BILL ANALYSIS Ó
AB 525
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Date of Hearing: April 28, 2015
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Susan Bonilla, Chair
AB 525
(Holden and Atkins) - As Amended April 6, 2015
NOTE: This bill is double-referred, having been previously heard
by the Assembly Judiciary Committee on April 21st, 2015 and
approved on a 7-2 vote.
SUBJECT: Franchise relations: renewal and termination.
SUMMARY: Revises the rights and responsibilities of franchisors
and franchisees as outlined in the California Franchise
Relations Act (CFRA), which governs the renewal and termination
of franchise agreements.
EXISTING LAW:
1)Establishes the CRFA, which:
a) Defines a franchise as a contract between two or more
persons by which: (Business & Professions Code (BPC) §
20001)
i) A franchisee is granted the right to offer, sell or
distribute goods or services under the plan or system of
the franchisor;
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ii) Operation of the business is substantially
associated with franchisor's trademark, advertising or
other symbol; and,
iii) A franchise fee is paid by the franchisee.
b) Excludes from the definition of a franchise those
governed by the Petroleum Marketing Practices Act; lease
departments, licenses, or concessions at or with a general
merchandise retail establishment; and, a cooperatively
operated nonprofit organization; (BPC § 20001)
c) Provides that any condition, stipulation or provision
waiving compliance with the CFRA is contrary to public
policy and void; (BPC § 20010)
d) Prohibits termination of a franchise agreement prior to
the end of the term, except for good cause, which includes
failure to comply with any lawful requirement of the
franchise agreement after written notice and a reasonable
opportunity (no more than 30 days) to cure; (BPC § 20020)
e) Authorizes the immediate termination of a franchise
agreement without notice or an opportunity to cure in cases
of bankruptcy, abandonment, mutual agreement, material
misrepresentation, failure to comply with the law after
notice, repeated noncompliance after cure, seizure of the
premises by a governmental entity or creditor, conviction
of a felony or relevant misdemeanor, failure to pay
franchisee fees within five days of overdue notice, and
imminent danger to public health or safety; (BPC 20021)
f) Requires a franchisor to notify the franchisee of its
intention not to renew a contract at least 180 days prior
to the expiration of the franchise in specified
circumstances, during which time the franchisee may attempt
to find a buyer acceptable to the franchisor; and, (BPC
20025)
g) Requires a franchisor that terminates or fails to renew
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a franchise without complying with the CFRA to offer to
repurchase the franchisee's resalable current inventory at
the lower of the fair wholesale market value or the price
paid by the franchisee. (BPC 20035)
2)Establishes the California Franchise Investment Law (CFIL),
which:
a) Makes it a violation of the CFIL for any franchisor,
directly or indirectly, through any officer, agent or
employee, to restrict or inhibit the right of franchisees
to join a trade association or to prohibit the right of
free association among franchisees for any lawful purposes;
(Corporations Code (CORP) § 31220)
b) Provides that any person who offers or sells a franchise
in violation of specified sections of the CFIL or in
violation of any provision that provides an exemption from
the requirements of the CFIL, as specified, shall be liable
to the franchisee or sub-franchisor, who may sue for
damages caused thereby, and if the violation is willful,
the franchisee may also sue for rescission, unless, in
specified cases, the defendant proves that the plaintiff
knew the facts concerning the untruth or omission, or that
the defendant exercised reasonable care and did not know,
or, if he or she had exercised reasonable care, would not
have known, of the untruth or omission; (CORP § 31300)
c) Allows any person who violates the right to free
association to be sued in the superior court in the county
in which the defendant resides or where a franchise
affected by the violation does business, for temporary and
permanent injunctive relief and for damages, if any, and
the costs of suit, including reasonable attorneys' fees.
