California Legislature—2013–14 Regular Session

Assembly Bill No. 1141

Introduced by Assembly Member Dahle

February 22, 2013

An act to amend Sections 20020, 20021, 20025, 20027, 20030, 20035, 20040, and 20040.5 of, to amend the heading of Article 6 (commencing with Section 20035) of Chapter 5.5 of Division 8 of, to add Sections 20000.5, 20028, 20038, 20039, and 20044 to, to add Article 2.5 (commencing with Section 20016) to Chapter 5.5 of Division 8 of, to repeal Section 20026 of, and to repeal and add Section 20036 of, the Business and Professions Code, and to amend Sections 31001, 31012, 31220, 31300, 31302, 31302.5, 31303, 31306, and 31512 of, to add Section 31110.5 to, to repeal Sections 31301 and 31304 of, and to repeal and add Section 31201 of, the Corporations Code, relating to franchises.

LEGISLATIVE COUNSEL’S DIGEST

AB 1141, as introduced, Dahle. Franchises.

(1) Existing law provides for the regulation of franchises and establishes certain duties, obligations, and remedies for parties to a franchise agreement. The California Franchise Relations Act sets forth certain requirements related to the termination, nonrenewal, and transfer of franchises, among other things. The Franchise Investment Law authorizes regulations relative to the registration of an offer or sale of a franchise, unless exempted, and prohibits certain fraudulent and unfair practices.

This bill would revise both the California Franchise Relations Act and the Franchise Investment Law.

(A) With respect to the California Franchise Relations Act, existing law generally prohibits a franchisor from terminating a franchise prior to expiration of its term except for good cause, which is defined to include the failure of a franchisee to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity, which need not exceed 30 days, to cure the failure.

This bill would provide that good cause in a termination case consists of a substantial and material breach of the franchise agreement after the franchisee is given written notice and 60 days to cure the failure. The bill would also require the termination to be in accordance with the current terms and standards equally applicable to all franchisees, with limited exceptions.

Existing law provides that immediate termination of a franchise is deemed reasonable without an opportunity to cure upon the occurrence of certain events. One of those events is the failure by the franchisee to pay franchise fees or other amounts due with 5 days of receiving written notice that these amounts are overdue.

This bill would exempt situations where the franchisee establishes that the event was caused in substantial manner by conduct of the franchisor. The bill would require certain noncompliance by the franchisee allowing immediate termination to be substantial and material. The bill would provide 60 rather than 5 days for the franchisee to pay overdue amounts.

Existing law requires at least 180 days written notice to the franchisee of the franchisor’s intention not to renew the franchise. Existing law imposes certain requirements on the franchisor in that regard relative to the franchisee’s interests.

This bill would delete these provisions and instead require a franchisor to renew a franchise unless the franchisee has substantially and materially breached the franchise agreement, and would authorize the renewal to be for the same term as the previous term and would require the renewal to be under the franchise agreement terms then being offered to new franchisees. The bill would continue to require 180 days’ written notice if the franchisor has grounds not to renew the franchise. The bill would also prohibit a franchisor, upon termination or expiration of a franchise, from enforcing against the franchisee any covenant not to compete.

Existing law provides that a franchisor, for a reasonable time after the death of the franchisee, may not deny the surviving spouse, heirs, or estate of the franchisee the opportunity to participate in the ownership of the franchise under the then-current qualifications and standards applicable to franchisees.

This bill would require the qualifications and standards to be reasonable.

Existing law requires a franchisor that terminates or fails to renew a franchise other than as permitted under the act to offer to repurchase the franchisee’s resalable current inventory, as specified.

This bill would instead require the franchisor to reinstate the franchisee and to pay all associated damages, or to pay to the franchisee the fair market value of the franchise or franchise assets.

Existing law allows a franchisor and franchisee to agree to binding arbitration of claims arising under the act subject to certain conditions.

This bill would also require the arbitration procedures and costs to allow franchisees the opportunity to vindicate their rights under the act.

This bill would also add new provisions to the California Franchise Relations Act. The bill would require the parties to a franchise agreement to deal with each other in good faith. The bill would provide that certain acts and practices by a franchisor or subfranchisor are unfair or deceptive acts or practices or an unfair method of competition. The bill would provide certain rights to a franchisee if the franchisor develops a new location or grants a new franchise in essentially the same market in unreasonable proximity to an existing franchise. The bill would provide that franchisors owe a duty of competence to franchisees. The bill would provide that a condition, stipulation, or provision in a franchise agreement requiring the application of the law of another state is void. The bill would provide additional remedies for violations of provisions governing actions of franchisors relative to termination, nonrenewal, and transfer of franchises, including specified damages in certain cases, injunctive relief, and an award of attorney’s fees and costs to a franchisee prevailing in an action.

(B) With respect to the Franchise Investment Law, existing law makes it unlawful for a person to offer or sell a franchise by means of a communication that includes an untrue statement of a material fact or omits to state a material fact necessary in order for the statements made to not be misleading.

