EXISTENCE OF IOWA DEALER/FRANCHISE TERMINATION, FRAUD AND NON-RENEWAL LAWS AND FRANCHISE INDUSTRY-SPECIFIC LAWS
In Iowa, the following Dealer/Franchise Termination and Non-Renewal Laws, Fraud, and Franchise Industry-Specific Laws, exist as follows:
– Iowa Does Not Have a Disclosure/Registration Franchise Law
– Iowa Has a Relationship/Termination Franchise Law
– Iowa Has a General Business Opportunity Franchise Law
– Iowa Has an Alcoholic Beverage Wholesaler/Franchise Law
– Iowa Has an Equipment Dealer/Franchise Law
– Iowa Has a Gasoline Dealer/Franchise Law
– Iowa Does Not Have a Marine Dealer/Franchise Law
– Iowa Has a Motor Vehicle Dealer/Franchise Law
– Iowa Does Not Have a Motorcycle Dealer/Franchise Law
– Iowa Does Not Have a Recreational and Power Sports Vehicle Dealer/Franchise Law
– Iowa Does Not Have a Restaurant Liability Law
Iowa has enacted two broad-sweeping franchise relationship acts, the most recent one a fully revised franchise act that covers most franchise agreements still in force. The most recent legislation will be referred to as the Iowa Franchise Act (“IFA”).
The IFA addresses the franchise encroachment problem in Section 6, where it states that if a franchisor develops, or grants to a franchisee the right to develop, a new outlet or location which sells essentially the same goods or services under the same trademark, service mark, trade name, logotype, or other commercial symbol as an existing franchisee and the new outlet or location is in unreasonable proximity to the existing franchisee's outlet or location and has an adverse effect on the gross sales of the existing franchisee's outlet or location, the existing adversely affected franchisee has a cause of action for monetary damages in an amount calculated elsewhere in the Act (paragraph "d"), unless any of the following apply: (1) The franchisor has first offered the new outlet or location to the existing franchisee on the same basic terms and conditions available to the other potential franchisee and such existing franchisee meets the reasonable current qualifications of the franchisor including any financial requirements, or, if the new outlet or location is to be owned by the franchisor, on the terms and conditions that would ordinarily be offered to a franchisee for a similarly situated outlet or location; or (2) The adverse impact on the existing franchisee's annual gross sales, based on a comparison to the annual gross sales from the existing outlet or location during the twelve-month period immediately preceding the opening of the new outlet or location, is determined to have been less than six percent during the first twelve months of operation of the new outlet or location; or (3) The existing franchisee, at the time the franchisor develops, or grants to a franchisee the right to develop, a new outlet or location, is not in compliance with the franchisor's then current reasonable criteria for eligibility for a new franchise, not including any financial requirements; or (4) The existing franchisee has been granted reasonable territorial rights and the new outlet or location does not violate those territorial rights.
The franchisor, with respect to any such encroachment claims by a franchisee, must establish both of the following: (a) A formal procedure for hearing and acting upon claims by an existing franchisee with regard to a decision by the franchisor to develop, or grant to a franchisee the right to develop, a new outlet or location, prior to the opening of the new outlet or location; and (b) A reasonable formal procedure for mediating a dispute resulting in an award of compensation or other form of consideration to a franchisee to offset all or a portion of the franchisee's lost profits caused by the establishment of the new outlet or location. The procedure shall involve a neutral third-party mediator. The procedure shall be deemed reasonable if approved by a majority of the franchisor's franchisees in the United States. The IFA further provides that a dispute submitted to a formal procedure as just described, does not diminish the rights of a franchisor or franchisee to bring a cause of action for a violation of this subsection if no settlement results from such procedure. The IFA also directs franchisors to establish and make available to its franchisees a written policy setting forth its reasonable criteria to be used by to determine whether an existing franchisee is eligible for a franchise for an additional outlet or location.
