Amended in Senate July 2, 2015

Amended in Senate June 23, 2015

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 BillNo. 525


Introduced by Assembly Members Holden, Atkins, Dodd, and Wilk

February 23, 2015


An act to amend Sections 20020, 20021,begin delete and 20036end deletebegin insert 20036, and 20041end insert 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 andbegin insert would require that the period forend insert a reasonable opportunity to cure the failurebegin insert beend insert no less than 60 days from the date of the notice of noncompliance.begin insert The bill would prohibit the period for curing the failure from exceeding 75 days, except as specified.end insert

This bill would make it unlawful for a franchise agreement to prevent a franchisee from selling or transferring all or substantially all of the assets of the franchise business as defined, or a controllingbegin insert or noncontrollingend insert interest in the franchise business to another person, provided that the person is qualified under the franchisor’s then-existing and reasonable standards for approval of new franchisees, as specified. The bill would prohibit a sale, transfer, or assignment if a franchise, or substantially all of the assets or a controllingbegin insert or noncontrollingend insert interest in the franchise business, 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 require the franchisee, prior to the sale, assignment, or transfer of all or substantially all of the assets of the franchise business, as defined, or a controllingbegin insert or noncontrollingend insert interest in the franchise business, to another person, to notify the franchisor of the franchisee’s intent to sell, transfer, or assign the franchise or its assets or interest, as specified, and would require the notice to be in writing and include specified information. The bill would 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 receipted mail. 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, 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, fixtures, and furnishings purchased from the franchisor or paid for by the franchisee, as specified.

This bill would, if a franchisor violates these provisions, require the finder of fact in awarding damages to reinstate the franchisee and pay specified damages or at the election of the franchisee, or if reinstatement is impossible or impracticable, require the franchisor to pay the franchisee the fair market value of the franchise and franchise assets and any other damages, as provided. The bill would provide for injunctive relief in the event of a violation or threatened violation of these provisions.begin insert The bill would limit its application to a franchise agreement entered into or renewed on or after January 1, 2016, or to franchises of an indefinite duration that may be terminated without cause.end insert

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

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

P3    1

SECTION 1.  

Section 20020 of the Business and Professions
2Code
is amended to read:

3

20020.  

Except as otherwise provided by this chapter, no
4franchisor may terminate a franchise prior to the expiration of its
5term, except for good cause. Good cause shall be limited to the
6failure of the franchisee to substantially comply with the franchise
7agreement after being given notice at least 60 days in advance of
8the termination and a reasonable opportunity, which in no event
9shall be less than 60 days from the date of the notice of
10noncompliance, to cure the failure.begin insert The period to exercise the right
11to cure shall not exceed 75 days unless there is a separate
12agreement between the franchisor and franchisee to extend the
13time.end insert

14

SEC. 2.  

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

16

20021.  

If during the period in which the franchise is in effect,
17there occurs any of the following events which is relevant to the
18franchise, immediate notice of termination without an opportunity
19to cure, shall be deemed reasonable:

20(a) The franchisee or the business to which the franchise relates
21has been the subject of an order for relief in bankruptcy, judicially
22determined to be insolvent, all or a substantial part of the assets
P4    1thereof are assigned to or for the benefit of any creditor, or the
2franchisee admits his or her inability to pay his or her debts as they
3come due;

4(b) The franchisee abandons the franchise by failing to operate
5the business for five consecutive days during which the franchisee
6is required to operate the business under the terms of the franchise,
7or any shorter period after which it is not unreasonable under the
8facts and circumstances for the franchisor to conclude that the
9franchisee does not intend to continue to operate the franchise,
10unless such failure to operate is due to fire, flood, earthquake, or
11other similar causes beyond the franchisee’s control;

12(c) The franchisor and franchisee agree in writing to terminate
13the franchise;

14(d) The franchisee makes any material misrepresentations
15relating to the acquisition of the franchise business or the franchisee
16engages in conduct which reflects materially and unfavorably upon
17the operation and reputation of the franchise business or system;

18(e) The franchisee fails, for a period of 10 days after notification
19of noncompliance, to comply with any federal, state, or local law
20or regulation, including, but not limited to, all health, safety,
21building, and labor laws or regulations applicable to the operation
22of the franchise;

23(f) The franchisee, after curing any failure in accordance with
24Section 20020 engages in the same noncompliance whether or not
25such noncompliance is corrected after notice;

26(g) The franchisee repeatedly fails to comply with one or more
27requirements of the franchise, whether or not corrected after notice;

28(h) The franchised business or business premises of the franchise
29are seized, taken over, or foreclosed by a government official in
30the exercise of his or her duties, or seized, taken over, or foreclosed
31by a creditor, lienholder, or lessor, provided that a final judgment
32against the franchisee remains unsatisfied for 30 days (unless a
33supersedeas or other appeal bond has been filed); or a levy of
34execution has been made upon the license granted by the franchise
35agreement or upon any property used in the franchised business,
36and it is not discharged within five days of such levy;

37(i) The franchisee is convicted of a felony or any other criminal
38misconduct which is relevant to the operation of the franchise;

P5    1(j) The franchisee fails to pay any franchise fees or other
2amounts due to the franchisor or its affiliate within five days after
3receiving written notice that such fees are overdue; or

4(k) The franchisor makes a reasonable determination that
5continued operation of the franchise by the franchisee will result
6in an imminent danger to public health or safety.

