BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 525 (Holden)
Version: July 2, 2015
Hearing Date: July 14, 2015
Fiscal: No
Urgency: No
RD
SUBJECT
Franchise relations: renewal and termination
DESCRIPTION
This bill would modify the California Franchise Relations Act
(CFRA), which governs the relations between a franchisor,
subfranchisor, and franchisee, to:
specify that "good cause" (for purposes of a valid termination
of a franchise under the CFRA) is limited to the failure of
the franchisee to substantially comply with the franchise
agreement after being given notice at least 60 days in advance
of the termination and a reasonable opportunity, which in no
event shall be less than 60 days and generally may not exceed
75 days from the date of the notice of noncompliance, to cure
the failure;
revise and expand the rights and duties of franchisees and
franchisors in relation to any terminations and renewals of
franchise agreements; compensation for inventory pursuant to a
termination or nonrenewal of the franchise agreement; the
sale, transfer or assignment of a franchise by the franchisee;
and
revise the remedies available to a franchisee in the event a
franchisor terminates or fails to renew a franchisee in
violation of the CFRA, as specified.
BACKGROUND
The California Franchise Investment Law (CFIL) was enacted in
1970 to regulate franchise investment opportunities in order to
protect California investors from flimsy or fraudulent franchise
investments. The CFIL generally requires franchisors to provide
prospective franchisees with the information necessary to make
an intelligent decision regarding franchise offers, and
prohibits the sale of franchises where they would lead to fraud
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or likelihood that a franchisor's promises would not be
fulfilled. (Corp. Code Sec. 31000 et seq.)
Subsequently, the California Franchise Relations Act (CFRA) was
enacted to govern the ongoing relationships between franchisors
and franchisees in an effort to prevent unfair practices in the
termination, renewal, or transfer of a franchise, where either
the franchise is domiciled in California or the franchise
business is or has been operated in California. (Bus. & Prof.
Code Sec. 20000 et seq.) For example, the CFRA generally
prohibits franchisors from terminating a franchise prior to the
expiration of its term, except for good cause, as specified.
(Bus. & Prof. Code Sec. 20020.)
In 2012, AB 2305 (Huffman, 2012) was introduced to enact the
Level Playing Field for Small Businesses Act of 2012 and would
have amended both the CFIL and CFRA in an attempt to address
"the widespread use of one-sided and nonnegotiable franchise
agreements [which have] created numerous problems for
franchisees in California." That bill sought to increase
protections against unfair practices of franchisors, for
example, by permitting termination of a franchise agreement for
good cause only where there has been a substantial and material
breach of the franchise agreement and the franchisee was granted
specified time to cure the breach. Among other things, the bill
would have required good faith in the performance and
enforcement of the franchise agreement. AB 2305 also would have
created a cause of action and would have permitted the award of
attorney's fees where a franchisor or subfranchisor sold or
offered to sell a franchise in violation of the bill's
prohibitions against specified unfair or deceptive acts or
practices or unfair methods of competition.
Subsequently, SB 610 (Jackson, 2013) took a narrower approach
than AB 2305 in seeking to amend the CFRA to enhance various
protections for franchisees against unfair practices of
franchisors with respect to sales, transfers, assignments, or
terminations of a franchise. For example, similar to this bill,
SB 610 would have generally prohibited a franchise agreement
from preventing a franchisee from selling or transferring all or
part of the franchise interest to another person and from
unreasonably withholding consent to a franchisee seeking to
sell, transfer, or assign the franchise or related rights, as
specified, and would have required certain notices to be given
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in relation to a proposed sale, transfer, or assignment of a
franchise. Additionally, SB 610 sought to protect franchisees by
prohibiting a franchisor from terminating a franchise prior to
expiration to its term, except upon a substantial and material
breach of the franchise agreement, in which case the bill would
have required the franchisor to allow the franchisee 30 days to
cure the failure before termination. Also similar to this bill,
SB 610 would have required a franchisor that fails to renew a
franchise in violation of the CFRA to offer to repurchase 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. Ultimately, SB 610
was vetoed by the Governor due to concern that the bill would
replace the well-known "good cause" standard with a "substantial
and material breach" standard.
This bill, seeks to enhance various protections under the CFRA
for franchisees, while also being responsive to the Governor's
veto message of SB 610.
CHANGES TO EXISTING LAW
Existing law , the California Franchise Relations Act (CFRA),
generally regulates the termination, nonrenewal, and certain
transfers of franchises with the intent to protect franchise
investors. (Bus. & Prof. Code Sec. 20000 et seq.) Existing law
provides that the provisions of 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.