This bill would also make it unlawful for a person offering or selling a franchise to intentionally misrepresent certain matters, including the prospects or chances for success of a franchise, the known required total investment for a franchise, and efforts to sell or establish more franchises than a market or market area can sustain.

Existing law provides that any person who willfully employs, directly or indirectly, any device, scheme, or artifice to defraud in connection with the offer or sale of a franchise or who engages in other willful acts that operate as a fraud or deceit is guilty of a crime.

This bill would allow these matters to also be the subject of civil litigation, as specified.

Existing law prohibit specified acts with respect to franchise offers including, but not limited to, an act that operates as a fraud on a person.

This bill would prohibit the registration of any franchise offer that restricts venue for resolution of dispute solely to a forum outside this state.

Existing law makes it unlawful for a franchisor to restrict or inhibit the right of franchisees to join a trade association or to prohibit the right of free association among franchisees for lawful purposes. A plaintiff may seek injunctive relief and damages for a violation of this provision.

This bill would also make it unlawful for a franchisor to refuse to recognize and deal fairly and in good faith with an independent franchisee association.

Existing law provides that a person who offers or sells a franchise in violation of specified provisions of the Franchise Investment Law is liable for damages to the franchisee or subfranchisor, with certain exceptions. Existing law also provides rescission as a remedy for willful violations of these provisions.

This bill would extend civil liability for damages to any violation of the Franchise Investment Law. The bill, following purchase of a franchise, would allow a franchisee or subfranchisor to seek rescission, restitution, and ancillary damages without the requirement for the violation to be willful. The bill would extend liability for any violation of the Franchise Investment Law, on a joint and several basis, to various other parties associated with the franchisor. The bill would also provide for injunctive relief for any violation of the Franchise Investment Law.

Existing law imposes time limits of one, 2, or 4 years for the bringing of an action to enforce specific liabilities under the Franchise Investment Law. Existing law provides that if the franchisor delivers a written notice to the franchisee disclosing a violation of certain disclosure provisions, an action must be brought within 90 days.

This bill would require the written notice to include an offer of restitution of investment and ancillary damages and would extend the time for bringing an action to 180 days. The bill would allow 4 years to bring other actions to enforce liabilities under the Franchise Investment Law.

Existing law provides that any condition, stipulation, or provision purporting to bind any person acquiring a franchise to waive compliance with the Franchise Investment Law is void.

This bill would provide that certain other provisions, if included in the offer or sale of a franchise and associated documents, are also void.

Existing law provides that a willful violation of any provision of the Franchise Investment Law is a crime, unless specifically excepted. Because the bill would change the definition of certain crimes, it would impose a state-mandated local program.

(2) The bill would make other related changes.

(3) The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that no reimbursement is required by this act for a specified reason.

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program: yes.

The people of the State of California do enact as follows:

SECTION 1.  

This act shall be known, and may be cited, as
“The Small Business Investment Protection Act.”

SEC. 2.  

Section 20000.5 is added to the Business and
Professions Code, to read:

20000.5.  

The Legislature hereby finds and declares all of the
following:

(a) The widespread use of one-sided and nonnegotiable franchise
agreements has created numerous problems for franchisees in
California. Many franchisees lack knowledge and experience with
franchise agreements, knowledge of particular industries and their
franchisors’ systems, and equality in bargaining power. In addition,
many franchisees invest their substantial assets, take loans
sometimes secured by their family homes, and enter into long-term
commercial leases and other obligations while looking to their
franchise businesses for their livelihoods.

(b) Unlike investments in securities, an investment in a franchise
may lead to substantial additional losses well beyond the initial
risk capital. Unlike employment, due to long-term contractual and
lease obligations, franchisees generally cannot resign and leave
without substantial liabilities.

(c) The inability of many franchisees to negotiate on an equal
footing extends not only to individual first-time franchisees, but
also to experienced multiunit and well-represented franchisees.
As a result of one-sided franchise agreements, California
franchisees have been the victims of economic opportunism of
franchisors. Many franchisees have lost their substantial
investments and sometimes more, including their homes, and others
have had to file for bankruptcy. California franchisees have also
been victimized by territorial encroachment, franchisor lack of
competence and negligence, unfair required purchases, and other
misconduct. The California Franchise Relations Act is designed
to protect franchisees and end abuses from those practices and
unfair contract provisions.

SEC. 3.  

Article 2.5 (commencing with Section 20016) is added
to Chapter 5.5 of Division 8 of the Business and Professions Code,
to read:

 

Article 2.5.  Relationships Between Franchisor or Subfranchisor
and Franchisees

 

20016.  

Without limiting the other provisions of this chapter,
the following specific rights and prohibitions shall govern the
relations between the franchisor or subfranchisor and its
franchisees:

(a) (1) The parties shall deal with each other in good faith in
the performance and enforcement of the franchise agreement.

(2) “Good faith” for purposes of this subdivision means honesty
in fact and the observance of reasonable commercial standards of
fair dealing in the trade.

