BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 610 (Jackson)
As Amended April 8, 2013
Hearing Date: April 16, 2013
Fiscal: No
Urgency: No
RD
SUBJECT
Franchises
DESCRIPTION
This bill would modify the California Franchise Relations Act,
which governs the relations between a franchisor, subfranchisor,
and franchisee, to:
require good faith dealings, as defined, between the parties;
and,
to protect the association rights of a franchisee, as
specified.
This bill would allow a franchisee to bring an action against a
franchisor or subfranchisor who offers to sell, sells, fails to
renew or transfer, or terminates a franchise in violation of the
above requirements, for damages caused thereby, or for
rescission or other relief deemed appropriate by the court.
This bill would also permit the court to increase the award of
damages to an amount not to exceed three times the actual
damages sustained and award reasonable costs and attorney's fees
to a prevailing plaintiff.
Finally, this bill would also allow a franchisor or
subfranchisor who is found liable to recover contributions from
any person who, if sued separately, would have been liable to
make the same payments.
BACKGROUND
The California Franchise Investment Law (CFIL) was enacted in
(more)
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1970 to regulate franchise investment opportunities in order to
protect California investors from flimsy or fraudulent franchise
investments. The CFIL generally requires franchisors to provide
prospective franchisees with the information necessary to make
an intelligent decision regarding franchise offers, and
prohibits the sale of franchises where they would lead to fraud
or likelihood that a franchisor's promises would not be
fulfilled. (Corp. Code Sec. 31000 et seq.)
Subsequently, the California Franchise Relations Act (CFRA) was
enacted to govern the ongoing relationships between franchisors
and franchisees in an effort to prevent unfair practices in the
termination, renewal or transfer of a franchise, where either
the franchise is domiciled in California or the franchise
business is or has been operated in California. (Bus. & Prof.
Code Sec. 20000 et seq.) For example, the CFRA generally
prohibits franchisors from terminating a franchise prior to the
expiration of its term, except for good cause, as specified.
(Bus. & Prof. Code Sec. 20020.)
Last year, AB 2305 (Huffman, 2012) was introduced to enact the
Level Playing Field for Small Businesses Act of 2012 and would
have amended both the CFIL and CFRA in an attempt to address
"the widespread use of one-sided and nonnegotiable franchise
agreements [which have] created numerous problems for
franchisees in California." That bill sought to increase
protections against unfair practices of franchisors, for
example, by permitting termination of a franchise agreement for
good cause only where there has been a substantial and material
breach of the franchise agreement and the franchisee was granted
specified time to cure the breach. Among other things, the bill
would have required good faith in the performance and
enforcement of the franchise agreement. AB 2305 also would have
created a cause of action and would have permitted the award of
attorney's fees where a franchisor or subfranchisor sold or
offered to sell a franchise in violation of the bill's
prohibitions against specified unfair or deceptive acts or
practices or unfair methods of competition.
This bill, SB 610 (Jackson), is narrower in scope than AB 2305,
but similarly would amend the CFRA to require franchisors or
subfranchisors and franchisees to deal with each other in good
faith, as defined. This bill would also protect the right of a
franchisee to join or participate in an association of
franchisees to the same extent that the CFIL already protects
such activities for CFIL-covered franchises. SB 610 would
permit a franchisee to bring an action against any franchisor or
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subfranchisor who offers to sell, sells, fails to renew or
transfer, or terminates a franchise in violation of this bill
and would provide for various damages. Lastly, the bill would
permit a franchisor or subfranchisor found liable for such a
violation to recover contributions from any person who would
have been liable to make the same payments, if sued separately.
CHANGES TO EXISTING LAW
Existing law , the California Franchise Relations Act (CFRA),
generally regulates the termination, nonrenewal, and certain
transfers of franchises with the intent to protect franchise
investors. (Bus. & Prof. Code Sec. 20000 et seq.)
