Amended in Assembly April 6, 2015

California Legislature—2015–16 Regular Session

Assembly Bill No. 525

Introduced by Assembly begin delete Member end delete begin insert Members end insert Holden begin insert and Atkins end insert

February 23, 2015

An act to amend begin delete Section 7563 of the Business and Professions Code, relating to private investigators, and declaring the urgency thereof, to take effect immediately. end delete begin insert Sections 20020, 20021, and 20036 of, to amend the heading of Article 6 (commencing with Section 20035) of Chapter 5.5 of Division 8 of, to add Sections 20022, 20028, and 20029 to, and to repeal and add Sections 20025 and 20035 of, the Business and Professions Code, relating to franchises. end insert

LEGISLATIVE COUNSEL’S DIGEST

AB 525, as amended, Holden. begin delete Private Investigators: fines. end delete begin insert Franchise relations: renewal and termination. end insert

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The California Franchise Relations Act sets forth certain requirements related to the termination, nonrenewal, and transfer of franchises between a franchisor, subfranchisor, and franchisee, as those terms are defined.

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That act, except as otherwise provided, prohibits a franchisor from terminating a franchise prior to the expiration of its term, except for good cause, which includes, but is not limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity to cure the failure within 30 days.

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This bill would instead limit good cause to be the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice at least 60 days in advance and a reasonable opportunity to cure the failure within 60 days or more.

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The act prohibits a franchisor from failing to renew a franchise agreement unless the franchisor provides the franchisee at least 180 day’s prior written notice of its intention not to renew and specified conditions are met.

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This bill would instead prohibit a franchisor from failing to renew a franchise agreement unless the franchisee has failed to substantially comply with the franchise agreement. The bill would allow the franchisee to renew for the same duration as provided in the expiring franchise agreement and would require the renewal to be under the franchise agreement terms that are being offered to new franchises. The bill would require, if the franchisor has grounds not to renew a franchise, the franchisor to provide written notice of its intention not to renew at least 180 days prior to the termination of the existing franchise agreement. The bill would, upon termination or expiration of the franchise, prohibit the franchisor from seeking to enforce against the franchisee any covenant not to compete.

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This bill would make it unlawful for a franchise agreement to prevent a franchisee from selling or transferring a franchise or a part of an interest of a franchise to another person, provided that the person is qualified under the franchisor’s then-existing and reasonable standards for approval of new franchisees.

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This bill would provide that a franchise agreement require the franchisee, prior to the sale, assignment, or transfer of all or substantially all of the assets of the franchise business, or a controlling interest in the franchise business, to another person, to notify the franchisor of the franchisee’s decision to sell, transfer, or assign the franchise, and would require the notice to be in writing and include specified information. The bill would provide that the franchise agreement require the franchisor, within a specified period, to notify the franchisee of the approval or disapproval of the sale, assignment, or transfer of the franchise, and would require the notice to be in writing and be personally served on the franchisee or sent by certified mail, return receipt requested. The bill would deem a proposed sale, assignment, or transfer approved, unless disapproved by the franchisor, as specified.

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The act requires a franchisor that terminates or fails to renew a franchise, other than in accordance with specified provisions of law, to offer to repurchase from the franchisee the franchisee’s resalable current inventory, as specified.

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This bill would require a franchisor that terminates or fails to allow the renewal, sale, assignment, or transfer of a franchise, other than in accordance with specified provisions of law, to, at the election of the franchisee, either reinstate the franchisee and pay specified damages or pay the franchisee the fair market value of the franchise and franchise assets, as provided.

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This bill would also allow a franchisee to have the opportunity to monetize any equity the franchise may have developed in the franchise business prior to the termination of the franchise agreement, as specified.

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The Private Investigator Act provides for the licensure and regulation of private investigators by the Bureau of Security and Investigative Services within the Department of Consumer Affairs and makes a violation of the licensing requirements a crime. The act authorizes the Director of Consumer Affairs to impose a civil penalty of no greater than $500 instead of suspending or revoking a license issued under the act for the violation of specified provisions if the director determines that the imposition of the civil penalty better serves the purposes of the act.

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This bill would increase that civil penalty to an amount no greater than $1,000 instead of $500.

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This bill would declare that it is to take effect immediately as an urgency statute.