The Act further places the burden of establishing damages under a cause of action brought for encroachment under the IFA on the franchisee, which must prove the amount of lost profits attributable to the compensable sales. In any action brought under this subsection, the damages payable shall be limited to no more than three years of the proven lost profits. For purposes of this paragraph, "compensable sales" means the annual gross sales from the existing outlet or location during the twelve-month period immediately preceding the opening of the new outlet or location less both of the following: (a) Six percent of the annual gross sales for that twelve-month period immediately preceding the opening of the new outlet or location; and (b) The actual gross sales from the operation of the existing outlet or location for the twelve-month period immediately following the opening of the new outlet or location. Further, the Act states that compensable sales shall exclude any amount attributable to factors other than the opening and operation of the new outlet or location. Last, with regard to an encroachment claim, such a cause of action based on this subsection must be brought within eighteen months of the opening of the new outlet or location or within thirty days after the completion of the procedure under paragraph "b", subparagraph (1), whichever is later.
Section 7 of the IFA regards franchise terminations. Under the statute, except as otherwise provided by this section, a franchisor is prohibited from terminating a franchise prior to the expiration of its term except for “good cause.” For purposes of this subsection, the IFA defines "good cause" as cause based upon a legitimate business reason. In this regard, the Act further explains that "good cause" includes the failure of the franchisee to comply with any material lawful requirement of the franchise agreement, provided that the termination by the franchisor is not arbitrary or capricious. With regard to proving that the action of the franchisor is arbitrary or capricious the burden is placed by the IFA on the franchisee.
The IFA goes on to declare that prior to termination of a franchise for good cause, a franchisor must provide a franchisee with written notice stating the basis for the proposed termination. In turn, after service of written notice, the IFA provides the franchisee with a reasonable period of time to cure the default, which in no event shall be less than thirty days or more than ninety days. And, in the event of nonpayment of moneys due under the franchise agreement, the period to cure under the IFA need not exceed thirty days.
The IFA, however, proceeds to carve out a number of bases of default that will support a franchise termination upon written notice but without an opportunity to cure if any of the following apply: (1) The franchisee or the business to which the franchise relates is declared bankrupt or judicially determined to be insolvent; (2) All or a substantial part of the assets of the franchise or the business to which the franchisee relates are assigned to or for the benefit of any creditor; (3) The franchisee voluntarily abandons the franchise by failing to operate the business for five consecutive business days during which the franchisee is required to operate the business under the terms of the franchise, or any shorter period after which it is not unreasonable under the facts and circumstances for the franchisor to conclude that the franchisee does not intend to continue to operate the franchise, unless the failure to operate is due to circumstances beyond the control of the franchisee; (4) The franchisor and franchisee agree in writing to terminate the franchise; (5) The franchisee knowingly makes any material misrepresentations or knowingly omits to state any material facts relating to the acquisition or ownership or operation of the franchise business; (6) The franchisee repeatedly fails to comply with one or more material provisions of the franchise agreement, when the enforcement of such material provisions is not arbitrary or capricious, whether or not the franchisee complies after receiving notice of the failure to comply; (7) The franchised business or business premises of the franchisee are lawfully seized, taken over, or foreclosed by a government authority or official; (8) The franchisee is convicted of a felony or any other criminal misconduct which materially and adversely affects the operation, maintenance, or goodwill of the franchise in the relevant market; (9) The franchisee operates the franchised business in a manner that imminently endangers the public health and safety.
Section 8 of the IFA also addresses franchise non-renewals. Specifically, the Act prohibits a franchisor from refusing to renew unless both of the following apply: (1) The franchisee has been notified of the franchisor's intent not to renew at least six months prior to the expiration date or any extension of the franchise agreement; and (2) Any of the following circumstances exist: (a) Good cause exists, provided that the refusal of the franchisor to renew is not arbitrary or capricious. For purposes of this subsection, "good cause" means cause based on a legitimate business reason; (b) The franchisor and franchisee agree not to renew the franchise; (c) The franchisor completely withdraws from directly or indirectly distributing its products or services in the geographic market served by the franchisee, provided that upon expiration of the franchise, the franchisor agrees not to seek to enforce any covenant of the non-renewed franchisee not to compete with the franchisor or franchisees of the franchisor.
The IFA non-renewal restrictions also direct that as a condition of renewal of the franchise, a franchise agreement may require that the franchisee meet the then current requirements for franchises and that the franchisee execute a new agreement incorporating the then current terms and fees for new franchises.
