BILL ANALYSIS Ó
SB 610
Page 1
Date of Hearing: June 24, 2014
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Susan A. Bonilla, Chair
SB 610 (Jackson) - As Amended: June 10, 2014
SENATE VOTE : 22-12
SUBJECT : Franchises
SUMMARY : Revises the California Franchise Relations Act (CFRA)
to increase franchisee protections, rights and remedies related
to the sale, transfer, assignment, renewal and termination of a
franchise contract, and prohibits franchise agreements from
restricting the right of association between franchisees or
waiving the implied covenant of good faith. Specifically, this
bill :
1)Provides that any condition, stipulation or provision
purporting to bind any person to waive the implied covenant of
good faith and fair dealing is contrary to public policy and
void.
2)Prohibits a franchise agreement 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, as specified.
3)Prohibits a franchise agreement from preventing a franchisee
from selling or transferring all or part of the franchise
interest to another person, although a franchisee may not
sell, transfer or assign the franchise or related rights
without the consent of the franchisor, who cannot withhold
that consent unreasonably.
4)Requires a franchise agreement to notify the franchisor prior
to the sale, transfer, or assignment of a franchise, a
controlling interest thereof, or the franchise's assets.
5)Requires the notice to the franchisor to be in writing and
include the proposed transferee's name and address; a copy of
all of the agreements relating to the sale, assignment, or
transfer of the franchised business or its assets; and the
proposed transferee's application for approval to become the
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successor franchisee. The application shall include forms and
related information generally utilized by the franchisor in
reviewing prospective franchisees, if those forms are readily
made available to existing franchisees.
6)Requires the franchisor, as soon as practicable after receipt
of the proposed transferee's application, to notify the
franchisee and the proposed transferee of information needed
to make the application complete.
7)Requires the franchisor, on or before 60 days after the
receipt of all of the required information, or as extended by
a written agreement, to notify the franchisee in writing of
the approval or the disapproval of the sale, transfer, or
assignment of the franchise, as specified.
8)Provides that a proposed sale, assignment, or transfer shall
be deemed approved, unless disapproved by the franchisor in
accordance with these provisions. If the proposed sale,
assignment, or transfer is disapproved, the franchisor shall
include in the notice of disapproval a statement setting forth
the reasons for the disapproval.
9)States that the reasonableness of a franchisor's withholding
of consent to a sale, transfer or assignment is a question of
fact requiring consideration of all the existing
circumstances.
10)Expands existing prohibitions on a franchisor's right to
terminate a franchise prior to expiration of its term by
requiring a substantial and material breach as a valid basis
for termination, rather than a lesser standard of good cause.
11)Requires a franchisor to provide a franchisee who has engaged
in a substantial and material breach of the franchise
agreement to have 30 days to cure the failure before
termination.
12)Requires the franchisor, unless the franchisee has engaged in
a substantial and material breach of the franchise agreement,
to offer the franchisee a renewal of the franchise agreement
under existing terms or under terms being offered to new
franchisees.
13)Applies existing non-renewal protections, previously granted
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to all nonrenewed franchisees, only to those franchisees that
the franchisor claims have engaged in a substantial and
material breach of the franchise contract.
14)Deletes the existing remedy of repurchase of resalable
inventory for unlawful termination or nonrenewal, and instead
requires that a franchisee who is terminated or not renewed in
violation of specified provisions may, at their election:
a) Have their franchise reinstated and be paid for all
related damages; or
b) Allow the contract to terminate or not be renewed, and
be paid the fair market value of the franchise and the
franchise assets.
15)Authorizes a court to grant preliminary and permanent
injunctions for violations of this chapter.
16)Makes other technical or nonsubstantive changes.
