BILL ANALYSIS �
AB 2305
Page 1
Date of Hearing: April 17, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 2305 (Huffman) - As Introduced: February 24, 2012
SUBJECT : FRANCHISES: THE LEVEL PLAYING FIELD FOR SMALL
BUSINESS ACT OF 2012
KEY ISSUE: SHOULD CALIFORNIA'S FRANCHISE LAW BE REVISED TO
STRENGTHEN PROTECTIONS FOR SMALL BUSINESS FRANCHISEES AND HELP
EQUALIZE BARGAINING POWER IN THE FRANCHISEE-FRANCHISOR
RELATIONSHIP?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
As indicated by the name of this legislation, The Level Playing
Field for Small Businesses Act of 2012, the author and bill
proponents strongly believe that the franchise business
relationship is inherently one-sided in favor of franchisors,
potentially to the great detriment of small business
franchisees. They contend that greater protections are needed
to protect franchisees against unfair practices-made easier by
the inherent one-sidedness of the franchise relationship--that
unfortunately arise in some cases and threaten the financial
livelihood of these small businessmen and women who form the
economic backbone of our state. To establish such protections,
this bill, sponsored by the American Franchisee Association,
proposes a number of changes to state franchise law, including,
among other things: (1) allowing franchise termination for good
cause only where there has been a substantial and material
breach of the franchise agreement, as well as 60 days to cure
the breach; (2) prohibiting any provision in a franchise
agreement that restricts venue for resolution of disputes solely
to a forum outside of California; (3) requiring good faith in
the performance and enforcement of the franchise agreement, and
requiring a duty of competence to franchisees, as specified.
The bill is strongly opposed by franchisors, retailers, and
large business interests, who contend generally that parties
have the right to freely contract as they wish, and that this
bill will hurt business in California by interfering in
contracting between consenting parties needed to freely develop
new franchise businesses. These opponents also contend that
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existing California law already scrutinizes franchise agreements
closely, and generally protects residents from unreasonable
contract provisions, making many of the components of this bill
unnecessary. The analysis below highlights the arguments made
for and against a number of the key policy changes proposed by
this bill. This bill is double referred to the Business and
Professions Committee.
SUMMARY : Enacts The Level Playing Field for Small Businesses
Act of 2012 to revise the rights and responsibilities of
franchisors and franchisees as well as the rules that govern the
franchise relationship in California. Specifically, this bill ,
among other things:
1)Requires the franchisee and franchisor to deal with each other
in good faith in the performance and enforcement of the
franchise agreement.
2)Prohibits franchisors from restricting franchisees from
associating with other franchisees or from participating in a
trade association.
3)Declares void as a matter of law any provision in a franchise
agreement that restricts venue for resolution of disputes
solely to a forum outside California, and prohibits the
Commissioner of Corporations from registering any franchise
offer that contains a provision restricting venue in such a
manner.
4)Requires franchisors to establish good cause as a condition of
terminating or failing to renew a franchise agreement, where
good cause means a substantial and material breach of the
franchise agreement, or be required to reinstate the
franchisee and pay resulting damages.
5)Allows franchisees 60 days after written notice to cure
defects that result in noncompliance with terms of the
franchise agreement.
6)Allows a franchisee to select vendors that meet standards
established by the franchisor without specifically limiting
the use of particular vendors.
7)Provides an existing franchisee with a limited cause of action
for damages when a franchisor develops a new franchise
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location by a different franchisee that is in unreasonable
proximity to an existing location and that results in a 6%
decline in annual gross sales to the existing franchisee.
8)Requires franchisors to owe a duty of competence to
franchisees.
9)Allows surviving spouses and heirs to meet reasonable
qualifications and standards for assuming responsibility for
the decedent's franchise rights.
10)Requires franchisors to show cause for the denial of a
transfer of the franchise from one franchisee to another.
11)Eliminates requirements for scienter and reasonable reliance
for recovery on claims of fraud, deceit, misrepresentation, or
omission.
12)Allows the prevailing plaintiff in a claim for violation of
these provisions to be awarded costs and reasonable attorneys'
fees.
EXISTING LAW , the California Franchise Relations Act (CFRA),
among other things:
1)Defines a franchise as a contract between two or more persons
by which: (a) a franchisee is granted the right to offer, sell
or distribute goods or services under the plan or system of
the franchisor; (b) operation of the business is substantially
associated with franchisor's trademark, advertising or other
symbol; and (c) a franchise fee is paid by the franchisee.
(Bus. & Prof. Code Section 20001.)
