BILL ANALYSIS �
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UNFINISHED BUSINESS
Bill No: SB 610
Author: Jackson (D)
Amended: 6/30/14
Vote: 21
SENATE JUDICIARY COMMITTEE : 5-2, 4/16/13
AYES: Evans, Corbett, Jackson, Leno, Monning
NOES: Walters, Anderson
SENATE FLOOR : 22-12, 5/28/13
AYES: Beall, Block, Corbett, De Le�n, DeSaulnier, Emmerson,
Evans, Gaines, Galgiani, Hancock, Hill, Hueso, Jackson, Lara,
Leno, Liu, Monning, Pavley, Price, Roth, Steinberg, Wolk
NOES: Anderson, Berryhill, Calderon, Correa, Fuller, Huff,
Knight, Nielsen, Torres, Walters, Wright, Wyland
NO VOTE RECORDED: Cannella, Hernandez, Lieu, Padilla, Yee,
Vacancy
ASSEMBLY FLOOR : 41-28, 8/14/14 - See last page for vote
SUBJECT : Franchises
SOURCE : American Association of Franchisees and Dealers
McDonalds Franchise Owner, Ed Carter and Kathryn
Slater-Carter
DIGEST : This bill 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.
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Assembly Amendments remove most of the previous content and
replace it with six key provisions pertaining to the
franchisor/franchisee relationship, and make other changes.
ANALYSIS :
Existing law:
1. Creates CFRA which:
A. Defines a franchise as a contract between two or more
persons by which:
(1) A franchisee is granted the right to offer,
sell or distribute goods or services under the
plan or system of the franchisor;
(2) Operation of the business is substantially
associated with franchisor's trademark,
advertising or other symbol; and,
(3) A franchise fee is paid by the franchisee;
B. Excludes from the definition of a franchise those
governed by the Petroleum Marketing Practices Act; lease
departments, licenses, or concessions at or with a
general merchandise retail establishment; and, a
cooperatively operated nonprofit organization;
C. Provides that any condition, stipulation or provision
waiving compliance with the CFRA is contrary to public
policy and void;
D. Prohibits termination of a franchise agreement prior
to the end of the term, except for good cause, which
includes failure to comply with any lawful requirement
of the franchise agreement after written notice and a
reasonable opportunity (no more than 30 days) to cure;
E. Authorizes the immediate termination of a franchise
agreement without notice or an opportunity to cure in
cases of bankruptcy, abandonment, mutual agreement,
material misrepresentation, failure to comply with the
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law after notice, repeated noncompliance after cure,
seizure of the premises by a governmental entity or
creditor, conviction of a felony or relevant
misdemeanor, failure to pay franchisee fees within five
days of overdue notice, and imminent danger to public
health or safety; and
F. 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.
2. Creates the California Franchise Investment Law (CFIL),
which:
A. Makes it a violation of the CFIL for any franchisor,
directly or indirectly, through any officer, agent or
employee, to restrict or inhibit the right of
franchisees to join a trade association or to prohibit
the right of free association among franchisees for any
lawful purposes;
B. Provides that any person who offers or sells a
franchise in violation of specified sections of the CFIL
or in violation of any provision that provides an
exemption from the requirements of the CFIL, as
specified, shall be liable to the franchisee or
subfranchisor, who may sue for damages caused thereby,
and if the violation is willful, the franchisee may also
sue for rescission, unless, in specified cases, the
defendant proves that the plaintiff knew the facts
concerning the untruth or omission, or that the
defendant exercised reasonable care and did not know,
or, if he/she had exercised reasonable care, would not
have known, of the untruth or omission;
C. Allows any person who violates the right to free
association to be sued in the superior court in the
county in which the defendant resides or where a
franchise affected by the violation does business, for
temporary and permanent injunctive relief and for
damages, if any, and the costs of suit, including
reasonable attorneys' fees. Further provides that a
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plaintiff shall not be required to allege or prove that
actual damages have been suffered in order to obtain
injunctive relief;
D. Prohibits an action from being maintained to enforce
any liability for violation of the right of free
association unless it is brought within two years after
the violation upon which it is based or within one year
after the discovery by the plaintiff of the facts
constituting such violation, whichever occurs first; and
E. Except as explicitly provided, prohibits civil
liability in favor of any private party against any
person by implication from or as a result of the
violation of any provision of CFIL or any rule or order
thereunder.
