BILL ANALYSIS Ó
AB 2637
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CONCURRENCE IN SENATE AMENDMENTS
AB
2637 (Wilk)
As Amended June 16, 2016
Majority vote
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|ASSEMBLY: |79-0 |(April 21, |SENATE: |39-0 |(August 24, |
| | |2016) | | |2016) |
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Original Committee Reference: B. & F.
SUMMARY: Makes changes to the California Franchise Investment
Law (CFIL). Specifically, this bill:
1)Eliminates some of the conditions that must be met in order
for a franchisor to claim the exemption from the franchisor
having to amend its franchise registration in connection with
a negotiated sale:
a) Deletes the requirement that the franchisee must receive
all of the following in a separate written appendix to the
franchise disclosure document (FDD):
i) That a prospective franchisee receives information
regarding terms the franchisor negotiated during the
previous 12 months;
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ii) A statement indicating that copies of the negotiated
terms are available upon written request; and,
iii) The name, telephone number, and address of the
representative of the franchisor to whom requests for a
copy of the negotiated terms may be obtained.
b) Deletes a requirement that provides the negotiated
terms, on the whole, confer additional benefits on the
franchisee.
2)Deletes a requirement that the franchisor provide a copy of
the negotiated terms to the prospective franchisee within five
business days following the request of the franchisee.
3)Adds a requirement that provides the cover page, a state cover
page, or a state addendum of the disclosure document to state
"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."
The Senate amendments delete the requirement that the disclosure
document states that California law does not prohibit a
franchisor from negotiating, or require a franchisor to
negotiate, the standard franchise agreement or other agreements
contained in the disclosure document and instead added a
requirement that must be stated in the disclosure document, "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
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to negotiate any changes."
EXISTING LAW:
1)Prohibits the sale of a franchise in California unless prior
to the sale the franchisor has, among other things, prepared a
FDD and registered with the Commissioner of the Department of
Business Oversight (DBO) (Commissioner) to sell franchises in
California. [Corporations Code, Sections 31000 et seq.]
2)Makes it unlawful for any person to offer or sell any
franchise in this state unless the offer of the franchise has
been registered with the Commissioner, or qualifies under one
of several specified exemptions. [Corporations Code, Section
31110]
3)Requires an application for registration to be accompanied by
a proposed FDD, which shall contain the material information
set forth in the application for registration, as specified by
rule of the commissioner, and such additional disclosures as
the Commissioner may require. [Corporations Code, Section
31114]
4)Makes it unlawful to sell any franchise in this state that is
subject to registration without first providing to the
prospective franchisee, at least 14 days prior to the
execution by the prospective franchisee of any binding
franchise or other agreement, or at least 14 days prior to the
receipt of any consideration, whichever occurs first, a copy
of the franchise disclosure document, together with a copy of
all proposed agreements relating to the sale of the franchise.
[Corporations Code, Section 31119 (a)]
5)Provides an exemption when the prospective franchisee receives
the offering, he or she also receives copies of all Notices of
Negotiated Sale of Franchise filed with the Commissioner
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within the last 12 months, if any. [California Code of
Regulations section 310.100.2]
6)Exempts certain negotiated sales of franchises. Provides the
statutory exemption eliminates the requirement that a
franchisor must amend its franchise registration in connection
with a negotiated sale if specified conditions are met.
[Corporations Code, Section 31109.1]
FISCAL EFFECT: According to the Assembly Appropriations
Committee, negligible state costs.
COMMENTS: Under this bill, franchisors would notify the
prospective franchisees in California that the negotiation of
franchise agreements is permitted by law and that California law
does not prohibit or compel negotiations. This notice should
ensure that prospective franchisees will not be misled into
believing that California law disallows negotiations.
In California, franchisors have two different statutory
frameworks they can work under in regards to negotiated sales:
one being the California Code of Regulations Section 310.100.2
established in 1989 and the second, Corporations Code, Section
31109.1 established in 2004.
