BILL ANALYSIS �
SB 610
Page 1
Date of Hearing: June 18, 2013
ASSEMBLY COMMITTEE ON JUDICIARY
Bob Wieckowski, Chair
SB 610 (Jackson) - As Amended: May 9, 2013
As Proposed to Be Amended
SENATE VOTE : 22-12
SUBJECT : FRANCHISES: GOOD FAITH REQUIREMENT
KEY ISSUE : SHOULD FRANCHISORS AND FRANCHISEES BE REQUIRED TO
DEAL WITH EACH OTHER IN GOOD FAITH IN PERFORMANCE AND
ENFORCEMENT OF THE FRANCHISE AGREEMENT?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Proponents of this bill contend that greater protections are
needed to protect franchisees against unfair, bad-faith
practices-made easier by the inherent one-sidedness of the
franchise relationship--that unfortunately arise in some cases
and threaten the financial livelihood of these small businessmen
and women who form the economic backbone of our state.
Accordingly, this bill, sponsored by franchisees and franchisee
associations, proposes two modest changes to the California
franchise law. First, the bill requires the parties to a
franchise agreement to deal with each other in good faith, as
defined. Secondly, the bill prohibits a franchisor from
restricting the right of a franchisee to participate in a
franchise association, as provided. The bill also authorizes
franchisees to enforce violations of these provisions through a
private right of action, including damages and other relief. As
proposed to be amended, the bill also authorizes injunctive
relief and seeks to ensure that the protections created under
this bill are not unknowingly or involuntarily waived. The bill
is supported by many franchisees and related associations, and
these proponents contend that creating a statutory affirmative
duty of good faith in franchise relationships will inhibit the
enforcement of one-sided franchise agreements in an abusive
manner. In addition, they contend that protecting franchise
associations and the freedom to associate will ultimately help
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increase power to negotiate fair contracts with franchisors.
The bill is opposed by franchisors, retailers, and large
business interests, who contend generally that parties have the
right to freely contract as they wish, and that this bill will
hurt business in California by interfering in contracting
between consenting parties needed to freely develop new
franchise businesses. Should this bill be approved by this
Committee, it will be referred to the Assembly Business and
Professions Committee.
SUMMARY : Revises the California Franchise Relations Act (CFRA)
to ensure a statutory duty of good faith in dealing and the
right of association among franchisees. Specifically, this
bill :
1)Requires franchisors, subfranchisors, and franchisees to deal
with each other in good faith in the performance and
enforcement of the franchise agreement, where "good faith"
means honesty in fact and the observance of reasonable
commercial standards of fair dealing in the trade.
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
Section 31220 of the Corporations Code.
3)Allows 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 temporary and permanent injunctive relief
and for damages caused thereby, or for rescission or other
relief deemed appropriate by the court. Permits the court in
its discretion to award reasonable costs and attorney's fees
to a prevailing plaintiff.
4)Provides that any waiver by the franchisee of a right under
this article must be knowing and voluntary, and not made a
condition of doing business with a franchisor or
subfranchisor, and furthermore that any waiver that is
required as a condition of doing business with a franchisor or
subfranchisor shall be presumed involuntary, unconscionable,
against public policy, and unenforceable.
5)Allows a franchisor or subfranchisor who is found liable to
recover contributions from any person who, if sued separately,
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would have been liable to make the same payments.
EXISTING LAW, the California Franchise Relations Act (CFRA),
among other things:
1)Defines a franchise as a contract between two or more persons
by which: (1) a franchisee is granted the right to offer, sell
or distribute goods or services under the plan or system of
the franchisor; (2) operation of the business is substantially
associated with franchisor's trademark, advertising or other
symbol; and (3) a franchise fee is paid by the franchisee.
(Business & Professions Code Section 20001. Unless otherwise
stated, all further references are to this code.)
2)Provides that any condition, stipulation or provision waiving
compliance with the CFRA is contrary to public policy and
void. (Section 20010.)
3)Prohibits termination of a franchise agreement prior to the
end of the term, except for good cause, where good cause
includes failure to comply with any lawful requirement of the
franchise agreement after written notice and a reasonable
opportunity to cure. (Section 20020.)
4)Requires a franchisor to notify the franchisee of their
intention not to renew a contract at least 180 days prior to
the expiration of the franchise, during which time the
franchisee may attempt to find a buyer acceptable to the
franchisor. (Section 20025.)
5)Requires a franchisor that terminates or fails to renew a
franchise without complying with the CFRA to offer to
repurchase the franchisee's resalable current inventory at the
lower of the fair wholesale market value or the price paid by
the franchisee. (Section 20035.)
EXISTING LAW , the California Franchise Investment Law (CFIL),
among other things:
1)Makes it 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. (Corporations Code Sec.
