BILL ANALYSIS                                                                                                                                                                                                    Ó





          SENATE COMMITTEE ON
          BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
                              Senator Jerry Hill, Chair
                                2015 - 2016  Regular 

          Bill No:            AB 525          Hearing Date:    June 29,  
          2015
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          |Author:   |Holden                                                |
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          |Version:  |June 23, 2015                                         |
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          |Urgency:  |No                     |Fiscal:    |No               |
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          |Consultant|Bill Gage/Mark Mendoza                                |
          |:         |                                                      |
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               Subject:  Franchise relations:  renewal and termination


          SUMMARY: Revises the rights and responsibilities of franchisors and  
          franchisees, as currently specified in the California Franchise  
          Relations Act, as to the termination of a franchise agreement,  
          compensation to the franchisee pursuant to a termination or  
          nonrenewal of the franchise agreement, the sale, transfer or  
          assignment of a franchise by the franchisee and remedies  
          provided for violation of the Act, and makes other minor and  
          clarifying changes.  

          Existing law:
          
          1)Establishes the California Franchise Relations Act (CFRA)  
            which governs the renewal, termination, transfer, and all  
            other conditions and provisions made pursuant to franchise  
            agreements.  (BPC § 20000 et seq.)

          2)Defines a franchise as a contract or agreement, either  
            expressed or implied, whether oral or written, between two or  
            more persons by which: 

             a)   A franchisee is granted the right to offer, sell or  
               distribute goods or services under the plan or system of  








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               the franchisor; 

             b)   Operation of the business is substantially associated  
               with franchisor's trademark, advertising or other symbol;  
               and, 

             c)   A franchise fee, as defined, is paid by the franchisee. 
             (Business & Professions Code (BPC) § 20001 (a), (b) and (c))

          3)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 (d))

          4)Specifies that a "franchisee" is a person to whom a franchise  
            is granted and a "franchisor" is a person who grants or has  
            granted a franchise.  (BPC § 20002, § 2003)

          5)Provides that any condition, stipulation, or provision waiving  
            compliance with the CFRA is contrary to public policy and  
            void.  (BPC § 20010)

          6)Establishes that the provisions under the CFRA apply to any  
            franchise where either the franchisee is domiciled in this  
            state or the franchised business is or has been operated in  
            this state. (BPC § 20015)

          7)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 the failure.  (BPC § 20020)

          8)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 any federal or local  
            law applicable to the operation of the franchise; 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)








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          9)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 under specified circumstances,  
            during which time the franchisee may attempt to find a  
            purchaser acceptable to the franchisor that meets their  
            current requirements regarding new franchises or for renewal  
            franchises.  Provides that nothing shall prohibit a franchisor  
            from exercising a right of first refusal to purchase the  
            franchisees business.
          (BPC § 20025)

          10)Provides that no franchisor shall deny the surviving spouse,  
            heirs, or estate of a deceased franchisee or the majority of  
            shareholder of the franchisee the opportunity to participate  
            in the ownership of the franchise under specified conditions.   

          (BPC § 20027)  

          11)Requires a franchisor that terminates or fails to renew 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)

          12)Provides that the franchisor may offset against any  
            repurchase offer made pursuant to Item #11 above, any sums  
            owed the franchisor or its subsidiaries by the franchisee  
            pursuant to the franchise or any ancillary agreement.  (BPC §  
            20036)

          13)Provides that nothing under the CFRA shall limit the right of  
            a franchisor and franchisee to agree before or after a dispute  
            has arisen to binding arbitration of claims under the CFRA, as  
            specified.  (BPC § 20040)

          14)Defines "relevant geographic market area" as this state or a  
            standard metropolitan statistical area within this state which  
            has been established by the United States office of Management  
            and Budget.  (BPC § 20999)
          15)Establishes a Franchises Act and the Franchise Dealers Fair  
            Practices law - which governs franchise relationships and  
            contracts between a refiner and a distributor, between a  
            refiner and retailer, between a distributor and another  
            distributor, or between a distributor and a retailer for the  
            sale, consignment, or distribution of gasoline, diesel, etc.   







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            (BPC § 20999 et seq. and BPC § 21140 et seq.)

          16)Establishes the California Franchise Investment Law (CFIL) -  
            which governs financial disclosures and registration  
            requirements with the Department of Business Oversight.  
            (Corporations Code (CORP) § 31000 et seq.)

          17)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.  (CORP § 31220)

          18)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)

          19)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)

          20)Prohibits an action from being maintained to enforce any  
            liability for violation of the right of free association  
            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. (CORP § 31302.5)

          21)Except as explicitly provided, prohibits civil liability in  







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            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 no franchisor may terminate a franchise prior to  
            the expiration of its term except for good cause, but that  
            good cause shall be limited to the failure of the franchisee  
            to  substantially  comply with the franchise agreement and that  
            the franchisee must be given notice at least  60 days  (rather  
            than the current 30 days or less) in advance of the  
            termination to cure the failure.  
          2)Specifies that one of the reasons for an immediate notice of  
            termination of the franchise without an opportunity to cure,  
            is if 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.

          3)Requires a franchisor, upon termination or nonrenewal of a  
            franchise, to compensate the franchisee at the value of price  
            paid minus depreciation, of all inventory, supplies,  
            equipment, fixtures, and furnishings purchased or paid for 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, and, at the time of the  
            notice of termination or nonrenewal, are in possession of the  
            franchisee or currently used in the franchise business.

          4)Provides that a franchisor is not required 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.

          5)Provides that the franchisor is not required to compensate the  
            franchisee as specified, when the franchisee declines a bona  
            fide offer of renewal from the franchisor or if the franchisee  
            is to retain control of the principal place of the franchise  
            business.

          6)Provides that franchisor is not required to compensate the  







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            franchisee as specified, if termination or nonrenewal of a  
            franchisee is due to publically announced and  
            non-discriminatory 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 BPC § 20999 (p).