Under the California Code of Regulations, conditions for
exemption include:
1)The initial offer must be registered;
2)Within 15 business days after consummating a negotiated sale,
the franchisor must file a "Notice of Negotiated Sale" with
DBO. The Notice of Negotiated Sale lists, among other things,
a description of the changes that were made by reference to
the relevant section of the franchisor's registered disclosure
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document;
3)When a prospective franchisee receives the franchisor's
disclosure document, he or she must also receive copies of all
Notices of Negotiated Sale filed by the franchisor in the last
12 months; and,
4)The franchisor must certify or declare in an appendix to its
application for renewal that it has complied with all the
requirement of the regulation, if this exemption is claimed.
Under the Corporations Code, the exemption eliminates the
requirement that a franchisor must amend its franchise
registration in connection with a negotiated sale if the
following conditions are met:
1)The initial offer (the franchisor's disclosure document) is
registered;
2)Within five business days after a request by the prospective
franchisee, franchisor must provide to the franchisee:
a) A summary description of each material negotiated term
that was negotiated by the franchisor for a California
franchise during the previous 12 months; and,
b) A statement indicating that copies of the negotiated
terms themselves are available upon written request, the
name, phone number, and address of a franchisor
representative from whom the franchisee may obtain the
negotiated terms.
3)The negotiated terms, on the whole, must benefit the
prospective franchisee; and,
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4)The franchisor must certify or declare in an appendix to its
application for renewal that it has complied with all the
requirements of the statute, if this exemption is claimed.
This bill eliminates conditions that must be met in order to
claim the exemption which includes 2) and 3) above. This bill
adds a new condition which will require that the franchisor's
disclosure document discloses that California law does not
prohibit a franchisor from negotiating, or require a franchisor
to negotiate, the standard franchise agreement contained in the
disclosure document.
Background:
Franchises subject to the CFIL may only be offered or sold after
compliance with various registration and disclosure obligations.
In general, most franchises are sold pursuant to the terms of
the franchise agreement drafted by the franchisor, which address
the needs of the franchisor but may not contemplate requirements
or needs of franchisees in special circumstances. In some
cases, the prospective franchisees or their counsel may request
changes to the franchise agreement or other terms of sale from
those registered with the DBO. Depending on the circumstances,
the franchisor may be willing to make some or all of the
requested changes, and a negotiation process may ensue, which
sometimes involves a degree of "give and take" by both parties.
The CFIL states that only a franchise agreement that is
described in a disclosure document that has been registered with
the DBO can be offered and sold to a resident of California or
to a franchisee whose franchise will be located in California.
This can lead to issues if a franchise agreement is changed as a
result of negotiations between the parties. Under existing law,
the franchisor would be required to amend its registration
before completing the sale. If the franchisor did not want to
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offer the same amended franchise agreement to all future
franchisees in California, the franchisor then needs to re-amend
its registration to return to the original document.
Both the regulation and the amendment of the CFIL were intended
to facilitate the ability of franchisors to comply with requests
for modification of franchise agreements, by eliminating the
need to re-register before selling a negotiated franchise
agreement.
According to the sponsor, the Business Law Section, Franchise
Law Committee of the California State Bar, "both the statute and
the regulation have created significant disincentives for
franchisors to negotiate the terms of sales with franchises.
While virtually all franchisors are willing to negotiate with
some prospective franchisees under some circumstances, the
statute and the regulation actually serve to decrease the
numbers of situations in which most franchisors are willing to
negotiate with franchisees in California. At this time,
California is the only state that currently imposes restrictions
on the ability of franchisees and franchisors to negotiate or
that requires the disclosure of negotiated changes."
The sponsors go on to state, "If a franchisor negotiates with a
franchisee in California, then the results of that negotiation
become publicly available, including the franchisees who are not
even located in California. Many franchisors are concerned that
this disclosure will cause the negotiated change to become a
"new normal" with future franchisees expecting to get not only
every change that was negotiated in the past but additional
changes as well. To avoid this consequence, many franchisors
refuse to negotiate any changes in California- even under
circumstances in which they would be willing to negotiate with a
similarly-situated franchisee in another state."
Analysis Prepared by:
Kathleen OMalley / B. & F. / (916) 319-3081 FN:
0004023
AB 2637
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