Further provides that a plaintiff shall not be required to
allege or prove that actual damages have been suffered in
order to obtain injunctive relief; (CORP § 31302.5)
d) Prohibits an action from being maintained to enforce any
liability for violation of the right of free association
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unless it is brought within two years after the violation
upon which it is based or within one year after the
discovery by the plaintiff of the facts constituting such
violation, whichever occurs first; and, (CORP § 31302.5)
e) Except as explicitly provided, prohibits civil liability
in favor of any private party against any person by
implication from or as a result of the violation of any
provision of CFIL or any rule or order thereunder. (CORP §
31306)
THIS BILL:
1)Provides that if a franchisor terminates a franchise for good
cause, good cause is limited to the failure of the franchisee
to substantially comply with any lawful requirement of the
franchise agreement after being given notice at least 60 days
in advance, and increases from 30 to at least 60 days the
amount of time to cure the failure.
2)Deletes existing requirements specifying when a franchisor may
fail to renew a franchise and instead prohibits a franchisor
from failing to renew a franchise agreement unless the
franchisee has failed to substantially comply with the
franchise agreement.
3)Allows a franchisee to have the opportunity to monetize any
equity the franchisee may have developed in the franchise
business prior to the termination of the franchise agreement.
4)Allows a franchisee in substantial compliance to renew for the
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same duration as provided in the expiring franchise agreement
and would require the renewal to be under the franchise
agreement terms that are being offered to new franchises.
5)Requires a franchisor that has grounds not to renew a
franchise to provide written notice of its intention not to
renew at least 180 days prior to the termination of the
existing franchise agreement.
6)Makes 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, except as
specified.
7)Requires a franchisee to notify the franchisor of its decision
to sell, transfer, or assign the franchise, as specified, and
requires the franchisor to notify the franchisee of the
approval or disapproval of the sale, assignment, or transfer
of the franchise within 60 days, as specified.
8)Requires a franchisor that terminates or fails to allow the
renewal, sale, assignment, or transfer of a franchise other
than in accordance with these provisions to reinstate the
franchisee under the same terms as the existing franchise
agreement and to pay all damages caused thereby, as specified.
9)Makes clarifying changes.
FISCAL EFFECT: None. This bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS:
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10)Purpose. This bill is sponsored by the Coalition of
Franchisee Associations . According to the author, "The
California Franchise Relations Act provides franchisee's fewer
rights than nearly every other form of contract law in
California, especially as it pertains to termination, breach
and damages. Franchise agreements are frequently one-sided
contracts that strongly favor the franchisor over the small
business owners who operate franchises. AB 525 restores
fairness to franchise agreements by applying traditional
contract law standards, giving franchisees the right to
transfer the business, ensuring franchisees can recover their
equity when a franchise relationship ends, all while
protecting the franchisor's rights to terminate the worst
actors, including those who break laws, cannot make required
payments or operate in direct defiance of the contract terms."
11)Background. According to the International Franchise
Association, "[a] franchise is the agreement or license
between two legally independent parties which gives a person
or group of people (the franchisee) the right to market a
product or service using the trademark or trade name of
another business (the franchisor)." It also gives the
franchisee the right to market a product or service using the
operating methods of the franchisor and the obligation to pay
the franchisor fees for those rights. The franchisor has the
obligation to provide those rights and support the franchisee
according to their agreement.
More specifically, franchisees serve to provide the look, name
recognition, and brand of the business. The franchisee builds
the brand locally and develops good will within the community.
The franchisee's business success helps support the community
with taxes and other contributions as well as improves the
bottom line for franchisors. Franchisees employ hundreds of
thousands of workers across the state.
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The franchise agreement contract is the central authority for
the relationship between the franchisor and franchisee, which
can be hundreds of pages long and contains a highly detailed
description of the rights, responsibilities and remedies of
the parties.
Current Law Regulating the Franchisor/Franchisee Relationship.
A substantial part of California franchise law is largely
embodied in CFIL and CFRA, although certain specific
industries (i.e., auto dealers and filling stations) have
their own unique provisions as well.
CFIL was enacted in 1970 to regulate franchise investment
opportunities in order to protect California investors from
potentially fraudulent franchise investments. The CFIL
generally requires franchisors to disclose to prospective
franchisees the information necessary to make an informed
decision about franchise offers, and prohibits the sale of
franchises that would lead to fraud or the likelihood that a
franchisor's promises would not be fulfilled. The CFIL
contains explicit provisions for enforcement generally through
damages (payment for economic losses) and rescission
(cancellation of the contract). It also provides for
injunctive relief (to require or prohibit a specific action),
and reasonable costs and attorneys' fees in certain
circumstances.