          7)Provides that the franchisor does not have to compensate the  
            franchisee for any inventory, supplies, equipment, fixtures,  
            or furnishings that are sold by the franchisee between the  
            date of the notice of termination or renewal, and the  
            cessation of operation of the franchise business, by the  
            franchisee, pursuant to the termination or nonrenewal. 
           
          8)Provides that, upon termination of a franchise, a franchisor  
            may offset amounts owed to a franchisee by any amounts owed by  
            such franchisee to the franchisor. 


          9)Deems it unlawful for a franchisor to prevent a franchisee  
            from selling or transferring all of substantially all of the  
            assets of the franchise business, or a controlling 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 renewed franchisees.


          10)Provides that a franchisee does not have the right to sell  
            transfer, or assign the franchise or substantially all of the  
            assets of the franchise business, or a controlling 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 is not qualified  
            under the franchisor's then-existing and reasonable standards  
            for the approval of new or renewed franchisees.


          11)Provides that nothing shall prohibit a franchisor from  
            exercising the 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; additionally  
            provides that any franchisor exercising the right of first  







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            refusal must offer the franchisee payment at least equal to  
            the value offered in the bona fide offer.


          12)Specifies that pursuant to the provisions that permit the  
            sale, transfer or assignment   of a franchise business by the  
            franchisee, that "franchise business" shall include a legal  
            entity that is a party to a franchise agreement.


          13)Requires 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 intent to sell, transfer, or assign the franchise  
            or substantially all of the assets of the franchise business,  
            or a controlling interest in the franchise business, as  
            specified.


          14)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.

          15)Provides that a proposed sale, assignment or transfer shall  
            be deemed approved, unless disapproved by the franchisor by  
            providing notice as specified and 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.

          16)Provides that in any action in which the franchisor's  
            disapproval of a sale, assignment or transfer is an issue, the  
            reasonableness  of the franchisor's decision shall be a  
            question of fact requiring consideration of all circumstances  
            and that the finder of fact may be an arbitrator as specified  
            in the franchise agreement and satisfies the requirements of  
            BPC § 20040.  Provides however that nothing shall prohibit  
            summary judgment when the reasonableness of transfer approval  
            or disapproval can be decided as a matter of law.

          17)Provides that a franchisor is not required to exercise a  
            right of first refusal pursuant to the sale, assignment, or  
            transfer of the franchised business, but that nothing shall  
            prohibit a franchisor from exercising the right of first  







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            refusal to purchase a franchise after receipt of a bona fide  
            offer to purchase the franchise by a proposed purchaser of the  
            franchise, however, any franchisor exercising the right of  
            first refusal must offer the franchisee payment at least equal  
            to the value offered in the bona fide offer.

          18)Provides that in the event a franchisor terminates or fails  
            to renew a franchisee in violation of provisions of the CFRA ,  
            the franchisee shall be entitled to either of the following  
            remedies:  

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

             b)   Upon request of the franchisee, or if the relief  
               provided above (reinstatement) 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 franchisee assets and any other  
               damages caused by the violation of the CFRA.

             c)   A court may grant preliminary and permanent injunctions  
               for a violation or threatened violation of the CFRA.

          19)Provides that the franchisor may offset against any remedies  
            made pursuant to 
          Item #18 above, any prior recovery by the franchisee made as to  
            compensation for their inventory, supplies, etc. and any sums  
            owed the franchisor or its subsidiaries by the franchisee  
            pursuant to the franchise or any ancillary agreement.

          20)Makes other technical and clarifying changes.


          FISCAL  
          EFFECT:  None.  This bill is not keyed "fiscal" by Legislative  
          Counsel. 

          
          COMMENTS:
          
          1.Purpose. This bill is sponsored by the  Coalition of Franchisee  
            Associations  .







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          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.  Unlike traditional small businesses, most  
            franchises reflect a profound imbalance of contractual power  
            that favors the franchisor and places franchisees in a  
            financially precarious situation.  "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 [investment]  
            when a franchise relationship end[s], 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."

          The Author further states that, "The current franchise relations  
            act has allowed franchisors to use unethical practices against  
            franchisees. These practices are used to terminate a franchise  
            agreement which effectively takes the franchisees business  
            away from them. This is evidenced in multiple lawsuits  
            throughout the country involving franchisors that engage in  
            'churning.'  Recent whistleblower lawsuits have exposed  
            franchisors engaging in this churning process whereby  
            franchisors file questionable violation reports against  
            franchisees in order to generate 'good cause,' a one-sided  
            contractual standard, to 'take back' the business.  Once the  
            business is returned to corporate control, the business is  
            sold to a new franchisee for higher franchise fees.  Good  
            cause is a legal standard rarely used in contract law. Even if  
            a franchisor is in the wrong, franchisees are severely limited  
            in the equity or damages they can recover- frequently leaving  
            many franchisees penniless."  

           2. The Franchise Business.  Franchised businesses represent a  
             large and growing segment of the nation's businesses, making  
             up almost 11 percent of businesses with employees, employing  
             an estimated 9.1 million people, and consistently adding jobs  
             faster than non-franchised businesses in recent years.   
             According to the International Franchise Association (IFA),  
             21 percent of franchisees nationally are minority owned  
             businesses, while there are 14 percent of minority  
             non-franchised small business ownerships.  Also, a higher  







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             proportion of Asian Americans and African Americans are in  
             franchised business than non-franchised business, and a  
             similar proportion of Latinos are in franchised and  
             non-franchised business. In 
           California, over 83,000 franchised establishments employ more  
             than 925,700 workers.  Fast food restaurants are the biggest  
             employers in the franchise sector.
           Franchises are a popular and potentially lucrative way for  
             people to open their own business.  Just like any other small  
             business owner, franchisees invest a large amount of their  
             own money in the business and continue to pay for upgrades  
             and changes in response to the market.  Also like independent  
             business owners, they often work long days and nights  
             handling operations, managing employees and overseeing  
             expenses.  According to the Author, "they are the  
             accountants, human resource managers, office managers, and  
             employees of these businesses.  Franchise owners invest so  
             much of their time, money and energy into these businesses  
             because the business is their livelihood for today and  
             security in the future."