EXISTING LAW:
1)Creates CFRA which:
a) Defines a franchise as a contract between two or more
persons by which:
i) A franchisee is granted the right to offer, sell or
distribute goods or services under the plan or system of
the franchisor;
ii) Operation of the business is substantially
associated with franchisor's trademark, advertising or
other symbol; and,
iii) A franchise fee is paid by the franchisee; (Business
& Professions Code (BPC) Section 20001)
b) Excludes from the definition of a franchise those
governed by the Petroleum Marketing Practices Act; lease
departments, licenses, or concessions at or with a general
merchandise retail establishment; and, a cooperatively
operated nonprofit organization; (BPC 20001)
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c) Provides that any condition, stipulation or provision
waiving compliance with the CFRA is contrary to public
policy and void; (BPC 20010)
d) Prohibits termination of a franchise agreement prior to
the end of the term, except for good cause, which includes
failure to comply with any lawful requirement of the
franchise agreement after written notice and a reasonable
opportunity (no more than 30 days) to cure; (BPC 20020)
e) Authorizes the immediate termination of a franchise
agreement without notice or an opportunity to cure in cases
of bankruptcy, abandonment, mutual agreement, material
misrepresentation, failure to comply with the law after
notice, repeated noncompliance after cure, seizure of the
premises by a governmental entity or creditor, conviction
of a felony or relevant misdemeanor, failure to pay
franchisee fees within five days of overdue notice, and
imminent danger to public health or safety; (BPC 20021)
f) Requires a franchisor to notify the franchisee of its
intention not to renew a contract at least 180 days prior
to the expiration of the franchise in specified
circumstances, during which time the franchisee may attempt
to find a buyer acceptable to the franchisor; and, (BPC
20025)
g) 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. (BPC 20035)
2)Creates the California Franchise Investment Law (CFIL), which:
a) 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 (CORP) Code Section 31220)
b) 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
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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, 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; (CORP 31300)
c) Allows any person who violates the right to free
association 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; (CORP 31302.5)
d) Prohibits an action from being maintained to enforce any
liability for violation of the right of free association
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; and, (CORP 31302.5)
e) Except as explicitly provided, prohibits civil liability
in favor of any private party against any person by
implication from or as a result of the violation of any
provision of CFIL or any rule or order thereunder. (CORP
31306)
FISCAL EFFECT : None. This bill has been tagged non-fiscal by
the Legislative Council.
COMMENTS :
1)Purpose of this bill . This bill aims to shift the balance of
power in franchisor-franchisee relationships by modifying the
rights and remedies related to the sale, transfer, assignment,
renewal and termination of franchise contracts, while also
prohibiting contracts that restrict franchisees' rights of
association or waive the existing implied covenant of good
faith and fair dealing. This bill is co-sponsored by the
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American Association of Franchisees and Dealers and an
individual McDonald's franchisee.
2)Author's statement . According to the author, "[t]his bill
will protect franchisees from unfairly losing their businesses
by protecting the equity they have created while still
allowing franchisors to terminate franchise contracts whenever
there has been a substantial and material breach of contract.
The bill creates protections for franchisees with respect to
contract terminations, renewals, and third party transfers,
while reaffirming franchisee rights to free association and
the implied covenant of good faith and fair dealing that
already applies to all contracts under well-established
contract law."
3)The franchise model of business . According to the
International Franchise Association, "[a] franchise is the
agreement or license between two legally independent parties
which gives a person or group of people (the franchisee) the
right to market a product or service using the trademark or
trade name of another business (the franchisor)." It also
gives the franchisee the right to market a product or service
using the operating methods of the franchisor and the
obligation to pay the franchisor fees for those rights. The
franchisor has the obligation to provide those rights and
support the franchisee according to their agreement.
More specifically, the author states that "franchises are a
'business kit' which provides the look, name recognition, and
brand of the business in question. Using his or her own
ingenuity and hard work, the franchisee builds the brand
locally and develops good will within the community. The
franchisee's business success helps support the community with
taxes and other contributions as well as improves the bottom
line for franchisors. Franchisees employ hundreds of thousands
of workers across the state."
The franchise agreement contract is the central authority for
the relationship between the franchisor and franchisee, which
can run into the hundreds of pages and contains a highly
detailed description of the rights, responsibilities and
remedies of the parties.
4)Current law regulating the franchisor/franchisee relationship .
