Amended in Assembly June 10, 2014

Amended in Assembly June 24, 2013

Amended in Senate May 9, 2013

Amended in Senate April 8, 2013

Senate Bill No. 610

Introduced by Senator Jackson

February 22, 2013

An act to begin insert amend Sections 20010, 20020, 20025, and 20035 of, and to end insert add Article 2.5 (commencing with Section 20016) to Chapter 5.5 of Division 8 of begin insert , end insert the Business and Professions Code, relating to franchises.

LEGISLATIVE COUNSEL’S DIGEST

SB 610, as amended, Jackson. Franchises.

The California Franchise Relations Act sets forth certain requirements related to the termination, nonrenewal, and transfer of franchises between a franchisor, subfranchisor, and franchisee, as those terms are defined. Existing law provides that any condition purporting to bind any person to waive compliance with the act is contrary to public policy and void.

begin delete

This bill would require these parties to deal with each other in good faith, as defined, and prohibit a franchisor or subfranchisor from restricting the right of a franchisee to join or participate in an association of franchisees to the extent the restriction is prohibited by existing law. The bill would authorize a franchisee to bring an action against a franchisor or subfranchisor who offers to sell, sells, fails to renew or transfer, or terminates a franchise in violation of these provisions for temporary and permanent injunctive relief, and damages caused thereby, or for rescission or other relief deemed appropriate by the court. The bill would additionally authorize a court in its discretion to award reasonable costs and attorney’s fees to a prevailing plaintiff. The bill would also authorize a franchisor or subfranchisor who becomes liable to make payments for a violation of these provisions to recover contributions from any person who, if sued separately, would also have been liable to make the same payments. The bill would prohibit a franchisor or subfranchisor from requiring a franchisee to waive its rights as a condition of doing business with the franchisor or subfranchisor, and would provide that any waiver that is required as a condition of doing business shall be presumed unenforceable. The bill would authorize a franchisor or subfranchisor to enforce a waiver of rights under these provisions only if the waiver is knowing, voluntary, and not made as a condition of doing business with the franchisor or subfranchisor.

end delete begin insert

This bill would provide that a condition of a franchise agreement requiring the franchisee to waive the implied covenant of good faith and fair dealing is contrary to public policy and void. The bill would prohibit a franchise agreement from restricting the right of a franchisee to join or participate in an association of franchisees to the extent the restriction is prohibited by existing law. The bill would prohibit a franchise agreement from preventing a franchisee from selling or transferring a franchise or a part of the interest of a franchise to another person, except as provided. The bill would prohibit a franchise agreement from giving a franchisee a right to sell, transfer, or assign the franchise, or a right thereunder, without the consent of the franchisor, as provided. The bill would prohibit a franchise agreement from allowing the transferring franchisee to fail to notify the franchisor of the franchisee’s decision to sell, transfer, or assign the franchise, as provided.

end insert begin insert

Existing law prohibits a franchisor from terminating a franchise agreement prior to the expiration of its term, except for good cause, as defined, and upon the occurrence of specified events.

end insert begin insert

This bill would prohibit a franchisor from terminating a franchise agreement prior to the expiration of its term unless there is a substantial and material breach on the part of the franchisee of a lawful requirement of the franchise agreement, except as otherwise provided.

end insert begin insert

Existing law prohibits a franchisor from failing to renew a franchise agreement unless the franchisor provides the franchisee at least 180 days prior written notice of its intention not to renew and specified conditions are met.

end insert begin insert

This bill would additionally condition a franchisor’s failure to renew a franchise agreement upon a substantial and material breach on the part of the franchisee of a lawful requirement of the franchise agreement and would require the franchisor to offer the franchisee either a renewal of the franchise agreement under terms then being offered to new franchisees or under existing terms.

end insert begin insert

Existing law requires a franchisor that terminates or fails to renew a franchise, other than in accordance with specified provisions of law, to offer to repurchase from the franchisee the franchisee’s resalable current inventory, as specified.

end insert begin insert

This bill would instead require a franchisor that terminates or fails to renew a franchise, other than in accordance with specified provisions of law, to, at the election of the franchisee, either reinstate the franchisee and pay specified damages or pay to the franchisee the fair market value of the franchise and franchise assets, as provided.

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Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.

The people of the State of California do enact as follows:

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begin insert SECTION 1. end insert   

end insert

begin insert Section 20010 of the end insert begin insert Business and Professions
Code end insert begin insert is amended to read: end insert

20010.  

Any condition, stipulation begin insert , end insert or provision purporting to
bind any person to waive compliance with any provision of this
law begin insert o end insert begin insert r to waive the implied covenant of good faith and fair dealing end insert
is contrary to public policy and void.

begin delete SECTION 1. end delete
begin insert SEC. 2. end insert   

Article 2.5 (commencing with Section 20016) is added
to Chapter 5.5 of Division 8 of the Business and Professions Code,
to read:

 

Article 2.5.  Relationships Between Franchisor begin delete or Subfranchisor end delete
and Franchisees

 

begin delete

20016.  

