BILL ANALYSIS �
-----------------------------------------------------------------
|SENATE RULES COMMITTEE | SB 610|
|Office of Senate Floor Analyses | |
|1020 N Street, Suite 524 | |
|(916) 651-1520 Fax: (916) | |
|327-4478 | |
-----------------------------------------------------------------
THIRD READING
Bill No: SB 610
Author: Jackson (D)
Amended: 4/8/13
Vote: 21
SENATE JUDICIARY COMMITTEE : 5-2, 4/16/13
AYES: Evans, Corbett, Jackson, Leno, Monning
NOES: Walters, Anderson
SUBJECT : Franchises
SOURCE : American Association of Franchisees and Dealers
DIGEST : This bill requires the franchisors, subfranchisors,
and franchisees to deal with each other in good faith, as
defined in the performance and enforcement of a franchise
agreement, and prohibits 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 existing law.
ANALYSIS :
Existing law:
1. The California Franchise Relations Act (CFRA), generally
regulates the termination, nonrenewal, and certain transfers
of franchises with the intent to protect franchise investors.
CONTINUED
SB 610
Page
2
2. 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.
3. 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 to cure the
failure.
4. 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.
5. 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.
CONTINUED
SB 610
Page
3
6. 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.
7. 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 attorney's fees. A plaintiff
shall not be required to allege or prove that actual damages
have been suffered in order to obtain injunctive relief.
8. 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.
9. 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/she had
exercised reasonable care, would not have known, of the
untruth or omission.
This bill:
1. Requires that franchisors, subfranchisors, and franchisees
deal with each other in good faith in the performance and
enforcement of the franchise agreement.
CONTINUED
SB 610
Page
4
2. Prohibits 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.
3. Defines good faith to mean honesty in fact and the observance
of reasonable commercial standards of fair dealing in the
trade.
4. Permits 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, and further allows 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.
5. Provides that a franchisor or subfranchisor who becomes
liable to make payments, may recover contributions from any
person who, if sued separately, would have been liable to
make the same payments.
Background
The CFIL was enacted in 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.
Subsequently, the 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. For example, the CFRA generally prohibits
franchisors from terminating a franchise prior to the expiration
of its term, except for good cause.
CONTINUED
SB 610
Page
5
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, is narrower in scope than AB 2305, but similarly
amends the CFRA to require franchisors or subfranchisors and
franchisees to deal with each other in good faith, as defined.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 4/19/13)
American Association of Franchisees and Dealers (source)
C & S Restaurants
Coalition of Franchise Associations
Lagarias Law Offices
Pacific Management Consulting Group
Service Station Franchise Association
OPPOSITION : (Verified 4/19/13)
California Chamber of Commerce
California Grocers Association
California Retailers Association
Civil Justice Association of California
International Franchise Association
CONTINUED
SB 610
Page
6
ARGUMENTS IN SUPPORT : The 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."
ARGUMENTS IN OPPOSITION : In opposition to this 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 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."
AL:d 4/19/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
**** END ****
CONTINUED