Insurance & Commerce- House

up first and I anticipate it might take some time. Um, so I do want to let um everyone in the audience know, unfortunately, uh, potentially, um, it appears a lot of people have signed up on HB 1405, that is not going to be heard today. Um, so just want to let you know you're obviously welcome to stay, but that bill is not going to be heard, so I just wanted to let everyone know, so. Thank you. Uh, Representative Brown? You're ready, come to the table. Introduce yourself and you may present your bill. You have my chee. Thank you, Mr. Chair. Matt Brown, District 55. Um, friends and Representative Acer, um, I know y'all have been hearing a lot about this bill and I think there's been a lot of misinformation about up there about this bill because people don't understand it. This is an all actuality, a very simple bill that actually doesn't really do anything. But before we talk about what the bill does, let me tell you about what this bill does not do. I know there's been a lot of scuttlebutt about this, this lawsuit that's going on and that this bill is going to somehow eviscerate that lawsuit or or do something to that lawsuit. This bill does not do that because of two reasons. Number one, the contract in that lawsuit was entered on November 1st, 1976. And Mr. Chair, if I may, I've got a copy of that lawsuit right here or the contract in that lawsuit I could pass out as an exhibit. And the reason why that doesn't kick in. down. And the reason why that doesn't affect it is because pursuant to the franchise Practices Act, specifically, ACA 472-203, the Act only applies to franchises entered into on and after March 4th, 1977. So the fight they're having up there in this lawsuit is for a contract that was written before this act actually kicks in and takes effect and it specifically excludes anything before March 4th, 1977. Second thing is, I know there's been a lot of discussion because this bill has a retroactive clause, you know, the very last section of the bill says this bill will be retroactive too. I think Act 461 of 1991, and there's been a lot of scuttlebutt out there, something nefarious because that's in there. Let me talk about that. I know that y'all have heard some people say bills don't have retroactive clauses. This is very unusual. What are they up to? Well, that's just completely wrong. In fact, this committee last session, and we passed in session a bill which may some amendments to the ranchise Practices Act, and that bill has a retroactive clause making it retroactive to that same Act 461 in 1991. And the reason for that is, is Act 461 was the last time there were any changes made to the definition section of the Franchise Practices Act. So last session we did the same thing. We made a change to the definition, made it retroactive to when the definition kicked in in 1991. This bill would do the same thing. However, to the extent that does cause any of y'all heartburn, I do have an amendment right here with me, and we can take that retroactive clause out because it really actually does not matter to the bill. And so if it's the committee's pleasure to take that out, so we just eliminate that as a point of discussion or any possible issue. I've got the amendment right here. I'm ready to go. Committee's fine to leave it in. I'm ready to go forward with the bill as it is. Is there any discussion by the committee, uh, excuse me, Representative Grahali, you recognized motion to accept the amendment at the proper time, or? They see the amendment. OK, um, would you like to then proceed with the amendment, Representer, if I could pass out that amendment, I'll be glad to talk on the amendment. Thank you. Members of staff will start circulating the amendment. being told they did not send it over. Oh. here on the motion. Members, um, Why don't we take approximately a 5 minute recess and we can determine if we can locate the amendment. So we are in recess. Well, that doesn't bode well for me. You're. OK, members, thank you for your patience. You all have the amendment, um. President Grahamlet, do you have your red motion to adopt. OK. OK, we have a motion to adopt the amendment. That's a proper motion. All in favor say aye. And they pose no. The motion carries Representative Brown, you'll recognize to present the bill as amended. Thank you, Mr. Chair, thank you for the patience. Now we're, now we're cooking with gas. You know. Peanut oil. So we've taken the retroactivity clause out of the bill, so that's no longer an issue. So what does this bill actually do? It makes one change to the franchise Practices Act. It essentially codifies what the courts have already said in terms of the 8th Circuit, which is the Federal Circuit that covers Arkansas, and what the Arkansas Supreme Court has previously said in two separate cases, and it also codifies what courts in Connecticut, New Jersey, New York, Illinois, and I think Michigan or Minnesota, one of the states have said, which is that when it comes to an insurance agent. You are not a franchisee for the purposes of the applicable states franchise Practices Act. Now, why is that? I mentioned the Eighth Circuit case. This is the first case interpreting our law. Our law was passed in '77, the first case to come on that it was in '86. It was the Kent Jenkins case where we have a salesman for a lighting company. He's an independent salesman. He sells to Walmart and people like that for the lighting company. He gets terminated by his distributor, he sues saying you can't do that. I'm a franchisee, you have to follow the provisions of Franchise Practices Act. And the Eighth Circuit said no, you're not a franchisee, and this is why. To be a franchisee, you have to own the product or service that you're selling to a customer. So like when you think of a McDonald's franchise. I go down to Billy Bob's McDonald's of Broadway Street LLC, the actual owner of the McDonald's here in in Little Rock or whoever it is. I buy a hamburger from them. That franchisee has purchased the meat. He's purchased the bun. He's gotten the labor that cooked the grill, that cooked the burger, put it together. He sells me that burger. He owns that burger that he is now selling to me. He is a franchise franchisee. But for our lighting salesmen, even though he had the right to enter into contracts to sell the lights, even though he could negotiate the price, he did not actually own the light products being sold, the company he represented did and so the 8th Circuit in that case said, you're not a franchisee, you are a solicitor of sales. That is what you legally are, so you're not a franchisee. Now that is not to say that other claims he may have had against them, such as breach of contract, fraud, whatever claims he brought, that's fine, but you can't bring this franchisee. because you're not a franchisee. Fast forward to 99, we have an insurance agent in the century insurance case, bring a lawsuit against the century insurance saying you terminated me, I'm going to sue you under the franchise Practices Act. And so now we have it before our Arkansas Supreme Court. And in that case, the Arkansas Supreme Court said Hey, this is coming to us. We see this 8th Circuit case, even though it's not binding on us because that's a federal court and it's a state law. We're the final arbiter of state law. They said, we agree though with their reasoning and find it persuasive, and they held in that case that because the insurance agent does not own the insurance policies that they're selling. They're like that lighting distributor. They are a solicitor of sales, because what does an insurance agent, a captive agent do at the end of the day. They take insurance policies, they take premium payments and things like that, or applications, I'm sorry. payments, and they send it to their insurer to issue the policies. They're not the ones actually issuing the policies. They don't own the policies. They can't even change the policies. So it's settled law. Well, fast forward to, I think it was 2009, we have the gun case, which is also mentioned in the bill. And in that case an insurance agent tried to do the same exact thing. I'm gonna sue for fraud, for breach of contract, for this, for that, for the other, and you violated the franchises Practices Act when you followed your contract and terminated me. And the Arkansas Supreme Court said again, since you do not own the insurance policies being sold, you are not a franchisee. Well, with this bill is we are simply taking that holding, and we are putting it into the law because despite having an Eighth Circuit case that addressed this issue despite having two Supreme Court cases to address this issue. We're still getting these lawsuits being, these claims being made in litigation. And so this bill simply makes it clear in the ranchise Practices Act that you are not a franchisee under the Act. And I would also point this out too. Think of it this way. When you have a franchisee, We don't have an Arkansas Department of Franchising, so all the franchisee has is their franchise agreement, and they've got the ranchise Practices Act. That's what they got to protect them. When you're dealing with insurance, we have a whole building about 2 blocks away, full of lawyers and experts and things of that nature that regulate insurance. In fact, I would probably argue it's probably the most regulated industry in the state. And if not the most, it's definitely in the top 3. And so, Again, they are not franchisees. They do not have to rely upon the Franchise Practices Act. They have the entire insurance code in the insurance commission if they feel like there's some issue. So that's really my bill in a nutshell, and I would be very glad to take any questions y'all have. Representatives, you are recognized for a question. Thank you. In the current lawsuit that is I guess the reason for this bill, best I can tell, um, it seems there if, if I read it correctly, and I'm not a lawyer, so just help me through this. There was a motion to dismiss, and what was the result of that motion to dismiss. The motion to dismiss in that case was denied, uh, I'm sorry, Representatives. Yeah, that so the motion to dismiss. was denied so the plaintiff was denied that. Does that mean that there would seem to be merit to the lawsuit? OK. Can you explain that so I can understand it. So in the legal world, um, we have different procedural things we can do in a litigation. Like for example, if a complaint is filed, we could file a motion to dismiss for a variety of reasons, like, for example, they didn't serve the papers properly, they didn't state their claim properly. The court doesn't have jurisdiction. There's all these procedural things we can move on. Uh, we also have