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Vote:  begin delete ²⁄₃ end delete begin insert majority end insert . Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

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begin insert SECTION 1. end insert   

end insert

begin insert Section 20020 of the end insert begin insert Business and Professions
Code end insert begin insert is amended to read: end insert

20020.  

Except as otherwise provided by this chapter, no
franchisor may terminate a franchise prior to the expiration of its
term, except for good cause. Good cause shall begin delete include, but not end delete be
limited begin delete to, end delete begin insert to end insert the failure of the franchisee to begin insert substantially end insert comply
with any lawful requirement of the franchise agreement after being
given notice begin insert at least 60 days in advance end insert thereof and a reasonable
opportunity, which in no event begin delete need be more end delete begin insert shall be less end insert than begin delete 30 end delete
begin insert 60 end insert days, to cure the failure.

begin insert

begin insert SEC. 2. end insert   

end insert

begin insert Section 20021 of the end insert begin insert Business and Professions Code end insert
begin insert is amended to read: end insert

20021.  

If during the period in which the franchise is in effect,
there occurs any of the following events which is relevant to the
franchise, immediate notice of termination without an opportunity
to cure, shall be deemed reasonable:

(a) The franchisee or the business to which the franchise relates
has been the subject of an order for relief in bankruptcy, judicially
determined to be insolvent, all or a substantial part of the assets
thereof are assigned to or for the benefit of any creditor, or the
franchisee admits his or her inability to pay his or her debts as they
come due;

(b) The franchisee abandons the franchise by failing to operate
the business for five consecutive days during which the franchisee
is required to operate the business under the terms of the franchise,
or any shorter period after which it is not unreasonable under the
facts and circumstances for the franchisor to conclude that the
franchisee does not intend to continue to operate the franchise,
unless such failure to operate is due to fire, flood, earthquake or
other similar causes beyond the franchisee’s control;

(c) The franchisor and franchisee agree in writing to terminate
the franchise;

(d) 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;

(e) The franchisee fails, for a period of 10 days after notification
of noncompliance, to comply with any federal, state or local law
or begin delete regulation end delete begin insert regulation, including, but not limited to, all health,
safety, building, and labor laws or regulations end insert applicable to the
operation of the franchise;

(f) The franchisee, after curing any failure in accordance with
Section 20020 engages in the same noncompliance whether or not
such noncompliance is corrected after notice;

(g) The franchisee repeatedly fails to comply with one or more
requirements of the franchise, whether or not corrected after notice;

(h) The franchised business or business premises of the franchise
are seized, taken over, or foreclosed by a government official in
the exercise of his or her duties, or seized, taken over, or foreclosed
by a creditor, lienholder or lessor, provided that a final judgment
against the franchisee remains unsatisfied for 30 days (unless a
supersedeas or other appeal bond has been filed); or a levy of
execution has been made upon the license granted by the franchise
agreement or upon any property used in the franchised business,
and it is not discharged within five days of such levy;

(i) The franchisee is convicted of a felony or any other criminal
misconduct which is relevant to the operation of the franchise;

(j) The franchisee fails to pay any franchise fees or other
amounts due to the franchisor or its affiliate within five days after
receiving written notice that such fees are overdue; or

(k) The franchisor makes a reasonable determination that
continued operation of the franchise by the franchisee will result
in an imminent danger to public health or safety.

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begin insert SEC. 3. end insert   

end insert

begin insert Section 20022 is added to the end insert begin insert Business and Professions
Code end insert begin insert , to read: end insert

begin insert

begin insert 20022. end insert   

While not transferring any equity in the franchisor’s
intellectual property to the franchisee, a franchisee shall have the
opportunity to monetize any equity the franchisee may have
developed in the franchised business prior to the termination of
the franchise agreement.

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begin insert

begin insert SEC. 4. end insert   

end insert

begin insert Section 20025 of the end insert begin insert Business and Professions Code end insert
begin insert is repealed. end insert

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20025.  