The CFRA (which excludes petroleum-related franchises, like gas
stations) was enacted in 1980 to govern relationships between
franchisors and franchisees after they have entered into
contract with each other. The CFRA is designed to prevent
unfair practices in the transfer, renewal or termination of a
franchise. The CFRA prohibits termination of a franchise
agreement except for good cause and only after notice and an
opportunity to fix the problem. It also lays out certain
circumstances where immediate termination is permitted, for
example: bankruptcy, abandonment, mutual agreement, material
misrepresentation, illegal activity, non-compliance with the
franchise agreement, failure to pay franchise fees and
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imminent danger to the public. The CFRA prohibits non-renewal
of a franchise agreement without 180 days prior notice, and
with certain additional protections for the franchisee. It
also provides for the transfer of ownership to surviving
spouses or heirs. The CFRA does not contain explicit
enforcement provisions except for the buyback of inventory
when a franchise is improperly terminated or non-renewed,
although general contract remedies may still be available.
The Balance of Power Between Franchisors and Franchisees.
Supporters of this bill argue that there is both a systemic
problem (a basic imbalance in bargaining power between the
franchisor and the franchisee), and a host of specific abuses
of that power which make this bill necessary.
An oft-cited 1996 court decision by the California Court of
Appeal (2nd Dist.) describes the franchise dynamic this way:
The relationship between franchisor and franchisee is
characterized by a prevailing, although not universal,
inequality of economic resources between the contracting
parties. Franchisees typically, but not always, are small
businessmen or businesswomen or people seeking to make the
transition from being wage earners and for whom the franchise
is their very first business. Franchisors typically, but not
always, are large corporations. The agreements themselves
tend to reflect this gross bargaining disparity. Usually they
are from contracts the franchisor prepared and offered to
franchisees on a take-it-or-leave-it basis. (Emerson,
Franchising and the Collective Rights of Franchisees (1990) 43
V and L. Rev. 1503, 1509 & fn. 21.) . . . Some courts and
commentators have stressed the bargaining disparity between
franchisors and franchisees is so great that franchise
agreements exhibit many of the attributes of an adhesion
contract and some of the terms of those contracts may be
unconscionable. Postal Instant Press v. Sealy, 43 Cal. App.
4th 1704, 1715-1717 (1996.)
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Opponents of this measure will cite that existing laws protect
the franchisor/franchisee relationship making the bill
unnecessary. Further, they argue that this measure would put
in jeopardy existing contracts and would create a number of
unprofitable situations for both the franchisor and
franchisee. They also believe that if this measure is
enacted, a number of franchisors will look to other states to
expand their brands.
ARGUMENTS IN SUPPORT:
The Coalition of Franchisee Associations , the bill's sponsor,
writes in its letter of support, "Our members work hard to make
their franchises a success and want franchisors to shut down bad
franchisees that damage the brand. However, we believe this can
be accomplished without forfeiting our right to operate."
The California Labor Federation writes in support, "AB 525 will
impact over 83,000 franchised establishments that employ more
than 925,700 workers in California. Fast food restaurants are
the biggest employers in the franchise sector, and fast food
workers and franchisees, mostly small-business people, share a
common problem - the unchecked power of big corporations."
The Service Employees International Union supports the bill and
writes, "These provisions are significant steps toward
rebalancing the relationship between franchisors and
franchisees. Prohibiting unfair terminations and non-renewals
ensures that franchisees who play by the rules have the
opportunity to thrive, while still providing franchisors with
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authority to terminate or not renew franchisees who don't meet
franchise standards. Protecting franchisees' rights to transfer
their business means that franchisees can pass their franchise
on to their children or sell it can reap the reward of their
labor and investment."