(Bus. & Prof. Code Sec. 20015.) Existing law provides that any
condition, stipulation or provision purporting to bind any
person to waive compliance with any provision of this law is
contrary to public policy and void. (Bus. & Prof. Code Sec.
20010.)
Existing law , the CFRA, generally defines a franchise to mean a
contract or agreement, either express or implied, whether oral
or written, between two or more persons by which:
a franchisee is granted the right to engage in the business of
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offering, selling or distributing goods or services under a
marketing plan or system prescribed in substantial part by a
franchisor;
the operation of the franchisee's business pursuant to that
plan or system is substantially associated with the
franchisor's trademark, service mark, trade name, logotype,
advertising, or other commercial symbol designating the
franchisor or its affiliate; and,
the franchisee is required to pay, directly or indirectly, a
franchise fee. (Bus. & Prof. Code Sec. 20001(a)-(c).)
Existing law , the CFRA, expressly excludes various
establishments or organizations from the definition of
"franchise." In relevant part, existing law provides that
"franchise" does not include any franchise governed by the
Petroleum Marketing Practices Act (P.L. 95-297). (Bus. & Prof.
Code Sec. 20001(d).)
Existing law , the CFRA, defines a "franchisee" as a person to
whom a franchise is granted, and defines "franchisor" as a
person who grants or has granted a franchise. (Bus. & Prof.
Code Secs. 20002, 20003.)
Existing law , the CFRA, prohibits franchisors, unless otherwise
provided under the CFRA, from terminating a franchise prior to
the expiration of its term, except for good cause. Existing law
provides that "good cause" shall include, but is not limited to,
the failure of the franchisee to comply with any lawful
requirement of the franchise agreement after being given notice
thereof and a reasonable opportunity, as specified, to cure the
failure. (Bus. & Prof. Code Sec. 20020.)
Existing law , the CFRA, specifies various grounds under which
immediate notice of termination without an opportunity to cure
shall be deemed reasonable. Among other things, this includes
where the franchisee:
makes any material misrepresentations relating to the
acquisition of the franchise business or the franchisee
engages in conduct which reflects materially and unfavorably
upon the operation and reputation of the franchise business or
system;
fails, for a period of 10 days after notification of
noncompliance, to comply with any federal, state or local law
applicable to the operation of the franchise;
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engages in the same noncompliance whether or not such
noncompliance is corrected after notice after curing any
failure in accordance with specified law above; or
repeatedly fails to comply with one or more requirements of
the franchise, whether or not corrected after notice. (Bus. &
Prof. Code Sec. 20021.)
Existing law prohibits a franchisor from failing to renew a
franchise unless the franchisor provides a written notice, to
the franchisee, of its intention not to renew the franchise, at
least 180 days prior to the expiration of the franchise, and,
certain other circumstances apply or are met. (Bus. & Prof.
Code Sec. 20025.) In relevant part, existing law permits the
franchisor to fail to renew the contract if the franchisor gives
the required notice to the franchisee at least 180 days prior to
the expiration of the franchise, and during that time, permits
the franchisee to sell his business to a purchaser meeting the
franchisor's then current requirements for granting new
franchises, or if the franchisor is not granting a significant
number of new franchises, the then current requirements for
granting renewal franchises. (Bus. & Prof. Code Sec. 20025(a).)
Existing law prohibits a franchisor from denying the surviving
spouse, heirs, or estate of a deceased franchisee or the
majority shareholder of the franchisee the opportunity to
participate in the ownership of the franchise under a valid
franchise agreement for a reasonable time after the death of the
franchisee or majority shareholder of the franchisee. Existing
law provides that during that time, the surviving spouse, heirs,
or estate of the deceased must either satisfy all of the then
current qualifications for a purchaser of a franchise or sell,
transfer, or assign the franchise to a person who satisfies the
franchisor's then current standards for new franchisees.
Existing law specifies that the rights granted pursuant to these
provisions shall be granted subject to the surviving spouse,
heirs or estate of the deceased maintaining all standards and
obligations of the franchise. (Bus. & Prof. Code Sec. 20027.)
Existing law , the CFRA, provides that in the event a franchisor
terminates or fails to renew a franchise other than in
accordance with the CFRA, the franchisor must offer to
repurchase the franchisee's resalable current inventory, as
specified. (Bus. & Prof. Code Sec. 20035.)
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Existing law , the CFRA, provides that the franchisor may offset
against any repurchase offer made pursuant to provision, above,
any sums owed the franchisor or its subsidiaries by the
franchisee pursuant to the franchise or any ancillary agreement.
(Bus. & Prof. Code Sec. 20036.)
Existing law , the California Franchise Investment Law (CFIL),
provides, in relevant part, that it shall be 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. Code Sec. 31220.)