other dispositive motions like a motion for summary judgment, where we go into the court and we say like Judge, there is no reason for us to even have a trial on this because of A, B, and C, which nobody can dispute, they're going to lose anyway, so you might as well just stop the bleeding and dismiss the case or grant us relief, you know, like the classic example is, uh, I, I do a mortgage foreclosure, you know, I go in, I say, Judge, there's no reason to have a trial because here's their payment history and they can't prove that they've made any payments since, you know, 3 months ago, so we might as well just foreclose. When a judge and I would note on the dismissal, the judge dismissed it without an opinion, which is pretty common in state court. He said denied. When a judge dismisses a procedural motion such as a 12b6 motion, motion to dismiss, or he dismisses a motion for summary judgment, you cannot read into that that the judge is opining as to the merits of the claim, because typically state court judges, I think in my experience and the experience of many attorneys in the room tend to be very loath to grant motions of that nature or summary judgments because they're afraid of being reversed on appeal. Typically, state judges want the case to go ahead and play out and then let the, let the trial occur. And then if you, when, if you win the lawsuit, well, then that's great. There's going to be no appeal anyway. If you lose the lawsuit, well, then you've got to the appellate court and make your claims. Um, but, uh, the fact that the judge dismisses a motion to dismiss. I do not read anything into that. That's just a procedural thing. And it's not, it shouldn't be interpreted as a comment on the merits. Usually it's a comment on, I'm a circuit judge, I don't have a law clerk, I have a busy docket. Let's just try this thing. I'm not going to get into was that they would like in some cases or in a lot of cases they would like to see this played out in court, right? Why shouldn't we let that happen in this case instead of preempting the court by passing this. Well, first off, I don't think it's preempting the court because it's up to us to make the law, not the courts. Uh, but the reason why in cases like this is, is Litigation is expensive. You know, to defend a case of any complexity with big building law firms, I would estimate you're looking at probably minimum $150,000 probably up until the 34, maybe $500,000 to litigate the case and dismiss. And so with this bill by codifying what the Supreme Court has already said you're using the plaintiff's argument, the defendant would say, well, it's worth this money. For me to argue this case. I'm sorry, I don't understand your question. Well, you said it's expensive to litigate a case. I'd say that's true in every case, but the, the defendant uh excuse me, the, the, the, the, the plaintiff is the one that's saying I'm OK with this. I want to litigate the case, right, but the defendant is being forced to litigate it when they shouldn't have to litigate this claim because as a matter of law, this claim will fail on appeal. And so what this bill does is simply give them another thing they can hang their hat on in the trial court of judge. Here's the case law, and this is why it should be dismissed. But even besides that, here's where the legislature has also clarified the law itself that this doesn't apply, which will make it easier to get claims like this dismissed. Now I would also point out though that like for example, the pending lawsuit, this is just one of, I think, 6 or 7 claims being made in the lawsuit. So the lawsuit still has these other claims like you breached the contract you had with me. Well, OK, we can go through that and litigate that. You committed fraud against me. Let's litigate that. This is just the one claim which seems to keep keep popping up, kind of whack a mole. Even though we have these two Supreme Court cases that have resolved it. Representative Monstrom, you're recognized. Thank you. You mentioned, um, this is something else that they can hang their hat on, so it feels like we are weighing in and giving them something else to hang their hat on. I would say that we are clarifying the law and statute in accordance with how courts have already interpreted this law both in Arkansas and several other states. OK. Follow up. This, this just feels. Inappropriate for us to even be here right now. Let the courts play it out. The defendant has the right to plead their case. Regardless of our opinions and I also feel like we're in the middle of interfering with contractual law. Well, actually, I'm glad you brought that up because what the plaintiff is doing by trying to say they are a franchisee actually is interfering with contractual law and potentially I think gets into some constitutional issues with the impairment of contractual obligations. So for example, the um federal court in Minnesota said in a 1992 case, this is Farmers Union versus Buttonhof A08 F 6677 that, and that was a case like this, is we had a a person trying to argue my agreement is covered by the. Franchised Practices Act, which was passed after the contract had been entered into. And in that case, they said the court denied McDonald's request to apply the terms of the statute to the pre-existing agreement, because to do so would eliminate the defendant's vested right under the contract to terminate without cause. And that contract, which I apologize I'm trying to think the folder's right there by you. I don't think it'd be passed all the way down. We have a copy of the contract at issue in that litigation. Let's, let's look at it. And you'll see on there that the contract provides that it is effective as of November 1st, 1976. But the franchise Practices Act did not, did not kick in until March 4th, 1977. So we already had a pre-existing contractual relationship. And that contractual relationship provided many things, and one of those things that provided was is that both the insurance company Uh, being a shelter. Or I guess it's predecessor. Or the agent, both have the right to terminate this agreement by giving the other side notice. Shelter could terminate it by saying, hey, we, we no longer want to do this deal, we're going to terminate it. The agent had the right to say, hey, I no longer want to do this deal. I'm going to terminate it. That's what their contractual agreement says. If they were permitted to proceed as a franchisee under the franchise Practices Act, that Act would rewrite that contract because one of the things it provides in there is that thou shalt not terminate a franchisor or franchisee, except if you have good cause, and good cause is then defined in the statute to apply to things that are more applicable to a restaurant operating like, you know, a decrease in sales or things of that nature. If you terminate for no cause, then there's other penalty provisions kicking in the in the, in the Franchise Practices Act. Which are nowhere in the contract. So by them arguing that they are a franchisee under the Act, they are actually trying to rewrite the contract to make it more advantageous to them, even though their contract itself predated this law ever coming into existence. And since it's a vested right, For them to get into the franchise Practices Act, it would violate the vested right and then you start having constitutional issues. OK, um, 11 final question. You use the McDonald's example, which is very helpful, but by nature of being a McDonald's franchise, you do have to sell their product their way, their burgers, all that stuff, much like an insurance agent has to sell that product that way. You don't have any choice in McDonald's to change the size of that burger. It's done McDonald's way. Same with an insurance agent, you have to sell that product that way, correct? So with McDonald's in particular, you're looking at the franchise agreement itself, which is going to put those strings on the franchisee. Essentially, if you want to sell our burger, then we have minimum standards you need to meet, you know, so that we can maintain brand consistency across the country, because that's the reason why people go to franchises is because you're probably a Big Mac in Arkansas is probably going to be identical to a Big Mac in Alaska. Well, when it comes to insurance, but the franchisee, if they wanted to, they could change and say, you know what, on Big Macs, we're not gonna put pickles on them anymore. Now they might violate their franchise agreement, but they have the legal right to do that subject to whatever contractual or other obligations or problems that may cause them with their franchisee or franchisor, I'm sorry. When it comes to insurance though, the agent cannot, as a matter of law, rewrite that policy, both legally because they don't own the policy. They're not the one giving the insurance and also under the terms of, for example, the contract we just passed out, which made it very clear in there that the agent has no right to change the insurance coverage or any of that nature, because again, the agent doesn't own that policy. They cannot change it. They are merely acting as a salesman or a conduit of sales for the insurance company. Thank you. I'll get back in the queue. Good question. Representative Aker, you recognized. Thank you, Mr. Chair. Uh, Representative Brown, you mentioned that there are several reasons that a judge may dismiss a request for dismissal in the case in question, what is the reason that that was dismissed. No one is given in the record. It just said did not. So we don't know if it was based on the franchisee argument or the fraud argument or different arguments contained within it just said deny it, and that's not uncommon to have just a motion denied in state court. Typically, in federal court, that's where you see more, well, first off, in a federal court setting, federal judges by and large are far more willing to dismiss claims on technical legal arguments and things of that nature in the state court judges. I, I chalk that up too is that federal judges tend to have an entire staff of law clerks. They've got a lot more resources. They're not the circuit court judges out in Arkansas that have got a docket that's 19 pages long. And you know, they just don't have time. Um, but that's kind of the big differences, and in federal court, you're far more likely to when a judge does grant or deny, they'll actually issue an opinion explaining why they're doing what they're doing follow up, Mr. Chair. Uh, so just to, to piggyback off of Representative Luundstrom's question a little bit about how the product itself has no tangible, I guess, fluidity. Based on the franchisee, is that What you're saying that