BILL ANALYSIS Ó
AB 525
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB
525 (Holden, et al.)
As Amended August 24, 2015
Majority vote
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|ASSEMBLY: |56-12 |(May 14, 2015) |SENATE: |37-0 |(August 27, |
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Original Committee Reference: B.&P.
SUMMARY: Revises the rights and responsibilities of franchisors
and franchisees under the California Franchise Relations Act
(CFRA) with respect to the termination of franchise agreements.
Specifically, this bill:
1)Revises the definition of "good cause," for the purpose of
authorizing termination of a franchise agreement prior to the
end of its term, to mean the failure of the franchisee to
substantially comply with the lawful requirements imposed upon
the franchisee by the franchise agreement after being given
notice and a reasonable opportunity to cure the failure.
2)Further specifies that the above notice shall be given at
least 60 days in advance, and that a reasonable opportunity to
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cure the failure shall in no event be less than 60 days from
the date of the notice of noncompliance (rather than 30 days
provided under existing law). Further provides that 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.
3)Clarifies that the franchisee's failure, for a period of 10
days after notification of noncompliance, to comply with any
federal, state or local laws or regulations including, but not
limited to, all health, safety, building and labor laws or
regulations applicable to operation of the franchise shall
constitute grounds for immediate termination of the franchise
agreement by the franchisor.
4)Establishes an additional ground for immediate termination of
a separate motor fuel franchise governed by the federal
Petroleum Marketing Practices Act if the franchise expressly
permits termination under such circumstances, as specified.
5)Requires 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, that are, at the time of
the notice of termination or nonrenewal in possession of the
franchisee or used in the franchise business, except as
specified.
6)Clarifies that the above requirement:
a) Shall not require the franchisor 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
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the franchise agreement or any ancillary or collateral
agreement;
b) Shall not apply if the franchisee declines a bona fide
offer of renewal from the franchisor;
c) 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;
d) 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.
7)Makes it unlawful for a franchise agreement 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 of the business, to
another person, provided that certain conditions are met,
including that: a) the person is qualified under the
franchisor's then-existing standards for approval of new or
renewing franchisees; b) the standards are made available to
the franchisee and are consistently applied to similarly
situated franchisees; and c) the franchisee and buyer comply
with the transfer conditions specified in the franchise
agreement.
8)Clarifies that, notwithstanding the prohibition in 7) above, a
franchisee shall not have the right to sell, transfer, or
assign the franchise without the written consent of the
franchisor except that consent shall not be withheld unless
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the buyer, transferee, or assignor does not meet the standards
for new franchisees or do not comply with the transfer
conditions specified in the franchise agreement.
9)Clarifies that this bill shall not prohibit a franchisor from
exercising the contractual right of first refusal to purchase
a franchise after receipt of a bona fide offer to purchase
from a proposed purchaser of the franchise, and requires a
franchisor exercising the contractual right of first refusal
to offer the seller payment at least equal to the value
offered in the bona fide offer.
10)Establishes a process and timeline for the franchisee to
notify the franchisor of a decision to sell or transfer the
franchise, and for the franchisor to notify the franchisee,
within 60 days after receipt of necessary information from the
franchisee, of his or her approval or disapproval of the sale
or transfer, as specified.
11)Provides 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, and clarifies
that the finder of fact may include an arbitrator as specified
in the franchise agreement.
12)Provides that in the event a franchisor terminates or fails
to renew a franchisee in violation 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.
Further authorizes a court to grant preliminary and permanent
injunctions for a violation or threatened violation of the
CFRA.
13)Provides that amendments to the CFRA made by this bill shall
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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.
The Senate amendments, among other things:
1)Revise the definition of "good cause" and clarify that the
period to exercise the right to cure noncompliance shall not
exceed 75 days unless there is a separate agreement between
the franchisor and franchisee to extend the time.
2)Establish an additional ground for termination of a franchise
agreement, specifically to allow the immediate termination of
a cross-contracted convenience store when a franchisee is
lawfully terminated under federal law, provided that the
termination is detailed in the contract and both facilities
are licensed by the same franchisor.
3)Require the franchisor, upon lawful termination or nonrenewal
of a franchise, to compensate the franchisee for supplies,
inventory, furnishings, fixtures, and equipment at the value
of price paid minus depreciation, except under certain
specified circumstances.
