BILL ANALYSIS �
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THIRD READING
Bill No: SB 610
Author: Jackson (D)
Amended: 5/9/13
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.
Senate Floor Amendments of 5/9/13 remove the language
specifically authorizing the award of three times the actual
damages sustained.
ANALYSIS :
Existing law:
1. The California Franchise Relations Act (CFRA) generally:
CONTINUED
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A. Regulates the termination, nonrenewal, and certain
transfers of franchises with the intent to protect
franchise investors.
B. 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.
C. 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.
D. Specifies various grounds under which immediate
notice of termination without an opportunity to cure
shall be deemed reasonable.
E. 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.
2. The California Franchise Investment Law (CFIL):
A. Provides, in relevant part, that it shall be a
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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.
B. 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.
C. 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.
E. 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.
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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 awards 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.
Last year, AB 2305 (Huffman, 2012) was introduced to enact the
Level Playing Field for Small Businesses Act of 2012 and would
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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. The billed died in
Assembly Business, Professions and Consumer Protection
Committee.
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 5/17/13)
American Association of Franchisees and Dealers (source)
C & S Restaurants
Coalition of Franchise Associations
Lagarias Law Offices
Pacific Management Consulting Group
Perris Valley Chamber of Commerce
Service Station Franchise Association
OPPOSITION : (Verified 5/17/13)
California Chamber of Commerce
California Grocers Association
California Retailers Association
Civil Justice Association of California
International Franchise Association
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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 : 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 5/17/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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