31220.)
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2)Allows any person who violates Section 31220 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. Further provides that a plaintiff shall not be required
to allege or prove that actual damages have been suffered in
order to obtain injunctive relief. (Corporations Code Sec.
31302.5.)
COMMENTS : This bill, sponsored by the American Association of
Franchisees and Dealers and two individual franchisees, proposes
modest changes to California franchise law that, according to
the author, "seek to address the one-sidedness of the franchise
relationship by giving franchisees the ability to work more
cooperatively with their respective franchises." First, the
bill requires the parties to a franchise agreement to deal with
each other in good faith, as defined. Secondly, the bill
prohibits a franchisor from restricting the right of a
franchisee to participate in a franchise association, as
provided. The bill also authorizes franchisees to enforce
violations of these provisions through a private right of
action, including damages and, as proposed to be amended,
injunctive relief.
Disparity in bargaining power between franchisors and
franchisees. Proponents of the bill assert that the franchise
business relationship is inherently one-sided in favor of
franchisors and greatly disfavors small business franchisees.
This view has been supported by several courts, among them the
California Court of Appeal (2nd Dist.), who has described the
dynamic as follows:
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
disparity. Usually they are form contracts the franchisor
prepared and offered to franchisees on a
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take-it-or-leave-it basis. (Emerson, Franchising and the
Collective Rights of Franchisees (1990) 43 V and. L. Rev.
1503, 1509 & fn. 21.) . . . Some courts and commentators
have stressed the bargaining disparity between franchisors
and franchisees is so great that franchise agreements
exhibit many of the attributes of an 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.)
The bill is opposed by the International Franchise Association,
representing franchisors, and a number of prominent business
associations, including grocers, retailers and the Chamber of
Commerce. These opponents contend generally that the parties
have the right to freely contract as they wish, and that this
bill will hurt business in California by interfering in
contracting between consenting parties that is needed to freely
develop new franchise businesses. These opponents also contend
that existing California law and the Federal Trade Commission
(FTC) already require extensive disclosure documents to ensure
that both parties know what is expected from the other before
they enter into a franchise agreement.
According to the author, this bill seeks to "respect the rights
of franchisors to protect and promote their brand," but also
establishes modest but necessary protections for franchisees
against unfair practices-made easier by the inherent
one-sidedness of the franchise relationship--that unfortunately
arise in some cases and threaten the financial livelihood of
these small businesspeople.
Establishing a good faith requirement in the California
Franchise Relations Act. According to the author, given that
franchisees have such a heavy investment in their small business
franchises, California's franchise laws do not sufficiently
protect franchisees from potential abuse by some franchisors
acting questionably or in bad faith. As a result, some small
business franchisees have lost heavy sums of their own money
because of what they perceive as intentionally unfair practices.
In response, this bill requires franchisors, subfranchisors and
franchisees to deal with each other in good faith in the
performance and enforcement of the franchise agreement. A
franchisor or subfranchisor that violates this provision could
be sued by the franchisee for injunctive relief, specified
damages, or other appropriate relief.
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Good faith is a common standard found throughout existing
commercial law. Existing commercial law contains an implied
covenant holding parties to a good-faith standard whenever they
enter into a contract. "Every 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).) More directly, Section 1304 of
the Uniform Commercial Code (UCC) states "Every contract or duty
within this code imposes an obligation of good faith in its
performance and enforcement" and "good faith" is defined under
the UCC to mean "honesty in fact and the observance of
reasonable commercial standards of fair dealing." (UCC Section
1201(b)(20).)
Proponents of the bill contend that, notwithstanding the implied
duty of good faith in all contracts, creating a statutory
affirmative duty of good faith in franchise relationships will
inhibit the enforcement of one-sided franchise agreements in an
abusive manner. They contend that an implied covenant is more
likely to be "trumped" by a contractual provision in a franchise
agreement, whereas a statutory expression of the same duty is
less likely to be. Finally, supporters of the bill note that
the states of Iowa, Washington and Hawaii have all enacted
similar provisions into law requiring that parties to franchise
agreements deal with one another in good faith, and no adverse
impacts on franchising in those states have been reported as a
result. (See Iowa Code, Sec. 523H.10, Rev. Code Wash. Sec.
19.100.180; Haw. Rev.Stat. Sec. 482E-6.)
Opponents of the bill 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" and that the concept of good faith "provides no
benefit in the context of detailed franchise contracts which
govern complex and ongoing business relationships." The
opponents further contend that "Allowing substandard franchisees
the ability to allege the franchisor's ability to use 'good
faith' instead of adhering to their contractual terms will have
a significant impact on franchisors and franchisees who work
hard every day to ensure the integrity of the brands they
represent."
