BILL ANALYSIS �
SB 610
Page 1
SENATE THIRD READING
SB 610 (Jackson)
As Amended June 30, 2014
Majority vote
SENATE VOTE :22-12
JUDICIARY 7-2 BUSINESS & PROFESSIONS
10-2
-----------------------------------------------------------------
|Ayes:|Wieckowski, Alejo, Chau, |Ayes:|Bonilla, Bocanegra, |
| |Dickinson, Garcia, | |Campos, Dickinson, |
| |Muratsuchi, Stone | |Gordon, Holden, Mullin, |
| | | |Skinner, Ting, Wilk |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Wagner, Maienschein |Nays:|Jones, Maienschein |
| | | | |
-----------------------------------------------------------------
SUMMARY : Revises various provisions of the California Franchise
Relations Act (CFRA) with respect to termination or transfer of
a franchise, as well as the right of association among
franchisees. Specifically, this bill :
1)Provides that any condition, stipulation or provision
purporting to bind any person to waive the implied covenant of
good faith and fair dealing is contrary to public policy and
void.
2)Prohibits 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
Corporations Code Section 31220.
3)Prohibits a franchise agreement from preventing a franchisee
from selling or transferring all or part of the franchise
interest to another person, although a franchisee may not
sell, transfer or assign the franchise or related rights
without the consent of the franchisor, except that consent
shall not be unreasonably withheld.
4)Clarifies that the reasonableness of a franchisor's
withholding of consent to a sale, transfer or assignment is a
question of fact requiring consideration of all the existing
SB 610
Page 2
circumstances.
5)Requires a franchise agreement to notify the franchisor in
writing prior to the sale, transfer, or assignment of a
franchise, a controlling interest thereof, or the franchise's
assets, and requires this notice to include the proposed
transferee's name and address; a copy of all of the agreements
relating to the transaction; and the proposed transferee's
application for approval to become the successor franchisee.
6)Requires the franchisor, on or before 60 days after the
receipt of all of the required information, or as extended by
a written agreement, to notify the franchisee in writing of
the approval or the disapproval of the sale, transfer, or
assignment of the franchise, as specified.
7)Provides that a proposed sale, assignment, or transfer shall
be deemed approved, unless disapproved by the franchisor in
accordance with these provisions. 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.
8)Provides that a franchisor shall not terminate a franchise
prior to expiration of its term, except upon a substantial and
material breach of the franchise agreement, in which case the
franchisor shall allow the franchisee 30 days to cure the
failure before termination.
9)Provides that if a franchisor fails to renew a franchise other
than in accordance with the provisions of the CFRA, the
franchisor shall offer to repurchase 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.
FISCAL EFFECT : None
COMMENTS : 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
franchisees from potential abuse by some franchisors acting
SB 610
Page 3
questionably or in bad faith. As a result, some small business
franchisees have lost heavy sums of their own money because of
what they perceive as intentionally unfair practices. This
bill, sponsored by the American Association of Franchisees and
Dealers, proposes several modest changes to California franchise
law that, according to the author, are intended to protect
franchisees from unfair predatory business practices by
franchisors, and to protect the equity franchise owners have
built over the term of their contracts by making it more
difficult for franchisors to unfairly terminate their contracts.
Good faith is a common standard found throughout existing
commercial law. Existing commercial law contains an implied
covenant holding parties to a good-faith standard whenever they
enter into a contract. "Every contract imposes upon each party
a duty of good faith and fair dealing in the performance of the
contract such that neither party can do anything that will have
the effect of destroying or injuring the right of the other
party to receive the fruits of the contract." (1 Witkin Summary
California Law Contracts Section 797(a).) More directly,
Uniform Commercial Code (UCC) Section 1304 states, "Every
contract or duty within this code imposes an obligation of good
faith in its performance and enforcement" and "good faith" is
defined under the UCC to mean "honesty in fact and the
observance of reasonable commercial standards of fair dealing."
(UCC Section 1201(b)(20).) As recently amended, this bill
provides that any condition, stipulation or provision of the
franchise agreement purporting to bind any person to waive the
implied covenant of good faith and fair dealing is contrary to
public policy and void.
This bill ensures that under every franchise agreement, the
franchisee may not be prevented from selling, transferring, or
assigning his or her franchise interests to a qualified buyer
without the franchisor's consent, which cannot be unreasonably
withheld. The bill requires a franchisee to notify the
franchisor in writing of his or her intent to sell, transfer, or
assign, along with the relevant documentation, and the
franchisor has 60 days to disapprove the transaction in writing
or else the transaction is automatically approved. This
provision is intended to prevent the franchisor from needlessly
delaying the transaction or otherwise disapproving the
transaction without good reason, thereby allowing a franchisee
SB 610
Page 4
the chance to fully realize the value he or she has created by
selling the franchise without unreasonable impediments.
Existing law 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, which need not be more than 30 days. This
bill would revise that requirement to provide that a franchisor
shall not terminate a franchise prior to expiration of its term,
except upon a substantial and material breach of the franchise
agreement, in which case the franchisor shall allow the
franchisee 30 days to cure the failure before termination.
Existing law provides that in the event a franchisor terminates
or fails to renew a franchise other than in accordance with the
CFRA, the franchisor shall offer to repurchase from the
franchisee the franchisee's resalable current inventory at the
lower of the fair wholesale market value or the price paid by
the franchisee, as specified. This bill leaves in place this
requirement with respect to when a franchisor fails to renew a
franchise. However, with respect to situations where the
franchisor terminates or fails to allow the sale, transfer, or
assignment of a franchise, this bill instead requires the
franchisor to reinstate the franchisee in accordance with the
CFRA and pay all damages caused thereby, or, at the election of
the franchisee, to pay to the franchisee the fair market value
of the franchise and franchise assets. According to the author,
payment to the franchisee in the amount of the full market value
of the franchise rather than that of the resalable current
inventory will help protect small businesses franchisees from
unfairly losing heavy sums of their own money upon termination
in such circumstances.
Finally, the right of a franchisee to join or participate in an
association is protected under the California Franchise
Investment Law (CFIL), Corporations Code Section 31220, which
generally requires offers and sales of franchises in California
to be registered with the Department of Corporations. While the
CFRA generally regulates the ongoing relationship between
franchisors and franchisees pursuant to a franchise agreement,
including the renewal, transfer, and termination of franchises,
by contrast the CFRA is silent on the right of franchisees to
associate with one another. This bill seeks to add a provision
SB 610
Page 5
to the CFRA to prohibit franchisors from restricting the right
of franchisees to join or participate in an association of
franchisees to the extent the restriction is prohibited by the
CFIL.
This bill is supported by Small Business California, the
Coalition of Franchise Associations, California Labor
Federation, and the Service Employees International Union
(SEIU), who contend generally that this bill is needed to ensure
greater balance in the relationship between franchisors and
franchisees, thus allowing small business owners to grow their
businesses, reap the rewards of their investments, and
potentially transfer the business to their children or to
another qualified buyer. This bill is opposed by the
International Franchise Association, representing franchisors,
and a number of prominent business associations, including
grocers, retailers and the Chamber of Commerce. The opponents
contend generally that the 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 that is needed to freely develop new franchise
businesses.
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334
FN: 0004211