Existing law , the CFIL, permits any person who violates the
above 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. A plaintiff shall not be required
to allege or prove that actual damages have been suffered in
order to obtain injunctive relief. (Corp. Code Sec.
31302.5(a).)
Existing law , the CFIL, prohibits an action from being
maintained to enforce any liability under Section 31220 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. Code Sec. 31302.5(b).)
Existing law , the CFIL, 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 subfranchisor, who may sue for damages caused
thereby, and if the violation is willful, the franchisee may
also sue for rescission, unless, in specified cases (provisions
relating to the willful making of an untrue statement of
material fact or omission of a material fact), 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,
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would not have known, of the untruth or omission. (Corp. Code
Sec. 31300.)
Existing law provides that except as explicitly provided in the
CFIL, no civil liability in favor of any private party shall
arise against any person by implication from or as a result of
the violation of any provision of this law or any rule or order
hereunder. Existing law further provides that nothing in the
CFIL shall limit any liability which may exist by virtue of any
other statute or under common law if this law were not in
effect. (Corp. Code Sec. 31306.)
This bill would redefine "good cause" for purposes of the CFRA's
provision on franchise terminations. Specifically, the bill
would specify that good cause is limited to the failure of the
franchisee to substantially comply with the franchise agreement
after being given notice at least 60 days in advance of the
termination and a reasonable opportunity, which in no event
shall be less than 60 days from the date of the notice of
noncompliance, to cure the failure. This bill would further
provide that in no event will the right to cure the failure
exceed 75 days unless there is a separate agreement between the
franchisor or franchisee to extend the time.
This bill would revise existing law to authorize immediate
termination where 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.
This bill would require a franchisor, upon a lawful termination
or nonrenewal of a franchisee to compensate the franchisee, at
the value of price paid minus depreciation, of all inventory,
supplies, equipment, fixtures, and furnishings purchased 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 used in the franchise business, except as
specified. This bill would provide that this provision:
shall not require the franchisor to purchase any personalized
items, inventory, supplies, equipment, fixtures, or
furnishings not reasonably required to conduct the operation
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of the franchise business in accordance with the franchise
agreement or any ancillary or collateral agreement;
shall not apply if the franchisee declines a bona fide offer
of renewal from the franchisor;
shall not apply to any termination or nonrenewal of a
franchisee due to a publicly announced and nondiscriminatory
decision by the franchisor to completely withdraw from all
franchise activity within the relevant geographic market area,
as defined under existing law, in which the franchise is
located; or
shall not apply to any inventory, supplies, equipment,
fixtures, or furnishings that are sold by the franchisee
between the date of the notice of termination or nonrenewal,
and the cessation of operation of the franchise business, by
the franchisee, pursuant to the termination or nonrenewal.
This bill would authorize a franchisor, upon the termination of
a franchisee, to offset against amounts owed to a franchisee
under the provisions above, any amounts owed by such franchisee
to the franchisor.
This bill would provide 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, as
defined, or a controlling or noncontrolling interest in the
franchise business, to another person provided that the person
is qualified under the franchisor's then-existing and reasonable
standards, as consistently applied to similarly situated
franchisees operating within the franchise brand, for the
approval of new or renewing franchisees.
This bill would provide that, notwithstanding the above, a
franchisee shall not have the right to sell, transfer, or assign
the franchise or substantially all of the assets of the
franchise business, or a controlling or noncontrolling interest
in the franchise business, without the written consent of the
franchisor, except that the consent shall not be withheld unless
the buyer, transferee, or assignor does not meet the standards
for new or renewing franchisees described above.
This bill would further specify that nothing in the above
provisions shall prohibit a franchisor from exercising the
contractual right of first refusal to purchase a franchise after
receipt of a bona fide offer to purchase the franchise by a
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proposed purchaser of the franchise. A franchisor exercising the
contractual right of first refusal shall offer the franchisee
payment at least equal to the value offered in the bona fide
offer.
This bill would require the franchisee, prior to the sale,
assignment, or transfer of all or substantially all of the
assets of the franchise business, or a controlling or
noncontrolling interest in the franchise business, to another
person, to notify the franchisor of the franchisee's intent to
sell, transfer, or assign the franchise or substantially all of
the assets of the franchise business, or a controlling or
noncontrolling interest in the franchise business. The notice
shall be in writing, delivered to the franchisor by business
courier or by receipted mail, and include specified information.