(b) For the purposes of this chapter and without limiting its
general application, it shall be an unfair or deceptive act or practice
or an unfair method of competition for a franchisor or subfranchisor
to do any of the following:

(1) Restrict the right of a franchisee to join or participate in an
association of franchisees to the extent the restriction is prohibited
by Section 20016.4 or Section 31220 of the Corporations Code.

(2) Require a franchisee to purchase or lease goods or services
in a manner prohibited by Section 20016.3.

(3) Discriminate between franchisees in the charges offered or
made for royalties, goods, services, equipment, rentals, advertising
services, or in any other business dealings, unless and to the extent
that any classification of or discrimination between franchisees is
any of the following:

(A) Based on franchises granted at materially different times,
and the discrimination is reasonably related to differences in time.

(B) Related to one or more programs for making franchises
available to persons with insufficient capital, training, business
experience, or education, or who lack other qualifications.

(C) Related to local or regional experimentation with, or
variations in, product or service lines or business formats or
designs.

(D) Related to efforts by one or more franchisees to cure
deficiencies in the operation of franchise businesses or defaults in
franchise agreements.

(E) Based on other reasonable distinctions considering the
purposes of this chapter and is not arbitrary.

(4) Obtain money, goods, services, anything of value, or any
other benefit from any other person with whom the franchisee does
business on account of that business unless the franchisor advises
the franchisee in advance of the franchisor’s intention to receive
that benefit.

(5) Establish a similar business or grant a franchise for the
establishment of a similar business at a location within a
geographical area specifically designated as the exclusive territory
in a franchise previously granted to another franchisee in a
currently effective agreement, except under the circumstances or
conditions prescribed in the agreement. The fact that other
franchisees or the franchisor may solicit business or sell goods or
services to people residing in that geographical territory shall not
constitute the establishment of a similar business within the
exclusive territory.

(6) Require a franchisee at the time of entering into a franchise
to assent to a release, assignment, novation, or waiver that would
relieve any person from liability imposed by this chapter. Any
condition, stipulation, or provision purporting to bind any person
acquiring any franchise to waive compliance with any provision
of this chapter shall be void. This paragraph shall not bar or affect
the settlement of disputes, claims, or civil suits arising or brought
under this chapter.

(7) Impose on a franchisee by contract, rule, or regulation,
whether written or oral, any unreasonable and arbitrary standard
of conduct.

(8) Terminate a franchise in violation of Article 3 (commencing
with Section 20020), refuse to renew a franchise in violation of
Article 4 (commencing with Section 20025), or refuse to permit
a transfer of a franchise in violation of Article 4.4 (commencing
with Section 20027).

(c) The provisions of this chapter shall apply to all written or
oral arrangements with the franchisee, including, but not limited
to, the franchise offering, the franchise agreement, sales of goods
or services, leases and mortgages of real or personal property,
promises to pay, security interest, pledges, insurance contracts,
advertising contracts, construction or installation contracts,
servicing contracts, and all other arrangements in which the
franchisor or subfranchisor has any direct or indirect interest.

(d) In any proceedings, damages may be based on reasonable
approximations but not on speculation.

20016.1.  

(a) The commission of any unfair or deceptive act
or practice or unfair method of competition prohibited by Section
20016 shall constitute an unfair or deceptive act or practice
pursuant to Chapter 5 (commencing with Section 17200) of Part
2 of Division 7.

(b) Any person who sells or offers to sell a franchise in violation
of this chapter shall be liable to the franchisee or subfranchisor,
who may sue for damages caused thereby or for rescission or other
relief as the court may deem appropriate. Rescission shall not be
available to the plaintiff if the defendant proves that the plaintiff
knew the facts concerning the untruth or omission or that the
defendant exercised reasonable care and did not know, or, if the
defendant had exercised reasonable care, would not have known,
of the untruth or omission.

(c) The suit authorized under subdivision (b) may be brought
to recover the actual damages sustained by the plaintiff together
with the cost of the suit, including reasonable attorney’s fees, and
the court may in its discretion increase the award of damages to
an amount not to exceed three times the actual damages sustained.

(d) Any person who becomes liable to make payments under
this section may recover contributions from any persons who, if
sued separately, would have been liable to make the same payment.

(e) A final judgment, order, or decree rendered against a person
under antitrust laws or this chapter shall be regarded as evidence
against that person in an action brought by any party against that
person under subdivision (a) or (b) as to all matters with respect
to which the judgment, order, or decree would be an estoppel
between the parties.

20016.2.  

(a) If a franchisor develops, or grants to a franchisee
the right to develop, a new outlet or location that 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
pursuant to subdivision (b), 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 the 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.

(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 12-month period immediately
preceding the opening of the new outlet or location, is determined
to have been less than 6 percent during the first 12 months of
operation of the new outlet or location.

(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.

(4) The existing franchisee has been granted reasonable
territorial rights and the new outlet or location does not violate
those territorial rights.

(b) In establishing damages under a cause of action brought
pursuant to this section, the franchisee has the burden of proving
the amount of lost profits attributable to the compensable sales.
For purposes of this subdivision, “compensable sales” means the
annual gross sales from the existing outlet or location.
Compensable sales shall exclude any amount attributable to factors
other than the opening and operation of the new outlet or location.