7

SEC. 3.  

Section 20022 is added to the Business and Professions
8Code
, to read:

9

20022.  

(a) Upon a lawful termination or nonrenewal of a
10franchisee, the franchisor shall compensate the franchisee, at the
11value of price paid minus depreciation, of all inventory, supplies,
12equipment, fixtures, and furnishings purchased or paid for by the
13franchisee from the franchisor or its approved suppliers and sources
14under the terms of the franchise agreement or any ancillary or
15collateral agreement, and, at the time of the notice of termination
16or nonrenewal, are in possession of the franchisee or used in the
17franchise business.

18(b) This section shall not require the franchisor to purchase any
19personalized items, inventory, supplies, equipment, fixtures, or
20furnishings not reasonably required to conduct the operation of
21the franchise business in accordance with the franchise agreement
22or any ancillary or collateral agreement.

23(c) This section shall not apply when the franchisee declines a
24bona fide offer of renewal from the franchisor.

25(d) This section shall not apply if the franchisee retains control
26of the principal place of the franchise business.

27(e) This section shall not apply to any termination or nonrenewal
28of a franchisee due to a publicly announced and nondiscriminatory
29decision by the franchisor to completely withdraw from all
30franchise activity within the relevant geographic market area in
31which the franchise is located. For the purpose of this section
32“relevant geographic market area” shall have the same meaning
33asbegin insert inend insert Section 20999.

34(f) This section shall not apply to any inventory, supplies,
35equipment, fixtures, or furnishings that are sold by the franchisee
36between the date of the notice of termination or nonrenewal, and
37the cessation of operation of the franchise business, by the
38franchisee, pursuant to the termination or nonrenewal.

P6    1(g) Upon the termination of a franchisee, a franchisor may offset
2against amounts owed to a franchisee under this section any
3amounts owed by such franchisee to the franchisor.

4

SEC. 4.  

Section 20028 is added to the Business and Professions
5Code
, to read:

6

20028.  

(a) It is unlawful for a franchisor to prevent a franchisee
7from selling or transferring all or substantially all of the assets of
8the franchise business, or a controllingbegin insert or noncontrollingend insert interest
9in the franchise business, to another person provided that the person
10is qualified under the franchisor’s then-existing and reasonable
11standards, as consistently applied to similarly situated franchisees
12operating within the franchise brand, for the approval of new or
13renewing franchisees.

14(b) Notwithstanding subdivision (a), a franchisee shall not have
15the right to sell, transfer, or assign the franchise or substantially
16all of the assets of the franchise business, or a controllingbegin insert or
17noncontrollingend insert
interest in the franchise business, without the
18written consent of the franchisor, except that the consent shall not
19be withheld unless the buyer, transferee, or assignor does not meet
20the standards for new or renewing franchisees described in
21subdivision (a).

22(c) Nothing in this section shall prohibit a franchisor from
23exercising the contractual right of first refusal to purchase a
24franchise after receipt of a bona fide offer to purchase the franchise
25by a proposed purchaser of the franchise. A franchisor exercising
26the contractual right of first refusal shall offer the franchisee
27payment at least equal to the value offered in the bona fide offer.

28(d) For the purpose of this section “franchise business” shall
29include a legal entity that is a party to a franchise agreement.

30

SEC. 5.  

Section 20029 is added to the Business and Professions
31Code
, to read:

32

20029.  

(a) The franchisee shall, prior to the sale, assignment,
33or transfer of all or substantially all of the assets of the franchise
34business, or a controllingbegin insert or noncontrollingend insert interest in the franchise
35business, to another person, notify the franchisor, of the
36franchisee’s intent to sell, transfer, or assign the franchise or
37substantially all of the assets of the franchise business, or a
38controllingbegin insert or noncontrollingend insert interest in the franchise business.
39The notice shall be in writing, delivered to the franchisor by
P7    1business courier or by receipted mail and include all of the
2following:

3(1) The proposed transferee’s name and address.

4(2) A copy of all agreements related to the sale, assignment, or
5transfer of the franchised business or its assets.