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Right of free association among franchisees. The right of a
franchisee to join or participate in an association is protected
under the California Franchise Investment Law (see Corporations
Code Sec. 31220), which generally requires offers and sales of
franchises in California to be registered with the Department of
Corporations. The CFRA generally regulates the ongoing
relationship between franchisors and franchisees pursuant to a
franchise agreement, including the renewal, transfer, and
termination of franchises. The CFRA is silent on the right of
franchisees to associate with one another.
This bill seeks to add a provision to the CFRA to prohibit
franchisors from restricting the right of franchisees to join or
participate in an association of franchisees to the extent the
restriction is prohibited by the CFIL. Proponents contend that
extending the protections for free association to the CFRA is
appropriate because the CFRA more relevantly deals with the
ongoing relationship between franchisors and franchisees, not
the sale or offer of franchises to prospective franchisees like
the CFIL. More importantly, they contend that protecting
franchise associations will also give buyers greater power to
negotiate fair contracts with franchisors.
Opponents note that "franchisors and franchisees have worked
together over the years through these associations to improve
the integrity of the brand and to respond to franchisee
concerns," but nevertheless contend that replicating the
prohibition in the CFRA is unnecessary because the CFIL already
prohibits restriction of the right of association.
The Committee notes that the bill's inclusion of this
protection in proposed new Article 2.5 of the CFRA is also
intended to consolidate it with the good faith provisions,
discussed above, both of which may be enforced by a
franchisee under this bill. Consolidation of these
protections within the same article of the CFRA promotes
clarity within the codes, particularly when these are the
only two protections that are subject to private enforcement
as specified by the bill.
Private right of action and remedies. The CFIL currently
authorizes a private right of action for specified violations
under the act (see, e.g. Corporations Code Sections 31300 and
31302.5.), including violation of free association rights. This
bill seeks to provide a similar, limited private right of action
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to franchisees for violation of the bill's provisions.
Specifically, 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 good faith and free association provisions of
the bill. As proposed to be amended, the bill authorizes the
franchisee to seek injunctive relief, in addition to damages,
rescission, or other relief deemed appropriate by the court, and
authorizes an award of reasonable court costs and attorneys'
fees for prevailing plaintiffs.
Opponents contend that by allowing a one-sided attorney's fee
award, this bill creates significant incentives for plaintiffs
to bring meritless lawsuits alleging breach of franchise law.
They also note that while the bill creates a bilateral duty of
good faith in dealing (i.e. owed by both parties to each other),
it only allows one-way enforcement of the duty because only the
franchisee may sue the franchisor for breach of the duty.
Proponents contend, however, that the bill is intended to merely
level the playing field, given the inherent one-sidedness of the
franchise relationship, and that franchisors are not lacking for
possible ways to enforce their rights against franchisees. They
state:
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.
Proponents assert that a private right of action under the CFRA
is extremely important to ensure these new franchisee rights are
protected because California authorities would not be able to
sufficiently enforce the statute with the limited resources they
have.
Author's Proposed Amendments: As discussed above, in order to
enable franchisees to seek injunctive relief when appropriate,
the author proposes to make the following amendment:
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On page 2, line 22, after "20016" insert "for temporary and
permanent injunctive relief and"
To effectively accomplish the author's stated objectives and
ensure that the rights created under this bill are not
unknowingly or involuntarily waived, the author also proposes to
add the following amendment:
On page 2, after line 31, insert the following:
"20018. A franchisor or subfranchisor may not require that the
franchisee waive any right provided for in this article as a
condition of doing business with the franchisor or
subfranchisor. Any waiver by the franchisee of a right under
this article must be knowing and voluntary, and not made a
condition of doing business with a franchisor or
subfranchisor. Any waiver that is required as a condition of
doing business with a franchisor or subfranchisor shall be
presumed involuntary, unconscionable, against public policy,
and unenforceable. The franchisor or subfranchisor may enforce
an agreement regarding any waiver of rights under this article
if the franchisor or subfranchisor shows that the agreement
was knowing, voluntary, and not made a condition of doing
business with the franchisor or subfranchisor."
REGISTERED SUPPORT / OPPOSITION :
Support
American Association of Franchisees & Dealers (AAFD)
(co-sponsor)
Kathryn Slater Carter, McDonald's franchisee (co-sponsor)
Lagarias Law Offices
Pacific Management Consulting Group
Perris Valley Chamber of Commerce
Dozens of letters from individual franchisees in California,
including:
7-Eleven franchise store owners
Arco AM/PM franchise store owners
Subway franchise store owners
A petition signed by hundreds of California franchisees
Opposition
California Chamber of Commerce
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California Grocers Association
California Retailers Association
Civil Justice Association of California
International Franchise Association
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334