House committee reviews H 7733 to tighten rules for franchisors, void noncompetes in franchise agreements

The Commerce & Economic Development committee convened at 9:20 a.m. to hear H 7733, a bill that would impose a new statutory framework on franchisor-franchisee relationships, including a provision declaring any agreement not to compete in a franchise agreement void and unenforceable.

Rick Siegel of the Office of Legislative Council walked the panel through the bill nd its major provisions, which include definitions for franchise terms, limits on franchisor termination authority, mandatory repurchase of inventory at market value after lawful termination, advance-notice requirements for nonrenewal and a prohibition on predispute mandatory arbitration clauses and out-of-state venue restrictions.

Why it matters: If enacted, H 7733 would change the balance of power between franchisors and franchisees on key operational questions — from who controls pricing and purchasing to whether franchisees can be bound by noncompete clauses after separation. The draft also creates a private right of action for franchisees with damages, injunctive relief and attorney-fee recovery.

Key provisions read into the record by Siegel include: - A definition of an "agreement not to compete" that excludes nondisclosure provisions protecting trade secrets; the bill then states any agreement not to compete "is void and unenforceable." (Rick Siegel) - Termination rules (Section 4052) that generally require "good cause" for a franchisor to terminate before contract expiration, with written notice and a minimum 60-day cure period except for enumerated immediate-termination events such as bankruptcy, abandonment or certain criminal convictions. - An inventory repurchase requirement (Section 4053) obligating franchisors to buy inventory, supplies, equipment and fixtures at then-current market value upon lawful termination or nonrenewal, with limited exceptions for personalized items or where clear title cannot be transferred. - A 180-day advance written notice requirement before nonrenewal, during which a franchisee may market the business to transferees who meet franchisor standards; franchisors must provide or make available forms and standards within 15 days upon request. - Prohibitions on predispute mandatory arbitration clauses in franchise agreements and on venue clauses that would require fora outside the state for claims arising under the franchise chapter. - A prohibition on liquidity-damages clauses and a requirement that franchisors cannot require franchisees to make capital expenditures above $5,000 without providing a validated business case demonstrating a positive return on investment.

Committee members pressed Siegel on several implementation and legal questions. One cosponsor asked whether the bill could invalidate existing noncompete clauses in preexisting contracts. Siegel cited the contracts clause as a potential constitutional concern and said litigation is possible but noted the legislature may set a policy that renders such provisions unenforceable going forward. He said: "I'm not gonna say it's unconstitutional to do this, but there would possibly be litigation." (Rick Siegel)

Members also raised concerns about the bill's "materially and unfavorably" standard for conduct that could justify termination, asking whether speech or statements by a franchisee could trigger termination. A legislator referenced national franchise examples ("I'm thinking of, like, Chick-fil-A") to illustrate how moral-standards clauses may be enforced; Siegel said the standard could be "open to interpretation" and ultimately be a matter for a court or jury.

On pricing and supply practices, lawmakers asked whether the bill addresses cases where franchisors vertically integrate and sell supplies at prices that leave franchisees unprofitable. One member cited Quiznos as an industry example. Siegel replied the bill's resale prohibition focuses on requiring that franchisors not force a franchisee to sell at a loss or at prices "not reasonably acceptable to the franchisee," but that the draft does not directly regulate how franchisors price goods they supply to franchisees.

The bill establishes enforcement and remedies: a franchisee may sue in state court for damages sustained because of a franchisor's violation, obtain injunctive relief, and recover reasonable attorney fees; in certain cases franchisees are entitled to the fair-market value of the franchise business and assets. The draft specifies state courts (and federal courts with jurisdiction in the state) have exclusive jurisdiction for actions under the chapter.

Several drafting and clarity issues were noted on the record: committee members asked for clearer language around the surviving-spouse or estate rights (the draft grants a 12-month protected period after a franchisee's death), the mechanics and timelines for transfers and the description of "materially and unfavorably" conduct that could lead to termination. Siegel acknowledged some language "needs to be written more clearly." (Rick Siegel)

The bill's stated effective date in the draft is July 1, 2026. No formal motion or vote was recorded during this hearing; the committee paused business to move to Room 11 for a related session.

Next steps: The committee paused and planned to continue work in Room 11; committee members signaled further drafting and clarification would be required on retroactivity, termination standards, and the interplay with federal and state contract law.