Existing law , the CFRA, generally defines a franchise to mean a
contract or agreement, either express or implied, whether oral
or written, between two or more persons by which:
A franchisee is granted the right to engage in the business of
offering, selling or distributing goods or services under a
marketing plan or system prescribed in substantial part by a
franchisor;
The operation of the franchisee's business pursuant to that
plan or system is substantially associated with the
franchisor's trademark, service mark, trade name, logotype,
advertising, or other commercial symbol designating the
franchisor or its affiliate; and,
The franchisee is required to pay, directly or indirectly, a
franchise fee. (Bus. & Prof. Code Secs. 20001(a)-(c).)
Existing law , the CFRA, prohibits franchisors, unless otherwise
provided under the CFRA, from terminating a franchise prior to
the expiration of its term, except for good cause. Existing law
provides that "good cause" shall include, but is not limited to,
the failure of the franchisee to comply with any lawful
requirement of the franchise agreement after being given notice
thereof and a reasonable opportunity, as specified, to cure the
failure. (Bus. & Prof. Code Sec. 20020.)
Existing law , the CFRA, specifies various grounds under which
immediate notice of termination without an opportunity to cure
shall be deemed reasonable. Among other things, this includes
where 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. (Bus. & Prof. Code Sec. 20021.)
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Existing law , the CFRA, provides that in the event a franchisor
terminates or fails to renew a franchise other than in
accordance with the CFRA, the franchisor must offer to
repurchase the franchisee's resalable current inventory, as
specified. (Bus. & Prof. Code Sec. 20035.)
Existing law , the California Franchise Investment Law (CFIL),
provides, in relevant part, that it shall be a violation of the
CFIL 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 purposes.
(Corp. Code Sec. 31220.)
Existing law , the CFIL, permits any person who violates the
above to 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, if any, and the costs of suit, including
reasonable attorneys' fees. A plaintiff shall not be required
to allege or prove that actual damages have been suffered in
order to obtain injunctive relief. (Corp. Code Sec.
31302.5(a).)
Existing law , the CFIL, prohibits an action from being
maintained to enforce any liability under Section 31220 unless
it is brought within two years after the violation upon which it
is based or within one year after the discovery by the plaintiff
of the facts constituting such violation, whichever occurs
first. (Corp. Code Sec. 31302.5(b).)
Existing law , the CFIL, provides that any person who offers or
sells a franchise in violation of specified sections of the CFIL
or in violation of any provision that provides an exemption from
the requirements of the CFIL, as specified, shall be liable to
the franchisee or subfranchisor, who may sue for damages caused
thereby, and if the violation is willful, the franchisee may
also sue for rescission, unless, in specified cases (provisions
relating to the willful making of an untrue statement of
material fact or omission of a material fact), 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. (Corp. Code
Sec. 31300.)
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This bill would add new provisions to the CFRA to:
require that franchisors, subfranchisors, and franchisees deal
with each other in good faith in the performance and
enforcement of the franchise agreement; and,
prohibit a franchisor or subfranchisor from restricting the
right of a franchisee to join or participate in an association
of franchisees to the extent the restriction is prohibited by
the CFIL. (See Corp. Code Sec. 31220, above.)
The bill would define good faith to mean honesty in fact and the
observance of reasonable commercial standards of fair dealing in
the trade.
The bill would permit a franchisee to bring suit for damages, or
for rescission or other relief as the court may deem
appropriate, if a franchisor or subfranchisor offers to sell,
sells, fails to renew or transfer, or terminates a franchise in
violation of the above requirements. The bill would further
allow the court to increase the award of damages to an amount
not to exceed three times the actual damages sustained and to
award reasonable costs and attorney's fees to a prevailing
plaintiff.
This bill would provide that a franchisor or subfranchisor who
becomes liable to make payments under this section may recover
contributions from any person who, if sued separately, would
have been liable to make the same payments.