Without limiting the other provisions of this chapter,
the following specific rights and prohibitions shall govern the
relations between a franchisor, subfranchisor, and franchisee:

(a) (1) These parties shall deal with each other in good faith in
the performance and enforcement of the franchise agreement.

(2) “Good faith” for purposes of this subdivision means honesty
in fact and the observance of reasonable commercial standards of
fair dealing in the trade.

(b) A franchisor or subfranchisor shall not restrict

end delete

begin insert

begin insert 20016. end insert   

end insert begin insert

It is unlawful for a franchise agreement to do any of
the following:

end insert

begin insert (a) end insert begin insert   end insert begin insert Restrict end insert the right of a franchisee to join or participate in an
association of franchisees to the extent the restriction is prohibited
by Section 31220 of the Corporations Code.

begin insert

(b) (1) Prevent a franchisee from selling or transferring a
franchise or a part of the interest of a franchise to another person.
A franchisee shall not, however, have the right to sell, transfer, or
assign the franchise, or a right thereunder, without the consent of
the franchisor except that the consent shall not be unreasonably
withheld.

end insert begin insert

(2) (A) Allow the transferring franchisee to fail, prior to the
sale, transfer, or assignment of a franchise or the sale, assignment,
or transfer of all, or substantially all, of the assets of the franchised
business or a controlling interest in the franchised business to
another person, to notify the franchisor of the franchisee’s decision
to sell, transfer, or assign the franchise. The notice shall be in
writing and shall include all of the following:

end insert begin insert

(i) The proposed transferee’s name and address.

end insert begin insert

(ii) A copy of all of the agreements relating to the sale,
assignment, or transfer of the franchised business or its assets.

end insert begin insert

(iii) The proposed transferee’s application for approval to
become the successor franchisee. The application shall include
forms and related information generally utilized by the franchisor
in reviewing prospective franchisees, if those forms are readily
made available to existing franchisees. As soon as practicable
after receipt of the proposed transferee’s application, the
franchisor shall notify the franchisee and the proposed transferee
of information needed to make the application complete.

end insert begin insert

(B) For the franchisor, to fail, on or before 60 days after the
receipt of all of the information required pursuant to subparagraph
(A), or as extended by a written agreement between the franchisor
and the franchisee, to notify the franchisee of the approval or the
disapproval of the sale, transfer, or assignment of the franchise.
The notice shall be in writing and shall be personally served or
sent by certified mail, return receipt requested, or by guaranteed
overnight delivery service that provides verification of delivery
and shall be directed to the franchisee. A proposed sale,
assignment, or transfer shall be deemed approved, unless
disapproved by the franchisor in the manner provided by this
subdivision. If the proposed sale, assignment, or transfer is
disapproved, the franchisor shall include in the notice of
disapproval a statement setting forth the reasons for the
disapproval.

end insert begin insert

(3) In an action in which the franchisor’s withholding of consent
under this subdivision is an issue, whether the withholding of
consent was unreasonable is a question of fact requiring
consideration of all the existing circumstances.

end insert

begin delete

20017.  

(a) A franchisee may bring an action against a
franchisor or subfranchisor who offers to sell, sells, fails to renew
or transfer, or terminates a franchise in violation of Section 20016
for temporary and permanent injunctive relief, and for damages
caused thereby, or for rescission or other relief deemed appropriate
by the court. In addition, the court may in its discretion award
reasonable costs and attorney’s fees to a prevailing plaintiff.

(b) A franchisor or subfranchisor who becomes liable to make
payments under this section may recover contributions from any
person who, if sued separately, would have been liable to make
the same payments.

20018.  

A franchisor or subfranchisor shall not require that the
franchisee waive any right provided for in this article as a condition
of doing business with the franchisor or subfranchisor. Any waiver
by the franchisee of a right under this article shall be knowing and
voluntary, and not made a condition of doing business with a
franchisor or subfranchisor. Any waiver that is required as a
condition of doing business with a franchisor or subfranchisor
shall be presumed involuntary, unconscionable, against public
policy, and unenforceable. The franchisor or subfranchisor may
enforce an agreement regarding any waiver of rights under this
article if the franchisor or subfranchisor shows that the agreement
was knowing, voluntary, and not made a condition of doing
business with the franchisor or subfranchisor.

end delete

begin insert

begin insert SEC. 3. end insert   

end insert

begin insert Section 20020 of the end insert begin insert Business and Professions Code end insert
begin insert is amended to read: end insert

20020.  

