BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 525|
|Office of Senate Floor Analyses | |
|(916) 651-1520 Fax: (916) | |
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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:
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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)
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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
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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
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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
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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.
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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,
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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:
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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)
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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
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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
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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
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