BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 525| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 525 Author: Holden (D), Atkins (D), Dodd (D), and Wilk (R) Amended: 8/17/15 in Senate Vote: 21 SENATE BUS, PROF. & ECON. DEV. COMMITTEE: 6-1, 6/29/15 AYES: Hill, Block, Hernandez, Jackson, Mendoza, Wieckowski NOES: Bates NO VOTE RECORDED: Berryhill, Galgiani SENATE JUDICIARY COMMITTEE: 7-0, 7/14/15 AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski ASSEMBLY FLOOR: 56-12, 5/14/15 - See last page for vote SUBJECT: Franchise relations: renewal and termination SOURCE: Coalition of Franchisee Associations DIGEST: This bill 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, and the sale, transfer or assignment of a franchise by the franchisee, and makes other minor and clarifying changes. ANALYSIS: Existing law: AB 525 Page 2 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. (Business and Professions Code (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 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. (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) AB 525 Page 3 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) 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 AB 525 Page 4 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 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.) 16)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) 17)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) 18)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 AB 525 Page 5 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) 19)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) 20)Prohibits, except as explicitly provided, civil liability in favor of any private party against any person by implication from or as a result of the violation of any provision of CFIL or any rule or order thereunder. (CORP § 31306) This bill: 1) Provides that 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. The period to exercise the right to cure shall not exceed 75 days unless there is a separate agreement between the franchisor and franchisee to extend the time. 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 AB 525 Page 6 franchise, to compensate the franchisee at the value of 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 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 franchisee as specified, if termination or nonrenewal of a franchise 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 in 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. AB 525 Page 7 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 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 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 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 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 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 or noncontrolling interest in the franchise business, to another person, to notify the franchisor of the franchisee's intent to sell, AB 525 Page 8 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, 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 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: AB 525 Page 9 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)Provides that the provisions of this chapter shall apply only to franchises granted or renewed on or after January 1, 1981, or to franchises of an indefinite duration that may be terminated by the franchisee or franchisor without cause, except as specified. 21)Provides that the amendments to this chapter made by the act adding this subdivision shall apply only to franchise agreements entered into or renewed on or after January 1, 2016, or to franchises of an indefinite duration that may be terminated by the franchisee or franchisor without cause. 22)Makes other technical and clarifying changes. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified8/18/15) AB 525 Page 10 Coalition of Franchisee Associations (source) 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: (Verified8/18/15) Civil Justice Association of California International Franchise Association ARGUMENTS IN SUPPORT: The Coalition of Franchisee Associations (CFA) is the sponsor of this bill 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 AB 525 Page 11 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, 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. ARGUMENTS IN OPPOSITION: The International Franchise Association (IFA) has an "Oppose Unless Amended" position on this bill. 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. ASSEMBLY FLOOR: 56-12, 5/14/15 AYES: Alejo, Bloom, Bonilla, Bonta, Brown, Burke, Calderon, Campos, Chang, Chau, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Roger Hernández, Holden, Irwin, Jones-Sawyer, Levine, Linder, Lopez, Low, Mayes, McCarty, Medina, Mullin, Nazarian, O'Donnell, Patterson, Quirk, Rendon, Ridley-Thomas, Rodriguez, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Weber, Wilk, Williams, Wood, Atkins NOES: Travis Allen, Baker, Brough, Chávez, Beth Gaines, Grove, Kim, Lackey, Obernolte, Perea, Salas, Wagner AB 525 Page 12 NO VOTE RECORDED: Achadjian, Bigelow, Dahle, Gallagher, Hadley, Harper, Jones, Maienschein, Mathis, Melendez, Olsen, Waldron Prepared by:Mark Mendoza / B., P. & E.D. / (916) 651-4104 8/20/15 16:29:09 **** END ****