A substantial part of California franchise law is largely
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embodied in CFIL and CFRA, although certain specific
industries (i.e., auto dealers and filling stations) have
their own unique provisions as well.
CFIL was enacted in 1970 to regulate franchise investment
opportunities in order to protect California investors from
potentially fraudulent franchise investments. CFIL generally
requires franchisors to disclose to prospective franchisees
the information necessary to make an informed decision about
franchise offers, and prohibits the sale of franchises that
would lead to fraud or the likelihood that a franchisor's
promises would not be fulfilled. CFIL contains explicit
provisions for enforcement generally through damages (payment
for economic losses) and rescission (cancellation of the
contract). It also provides for injunctive relief (to require
or prohibit a specific action), and reasonable costs and
attorneys' fees in certain circumstances.
CFRA (which excludes petroleum-related franchises, like gas
stations) was enacted in 1980 to govern relationships between
franchisors and franchisees after they have entered into
contract with each other. CFRA is designed to prevent unfair
practices in the transfer, renewal or termination of a
franchise. CFRA prohibits termination of a franchise
agreement except for good cause and only after notice and an
opportunity to fix the problem. It also lays out certain
circumstances where immediate termination is permitted, for
example: bankruptcy, abandonment, mutual agreement, material
misrepresentation, illegal activity, noncompliance with the
franchise agreement, failure to pay franchise fees, and
imminent danger to the public. CFRA prohibits nonrenewal of a
franchise agreement without 180 days prior notice, and with
certain additional protections for the franchisee. It also
provides for the transfer of ownership to surviving spouses or
heirs. CFRA does not contain explicit enforcement provisions
except for the buyback of inventory when a franchise is
improperly terminated or nonrenewed, although general contract
remedies may still be available.
5)The balance of power between franchisors and franchisees .
Supporters of this bill argue that there is both a systemic
problem (a basic imbalance in bargaining power between the
franchisor and the franchisee), and a host of specific abuses
of that power which make this bill necessary.
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An oft-cited 1996 court decision by the California Court of
Appeal (2nd Dist.) describes the franchise dynamic this way:
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 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.)
Supporters of this bill argue that the inherent asymmetry in
bargaining power enables franchisors to take unfair advantage
of franchisees. The 1969 Harold Brown treatise on franchises,
entitled "Franchising: A Trap for the Trusting", states: "[a]t
the core of the franchise relationship is the contractual
control exercised by the franchisor over every aspect of the
franchisee's business?The franchisor controls the site,
commissary purchases, purchases from other vendors, methods of
business operations, labor practices, quality control,
merchandising, and even record keeping. This control is
buttressed by the contractual requirement that the franchisee
must obey the commands of the Operating Manual as unilaterally
amended from time to time and as expounded by the franchisor's
supervisor, on pain of losing the franchise if he disobeys
them and under constant threat of such termination. And upon
termination, or failure to renew, the franchisee is confronted
with the covenant not to compete and forfeiture of his equity
in the business."
Examples of specific abuses alleged by supporters include:
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refusal to communicate with franchisees when problems arise;
putting new and competing stores in close proximity to the
franchisee causing a unreasonable dilution of profits; unfair
terms for renewal, including expensive investments in facility
upgrades and remodeling; excessive control over advertising
rates, building and equipment standards, and franchisee
behavior through franchisor-sponsored organizations;
excessive, compulsory and distant meetings with heavy
associated costs; requirements to use specific and expensive
point of sale software; little flexibility in changing prices;
use of arguable building and equipment valuation methods which
can reduce the value of a franchise when being sold back to
the franchisor; and the continued exaction of royalty payments
even after a franchise has gone bankrupt.
Opponents contend that such abuses are the exception rather
than the rule, and that franchise agreements are contracts
freely entered into by two private parties, and then only
after extensive disclosures to the franchisee have been made.
As a result, franchise agreements should not warrant further
state interference with the specific terms of the agreement
after it is signed.
