealer agreements to mitigate the risk of unintentionally creating a franchise relationship under the law.
HB 2404 limits how franchisors can lawfully terminate or refuse to renew dealers. The proposed law states that covered manufacturers can terminate a dealer only for good cause, which is limited to “the failure of the franchisee to substantially comply with the lawful requirements imposed on the franchisee by the franchise agreement.” Of course, the law would also contain customary exceptions for termination due to insolvency, by agreement, by abandonment, etc. HB 2404 also requires that franchisors provide franchisees with notice of termination at least 60 days prior to the date of termination, during which franchisees have a right to cure their breaches. The same is true for failure to renew a franchisee, but the notice period is extended to 180 days. Importantly, the proposed law also provides that courts may grant temporary or permanent injunctions against franchisors that violate or threaten to violate its termination or nonrenewal requirements.
HB 2404 requires franchisors to repurchase franchisee inventory upon termination or nonrenewal of a franchisee. The proposed law would have Arizona join the multitude of states that establish the onerous and expensive requirement on covered manufacturers to repurchase “all inventory, supplies, equipment, fixtures and furnishings purchased or paid for under the terms of the franchise agreement or any ancillary agreement” upon lawful termination or nonrenewal of a franchisee, with certain narrow exceptions.
HB 2404 explicitly incorporates federal disclosure requirements on franchisors. If enacted, the law would create a private right of action for franchisees to recover damages from franchisors that violate 16 CFR 436, which establishes the Federal Trade Commission’s stringent franchisor disclosure requirements.
What Happens Next
HB 2404 is currently making its way through the Arizona House of Representatives, and it has received bipartisan support thus far. If the House of Representatives votes to pass the bill, it will go to the Arizona Senate, where it will again make its way through committees before being voted on. Only after both the House and the Senate pass identical versions of the bill will it be sent to the Governor, who can either veto or sign the bill into law. Thus, manufacturers with dealers in Arizona should closely monitor legislative activity in the coming months to prepare for its potential passage.