           The advantage of owning a franchise over an independent  
             business is the name brand recognition and the support of the  
             corporation.  Franchise owners rely on the trusted name brand  
             of their products to drive sales.  Reliably providing the  
             well-known product or service makes their business  
             successful.  It can also lead to ownership of more  
             franchises.  

           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.  The franchisee must sign the contract promising  
             to comply with all of the requirements and the franchisor's  
             service and marketing directives now and in the future.   
             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  







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             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.  
          3.Current Law Regulating the Franchisor-Franchisee Relationship.  
             A substantial part of California franchise law is largely  
            embodied in California Franchise Investment Law (CFIL) and  
            California Franchise Relations Act (CFRA), although certain  
            specific industries (i.e., auto dealers and gas stations) have  
            their own unique provisions as well. 

             Under the Corporations Code, CFIL was enacted in 1970 to  
             regulate franchise investment opportunities in order to  
             protect California investors from potentially fraudulent  
             franchise investments.  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.  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.  

             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.  CFRA is designed to prevent unfair  
             practices in the transfer, renewal, or termination of a  
             franchise.  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, noncompliance with the  
             franchise agreement, failure to pay franchise fees, and  
             imminent danger to the public.  CFRA prohibits nonrenewal of  
             a franchise agreement without 180 days prior notice, and with  
             certain additional protections for the franchisee.  It also  







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             provides for the transfer of ownership to surviving spouses  
             or heirs.  CFRA does not contain explicit provisions to  
             compensate a franchisee for the nonrenewal or termination of  
             a franchise, except for the buyback of inventory when a  
             franchise is improperly terminated or nonrenewed, although  
             general contract remedies may still be available. 

          4.The Imbalance in Bargaining 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  
          form 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.  "Franchising involves  
          the unequal bargaining power of franchisors and franchisees and  
          therefore carries within itself the seeds of abuse.  Before the  
          relationship is established, abuse in threatened by the  
          franchisor's use of contracts of adhesion presented on a  
          take-it-or-leave-it basis. Indeed such contracts are sometimes  
          so one-sided, with all the obligations on the franchisee 
          and none on the franchisor, as not to be legally enforceable.   
          (Postal Instant Press v. Sealy, 43 Cal. App. 4th 1704, 1715-1717  
          (1996.)) 

             As indicated by the proponents, franchising in California  
             today is still characterized by increasingly one-sided and  







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             non-negotiable franchise agreements. What may be worse,  
             according to proponents, is that franchisees cannot easily  
             close down even a money-losing franchise.  With zero cash  
             flow, the franchisee cannot pay rents, loans, employees, or  
             other obligations.  Indeed, many franchise agreements are  
             written so that failed franchisees are required to continue  
             to pay the franchisor royalties for the balance of the  
             franchise term, even if there is no franchise generating  
             income.  Franchisees thus become indentured servants to the  
             franchisor.  At least by keeping the business open, there is  
             some money to cover or partially cover these expenses.  The  
             franchisee become literally trapped in a downward spiral and  
             cannot close the business.  Unfortunately, this happens  
             repeatedly in franchising as pointed out by proponents.  When  
             the funds completely run out the only remaining recourse may  
             be bankruptcy.

             The Small Business Administration has lending programs for  
             individuals seeking to buy franchises.  A published report,  
             however, found dozens of franchise systems with over fifty  
             percent of franchisees with loans failing to pay back their  
             loan obligations and some systems have loan failure rates  
             over ninety percent as noted in the report.  Veterans have  
             also been targeted through the use of SBA loans to own and  
             operate a franchise and are experiencing high failure rates  
             as well with particular franchises.  VetFran, a program  
             sponsored by the IFA, has worked to make franchise ownership  
             and employment more accessible to veterans since 1991.   
             According to VetFran, veterans own approximately 66,000  
             franchise businesses, and since 2011, over 5,600 veterans  
             have become franchise business owners since 2011, and 65  
             percent of franchisors report an increase in the number of  
             veterans being recruited over just the last 12 months.   
             Proponents point out, however, that there are certain  
             franchises which have had a higher than normal risk of  
             failure for veterans even though they are listed as by  
             VetFran directory as one of its "premium veteran  
             franchisors."  AAMCO Transmissions, for example, has a 23.8  
             percent SBA loan failure rate, Meineke Car Care Center has a  
             22.2 percent failure rate, Huntington Learning Center has a  
             30.8 percent, and Matco Tools has a 33.4 percent failure rate  
             on SBA loans.  Veterans have actually accused Matco Tools of  
             aggressively recruiting and falsely representing the business  
             opportunity and have online petitions and urged Matco Tools  
             in other social media to "stop selling fraudulent franchises  







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             to our troops."    

             As indicated, the CFRA was enacted over thirty years ago as  
             one of the first state statutes to address the franchise  
             relationship and partially limit terminations and  
             nonrenewals.  But even then, franchisees were opposed to the  
             bill (  AB 295 , Chapter 1355, Statutes of 1980) to implement  
             the CFRA and argued that while the original intent of  
             creating the CFRA was to cure the widespread abuses in the  
             termination and nonrenewal of franchises, it instead  
             basically sanctioned many of those abuses in law.  They  
             stated, [We] cannot describe how distressed franchisees  
             throughout the State of California  are  over the fact that  
             this bill is no longer in their best interests but is, in  
             reality a franchisor bill."  Proponents argue that it has  
             been proven over time that the statutory provisions which  
             were intended to protect franchisees are not strong enough  
             and the remedies provided are limited.  Other states  
             including Arkansas, Hawaii, Indiana, Iowa, Nebraska, New  
             Jersey, Rhode Island, Washington and Wisconsin have enacted  
             stronger provisions for franchisees to prohibit unfair  
             practice in the franchise relationship and to address  
             franchisors who unfairly terminate, fail to renew, block  
             transfers, or adequately compensate franchisees for their  
             investment in the business. 