2)Provides that any condition, stipulation or provision waiving
compliance with the CFRA is contrary to public policy and
void. (Bus. & Prof. Code Section 20010.)
3)Prohibits termination of a franchise agreement prior to the
end of the term, except for good cause, where good cause
includes failure to comply with any lawful requirement of the
franchise agreement after written notice and a reasonable
opportunity to cure. (Bus. & Prof. Code Section 20020.)
4)Requires a franchisor to notify the franchisee of their
intention not to renew a contract at least 180 days prior to
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the expiration of the franchise, during which time the
franchisee may attempt to find a buyer acceptable to the
franchisor. (Bus. & Prof. Code Section 20025.)
5)Requires the surviving spouse or heirs of deceased
franchisees, wishing to participate in the ownership of the
franchise, to meet all franchisor requirements for standards
for new franchise purchase. (Bus. & Prof. Code Section
20027.)
6)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. (Bus. & Prof. Code Section 20035.)
EXISTING LAW , the California Franchise Investment Law (CFIL),
among other things:
1)Imposes civil liability upon the franchisor for false
statements or omissions of material fact in connection with
the purchase or sale of a franchise, but only if there is
scienter on the part of the franchisor and reasonable reliance
by the franchisee. (Corporations Code Sections 31201 and
31301.)
2)Provides that, except as explicitly provided by the CFIL, no
civil liability shall arise against any person for violation
of any provision of the CFIL or any rule or order hereunder.
(Corporations Code Section 31306.)
COMMENTS : This bill, sponsored by the American Franchisee
Association, proposes a number of changes to California
franchise law that, according to proponents, seek to "level the
playing field and provide for fair relationships with
franchisors (to help) small businesses throughout California
avoid bankruptcy and continue creating jobs in our communities."
Disparity in bargaining power between franchisors and
franchisees. As indicated by the name of this legislation (The
Level Playing Field for Small Businesses Act), proponents
strongly believe that the franchise business relationship is
inherently one-sided in favor of franchisors, potentially to the
great detriment of small business franchisees. This view has
been supported by, among others, the California Court of Appeal
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(2nd Dist.), 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
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 & fn. 21.) . . . Some courts and
commentators have stressed the bargaining disparity between
franchisors and franchisees is so great that franchise
agreements exhibit many of the attributes of an adhesion
contract and some of the terms of those contracts may be
unconscionable. Postal Instant Press v. Sealy, 43 Cal. App.
4th 1704, 1715-1717 (1996.)
Franchisors who oppose the bill contend generally that parties
have the right to freely contract as they wish, and that this
bill will hurt business in California by interfering in
contracting between consenting parties needed to freely develop
new franchise businesses. These opponents also contend that
existing California law already scrutinizes franchise agreements
closely and generally protects residents from unreasonable
contract provisions, making many of the components of this bill
unnecessary.
According to the author, this bill seeks to "respect the
importance and rights of franchisors who have a responsibility
to the overall brand and their other franchisees," but also
establish needed protections for franchisees against unfair
practices-made easier by the inherent one-sidedness of the
franchise relationship--that unfortunately arise in some cases
and threaten the financial livelihood of these small
businesspeople. For reasons of brevity, this analysis discusses
only five of the key policy changes proposed by this bill.
1.) Termination for good cause; opportunity to cure breach. BPC
Section 20020 currently allows premature termination of a
franchise for failure to comply with any lawful requirement of
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the franchise agreement, after written notice and a reasonable
opportunity to cure "which in no event need be more than 30
days." This bill would instead allow termination for good cause
only where there has been a substantial and material breach of
the franchise agreement, and would allow the franchisee 60 days
to cure the breach. Opponents contend that this change is
anti-consumer because it will allow sub-standard franchise
outlets to offer inferior products and services to consumers
that are not up to par with high standards necessary to protect
the brand's reputation. Supporters of the bill counter that
only a substantial and material breach-for example, endangering
public health or safety-should be grounds for early termination,
and that failure to comply with any lawful requirement of the
agreement (e.g. a missing light bulb; walls painted red, not
blue) is simply unwarranted. Supporters also report that
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-and therefore allowing 60 days to cure
is a reasonable solution common to many other commercial
transactions.