(c) Any cause of action brought under this section shall be filed
within two years of the opening of the new outlet or location.

20016.3.  

(a) A franchisor shall not require 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 those goods, supplies,
inventories, or services of comparable quality are available from
sources other than those designated by the franchisor, unless
necessary for a lawful purpose that is justified on business grounds.

(b) The publication by the franchisor of a list of approved
suppliers of goods, supplies, inventories, or services, or the
requirement that goods, supplies, inventories, or services comply
with specifications and standards prescribed by the franchisor,
does not constitute designation of a source under subdivision (a).
Additionally, the reasonable right of a franchisor to disapprove a
supplier does not constitute a designation of source under
subdivision (a).

(c) This section does not apply to the principal goods, supplies,
inventories, or services manufactured by the franchisor, or any
goods, supplies, inventories, or services entitled to protection as
a trade secret.

20016.4.  

 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.

20016.5.  

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. A determination of whether the duty of good faith with
respect to a new outlet or location has been met shall be made
pursuant to the provisions, standards, and procedures in Section
20016.2. “Good faith” for purposes of this section shall have the
same meaning as defined in paragraph (2) of subdivision (a) of
Section 20016.

20016.6.  

Franchisors shall owe a duty of competence to
franchisees operating in the state regarding all goods, services,
programs, advertising, and operating manuals required to be used
or provided to franchisees for their use.

SEC. 4.  

Section 20020 of the Business and Professions Code
is amended to read:

20020.  

Except as otherwise provided by this chapter, no
franchisor may terminate a franchise prior to the expiration of its
term, except for good cause begin insert , and in accordance with the current
terms and standards established by the franchisor then equally
applicable to all franchisees, except with respect to any
classification of, or discrimination between, franchisees that is
reasonable, is based on proper and justifiable distinctions
considering the purposes of this chapter, and is not arbitrary. In
any proceeding under this section, the franchisor shall have the
burden of proving that a classification or discrimination meets the
requirements of this section end insert . Good cause begin insert in a termination case end insert
shall begin delete include, but not be limited to, the failure of the franchisee to
comply with any end delete begin insert consist of a substantial and material breach of
any end insert lawful requirement of the franchise agreement after being
given begin insert written end insert notice thereof and begin delete a reasonable opportunity, which
in no event need be more than 30 end delete begin insert 60 end insert days begin delete , end delete to cure the failure.

SEC. 5.  

Section 20021 of the Business and Professions Code
is amended to read:

20021.  

If during the period in which the franchise is in effect,
there occurs any of the following events which is relevant to the
franchise, immediate notice of termination without an opportunity
to cure begin delete , end delete shall be deemed reasonable begin insert unless the franchisee
establishes that the event was caused in substantial manner by
conduct of the franchisor end insert :

(a) The franchisee or the business to which the franchise relates
has been the subject of an order for relief in bankruptcy, judicially
determined to be insolvent, all or a substantial part of the assets
thereof are assigned to or for the benefit of any creditor, or the
franchisee admits his or her inability to pay his or her debts as they
come due;

(b) The franchisee abandons the franchise by failing to operate
the business for five consecutive 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 such failure to operate is due to fire, flood, earthquake begin insert , end insert or
other similar causes beyond the franchisee’s control;

(c) The franchisor and franchisee agree in writing to terminate
the franchise;

(d) The franchisee makes any material misrepresentations
relating to the acquisition of the franchise business or the franchisee
engages in conduct which reflects materially and unfavorably upon
the operation and reputation of the franchise business or system;

(e) The franchisee fails, for a period of 10 days after notification
of noncompliance, to comply begin insert substantially end insert with any federal, state begin insert , end insert
or local law or regulation applicable begin insert and material end insert to the operation
of the franchise;

(f) The franchisee, after curing any failure in accordance with
Section 20020 begin insert , end insert engages in the same begin insert substantial and material end insert
noncompliance whether or not begin delete such end delete begin insert the end insert noncompliance is corrected
after notice;

(g) The franchisee repeatedly fails to comply with one or more
begin insert substantial and material end insert requirements of the franchise, whether
or not corrected after notice;

(h) The franchised business or business premises of the franchise
are seized, taken over, or foreclosed by a government official in
the exercise of his or her duties, or seized, taken over, or foreclosed
by a creditor, lienholder begin insert , end insert or lessor, provided that a final judgment
against the franchisee remains unsatisfied for 30 days (unless a
supersedeas or other appeal bond has been filed); or a levy of
execution has been made upon the license granted by the franchise
agreement or upon any property used in the franchised business,
and it is not discharged within five days of such levy;

(i) The franchisee is convicted of a felony or any other criminal
misconduct which is relevant begin insert and material end insert to the operation of the
franchise;

(j) The franchisee fails to pay any franchise fees or other
amounts due to the franchisor or its affiliate within begin delete five end delete begin insert 60 end insert days
after receiving written notice that begin delete such end delete begin insert the end insert fees are overdue; or

(k) The franchisor makes a reasonable determination that
continued operation of the franchise by the franchisee will result
in an imminent danger to public health or safety.