Except as otherwise provided by this chapter, begin delete no end delete begin insert a end insert
franchisor begin delete may end delete begin insert shall not end insert terminate a franchise prior to the
expiration of its term, except begin delete for good cause. Good cause shall
include, but not be limited to, the failure of the franchisee to
comply with any end delete begin insert upon a substantial and material breach on the
part of the franchisee of a end insert lawful requirement of the franchise
begin delete agreement after being given notice thereof and a reasonable
opportunity, which in no event need be more than 30 days, to cure
the failure. end delete begin insert agreement. If there is a substantial and material breach
of a lawful requirement of the franchise agreement, the franchisor
shall allow the franchisee 30 days to cure the failure before
termination. end insert

begin insert

begin insert SEC. 4. end insert   

end insert

begin insert Section 20025 of the end insert begin insert Business and Professions Code end insert
begin insert is amended to read: end insert

20025.  

begin delete No franchisor may fail to renew a franchise unless such end delete
begin insert Unless there has been a substantial and material breach on the
part of the franchisee of a lawful requirement of the franchise
agreement, the franchisor shall offer to the franchisee either a
renewal of the franchise agreement under terms then being offered
to new franchisees or under existing terms. If the franchisor has
claimed a substantial and material breach on the part of the
franchisee of a lawful requirement of the franchise agreement, the end insert
franchisor begin delete provides end delete begin insert shall provide end insert the franchisee at least 180 days
prior written notice of its intention not to renew; and

(a) During the 180 days prior to expiration of the franchise the
franchisor begin delete permits end delete begin insert shall permit end insert the franchisee to sell his business
to a purchaser meeting the franchisor’s then current requirements
for granting new franchises, or if the franchisor is not granting a
significant number of new franchises, the then current requirements
for granting renewal franchises; or

(b) (1) The refusal to renew begin delete is end delete begin insert shall end insert not begin insert be end insert for the purpose of
converting the franchisee’s business premises to operation by
employees or agents of the franchisor for such franchisor’s own
account, provided, that nothing in this paragraph shall prohibit a
franchisor from exercising a right of first refusal to purchase the
franchisee’s business; and

(2) Upon expiration of the franchise, the franchisor begin delete agrees end delete begin insert shall end insert
not begin delete to end delete seek to enforce any covenant of the nonrenewed franchisee
not to compete with the franchisor or franchisees of the franchisor;
or

(c) Termination begin delete would be end delete begin insert is end insert permitted pursuant to Section 20020
or 20021; or

(d) The franchisee and the franchisor agree not to renew the
franchise; or

(e) The franchisor withdraws from distributing its products or
services through franchises in the geographic market served by
the franchisee, provided that:

(1) Upon expiration of the franchise, the franchisor agrees not
to seek to enforce any covenant of the nonrenewed franchisee not
to compete with the franchisor or franchisees of the franchisor;
and

(2) The failure to renew is not for the purpose of converting the
business conducted by the franchisee pursuant to the franchise
agreement to operation by employees or agents of the franchisor
for such franchisor’s own account; and

(3) Where the franchisor determines to sell, transfer, or assign
its interest in a marketing premises occupied by a franchisee whose
franchise agreement is not renewed pursuant to this paragraph:

(A) The franchisor, during the 180-day period after giving notice
offers such franchisee a right of first refusal of at least 30 days’
duration of a bona fide offer, made by another to purchase such
franchisor’s interest in such premises; or

(B) In the case of the sale, transfer, or assignment to another
person of the franchisor’s interest in one or more other controlled
marketing premises, such other person in good faith offers the
franchisee a franchise on substantially the same terms and
conditions currently being offered by such other person to other
franchisees; or

(f) The franchisor and the franchisee fail to agree to changes or
additions to the terms and conditions of the franchise agreement,
if such changes or additions would result in renewal of the
franchise agreement on substantially the same terms and conditions
on which the franchisor is then customarily granting renewal
franchises, or if the franchisor is not then granting a significant
number of renewal franchises, the terms and conditions on which
the franchisor is then customarily granting original franchises. The
franchisor may give the franchisee written notice of a date which
is at least 30 days from the date of such notice, on or before which
a proposed written agreement of the terms and conditions of the
renewal franchise shall be accepted in writing by the franchisee.
Such notice, when given not less than 180 days before the end of
the franchise term, may state that in the event of failure of such
acceptance by the franchisee, the notice shall be deemed a notice
of intention not to renew at the end of the franchise term.

begin insert

begin insert SEC. 5. end insert   

end insert

begin insert Section 20035 of the end insert begin insert Business and Professions Code end insert
begin insert is amended to read: end insert

20035.  

In the event a franchisor terminates or fails to renew a
franchise other than in accordance with the provisions of this
chapter, the franchisor shall begin delete offer to repurchase from the franchisee
the franchisee’s resalable current inventory meeting the franchisor’s
present standards that is required by the franchise agreement or
commercial practice and held for use or sale in the franchised
business at the lower of the fair wholesale market value or the
price paid by the franchisee. The franchisor shall not be liable for
offering to purchase personalized items which have no value to
the franchisor in the business which it franchises. end delete begin insert reinstate the
franchisee in accordance with the provisions of this chapter and
shall pay all damages caused thereby, or, at the election of the
franchisee, shall pay to the franchisee the fair market value of the
franchise and franchise assets. A court shall be entitled to grant
preliminary and permanent injunctions for violations of this
chapter. end insert