the, the product itself is, is built in that there's no capacity, can't be changed, um, so I guess my question is, and you practice law, is, is leaving this open for it to be interpreted um. More in line with Say the intent, which would be that as businesses develop and products become less tangible as things become more online or more, I guess. Less McDonald's-esque. Is it not in our Interest or our responsibility to allow courts. Interpret those as they come because I understand your argument that we have precedent set and that it seems it's odd that we have to continue coming back to this, but also a precedent that this hasn't been codified almost makes it seem like it's open-ended to allow franchisees or people to defend the opportunity to be considered each and every time they feel that they are as those definitions develop. So I wanna make sure I understand your question. I'm sorry, Baker. I'll rephrase it the question is, What's your opinion on leaving this open-ended so that as products become less physical and tangible. The courts have the opportunity to hear cases where someone feels that they are franchising. But I think my first answer would be is that I'm of the opinion that it's up to the legislature to make the law, not the courts. And I think that by, by giving this authority to the courts, we're abdicating our duties to our voters and to the citizens of the state. It's up to this body to set the law, not a, not a judge. Uh, I was about to say unelected judge, but again, it's not federal court, so at least they are elected judges, can I follow up on that point right there real quick? Sure. So are we today, you're willing to, we're going to try and define what a franchisee. franchise relationship is as Law today that that's the intent that we've, we are clarifying what it is because even though I think that it's clear in the code, and I think it's clear in the cases interpreting that definition. Certain Attorneys keep trying to chip away at it, seeing if they can change it through litigation instead of through legislation, and this is simply saying we're just making it clear, so it's crystal clear now and insurance agent is not a franchisee. That is all this bill does, but we're using legal ruling precedent to make that decision. That I think we're also using the history of the Act. So let's talk about the act. Um, franchisees for lack of franchises, for lack of a better term, they weren't really invented until like, you know, like kind of like late 60s, that's when they kind of start gearing up, you know, and we come back to McDonald's, I mean, what is the first big franchise you can think of and they got started in California, you know, McDonald's. And so that's when they first got kind of invented. So fast forward to the 70s and the uh the oil crisis actually is what it was up in Wisconsin, they were having a problem up there with these oil companies that had company-owned gas stations and then they also had independent gas stations that carry the company's gas. So think of your shell, your shell station that's got all the branding. Well, like a franchise, it's actually owned maybe by somebody in your town, not by Shell corporate. And during the gas crisis, the oil companies were saying what little gas we have, we're giving it to our stores. Tough luck independent guys. And up in Wisconsin, that became a problem and so they passed the Wisconsin Fair Dealership Act, which is what our Franchise Act was modeled off of in 1977. But back then, a franchise was understood again, you are selling a product, but you're doing it under license of someone else's name. And that is the definition, that is what's in our code right now and that's what the courts have held. But like I said, we keep having these clever lawyers trying to chip at it and say, well, I'm a franchisee, well, but you don't own the product you're selling. And so that's just like I said, all this bill does is just clarifies that. But the question before us is to agree with what a franchisee and a franchise was in 1977 and we're taking the position that that has not changed between now and then. Now, I think what we're doing is we're saying, looking at how courts have interpreted what we and other states have done. We are just simply clarifying that if you are an insurance agent, the Franchise Act is not an avenue of relief for you if you do get into a dispute with your, with your franchise, or sorry, with your insurance company, you know, your remedies are breach of contract, talking to the insurance commission, filing a tort claim, things of that nature. OK, and it I'll go back to the queue. Thank you. Uh, Woo, excuse me. Come on A. work. Mhm Does yours work? out Our mics are off. Oh Well, I'm it appears our mics are not working, so. I. It's red though, isn't it. need time There it goes. OK, it appears that mine is back. I think we're all. I believe we're all back working. Thank you, Mr. Chairman, question to, uh, I got 2 or 3. First of all, what, what, what, what am I paying the franchise tax for To the Secretary of State. Of $150. Is that Is that for instance you said we didn't have a franchise department. So what is that? So Wooten, the franchise tax that you pay the Secretary of State for having a corporation in the state, they charge $150 a year. Um, that is completely, that, that, that's using the word franchise in a different legal context. That has nothing to do with the franchis or franchisee relationship or a McDonald's franchise. Well, that's for another day. Uh. Are we not in the mule already out of the bone in country terms with the lawsuit being filed against the law as it is, and we're going to change it and amend it. And, and you're saying I'm not up here for so some company. Large company can hang their head on a law that we passed. That's not protecting the people of the state of Arkansas. So what, what, what are we doing here? Are we in following up on uh representatives Lindstrom's questions. What in the and shouldn't we deal with this after the fact? Well, to answer your question, Representative Wu and I would say my first answer would be is, um, in my opinion, this doesn't even apply to that case up there because again, under the franchise Practices Act as it's written right now, it only applies to a franchise on and after March 4th, 1977, and as that contract we passed out clearly shows their contract is dated November 1st '76, so it doesn't even apply. As to the second question, I think that we are serving the citizens of Arkansas because litigation is not free and if an insurance company is having to pay 23456. $100,000 to defend a case or defend a claim that they shouldn't have to defend, that cost is being passed on to the consumer. Well, that's not my worry. I mean, if they want to spend that money, this passed a law that says the shareholders had to pay it, not, not the consumer. That's, that's easily handled. Well, because unfortunately money is a zero-sum game and it has to come from someone and ultimately it comes from the consumer in the form of increased in premium prices. But aren't we, aren't we passing this law after the fact, hadn't it already occurred, they're saying that they are not, are they saying they are not franchises or they are franchise. The plaintiff is attempting to argue that they are a franchisee. This law is clarifying no an insurance agent is not a franchisee for the purposes of the franchise. Practices Act. And as to your second question, I think that doing this bill is to hopefully bring clarity for future lawsuits, so we can go ahead and have it set as a matter of law. You are not a franchisee. But it's after the fact. Because the lawsuits already been filed. Yeah, for for future after the fact, yes sir, for future use. Thank you, Mr. Chairman. Thank you. Ferguson, you're recognized. Thank you, Mr. Speaker. Representative Brown. Just a little bit for clarification for me. I hadn't sold insurance in probably 47 or 48 years, and I didn't like some of the products I was selling. But anyway, I was working for an insurance company, but a friend of mine was an independent insurance agent and he had several companies he was working for, and he had a contractual agreement. With particular companies. So in your explanation in terms of owning the product. Uh Are you still saying that that product is not because he has a contractual relationship with the company. Would that make him a franchisee. It wouldn't under. The bill that you now propose, what I'm saying is that under the definition, which we can actually go to the y'all like to. The actual definition of franchisee under the Act is a franchise means a written or oral agreement which a person grants to another, a license to use a trade name to sell or distribute goods or services within a exclusive or non-exclusive territory. And so that's kind of the rub right there is, is that in the case of the insurance agent, they do not own the policy they are selling the Sure does. They're not the actual person doing the, you know, with the insurance product and so therefore they are an agent of the actual seller, not a franchisee. And that's why I come back to is, is the courts have held and other states which have a very similar provision, and I think a lot of them are modeled up that Wisconsin act I mentioned about the oil crisis is that's how it's been interpreted as to be a franchisee, you have to own the product being sold. If you don't own the product being sold, then you are a salesman or someone who solicits sales or an agent or some other legal relationship. It's not a franchisee. so just for clarity, that independent insurance agent. As a contractual arrangement with ABC insurance company. What you're saying is they don't own the product, they just have a contractual arrangement to sell the product. Yeah, I'm sorry, I misunderstood your question. Yes, sir, that's, that's exactly right. And I'm glad that you brought that up. Actually, as to independent insurance agents, uh, Mr. Kelly Erstein from Big Eye, who represents independent agents in Arkansas, could not be here today because something had come up. However, I do have a letter from Mr. Erstine confirming that they are OK with this bill and this does not impact their, the, the people he represents, which I'd be glad to pass out as well. So it does not impact independent insurance agents does not does not affect the operations business practices or regulatory obligations of IAAA members, the bill's scope and intended outcomes pertaining to areas outside the purview of independent insurance agents. All right, all right, thank you. Thank you, Mr. Speaker. I mean, Mr. Chair. Thank you. Representative Lonestrom, you recognized. Thank you. Um, you, let's go back to that big