4)Specify additional conditions that must be met in order to
authorize a franchisee to sell or transfer a franchise, all or
substantially all of the assets of the franchise business, or
a controlling or noncontrolling interest of the business, to
another person without being prevented by the franchise
agreement from doing so.
5)Clarify that this bill shall not prohibit a franchisor from
exercising the contractual right of first refusal to purchase
a franchise after receipt of a bona fide offer to purchase
from a proposed purchaser of the franchise, and requires a
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franchisor exercising the contractual right of first refusal
to offer the seller payment at least equal to the value
offered in the bona fide offer.
6)Ensure that the franchisee is 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 the CFRA, in the event that a franchisor
terminates or fails to renew a franchisee in violation of the
CFRA.
7)Provide that amendments to the CFRA made by 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.
FISCAL EFFECT: None
COMMENTS: This bill, sponsored by the Coalition of Franchisee
Associations, proposes a number of changes to California
franchise law that, according to the author, seek to protect the
investment and wellbeing of franchisees against unfair practices
by franchisors. This bill revises rights and responsibilities
of franchisors and franchisees under the CFRA, primarily with
respect to the termination of franchise agreements and the sale
or transfer of franchise businesses.
Proponents of this bill assert that the franchise business
relationship is inherently one-sided in favor of franchisors,
often to the detriment of small business franchisees. This view
has been supported by, among others, the California Court of
Appeal (2nd District), who described the dynamic as follows:
"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
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businessmen or businesswomen or people seeking to make the
transition from being wage earners and for whom the franchise is
their very first business. Franchisors typically, but not
always, are large corporations. The agreements themselves tend
to reflect this gross bargaining disparity. Usually they are
form contracts the franchisor prepared and offered to
franchisees on a take-it-or-leave-it basis." (Emerson,
Franchising and the Collective Rights of Franchisees (1990) 43 V
and. L. Rev. 1503, 1509 and fn. 21.)
The bill was previously opposed by the International Franchise
Association (IFA), who contended that the bill creates ambiguity
in the enforcement of franchise contracts and will promote
litigation between franchisees and franchisors, which will
result in sub-standard services and products being delivered to
California consumers. After substantial amendments negotiated
with the author and subsequently taken in the Senate, the IFA
has removed their opposition to the bill, as has the Chamber of
Commerce, Civil Justice Association and other opponents. The
current version of the bill now has no known opposition.
Substantial compliance standard for termination. Business and
Professions Code (BPC) Section 20020 currently allows premature
termination of a franchise agreement for good cause, which
includes failure to comply with any lawful requirement of the
franchise agreement after written notice and a reasonable
opportunity to cure the breach of at least 30 days. BPC Section
20025 allows the franchisor to fail to renew a franchise
agreement simply by providing the franchisee with 180 days
written notice of its intent not to renew the agreement.
According to the author, these standards unfortunately allow
some franchisors to unfairly take advantage of franchisees by
using the contract to punish franchisees by taking their
business away and to avoid their legal obligations to give
franchisees another chance.
Accordingly, this bill provides that "good cause" is limited to
the failure of the franchisee to substantially comply with the
lawful requirements imposed upon the franchisee by the franchise
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agreement after being given notice at least 60 days in advance
of the termination and a reasonable opportunity to cure the
failure. The bill clarifies that a reasonable opportunity to
cure the failure shall in no event be less than 60 days from the
date of the notice of noncompliance (rather than 30 days
provided under existing law), but shall not exceed 75 days
unless there is a separate agreement between the parties to
extend the time. According to the author, these important
provisions ensure fairness to franchisees by barring the
termination of any franchisee that is in substantial compliance
with the franchise agreement, instead of allowing termination
much more broadly for any failure to comply "with any lawful
requirement of the franchise agreement." The author also notes
that because some franchisees are often given as little as five
days to cure noncompliance - an unreasonable amount of time
depending on the nature of the cure needed - providing 60 days
to cure is a reasonable solution common to many other commercial
transactions.