SEC. 6.  

Section 20025 of the Business and Professions Code
is amended to read:

20025.  

begin insert (a) end insert begin insert   end insert No franchisor may fail to renew a franchise unless
begin delete such franchisor provides end delete the franchisee begin delete at least 180 days prior
written notice of its intention not to renew; and end delete begin insert has substantially
and materially breached the franchise agreement. If the franchisee
has not substantially and materially breached the franchise
agreement at time of renewal, the franchisee may renew for the
same term as the previous term. The renewal shall be under the
franchise agreement terms then being offered new franchisees. If
the franchisor has grounds not to renew a franchise under this
chapter, then the franchisor shall provide at least 180 days prior
written notice of its intention to not renew as set forth in this
chapter. end insert

begin delete

(a) During the 180 days prior to expiration of the franchise the
franchisor permits the franchisee to sell his business to a purchaser
meeting the franchisor’s then current requirements for granting
new franchises, or if the franchisor is not granting a significant
number of new franchises, the then current requirements for
granting renewal franchises; or

end delete begin delete

(b) (1) The refusal to renew is not for the purpose of converting
the franchisee’s business premises to operation by employees or
agents of the franchisor for such franchisor’s own account,
provided, that nothing in this paragraph shall prohibit a franchisor
from exercising a right of first refusal to purchase the franchisee’s
business; and

end delete begin delete

(2) Upon expiration of the franchise, the franchisor agrees not
to seek to enforce any covenant of the nonrenewed franchisee not
to compete with the franchisor or franchisees of the franchisor; or

end delete begin delete

(c) Termination would be permitted pursuant to Section 20020
or 20021; or

end delete begin delete

(d) The franchisee and the franchisor agree not to renew the
franchise; or

end delete begin delete

(e) The franchisor withdraws from distributing its products or
services through franchises in the geographic market served by
the franchisee, provided that:

end delete begin delete

(1) Upon expiration of the franchise, the franchisor agrees not
to seek to enforce any covenant of the nonrenewed franchisee not
to compete with the franchisor or franchisees of the franchisor;
and

end delete begin delete

(2) The failure to renew is not for the purpose of converting the
business conducted by the franchisee pursuant to the franchise
agreement to operation by employees or agents of the franchisor
for such franchisor’s own account; and

end delete begin delete

(3) Where the franchisor determines to sell, transfer, or assign
its interest in a marketing premises occupied by a franchisee whose
franchise agreement is not renewed pursuant to this paragraph:

end delete begin delete

(A) The franchisor, during the 180-day period after giving notice
offers such franchisee a right of first refusal of at least 30 days’
duration of a bona fide offer, made by another to purchase such
franchisor’s interest in such premises; or

end delete begin delete

(B) In the case of the sale, transfer, or assignment to another
person of the franchisor’s interest in one or more other controlled
marketing premises, such other person in good faith offers the
franchisee a franchise on substantially the same terms and
conditions currently being offered by such other person to other
franchisees; or

end delete begin delete

(f) The franchisor and the franchisee fail to agree to changes or
additions to the terms and conditions of the franchise agreement,
if such changes or additions would result in renewal of the
franchise agreement on substantially the same terms and conditions
on which the franchisor is then customarily granting renewal
franchises, or if the franchisor is not then granting a significant
number of renewal franchises, the terms and conditions on which
the franchisor is then customarily granting original franchises. The
franchisor may give the franchisee written notice of a date which
is at least 30 days from the date of such notice, on or before which
a proposed written agreement of the terms and conditions of the
renewal franchise shall be accepted in writing by the franchisee.
Such notice, when given not less than 180 days before the end of
the franchise term, may state that in the event of failure of such
acceptance by the franchisee, the notice shall be deemed a notice
of intention not to renew at the end of the franchise term.

end delete begin insert

(b) Upon the termination or expiration of the franchise, the
franchisor shall not seek to enforce, against the franchisee, any
covenant not to compete.

end insert

SEC. 7.  

Section 20026 of the Business and Professions Code
is repealed.

begin delete

20026.  

Nothing in Section 20025 shall prohibit a franchisor
from offering or agreeing before expiration of the current franchise
term to extend the term of the franchise for a limited period in
order to satisfy the time of notice of nonrenewal requirement of
that section.

end delete

SEC. 8.  

Section 20027 of the Business and Professions Code
is amended to read:

20027.  

(a) No franchisor shall deny the surviving spouse, heirs,
or estate of a deceased franchisee or the majority shareholder of
the franchisee the opportunity to participate in the ownership of
the franchise under a valid franchise agreement for a reasonable
time after the death of the franchisee or majority shareholder of
the franchisee. During that time the surviving spouse, heirs, or
estate of the deceased shall either satisfy all of the then current
begin insert and reasonable end insert qualifications for a purchaser of a franchise or sell,
transfer, or assign the franchise to a person who satisfies the
franchisor’s then current begin insert and reasonable end insert standards for new
franchisees. The rights granted pursuant to this section shall be
granted subject to the surviving spouse, heirs begin insert , end insert or estate of the
deceased maintaining all standards and obligations of the franchise.