6)Recent amendments . On June 10, 2014, this bill was
substantially amended to remove most of its previous contents
and add the present language. The prior version of the bill
would have explicitly required franchisors and franchisees to
deal with each other in good faith, as defined, in the
performance and enforcement of a franchise agreement;
prohibited a franchisor from restricting the right of a
franchisee to join or participate in an association of
franchisees; and authorized a private right of action for
violation of these provisions that may be remedied by
injunctive relief, damages, rescission, reasonable costs
and/or attorneys' fees.
7)Key components of this bill . The current version of this bill
contains six key provisions to shift the balance of power in
the franchisor/franchisee relationship: notice procedures and
a 60 day deadline for sale, transfer, and assignment request
approvals; a requirement of substantial and material breach as
the basis for termination; a requirement of substantial and
material breach as the basis for nonrenewal, and a right to
renew the franchise agreement; a new remedy for unlawful
termination and non-renewal of either reinstatement and
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damages, or termination and payment of full market value of
the franchise; a prohibition on waiver of the implied covenant
of good faith and fair dealing; and reinforcement of a right
of free association.
a) Notice and deadline requirements for sale, transfer or
assignment . This bill permits a franchisee to sell,
transfer, or assign his or her franchise interests to
another with the franchisor's consent, which cannot be
unreasonably withheld. The franchisee must notify the
franchisor in writing of his or her intent to sell,
transfer, or assign, along with the relevant documentation,
and the franchisor has 60 days to disapprove the
transaction in writing or else the transaction is
automatically approved.
The practical application of the provision is to prevent the
franchisor from needlessly delaying the transaction or
otherwise disapproving the transaction without good reason.
b) Requirement of substantial and material breach for
termination . This bill expands existing prohibitions on a
franchisor's right to terminate a franchise prior to
expiration of its term by requiring a substantial and
material breach ("SMB") as a valid basis for termination.
More specifically, this bill would require SMB in order to
terminate a contract rather than the less exacting standard
of "good cause." Franchisees would also be required to
have 30 days to cure the breach, although that element is
already part of existing law.
Generally speaking, "good cause" simply means "sufficient
grounds to act on". The term is very dependent on the facts
of the case, but good cause can be shown as long as a
reason is not obviously arbitrary, irrational or otherwise
implausible. This bill imposes a higher standard:
substantial and material breach.
The term "substantial and material breach" is not defined
in this bill, nor does the term appear in the California
Code. However, the term is generally understood to mean an
action or omission that defeats the benefit for which the
parties bargained (See e.g., Naydihor, 678 N.W.2d at 225),
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which makes it effectively synonymous with the more common
term "material breach".
Material breach in a contract is generally any failure to
perform that permits the other party to the contract to
either compel performance or collect damages because of the
breach. Deciding whether or not a specific breach is
material is a question of fact for a judge or jury, but the
following factors would be considered: 1) What benefit, if
any, nonbreaching party actually received; 2) Whether
nonbreaching party can be adequately compensated in damages
for lack of complete performance; 3) Whether party in
breach has failed to perform or made preparations for
performing; 4) Any hardship on party failing to perform, if
court terminates contract; 5) Willful, negligent, or
innocent behavior of party failing to perform; and 6)
Likelihood that breaching party will perform remainder of
contract. ( Sackett v. Spindler (1967) 248 CA2d 220, 229, 56
CR 435)
This bill would set a higher SMB standard as grounds for
terminating a franchise contract without triggering the new
remedies created by this bill, namely reinstatement and
payment of damages or cancellation and payment of fair
market value. Good cause would no longer sufficient to
terminate a contract, and even a franchisee who committed
an SMB would have 30 days to cure before termination could
take effect.
c) Requirement of SMB for non-renewal, and provisions for
setting renewal terms . This bill would prohibit a
franchisor from failing to renew a franchise contract
unless the franchisee had committed a SMB. The franchisor
would be required to offer terms for the renewed franchisee
under either the existing terms or on terms being offered
to new franchisees. Franchisees that are not renewed after
a breach may avail themselves of certain existing remedies,
including a requirement of 180 days' notice.