guy letter you say this doesn't impact them so it does impact those agents that are solely distributing an individual product. They are a franchise of that individual product. No, ma'am, they are not a franchise. No ma'am. So I think this is probably the way I would summarize it the best way I can think of. is, and this is probably where y'all are getting a lot from different agents because they don't understand what this bill is doing, and they don't, they don't understand that they were never a franchisee in the first place. That's really the big rub. And I think my analogy would be is that Some people think that we're closing a door on them, that this was an avenue we had of available relief, and we're now slamming the door shut on them. What they're not understanding is that under 8th Circuit precedent under Arkansas Supreme Court precedent times twice under other superior and supreme courts around the country that have faced similar issues in their states with the same argument, insurance agents, the franchisee and they've, and they've consistently batted it down. What, what we're doing is we're saying this door was never opened to you in the first place and we're putting a sign on the door that just makes it clear, hey, this door is not available to you. You may have other doors for remedies. But this door was never opened in the first place. We're not closing it, it was never open in the first place. OK, evidently they disagree or they wouldn't have gone to court and our the argument of litigation isn't free. What else is new? Um, they still have the right to go to court and defend their The business and the contract and they are, but the point is, is that they don't have a right to take an act that does not apply to them and try to shoehorn it into their claims that they're trying to assert for the purposes of a litigation advantage, then they'll lose in court. That's not, that's not up for us to decide or put our finger on the scale or give them something to hang their hat on. I'm just concerned that we're treading into an area that we may be able to stay out for a little bit longer. Well, my response to that would be again, it is up to the legislature of this state to set public policy and set what the law is, not the courts. And I do think that this is an attempt by certain attorneys to try to create law through legislation. And I can think of many famous examples where that happens, such as, um, think of any big Supreme Court case where some side can't get what they want by going through the legislative process, so they get some high priced lawyers to file lawsuits, and the next thing you know, we have the Supreme Court creating law, you know, no. elected people up at Washington creating law that we're stuck with and look at all the consternation that it causes the country, regardless of what side you are on an issue, because again, we have a court setting law instead of the legislature setting the law. OK, thank you. It still feels like we're entering into that argument, so I'll let it be there. Thank you. Represent Dolby. Thank you, Mr. Chair. Taking all the the lawsuit talk out is really your argument that the insurance code and contract law. Uh, controls and not the franchise Act, is that boils down what your argument really is in regard to insurance agents that it's really insurance code and contract law. That's exactly right, Representative Dalby, and I'm actually glad that you brought up the insurance code because this actually brings up another issue with what's being attempted through the court process instead of going through the legislative process. Let's say that a plaintiff is successful, and they're able to say that, hey, I'm a franchisee, therefore you have to follow the franchise Practices Act. We just broke the insurance code by doing that. Because the insurance code has several sections which govern things such as the appointment of agents, the termination of agents, and I'll be glad to cite to the code sections if we need to, but the insurance code, which has been around a whole lot longer than the franchise Practices Act sets out those relationships and for example, if an insurance agent is arrested for or convicted of certain crimes. They immediately lose their agency, they immediately lose their license to have to practice insurance in this state automatic. If they become a franchisee under the Act, that may or may not actually, you can't being convicted of certain crimes can be, but let's say it's a, a crime of uh uh well, I'll give you an example. If an insurance agent steals premiums. They don't, they collect premiums from a customer and put them in their pockets to the insurance company, that's immediate, your license is gone. That is not good cause under the franchises Act. So if a plaintiff like that was successful in saying, well, we're now franchisees. Well, now we have to have 90 days written notice. Or the company can terminate our agency appointment. We have to have a 30 day right to cure any deficiencies. We just broke all these sections in the insurance code, and who knows how many regulations down the street by doing that. And I think that's a huge unintended consequence if they were ever successful. Um, there was one court and I apologize, I cannot remember the citation, but there was one court that actually brought that up head on. And their whole point was, is that insurance law has been around for hundreds of years, and in that state their insurance code had been around for a century, as I recall. Franchiss are relatively new invention, and these laws have only been on the books since the late 70s. We're not going to use this new law to circumvent and turn, turn, turn the card over on a century of law that's well established when it comes to insurance agents, insurance companies and things of that nature. OK, thank you, Representative Brown. Seeing no further Rep some gram. Um, I guess I have two questions. First off, concerning this lawsuit, um, you know, you, you've spoken that there's been many other people who have tried to use the same franchise Practices Act in a lawsuit. To your knowledge, has there ever been one who's been successful in it like. to speak on that. Yeah, so Well I was getting ready for this bill, I tried to, we only have the two cases here in Arkansas that have been reported. Um, and in both of those cases, the Supreme Court said You're not a franchisee. Um, in terms of other states with this exact same issue has come up, uh, there are cases from Uh Well, New Jersey, for example, uh, New Jersey has a franchise Practices Act law that's written very similar to ours, which is probably because it was probably kind of modeled off that Wisconsin act I mentioned earlier. DeLuca versus Allstate Company insurance. Superior Court of New Jersey 2011 case, and there they held was not a franchisee under the under the New Jersey ranchi Practices Act because they are governed by insurance licensing laws in their contracts to hold them as a franchisee would result in irreconcilable differences with the New Jersey insurance code. Um, Gabrinsky versus National Property and Casualty, which is a 2nd circuit case. Same thing there. This is under Connecticut law that uh an insurance agent is not a franchisee under Connecticut law because unlike in a typical franchise, the agent did not buy the insurance products from nationwide before reselling them to clients rather, the insurance company owned the policies it issued. He was a commission sales representative and never owned the policies himself. Illinois Durst versus Illinois's Farmers Insurance Company, same holding. Insurance agents' claims against an insurance company alleging violations of Illinois's franchise Disclosure Act were dismissed because the party's agreement clearly contemplated that the policies sold, quotes in the opinion, by the agent had to first be approved by the company, so agent could not meet the first element of a franchise definition under their act. That contract I pointed out, I passed out to y'all, we've highlighted those relevant provisions and one of those provisions in that contract is, you do not have the right to Um, you, you can gather applications, send them in, and yes, you can temporarily bind coverage under our law, but the ultimate decision on whether we actually honor issue that policy on that insurance, we reserve that right to reject any application you send to us. It's in their contract, uh, because again the company owns the product and they have the final right. Uh, I mentioned Illinois, uh, New York, and Wisconsin or other states that have had the same issue come up and they have said under their similar laws, they are not franchisees. Finished? OK. OK, seeing no one else in the queue, um, Looks like we do have some people signed up to speak, um, I would start with, um, Is it Kevin Crass available? Sir, if you would just introduce yourself, um, who you're with and you can proceed with your testimony. Thank you, Chairman Maddox. My name is Kevin Crass. I'm a lawyer here in Little Rock with a firm, uh Friday Eldridge and Clark. I'm here today on behalf of Shelter as well as the uh National Association of Mutual Insurance. companies and the association of Property and Casualty Insurance Companies. As I said, I'm, I'm a practicing lawyer here. I've been at it about 40, 41 years have done a lot of what I call commercial litigation disputes among businesses, and that is included, uh, more than I can count disputes among franchisors, franchisees. I've represented both sides of it. I can honestly say I've never seen or heard of a court declare an insurance agency, a franchise. Um, and to try to put some of what Representative Brown put in context. Bear with me while I just go through this basic stuff. A franchise is a creature of statute. In this state, when you, when this entity previous legislature passed. The Arkansas franchise Practices Act, it created by a definition of franchises. And he read part of that. Uh, franchises are unique in that they almost always include a franchise fee paid by the franchisee to the company. And the franchisee also has to make a substantial capital investment building McDonald's to use that. Uh, there's a term of the contract and in most cases it bars that franchisee from selling someone else's product or services, so you're not going to see a McDonald's sell Burger King. Now you may say we see Taco Bell and KFC, those franchises are owned by the same company, but any rate, um, so what the franchise practice Act does that is so significant, and this is what Representative Dalby touched on. is that it takes an ordinary contract, an agency contract, a license contract. Let's call it a contract for a restaurant. Agreement. And