This bill would require the franchisor, within 60 days after the
receipt of all of the necessary information and documentation
required pursuant to the above, or as specified by written
agreement between the franchisor and the franchisee, to notify
the franchisee of the approval or disapproval of the sale,
assignment, or transfer of the franchise. This bill would
require the notice to be in writing and be delivered to the
franchisor by business courier or receipted mail within 15
calendar days. The bill would require a proposed sale,
assignment, or transfer to be deemed approved, unless
disapproved by the franchisor in the manner provided by this
subdivision. Further, if the proposed sale, assignment, or
transfer is disapproved, the bill would require the franchisor
to include in the notice of disapproval a statement setting
forth the reasons for the disapproval.
This bill would provide that in any action in which the
franchisor's disapproval of a sale, assignment, or transfer
pursuant to this subdivision is an issue, the reasonableness of
the franchisor's decision shall be a question of fact requiring
consideration of all existing circumstances. This bill would
provide that for these purposes, the finder of fact may be an
arbitrator specified in the franchise agreement and who
satisfies the specified requirements under the CFRA. This bill
would provide that nothing in this paragraph shall prohibit
summary judgment when the reasonableness of transfer approval or
disapproval can be decided as a matter of law.
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This bill would provide that nothing in the above notice
provisions requires a franchisor to exercise a contractual right
of first refusal or prohibits a franchisor from exercising the
contractual right of first refusal to purchase a franchise after
receipt of a bona fide offer to purchase the franchise by a
proposed purchaser of the franchise. Any franchisor exercising
the contractual right of first refusal shall offer the
franchisee payment at least equal to the value offered in the
bona fide offer.
This bill would repeal the existing provision requiring that a
franchisor offer to repurchase from the franchisee the
franchisee's resalable current inventory, as specified, in the
event a franchisor terminates or fails to renew a franchise
other than in accordance with the provisions of the CFRA.
This bill would provide that in the event a franchisor
terminates or fails to renew a franchisee, in violation of this
chapter, the franchisee shall be entitled to either: (1)
reinstatement of the franchisee under the same terms as the
existing franchise agreement, and the franchisor shall pay all
damages caused to the franchisee from the violation; or (2) upon
request of the franchisee, or if the specified reinstatement
relief is determined by the finder of fact to be impossible or
impracticable, then the franchisor shall pay the franchisee the
fair market value of the franchise and franchise assets and any
other damages caused by the violation of this chapter. This bill
would authorize the court to grant preliminary and permanent
injunctions for a violation or threatened violation of this
bill.
This bill would revise the existing authorization for the
franchisor to offset against any repurchase officer for the
franchisee's resalable current inventory to, instead, provide
that the franchisor may offset against any remedies made
pursuant to the provisions above, any prior recovery by the
franchisee pursuant the bill's specified provisions on
compensation for inventory at the time of termination or
nonrenewal, and any sums owed the franchisor or its subsidiaries
by the franchisee pursuant to the franchise or any ancillary
agreement.
This bill would provide that the amendments to the CFRA made by
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this bill shall apply only to franchise agreements entered into
or renewed on or after January 1, 2016, or to franchises of an
indefinite duration that may be terminated by the franchisee or
franchisor without cause.
COMMENT
1. Stated need for the bill
According to the author, "[t]he annual survey of the franchise
industry, the National Survey of Franchisees-2015, found that
many franchisees feel that they do not receive support from the
national organization. Although 68 [percent] of franchisee's
reported that a franchise sales person helped induce them into
buying the business, only 20 [percent] feel they were given a
full and accurate picture of the franchise costs and
requirements. Although 70 [percent] of franchisees reporting
requirements involving investment of new capital beyond their
original investment, only one-third believe the franchisor
adequately tries to develop new products and grow business.
Perhaps most telling from the 2015 survey is that only 17
[percent] of franchisees would recommend joining the industry to
friends and family." The author writes that this bill is needed
because "[t]he 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." As stated by the author:
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 the depreciated value of supplies, inventories,
equipment, and business fixtures and furnishings, 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 asserts that "AB 525 adopts provisions and
legal standards already used in nearly a half-dozen states,
including some standards that date back to the 1970's. These
states continue to see robust growth and success in franchising,
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showing that providing a level playing field between franchisors
and franchisees helps, not hurts, business."
The sponsor of this bill, the Coalition of Franchisee
Associations, writes that:
Franchisees in California have had their businesses terminated
without proof of any substantial violation of a contract or
with manufactured evidence. They have also been denied the
opportunity to pass the business to their family member, even
though the family member was qualified to run it. 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. AB 525
clarifies state law to specify that a franchisor can terminate
a franchise, but only where there are serious and substantial
violations of the contract. It will also help
California-based small business owners pass their business
onto their family members, prevent franchisors from
terminating a franchise without an opportunity to cure, and
allow franchisees to renew their contracts (pending compliance
with the franchise agreement) so as to continue their
financial and personal investment in the franchise."