Section 5 of the IFA deals with franchise transfers, and permits a franchisee to transfer the franchised business and franchise to a transferee, provided that the transferee satisfies the reasonable current qualifications of the franchisor for new franchisees. For the purposes of this subsection, the IFA states that a reasonable current qualification for a new franchisee is a qualification based upon a legitimate business reason. If the proposed transferee does not meet the reasonable current qualifications of the franchisor, the franchisor may refuse to permit the transfer, provided that the refusal of the franchisor to consent to the transfer is not arbitrary or capricious.
The transfer provisions of the Act also state that a franchisee may transfer less than a controlling interest in the franchise to an employee stock ownership plan, or employee incentive plan provided that more than fifty percent of the entire franchise is held by those who meet the franchisor's reasonable current qualifications for franchisees, and such transfer is approved by the franchisor. Importantly, the IFA prohibits franchisors from unreasonably withholding such transfer requests. In addition, if pursuant to such a transfer, less than fifty percent of the entire franchise would be owned by persons who meet the franchisor's reasonable current qualifications, the franchisor may refuse to authorize the transfer, provided that enforcement of the reasonable current qualifications is not arbitrary or capricious. Interestingly, the IFA teaches that participation by an employee in an employee stock ownership plan or employee incentive plan established pursuant to this subsection does not confer upon such employee any right to access trade secrets protected under the franchise agreement which access the employee would not otherwise have if the employee did not participate in such plan.
The IFA then provides that a franchisor may require as a condition of a transfer any of the following: (1) That the transferee successfully complete a training program; (2) That a transfer fee be paid to reimburse the franchisor for the franchisor's actual expenses directly attributable to the transfer; (3) That the franchisee pay or make provision acceptable to the franchisor to pay any amount due the franchisor or the franchisor's affiliate; (4) That the financial terms of the transfer comply at the time of the transfer with the franchisor's current financial requirements for franchisees.
Moreover, with regarding to timing of transfers, the IFA states that a franchisee must give the franchisor no less than sixty days' written notice of a transfer, and on request from the franchisor must provide in writing the ownership interests of all persons holding or claiming an equitable or beneficial interest in the franchise subsequent to the transfer or the franchisee, as appropriate. The IFA in this regard also warns that a franchisee must not circumvent the intended effect of a contractual provision governing the transfer of the franchise or an interest in the franchise by means of a management agreement, lease, profit-sharing agreement, conditional assignment, or other similar device.
Also, the IFA’s transfer requirements proclaim that a transfer by a franchisee is deemed to be approved sixty days after the franchisee submits the request for consent to the transfer unless the franchisor withholds consent to the transfer as evidenced in writing, specifying the reason or reasons for withholding the consent. The written notice must be delivered to the franchisee prior to the expiration of the sixty-day period. Any such notice is privileged and is not actionable based upon a claim of defamation. The IFA also directs that a franchisor shall not discriminate against a proposed transferee of a franchise on the basis of race, color, national origin, religion, sex, or disability. In addition, a transfer of less than a controlling interest in the franchise to the franchisee's spouse or child or children shall be permitted if following the transfer more than fifty percent of the interest in the entire franchise is held by those who meet the franchisor's reasonable current qualifications. If following such a transfer fifty percent or less of the interest in the franchise would be owned by persons who meet the franchisor's reasonable current qualifications, the franchisor may refuse to authorize the transfer, provided that enforcement of the reasonable current qualifications is not arbitrary or capricious.
Further, regarding a family-transfer, the IFA prohibits a franchisor from denying the surviving spouse or a child or children of a deceased or permanently disabled franchisee the opportunity to participate in the ownership of a franchise under a valid franchise agreement for a reasonable period, which need not exceed one year, after the death or disability of the franchisee. During such reasonable period, the IFA further directs that the surviving spouse or the child or children of the franchisee shall either meet all of the qualifications which the franchisee was subject to at the time of the death or disability of the franchisee, or sell, transfer, or assign the franchise to a person who meets the franchisor's current qualifications for a new franchisee. The rights granted pursuant to this subsection are subject to the surviving spouse or the child or children of the franchisee maintaining all standards and obligations of the franchise. The Act also directs that incorporation of a proprietorship franchise must be permitted upon sixty days' prior written notice to the franchisor. Such incorporation does not prohibit a franchisor from requiring a personal guaranty by the franchisee of obligations related to the franchise, and the owners of the corporation must meet the franchisor's reasonable current qualifications for franchisees. Also, the IFA states that a transfer within an existing ownership group of a franchise shall be permitted provided that the transferee meets the franchisor's reasonable current qualifications for franchisees, and written notice is submitted to the franchisor sixty days prior to such a transfer. If less than fifty percent of the franchise would be owned by persons who meet the franchisor's reasonable current qualifications, the franchisor may refuse to authorize the transfer, provided that enforcement of the reasonable current qualifications is not arbitrary or capricious.