This particular provision raises a couple of practical
questions as to how those terms would be chosen. First,
how should a franchisor decide which contract terms are
eligible for offer? Is it terms literally offered on the
day of renewal only? Terms offered in the past 15 days? 90
days? May franchisors choose between terms offered in
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multiple contracts to assemble a new package of terms?
More importantly, the Committee may wish to consider whether
or not SMB is an appropriate standard for automatic
nonrenewal. Contract law treats a "meeting of the minds" -
also referred to as mutual agreement or mutual assent - as
an essential element of a valid contract. However, because
a franchisee already has a great deal of sunk costs in a
franchise, they stand to be more negatively affected by
non-renewal than would the franchisor.
In any event, this provision would create a scenario where
the franchisee would effectively enjoy a unilateral and
perpetual contract right unless he or she decided to not
renew the contract or substantially breached the contract,
but the franchisor would have little ability to walk away
of their own accord unless the franchisee were offered a
voluntary buyout.
d) New remedies for unlawful termination and non-renewal .
This bill provides significant new remedies for franchisees
who are unlawfully terminated or not renewed. Under
current law, the CFRA requires a franchisor that unlawfully
terminates or fails to renew to repurchase the resalable
inventory at the lower of the fair wholesale market value
or the price paid by the franchisee.
This bill would require that a franchisor that unlawfully
terminates or fails to renew a franchise must reinstate the
franchisee and pay any resulting damages, or at the
election of the franchisee, pay the fair market value of
the franchise and its assets. The intent would be to put
the franchisee back into the original position before the
unlawful termination or non-renewal, or allow them to leave
the contract with the value of the franchise.
e) No waiver of the implied covenant of good faith and fair
dealing . SB 610 requires that any provision of a franchise
contract that purports to waive the implied covenant of
good faith and fair dealing is contrary to public policy
and void.
"Good faith" is an implied covenant in contract law, which
means that it is assumed that both parties enter into the
agreement without malicious intent and with a desire for
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each party to benefit fairly. Broadly speaking, a judge
would draw upon this implied duty in a contract dispute
where the language does not speak clearly as to exactly how
a particular situation would be handled, and extrapolate
the right answer based in part on the assumption that both
sides intended to act with honesty, reasonableness,
accepted standards within the industry, and a desire to see
the spirit of the contract fulfilled. However, good faith
is very fact-dependent, meaning that it may difficult to
know in advance if and how a court will apply the standard.
More importantly, as an implied covenant rather than a
statutory duty, good faith is superseded by the explicit
terms of the contract.
The Restatement of Contracts, 2d, describes good faith and
fair dealing this way: "Subterfuges and evasions violate
the obligation of good faith in performance even when the
actor believes his conduct to be justified. But the
obligation goes further: bad faith may be overt or may
consist of inaction, and fair dealing requires more than
honesty. A complete catalogue of types of bad faith is
impossible, but the following types are among those which
have been recognized in judicial decisions: evasion of the
spirit of the bargain, lack of diligence and slacking off,
willful rendering of imperfect performance, abuse of a
power to specify terms, and interference with or failure to
cooperate in the other party's performance." (Rest.2d,
Contracts Section 205, comment (d).)
Presumably, a court wishing to construe the meaning of
'good faith' contained in this bill would look to
California's own Uniform Commercial Code (UCC) for
guidance. The UCC recognizes an obligation of good faith in
the performance and enforcement of every contract or duty,
and defines good faith in a merchant context as "honesty in
fact and the observance of reasonable commercial standards
of fair dealing in the trade." (UCC Section 2-103(1)(b))
Conversely, "bad faith" generally describes behavior that
violates community standards of decency, fairness or
reasonableness.
The key element of the good faith requirement is its
breadth - it could be applied to any number of situations
.This is viewed as an advantage to franchisees, who see it
as a kind of all-purpose requirement for franchisors to act
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properly, giving franchisees new leverage in the context of
a franchise agreement where the written terms can be very
open-ended and quite one-sided, favoring the franchisor.