2. Nature of franchise agreements and state attempts to
address disparity of bargaining power between franchisor and
franchisees
A 2010 article by the American Bar Association's Business Law
Section notes that, since the "[r]egulation of the offer and
sale of franchises was ushered in by the adoption of the
California Franchise Investment Law in 1970," at least "16
states have passed 'relationship laws' focused on the rights of
franchisees in existing franchise relationships. There are also
other state statutes, in these and other states, that address
specific industries, most notably petroleum dealers, automobile
dealers, farm equipment dealers, and alcoholic beverage
distributorships." These franchise "[r]elationship laws were
passed to restrict the power of franchisors over franchise
terminations, renewals, transfers, and certain other aspects of
the franchise relationship. The statutes generally apply to
franchisees located within a particular state, although coverage
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of state relationship laws may vary. State relationship laws
usually require good cause for termination, which is defined as
a material breach of the franchise agreement. State laws often
impose a requirement of a notice of default and an opportunity
to cure." (Gruneberg and Solish, Franchising 101: Key Issues in
the Law of Franchising, American Bar Association, Business Law
Today (Vol. 19, No. 4) (Mar./Apr. 2010) <
http://apps.americanbar.org/buslaw/blt/2010-03-04/grueneberg-soli
sh.shtml> [as of Jul. 4, 2015].)
Multiple proponents of the bill write in support of the bill's
effort to strengthen this state's CFRA, noting the need for such
laws based upon the fact that franchise agreements typically
continue to be one-sided adhesion contracts favoring the
franchisor. One individual supporting this bill, an attorney
with experience representing franchisees, calls attention to a
1996 California Court of Appeal opinion, Postal Instant Press v.
Sealy (1996) 43 Cal.App.4th 1704, 1715-1717, detailing the
one-sided franchise relationship as follows:
Although franchise agreements are commercial contracts they
exhibit many of the attributes of consumer contracts. 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 Vand. L. Rev. 1503, 1509 & fn. 21.) Among other
typical terms, these agreements often allow the franchisor to
terminate the agreement or refuse to renew for virtually any
reason, including the desire to give a franchisor-owned outlet
the prime territory the franchisee presently occupies.
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
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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 is threatened by the
franchisor's use of contracts of adhesion presented on a
take-it-or-leave-it basis. (See, e.g., Ungar [v. Dunkin'
Donuts of America, Inc. (3d Cir. 1976) 531 F.2d 1211],
1222-1223; Semmes Motors, Inc. v. Ford Motor (2d Cir. 1970)
429 F.2d 1197, 1207; see generally, Note, Fairness in
Franchising: The Need for a Good Cause Termination Requirement
in California (1980) 13 U.C. Davis L.Rev. 780, 785, fn. 18?.)
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. (Brown & Cohen, Franchising:
Constitutional Considerations for 'Good Cause' State
Legislation (1978) 16 Hous.L.Rev. 21, 33?.)."(E. S. Bills,
Inc. v. Tzucanow (1985) 38 Cal. 3d 824, 835-836 [215 Cal.
Rptr. 278, 700 P.2d 1280] (conc. opn. of Mosk, J.).)
The individual notes that while 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
non-renewals in franchising, the protections afforded to
franchisees under these laws are still not sufficiently strong
enough and the remedies are limited. In contrast, he notes that
"[o]ther states including Hawaii, Indiana, Iowa, Washington, and
Wisconsin, have enacted other franchise or dealership
relationship provisions to prohibit unfair practices in the
franchise relationship. AB 525 copies already existing statutes
providing that 'good cause' for terminating the franchise or
dealership relationship requires that the franchisee or dealer
fail 'to comply substantially' with the franchise or dealership
agreement [requirements],'" citing Arkansas Franchise Practices
Act (Ark. Code Sec. 4-72-202[7(A)]); Nebraska Franchise Law
(Neb. Rev. Stats. Sec. 87-402[8]); New Jersey Franchise
Practices Act (N.J. Stat. [Sec. 56:10-5]); Rhode Island Fair
Dealership Law (R.I. [Gen.] Law[s] Sec. 6-5[4]-2); Wisconsin
Fair Dealership Act (Wis. Stat. Sec. 135.02[4(A)]).
3. Bill more narrowly defines what constitutes "good cause"
for purposes of termination of a franchise agreement
This bill would modify the California Franchise Relations Act
(CFRA) to enhance the protections for and rights of franchisees
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in the performance and enforcement of the franchise agreement.