          5.Recent Survey of Franchisees Satisfaction and Relationship  
            with Franchisors.   A recent survey was conducted in 2015 by  
            an organization called, "FranchiseGrade.com."  The purpose of  
            the survey was to develop and conduct a survey of franchisees,  
            and various dimensions related to their satisfaction [in the  
            franchise business].  Some of the topics covered in the survey  
            included satisfaction with the franchise business, level of  
            work and business experience, degree of investment due  
            diligence, types of financing and assets pledged, relationship  
            with franchisor, and economic success.  The survey sample was  
            drawn from a list of 
          282,809 unique franchisees nationally, and 39,681 in California  
            and the target population were those that had been in a  
            franchise business for one year or more.  

          According to the survey, 72% of franchisees are in the 40 to 60  
            age range, 77% are male, 68% have a community college or  
            four-year degree, a majority of franchisees have been in  
            business over 5 years and 66% have only one franchise  







          AB 525 (Holden)                                         Page 15  
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            business.  This survey seems to indicate that many franchisees  
            in California are dissatisfied with their franchises because  
            they have invested a lot into their business, but are not  
            receiving the benefits they expected.  Approximately 46% said  
            they were dissatisfied or very dissatisfied as a franchisee  
            and 65% said they would not recommend franchising to a family  
            member. Meanwhile only 28% said they were satisfied.  Many had  
            little experience owning a business initially, but they  
            indicate that they did their research before purchasing: 85%  
            spoke to a franchisee and 72% had an attorney review the  
            franchise agreement before signing it.  Although franchisors'  
            representatives provided revenue and profit projections, only  
            13% said they also received a clear estimate of how much they  
            would need to spend on major improvements.

          The survey also indicates that after deciding to invest their  
            time and energy into a new business, franchisees also invested  
            heavily financially.  Approximately 74% took out a loan, 34%  
            of those were SBA loans and 49% pledged their home as an asset  
            to purchase the franchise.   After establishing the franchise,  
            the large, mandatory financial investments continued.  About  
            50% have been required to make major capital improvements and  
            only 33% of them believe it improved their business.   Another  
            78% say there have been mandatory changes to the business  
            model that increased their costs, but not increased revenue,  
            and 73% said there has been an increase in mandatory fees.  
            There is a possibility that these required changes to the  
            business model can cause a franchisee to be terminated for  
            noncompliance, and many of them have been warned accordingly.   
            Approximately 82% said they have been warned that a failed  
            inspection can lead to termination or nonrenewal.  

          Finally, only 22% say they can earn a decent living from their  
            franchise, and 79% pull a salary of less than $50,000 from  
            their business.  The survey also asked 
          franchisees about transfers and 48% say that they cannot sell  
            their business for a fair price and only 30% believe they can.  
            
          
          6.Requirements and Remedies Provided in this Measure Attempt to  
            Level the Playing Field Between Franchisee and Franchisor.   
            Supporters argue that this bill provides significant new  
            remedies for franchisees from unfair terminations and  
            nonrenewals of their franchises by the franchisor, adequate  
            compensation to the franchisee upon termination or nonrenewal  







          AB 525 (Holden)                                         Page 16  
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            of their franchise business, and protection of their rights to  
            sell, assign or transfer their franchise business.  The  
            following describes existing law and the changes proposed and  
            the responses of the Author, proponents and opponents to these  
            changes:  

             a)   Substantial compliance standard applied to termination  
               and renewal.  


             BPC Section 20020 currently allows premature termination of a  
               franchise agreement for good cause, which includes failure  
               to comply with any lawful requirement of the franchise  
               agreement after written notice and a reasonable opportunity  
               to comply with the agreement within at least 30 days.   
               Section 20025 allows the franchisor to not renew a  
               franchise agreement simply by providing the franchisee with  
               180 days written notice of its intent not to renew.   
               According to the Author, these standards unfortunately  
               allow some franchisors to unfairly take advantage of  
               franchisees by using the contract to punish franchisees by  
               taking their business away and to avoid their legal  
               obligations to give franchisees another chance.

             Accordingly, this bill would allow termination of franchise  
               agreement for good cause only upon the failure of the  
               franchisee to substantially comply with the franchise  
               agreement, and give the franchisee advance notice and an  
               opportunity of at least 60 days to comply.  According to  
               the Author, this provision ensures fairness to franchisees  
               by barring the termination of any franchisee that is in  
               substantial compliance with the franchise agreement,  
               instead of allowing termination much more broadly for  
               failure to comply, in the case of terminations, "with any  
               lawful requirement of the franchise agreement."  

             Proponents of the bill argue that the "substantial  
               compliance" legal standard reduces ambiguity in terms of  
               the franchise agreement because the term is well-defined,  
               historically accepted, and is a central tenet of contract  
               law used by many other states to regulate franchise  
               agreements and contracts, generally.  They note that  
               California courts have been interpreting substantial  
               performance of contracts dating back to at least the early  
               1900s (see, e.g., Thomas Haverty Co. v. Jones, 185 Cal. 285  







          AB 525 (Holden)                                         Page 17  
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               (1921), holding that substantial performance was achieved  
               when the non-breaching party still "is enjoying the fruits  
               of the . . . work in performance of the contract.")   
               Proponents also note that current California jury  
               instructions provide for a simple two-part test to  
               determine the existence of substantial performance.  First,  
               the breaching party must show they "made a good faith  
               effort to comply with the contract," and second, "[the  
               non-breaching party] received essentially what the contract  
               called for because?failures, if any, were so trivial that  
               they could have been easily fixed or paid for."   
               (California Civil Jury Instructions No. 312. Substantial  
               Compliance.)