The IFA also contains directives regarding sources of franchise goods and services. Section 9 of the IFA prohibits a franchisor from requiring that a franchisee purchase goods, supplies, inventories, or services exclusively from the franchisor or from a source or sources of supply specifically designated by the franchisor where such goods, supplies, inventories, or services of comparable quality are available from sources other than those designated by the franchisor. However, the IFA holds that the publication by the franchisor of a list of approved suppliers of goods, supplies, inventories, or services, or the requirement that such goods, supplies, inventories, or services comply with specifications and standards prescribed by the franchisor, does not constitute designation of a source. Additionally, the IFA explicitly cautions that the reasonable right of a franchisor to disapprove a supplier does not constitute a designation of source. And, the Act specifically exempts the principal goods, supplies, inventories, or services manufactured by the franchisor, or such goods, supplies, inventories, or services entitled to protection as a trade secret.
The IFA explicitly addresses the concept of good faith, when, in Section 11 it directs that a franchise imposes on the parties a duty of good faith in performance and enforcement of the franchise agreement. In turn, the statute defines "good faith" to mean honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. The IFA further states that the duty of good faith is imposed in situations including, but not limited to, where the franchisor opens a new outlet or location that has an adverse impact on an existing franchisee. The provision also instructs that in the event the good faith issue must be decided with respect to a new outlet or location the factors listed in the IFA regarding new outlets must be followed.
In the event a franchisee chooses to sue under the IFA, the statute creates an explicit cause of action in Section 13, where it states that a person who violates a provision of this section or order issued under this section is liable for damages caused by the violation, including, but not limited to, costs and reasonable attorneys' and experts' fees, and subject to other appropriate relief including injunctive and other equitable relief.
The IFA also addresses a franchisee's right to associate, when it directs that a franchisor shall not restrict a franchisee from associating with other franchisees or from participating in a trade association, and shall not retaliate against a franchisee for engaging in these activities. Last, the IFA, like other franchise relationship acts, voids any provision requiring a franchisee to waive compliance with or relieving a person of a duty or liability imposed by or a right provided by this section.
In Iowa, the following Dealer/Franchise Termination, Fraud and Non-Renewal Laws, and Franchise Industry-Specific Laws, are identified as follows:
Iowa State Franchise Disclosure/Registration Laws
Iowa has No statute of general applicability regarding Franchise Disclosure
Franchisors must comply with the FTC franchise disclosure rule
Iowa State Franchise Relationship/Termination Laws
Franchises Law; Franchise Agreements Law
Iowa Code, Title XIII, Chap. 523H, Sec. 523H.1 through 523H.17; Iowa Code, Title XIII, Chap. 537A, Sec. 537A.10
Iowa State Business Opportunity Laws
Business Opportunity Promotions Law
Iowa Code Title XIII, Chapter 551A, Sections 551A.1 through 551A.10
Alcoholic Beverage Wholesaler Laws
Iowa beer law
Iowa Code Ann. Tit. IV, Chap. 123A
Equipment Dealer Laws
Iowa farm implement, motorcycle, snowmobile, and all-terrain vehicles dealer law; Iowa agricultural equipment dealer law
Iowa Code Ann. Tit. VIII, Chap. 322D, Iowa Code Ann. Tit. VIII, Chap. 322F
Gasoline Dealer Laws
Iowa motor fuel dealer law
Iowa Code Ann. Tit. VIII, Chap. 323.
Marine Dealer Laws
Iowa has no Franchise Law in this Specific Market Niche
Motor Vehicle Dealer Laws
Iowa motor vehicle dealer law .