ARGUMENTS IN OPPOSITION:
The International Franchise Association opposes the bill and
writes, "AB 525 is unnecessary. California already regulates
franchise disclosure above and beyond the requirements
established by the Federal Trade Commission's Franchise Rule to
provide consumers with protections about the investments they
feely enter into under the CFIL. Additionally, California
regulates certain terms of the relationship between franchisor
and franchisee under the Franchise Relations Act. If adopted,
AB 525 would make it extremely difficult for existing franchise
systems to conduct business in California, rendering the state
an unattractive place to open a new franchise business."
AMENDMENTS:
In order to clarify definitions within the bill and provide
protections for the franchisee, the following amendments should
be made by the author:
1)Strike BPC § 20025, page 7, lines 7-22 inclusive.
2)In order to clarify exactly when the 60 day timeline begins,
the following amendment should be made to BPC § 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
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failure of the franchisee to substantially comply with any
lawful requirement of 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 non-compliance, to cure
the failure
3)The author should amend BPC § 20022 as follows:
In order to better specify the ability for the franchisee to
monetize any equity in the business should the franchisor not
provide an opportunity for the franchisee's contract to be
renewed, the author should make the following amendment on
page 5, line19:
(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 non-renewal of the franchise agreement.
The author should include the following amendment in order to
more clearly define equity and specify that the appraiser is a
mutually agreed upon third party:
(b)(1) For the purpose of this section, "equity" shall mean
the fair market value of the franchise and franchise
assets, on the date of the notice of termination or
non-renewal, of all investments in the franchise made by
the franchisee, including but not limited to improvements
to or purchases of real property, equipment, inventory,
advertising, and real estate, as determined by a mutually
agreed upon appraiser of business value.
(2) Notwithstanding paragraph (1), equity shall not include any
initial franchise fees paid by the franchisee.
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Add the following language in order to ensure that a
franchisee would not be able to file suit to seek additional
remedies if the franchise is sold by a franchisee before the
franchise relationship is terminated.
(c) Notwithstanding subdivision (b), should the franchisee sell,
transfer or assign any franchise assets before a valuation is
made, the sale price shall be deemed the monetized value of the
equity of that franchise asset.
The following amendment should be made in order to ensure that
the worst acting franchisees are not entitled to monetize any
equity in their business.
(d) This section shall not apply to any franchisee terminated
pursuant to Business and Professions Code §20021.
1)In order to ensure that the standards set for one franchisee's
request to sell his/her franchise is not arbitrary and
punitive compared to standards imposed on another franchisee,
the author should make the following amendment to BPC § 20028,
page 7, lines 30-33:
(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 consent shall not be withheld unless
the transferee does not meet the then-existing and reasonable
standards for new franchisees, as defined in subdivision (a).
unreasonably withheld.
2)In order to clarify that the finder of fact does not have to
be a judge and jury, but can also be an arbitrator, as
specified in the franchise agreement, the author should amend
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BPC § 20029, page 8, line 32, as follows:
(3) The finder of fact may include an arbitrator as specified in
the franchise agreement and agreed upon pursuant to Business
and Professions Code Section 20040.
3)In order to clarify that the finder of fact does not have to
be a judge and jury, but can also be an arbitrator, as
specified in the franchise agreement, the author should amend
BPC § 20041 as follows:
(a) The provisions of this chapter shall apply only to
franchises granted or renewed on or after January 1, 2016
January 1, 1981 or to franchises of an indefinite duration
which may be terminated by the franchisee or franchisor
without cause.
(b) Any franchises granted before January 1, 2016 shall be
governed by the provisions of this chapter in effect at the
time the franchise was granted or renewed.
REGISTERED SUPPORT:
Coalition of Franchisee Associations (sponsor)
California Fair Franchise Association
California Labor Federation
Service Employees International Union
Independent Organization of Little Caesars Franchisees
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Plumbing Heating Cooling Contractors Association of California
Slater Associates
Small Business California
Small Business Majority
3 individuals
REGISTERED OPPOSITION:
International Franchise Association
Analysis Prepared by:Le Ondra Clark Harvey, Ph.D. / B. & P. /
(916) 319-3301