COMMENT
1. Stated need for the bill
According to the author:
Franchisees strongly believe that their business relationship
is one-sided in favor of franchisors. [The California Court
of Appeal has stated:] "The relationship between franchisor
and franchisee is characterized by a prevailing, although not
universal, inequality of economic resources between the
contracting parties. Franchisees typically, but not always,
are small businessmen or businesswomen or people seeking to
make the transition from being wage earners and for whom the
franchise is their very first business. Franchisors
typically, but not always, are large corporations. The
agreements themselves tend to reflect this gross bargaining
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disparity. Usually, they are form contracts the franchisor
prepared and offered to the franchisees on a
take-it-or-leave-it basis. [Citation omitted] . . . Some
courts and commentators have stressed the bargaining disparity
between franchisors and franchisees is so great that the
franchise agreements exhibit many of the attributes of
adhesion contract and some of the terms of those contracts may
be unconscionable." (Postal Instant Press v. Sealy, 43
Cal.App.4th 1704, 1715-1717 (1996).)
Franchisees suggest that this disparity could be significantly
lessened by several revisions to the California Franchise
Relations Act. SB 610 would implement two of their reform
proposals: 1) allowing franchisees to associate freely with
fellow franchisees in their system and 2) [ . . . ] assuring
that each of the parties deal in good faith.
2. Good faith dealings between franchisors and franchisees
This bill would modify the California Franchise Relations Act
(CFRA) to enhance the protections for and rights of franchisees
in the performance and enforcement of the franchise agreement.
As noted in the Background, the CFRA governs the ongoing
relationships between franchisors (including subfranchisors) and
franchisees to generally prevent unfair practices in the
termination, renewal, or transfer of a franchise.
Consistent with the general goal of the CFRA, this bill would
require franchisors, subfranchisors and franchisees to deal with
each other in good faith in the performance and enforcement of
the franchise agreement. The bill would define good faith for
these purposes to mean honesty in fact and the observance of
reasonable commercial standards of fair dealing in the trade. A
franchisor or subfranchisor who violates this provision could be
sued by the franchisee for specified damages. (See Comment 4
below for more on the private right of action and available
damages.)
In opposition to the bill, a coalition comprised of the
International Franchise Association, California Chamber of
Commerce, Civil Justice Association of California, California
Grocers Association, and California Retailers Association, raise
concerns with the good faith requirement, arguing that it is an
"amorphous term . . . to be applied to the franchisor in its
relationship with the franchisee. The concept of 'good faith'
was created in the Uniform Commercial Code to fill in the blanks
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on short form contracts for the sale of goods. However, it
provides no benefit in the context of detailed franchise
contracts which govern complex and ongoing business
relationships."
In response, co-sponsor American Association of Franchisees and
Dealers states that "[m]odern franchise relationships are most
always governed by one-sided 'take it or leave it' adhesion
contracts that elicit substantial monetary investment from
franchise owners, provide substantial protection for
franchisors, but severely limit a franchisee's rights in the
franchise relationship. Creating a statutory affirmative duty
of good faith in franchise relationships will inhibit the
enforcement of one-sided franchise agreements in an abusive
manner."
Further, Committee staff notes that good faith is a common
standard used throughout law. As alluded to in the coalition
opposition letter, the Uniform Commercial Code (UCC), in similar
fashion to this bill, provides: "Every contract or duty within
this code imposes an obligation of good faith in its performance
and enforcement." (U. Com. Code Sec. 1304.) To that end, the
UCC also generally defines "good faith" to mean "honesty in fact
and the observance of reasonable commercial standards of fair
dealing." (U. Com. Code Sec. 1201(b)(20).) Good faith,
however, is not limited just to those sales or transactions
covered by the Uniform Commercial Code. In fact, "[e]very
contract imposes upon each party a duty of good faith and fair
dealing in the performance of the contract such that neither
party can do anything that will have the effect of destroying or
injuring the right of the other party to receive the fruits of
the contract." (1 Witkin Sum. Cal. Law Contracts Sec. 797(a).)
Additionally, Committee staff has found that at least two other
states, Washington and Hawaii, have enacted a similar provision
into law requiring that the franchise parties deal with one
another in good faith. (See Rev. Code Wash. Sec. 19.100.180,
< http://apps.leg.wa.gov/rcw/default.aspx?cite=19.100.180 > [as of
Apr. 9, 2013]; Haw. Rev. Stat. Sec. 482E-6,
< http://codes.lp.findlaw.com/histatutes/2/26/482E/482E-6 > [as of
Apr. 9, 2013].) Committee staff is unaware of any adverse
consequences as a result of good faith requirement in either of
those states.
