BILL ANALYSIS Ó
SENATE COMMITTEE ON
BANKING AND FINANCIAL INSTITUTIONS
Senator Steven Glazer, Chair
2015 - 2016 Regular
Bill No: AB 2637 Hearing Date: June 15,
2016
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|Author: |Wilk |
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|Version: |June 6, 2016 Amended |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant:|Eileen Newhall |
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Subject: Franchise investments: offer and sale of registered
franchises: registration exemption
SUMMARY Exempts a franchisor from the requirement to re-register
its franchise disclosure document with the Department of
Business Oversight (DBO), each time the franchisor negotiates
changes to a franchise agreement described in that disclosure
document with a franchisee, as specified.
DESCRIPTION
1. Lessens the burden on franchisors who wish to avoid having
to re-register a franchise disclosure document with DBO,
every time they negotiate an amendment to a franchise
agreement described in that disclosure document. Under the
provisions of this bill, a franchisor is exempt from the
requirement to re-register a franchise disclosure document,
if all of the following conditions are met:
a. The initial franchise offer was registered.
b. The cover page of the disclosure document states,
"You and the franchisor may agree to sign the forms of
franchise agreement and other agreements attached to this
disclosure document. However, California law does not
prohibit you and the franchisor from negotiating changes
to the franchise agreement and other agreements, nor does
it require you or the franchisor to negotiate any
AB 2637 (Wilk) Page 2
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changes."
c. The franchisor certifies or declares in an appendix
to its application for renewal that it has complied with
the requirements of the exemption.
d. The franchisor maintains copies of all material
negotiated terms for a period of five years from the
effective date of the agreement containing the relevant
negotiated term and makes these copies available to the
Commissioner of Business Oversight (commissioner) upon
request. In the context of this requirement, "material"
means that a reasonable franchisee would view the terms
as important in negotiating the franchise.
EXISTING LAW
2. Exempts a franchisor from the requirement to re-register
its franchise disclosure document with DBO, every time it
negotiates an amendment to a franchise agreement described
in that disclosure document, as long as all of the following
requirements are met:
a. The initial franchise offer was registered.
b. Each prospective franchisee is provided with all of
the following in a separate written appendix to the
franchise disclosure document:
i. A summary description of each material
negotiated term that was negotiated by the franchisor
for a California franchise during the 12-month period
ending in the calendar month immediately preceding
the month in which the negotiated offer or sale was
made.
ii. A statement indicating that copies of the
negotiated terms are available upon written request.
iii. The name, telephone number, and address of
the franchisor to whom requests for a copy of the
negotiated terms may be obtained.
c. The franchisor certifies or declares in an appendix
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to its application for renewal that it has complied with
the requirements of the exemption.
d. The negotiated terms of the amended franchise
agreement, on the whole, confer additional benefits on
the franchisee.
e. The franchisor provides a copy of the negotiated
terms to a prospective franchisee within five business
days of request by the prospective franchisee.
f. The franchisor maintains copies of all material
negotiated terms for a period of five years from the
effective date of the first agreement containing the
relevant negotiated term and makes these copies available
to the commissioner upon request. In the context of this
requirement, "material" means that a reasonable
franchisee would view the terms as important in
negotiating the franchise.
COMMENTS
1. Purpose: The Franchise Law Committee of the Business Law
Section of the California State Bar is sponsoring this bill
to mitigate the unintended consequences of a law change the
Business Law Section sponsored in 2004, which has hampered
the ability of franchisees and franchisors to negotiate
franchise agreements.
2. Background: In 2004, the Business Law Section of the
California State Bar sponsored a change to the Franchise
Investment Law, which was intended to help franchisees by
promoting transparency (AB 2921, Cox, Chapter 458, Statutes
of 2004). One section added to the codes in 2004
(Corporations Code Section 31109.1), allows a franchisor to
avoid having to re-register a new franchise disclosure
document with DBO every time it negotiates a change with a
franchisee to a franchise agreement described in that
disclosure document, as long as that franchisor discloses
the negotiated terms to future prospective franchisees. At
the time this change was promoted, its sponsors believed
that the transparency the change would require would promote
fairness among franchisees. They believed that, if a
franchisor agreed to an amendment that benefitted one
AB 2637 (Wilk) Page 4
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franchisee, future prospective franchisees should be made
aware of that amendment.
Unfortunately, rather than helping franchisees, Section 31109.1
has had the opposite effect, by discouraging franchisors
from negotiating with franchisees. Many franchisors are
concerned that disclosing previously negotiated terms to
prospective franchisees will cause the negotiated changes to
become the starting point for all future negotiations.
Franchisors observe that the circumstances of each
franchisee are different, and that terms appropriate to one
franchisor-franchisee agreement may be inappropriate to
another agreement negotiated between that franchisor with a
differently situated franchisee. Yet, logically, future
franchisees expect to receive at least all the franchise
benefits negotiated with prior franchisees, and possibly
additional benefits.
Because of the requirement that they disclose previously
negotiated terms if they wish to take advantage of the
exemption from re-registration, many franchisors are
refusing to negotiate any changes to franchise agreements in
California, even under circumstances in which they would
have been willing to negotiate with a similarly situated
franchisee in another state. According to this bill's
sponsor, Section 31109.1 is the only provision of its kind
in the United States.
3. Discussion: The provisions of this bill were developed by
the Franchise Law Committee, which counts among its
membership attorneys who primarily represent franchisees and
attorneys who primarily represent franchisors. Reportedly,
attorneys representing both parties have witnessed the
chilling effects of Section 31109.1 on franchise
negotiations in California. They hope that the language of
this bill, which informs franchisees that negotiations are
permitted, but does not require franchisors to disclose the
terms of prior negotiations, will reverse the chilling
effects of Section 31109.1 and encourage more negotiations.
4. Summary of Arguments in Support:
a. The Franchise Law Committee of the Business Law
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Section of the California State Bar is sponsoring this
bill for the reasons stated above.
b. The International Franchise Association (IFA), which
represents all three segments of the franchise model,
including franchisees, franchisors, and suppliers,
supports the bill, because it will encourage franchise
growth in California and lead to more entrepreneurs
opening businesses and providing more jobs and revenue to
California. IFA is particularly supportive of the
amendment, discussed immediately below, to clarify where
key information about the negotiation process should be
presented.
5. Summary of Arguments in Opposition: None received.
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6. Amendments:
a. This bill's author plans to propose the following
minor technical and clarifying amendment in Committee:
Page 2, line 14, amend as follows: (2) The cover page,
state-specific cover page, or state-specific addendum of
the disclosure document specifically states
7. Prior and Related Legislation:
a. AB 2921 (Cox), Chapter 458, Statutes of 2004: Made
several changes to the FIL, one of which created the code
section this bill would significantly amend. Sponsored
by the Business Law Section of the California State Bar.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
Franchise Law Committee of the Business Law Section of the
California State Bar (sponsor)
International Franchise Association
Opposition
None received
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