As noted in the Background, the CFRA governs the ongoing
relationships between franchisors and franchisees to generally
prevent unfair practices in the termination, renewal, or
transfer of a franchise. Specifically, the CFRA law prohibits a
franchisor from terminating a franchise prior to the expiration
of its term, except for good cause. Such a requirement
prohibits a franchisor from terminating a franchise at will,
after the franchisee has invested substantial time and money
into the franchise to make it profitable, so that the franchisor
can continue to run the operation and reap the profits for
himself or herself. Under the CFRA, "good cause," for these
purposes, is currently defined to include, but not be limited
to, the failure of the franchisee to comply with any lawful
requirement of the franchise agreement after being given notice
thereof and a reasonable opportunity, which in no event need be
more than 30 days, to cure the failure. Other states similarly
require good cause, but define it more narrowly to constitute
situations where the franchisee fails to substantially comply
with the requirements (or in some cases, reasonable or material
requirements), of the franchise agreement. Some, but not all,
of these states further require a 60 day opportunity to cure the
failure. (See e.g. Conn. Gen. Stat. Sec. 42-133l ; Haw. Rev.
Stats. Ann. Sec. 437-58; Minn. Stat. Sec. 80C.14; N.J. Stat.
Sec. 56:10-5; Wis. Stat. Secs. 135.02, 135.04.)
The author asserts that the vagueness of the term "good cause"
under the CFRA leads to termination of franchisees for minor
issues. Accordingly, this bill seeks to instead provide that
"good cause" shall be limited to the failure of the franchisee
to substantially comply with the franchise agreement after being
given notice at least 60 days in advance of the termination and
a reasonable opportunity, which in no event shall be less than
60 days from the date of the notice of noncompliance, to cure
the failure.
As a matter of public policy, this more limited definition of
"good cause" would arguably provide greater clarity to the
parties that not any and every violation of what the contract
constitutes a lawful ground for immediate termination of the
franchise agreement. For example, if the franchisee were to
fail to wash the windows of the franchise pursuant to a
provision in the franchise agreement requiring window washing on
a daily basis, such a violation, arguably, would not justify
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immediate termination where the franchisee is otherwise
complying with the requirements of the franchise agreement.
Instead, the franchisee would be given the opportunity to come
into compliance with the window washing requirements within the
specified time periods above. Of course, under the CFRA,
existing law provides that if during the period in which the
franchise is in effect the franchisee repeatedly fails to comply
with one or more requirements of the franchise, whether or not
corrected after notice, immediate notice of termination without
an opportunity to cure, is deemed reasonable.
This bill would not affect that existing authorization-it simply
would recognize that in order for there to be good cause to
terminate a franchise, there must be a failure by the franchisee
to substantially comply with the franchise agreement after being
given notice at least 60 days in advance of the termination and
a reasonable opportunity to correct the failure. In order to
address opposition concerns that the bill failed to place a cap
on the cure period beyond the minimum 60 day cure period in
which the franchisee has the opportunity to fix a violation of
the franchise agreement, this bill was recently amended in the
prior policy committee to include a cap of 75 days.
Specifically, the bill now provides that, in no event will the
right to cure the failure exceed 75 days, unless there is a
separate agreement between the franchisor or franchisee to
extend the time.
Small Business Majority writes in support that "[w]hile the
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 included 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 franchisee's basic
investment. This has led 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. AB 525 will address this by upholding the
current relationship between franchisors and franchisees while
helping protect small franchise owners from unfair termination
practices. The legislation will clarify existing law to make it
harder for franchisors to unfairly terminate contracts with the
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small business owners who run their franchises, and help protect
the equity of franchisees by ensuring they receive the equity
they put into their businesses in cases of termination."
The International Franchise Association (IFA), in opposition,
contends that "[t]his 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 [ . . . ] 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.'" [Emphasis in original.]
In response, the author writes:
Substantial compliance is rooted in the traditional contract
law principal of substantial performance. Both standards, by
definition, examine the contract as a whole. 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 (1921)). California's own
civil jury instructions (CAIC 312) require the non- performing
party to show that[: (1) a] good faith effort to comply with
the contract[;] and [(2)] that the non-breaching party
"received essentially what the contract called for." These
instructions do not require a clause by clause analysis but
rather ensure that the purpose of the contract is not
frustrated. Longstanding defaults and failures to cure by
franchisees would clearly be considered frustrating the
purpose of the agreement, as the franchisor is not receiving
their end of the bargain. To adopt the IFA's language would
adopt a new, untested legal standard, something the Governor
expressly rejected in vetoing SB 610 last year."
4. Bill modifies CFRA remedies
This bill would modify the remedies available under the CFRA,
including repealing a provision requiring the franchisor to
offer to repurchase the franchisee's resalable current inventory
in the event a franchisor terminates or fails to renew a
franchise other than in accordance with the provisions of the
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CFRA, as specified, and replacing it with a provision that
provides the franchisee with the following limited remedies:
(1) reinstatement of the franchisee, as specified, including
damages caused to the franchisee from the violation; or (2) upon
request of the franchisee, or if the reinstatement relief is
determined to be impossible or impracticable, as specified,
payment of the fair market value of the franchise and franchise
assets and any other damages caused by the violation of the
CFRA. The bill would also authorize the court to grant
preliminary and permanent injunctions for a violation or
threatened violation of the CFRA.