Iowa Code Ann. Title VIII, Chap. 322A
Motorcycle Dealer Laws
Iowa has no Franchise Law in this Specific Market Niche
Recreational and Powersports Vehicle Dealer Laws
Iowa has no Franchise Law in this Specific Market Niche
Iowa has no Franchise Law in this Specific Market Niche
G.P.P., Inc. v. Guardian Protection Products, Inc., United States District Court, E.D. California, .June 30, 2015 Slip Copy 2015 WL 3992878 (“GIS' Sixth through Ninth Causes of Action seek declaratory judgments that termination of the Iowa Agreement violates the 1992 and 2000 Iowa Franchise Acts. (Doc. 1, ¶¶ 80–96.) GIS alleges that the Midwest Agreement, which includes Iowa, is a franchise within the meaning of Iowa law. Although GIS has a business presence in Iowa, Guardian is now requiring GIS to develop a physical presence in each state where it operates a franchise on behalf of Guardian. Iowa law does not allow a franchisor to terminate a franchise prior to the expiration of its term except for good cause and on written notice stating the basis for termination along with a reasonable time to cure the default. Iowa Code § 523H.7. GIS alleges Guardian has threatened to terminate the Midwest Agreement and GIS' exclusive distributorship in Iowa territory, but it gave no notice or explanation for this action other than the agreement was “no longer applicable to the current business.” GIS alleges this threatened termination without good cause violates Iowa Code § 523H.7. Further, Guardian's failure to provide GIS with written notice or an opportunity to cure violates Iowa Code § 537A.10(7) (b), which is GIS' Seventh Cause of Action. In its Eighth and Ninth Causes of Action, GIS alleges that Guardian's threatened termination of the Midwest Agreement also violates Iowa Code § 523H.10 and § 537A.10(11), which impose on the parties to the agreement a duty of good faith performance and enforcement of the franchise agreement. GIS alleges that Defendant has breached its duty of good faith under Sections 523H.10 and 537A.10(11) by threatening to terminate the Midwest Agreement without good cause and by using the Midwest Agreement as leverage to force GIS to re-negotiate its other agreements with Guardian.”)
Diesel Machinery, Inc. v. Manitowoc Crane Group, United States District Court, D. South Dakota, Southern Division, March 31, 2011, 777 F.Supp.2d 1198 (“Franchise statutes in other states within this region confirm that a “notice of cancellation” does not constitute a “cancellation” and that a notice of cancellation may be voided prior to the effective date. Under the Wisconsin Fair Dealership Law (“WFDL”), a franchisor must provide a dealer with at least 90 days written notice of cancellation stating the reasons for cancellation. Wis. Stat. § 135.04. Such notice triggers a 60–day period in which the dealer may rectify the claimed deficiencies, thereby voiding the notice and avoiding cancellation. Id. Similarly, under the Minnesota Franchise Act, cancellation of a franchise may not occur until the franchisee: i) receives “written notice setting forth all the reasons for the termination or cancellation at least 90 days in advance of termination or cancellation, and ii) the recipient of the notice fails to correct the reasons stated for termination or cancellation in the notice within 60 days of receipt of the notice.” Minn.Stat. § 80C.14. Iowa law expressly permits withdrawal of a notice of franchise termination for up to 90 days following the notice. The Iowa Franchise Act requires that: Prior to termination of a franchise for good cause, a franchisor shall provide a franchisee with written notice stating the basis for the proposed termination. After service of the written notice, the franchisee shall have a reasonable period of time to cure the default, which in no event shall be less than thirty days or more than ninety days. Iowa Code § 523H.7. By requiring withdrawal of notices of cancellation in certain circumstances prior to the effective date of cancellation, the above-referenced provisions of the Wisconsin, Minnesota, and Iowa franchise statutes provide more extensive protections to dealers than the SDDPA. The SDDPA neither requires voidance of a notice of cancellation under certain circumstance nor prohibits withdrawal of a notice of cancellation prior to the effective date. In short, dealer protection statutes from surrounding states recognize the distinction between a notice of cancellation and a cancellation itself.”)
