Amended in Assembly March 20, 2013

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, begin delete 20027, 20030, end delete begin insert and end insert 20035 begin delete , end delete begin delete 20040, and 20040.5 end delete 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, begin insert and end insert 20039 begin insert to end insert , begin delete and 20044 to, end delete to add Article 2.5 (commencing with Section 20016) to Chapter 5.5 of Division 8 of, begin insert and end insert to repeal Section 20026 of, begin delete and to repeal and add Section 20036 of, end delete the Business and Professions Code, and to amend begin delete Sections 31001, 31012, end delete begin insert Section end insert 31220 begin delete , 31300, 31302, 31302.5, 31303, 31306, and 31512 end delete of begin delete , to add Section 31110.5 to, to repeal Sections 31301 and 31304 of, and to repeal and add Section 31201 of, end delete the Corporations Code, relating to franchises.

LEGISLATIVE COUNSEL’S DIGEST

AB 1141, as amended, 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 begin delete 60 end delete begin insert 30 end insert 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.

begin delete

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.

end delete begin delete

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

end delete

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. begin delete 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. end delete 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 begin delete 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 end delete begin insert that a franchisee prevailing in an action pursuant to these provisions is entitled to end insert an award of attorney’s fees and costs begin delete to a franchisee prevailing in an action end delete .

(B) With respect to the Franchise Investment Law, existing begin delete 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. end delete

begin delete

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.

end delete begin delete

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.

end delete begin delete

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

end delete begin delete

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.

end delete begin delete

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

end delete

begin delete Existing end delete 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. begin insert Existing law also authorizes the Deputy Commissioner of Business Oversight for the Division of Corporations to bring an action to enforce compliance with the Franchise Investment Law, as specified. end insert

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 begin insert disclosed in the current franchise disclosure document end insert .

begin delete

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.

end delete begin delete

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.

end delete begin delete

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.

end delete begin delete

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.

end delete begin delete

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.

end delete begin delete

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

end delete begin delete

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.

end delete

(2) The bill would make other related changes.

begin delete

(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.

end delete begin delete

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

end delete

Vote: majority. Appropriation: no. Fiscal committee: yes. State-mandated local program:  begin delete yes end delete begin insert no end insert .

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 begin insert of 2013 end insert .”

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)  begin delete 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 end delete begin insert California franchisees are a major force in the
state’s economic development. As opposed to corporate entities
that are franchisors and most often reside outside California,
franchisees are the local small business owners who personally
fund the franchise brand development, sales, use, and income tax,
and who invest in building, equipment, pay leases, and other spill
over investments. Franchisees end insert 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 begin insert , including franchisees’ homes, and sometimes filing
for bankruptcy end insert . Unlike employment, due to long-term contractual
and lease obligations, franchisees generally cannot resign and leave
without substantial begin delete liabilities. end delete

begin delete (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 end delete begin insert liabilities. The end insert California Franchise Relations
Act is designed to protect franchisees and end abuses from those
practices and unfair contract provisions.

begin insert

(c) California franchise law is a vitally needed component of
franchise regulation that serves the public good as that no
substantial oversight or cause of action exists via Federal
regulation other than common law provisions.

end insert

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.

begin delete

(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)

end delete

begin insert (2) end insert  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 begin delete , end delete begin insert and end insert the franchise agreement begin delete , 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 end delete .

begin delete

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

end delete

begin delete

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.

end delete

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.

begin delete

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.

end delete begin delete

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.

end delete

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, 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. Good cause in a termination case
shall consist of a substantial and material breach of any lawful
requirement of the franchise agreement after being given written
notice thereof and 60 days 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 shall be deemed reasonable unless the franchisee establishes
that the event was caused in substantial manner by conduct of the
franchisor:

(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, 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 substantially with any federal, state,
or local law or regulation applicable and material to the operation
of the franchise;

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

(g) The franchisee repeatedly fails to comply with one or more
substantial and material 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, 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 and material 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 60 end delete begin insert 30 end insert days
after receiving written notice that the 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.  

(a) No franchisor may fail to renew a franchise unless
the franchisee 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.

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

SEC. 7.  

Section 20026 of the Business and Professions Code
is repealed.

begin 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
and reasonable qualifications for a purchaser of a franchise or sell,
transfer, or assign the franchise to a person who satisfies the
franchisor’s then current and reasonable standards for new
franchisees. The rights granted pursuant to this section shall be
granted subject to the surviving spouse, heirs, 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.

end delete

begin delete SEC. 9. end delete
begin insert SEC. 8. end insert   

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.

begin delete

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, or personally delivered to the
franchisee; and

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

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

(2) The effective date of such termination or nonrenewal.

end delete

begin delete SEC. 11. end delete
begin insert SEC. 9. end insert   

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.  Remedies

 

begin delete SEC. 12. end delete
begin insert SEC. 10. end insert   

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 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.

begin delete

SEC. 13.  

Section 20036 of the Business and Professions Code
is repealed.

end delete

begin 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.

end delete

begin delete SEC. 15. end delete
begin insert SEC. 11. end insert   

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.

begin delete SEC. 16. end delete
begin insert SEC. 12. end insert   

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.

begin delete

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 all of the following:

(a) The standards applied in the arbitration are not less than the
requirements specified in this chapter.

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

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

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
solely 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
that 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 of deceit or 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.  

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

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.

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.

end delete

begin delete SEC. 25. end delete
begin insert SEC. 13. end insert   

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, 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 purpose, or to refuse to recognize and deal fairly and
in good faith with any independent franchisee association begin insert disclosed
in the current franchise disclosure document end insert . Notwithstanding
Section 31410, a violation of this section shall not constitute a
crime.

begin delete

SEC. 26.  

Section 31300 of the Corporations Code is amended
to read:

31300.  

Any person who offers or sells a franchise in violation
of this division shall be liable to the franchisee or subfranchisor,
who may sue for damages following the purchase of the franchise,
or for rescission, restitution, and ancillary 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 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.

SEC. 28.  

Section 31302 of the Corporations Code is amended
to read:

31302.  

Every person who directly or indirectly controls a
person liable under this chapter, 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 any provision of this
chapter 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. A plaintiff shall not be required to allege or prove
that actual damages have been suffered in order to obtain injunctive
relief.

(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.

SEC. 30.  

Section 31303 of the Corporations Code is amended
to read:

31303.  

No action shall be maintained to enforce any liability
under this chapter unless brought before the expiration of four
years after the act or transaction constituting the violation or 180
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. The notice shall include
an offer of restitution of investment and ancillary damages to the
franchisee.

SEC. 31.  

Section 31304 of the Corporations Code is repealed.

SEC. 32.  

Section 31306 of the Corporations Code is amended
to read:

31306.  

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

SEC. 33.  

Section 31512 of the Corporations Code is amended
to read:

31512.  

Any condition, stipulation, 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
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.

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.

end delete