Separately, this bill would require a franchisor, upon a lawful
termination or nonrenewal of a franchise to compensate the
franchisee, at the value of the 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 used in the franchise
business, except as specified. These exceptions include 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; as well as
any inventory, supplies, equipment, fixtures, or furnishings
that are sold by the franchisee between the date of the notice
of termination or nonrenewal, and the cessation of operation of
the franchise business, by the franchisee, pursuant to the
termination or nonrenewal. A franchisor would further be
exempted from these requirements if the franchisee declines a
bona fide offer of renewal from the franchisor; or if the
termination or nonrenewal of a franchise is due to a publicly
announced and nondiscriminatory decision by the franchisor to
completely withdraw from all franchise activity within the
relevant geographic market area, as defined under existing law,
in which the franchise is located.
In opposition, the IFA, questions why a franchisee whose
franchise is legitimately terminated under the new and
heightened good cause standard should be entitled to any
compensation, noting also that a prior version of the bill at
the very least excluded from the compensation requirement those
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immediate terminations that a franchisor is authorized to make
without any opportunity to cure pursuant to the CFRA's own
terms. "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." Moreover, IFA asserts, "[i]t is unfair to the
franchisor, and creates an improper windfall for the franchisee,
to require the franchisor to compensate the franchisee when the
franchisor and franchisee mutually agree not to renew; where
franchisee purchases are required by applicable law; and where
the franchisee is provided an opportunity to sell its business
over an extended timeframe."
Additionally, IFA raises concerns with the remedy of
"reinstatement," writing that it "does not work and makes little
sense when the franchisee may seek injunctive relief to stop an
allegedly inappropriate termination or non-renewal and also is
entitled to recover damages for the franchisor's violation of
its rights." Staff notes that it may behoove a franchise
seeking to be reinstated to still seek injunctive relief so that
he or she may feasibly be reinstated once the issue surrounding
the validity of termination is resolved. Nonetheless, if the
franchisee does not and the court finds that reinstatement is
not possible or is impracticable, then the concerns raised would
be moot under the provisions of the bill that would limit the
franchisees remedies to payment of the fair market value of the
franchise and franchise assets and any other damages caused by
the violation of the CFRA.
In response, the author argues:
AB 525's narrow compensation requirements only apply when a
franchisor retains the premises upon which the franchise was
operated. Regardless of the reason for termination this
section simply provides the franchisee compensation for goods
they purchased that can now be used by the franchisor, or
future franchisee, in running the business for a profit. This
provision simply provides that if the franchisor can benefit
from purchases made by the franchisee then the franchisee
should be compensated. The franchisee remains liable for all
damages caused to the franchisor and loses any opportunity to
continue running the business.
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The reinstatement provisions of AB 525 have already been
significantly amended to address concerns raised by the IFA.
AB 525 provides the finder of fact the discretion to provide
reinstatement, only when it is requested by the franchisee and
the finder of fact determines the reinstatement is not
otherwise impossible or impractical. In reality few
franchisees will seek reinstatement after a business
relationship has soured and those that wish to continue
working in the industry will likely seek an injunction. The
reinstatement provisions only apply in the narrow
circumstances in which an injunction was not obtained and a
neutral party believes continuing the relationship is
practical.
5. Governor's veto message of SB 610 (Jackson)
This bill is in many ways similar to SB 610 (Jackson, 2013),
which was ultimately vetoed by Governor Brown in 2014, with the
following veto message:
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.
This bill, however, attempts to respond to the Governor's veto
message, and as such includes differences from SB 610. Most
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obvious is this bill's retention of the "good cause" standard,
though the bill does attempt to provide better clarity as to
what constitutes "good cause" under the CFRA statute. (See
Comment 3, above.)
Additionally, staff notes that when heard in the Senate
Business, Professions & Economic Development Committee, it was
specifically noted that the author and proponents have held
stakeholder meetings and attempted to revise the bill in an
effort to respond to the concerns raised by opponents. At that
hearing, where additional amendments were taken in response to
concerns, many of the opponents commented that they believed the
few remaining issues could also be resolved.
