Amended in Senate August 24, 2015

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 begin insert lawful requirements of the end insert franchise agreement begin insert imposed on the franchisee end insert 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 begin insert a franchise, end insert all or substantially all of the assets of the franchise begin delete business end delete begin insert business, end insert as defined, 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 for approval of new begin insert or renewing end insert franchisees, as begin delete specified. end delete begin insert specified, and the parties comply with specified transfer provisions. end insert The bill would prohibit a sale, transfer, or assignment begin delete if end delete begin insert of end insert a franchise, begin insert all end insert or substantially all of the assets begin insert of a franchise business, end insert or a controlling or noncontrolling 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 begin delete franchisees. end delete begin insert or renewing franchisees or the parties fail to meet specified transfer provisions. end insert

This bill would require the franchisee, prior to the sale, assignment, or transfer of begin insert a franchise, end insert all or substantially all of the assets of begin delete the end delete begin insert a end insert 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 begin insert proposed end insert sale, assignment, or transfer of the franchise, and would require the notice to be in writing and be delivered by courier to the franchisee or sent by receipted mail. begin insert The bill would require the franchisor to communicate the franchisor’s standards for approval of new or renewing franchisees, as specified. end insert 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 repeal those provisions and would, with certain exceptions, require the franchisor, upon a lawful termination or nonrenewal of a franchisee, to begin delete compensate end delete begin insert purchase from end insert the franchisee at the value of price paid, minus depreciation, begin delete for end delete all inventory, supplies, equipment, fixtures, and furnishings purchased or paid for under the franchise agreement, as specified. begin insert The bill would not require a franchisor to purchase assets to which the franchisee cannot or does not provide clear title and possession. end insert

This bill would begin delete prescribe specified remedies that may be elected by end delete begin insert entitle end insert a franchisee begin insert to receive from the franchisor the fair market value of the franchise business and assets, as well as resulting damages, end insert if a franchisor terminates or fails to renew a franchise in violation of the act. begin delete 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, at the request of the franchisee, if reinstatement is impossible or impracticable, as determined by the trier of fact, would require the franchisor to pay the franchisee the fair market value of the franchise and franchise assets and any other damages, as provided. end delete The bill would provide for injunctive relief in the event of a violation or threatened violation of these provisions.

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.

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. begin delete Good end delete begin insert Except as provided in Section
20021, good end insert cause shall be limited to the failure of the franchisee
to substantially comply with the begin insert lawful requirements imposed upon
the franchisee by the end insert 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.

begin insert

(l) If the franchise expressly permits termination under such
circumstances, there is a lawful termination or nonrenewal of a
separate motor fuel franchise governed by provisions of the
Petroleum Marketing Practices Act (15 U.S.C. Secs. 2801 to 2807,
inclusive) that is operated by the franchisee or affiliate of the
franchisee located at the same business premises if both franchises
are granted by the same franchisor or an affiliate of the franchisor.
“Affiliate” shall have the same meaning as set forth in subdivision
(k) of Section 31005.5 of the Corporations Code.

end insert

SEC. 3.  

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

20022.  

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

(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 begin delete agreement. end delete begin insert agreement or to which
the franchisee, at the cessation of operation of the franchise
business by the franchisee, cannot lawfully, or does not, grant the
franchisor clear title and possession upon the franchisor’s payment
to the franchisee for the inventory, supplies, equipment, fixtures,
or furnishings. end insert

(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 begin insert franchisor does not prevent
the end insert franchisee begin delete retains end delete begin insert from retaining end insert control of the principal place
of the franchise business.

(e) This section shall not apply to any termination or nonrenewal
of a franchise 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.

begin insert

(f) This section shall not apply if the franchisor and franchisee
mutually agree in writing to terminate or not renew the franchise.

end insert begin delete

(f)

end delete

begin insert (g) end insert  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.

begin delete

(g)

end delete

begin insert (h) end insert  Upon the termination begin insert or nonrenewal end insert of a franchise, a
franchisor may offset against begin insert the end insert amounts owed to a franchisee
under this section any amounts owed by begin delete such end delete begin insert the end insert 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 begin insert a franchise, end insert 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 begin delete and reasonable standards, as end delete begin insert standards for the
approval of new or renewing franchisees, these standards to be
made available to the franchisee, as provided in Section 20029,
and to be end insert consistently applied to similarly situated franchisees
operating within the franchise begin delete brand, for the approval of new or
renewing franchisees. end delete begin insert brand, and the franchisee and the buyer,
transferee, or assignee comply with the transfer conditions
specified in the franchise agreement. end insert

(b) Notwithstanding subdivision (a), a franchisee shall not have
the right to sell, transfer, or assign the begin delete franchise end delete begin insert franchise, all end insert 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
begin delete assignor end delete begin insert assignee end insert does not meet the standards for new or renewing
franchisees described in subdivision begin delete (a). end delete begin insert (a) or the franchisee and
the buyer, transferee, or assignee do not comply with the transfer
conditions specified in the franchise agreement. end insert

(c)  begin delete Nothing in this section shall end delete begin insert This section does not end insert prohibit
a franchisor from exercising the contractual right of first refusal
to purchase a begin delete franchise end delete begin insert franchise, all or substantially all of the
assets of a franchise business, or a controlling or noncontrolling
interest in a franchise business end insert after receipt of a bona fide offer
begin insert from a proposed purchaser end insert to purchase the begin delete franchise by a proposed
purchaser of the franchise. end delete begin insert franchise, assets, or interest. end insert A
franchisor exercising the contractual right of first refusal shall offer
the begin delete franchisee end delete begin insert seller end insert 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 begin insert a franchise, end insert all or substantially all of the assets of
begin delete the end delete begin insert a end insert 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 begin delete franchise end delete
begin insert franchise, all end insert or substantially all of the assets of the franchise
business, or begin delete a end delete begin insert the end insert 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 begin delete franchised business or its assets. end delete begin insert franchise, the assets
of the franchise business, or the interest in the franchise business. end insert

(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. begin insert If the franchisor’s
then-existing standards for the approval of new or renewing
franchisees are not readily available to the franchisee when the
franchisee notifies the franchisor of the franchisee’s intent to sell,
transfer, or assign the franchise, the assets of the franchise
business, or the controlling or noncontrolling interest in the
franchise business, the franchisor shall communicate the standards
to the franchisee within 15 calendar days. end insert

(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 proposed sale, assignment,
or begin delete transfer of the franchise. end delete begin insert transfer. end insert The notice shall be in writing
and shall be delivered to the franchisee by business courier or
receipted mail. 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)  begin delete Nothing in this subdivision requires end delete begin insert This section does not
require end insert a franchisor to exercise a contractual right of first refusal.

(c)  begin delete Nothing in this section shall end delete begin insert This section does not end insert prohibit
a franchisor from exercising the contractual right of first refusal
to purchase a begin delete franchise end delete begin insert franchise, all or substantially all of the
assets of a franchise business, or a controlling or noncontrolling
interest in a franchise business end insert after receipt of a bona fide offer
begin delete to purchase the franchise by end delete begin insert from end insert a proposed purchaser begin delete of the
franchise. end delete begin insert to purchase the franchise, assets, or interest. end insert Any
franchisor exercising the contractual right of first refusal shall offer
the begin delete franchisee end delete begin insert seller end insert 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 begin delete either of the following remedies: end delete begin insert receive from the
franchisor the fair market value of the franchised business and
franchise assets and any other damages caused by the violation
of this chapter. end insert

begin delete

(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.

end delete

(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.