2.) Choice of law and forum selection clauses. This bill
declares void any provision in a franchise agreement that
restricts venue for resolution of disputes solely to a forum
outside of California. Supporters contend that the ability of
franchisors to enforce out-of-state forum-selection clauses
against California franchisees encourages franchisors to pursue
frivolous claims and discourages franchisees from asserting
their legal rights. In addition, they note that it is often
prohibitively expensive for a franchisee to have to travel
across the country to defend himself in an arbitration seeking
franchise termination. Opponents, including CJAC, counter that
this bill will prevent judges from allowing choice of law or
forum selection clauses when appropriate, for example, when the
location of the forum may make sense due to the nature of the
contract. They contend that courts can and should be able to
exercise their discretion, in a particular case, as to whether
the clause is reasonable or not. Because of the unequal burden
placed on franchisees who must travel to the franchisor's chosen
state, the Committee may nevertheless conclude that it is
reasonable that franchisors who wish to benefit from the robust
California marketplace should be prohibited from excluding
California as a forum for resolving disputes with California
franchisees.
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3.) Good faith requirement and duty of competence. The bill
seeks to require the parties to deal with each other in good
faith in the performance and enforcement of the franchise
agreement, and also provides that franchisors shall owe a duty
of competence to franchisees. According to the author, given
that franchisees have such a heavy investment in their small
business franchises, California's franchise laws do not
sufficiently protect the franchisee from abuse by some
unscrupulous or mismanaged franchisors. As a result, some small
business franchisees "have lost everything trying to fight
honest battles against intentionally unfair practices."
Opponents contend that "good faith" and "duty of competence" are
so broadly defined or undefined to require judicial involvement
to resolve minor disputes and contractual uncertainties, at
great expense to both parties as well as consumers who would
have to absorb the costs.
Supporters respond that the bill would not require contractual
terms to be examined under a "good faith" standard, but rather
the conduct of either party to the franchise agreement. They
note that franchisors are apparently having no problem selling
franchises in Washington where state law also requires the
parties "to deal with each other in good faith", and point out
that Congress has included the term "good faith" over 900 times
in the Internal Revenue Code. Finally, supporters contend that
a duty of competence does not handicap honest franchisors that
do not mislead franchisees in order to develop business, and
that if such claims are made in selling the franchise, they
should not be insulated from responsibility if untrue.
4.) Right to renewal. This bill seeks to provide franchisees
with a statutory right to renewal of the franchise agreement
that "shall be under the same terms as the existing franchise
agreement" or at the franchisee's election, under terms then
being offered to new franchisees. Supporters contend that all
too often, when it comes time for a franchisee to renew the
agreement, the franchisor uses its superior bargaining power to
obtain new terms that may not be as favorable to the franchisee
as the terms that persuaded him to enter the initial contract.
Having invested so much in the new franchise, they contend, the
franchisee is placed in an unfair and unworkable position. On
the other hand, opponents contend that the current language of
the bill essentially requires the franchise agreement to last in
perpetuity (assuming no substantial or material breach), and is
so inflexible that it prevents the original contract from being
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modified to even add new products or services or require
technological improvements.
Because the Committee may conclude that the current version of
the bill may potentially allow insufficient flexibility to
modify the contract in ways that might benefit both parties, the
Committee may wish to discuss with the author his openness to
continuing to work with stakeholders to increase flexibility in
the renewal process , perhaps by requiring only certain key terms
to be preserved, or by providing more than 180 days of notice of
intent not to renew so the franchisee has more time to
renegotiate or locate a buyer.
5.) Private right of action and attorneys' fees. Existing law,
the CFIL, already provides a private right of action, but this
bill seeks to strengthen the damages remedies and provide
attorneys' fees for prevailing plaintiffs. Opponents contend
that by allowing treble damages and a one-sided attorney's fee
award, this bill creates significant incentives for plaintiffs
to bring meritless lawsuits alleging breach of franchise law.
Supporters counter that the private right of action under the
CFIL is extremely important because California authorities have
limited resources and cannot sufficiently enforce the statute.
REGISTERED SUPPORT / OPPOSITION :
Support
American Franchisee Association (co-sponsor)
California Small Business Association (co-sponsor)
American Association of Franchisees & Dealers (AAFD)
Asian American Hotel Owners Association (AAHOA)
Association of Certified Family Law Specialists
Consumer Attorneys of California (CAOC)
Coalition of Franchisee Associations (CFA)
Independent Coalition of Franchise Owners
Dozens of letters from individual franchisees in California,
including:
7-Eleven franchise store owners
Arco AM/PM franchise store owners
UPS franchise store owners
Subway franchise store owners
Big O Tires franchise store owners
Several private individuals and out-of-state franchisees
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Opposition
California Chamber of Commerce
California Retailers Association (CRA)
Civil Justice Association of California (CJAC)
International Franchise Association (IFA)
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334