Amended in Senate June 15, 2015

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, Dodd, 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 substantially comply with 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 begin delete provide that a franchise agreement end delete 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 begin delete provide that the franchise agreement end delete 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.

begin insert

This bill would, with certain exceptions, require the franchisor, upon a lawful termination or nonrenewal of a franchisee, to compensate the franchisee at the value of price paid minus depreciation of all inventory, supplies, equipment, and furnishings purchased by the franchisee from the franchisor, as specified.

end insert

This bill would begin delete require end delete begin insert , if end insert a franchisor begin delete that terminates or fails to allow the renewal, sale, assignment, or transfer of a franchise, other than in accordance with specified provisions of law, end delete begin insert violates these provisions, require the finder of fact in awarding damages end insert to begin delete , at the election of the franchisee, either end delete reinstate the franchisee and pay specified damages or begin insert at the election of the franchisee, or if reinstatement is impossible or impracticable, require the franchisor to end insert pay the franchisee the fair market value of the franchise and franchise assets begin insert and any other damages end insert , as provided.

begin delete

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.

end delete

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 the franchise
agreement after being given notice at least 60 days in advance
begin delete thereof end delete begin insert of the termination end insert 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, 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 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, 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.

SEC. 3.  

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

begin delete

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.

end delete

begin insert

begin insert 20022. end insert   

end insert

begin insert (a) end insert begin insert   end insert begin insert Upon a lawful termination or nonrenewal of a
franchisee, the franchisor shall compensate the franchisee, at the
value of price paid minus depreciation, of all inventory, supplies,
equipment, and furnishings purchased by the franchisee from the
franchisor or its approved suppliers and sources under the terms
of the franchise agreement or any ancillary or collateral
agreement. end insert

begin insert

(b) This section shall not require the franchisor to purchase
any personalized items, inventory, supplies, equipment, or
furnishings not reasonably required to conduct the operation of
the franchise business in accordance with the franchise agreement
or any ancillary or collateral agreement.

end insert begin insert

(c) This section shall not apply when the franchisee declines a
bona fide offer of renewal from the franchisor.

end insert begin insert

(d) This section shall not apply if the franchisee retains control
of the premises of the franchise business.

end insert begin insert

(e) This section shall not apply to any termination or nonrenewal
of a franchisee due to publicly announced and nondiscriminatory
decision by the franchisor to completely withdraw from all
franchise activity within the relevant geographic market area in
which the franchise is located. For the purpose of this section
“relevant geographic market area” shall have the same meaning
as Section 20999.

end insert begin insert

(f) Upon the termination of a franchisee, a franchisor may offset
against amounts owed to a franchisee under this section any
amounts owed by such franchisee to the franchisor.

end insert

SEC. 4.  

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

20028.  

(a) It is unlawful for a begin delete franchise agreement end delete begin insert franchisor end insert
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 begin insert the end insert approval of new begin insert or renewing end insert
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 begin insert or renewing end insert
franchisees described in subdivision (a).

begin insert

(c) Nothing in this section shall prohibit a franchisor from
exercising the contractual right of first refusal to purchase a
franchise after receipt of a bona fide offer to purchase the franchise
by a proposed purchaser of the franchise. A franchisor exercising
the contractual right of first refusal shall offer the franchisee
payment equal to or greater than the value offered in the bona fide
offer.

end insert

SEC. 5.  

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

20029.  

(a) The begin delete franchise agreement shall require the franchisee, end delete begin insert end insert
begin insert franchisee shall, end insert 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, begin delete to end delete
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 begin delete forms end delete
begin insert forms, financial disclosures, end insert and related information generally
utilized by the franchisor in reviewing prospective new franchisees,
if those forms are readily made available to the existing franchisee.
begin insert If the forms are not readily available, the franchisee shall request
and the franchisor shall deliver the forms to the franchisee by
business courier or receipted mail within 15 calendar days. end insert 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 begin insert or
documentation end insert necessary to complete the transfer application.

(b) (1) The begin delete franchise agreement shall require the franchisor, end delete
begin insert franchisor shall, end insert within 60 days after the receipt of all of the
necessary information begin insert and documentation end insert required pursuant to
subdivision (a), or as specified by written agreement between the
franchisor and the franchisee, begin delete to end delete 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, begin delete assignment end delete begin insert assignment, end insert 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,
begin delete assignment end delete begin insert assignment, end insert 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.

begin insert

(3) Nothing in this subdivision requires a franchisor to exercise
a contractual right of first refusal.

end insert begin insert

(c) Nothing in this section shall prohibit a franchisor from
exercising the contractual right of first refusal to purchase a
franchise after receipt of a bona fide offer to purchase the franchise
by a proposed purchaser of the franchise. Any franchisor exercising
the contractual right of first refusal shall offer the franchisee
payment equal to or greater than the value offered in the bona fide
offer.

end insert

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 begin delete terminates or fails to allow
the renewal, sale, assignment, or transfer of a franchise other than
in accordance with the provisions of this chapter, end delete begin insert violates this
chapter, the finder of fact in awarding damages shall either require end insert
the franchisor begin delete shall end delete begin insert to end insert reinstate the franchisee under the same terms
as the existing franchise agreement and begin delete shall end delete pay all damages
caused thereby, or at the election of the begin delete franchisee shall end delete begin insert franchisee,
or if reinstatement is impossible or impracticable, require the
franchisor to end insert pay the franchisee the fair market value of the
franchise and franchise begin delete assets. end delete begin insert assets, and any other damages
caused by the violation of this chapter. end insert 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.