BILL ANALYSIS �
AB 2305
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Date of Hearing: April 24, 2012
ASSEMBLY COMMITTEE ON BUSINESS, PROFESSIONS AND CONSUMER
PROTECTION
Mary Hayashi, Chair
AB 2305 (Huffman) - As Introduced: February 24, 2012
(As Proposed to be Amended)
SUBJECT : Franchises.
SUMMARY : Enacts The Level Playing Field for Small Businesses
Act of 2012, which revises the rights and responsibilities of
franchisors and franchisees and the laws that govern the
franchise relationship in California. Specifically, this bill :
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)Prohibits franchisors from terminating a franchise except for
good cause and in accordance with current terms and standards
established by the franchisor then equally applicable to all
franchisees, with specified exceptions. Good cause shall
consist of a breach of any lawful requirement of the franchise
agreement, as specified.
5)Allows franchisees 30 days after written notice to cure
defects that result in noncompliance with terms of the
franchise agreement.
6)Prohibits franchisors from failing to renew a franchise unless
the franchisor provides the franchisee at least 12 months
prior written notice.
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7)Allows a franchisee to select vendors that meet standards
established by the franchisor without specifically limiting
the use of particular vendors.
8)Provides an existing franchisee with a limited cause of action
for damages when a franchisor develops a new franchise
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.
9)Requires franchisors to owe a duty of competence to
franchisees.
10)Allows surviving spouses and heirs to meet reasonable
qualifications and standards for assuming responsibility for
the decedent's franchise rights.
11)Requires franchisors to show cause for the denial of a
transfer of the franchise from one franchisee to another.
12)Provides that a cause of action shall not require scienter
(intent or knowledge of wrongdoing) or reasonable reliance.
13)Allows the prevailing plaintiff in a claim for violation of
these provisions to be awarded costs and reasonable attorneys'
fees.
14)Makes a number of additional changes to the California
Franchise Relations Act (CFRA) and the California Franchise
Investment Law (CFIL) that enhance protections for
franchisees.
EXISTING LAW
1)Establishes the CFRA and the CFIL that, together, govern the
offering and operation of franchise businesses in the state.
2)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.
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3)Provides that any condition, stipulation or provision waiving
compliance with the CFRA is contrary to public policy and
void.
4)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.
5)Requires a franchisor to notify the franchisee of their
intention not to renew a contract at least 180 days prior to
the expiration of the franchise, during which time the
franchisee may attempt to find a buyer acceptable to the
franchisor.
6)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.
7)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.
8)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.
9)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.
FISCAL EFFECT : Unknown
COMMENTS :
Purpose of this bill . According to the author, this bill
increases "fairness in the way franchisors must, in the future
(if the bill becomes law) deal with their franchisees in
California. There are a number of specific manners in which
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this notion of fairness is manifested in the bill's language,
but the core of the bill is fairness."
Background .
The CFIL was enacted in 1970, followed by the CFRA ten years
later in 1980. The CFIL is found in the Corporations Code, and
the CFRA is contained in the Business and Professions Code.
The CFIL statute states, "It is the intent of this law to
provide each prospective franchisee with the information
necessary to make an intelligent decision regarding franchises
being offered. Further, it is the intent of this law to
prohibit the sale of franchises where such sale would lead to
fraud or a likelihood that the franchisor's promises would not
be fulfilled, and to protect the franchisor by providing a
better understanding of the relationship between the franchisor
and the franchisee with regard to their business relationships."
This bill proposes a number of changes to both the CFIL and the
CFRA 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."
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.
Franchisors who oppose the bill contend 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
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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.
This bill contains numerous changes to the CFIL and the CFRA.
The provisions discussed below are the most significant and/or
most controversial of those proposed changes.
Existing law allows termination of a franchise for good cause,
which includes but is not limited to the failure of the
franchisee to comply with any lawful requirement of the
franchise agreement, after written notice and a reasonable
opportunity to cure "which in no event need be more than 30
days." This bill allows termination for good cause and in
accordance with the terms and standards that are currently
available to other franchisees (with some exceptions). Good
cause is strictly limited to a breach of any lawful requirement
of the franchise agreement. The bill also provides franchisees
30 days to cure the breach. Opponents contend 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 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, guaranteeing 30 days to cure is a
reasonable solution.
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 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.
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This bill requires franchisors and franchisees 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.
This bill extends the amount of time franchisors must provide
franchisees when providing notice of non-renewal, from the
current 180 days to 12 months. Having invested so much in the
franchise, supporters contend, the franchisee is placed in an
unfair and unworkable position when notice is provided only 180
days in advance. This bill grants franchisees more time to
renegotiate or locate a buyer after receiving a non-renewal
notice from the franchisor.
Existing law provides a private right of action. This bill
allows franchisees to recover actual damages and costs of the
suit, including attorneys' fees. Opponents contend that
allowing a one-sided attorney's fee award creates incentives for
plaintiffs to bring meritless lawsuits alleging breach of
franchise law. Supporters counter that the private right of
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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 (sponsor)
7-Eleven Franchise Owners' Association
American Association of Franchisees and Dealers
Asian American Hotel Owners Association
Association of Certified Family Law Specialists
California Conference of Machinists
California Small Business Association
California Teamsters
Coalition of Franchisee Associations
Consumer Attorneys of California
Independent Coalition of Franchise Owners
Perris Valley Chamber of Commerce
Service Station Franchise Association, Inc.
Sharma Law Group, Attorneys at Law
UFCW Western States Council
UNITE-HERE, AFL-CIO
Numerous individuals
Opposition
ACFN Franchised, Inc.
Always Best Care Senior Services
Auntie Anne's
Bottle and Bottega
California Chamber of Commerce
California Closet Company, Inc.
California Grocers Association
California Manufacturers and Technology Association
California Retailers Association
Civil Justice Association of California
CKE Restaurants, Inc.
FASTSIGNS International
Franchise Services, Inc.
Hilton
International Franchise Association
Marriott
Neighborhood Market Associations
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Pinkberry
Shakey's USA, Inc.
Sizzler USA, Inc.
Two Men and a Truck/International, Inc.
Analysis Prepared by : Angela Mapp / B.,P. & C.P. / (916)
319-3301