No franchisor may fail to renew a franchise unless such
franchisor provides the franchisee at least 180 days prior written
notice of its intention not to renew; and

(a) During the 180 days prior to expiration of the franchise the
franchisor permits the franchisee to sell his business to a purchaser
meeting the franchisor’s then current requirements for granting
new franchises, or if the franchisor is not granting a significant
number of new franchises, the then current requirements for
granting renewal franchises; or

(b) (1) The refusal to renew is not for the purpose of converting
the franchisee’s business premises to operation by employees or
agents of the franchisor for such franchisor’s own account,
provided, that nothing in this paragraph shall prohibit a franchisor
from exercising a right of first refusal to purchase the franchisee’s
business; and

(2) Upon expiration of the franchise, the franchisor agrees not
to seek to enforce any covenant of the nonrenewed franchisee not
to compete with the franchisor or franchisees of the franchisor; or

(c) Termination would be permitted pursuant to Section 20020
or 20021; or

(d) The franchisee and the franchisor agree not to renew the
franchise; or

(e) The franchisor withdraws from distributing its products or
services through franchises in the geographic market served by
the franchisee, provided that:

(1) Upon expiration of the franchise, the franchisor agrees not
to seek to enforce any covenant of the nonrenewed franchisee not
to compete with the franchisor or franchisees of the franchisor;
and

(2) The failure to renew is not for the purpose of converting the
business conducted by the franchisee pursuant to the franchise
agreement to operation by employees or agents of the franchisor
for such franchisor’s own account; and

(3) Where the franchisor determines to sell, transfer, or assign
its interest in a marketing premises occupied by a franchisee whose
franchise agreement is not renewed pursuant to this paragraph:

(A) The franchisor, during the 180-day period after giving notice
offers such franchisee a right of first refusal of at least 30 days’
duration of a bona fide offer, made by another to purchase such
franchisor’s interest in such premises; or

(B) In the case of the sale, transfer, or assignment to another
person of the franchisor’s interest in one or more other controlled
marketing premises, such other person in good faith offers the
franchisee a franchise on substantially the same terms and
conditions currently being offered by such other person to other
franchisees; or

(f) The franchisor and the franchisee fail to agree to changes or
additions to the terms and conditions of the franchise agreement,
if such changes or additions would result in renewal of the
franchise agreement on substantially the same terms and conditions
on which the franchisor is then customarily granting renewal
franchises, or if the franchisor is not then granting a significant
number of renewal franchises, the terms and conditions on which
the franchisor is then customarily granting original franchises. The
franchisor may give the franchisee written notice of a date which
is at least 30 days from the date of such notice, on or before which
a proposed written agreement of the terms and conditions of the
renewal franchise shall be accepted in writing by the franchisee.
Such notice, when given not less than 180 days before the end of
the franchise term, may state that in the event of failure of such
acceptance by the franchisee, the notice shall be deemed a notice
of intention not to renew at the end of the franchise term.

end delete

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begin insert SEC. 5. end insert   

end insert

begin insert Section 20025 is added to the end insert begin insert Business and Professions
Code end insert begin insert , to read: end insert

begin insert

begin insert 20025. end insert   

(a) No franchisor may fail to renew a franchise unless
the franchisee has failed to substantially comply with the franchise
agreement.

(b) If the franchisee is in substantial compliance with the
franchise agreement at the time of the expiration of the franchise
agreement, the franchisee may renew for the same duration as
provided in the expiring franchise agreement. The renewal shall
be under the franchise agreement terms that are being offered to
new franchises.

(c) If the franchisor has grounds not to renew a franchise under
this chapter, then the franchisor shall provide written notice of its
intention not to renew, as set forth in this chapter, at least 180
days prior to the termination of the existing franchise agreement.

(d) Upon termination or expiration of the franchise, the
franchisor shall not seek to enforce against the franchisee any
covenant not to compete.

end insert

begin insert

begin insert SEC. 6. end insert   

end insert

begin insert Section 20028 is added to the end insert begin insert Business and Professions
Code end insert begin insert , to read: end insert

begin insert

begin insert 20028. end insert   

(a) It is unlawful for a franchise agreement to prevent
a franchisee from selling or transferring a franchise or a part of
an interest of a franchise to another person, provided that the
person is qualified under the franchisor’s then-existing and
reasonable standards for approval of new franchisees.