Restrictions on transfer of franchise. Existing law limits the
transfer of franchises to family members of a deceased
franchisee as long as those family members meet criteria for
owning a franchise as determined by the franchisor. Similarly,
current law also provides the deceased franchisee's family the
opportunity to sell or transfer the franchise to a third party
that meets the franchisor's criteria for owning a franchise, as
specified. As recently amended, this bill makes 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 following conditions are met: 1) the person is
qualified under the franchisor's then-existing standards for the
approval of new or renewing franchisees; 2) these standards are
to be made available to the franchisee and consistently applied
to similarly situated franchisees operating within the franchise
brand; and 3) the franchisee and the buyer, transferee, or
assignee comply with the transfer conditions specified in the
franchise agreement. In response to opposition concerns that
the transfer provisions are too ambiguous and will lead to
uncertainty and increased litigation costs for both the
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franchisor and franchisee, the author has amended this bill to
reinforce that the franchisor shall approve a sale or transfer
request without withholding consent unless the transferee does
not meet the franchisor's then-existing standards for approval
of new or renewing franchisees or the franchisee and buyer or
transferee do not comply with the transfer conditions in the
franchise agreement.
This bill also seeks to establish a streamlined process and
timeline for the sale or transfer of a franchise. Amendments in
the Senate require the franchisee to notify the franchisor of a
decision to sell or transfer the franchise, accompanied by a
specified notice, a copy of all agreements related to the sale
or transfer, and the proposed transferee's application for
approval to become the successor franchisee, among other things.
As amended, the bill also requires the franchisor to notify the
franchisee, within 60 days after receipt of necessary
information from the franchisee, of his or her approval or
disapproval of the sale or transfer, as specified.
The bill also provides 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, and clarifies that
the finder of fact may include an arbitrator as specified in the
franchise agreement. Finally, Senate amendments now clarify
that this bill shall not prohibit a franchisor from exercising
the contractual right of first refusal to purchase a franchise
after receipt of a bona fide offer to purchase from a proposed
purchaser of the franchise, and require any franchisor
exercising the contractual right of first refusal to offer the
seller payment at least equal to the value offered in the bona
fide offer. As a result of these negotiated amendments, it
should be again noted that all opposition to the bill has been
removed, including from the IFA.
Compensation upon dissolution. Unlike other types of contract
law in California, the CFRA only entitles franchisees to recover
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the cost of any existing inventory remaining upon dissolution of
the franchise. Current law that allows the franchisor to
essentially take all equity, personal capital, and goodwill a
franchisee has developed upon franchise dissolution is
particularly unfair to small business franchisees, contends the
author, given that franchisees invest a large amount of their
own money in the business and continue to pay for upgrades and
changes in response to the market. Even if the franchisor
breaches the franchise contract, the franchisee is limited by
the original franchisee agreement in what contract damages they
can claim.
As amended in the Senate, this bill would require a franchisor,
upon 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 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.
With respect to any instance in which a franchisor terminates or
fails to renew a franchisee in violation of the CFRA, Senate
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amendments to the bill entitle the franchisee 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 the CFRA. The bill also authorizes a court to
grant preliminary and permanent injunctions for a violation or
threatened violation of the CFRA.
Violation of local health and safety laws; grounds for immediate
termination. Existing law, BPC Section 20021, provides for a
number of circumstances that justify immediate notice of
termination of a franchise agreement without an opportunity to
cure. These circumstances are considered so serious that they
threaten to damage the brand reputation of the franchise and are
thus grounds for immediate termination - for example, when a
franchisee is convicted of a felony, goes bankrupt, or the
franchise operation poses an imminent danger to public health.
Among other things, Section 20021 calls for immediate
termination when "the franchisee fails, for a period of 10 days
after notification of noncompliance, to comply with any federal,
state or local law or regulation applicable to the operation of
the franchise." Supporters of this bill contend that this
particular clause justifying immediate termination should be
clarified to avoid an unnecessarily broad interpretation.
Accordingly, this bill clarifies that violations of state and
local "health, safety, building and labor" laws and regulations
are grounds for immediate termination, but not violations not
falling outside of those important categories of laws.
Applicability of this bill. In order to address concerns about
the retroactive application of this bill to existing franchise
agreements, the bill now provides that amendments to the CFRA
made by 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.
Analysis Prepared by:
Anthony Lew / JUD. / (916) 319-2334FN: 0001598
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