, United States District Court, S.D. Iowa, Central Division, May 14, 1993, 822 F.Supp. 597, 61 USLW 2732 (“Section 12 of the Holiday Inns license agreement sets out many restrictions on transfer of the license. It states that any transfer “not specifically authorized pursuant to this section will be void and will also be a breach of this agreement. The License may not be the subject of a security interest, lien, levy, attachment or execution.” If the licensee wants to transfer the license, the “proposed transferee will, with Licensee's consent, apply for a new license agreement to replace the License for the unexpired term. Licensor will process the application in good faith and in accordance with procedures and criteria * * * then being applied by Licensor in issuing new licenses * * *.” Section 12 of the agreement also contains provisions allowing transfer of equity interests with the licensor's consent with certain restrictions. Holiday Inns argues that Section 5 of the Act directly conflicts with its requirement that transferees enter into new license agreements upon transfer, in part because the new agreements often require the transferee to perform reasonable quality upgrades. It *602 also contends that the Act substantially restricts Holiday Inns' rights under existing agreements to control transfers and to select the best qualified individuals or entities as franchisees. II. Encroachment A. Section 6 of the Act Section 6 states that notwithstanding the terms of an agreement or franchise, if a franchisor seeks to establish a new outlet, * * * within an unreasonable proximity of an existing franchisee, the existing franchisee, at the option of the franchisor, shall have either a right of first refusal with respect to the proposed new outlet, * * * or a right to compensation for market share diverted by the new outlet. § 523H.6(1). As applied to a food establishment or food service establishment franchisor, “unreasonable proximity” includes but is not limited to “the shortest distance as measured by the following methods”: (a) a “three-mile radius, using a straight line measurement, from the center of an already existing franchise”; (b) a “circular radius, using a straight line measurement, from an existing franchise business which comprises a population of thirty thousand or greater.” Section 6(2) provides for a procedure for right of first refusal. First the parties “seek to establish a mutually agreeable price and terms.” If they cannot reach agreement, each party appoints an independent appraiser. If the independent appraisers cannot agree, they name a third appraiser to determine the price and terms. The third appraiser's decision is final and binding, subject to judicial review under Iowa Code chapter 679A. The compensation for the diverted market share is determined by the same process. § 6(3). B. McDonald's -- Paragraph 2(a)(i) of the McDonald's agreement states that McDonald's grants a license to the licensee “to adopt and use the McDonald's System” in the restaurant at only the location specified in the agreement. The licensee acknowledges in paragraph 28(e) that the license establishes a restaurant at the location specified only, and “no ‘exclusive,’ ‘protected’ or other territorial rights in the contiguous market area of such Restaurant is hereby granted or inferred.” McDonald's argues that its experience shows that the absence of territorial or exclusive rights for the franchisee serves as an incentive to do more than bare-minimum compliance with the agreement and to avoid material breaches of the agreement. Also, McDonald's has been planning to develop a new restaurant on Fleur Drive in Des Moines—a site that is within a three-mile radius of Nelson's existing S.W. 9th franchise location. Contrary to existing license agreements, under which McDonald's would be able to determine according to its own practices and policies who should operate the new franchise, the Act provides certain rights to existing franchisees in this situation.
Therefore, McDonald's argues, the Act substantially impairs the license agreements. C. Holiday Inns -- Section 1 of the Holiday Inns agreement states that the license is nonexclusive, and “applies to the specified location and no other.” It also provides that the agreement “does not limit Licensor's right to use or license the System or to engage in or license any business activity at any other location.” Holiday Inns argues that Section 6 of the Act imposes vague and undue restrictions on the establishment of new franchises or company-owned locations, undermining the concept of a nonexclusive license which is fundamental to its license agreements. It further asserts that the section apparently would apply to establishing franchises of different brands by the same franchisor (e.g., “Holiday Inn” hotel and a “Holiday Inn Crowne Plaza”), thereby preventing it from serving different market segments of the consuming public in a given area. III. Termination -- A. Section 7 of the Act -- Section 7(1) states that “a franchisor shall not terminate a franchise prior to the expiration of its term except for good cause,” i.e. “cause based upon a legitimate business reason.” *603 Good cause includes a franchisee's failure to “comply with any material lawful requirement of the franchise agreement, provided that the termination by the franchisor is not arbitrary or capricious when compared to the actions of the franchisor in other similar circumstances.” Prior to good cause termination, the franchisor must provide the franchisee with “written notice stating the basis for the proposed termination.” § 