             Opponents argue that the bill limits good cause to the  
               "failure of the franchisee to substantially comply with the  
               franchise agreement," and removes the words "any lawful  
               requirement" of the franchise agreement.  This language  
               poses a much higher threshold for a franchisor to establish  
               than the "failure of the franchisee to substantially comply  
               with lawful requirements of the agreement." California  
               would be the only state imposing such a high threshold. The  
               language in this Section  allows a franchisee to avoid  
               termination, no matter how serious and longstanding its  
               default and failure to cure, as long as the franchisee  
               complies with its remaining obligations.  Each default  
               situation will require an individual balancing of the  
               uncured default against the balance of the required  
               contractual performance in order to assess "substantial  
               compliance."
             b)   Allow 60-day opportunity to substantially comply with  
               franchise agreement.  BPC Section 20020 allows the  
               franchisor to set a period of time to cure noncompliance  
               with the franchise agreement "which in no event need be  
               more than 30 days to cure the failure."  Supporters report  
               that franchisees are often given as little as 5 days to  
               cure noncompliance; an unreasonable amount of time  
               depending on the nature of the cure needed.  Therefore,  
               providing 60 days to cure is a reasonable solution common  
               to many other commercial transactions.


             Initially, opponents argued that the substantial compliance  
               standard and the extended opportunity to cure provisions  
               will make it  burdensome and difficult for existing  







          AB 525 (Holden)                                         Page 18  
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               franchisors to conduct business in California, and will  
               render it an unattractive place to open new franchises.

             Proponents argue that economic data derived from states that  
               employ the substantial compliance standard and a 60-day  
               notice before termination requirement, or both, do not  
               support this contention.  Instead, they report that between  
               2003 and 2013, the eleven states that have one or both of  
               these provisions had an average franchised unit growth rate  
               of 23.2 percent, as compared to the 18.9 percent growth  
               rate for the other 39 states and the District of Columbia  
               that have neither provision in law.  Of those eleven  
               states, five (Arkansas, Nebraska, New Jersey, Rhode Island  
               and Wisconsin) employ both the "substantial compliance"  
               standard and require at least 60 days' notice before  
               termination.  The same data show that the franchise growth  
               rate for those five states is essentially identical to the  
               growth rate as compared to the other 45 states and the  
               District of Columbia (19.4 percent vs. 19.8 percent,  
               respectively.)  In short, proponents contend that  
               "substantial compliance" standards and extending the time  
               frame to cure noncompliance of the agreement have resulted  
               in greater certainty and investment protection, not less,  
               for franchisees in those states that employ such standards.

             Opponents assert that Section 20020 contains no cap on the  
               cure period beyond the minimum 60-day cure period in which  
               a franchisee has the opportunity to fix a violation of the  
               franchise agreement.  Each franchisee will be able to argue  
               that the new 60-day minimum cure period, already at least  
               twice as long a cure period as the cure period in the  
               current statute, still is an inadequate cure opportunity.   
               That will result in a case-by-case analysis of the proper  
               cure period for a particular franchisee, in a particular  
               situation, involving a particular default.  There will be  
               no guidance for franchisors and franchisees, inviting  
               litigation in each and every situation. "We suggest a cap  
               on the franchisee's cure period [of 75 days]."
             c)   Clarifies grounds for immediate termination.  Existing  
               law, BPC Section 20021, provides for a number of  
               circumstances that justify immediate notice of termination  
               of a franchise agreement without an opportunity to cure.   
               These circumstances are considered so serious that they  
               threaten to damage the brand reputation of the franchise  
               and are thus grounds for immediate termination by the  







          AB 525 (Holden)                                         Page 19  
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               franchisor, for example, when a franchisee abandons the  
               business, is convicted of a felony, goes bankrupt, or the  
               franchise operation poses an imminent danger to public  
               health.  One set of circumstances listed in Section 20021  
               calls for immediate termination when "the franchisee fails,  
               for a period of 10 days after notification of  
               noncompliance, to comply with any federal, state or local  
               law or regulation applicable to the operation of the  
               franchise."  Supporters of the bill contend that, like the  
               provision that allows early termination "for any lawful  
               requirement of the franchise agreement," this particular  
               set of circumstances justifying immediate termination  
               should be clarified to avoid an unnecessarily broad  
               interpretation of laws that would allow the franchisor to  
               immediately terminate the franchise agreement.   
               Accordingly, the bill clarifies that violations of federal,  
                  state of 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,  
               are grounds for immediate termination.
            
             d)   Removes "monetization of equity" provision for  
               termination or nonrenewal of a franchise and requires  
               instead "compensation" to franchisee for inventory,  
               supplies, equipment, fixtures and furnishings at current  
               depreciated value.  Unlike other types of contract law in  
               California, the CFRA only entitles franchisees to recover  
               the cost of any existing inventory remaining upon  
               dissolution of the franchise.  Current law that allows the  
               franchisor to essentially take all equity, personal  
               capital, and goodwill a franchisee has developed upon  
               franchise dissolution is particularly unfair to small  
               business franchisees, contends the Author, given that  
               franchisees invest a large amount of their own money in the  
               business and continue to pay for upgrades and changes in  
               response to the market.  Even if the franchisor breaches  
               the franchise contract, the franchisee is limited by the  
               original franchisee agreement in what contract damages they  
               can claim.



             This measure, prior to recent amendments on June 15, 2015,  
               codified the IFA's own "Statement of Guiding Principles" by  
               providing for a franchisee's right to "monetize any equity"  







          AB 525 (Holden)                                         Page 20  
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               they have developed in their business prior to the  
               termination or nonrenewal of the franchise agreement, this  
               "equity" included the fair market value of the franchise  
               and franchise assets, all investments in the franchise made  
               by the franchisee, including, but not limited to, purchase  
               of real property, equipment, inventory, advertising, and  
               real estate.

