BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2637|
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THIRD READING
Bill No: AB 2637
Author: Wilk (R)
Amended: 6/16/16 in Senate
Vote: 21
SENATE BANKING & F.I. COMMITTEE: 7-0, 6/15/16
AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell
SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16
AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning,
Wieckowski
SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16
AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen
ASSEMBLY FLOOR: 79-0, 4/21/16 (Consent) - See last page for
vote
SUBJECT: Franchise investments: offer and sale of registered
franchises: registration exemption
SOURCE: Franchise Law Committee of the Business Law Section
of the
California State Bar
DIGEST: This bill 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.
AB 2637
Page 2
ANALYSIS: Existing law 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 (Corporations Code Section
31109.1):
1)The initial franchise offer was registered.
2)Each prospective franchisee is provided with all of the
following in a separate written appendix to the franchise
disclosure document:
a) 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.
b) A statement indicating that copies of the negotiated
terms are available upon written request.
c) The name, telephone number, and address of the
franchisor to whom requests for a copy of the negotiated
terms may be obtained.
3)The franchisor certifies or declares in an appendix to its
application for renewal that it has complied with the
requirements of the exemption.
4)The negotiated terms of the amended franchise agreement, on the
whole, confer additional benefits on the franchisee.
5)The franchisor provides a copy of the negotiated terms to a
prospective franchisee within five business days of request by
the prospective franchisee.
6)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 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
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Page 3
negotiating the franchise.
This bill exempts franchisors from the requirement to
re-register a franchise disclosure document with DBO, every time
they negotiate an amendment to a franchise agreement described
in that disclosure document, if all of the following conditions
are met:
1)The initial franchise offer was registered.
2)The cover page, a state cover page, or a state addendum 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
changes."
3)The franchisor certifies or declares in an appendix to its
application for renewal that it has complied with the
requirements of the exemption.
4)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 upon request.
Background
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.
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
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Page 4
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 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.
Comments
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
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Page 5
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.
FISCAL EFFECT: Appropriation: No Fiscal
Com.:YesLocal: No
According to the Senate Appropriations Committee, this bill will
have unknown, but potentially significant costs to DBO to
investigate any reported violations of the bill's provisions.
This bill also has the potential to result in minor cost savings
to DBO through a reduction in DBO's administrative workload
associated with processing revised franchise disclosure
documents.
SUPPORT: (Verified8/11/16)
Franchise Law Committee of the Business Law Section of the
California State Bar (source)
Coalition of Franchisee Associations
International Franchise Association
Small Business California
OPPOSITION: (Verified8/11/16)
None received
ARGUMENTS IN SUPPORT: The International Franchise
Association supports the bill, because it "will modify the
conditions for an exemption and make it easier for franchisors
and potential franchisees to negotiate with each other...AB 2637
will encourage franchise growth in California and lead to more
entrepreneurs opening businesses and providing more jobs and
revenue to California."
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Page 6
The Coalition of Franchisee Associations supports the intent of
the bill "to make it easier for franchisees to negotiate their
franchise agreement in Calkifornia."
ASSEMBLY FLOOR: 79-0, 4/21/16
AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker,
Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke,
Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley,
Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth
Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto,
Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper,
Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim,
Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis,
Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte,
O'Donnell, Olsen, Patterson, Quirk, Rodriguez, Salas,
Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner,
Waldron, Weber, Wilk, Williams, Wood, Rendon
NO VOTE RECORDED: Ridley-Thomas
Prepared by:Eileen Newhall / B. & F.I. / (916) 651-4102
8/15/16 20:22:27
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