Despite the existence of this implied obligation under
current law, supporters argue that the covenant is usually
beat out by explicit provisions in the contract. In other
words, supporters contend that franchise contracts are
written primarily to benefit the franchisor, and that the
covenant of good faith and fair dealing is often little
help against the explicit language of a valid contractual
agreement.
As there continue to be cases where contract provisions are
not clear, the implied covenant can be brought to bear,
provided that the covenant has not be explicitly waived.
However, supporters contend that franchise contracts
increasingly require a waiver or restriction of implied
good faith as a standard provision.
Interestingly, one opponent points out that California's
Uniform Commercial Code already prohibits such waivers,
stating in part "The obligations of good faith?prescribed
by this code may not be disclaimed by agreement. The
parties, by agreement, may determine the standards by which
the performance of those obligations is to be measured if
those standards are not manifestly unreasonable?"
(Commercial Code 1302(b)) While this suggests that there
may be limited practical value in this bill's non-waiver
provision, it also suggests that a prohibition on waiver
would also not represent a tectonic shift in franchising
law.
This bill would simply prohibit the waiver of the implied
covenant as counter to public policy, meaning that it would
remain available to both franchisors and franchisees into
the future to deal with situations where the contract is
silent on an important matter. Contrary to the prior
version of this bill, it would not create a statutory duty
of good faith that could conceivably be used to modify
explicit contract terms.
f) No restriction on the right of free association . This
bill prohibits franchisors from restricting the right of a
franchisee to join or participate in an association of
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franchisees. However, such a restriction already exists in
the CFIL (CORP 31220). The only practical difference this
provision may have is that the new remedies created by this
bill, which are broader than those in the CPIL, would be
applicable if the contract were terminated or not renewed
based on the exercise of that right.
8)Suggested Committee amendments . At the direction of the
Chair, the Committee may wish to consider the following
amendments which would clarify that the remedy provisions
apply to unlawful denial of transfer, delete the bill's
provisions pertaining to nonrenewal, and place the existing
remedies for nonrenewal in their own subdivision:
Page 4, line 11, after the word "person" add ", provided
that person is qualified"
Strike Section 4 of the bill in its entirety
Page 8, line 5, re-number the current language as
subdivision (a)
Page 8, line 5, strike the words "renew a" and add "allow
the sale, transfer, or assignment of a"
Page 8, Section 5, add the following new subdivision: "(b)
In the event a franchisor fails to renew a franchise other
than in accordance with the provisions of this chapter, the
franchisor shall offer to repurchase from the franchisee
the franchisee's resalable current inventory meeting the
franchisor's present standards that is required by the
franchise agreement or commercial practice and held for use
or sale in the franchised business at the lower of the fair
wholesale market value or the price paid by the franchisee.
The franchisor shall not be liable for offering to purchase
personalized items which have no value to the franchisor in
the business which it franchises."
9)Arguments in support . According to the California Labor
Federation, "SB 610 will impact over 83,000 franchised
establishments that employ more than 925,700 workers in
California. Fast food restaurants are the biggest employers
in the franchise sector, and fast food workers and
franchisees, mostly small-business people, share a common
problem - the unchecked power of big corporations. SB 610
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protects franchisees against franchisor abuse, giving
franchisees the opportunity to grow profitable businesses,
achieve financial security, and pass some of their gains to
their workers in the form of higher wages and benefits."
According to Service Employees International Union (SEIU), "[the
provisions of SB 610] are significant steps towards
rebalancing the relationship between franchisors and
franchisees. Prohibiting unfair terminations and non-renewals
ensures that franchisees who play by the rules have the
opportunity to thrive, while still providing franchisors with
authority to terminate or not renew franchisees who don't meet
franchise standards. Protecting franchisees' rights to
transfer their business means that franchisees can pass their
franchise on to their children or sell it and reap the reward
of their labor and investment. And protecting franchisees'
right to join franchisee associations without retaliation
means that franchisees can work together to address problems
in their franchise system.
"The relationship between franchisees and franchisors needs to
be more balanced to ensure that small business owners have
more say in running their business, including the ability to
improve conditions for their employees."
