Amended in Senate August 17, 2015

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 Bill No. 525

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

February 23, 2015

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

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 controlling or noncontrolling interest in the franchise begin delete business end delete begin insert business, end insert 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 controlling or noncontrolling interest in the franchise business, without the franchisor’s written begin delete consent end delete begin insert consent, end insert 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 controlling or noncontrolling 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 begin delete personally served on end delete begin insert delivered by courier to end insert 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 begin insert would repeal those provisions and end insert 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 begin delete paid end delete begin insert paid, end insert minus begin delete depreciation of end delete begin insert depreciation, for end insert all inventory, supplies, equipment, fixtures, and furnishings purchased begin delete from the franchisor end delete or paid for begin delete by the franchisee, end delete begin insert under the franchise agreement, end insert as specified.

This bill begin delete would, if a franchisor violates these provisions, require the finder of fact in awarding damages to reinstate the franchisee and pay specified damages or end delete begin insert would prescribe specified remedies that may be elected by a franchisee if a franchisor terminates or fails to renew a franchise in violation of the act. The bill would entitle a franchisee to be reinstated under the same terms as the existing franchise agreement, in addition to an award for damages or, end insert at the begin delete election end delete begin insert request end insert of the franchisee, begin delete or end delete if reinstatement is impossible or impracticable, begin insert as determined by the trier of fact, would end insert 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 delete The end delete

begin insert The end insert 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.

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 of
the termination 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. The period to exercise the right
to cure shall not exceed 75 days unless there is a separate
agreement between the franchisor and franchisee to extend the
time.

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:

20022.  

(a) Upon a lawful termination or nonrenewal of a
franchisee, the franchisor shall compensate the franchisee, at the
value of price begin delete paid end delete begin insert paid, end insert minus depreciation, begin delete of end delete begin insert for end insert all inventory,
supplies, equipment, fixtures, and furnishings purchased or paid
for begin delete by the franchisee from the franchisor or its approved suppliers
and sources end delete under the terms of the franchise agreement or any
ancillary or collateral begin delete agreement, and, end delete begin insert agreement by the franchisee
to the franchisor or its approved suppliers and sources, that, end insert at
the time of the notice of termination or nonrenewal, are in
possession of the franchisee or used in the franchise business.

(b) This section shall not require the franchisor to purchase any
personalized items, inventory, supplies, equipment, fixtures, 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.

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

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

(e) This section shall not apply to any termination or nonrenewal
of a begin delete franchisee end delete begin insert franchise end insert due to a 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 in Section 20999.

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

(g) Upon the termination of a begin delete franchisee, end delete begin insert franchise, end insert a franchisor
may offset against amounts owed to a franchisee under this section
any amounts owed by such franchisee to the franchisor.

SEC. 4.  

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

20028.  

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

(b) Notwithstanding subdivision (a), a franchisee shall not have
the right to sell, transfer, or assign the franchise or substantially
all of the assets of the franchise business, or a controlling or
noncontrolling interest in the franchise business, 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 or renewing franchisees described in
subdivision (a).

(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 at least equal to the value offered in the bona fide offer.

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

SEC. 5.  

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

20029.  

(a) The franchisee shall, prior to the sale, assignment,
or transfer of all or substantially all of the assets of the franchise
business, or a controlling or noncontrolling interest in the franchise
business, to another person, notify the franchisor, of the
franchisee’s intent to sell, transfer, or assign the franchise or
substantially all of the assets of the franchise business, or a
controlling or noncontrolling interest in the franchise business.
The notice shall be in writing, delivered to the franchisor by
business courier or by receipted mail 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,
financial disclosures, and related information generally utilized
by the franchisor in reviewing prospective new franchisees, if those
forms are readily made available to the existing franchisee. 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. 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 or documentation
necessary to complete the transfer application.

(b) (1) The franchisor shall, within 60 days after the receipt of
all of the necessary information and documentation required
pursuant to subdivision (a), or as specified by written agreement
between the franchisor and the franchisee, notify the franchisee
of the approval or disapproval of the begin insert proposed end insert sale, assignment,
or transfer of the franchise. The notice shall be in writing and shall
be delivered to the begin delete franchisor end delete begin insert franchisee end insert by business courier or
receipted begin delete mail within 15 calendar days. end delete begin insert mail. end insert 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
reasonableness 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. Nothing in this paragraph shall
prohibit summary judgment when the reasonableness of transfer
approval or disapproval can be decided as a matter of law.

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

(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 at least equal to the value offered in the bona fide offer.

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

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.  

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

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

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

(b) A court may grant preliminary and permanent injunctions
for a violation or threatened 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 prior recovery by the franchisee
pursuant to Section 20022 and any sums owed the franchisor or
its subsidiaries by the franchisee pursuant to the franchise or any
ancillary agreement.

SEC. 10.  

Section 20041 of the Business and Professions Code
is amended to read:

20041.  

(a) Except as provided in subdivision (b), the provisions
of this chapter shall apply only to franchises granted or renewed
on or after January 1, 1981, or to franchises of an indefinite
duration that may be terminated by the franchisee or franchisor
without cause.

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