when it's deemed a franchise, the law imposes substantial and additional obligations on the parties. It, it is subject to regulation by the Federal Trade Commission, which requires that certain disclosures be given to the franchisee. It's a book about that thick. It's called the Uniform Franchise offering circular. And it required the law there requires that they tell the franchise that here's how much it's going to cost you. Here's some lawsuits where people didn't make as much money as you think you're going to make, and on and on and on. And in most of these franchise agreements, the franchisee is obligated to pay a royalty based on sales. Now none of what I just described is even close to an insurance agency agreement. And an insurance agency. It is also regulated as the representative said by the department, which makes it different from most franchisees, so bottom line. I submit to you that to claim an insurance agency is a franchise. It is like trying to stick a square peg in a round hole to use an old analogy. Now, what brought us here is that obviously lawyers argue about words. And when you define something, lawyers are going to argue about it. was here is the courts have decided those arguments in favor of an agency is not a franchise. Because in part, I, I'm, I skipped this. One of the obligation, one of many obligations that they're kicked in by the statute. Representative Lundstrom, you said, aren't we rewriting a contract. Indeed, the franchise practices Act takes an ordinary contract and imposes substantial obligations, for example, and he mentioned this, if, if the one of the parties wanted to Terminate the contract. Well, it's no longer governed merely by the language of the agreement that they signed, all of a sudden the statute kicks in. And it requires a certain amount of notice. It requires an opportunity to cure the breach and on and on. So, You know, when you, when you're sitting here pondering, well, what's the, what's the difference does it make if it's a franchise. It makes all the difference in the world in terms of the rights of the parties. And so there's been a whole lot of focus on are we stepping in the middle of a lawsuit is broader than that. members of the committee, it's about all these people out there that have agreements that are trying to operate within an agreement. They need to know is this the binding agreement or is it subject to some franchise act that none of us contemplated when we entered into this agreement. You know, ultimately, believe it or not, and I'm a lawyer who's made a good living with people litigating, but most people want to avoid litigation. What they're looking to when someone reads the law is, is it clear? Is there clarity here so that I can evaluate my risk and make informed decisions. What this bill tries to do is clear up misconception about whether an agency is a franchise. And you could, you could take a bill and say it is subject to the franchise. But that would be different than what the Act currently says, which requires that the franchisee own the product or service. It'd be different from what the Supreme Court has said twice is the law. You could take that up. What this bill is trying to do is create clarity. And stability for people who've entered into insurance agency agreements and the the letter from Mr. Erskine, I think is important, and it goes to what uh the representative asked about an independent agency. Think about how many independent agents. Or in this issue. Well, who's franchisee are they? Company A? Company B, Company C, Company D, all of the above. I mean, that, that is that square peg in the round hole I'm describing. It doesn't fit. Now I understand that that an agent has been terminated and he's filed a lawsuit and they can litigate that to in, in all candor, our law firm is defending it. I am not personally involved in it. But without the retroactivity provision. The court is ultimately going to decide who wins that lawsuit and who doesn't. They'll get to the merits. Where, where this bill, I think is headed is if that case goes up to the Supreme Court. What you want that Supreme Court to do. First of all, you want them to meet. You want them to function right? They're doing their best. God, God help them. But, but, but, um, and it's, you know, we're laughing, but it's a serious matter. I'm laughing. It's a serious matter. We need that court to function and what we need them to do in a case like this is say, what did the legislature intend? What is the the, what do the words in the statute reflect was that intent. And it's my job as a judge to enforce the law as this body passed. And all this bill is asking you to do is clarify. Be consistent with the way the court previously interpreted it. Clarify that an agency is not a franchise under the definition of the statute. So I know I've probably been redundant, and I apologize. Uh, I do think this thing sets up for potential conflicts with the insurance code, uh, and the insurance regulators, that's different from McDonald's, you know, the Franchise Acts really protect that mom and pop that decides we want to get in business. We've invested all this money and and we want to have certain rights. And, and everybody knows their, their eyes are wide open. I'm signing an agreement at the top that says franchise agreement. And I know that this bill, this statute that was passed in '77 will protect me. But when I signed that insurance agency, it doesn't use the word franchise. It doesn't refer to the Franchise Act. So this is really a game of let's be creative and arguing that one law, pull it over here and a plot that's been rejected before. This bill is to just clarify that that is indeed The law in case these cases percolate to the Supreme Court, but I would say ultimately it provides clarity to the hundreds if not thousands of agents out there that need to know what are our rights in a business relationship. That's really what people want to avoid lawsuits. I'm happy to answer any questions. Thank you for your testimony, Mr. Krass. Representative Acer, I believe. Do you have a question? You're right. Thank you, Mr. Chair. Uh, Mr. Krass, I appreciate your testimony and and helping uh really give us the context of what we're doing here today. And I think really that might actually be some of the concern is that we are issuing a opinion. To all these agents that they're not franchisees by passing this law, whereas we haven't seen any argument for why we're not debating whether they are or aren't. We're debating whether or not we're going to codify a decision that they aren't. And I think that that that's kind of where My concern is that the debate over whether they qualify or doesn't qualify. Isn't happening. What's happening is we're closing that door to have that conversation in law and sending that message to all of those thousands of agents, and there is precedent to allow that to happen, but as the legislative body and our intent, I don't know if our intent. is to codify that. Does that make sense? I understand the question and you know, as I say, I started with the notion that that the franchise is a creature of statute. You're responsible for it. This body is responsible. The courts duty is to take the words and enforce it. They've twice said it's not a franchise, and yet people are continuing to claim it is. This bill is strictly simply asking you to to clarify that that is the intent of the body. It's not and I know a splitting hairs here, that's what we're accused of doing, and I admit I'm doing it, but we're not uh asking you to create new law. We're asking you just to confirm that is the law. You mean I realize it's a new act. It'll be a new bill. It'll be a new law. I get that. Thank you. Thank you. Thank you, Representative Aker. Rein McGrew, you recognized. Thank you. A couple of questions. One in this that What you're asking us to to clarify what is and what is not a franchise. It seems to me that the Supreme Court is already clarified that twice. Correct. And if I am a I think I'm a franchisee and I'm looking at litigation. I'm going to expect my attorney and I'm going to look into What are my chances before I spend all this money. Fighting this, I would expect the attorney to present me with those cases and say it's already been clarified in law. And if I wanted to go forward with it, I could. So that is that not true? And the second question is, if this is a big problem for insurance companies, can they not put in their agreements going forward. That this is not a franchisee and clarify it so that this problem goes away. The second question is a very insightful question because people have tried that for a long time, and the Franchise Act actually says it is illegal to require somebody to sign an agreement that says they're not a franchisee. Yeah, yeah, yeah, I, I've, I've fought over that, uh, there's so many issues in the Franchise Act that people that think they're signing an insurance agency have no idea what, what they're exposing the relationship to if you deem it a franchise. It's, it's, it's a major change in the insurance agency relationship. And, and I do recognize that lawyers may disagree. Apparently we have a lawyer who's filed a lawsuit and is arguing that the Supreme Court was wrong. It's interesting in his letter, he cites the three people who dissented. Now I've lost a lot of cases, 4 to 3, and I got some comfort that 3 of them agreed with me, but it didn't make a hill of beans difference to my client. Because 4 wins and and he's citing the dissent and saying, well, 3 of them thought at least there should have been a jury trial. He, the three dissents did not say it is a franchise. They said there are enough fact issues that a jury ought to decide, but the majority which rules over there when um said no, it's not a franchise. Thank you, Mr. Craz. Representatives, if you have time for more questions, OK. I'm sorry I didn't want to monopolize. No, no, yeah, so. I was following your, your definition of franchises and I think I understand it, but and you use the McDonald's example about, you know, they, it's a mom and pop, they set up shop. They own the building and all that. But there were other types of franchise, Chick fil A, the company owns the building. Yeah, that's not actually a franchise. That would, that would, that's yeah, it's not by definition of franchise, they enter into a different type of arrangement where they're basically an operator, as I understand the agreement, yeah, so. The last case that came up was in 2010. That was an argument in front of the court about whether an insurance agent was a franchise, is that right? That's right, sir. How are we survived for the last 15 years without this bill. Well, why