(b) Nothing in subdivision (a) shall prohibit a franchisor from
exercising the right of first refusal to purchase a franchise after
receipt of a bona fide offer to purchase the franchise by a proposed
purchaser of the franchise.

begin delete

(c) This article shall not apply to any agreement or contract in
effect prior to January 1, 1984, except an agreement or contract
of an indefinite duration. This section shall not apply to any bequest
or intestate succession that took effect prior to January 1, 1984.

end delete

SEC. 9.  

Section 20028 is added to the Business and Professions
Code, to read:

20028.  

(a) (1) No franchisor shall refuse to permit a transfer
of ownership of a franchise, or of a proprietorship, partnership,
corporation, or other business entity that is a franchisee or
subfranchisor, except for good cause.

(2) For purposes of this subdivision, good cause shall include,
but not be limited to, any of the following:

(A) The failure of a proposed transferee to meet any of the
franchisor’s or subfranchisor’s reasonable qualifications or
standards then in effect for a franchisee or subfranchisor.

(B) The fact that the proposed transferee or any affiliated person
of the proposed transferee is a competitor of the franchisor or
subfranchisor.

(C) The inability or unwillingness of the proposed transferee to
agree in writing to comply with and be bound by all lawful
obligations imposed by the franchisor, including, without
limitation, all instruction and training obligations, and to sign the
current form of the franchise agreement used by the franchisor or
subfranchisor.

(D) The failure of the franchisee or proposed transferee to pay
any sums owing to the franchisor and to cure any default in the
franchise agreement or other agreements with the franchisor
existing at the time of the proposed transfer.

(b) A franchisor or subfranchisor shall have 30 days after being
notified in writing of a proposed transfer to approve or disapprove
in writing a proposed transfer of ownership or control of a
franchise, or of a proprietorship, partnership, corporation, or other
business entity that is a franchisee or subfranchisor, stating its
reason for disapproval. If a franchisor or subfranchisor fails to
approve or disapprove a proposed transfer in writing within that
period, the franchisor or subfranchisor shall be deemed to have
approved such transfer.

SEC. 10.  

Section 20030 of the Business and Professions Code
is amended to read:

20030.  

All notices of termination or nonrenewal required by
this chapter:

(a) Shall be in writing;

(b) Shall be posted by registered, certified or other receipted
mail, delivered by telegram begin insert , end insert or personally delivered to the
franchisee; and

(c) Shall contain a statement of intent to terminate or not renew
the franchise:

(1) Together with begin insert all of end insert the reasons therefor, and

(2) The effective date of such termination or nonrenewal begin delete or
expiration end delete .

SEC. 11.  

The heading of Article 6 (commencing with Section
20035) of Chapter 5.5 of Division 8 of the Business and Professions
Code is amended to read:

 

Article 6.  begin delete Offers to Repurchase Inventory end delete begin insert Remedies end insert

 

SEC. 12.  

Section 20035 of the Business and Professions Code
is amended to read:

20035.  

In the event a franchisor terminates or fails to renew a
franchise other than in accordance with the provisions of this
chapter, the franchisor shall begin delete offer to repurchase from the franchisee
the franchisee’s resalable current inventory meeting the franchisor’s
present standards that is required by the franchise agreement or
commercial practice and held for use or sale in the franchised
business at the lower of the fair wholesale market value or the
price paid by the franchisee. The franchisor shall not be liable for
offering to purchase personalized items which have no value to
the franchisor in the business which it franchises end delete begin insert reinstate the
franchisee in accordance with the provisions of this chapter and
pay all damages caused thereby, or at the election of the
franchisee, shall pay to the franchisee the fair market value of the
franchise or the fair market value of the franchise assets end insert .

SEC. 13.  

Section 20036 of the Business and Professions Code
is repealed.

begin delete

20036.  

The franchisor may offset against any repurchase offer
made pursuant to Section 20035 any sums owed the franchisor or
its subsidiaries by the franchisee pursuant to the franchise or any
ancillary agreement.

end delete

SEC. 14.  

Section 20036 is added to the Business and
Professions Code, to read:

20036.  

Any franchisee establishing a reasonable probability
of prevailing in an action under this chapter shall be entitled to a
temporary restraining order and preliminary injunction enjoining
termination or nonrenewal pending trial without any showing of
irreparable injury or posting bond.

SEC. 15.  

Section 20038 is added to the Business and
Professions Code, to read:

20038.  

Any franchisee prevailing in an action under this chapter
shall be entitled to an award of reasonable attorney’s fees and
costs.

SEC. 16.  

Section 20039 is added to the Business and
Professions Code, to read:

20039.  

A condition, stipulation, or provision in a franchise
agreement requiring the application of the law of another state in
lieu of this chapter is void.

SEC. 17.  

Section 20040 of the Business and Professions Code
is amended to read:

20040.  