7(2). After service of the notice, the franchisee “shall have a reasonable period of time to cure the default,” no less than 30 days or more than 90 days. Id. Section 7(3) provides a list of situations in which “a franchisor may terminate a franchisee upon written notice and without an opportunity to cure,” including: bankruptcy or insolvency of the franchisee or franchise business, voluntary abandonment by the franchisee, mutual agreement by the franchisor and franchisee to terminate, knowing material misrepresentation by the franchisee, the franchisee's repeated failure to comply with the same material provision of the franchise agreement, lawful seizure or foreclosure by the government, conviction of felony or other criminal misconduct that materially affects the franchise, and operation of the franchise in a manner imminently endangering the public health and safety. B. Holiday Inns -- Section 14 of the Holiday Inns agreement provides that the license will terminate without notice on a specified date (usually for a 20–year term), subject to earlier termination in certain stated situations. Section 14 also provides for liquidated damages for premature termination. Section 14(b) states that the licensor may terminate with notice if: “(i) the notice is mailed at least 30 days (or longer, if required by law) in advance of the termination date, (ii) the notice reasonably identifies one or more breaches of the Licensee's obligations, and (iii) the breach(es) is/are not fully remedied within the time period specified in the notice.” If the notice is the second notice in 12 months about a certain violation for which the default was remedied the first time, the cure period will “if and to the extent permitted by law” be 10 days instead of 30. The licensor can immediately (or at the earliest time permitted by applicable law) terminate the licensee upon notice for the following reasons: licensee's insolvency or bankruptcy, licensee's loss of possession of the hotel, licensee's pursuit of a legal contest to the licensor's ownership of the system, a breach of Section 12 (transfer) occurs, dissolution or liquidation proceedings on a corporate or partnership licensee (except for death of a partner), or “Licensee is, or is discovered to have been, convicted of a felony (or any other offense if it is likely to adversely reflect upon or affect the Hotel, the System or Licensor in any way).” Holiday Inns argues that the Act's vague requirement of “good cause” should not replace its own well-defined and explicit provisions in its existing agreements. It also asserts that the Act would prohibit it from immediately terminating a franchisee in cases of egregious misconduct. IV. Nonrenewal of a Franchise A. Section 8 of the Act -- A franchisor cannot refuse to renew a franchise unless: (1) the franchisor notifies the franchisee of its intent not to renew “at least six months prior to the expiration date of the franchise agreement”; and (2) good cause exists as defined in section 7 (and the refusal not to renew is not arbitrary or capricious compared to franchisor actions in similar circumstances), or the franchisor and franchisee agree not to renew the franchise (provided that the franchisor agrees not to enforce any covenant not to compete with the franchisor or its franchisees when the franchise expires), or the “franchisor completely withdraws from directly or indirectly distributing its products or services in the geographic market served by the franchisee” (provided that the franchisor agrees not to enforce any covenant not to compete with the franchisor or its franchisees). B. McDonald's -- All of the McDonald's license agreements at issue are for specific 20–year terms. The *604 licensee acknowledges in paragraph 28(a) that the license is issued for the term stated “with no promise or representation as to the renewal of this License or the grant of a new License.” McDonald's follows its own procedure for determining whether to re-write a license agreement, which it has found serves as an incentive to “maximize franchisee performance and dedication.” McDonald's Brief, p. 25. McDonald's argues that the Act, because it restricts the right of the franchisor to refuse to renew a franchise, contravenes the parties' existing agreements. C. Holiday Inns -- The Holiday Inns license agreements are for stated terms, and terminate without notice on the specified termination date. Section 15 of the agreements governs renewals.
The licensee can apply for a “commitment to renew the License” during a certain year of the term (the 15th year for 20–year terms). The licensor promises to process the application in good faith and in accordance with procedures and criteria applicable to new license applications at the time. If the licensor approves the application, the parties sign two agreements: “A new license agreement covering the unexpired License Term under this agreement, and a commitment agreement to renew the License Term, upon expiration, for a specified time (up to 10 years) if Licensee fulfills specified upgrading and other requirements within a specified time.” Holiday Inns argues that the Act substantially impairs its agreements by effectively requiring Holiday Inns to grant a franchise of perpetual duration at the option of the franchisee, even though the franchisee paid only for a specified term. Holiday Inns also argues that the Section 8 of the Act disserves the public by preventing Holiday Inns from replacing marginal hotel operators at the end of a term, and from responding to changing market conditions by replacing inappropriate hotel locations. “)