             The recent amendments to Section 20022 of the BPC removed  
               this requirement and instead now provides for compensation  
               to the franchisee, upon termination or nonrenewal of a  
               franchise, for the value of price paid, minus depreciation,  
               of all inventory, supplies, equipment, fixtures and  
               furnishings purchased or paid for by the franchisee from  
               the franchisor or its approved supplier, or other sources  
               under the terms of the franchise agreement or any ancillary  
               or collateral agreement, and, at the time of the notice of  
               termination or nonrenewal, are in possession of the  
               franchisee or used in the franchise business.  It also  
               specifies under what circumstances a franchisor would  not   
               have to compensate the franchisee for the above items, or  
               provide for an offset against amounts owed to the  
               franchisee.

             The opponents still raise a concern about including the term,  
               "termination" under this Section since it would allow for a  
               franchisee to receive compensation from the franchisor when  
               its franchise agreement is terminated for cause [immediate  
               termination without an opportunity to cure]; a previous  
               version of AB 525 at least excluded from coverage any  
               termination under Section 20021.  Opponents ask, "Why  
               should a franchisee whose franchise is legitimately  
               terminated under the new and heightened good cause standard  
               be entitled to any compensation?" 
             A bad-actor or wholly incompetent franchisee can unfairly  
               harm a franchise system by daring the franchisor to  
               terminate the franchise, knowing that the franchisor  
               ultimately must compensate the franchisee even if the  
               termination decision is lawful.

             Opponents are also concerned that one of the reasons for not  
               compensating the franchisee would be if the  franchisee   
               retains control of the principal place of the franchise  
               business.  Opponents argue that there should be no  
               compensation to the franchisee "if the  franchisor  does not  







          AB 525 (Holden)                                         Page 21  
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               prevent the franchisee from retaining control of the  
               franchise business."  It should be the franchisor  
                preventing  the franchisee from continuing the use of the  
               franchise business, not the franchisee who decides to  
               retain control of the business. 

             Opponents believe as well that the compensation would not be  
               needed if the franchisor and franchisee mutually agree not  
               to renew or where purchases are required by applicable law.  
                As explained by the opponents, this is to clarify that the  
               parties can mutually agree not to renew and Section 20022  
               (g) will not be applicable.  Similarly, a franchisor should  
               not be required to pay the franchisee for items the  
               franchisee must purchase because of the requirements of  
               applicable law and not because the franchisor requires such  
               purchases.


             Opponents lastly indicate that compensation would not be  
               needed if the franchisor provides notice of nonrenewal of  
               the franchise agreement not less than one year prior to the  
               expiration date of the agreement during which time the  
               franchisee has the opportunity to transfer or assign the  
               franchise or the assets of the business.

             e)   Attempts to streamline process and timeline for sale,  
               assignment or transfer of franchise business by franchisee.  
                BPC Section 20025 required 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  
               under specified circumstances, during which time the  
               franchisee may attempt to find a purchaser acceptable to  
               the franchisor that meets their current requirements  
               regarding new franchises or for renewal franchises, and  
               provided that nothing shall prohibit a franchisor from  
               exercising a right of first refusal to purchase the  
               franchisees business.

             BPC Section 20027 limits the transfer of franchises to family  
               members of a deceased franchisee as long as those family  
               members meet criteria for owning a franchise as determined  
               by the franchisor.  Similarly, Section 20027also provides  
               the deceased franchisee's family the opportunity to sell or  
               transfer the franchise to a third party that meets the  
               franchisor's criteria for owning a franchise, as specified.  







          AB 525 (Holden)                                         Page 22  
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             According to the Author, this bill seeks to establish a  
               streamlined process and timeline for the sale or transfer  
               of a franchise and under what conditions the sale,  
               assignment or transfer could occur.  Section 20025 is  
               repealed and two new Sections were added to the CFRA.  The  
               Section 20028 specifies that 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 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, but also provides that the 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 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 as specified.   
               The measure also details the requirements of the notice and  
               other necessary information and documentation that shall be  
               provided to the franchisor and provides that the franchisor  
               may still exercise their right of first refusal to purchase  
               the franchise. 

             Opponents argue that the new requirements of Section 20028  
               appear to allow unfettered transfers by franchisees of  
               non-controlling interests in either the franchise business  
               or the legal entity that is a party to a franchise  
               agreement. Applying transfer qualifications only to a  
               person who obtains all or a controlling interest of a  
               franchise eliminates the qualification requirements of  
               people who may acquire lesser ownership interests in a  
               franchise.  All purchasers or acquirers of an interest must  
               be qualified in order to protect the brand and the  
               integrity of the franchise. For example, someone could  
               purchase a 10% ownership and may be selected to operate the  
               franchise.  Or someone acquiring a non-controlling interest  
               could already own or operate a competing business, buy his  
               way into the franchise business to which he otherwise would  







          AB 525 (Holden)                                         Page 23  
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               not have had access, and now have access to proprietary  
               information generally unavailable to competitors. The  
               franchisor should have the right to review and approve all  
               potential owners of the franchise business or legal entity.  
                In addition, retaining the word "reasonable" as a modifier  
               of "standards" under Section 20028, rather than relying  
               solely on "then applicable" or "then-existing" standards,  
               for the approval of new franchisees, allows every  
               franchisee to challenge any standard a franchisor  
               articulates, even if the franchisor consistently applies  
               the standard to similarly-situated franchisees.