10)Arguments in opposition . A broad coalition of opponents
writes: "The proposed bill would create ambiguity in the
enforcement of franchise contracts and to promote litigation
between franchisees and franchisor, resulting in sub-standard
services and products being delivered to consumers?SB 610
would introduce ambiguity into the franchise contractual
relationship by layering on an amorphous concept of 'good
faith' and 'fair dealing'?in the context of detailed franchise
contracts which govern complex and ongoing business
relationships, it creates uncertainty as to the enforceability
of the contracts and standards.
"Additionally, the provision that the franchise has an automatic
right of renewal unless there is a substantial and material
breach has serious consequences. Possible harmful
consequences include: requiring that franchisors remain in
contracts with underperforming and/or uncooperative
franchisees in perpetuity; potentially overturning
longstanding law that, if applied to existing leases, would
effectively sanction business and residential 'squatters';
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discouraging franchisors from offering discounted franchise
fees during tough economic times for fear of never being
allowed to raise them; and creating a situation in which the
quality of a franchisor's brand is diminished by the
franchisor's inability to remove substandard operators from
the system, harming both the franchisor and all of its
franchisees as a result. "
11)Previous legislation . AB 1141 (Dahle) of 2013 would enact the
Small Business Investment Protection Act of 2013 to
incorporate some of the good faith and rights association
provisions of SB 610 as well as changes to the right to
terminate a franchise agreement. AB 1141 was held in the
Assembly Judiciary Committee.
AB 2305 (Huffman) of 2012 would have enacted The Level Playing
Field for Small Business Act of 2012 to revise the rights and
responsibilities of franchisors and franchisees as well as the
rules that govern the franchise relationship in California. AB
2305 was held in the Assembly Business, Professions and
Consumer Protection Committee.
12)Double-referral . This bill is double-referred, and was
previously heard in the Assembly Judiciary Committee on June
18, 2013, and was passed out on a 7 to 2 vote.
REGISTERED SUPPORT / OPPOSITION :
Support
American Association of Franchisees and Dealers (sponsor)
ARCO Travel Zone Center (Parris, CA)
California Labor Federation
Coalition of Franchisee Associations
Griswold Home Care (Diablo Valley, CA)
Law Offices of Peter Lagarias
Pacific Management Consulting Group
Service Employees International Union
Service Station Franchise Association, Inc.
Small Business California
736 individuals (including 6/24/2013 version)
Opposition
AAMCO
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ACFN Franchised, Inc.
Allied PRA
Always Best Care Senior Services
AmeriSpec & Furniture Medic
Aussie Pet Mobile, Inc.
Bottle & Bottega
BP America (AM PM)
BrightStar Care
California Chamber of Commerce
California Closets
California Grocers Association
California Manufacturers & Technology Association
Civil Justice Association of California
FASTSIGNS International
Fatburger
FirstService Brands
FOCUS Brands (Auntie Anne's, Carvel, Cinnabon, Moe's Southwest
Grill, Schlotsky's)
FranNet
Go Mini's Moving & Portable Storage
Home Instead Senior Care
Instant Imprints
Interim Health Care
International Franchise Association
Jani-King
Keepsake Companions Inc.
KidsPark
Max Muscle Sports Nutrition
menchie's
Merry Maids
Mr. Rooter of Sonoma County
MSA Worldwide
No Frill Franchising, Inc. - Instant Imprints
Right at Home
Round Table Pizza
Scooter's Jungle
ServiceMaster Clean
Sir Speedy, Inc.
Sizzler USA, Inc.
Sky Zone Franchise Group, LLC
Star Franchise Association
The Dwyer Group (AirServ, Glass Doctor, The Grounds Guys, Mr.
Appliance, Mr. Electric, Mr.
Rooter, Portland Glass, Rainbow International)
The Entrepreneur Authority, Auburn CA
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Page 19
The UPS Store, Inc.
Two Men And A Truck
West's Insurance Agency
7 individuals
Analysis Prepared by : Hank Dempsey / B.,P. & C.P. / (916)
319-3301