Nothing contained in this chapter shall limit the right
of a franchisor and franchisee to agree before or after a dispute
has arisen to binding arbitration of claims under this chapter,
provided begin delete that end delete begin insert all of the following end insert :

(a) The standards applied in begin delete such end delete begin insert the end insert arbitration are not less
than the requirements specified in this chapter begin delete ; and end delete begin insert . end insert

(b) The arbitrator or arbitrators employed in begin delete such end delete begin insert the end insert arbitration
are chosen from a list of impartial arbitrators supplied by the
American Arbitration Association or other impartial person.

begin insert

(c) The arbitration procedures and costs allow franchisees the
opportunity to vindicate their rights under this chapter.

end insert

SEC. 18.  

Section 20040.5 of the Business and Professions
Code is amended to read:

20040.5.  

A provision in a franchise agreement restricting venue
begin insert solely end insert to a forum outside this state is void with respect to any claim
arising under or relating to a franchise agreement involving a
franchise business operating within this state.

SEC. 19.  

Section 20044 is added to the Business and
Professions Code, to read:

20044.  

This chapter shall be liberally construed to effectuate
its purposes.

SEC. 20.  

Section 31001 of the Corporations Code is amended
to read:

31001.  

The Legislature hereby finds and declares that the
widespread sale of franchises is a relatively new form of business
begin delete which end delete begin insert that end insert has created numerous problems both from an investment
and a business point of view in the State of California. Prior to the
enactment of this division, the sale of franchises was regulated
only to the limited extent to which the Corporate Securities Law
of 1968 applied to those transactions. California franchisees have
suffered substantial losses where the franchisor or his or her
representative has not provided full and complete information
regarding the franchisor-franchisee relationship, the details of the
contract between franchisor and franchisee, and the prior business
experience of the franchisor.

It is the intent of this law to provide each prospective franchisee
with the information necessary to make an intelligent decision
regarding franchises being offered. Further, it is the intent of this
law to prohibit the sale of franchises where the sale would lead to
fraud or a likelihood begin insert of deceit or end insert that the franchisor’s promises
would not be fulfilled, and to protect the franchisor and franchisee
by providing a better understanding of the relationship between
the franchisor and franchisee with regard to their business
relationship.

SEC. 21.  

Section 31012 of the Corporations Code is amended
to read:

31012.  

begin delete “Fraud” and “deceit” end delete begin insert “Fraud,” “deceit,”
“misrepresentation,” and “omissions” end insert are not limited to common
law fraud or deceit begin insert , and only actual reliance is required for
recovery for fraud, deceit, misrepresentation, or omissions under
this division end insert .

SEC. 22.  

Section 31110.5 is added to the Corporations Code,
to read:

31110.5.  

The commissioner shall not register any franchise
offer that contains a provision in a franchise agreement, contrary
to Section 20040.5 of the Business and Professions Code,
restricting venue for resolution of disputes solely to a forum outside
this state.

SEC. 23.  

Section 31201 of the Corporations Code is repealed.

begin delete

31201.  

It is unlawful for any person to offer or sell a franchise
in this state by means of any written or oral communication not
enumerated in Section 31200 which includes an untrue statement
of a material fact or omits to state a material fact necessary in order
to make the statements made, in the light of the circumstances
under which they were made, not misleading.

end delete

SEC. 24.  

Section 31201 is added to the Corporations Code, to
read:

31201.  

(a) It is unlawful for any person in connection with the
offer, sale, or purchase of any franchise, or in any filing with the
commissioner, to do any of the following, directly or indirectly:

(1) Employ any device, scheme, or artifice to defraud.

(2) Make any untrue statements of a material fact or omit to
state a material fact necessary to make the statement, in light of
the circumstances under which they are made, not misleading.

(3) Engage in any act that operates or that would operate as a
fraud or deceit upon any person.

(b) It is unlawful for any person when offering or selling a
franchise to do any of the following:

(1) Intentionally misrepresent the prospects or chances for
success of a proposed or existing franchise.

(2) Intentionally misrepresent, by failure to disclose or
otherwise, the known required total investment for a franchise.

(3) Intentionally misrepresent, or fail to disclose, efforts to sell
or establish more franchises than is reasonable to expect the market
or market area for the particular franchise to sustain.

SEC. 25.  

Section 31220 of the Corporations Code is amended
to read:

31220.  

It shall be a violation of this division for any franchisor,
directly or indirectly, through any officer, agent begin insert , end insert or employee, to
restrict or inhibit the right of franchisees to join a trade association
or to prohibit the right of free association among franchisees for
any lawful begin delete purposes end delete begin insert purpose, or to refuse to recognize and deal
fairly and in good faith with any independent franchisee
association end insert . Notwithstanding Section 31410, a violation of this
section shall not constitute a crime.

SEC. 26.  

Section 31300 of the Corporations Code is amended
to read:

31300.  