6(3) The proposed transferee’s application for approval to become
7the successor franchisee. The application shall include all forms,
8financial disclosures, and related information generally utilized
9by the franchisor in reviewing prospective new franchisees, if those
10forms are readily made available to the existing franchisee. If the
11forms are not readily available, the franchisee shall request and
12the franchisor shall deliver the forms to the franchisee by business
13courier or receipted mail within 15 calendar days. As soon as
14practicable after the receipt of the proposed transferee’s application,
15the franchisor shall notify, in writing, the franchisee and the
16proposed transferee of any additional information or documentation
17necessary to complete the transfer application.

18(b) (1) The franchisor shall, within 60 days after the receipt of
19all of the necessary information and documentation required
20pursuant to subdivision (a), or as specified by written agreement
21between the franchisor and the franchisee, notify the franchisee
22of the approval or disapproval of the sale, assignment, or transfer
23of the franchise. The notice shall be in writing and shall be
24delivered to the franchisor by business courier or receipted mail
25within 15 calendar days. A proposed sale, assignment, or transfer
26shall be deemed approved, unless disapproved by the franchisor
27in the manner provided by this subdivision. If the proposed sale,
28assignment, or transfer is disapproved, the franchisor shall include
29in the notice of disapproval a statement setting forth the reasons
30for the disapproval.

31(2) In any action in which the franchisor’s disapproval of a sale,
32assignment, or transfer pursuant to this subdivision is an issue, the
33reasonableness of the franchisor’s decision shall be a question of
34fact requiring consideration of all existing circumstances. For
35purposes of this paragraph, the finder of fact may be an arbitrator
36specified in the franchise agreement and who satisfies the
37requirements of Section 20040. Nothing in this paragraph shall
38prohibit summary judgment when the reasonableness of transfer
39approval or disapproval can be decided as a matter of law.

P8    1(3) Nothing in this subdivision requires a franchisor to exercise
2a contractual right of first refusal.

3(c) Nothing in this section shall prohibit a franchisor from
4exercising the contractual right of first refusal to purchase a
5franchise after receipt of a bona fide offer to purchase the franchise
6by a proposed purchaser of the franchise. Any franchisor exercising
7the contractual right of first refusal shall offer the franchisee
8payment at least equal to the value offered in the bona fide offer.

9(d) For the purpose of this section “franchise business” shall
10include a legal entity that is a party to a franchise agreement.

11

SEC. 6.  

The heading of Article 6 (commencing with Section
1220035) of Chapter 5.5 of Division 8 of the Business and Professions
13Code
is amended to read:

14 

15Article 6.  Remedies
16

 

17

SEC. 7.  

Section 20035 of the Business and Professions Code
18 is repealed.

19

SEC. 8.  

Section 20035 is added to the Business and Professions
20Code
, to read:

21

20035.  

(a) In the event a franchisor terminates or fails to renew
22a franchisee, in violation of this chapter, the franchisee shall be
23entitled to either of the following remedies:

24(1) Reinstatement of the franchisee under the same terms as the
25existing franchise agreement, and the franchisor shall pay all
26damages caused to the franchisee from the violation.

27(2) Upon request of the franchisee, or if the relief in paragraph
28(1) is determined by the finder of fact to be impossible or
29impracticable, then the franchisor shall pay the franchisee the fair
30market value of the franchise and franchise assets and any other
31damages caused by the violation of this chapter.

32(b) A court may grant preliminary and permanent injunctions
33for a violation or threatened violation of this chapter.

34

SEC. 9.  

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

36

20036.  

The franchisor may offset against any remedies made
37pursuant to Section 20035 any prior recovery by the franchisee
38pursuant to Section 20022 and any sums owed the franchisor or
39its subsidiaries by the franchisee pursuant to the franchise or any
40ancillary agreement.

P9    1begin insert

begin insertSEC. 10.end insert  

end insert

begin insertSection 20041 of the end insertbegin insertBusiness and Professions Codeend insert
2begin insert is amended to read:end insert

3

20041.  

begin deleteThe end deletebegin insert(a)end insertbegin insertend insertbegin insertExcept as provided in subdivision (b), the end insert
4provisions of this chapter shall apply only to franchises granted
5or renewed on or after January 1,begin delete 1981end deletebegin insert 1981,end insert or to franchises of
6an indefinite durationbegin delete whichend deletebegin insert thatend insert may be terminated by the
7franchisee or franchisor without cause.

begin insert

8(b) The amendments to this chapter made by the act adding this
9subdivision shall apply only to franchise agreements entered into
10or renewed on or after January 1, 2016, or to franchises of an
11indefinite duration that may be terminated by the franchisee or
12franchisor without cause.

end insert


O

    93