3. Association rights of franchisees
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This bill would also add a provision to the CFRA to protect the
ability of franchisees to join or participate in an association
of franchisees to the extent that the ability is protected under
the CFIL. A franchisee whose right has been restricted in
violation of this provision would be permitted to bring suit
against the franchisor or subfranchisor for specified damages
pursuant to this bill.
Currently, the right of a franchisee to join or participate in
an association is protected under the CFIL, which generally
requires offers and sales of franchises in California to
register with the Department of Corporations. (Corp. Code Sec.
31220; hereinafter Section 31220.) In contrast, the CFRA, which
generally regulates the renewal, transfer, and termination of
franchises (in other words, the ongoing relationship between
franchisors or subfranchisors and franchisees after the sale has
been made), remains silent on the right of franchisees to
associate with one another.
In their coalition letter, the opposition notes that
"franchisees are specifically prohibited from interfering with
the franchisees' right to join a trade association" already
under the CFIL. They add that, "[f]ranchisors and franchisees
have worked together over the years through these associations
to improve the integrity of the brand and to respond to
franchisee concerns."
The author argues "SB 610 would extend the existing protection
for franchisees to associate that exists in the California
Franchise Investment [Law] (Corporations Code Section 31220) to
the California Franchise Relations Act where it should be, since
that section deals with the ongoing relationship between
franchisors and franchisees."
Although the CFIL also provides specific remedies for a
violation of the franchisee's right to associate with other
franchisees, this bill would apply the same remedy for any
violation of a franchisee's right to associate as would apply to
any violation of the good faith requirement discussed in Comment
2 above. Namely, the franchisee would be permitted to bring a
cause of action against the franchisor or subfranchisor for
damages caused thereby, or for rescission or other relief deemed
appropriate by the court. In addition, the bill would permit
the court, in its discretion, to award up to three times the
actual damages, as well as reasonable costs and attorney's fees.
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4. Available remedies for a prevailing franchisee
This bill would allow for a franchisee to bring an action for
damages, rescission or other relief deemed appropriate by the
court, against a franchisor or subfranchisor who violates either
of the two main provisions of the bill which 1) require
franchisors or subfranchisors and franchisees to deal with each
other in good faith, as specified, and 2) prohibit a franchisor
or subfranchisor from restricting the right of a franchisee to
join or participate in an association of franchisees, as
specified.
a. Remedies
Under this bill, a franchisee could bring an action against a
franchisor or subfranchisor who offers to sell, sells, fails
to renew or transfer, or terminates a franchise in violation
of the above provisions, for damages caused thereby, or for
rescission or other relief deemed appropriate by the court.
In addition, the bill would permit the court, in its
discretion, to award up to three times the actual damages, as
well as reasonable costs and attorney's fees.
The CFIL provides for similar remedies for violations of
various sections relating to fraudulent or prohibited
practices. Section 31300 of the Corporations Code provides
that any person who offers or sells a franchise in violation
of specified sections of the CFIL or in violation of any
provision that provides an exemption from the requirements of
the CFIL, as specified, shall be liable to the franchisee or
subfranchisor, who may sue for damages caused thereby, and if
the violation is willful, the franchisee may also sue for
rescission, unless, in specified cases (provisions relating to
the willful making of an untrue statement of material fact or
omission of a material fact), 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.
The right of rescission is, as a practical matter, arguably
more complicated to give force and effect to where, for
example, the bad faith dealings begin 10 years into a
franchise agreement (which is not unlikely under this bill,
given that the CFRA governs ongoing relationships between
franchisors and franchisees). However, while the franchisee
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has the option to sue for rescission, the court ultimately has
discretion to award non-rescission based relief if more
appropriate under the circumstances. Additionally, the bill
specifically states, in relevant part, that the franchisee can
bring an action "for damages caused thereby, or for rescission
or other relief deemed appropriate by the court." Rescission,
thus, is not the only remedy available.
b. Fee shifting provision
The bill would also allow the court to award an amount not to
exceed three times the actual damages, and to award reasonable
attorney's fees and costs for a prevailing franchisee.
