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: 8/24/15 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 (CFRA), 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. Senate Floor Amendments of 8/24/15 address an issue regarding cross-contracts for a gas franchise and convenience store, AB 525 Page 2 compensation for franchisees, and the selling and transferring of a franchise; and make technical and clarifying changes. ANALYSIS: Existing law: 1) Establishes the 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, as specified. (BPC § 20001 (a), (b) and (c)) 3) Excludes from the definition of a franchise those governed by the Petroleum Marketing Practices Act (PMPA), 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, § 20003) 5) 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) 6) 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) 7) 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 AB 525 Page 3 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) 8) 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 franchisee's business. (BPC § 20025) 9) 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) 10)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) 11)Provides that the franchisor may offset against any repurchase offer made pursuant to Item #11 above, any sums owed the franchisor or its subsidiaries by the franchisee pursuant to the franchise or any ancillary agreement. (BPC § 20036) 12)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) 13)Defines "relevant geographic market area" as this state or a standard metropolitan statistical area within this state AB 525 Page 4 which has been established by the United States Office of Management and Budget. (BPC § 20999) 14)Establishes the California Franchise Investment Law - which governs financial disclosures and registration requirements with the Department of Business Oversight. (Corporations Code § 31000 et seq.) 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, as specified, shall be limited to the failure of the franchisee to substantially comply with the lawful requirements imposed upon the franchisee by 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) Provides for the immediate termination of a convenience store only if a contract's provisions link both the fueling franchise and convenience store and if the PMPA/fueling breach is lawful (either not contested or upheld in court). 4) Requires a franchisor, upon lawful termination or nonrenewal of a franchise, to purchase from the franchisee at the value of price paid, minus depreciation, 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 are, at the time AB 525 Page 5 of the notice of termination or nonrenewal, are in the possession of the franchisee or currently used in the franchise business; additionally, provides the franchisor the right to receive clear title to and possession of all items purchased from the franchisee, as specified. 5) 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 or to which the franchisee, at the cessation of operation of the franchise business by the franchisee, cannot lawfully, or does not, grant the franchisor clear title and possession upon the franchisor's payment to the franchisee for the inventory, supplies, equipment, fixtures, or furnishings. 6) 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 franchisor does not prevent the franchisee from retaining control of the principal place of the franchise business. 7) 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). 8) Provides that the franchisor is not required to compensate the franchisee if the franchisor and franchisee mutually agree in writing to terminate or not renew the franchise. 9) 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. AB 525 Page 6 10)Provides that, upon termination or nonrenewal of a franchise, a franchisor may offset against the amounts owed to a franchisee by any amounts owed by the franchisee to the franchisor. 11)Deems it unlawful for a franchisor to prevent a franchisee from selling or transferring a franchise, all or 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 standards for the approval of new or renewing franchisees, these standards to be made available to the franchisee, as provided in BPC § 20029, and to be consistently applied to similarly situated franchisees operating within the franchise brand and the franchisee and the buyer, transferee, or assignee comply with the transfer conditions specified in the franchise agreement. 12)Provides that a franchisee does not have the right to sell transfer, or assign the franchise, all 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 assignee does not meet the standards for new or renewing franchisees, as specified, or the franchisee and the buyer, transferee, or assignee do not comply with the transfer conditions specified in the franchise agreement. 13)Allows a franchisor to exercise the right of first refusal to purchase a franchise, all or substantially all of the assets of a franchise business, or a controlling or noncontrolling interest in a franchise business after receipt of a bona fide offer from a proposed purchaser to purchase the franchise, assets, and interest; additionally provides that any franchisor exercising the right of first refusal must offer the seller payment at least equal to the value offered in the bona fide offer. 14)Defines "franchise business" specified in Items #11-13 above, as a legal entity that is a party to a franchise agreement AB 525 Page 7 15)Requires the franchisee, prior to the sale, assignment, or transfer of a franchise, all or substantially all of the assets of a 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, all or substantially all of the assets of the franchise business, or the controlling or noncontrolling interest in the franchise business, as specified. 16)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. 17)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. 18)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. 19)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; additionally provides that a franchisor is not required to exercise the right of first refusal to purchase a franchise all or substantially all of the assets of a franchise business, or a controlling or noncontrolling interest in a franchise business after receipt of a bona fide offer from a proposed purchaser to purchase the franchise, assets, or interest. Any franchisor exercising the contractual right of first refusal shall offer AB 525 Page 8 the seller payment at least equal to the value offered in the bona fide offer. 20)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 receive from the franchisor the fair market value of the franchised business and franchise assets and any other damages caused by the violation of this chapter. 21)Provides that a court may grant preliminary and permanent injunctions for a violation or threatened violation of the CFRA. 22)Provides that the franchisor may offset against any remedies, as specified, any prior recovery by the franchisee pursuant to BPC Section 20022 and any sums owed the franchisor or its subsidiaries by the franchisee pursuant to the franchise or any ancillary agreement. 23)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. 24)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. 25)Makes other technical and clarifying changes. FISCAL EFFECT: Appropriation: No Fiscal Com.:NoLocal: No SUPPORT: (Verified8/25/15) Coalition of Franchisee Associations (source) AB 525 Page 9 California Association for Micro Enterprise Opportunity California Beer and Beverage Distributors California Fair Franchise Association California Labor Federation Dunkin Donuts Independent Franchise Owners EA Independent Franchisee Association East Valley Business Legislative Advocacy Committee Independent Organization of Little Caesar Franchisees Lagarias& Napell, LLP North American Association of Subway Franchisees Pacific Advocacy Pacific Management Consulting Group Plumbing Heating Cooling Contractors Association of California Service Employees International Union Slater Associates Small Business California Small Business Majority 10 individual business owners and representatives and franchisees OPPOSITION: (Verified8/25/15) None received 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. 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 AB 525 Page 10 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. 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 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 8/26/15 12:15:08 **** END ****