6. Other opposition concerns
IFA also argues in opposition to the bill that "requiring
'reasonable' standards under [proposed Business and Professions]
Section 20028 for the approval of new franchisees in the
transfer context is troublesome because it allows every
franchisee to challenge any standard a franchisor articulates
for new franchisees, even if the franchisor consistently applies
the standard to similarly-situated franchisees. [That
provision] also ignores whether a franchisor may require
compliance with transfer conditions expressly stated in a
franchise agreement from the inception of the franchise
relationship."
The Civil Justice Association of California (CJAC) also writes
an "oppose unless amended" position letter with respect to the
prior version of this bill, asserting 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 terminated from good cause when
failing to comply with lawful requirements of the contract and
(2) introducing new, litigious standards on
nonrenewals/nontransfers of the franchise relationship."
In response, the author writes that "language regarding
automatic renewals was removed from the bill in April, two
months before CJAC began opposing the measure."
Additionally, in response to the concerns regarding the change
in the "good cause" standard, the author reiterates that
"substantial compliance is based in the traditional contract law
principal of substantial performance and can traces its origins
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back to English Common Law" and is less vague than the current
"good cause" standard used by the CFRA. (See also Comment 2
above, for further response by the author on this issue in
response to IFA's similar concerns.) "Furthermore," the author
writes, "six states have already successfully implemented
substantial compliance standards in the franchise context
starting in the 1970's. This well understood standard provides
legal clarity that will actually reduce litigation by
eliminating fights over every minor dispute between a franchisee
and a franchisor, and eliminate the necessity or arguing over
every instance of 'good cause.'" In fact, the author asserts:
[ . . . ] the new standards and processes for transfers will
reduce litigation by providing a clear, step-by-step procedure
for the approval or denials of a transfer. Existing law
requires no affirmative disclosure by the franchisor as to why
a franchise cannot be transferred, leaving litigation and the
lengthy discovery process as the only remedy retained by a
franchisee seeking answers as to why they cannot sell a
franchise. Instead AB 525 requires the franchisor to clearly
state the grounds for denying transfer, which so long as they
are equally applied to other similarly situated franchisees,
precludes the franchisee from objecting to the denial.
In response to the IFA's concerns regarding "reasonable
standards," the author argues that "[c]urrently, franchisors
retain authority to unilaterally and arbitrarily change the
conditions for transfers by simply updating their operations
manual. The 'reasonable' language ensures that a franchisor
cannot unilaterally change the criteria for the transfer of a
franchise while the sales process is taking place. In response
to IFA concerns that this standard would require their member
companies to compare transfer terms across the industry, AB 525
was amended to significantly narrow the language to apply only
to similarly situated franchisees operating within the same
brand. Rather than permitting the contesting of every standard
in every contract, it prohibits the unilateral inclusion of
one-time conditions on an individual franchisee's transfer or
sale."
7. Technical and clarifying amendments
The following technical and clarifying amendments are suggested
to address drafting errors and issues.
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Suggested amendments:
On page 5, line 9, strike "Upon lawful termination or
nonrenewal of a"
On page 5, strike lines 10-17, inclusive, and insert "Upon a
lawful termination or nonrenewal of a franchisee, the
franchisor shall compensate the franchisee, at the value of
the price paid, minus depreciation, for all inventory,
supplies, equipment, fixtures, and furnishings purchased or
paid for under the terms of the franchise agreement or any
ancillary or collateral agreement by the franchisee to the
franchisor or its approved suppliers and sources, that, at the
time of the notice of termination or nonrenewal, are in
possession of the franchisee or used in the franchise
business."
On page 5, line 28, strike "franchisee" and insert "franchise"
On page 6, line 1, strike "franchisee" and insert "franchise"
On page 7, line 22, before "sale, assignment, or transfer"
insert "proposed"
On page 7, line 24, strike "franchisor" and insert
"franchisee"
On page 7, line 25, strike "15 calendar days"
Support : 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;
Slater Associates; Small Business California; Small Business
Majority; numerous individuals
Opposition : Civil Justice Association of California (oppose
unless amended);
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International Franchise Association (oppose unless amended)
HISTORY
Source : Coalition of Franchisee Associations
Related Pending Legislation : None Known
Prior Legislation :
SB 610 (Jackson, 2013) See Background.
AB 1141 (Dahle, 2013) would have enacted the Small Business
Investment Protection Act of 2013, which was broader in scope
than SB 610 but also similar in some respect. AB 1141 died in
the Assembly Judiciary Committee without a hearing.
AB 2305 (Huffman, 2012) See Background.
Prior Vote :
Senate Business, Professions & Economic Development (Ayes 6,
Noes 1)
Assembly Floor (Ayes 56, Noes 12)
Assembly Business and Professions Committee (Ayes 11, Noes 0)
Assembly Judiciary Committee (Ayes 7, Noes 2)
Assembly Rules Committee (Ayes 11, Noes 0)
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