Generally, with respect to attorney's fees, the "American
rule" is that parties must bear their own costs of civil
litigation. In Alyeska Pipeline Co. v. Wilderness Society
(1975) 421 U.S. 240, the United States Supreme Court held that
it was the province of the legislative branch to craft
exceptions to the American rule, and courts were not free to
shift such costs absent express legislative authorization.
(Id. at 269-270.)
Furthermore, fee shifting statutes are enacted only when
society considers a statutory or constitutional right
important enough to justify fee shifting. (See Choate v.
County of Orange (2000) 86 Cal.App.4th 312, 322-23; Code Civ.
Proc. Sec. 1021.) In this case, as a matter of public policy,
the freedom of a franchisee to associate with other
franchisees and their right to be dealt with in good faith are
arguably rights important enough to justify such a shift in
fees. Failure to include an award of attorney's fees in this
bill could make the proposed restrictions essentially
unenforceable if an aggrieved franchisee is unable to afford
an attorney after spending his or her life savings to purchase
a franchise.
A coalition of organizations argue in opposition that "the
treble damages and one-sided attorney's fees provision make it
a lucrative, no-risk option for a franchisee to sue a
franchisor if he [or] she after the fact decides that they
don't want to abide by the contract and the terms they
knowingly signed. This will lead to costly litigation and
reduced ability to settle disputes between the parties."
The proponents of the bill note, however, that the one-sided
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nature of the remedies in this bill do not tip the balance in
the favor of franchisees, but merely levels the playing field.
"The typical franchise agreement is loaded with remedies in
favor of franchisors and usually devoid of remedies protecting
the franchisee. The goal of this statute is [to] fill a gap
and to provide a more level playing field in franchise
relationships. If the remedy provided for franchisees is made
reciprocal (where plentiful remedies are already reserved to
franchisors in the franchise agreement), the statute could
actually become a tool of abuse rather than protection for the
unprotected."
Committee staff also notes that this bill requires good faith
dealings in the performance and enforcement of the contract-it
does not provide parties the ability to unilaterally declare
provisions of a contract void. In fact, the CFRA acknowledges
that a franchisor may terminate a contract for "good cause,"
which shall include, but is not limited to, the failure of the
franchisee to comply with any lawful requirement of the
franchise agreement after being given notice thereof and a
reasonable opportunity, as specified, to cure the failure.
(See Bus. & Prof. Code Sec. 20020.)
5. Additional arguments in opposition
The same coalition of organizations also argue that "California
law and the Federal Trade Commission require extensive
disclosure documents to ensure that before entering into a
franchise agreement, both parties know what is expected for each
other. Allowing substandard franchisees the ability to allege
the franchisors failure to use 'good faith' instead of adhering
to their contractual terms will have a significant impact on the
franchisors and franchisees who work hard every day to ensure
the integrity of the brands they represent."
Support : Pacific Management Consulting Group
Opposition : California Chamber of Commerce; California Grocers
Association; California Retailers Association; Civil Justice
Association of California; International Franchise Association
HISTORY
Source : American Association of Franchisees & Dealers; Kathryn
Slater-Carter, a McDonald's restaurant franchisee
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Related Pending Legislation : AB 1141 (Dahle, 2013) would enact
the Small Business Investment Protection Act of 2013. While
broader in scope than SB 610, AB 1141 also contains a
requirement that the parties deal with each other in good faith
in the performance and enforcement of the franchise agreement,
and adds to the CFRA the same protection for franchisees to
associate with one another that is currently found under the
CFIL. AB 1141 is in the Assembly Judiciary Committee.
Prior Legislation : AB 2305 (Huffman, 2012) See Background.
This bill passed the Assembly Judiciary Committee but died after
failing passage in the Assembly Business Professions & Consumer
Protection Committee on a vote of 4-3.
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