did it take 15 years for an agent to argue that he's a franchise. I I I just find it kind of odd that this bill pops up now. And, and clearly it's because of the case, I think in Harrison. I think it is in Harrison. So because of this situation and I read it. Now we filed this bill. I mean, it, it just feels like we're going to take away this particular agent's ability to have his day in court. Well, I think without the retroactivity, he's still going to have his day in court. I think I think this will, the judge will have to address your bill, but as we say, we, we think it's just consistent with what the Supreme Court said. I mean, it, we're all in an awkward spot because the judge, and I'm sure the plaintiff's lawyer would agree with this, it'd be nice if the judge had rendered an opinion that said I think it's a franchise because of this and we'd have a little more clarity, but he, he or she just said motion denied and that's not unusual as the representative said, doesn't give you much so is that the reason for this bill? I can't speak completely to that. I think there are other, uh, claims being made that haven't reached the point of the Harrison case, but clearly the Harrison case is further along. OK. Um, I thought we're finished, but represent Wooton, you're recognized. Mr. Qu, thanks for being here this morning. If, if I understand what we're saying and what you said. They'll look back at this, they'll look at this law that we, if we pass it and take that into consideration while it was not in effect when the gentleman filed the lawsuit from Harrison. When you say they, you mean the Supreme Court. Yes, sir. Um, just the Arkansas Supreme Court. That's what I'm, yes. Yes, sir. um. It's, it's a question I'd have to ponder given the lack of the retroactivity clause. I, I can see where the plaintiff's lawyer would say, you, you shouldn't be bound by it, but I, I'd have a hard time predicting what the court would do. Right. OK. Thank you. Thank you, Mr. Chairman. Thank you, Representative Morton. Um, there's no other questions. Thank you for your testimony, Mr. Kras. Thank you. We have someone signed up to speak against the bill, Mr. RG Ernest. If you would come to the table, um, introduce yourself and you can proceed with your bill, or excuse me, you can proceed with your testimony. Thank you, Representative Maddox. Good morning, committee members. I'm Margie Ernest and I'm speaking against this bill today. I am also a practicing attorney and I ran an insurance agency for 12 years. I know a lot about what insurance agencies do. I know a lot about the Arkansas franchise Practices Act. I know a lot about the two cases cited in this bill, and I know a lot about this case. So first, Um, Representative Brown began His discussion about misinformation, he said there's a lot of misinformation going on. People don't understand. Well, let's start with that because the facts. are important And the what these cases say is important. Everyone is looking at a contract right now that you were given. It says 1976. That is not the contract that is at issue in this case. That was an original contract. That was filed in the case with the complaint. A company in that contract was the superseding contract that was executed in 1985. That was also filed in this complaint. So yes, this bill matters to this ongoing case. It is not 19, I cannot emphasize that enough because it was stated multiple times that you're looking at the contract that is at issue in this case, and you can look at the very first filing in the entire lawsuit in the complaint, and you will see that that is not the right contract. It is the contract from 1985 that superseded it. And if that was the correct contract, there would not be a case. Representative Brown is right. The Arkansas ranchise Practices Act applies to agreements entered into after 1977. That's the first point that I need to make. The second point is about The merits of the case, it was stated that the merits of the case, we don't know if they were addressed with the whenever the judge um uh granted his um, his, his, uh or denied the motion for dismissal Rule 12b6 motions, which was the motion that was made are by definition, um, motions based on the merits of the case. They are under rules of civil procedure, they have to be and so it was noted in the discussion that what we really don't know which claim, um, was, was being decided on the merits or not. Yes, we do. It was one claim because there was only one claim that has been made against the insurance against the insurance company in this case, and that is an Arkansas franchise practices Act claim. There was one claim, and so we know that that claim was decided on the merits. Regardless of whether the judge in the case stated that he was deciding that claim on the merits. The, um, the next thing that I want to clarify. is, and I'll talk some more about retroactivity later on. I, I know that, um, uh, I think it was Mr. Kraft who who got up here. He, he talked about franchises and how franchises always have a franchise fee and a capital contribution or that they typically do, um. Not in Arkansas. In other states they do, but not in Arkansas. Arkansas chose its definition of franchise. It shows a broad definition of franchise. It did that in 1977, and it's been that way for a long time. There's no franchise fee. There is no requirement of a capital contribution. Other states do require that, but not in Arkansas. I believe that Representative Brown mentioned how Arkansas is modeled after the Wisconsin Act. That is correct. Wisconsin's definition of franchise expressly includes insurance agents, so whenever Arkansas modeled its definition of, uh, franchise off of the Wisconsin Act, it could see in the Wisconsin Act. That the, that uh that Wisconsin act was expressly excluding insurance agents in Arkansas chose not to expressly exclude insurance agents. So there are two things that I really need to emphasize here, and I can't emphasize it enough today. One, this bill is not good lawmaking because it asks our legislatures to involve themselves in an Arkansas case that is being litigated right now. In the cases cited in the bill do not actually say. What the bill says, they say. I want to back up a little bit and the Arkansas franchise practicees Act has been protecting Arkansas's small businesses for nearly 50 years now. And for all of these 50 years, the insurance industry in Arkansas has been on notice that the act may apply to some types of insurance businesses. And on the other side of that, these insurance businesses have rightfully believed that they are protected by the act. So specifically let's talk about what the actual definition of franchises, the act protects franchises, and it defines a franchise to be any Arkansas business. That agrees to use another company's branding or sell or distribute in another company's products or sell or distribute in other company's services. So if you're the kind of insurance agent. That sells an insurance company's policies, you and your legal advisors could have rightfully believed for the past 50 years that you're protected by this act in the insurance industry that has surely been aware of that. Now I'll talk about what the cases in this bill actually say. 25 years ago, things in the law changed a little bit. The Supreme Court showed us that not all insurance agents are actually sell policies. It looked at an agent who was just an employee who only solicited applications, and it said that that agent was not a franchise because he was not actually selling policies. That's the stocking case. Then around 15 years ago, The Supreme Court again looked at an insurance agent in the gun case. But this time the agent was an independent contractor. He wasn't an employee. And he did a little bit more than just solicit, but not much more. And the justices could not agree about whether the agent in that case was a franchise 4 justices said she was still just a solicitor who did not actually sell policies. 3 justices said she had done enough to be a protected franchise. Now with this in mind, uh, consider what this bill asserts about these cases. It says that these two cases tell us that the Arkansas franchise Practices Act does not protect insurance agents, not a single one, not of any type. But that's just not true. These two cases show us simply that not all insurance agents are protected by the act because soliciting policies is not the same as selling policies. Representative Brown mentioned that agents in a blanket statement, agents can't make changes to policies. Yes, they can. They can. I ran an insurance agency for many years. They put endorsements on policies they they consistently look at the risk they might increase coverage, they might take off coverage. They might add a driver. They might add a discount, take off the discount. There are all sorts of changes that insurance agents may be authorized to provide, but what you see in these cases that I just discussed is the agents in those cases were not so authorized and therefore they lost their claims under the Arkansas franchise practices at. The other item that was noted is that insurance is heavily regulated in the state of Arkansas. Agreed. It is heavily regulated. The Arkansas Supreme Court. Has also been clear that the franchise Practices Act does apply to regulated industries. It has said that in its case law. And so another item that was brought up is What happens if you have an insurance agent who commits theft of premiums. You have to give them 90 days' notice and, and Representative Brown is correct. There is a 90 day notice provision in the Arkansas ranchise Practices Act, and suddenly you have a thieving agent out there who's who you have, you're stuck with them for 90 days. No, you're not. Because the Arkansas franchise Practices Act expressly exempts those types of offenses from the notice provision. So if you have an agent who commits theft of premium. Then he can immediately be terminated without notice, without the necessity to cure because it would be ridiculous to give someone to a cure, um, dishonest facts. that is built into the Arkansas franchise Practices Act. So looking at what the cases and say, insurance agents in Arkansas who sell companies' policies and don't just solicit applications, have been able to rely on the Arkansas franchise Practices Act and its case law. For nearly 50 years now in the insurance industry has been on notice of this. For 50 years now. So what has changed that makes it so urgent. That this bill be passed now after 50 years of the Act saying what it says for agents to rely on and why the aggressive rewrites of these case holdings. And why the retroactive effect. And I, I think the questions