(b) Notwithstanding subdivision (a), a franchisee shall not have
the right to sell, transfer, or assign the franchise, or any right
thereunder, without the written consent of the franchisor, except
that the consent shall not be unreasonably withheld.

end insert

begin insert

begin insert SEC. 7. end insert   

end insert

begin insert Section 20029 is added to the end insert begin insert Business and Professions
Code end insert begin insert , to read: end insert

begin insert

begin insert 20029. end insert   

(a) The franchise agreement shall require the
franchisee, prior to the sale, assignment, or transfer of all or
substantially all of the assets of the franchise business, or a
controlling interest in the franchise business, to another person,
to notify the franchisor, of the franchisee’s decision to sell, transfer
or assign the franchise. The notice shall be in writing and include
all of the following:

(1) The proposed transferee’s name and address.

(2) A copy of all agreements related to the sale, assignment, or
transfer of the franchised business or its assets.

(3) The proposed transferee’s application for approval to
become the successor franchisee. The application shall include
all forms and related information generally utilized by the
franchisor in reviewing prospective new franchisees, if those forms
are readily made available to the existing franchisee. As soon as
practicable after the receipt of the proposed transferee’s
application, the franchisor shall notify, in writing, the franchisee
and the proposed transferee of any additional information
necessary to complete the transfer application.

(b) (1) The franchise agreement shall require the franchisor,
within 60 days after the receipt of all of the necessary information
required pursuant to subdivision (a), or as specified by written
agreement between the franchisor and the franchisee, to notify the
franchisee of the approval or disapproval of the sale, assignment,
or transfer of the franchise. The notice shall be in writing and be
personally served on the franchisee or sent by certified mail, return
receipt requested. A proposed sale, assignment or transfer shall
be deemed approved, unless disapproved by the franchisor in the
manner provided by this subdivision. 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.

(2) In any action in which the franchisor’s disapproval of a
sale, assignment or transfer pursuant to this subdivision is an
issue, the reasonability of the franchisor’s decision shall be a
question of fact requiring consideration of all existing
circumstances.

end insert

begin insert

begin insert SEC. 8. end insert   

end insert

begin insert The heading of Article 6 (commencing with Section
20035) of Chapter 5.5 of Division 8 of the end insert begin insert Business and Professions
Code end insert begin insert is amended to read: end insert

 

Article 6.  begin delete Offers to Repurchase Inventory end delete begin insert Remedies end insert

 

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begin insert SEC. 9. end insert   

end insert

begin insert Section 20035 of the end insert begin insert Business and Professions Code end insert
begin insert is repealed. end insert

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20035.  

In the event a franchisor terminates or 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.

end delete

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begin insert SEC. 10. end insert   

end insert

begin insert Section 20035 is added to the end insert begin insert Business and
Professions Code end insert begin insert , to read: end insert

begin insert

begin insert 20035. end insert   

In the event a franchisor terminates or fails to allow
the renewal, sale, assignment, or transfer of a franchise other than
in accordance with the provisions of this chapter, the franchisor
shall reinstate the franchisee under the same terms as the existing
franchise agreement and shall pay all damages caused thereby,
or at the election of the franchisee shall pay the franchisee the fair
market value of the franchise and franchise assets. A court may
grant preliminary and permanent injunctions for a violation of
this chapter.

end insert

begin insert

begin insert SEC. 11. end insert   

end insert

begin insert Section 20036 of the end insert begin insert Business and Professions Code end insert
begin insert is amended to read: end insert

20036.  

The franchisor may offset against any begin delete repurchase offer end delete
begin insert remedies end insert made pursuant to Section 20035 any sums owed the
franchisor or its subsidiaries by the franchisee pursuant to the
franchise or any ancillary agreement.

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SECTION 1.  

Section 7563 of the Business and Professions
Code is amended to read:

7563.  

The director, in lieu of suspending or revoking a license
issued under this chapter for violations of Sections 7561.1, 7561.3,
and 7561.4, may impose a civil penalty not to exceed one thousand
dollars ($1,000) upon a licensee, if the director determines that
this action better serves the purposes of this chapter.

end delete

begin delete

SEC. 2.  

This act is an urgency statute necessary for the
immediate preservation of the public peace, health, or safety within
the meaning of Article IV of the Constitution and shall go into
immediate effect. The facts constituting the necessity are:

In order to enable the Director of Consumer Affairs to provide
increased protection to consumers from unscrupulous private
investigators at the earliest possible time it is necessary that this
act take effect immediately.

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