Amended in Assembly May 7, 2015

Amended in Assembly May 4, 2015

Amended in Assembly April 6, 2015

California Legislature—2015–16 Regular Session

Assembly Bill No. 525

Introduced by Assembly Members Holden, Atkins, begin insert Dodd, end insert and Wilk

February 23, 2015

An act to amend 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 Section 20035 of, the Business and Professions Code, relating to franchises.

LEGISLATIVE COUNSEL’S DIGEST

AB 525, as amended, Holden. Franchise relations: renewal and termination.

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.

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.

This bill would instead limit good cause to the failure of the franchisee to begin insert substantially end insert comply with begin delete any lawful requirement of end delete the franchise agreement after being given notice at least 60 days in advance and a reasonable opportunity to cure the failure no less than 60 days from the date of the notice of noncompliance.

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. The bill would prohibit a sale, transfer, or assignment or a franchise without the franchisor’s written consent but would prohibit that consent from being withheld unless the buyer, transferee, or assignor does not meet standards for new franchisees.

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.

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.

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.

This bill would also require that a franchisee have the opportunity to monetize any equity the franchise may have developed in the franchise business prior to the termination or nonrenewal of the franchise agreement, as specified. The bill would define equity for these purposes. The bill would prohibit application of these provisions to certain franchisees terminated without an opportunity to cure, including those who abandon their franchises.

Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

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

SECTION 1.  

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

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 be limited to the
failure of the franchisee to substantially comply with begin delete any lawful
requirement of end delete the franchise agreement after being given notice
at least 60 days in advance thereof and a reasonable opportunity,
which in no event shall be less than 60 days from the date of the
notice of noncompliance, to cure the failure.

SEC. 2.  

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

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, begin delete earthquake end delete
begin insert earthquake, end insert 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, begin delete state end delete begin insert state, end insert or local
law or regulation, including, but not limited to, all health, safety,
building, and labor laws or regulations 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, begin delete lienholder end delete begin insert lienholder, end insert 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.

SEC. 3.  

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

20022.  

(a) 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 or
nonrenewal of the franchise agreement.

(b) (1) Except as provided in paragraph (2), for the purpose of
this section, “equity” means the fair market value, on the date of
the notice of termination or nonrenewal, of the franchise and
franchise assets, and of all investments in the franchise made by
the franchisee, including, but not limited to, purchases of real
property, improvements to real property, equipment, inventory,
advertising, and real estate, as determined by a mutually
agreed-upon appraiser of business value. Equity does not mean
any initial franchise fees paid by franchisee.

(2) Notwithstanding paragraph (1), if the franchisee sells,
transfers, or assigns a franchise asset before a valuation is made,
the price associated with that sale, transfer, or assignment shall be
deemed the monetized value of the equity of that franchise asset.

(c) This section does not apply to a franchisee terminated
pursuant to Section 20021.

SEC. 4.  

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

20028.  

(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 withheld unless the buyer, transferee,
or assignor does not meet the standards for new franchisees
described in subdivision (a).

SEC. 5.  

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

20029.  

(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, begin delete transfer end delete begin insert transfer, end insert 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. For
purposes of this paragraph, the finder of fact may be an arbitrator
specified in the franchise agreement and who satisfies the
requirements of Section 20040.

SEC. 6.  

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

 

Article 6.  Remedies

 

SEC. 7.  

Section 20035 of the Business and Professions Code
is repealed.

SEC. 8.  

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

20035.  

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.

SEC. 9.  

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

20036.  

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