Any person who offers or sells a franchise in violation
of begin delete Section 31101, 31110, 31119, 31200, or 31202, or in violation
of any provision of this division that provides an exemption from
the provisions of Chapter 2 (commencing with Section 31110) of
Part 2 or any portions of Part 2, end delete begin insert this division end insert shall be liable to the
franchisee or subfranchisor, who may sue for damages begin delete caused
thereby, and if the violation is willful, the franchisee may also sue end delete
begin insert following the purchase of the franchise, or end insert for rescission begin insert ,
restitution, and ancillary damages end insert , unless begin delete , in the case of a violation
of Section 31200 or 31202, end delete the defendant proves that the plaintiff
knew the facts concerning the untruth or omission, or that the
defendant exercised reasonable care and did not know, or, if he or
she had exercised reasonable care, would not have known, of the
untruth or omission.

SEC. 27.  

Section 31301 of the Corporations Code is repealed.

begin delete

31301.  

Any person who violates Section 31201 shall be liable
to any person (not knowing or having cause to believe that such
statement was false or misleading) who, while relying upon such
statement shall have purchased a franchise, for damages, unless
the defendant proves that the plaintiff knew the facts concerning
the untruth or omission or that the defendant exercised reasonable
care and did not know, (or if he had exercised reasonable care
would not have known) of the untruth or omission.

end delete

SEC. 28.  

Section 31302 of the Corporations Code is amended
to read:

31302.  

Every person who directly or indirectly controls a
person liable under begin delete Section 31300 or 31301 end delete begin insert this chapter end insert , every
partner in a firm so liable, every principal executive officer or
director of a corporation so liable, every person occupying a similar
status or performing similar functions, every employee of a person
so liable who materially aids in the act or transaction constituting
the violation, are also liable jointly and severally with and to the
same extent as such person, unless the other person who is so liable
had no knowledge of or reasonable grounds to believe in the
existence of the facts by reason of which the liability is alleged to
exist.

SEC. 29.  

Section 31302.5 of the Corporations Code is amended
to read:

31302.5.  

(a) Any person who violates begin delete Section 31220 end delete begin insert any
provision of this chapter end insert may be sued in the superior court in the
county in which the defendant resides or where a franchise affected
by the violation does business, for temporary and permanent
injunctive relief and for damages begin delete , if any, and the costs of suit,
including reasonable attorneys’ fees end delete . A plaintiff shall not be
required to allege or prove that actual damages have been suffered
in order to obtain injunctive relief.

begin delete

(b) No action shall be maintained to enforce any liability created
under Section 31220 unless brought before the expiration of two
years after the violation upon which it is based or the expiration
of one year after the discovery by the plaintiff of the facts
constituting such violation, whichever occurs first.

end delete begin insert

(b) A plaintiff prevailing in a claim for violation of any provision
of this chapter shall also be awarded costs of suit, including
reasonable attorney’s fees.

end insert

SEC. 30.  

Section 31303 of the Corporations Code is amended
to read:

31303.  

No action shall be maintained to enforce any liability
begin delete created under Section 31300 end delete begin insert under this chapter end insert unless brought
before the expiration of four years after the act or transaction
constituting the violation begin delete , the expiration of one year after the
discovery by the plaintiff of the fact constituting the violation, end delete or
begin delete 90 end delete begin insert 180 end insert days after delivery to the franchisee of a written notice
disclosing any violation of Section 31110 or 31200, which notice
shall be approved as to form by the commissioner begin delete , whichever shall
first expire end delete . begin insert The notice shall include an offer of restitution of
investment and ancillary damages to the franchisee. end insert

SEC. 31.  

Section 31304 of the Corporations Code is repealed.

begin delete

31304.  

No action shall be maintained to enforce any liability
created under Section 31301 unless brought before the expiration
of two years after the violation upon which it is based, expiration
of one year after the discovery by the plaintiff of the facts
constituting such violation, or 90 days after delivery to the
franchisee of a written notice disclosing any violation of Section
31201 or 31202 which notice shall be approved as to form by the
commissioner, whichever shall first expire.

end delete

SEC. 32.  

Section 31306 of the Corporations Code is amended
to read:

begin delete

31306.  

Except as explicitly provided in this chapter, no civil
liability in favor of any private party shall arise against any person
by implication from or as a result of the violation of any provision
of this law or any rule or order hereunder.

end delete

begin insert

begin insert 31306. end insert   

end insert

Nothing in this chapter shall begin insert preempt, supersede, end insert limit begin insert ,
or repeal end insert any liability begin delete which end delete begin insert that end insert may exist by virtue of any other
statute or under common law if this law were not in effect begin insert ,
including, but not limited to, common law fraud end insert .

SEC. 33.  

Section 31512 of the Corporations Code is amended
to read:

31512.  

Any condition, stipulation begin insert , end insert or provision purporting to
bind any person acquiring any franchise to waive compliance with
any provision of this law or any rule or order hereunder is void
begin insert and of no effect, without limitation. All no representation, no
reliance, and choice of law, other than California law, clauses in
the offer or sale of franchises, including in the franchise agreement,
franchise disclosure document, or separate disclaimer, are void
and of no effect end insert .

SEC. 34.  

No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of
the Government Code, or changes the definition of a crime within
the meaning of Section 6 of Article XIII B of the California
Constitution.