             f)   For violation of CFRA, provides for reinstatement, award  
               of damages or fair market value of franchise to the  
               franchisee.  Current BPC Section 20035 provides that in the  
               event a franchisor terminates or fails to renew a franchise  
               other than in accordance with the CFRA, the franchisor  
               shall offer to repurchase from the franchisee the  
               franchisee's resalable current inventory meeting the  
               franchisor's present standards that is required by the  
               franchise agreement or commercial practice and held for use  
               or sale in the franchised business at the lower of the fair  
               wholesale market value or the price paid by the franchisee.  
                The language in this Section has now been eliminated and  
               recast and now specifies that in the event that a  
               franchisor terminates or fails to renew a franchise in  
               violation of the CFRA, the franchisee shall be entitled to  
               either of two remedies: (1) "reinstatement" of the  
               franchisee under the same terms as the existing franchise  
               agreement and for the franchisor to pay all damages caused  
               thereby; or (2) upon the request of the franchisee, or if  
               the relief provided for pursuant to reinstatement above 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 the CFRA.   
               It also provides that a court may to grant preliminary and  
               permanent injunctions for violation of threatened violation  
               of the CFRA.

             Opponents argue against the "reinstatement" remedy and  
               contend that it still makes no sense when the franchisee  
               may seek injunctive relief to stop an allegedly  
               inappropriate termination or non-renewal and also be  
               entitled to recover damages.  In the event of a violation,  







          AB 525 (Holden)                                         Page 24  
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               the franchisor must pay the franchisee the fair market  
               value of the franchise and franchise assets and any other  
               damages caused by the violation.  This is an adequate  
               remedy.

             g)   Measure Have Prospective or Retroactive Effect.   
               Although laws which are generally passed by the Legislature  
               have prospective effect unless explicitly indicated  
               otherwise in the measure, Opponents are concerned that  
               since there is no language specifying that SB 525 will have  
               only prospective application that this would unfairly and  
               unconstitutionally impair all existing franchise agreements  
               that were entered into by franchisors and franchisees under  
               a specific set of legal rules and expectations. "Litigation  
               attacking the constitutionality of AB 525 on this basis  
               alone would be a given."

          7.Prior Legislation.   SB 610  (Jackson) of 2014 would have  
            revised various provisions of the California Franchise  
            Relations Act  with respect to termination or transfer of a  
            franchise, as well as the right of association among  
            franchisees. (  Status  : This bill was vetoed by the Governor. In  
            his veto message he indicated the following:

          "This bill alters the relationship between franchisors and  
            franchisees by, among other things, changing the standard  
            required to terminate a franchise agreement from "good cause"  
            to a "substantial and material breach." While the "good cause"  
            standard is common and well understood, the standard provided  
            in this bill is new and untested. 

          The bill's changes would significantly impact California's vast  
            franchise industry that relies on the certainty of  
            well-settled laws. I am open to reforming the California  
            Franchise Relations Act to give more protections to  
            franchisees if there are indeed unacceptable or predatory  
            practices by franchisors. I need, however, a better  
            explanation of the scope of the problem so I am certain that  
            the solution crafted will fix those problems and not create  
            new ones.

          Additionally, the parties supporting and opposing this bill have  
            diametrically different views. Given the polarized positions,  
            it is in the best interest of all that a concerted effort be  
            made to reach a more collaborative solution.")







          AB 525 (Holden)                                         Page 25  
          of ?
          
             
              AB 1141  (Dahle) of 2013 would have enacted the "Small  
             Business Investment Protection Act of 2013" to incorporate  
             some of the good faith and rights association provisions of  
             SB 610 as well as changes to the right to terminate a  
             franchise agreement. (  Status  : This bill was held in the  
             Assembly Judiciary Committee). 
              
             AB 2305  (Huffman) of 2012 would have enacted "The Level  
             Playing Field for Small Business Act of 2012" to revise the  
             rights and responsibilities of franchisors and franchisees as  
             well as the rules that govern the franchise relationship in  
             California. (  Status  : This bill was held in the Assembly  
             Business, Professions and Consumer Protection Committee). 

              SB 814  (Oller) of 2001 would have authorized a franchisee to  
             pursue damages, including attorney's fees, from a franchisor  
             that violates the CFRA by terminating or failing to renew a  
             franchise.  It also provided a franchisee could seek  
             injunctive relief if the franchisor did not provide adequate  
             notice of termination of a franchise to seek injunctive  
             relief.  (  Status  :  This bill was held in the Senate Judiciary  
             Committee.)

          8.Arguments in Support.  The  Coalition of Franchisee  
            Associations  (CFA) is the sponsor of this measure and explains  
            that across the country, millions of small business owners  
            embrace the entrepreneurial spirit and support their local  
            communities by opening their own franchise.  These businesses  
            are their livelihood, supporting their family and the families  
            of their employees.  However, contracts with franchisors, the  
            franchise agreement, allow franchisors to take away that  
            livelihood for any reason, with all the equity the franchisee  
            invested into it and without recourse for the franchisee.   
            Franchisees have had their business terminated without any  
            proof of any substantial violation of a contract or with  
            manufactured evidence.  They have also been denied the ability  
            to sell, assign or transfer their business to a legitimate  
            purchaser.  After the business is taken, the franchisee cannot  
            even recover the hundreds of thousands of dollars they have  
            invested.  This is all done through unethical intimidation  
            tactics that remain legal because franchisors write contracts  
            that allow them to do what they want and hide behind vague  
            state laws.  According to CFA, this bill will clarify state  
            law to specify that a franchisor can terminate a franchise,  







          AB 525 (Holden)                                         Page 26  
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            but only when there are serious and substantial violations of  
            contract.  It will also allow these small business owners to  
            sell their business to legitimate buyers or family members,  
            prevent franchisors from terminating a franchise without any  
            opportunity to cure, and allow franchisees to renew their  
            contracts pending compliance so as to continue their financial  
            and personal investment in the franchise. 

          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  
            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.  Many franchisees operate in an  
            unpredictable environment of ever changing rules and financial  
            requirements as dictated by the franchisor.  A more balanced  
            system would stabilize franchisees and enable them to invest  
            in their business as well as pay living wages to a chronically  
            underpaid low-wage workforce." 