have been not asked enough that we know, we know why. Um, the only thing that's changed is this new case in Arkansas. It's going on right now and on the facts as alleged in the complaint in that case. What you will see is that that agent looks very different from the insurance agents in the Stockton and the gun cases who were who were said not to be franchises because they only solicited and they did not sell. The agent in the complaint in this case did much more. Just looking at the complaint, that agent did much more. So this bill appears to be a knee-jerk reaction to that case and for that reason it deeply undermines the public's confidence in the legislative process, and it could wind up undermining people's confidence in the judicial process. It looks bad. And passing it would upset the affairs of Arkansas business owners who have relied on what the law actually says to start and continue their insurance businesses and even to enter into costly litigation in an Arkansas court. There is a very simple way today to preserve the public's faith in the legislative process and the rights of small business owners and the interests of insurance companies, and that way is to just wait. Do not pass this bill in this session instead just wait for a clear day when these issues are not being argued about. In a court and both sides can have their interests addressed in these cases. Can be Understood for what they actually say. I know that it has been noted. Well, let's just take out the retroactivity provision of this bill, and it's all fixed for the litigant in the case. No, it's not because the cases that are discussed in the bill, the statements that are made about those cases are incorrect statements and so even taking out the retroactivity provision does not cure that. It does not address. That certain insurance agents in the state of Arkansas have been subject to the protections of the Arkansas franchise Practices Act, while others, according to the Supreme Court are not, do not benefit from those protections. So I would simply ask that this committee just wait. We've waited for nearly 50 years, and we can wait a little longer for the dust to settle. I thank this committee for its time, and I welcome any questions you may have. Reps in McCollum, you recognized. Thank you. Mr. Chair and thanks for being here today. I guess my question is, um, Around the, you know, the comment about waiting, um, My question is, could you help frame my thinking essentially what I'm hearing, I think from what I did hear from a number of members is maybe a hesitation on uh creating any type of clarification on code when there's an ongoing lawsuit of some sort. If I play that out of my mind, I'm OK, I as a lawmaker, I only get to. Lawmak every other year for 60 days, so it's like when is the right time or when do I wait? If I play that logic out any time, there can be a lawsuit on any given piece of code. So can you kind of just help me out with that as noted in the prior discussion, um, this, uh, I think it was stated that this lawsuit has came about after 15 years of what appear to be multiple clear days. And so, Again, I know that you say that what if other lawsuits come up, um, yeah, um, other lawsuits could have come up over the last 50 years and this this act has existed as is currently written for those last 50 years, 25 years ago, the Supreme Court of Arkansas weighed in on this very issue, and they looked at an insurance agent in that case, and they did not say that as the bill says that the Arkansas franchise practice Act just does not protect insurance agents. They assume that it could, but what they looked at was they looked at the definition of franchise on the facts of that case, and they said, well, does this particular insurance agent, this employee. Actually Sell insurance if they're just soliciting, and they concluded that that agent did not meet the definition of a franchise, and the reason why I bring that up to answer your question is because that was 25 years ago. Everyone in the insurance industry, every agent in the state had the opportunity to read that case and understand what it meant. And if you're the insurance industry, you can read that case and you can say, huh, this, this seems to suggest that reading the act, the Arkansas Supreme Court, 9 justices read the act and they said, yeah, an insurance agent may be protected under the law, but they have to actually sell a product, and they were not actually selling the product and and one thing I'll add real quick is there's talks about how to be a franchises you have to sell a product. That's not true for an. agent. The Supreme Court was very clear that the central inquiry in those two cases was whether the agent was able to consummate a cell of a policy. There doesn't have to be a tangible product. It merely has to be that the agent is able to consummate a cell of a policy. It's not enough to just solicit and so again all of that has been was on the on on the law books and the case law 25 years ago again 15. years ago in the gun case, the Supreme Court again came in. They did not say blanket terms like, oh, we know from Stockton that agents are never protected. They said, yeah, from Stockton we can tell that an agent may be protected, but is the agent here in this case more like the agent in Stockton, or are they something different and what 4 justices determined was that that agent was more like or was like the agent in Stockton. 3 justices. Disagree, so that that is hardly the Supreme Court weighing in and saying that insurance agents are just not protected by the act, and it's been that way for some time now. Thank you. Representative Wooton, you're recognized. Thank you, Mr. Chairman. clarification. We we've had 50 years of established law where they have been recognized as a franchise. Is that correct? I, I would not go so far as to say that insurance agents have been expressly recognized as a franchise, and that that's not because of any issues with whether they are or they're not. It has to do with the structure of the Arkansas franchise Practices Act. It does not name a single type of business that is protected by the law. It sets out, and this is important, it names the type of businesses that are not protected by the franchise practices. one example of that is the door to door salesman. It is right here in this book that I have in front of me. It says door to door salespeople are not protected by the Arkansas franchise Practices Act, but if you want to know, What the law's been for the past 50 years. And who's protected, it's anyone who meets the definition of a franchise, and it has to do with is someone using a particular other companies brands, are they selling their products, so I mean as far as using trademarks and trade names, I, you know, there's a lot of insurance agent billboards out there, right? Um, where insurance agents are using another company's brands. Good. Follow up, if I may, um, The difference between an independent agent. Who represents numerous companies. And a single source company. The the single source company has the franchise would be protected under the current law. Is that correct? It, it depends um an agent may be protected if they can state the right facts, um, and so the agents that were were noted in these two cases, the stocking case and the gun case, they were not protected because they did not fully consummate the sale of insurance. Other types of agents who consummate sales of insurance, which there are many of them. would be protected by the act. The reason why I know that it was discussed in a letter about the, you know, the independent agents out there are saying that they don't have a dog in this, so to speak, and they don't really need to because they don't look like franchises that are captive to one specific business. So if you're an independent agent, you may be appointed to a 25 different carriers and so if you lose the contract with one carrier, well, you got 20 4 more but if you are appointed with one company. And your whole business over the years has been built by that one company. Then you look exactly like the kind of business that was intended to be protected by the Arkansas franchise Practices Act. OK. So, In current law then, if, if it Goes to court. Then the court based on, will you, will use as a um An example, the 50 years of the fact that it's established law. And what this, what this law will do is change all that after 50 years of the Supreme Court. I don't care what happens in New Jersey or other states. I'm concerned mainly about Arkansas. Is, is that correct? Well, that the, the court, if, if it's, if it was in state court. And it ended up for the Supreme Court. Their likelihood they would look at the 50 years of presence has been set by the law saying that they are franchises. Is that what the Supreme Court would do is that they would look first and foremost at the act. They would start with the act, and that's exactly what they did in Stockton case and the gun, and then they would look at this prior case law, both the Stockton cases and the gun cases, and they would use that as guidance in their analysis. What I feel very confident in saying is that there is no way that the Supreme Court would look at the act and look at those cases and say nothing left to discuss here. Insurance agents just are not protected because that is not what the Stockton case and the gun case said the stocking case and the gun case said, well, if they meet the definition of a franchise, they're protected. So we need to look at the definition of a franchise, and we need to look expressly at the facts of that agent's case and determine whether that agent meets the definition of a franchise and And one of the things that the Supreme Court will do is they will compare uh any agent in any litigation against the agents that were described in those two cases and to decide whether or not um those and, and that's exactly what happened in the gun case that's cited as the Supreme Court compared the agent and gun to the agent in Stockton, and they noted that the agent and gun looked a little bit different than the agent in Stockton, um, but not enough different. The Supreme Court expressly stated in the gun case that the the the that agent, Mrs. Gunn, um, at the end of the day could most fairly be characterized as a solicitor and a promoter, and for that reason, they said she's not really selling insurance, um. Agent or um that agent in the gun case, there's, there's no way that we can say that she represents all agents, all insurance agents in the state of Arkansas. She was just one agent who had one contract, um, and the determination of her, uh, not being a franchise was purely factual. So one more question. So, In reality, you use the definition of knee-jerk reaction with this piece of legislation. I use this after the mule getting out of the barn, they were trying to put, put it in effect. So we would actually be putting the state of Arkansas in this legislative body, you know, in a difficult position relative to trying to defend a change. That The court is not going to go with the new law. Inside that, they're going to look at previous, as you've pointed out previous law decisions, right, and if I understand your, your, your question correctly, I, they're going to, if this bill is passed, it's going to Go back to this case and it's, it's going to affect the outcome of that case and again I'm going to emphasize every single one of you has a document in front of you that is not the relevant document. It is a copy of the 1976 contract that is not the contract that is at issue in this particular case. All right. Thank you, Mr. Chairman. Thank you, sir. Thank you. Thank you. Representative, you recognized. Thank you, Mr. Chair. Uh, thank you for your testimony, sir. So, um, I appreciate the context you provided because I think there has been some a little bit of confusion on our side where we think, well this has been settled at the Supreme Court level. Why would anybody ever try and, I guess challenge that, um, but what your testimony here today is that there is a that the decisions are made on a threshold of selling versus soliciting, correct? And this bill. Would prevent current insurance agents in the future from arguing that they've met a selling threshold based on their business practices. Is that correct? Yeah, I think that that's very much an accurate statement. So, so the first off, yes, it's been stated multiple times that the But all those rulings were based on a ruling that the majority of the judges said this is a solicitor, not selling the product and it's, it's a misstatement to say that it's settled law in the state of Arkansas that um that insurance agents are, are as in a blanket term are simply not protected by the act. It's not settled law. What is settled law is what we're talking about right now is what these two cases actually say, and they're making this distinction between soliciting and selling, and they're saying in that was the main inquiries in those two cases for and so the case that's ongoing now, I'm assuming the plaintiff is making the argument that I am different enough from those settled cases that I should be considered as someone who has sold product, not someone that is soliciting products. That's exactly right. OK, thank you. Representative Eubanks, do you have a question? I do, Mr. Chairman, I don't know how many other people are signed up to speak for or against this bill, but there are 3 members on this committee that have a rules committee at noon and we have people traveling from across the state to testify at that meeting, and I'm the chairman and I sort of need to be there, so if we could try to limit the debate so that The members here can get to that rules committee. I'd appreciate it. OK, well, what I would say is I don't want to stop this testimony at this stage. What I will do is we'll be accommodating and make sure that everyone can be in their seat and vote whenever we need to do that. If we need to come back after whatever we need to do, but I don't want to, uh, people have come here to testify, so I wanna, I want to go, members, let's do try to move as quickly as we can, but do answer your questions. So, Um We do have another question, Richardson. Representative Allen. Thank you, Mr. Chairman. Just for clarification, you mentioned that we could come back this afternoon and possibly vote on this. Is that what you think members can't be here when it's time to vote, I'm going to accommodate where everyone who wants to be here can be here to vote. That's what I want to do. But we There's only one other person to speak, and he's 4, so it could be cumulative. We, we could finish. So, but I don't want to cut off the gentleman down here. I understand, but we actually have members to leave right now and we don't know how they're gonna vote. So for us to take a vote right now all you won't take a vote there, OK, OK. Thank you, Jay. Thank you. I'm sure I made that really clear. Um, Is there any other members who have questions for Mr. Ernest. OK, see no, sir. Thank you for your testimony. Thank you. Represented to, well, there is one other person signed up. to speak on this bill, that is Derek Smith. Um Mr. Smith is not up to speak for the bill, Mr. Smith, you He know wonder a little bit of a time constraint. I know you're 4. I'd ask you to not be cumulative if you can, um, touch on anything that we have not already heard. Um, if you can and um appreciate your testimony. Go ahead and introduce yourself. Thank you, Mr. Chairman, committee, uh, my name is Derek Smith. I'm an attorney with the Mitchell Williams Selig Gates and Woodyard Law firm here in Little Rock, Arkansas, where I practice insurance regulatory law. I'm here today on behalf of State Farm, uh, in light of the hour and the interest in moving. this long, I will simply adopt the comments of Mr. Krass and certainly if you have any questions for me, I'd invite him up here to answer them for you. um. I will only say State Farm as a company that uses captive agents not involved in any of the current litigation, was not involved in any of the previous litigation, and so it's not a sued on this basis, but in following some of the litigation, uh, it did become concerned with overlaying the franchise Practices Act with its obligations as an insurer and appointment of insurance agents, and so it feels compelled to support the bill. Certainly happy to answer any questions. Any questions from the members? OK. Thank you, Mr. Smith. Is there anyone else in the audience who would like to speak, would like to speak against the bill. OK. Seeing none, um, Representative Brown, you are recognized. Thank you, Mr. Chair. No, no pressure like the clock to put brevity and make it succinct. I'd like to address just a few quick things that were brought up during the comments. I wanna make sure we're clear. Uh, there was a comment made about clarity in the fifteen-year delay. I would point out to the committee that the problem I mentioned about the bill we did last session to fix a problem that if problem was identified in 2001, it took until 2023 to bring the bill to fix it. So I don't think that delay is really an issue. Um, the comment was made that this is not the contracted issue in the case, and my response to that is and why it was attached as Exhibit A to the complaint. It's not an issue in the case. Uh, there was a comment made that 12b6 motions are based on the merits in the case. I'm sorry, that is outright incorrect. They are not go, they do not go to the merits of the case. They are procedural. 12b6 is a mechanism in court where you say, Judge, they're suing us for X, they have to allege an element of that which is missing from their complaint, so you should dismiss their complaint, and I would point out that a 12b6 motion if the complaint is dismissed, the plaintiff has the right to refile. Anything that addresses the merit of a case when that dismissal or whatever is entered, you don't have a right to bring that back. up res judicata attaches your only remedies to appeal. There was a comment made that we have 50 years of precedent saying their insurance companies that is incorrect as well. One thing I would point out is, is that number one, insurance is not mentioned the Franchise Prices Act. Number 2, I gave y'all citations to cases where insurance was specifically addressed by the Supreme Court, the rebuttal argument did not provide you with citation to a single case where they have said an insurance agency is a franchise because there are none in Arkansas. And finally, a statement was made. Oh, let me back up. And let's talk about precedent. An issue came up in the past about beer distributors. Are they a franchise or not? And the legislature specifically changed the act to say beer distributors are a franchise and are protected by this act. We have not done that for insurance companies. And my final point is there's a comment made that Wisconsin law says that insurance agency, it's applicable to insurance agencies, we keep coming back to Wisconsin, which is the first bill. Wisconsin statutes 135.07. This chapter does not apply. To the insurance business. Wisconsin specifically exempted insurance agencies from their franchise Practices Act. This bill would do the same here in Arkansas, and with that, I appreciate a good vote. OK. Representative Brown has closed for his bill. Um, What is the will of the committee. Representative Perry, you are recognized. Representative Perry makes a motion to pass. That's a proper motion, um. Thank you. Actually, um, as amended is the motion. Motion to pass as amended because there was the amendment that's a proper motion. Um, I will um take discussion on that motion if there is any for the members. in Perry, you're working for discussion on your motion to pass as amended. Thank you, Mr. Chairman. You know, I'm kind of one of the probably the only person here that has a unique position where I've actually been on both sides of this. I was a farmer's agent for 23 years, which when I decided to switch my practice and go to something different. I didn't own that book of business. I was able to, you know, farmers actually took it over and I went my way. I, uh, you know, I'm still there. Me and my partners, we have Subway stores. That's an actual franchise, you know, I operate the store under the Subway brand. I pay a franchise royalty. I pay for the overhead, the labor, and everything else, but that is an actual franchise, so it's a distinct difference on that, and that's why I'm a yes vote. Thank you Perry. Any other? Um, discussion by the committee representative Langstrom, you're recognized for discussion. I'm a no vote. I'm very concerned that we're interfering in something that we need to wait and let this cure out in the courts. I think this is an inappropriate time. Maybe there is an appropriate time later, but when you have a substantial investment as an insured agent, you're barred from selling other products because you're with that specific agency and your captive agents. I'm really concerned that we're about to step on something here. Thank you. Any further questions? Excuse me, any further commentary discussion from the committee. OK. Seeing none, we have a motion do pass as amended all, all in favor say aye. I'll say no. No. The nos have it. The bill's failed. No I see two hands and that is appropriate for a roll call. The motion has failed. We are adjourned.