          The  California Labor Federation  also supports this measure and  
            believes it will clarify exiting law and provide modest and  
            important protections to franchisees.  The provisions in the  
            bill are significant steps toward rebalancing the relationship  
            between franchisors and franchisees. Prohibiting unfair  
            terminations ensures that franchisees that play by the rules  
            have the opportunity to thrive, while still providing  
            franchisors with authority to terminate franchisees who do not  
            meet franchise standards.  Protecting franchisees' rights to  
            transfer their business means that franchisees can pass on the  
            fruits of their labor.  Allowing franchisees to receive  
            compensation for their investments in the franchise will  
            enable them to recoup some what they put into the business  
            upon termination of the franchise.  "The current system is one  
            where the franchisor has all the power and the franchisee has  
            little security or say.  This structure is not only unfair for  
            small business owners, but it also promotes a low-wage, high  
            turnover environment for the almost one million fast food  
            workers.  Franchisees need the protections in this bill,  
            especially those seeking to do the right thing for their  







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            workers." 

          Other proponents of this measure including the Small Business  
            California and the Small Business Majority and many of the  
            franchisees from across the nation and state make similar  
            arguments and the need for this measure.  They indicate that  
            the legislation is crucial to helping California's small  
            franchises grow and thrive.  While franchisee-franchisor  
            relationship is often mutually beneficial, there have been  
            instances of franchisors taking advantage of individual  
            franchise owners, using their contract as a shield.  Certain  
            franchisors include unfair provisions in their contracts to  
            limit franchisee rights while others have broadly interpreted  
            state law to terminate the franchise agreements without cause  
            and avoid their legal obligations to give franchisees another  
            chance or return the franchisees basic investment.  This has  
            led to business owners who have invested their money into a  
            franchise to be left with no possibility to regain the equity  
            invested and no legal recourse to gain their investment back.

          9.Arguments in Opposition.  The  International Franchise  
            Association  (IFA) has an "Oppose Unless Amended" position on  
            this measure.  The issues and most of the suggested changes  
            they propose are reflected in this analysis.  The IFA has  
            argued initially that, "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."   IFA has, however,  
            been working with the Author's office to try and address many  
            of their concerns with this bill.  It appears as if the  
            Author's office has tried to address many of these concerns  
            and have met with the IFA and the opponents and provided this  
            Committee with at least two significant sets of amendments;  
            one set of amendments on June 15, 2015 and another on June 23,  
            2015.  

          As of June 25, 2015, this Committee received an "Oppose Unless  
            Amended" letter from the  Civil Justice Association of  







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            California  (CJAC) and they state that this bill "would create  
            uncertainty and encourage litigation in the franchise  
            relationship by 
          (1) changing the standard under which a franchisee agreement may  
                                                                        be from good cause when failing to comply with lawful  
            requirements of the contract, (2) introducing new, litigious  
            standards on nonrenewals/nontransfers of the franchise  
            relationship, and (3) impacting existing, complex long-term  
            contracts making these changes retroactive."  CJAC goes on to  
            raise many of the same concerns which have been expressed by  
            IFA.   

           10.Policy Issue  : Is it intended that petroleum companies and  
            their convenience stores (mini-marts) would be covered under,  
            or exempt from the current requirements of the CFRA?   
            Petroleum related franchises are regulated by both state law,  
            BPC § 20999 et seq., and federal law, the Petroleum Marketing  
            Practices Act.  Both statutes outline "good cause"  
            requirements for the termination and non-renewal of a  
            franchise.  However, it is unclear whether state or federal  
            "good cause" guidelines would apply to their convenience  
            stores or "mini-marts" located at the same premises as a  
            franchise governed by the Petroleum Marketing Practices Act.   
            The Author may wish to clarify in the future whether or not it  
            is intended that these franchises would be covered under this  
            measure. 

          11.Recommended Amendments:

             a)   Because of concerns raised that there is no cap on the  
               cure period beyond the minimum of 60-day cure period in  
               which a franchisee has the opportunity to fix a violation  
               of the franchise agreement, recommend the following  
               amendment:

             On page 3, line 10, insert after "failure.":   In no event  
               will the right to cure the failure exceed 75 days unless  
               there is a separate agreement between the franchisor and  
               franchisee to extend the time.  

             b)   Because of concerns raised that under Section 20028 the  
               franchisor would not have the right to review and approve a  
               person who may acquire a lesser ownership interest in the  
               franchise and possibly threaten the brand and integrity of  
               the franchise, recommend the following amendment:







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             On page 5, line 40, insert after "controlling":   or  
               non-controlling interest  

             On page 6, line 9, insert after "controlling":  or  
               non-controlling interest   

             On page 6, line 27, insert after "controlling":  or  
               non-controlling interest  

             On page 6, line 31, insert after "controlling":  or  
               non-controlling interest  

             c)   Clarify that the implementation of this measure will be  
               prospective rather than retroactive.
           
          NOTE  :  Double-referral to the Senate Committee on Judiciary.

          SUPPORT AND OPPOSITION:
          
           Support:  

          Coalition of Franchisee Associations (Sponsor)
          California Association for Micro Enterprise Opportunity
          California Beer and Beverage Distributors
          California Fair Franchise Association
          California Labor Federation
          EA Independent Franchisee Association 
          East Valley Business Legislative Advocacy Committee
          Service Employees International Union
          Independent Organization of Little Caesars Franchisees
          North American Association of Subway Franchisees
          Plumbing Heating Cooling Contractors Association of California
          Small Business California
          Small Business Majority
          10 Individual Business Owners and Representatives and  
          Franchisees

           Opposition:  

          Civil Justice Association of California (Oppose Unless Amended)
          International Franchise Association (Oppose Unless Amended)


                                      -- END --







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