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
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
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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.
Background
The CFIL was enacted in 1970 to regulate franchise investment
opportunities in order to protect California investors from
flimsy or fraudulent franchise investments. The CFIL generally
requires franchisors to provide prospective franchisees with the
information necessary to make an intelligent decision regarding
franchise offers, and prohibits the sale of franchises where
they would lead to fraud or likelihood that a franchisor's
promises would not be fulfilled.
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Subsequently, the CFRA was enacted to govern the ongoing
relationships between franchisors and franchisees in an effort
to prevent unfair practices in the termination, renewal or
transfer of a franchise, where either the franchise is domiciled
in California or the franchise business is or has been operated
in California. For example, the CFRA generally prohibits
franchisors from terminating a franchise prior to the expiration
of its term, except for good cause.
Last year, AB 2305 (Huffman, 2012) was introduced to enact the
Level Playing Field for Small Businesses Act of 2012 and would
have amended both the CFIL and CFRA in an attempt to address
"the widespread use of one-sided and nonnegotiable franchise
agreements [which have] created numerous problems for
franchisees in California." That bill sought to increase
protections against unfair practices of franchisors, for
example, by permitting termination of a franchise agreement for
good cause only where there has been a substantial and material
breach of the franchise agreement and the franchisee was granted
specified time to cure the breach. Among other things, the bill
would have required good faith in the performance and
enforcement of the franchise agreement. AB 2305 also would have
created a cause of action and would have permitted the award of
attorney's fees where a franchisor or subfranchisor sold or
offered to sell a franchise in violation of the bill's
prohibitions against specified unfair or deceptive acts or
practices or unfair methods of competition. The billed died in
Assembly Business, Professions and Consumer Protection
Committee.
FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local:
No
SUPPORT : (Verified 8/15/14)
American Association of Franchisees and Dealers (co-source)
McDonalds Franchise Owner, Ed Carter and Kathryn Slater-Carter
(co-source)
ARCO Travel Zone Center
California Labor Federation
Coalition of Franchisee Associations
Dunkin Donuts Independent Franchise Owners
Greater Bay Franchise Owners Association
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Griswold Home Care
Law Offices of Peter Lagarias
Pacific Management Consulting Group
Service Employees International Union
Service Station Franchise Association, Inc.
Small Business California
Small Business Majority
OPPOSITION : (Verified 8/15/14)
AAMCO
ACFN Franchised, Inc.
Allied PRA
Always Best Care Senior Services
AmeriSpec & Furniture Medic
Aussie Pet Mobile, Inc.
Bach to Rock
Bottle & Bottega
BP America (AM PM)
BrightStar Care
California Chamber of Commerce
California Closets
California Grocers Association
California Manufacturers & Technology Association
Civil Justice Association of California
FASTSIGNS International
Fatburger
FirstService Brands
FOCUS Brands (Auntie Anne's, Carvel, Cinnabon, Moe's Southwest
Grill,
Schlotsky's)
FranNet
Go Mini's Moving & Portable Storage
Home Instead Senior Care
Instant Imprints
Interim Health Care
International Franchise Association
Jani-King
Keepsake Companions Inc.
KidsPark
Max Muscle Sports Nutrition
Menchie's
Merry Maids
Mr. Rooter of Sonoma County
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MSA Worldwide
No Frill Franchising, Inc. - Instant Imprints
Right at Home
Round Table Pizza
Scooter's Jungle
ServiceMaster Clean
Sir Speedy, Inc.
Sizzler USA, Inc.
Sky Zone Franchise Group, LLC
Star Franchise Association
The Dwyer Group (AirServ, Glass Doctor, The Grounds Guys, Mr.
Appliance,
Mr. Electric, Mr. Rooter, Portland Glass, Rainbow
International)
The Entrepreneur Authority - Auburn CA
The UPS Store, Inc.
Two Men And A Truck
West's Insurance Agency
ARGUMENTS IN SUPPORT : According to the California Labor
Federation, "SB 610 will impact over 83,000 franchised
establishments that employ more than 925,700 workers in
California. Fast food restaurants are the biggest employers in
the franchise sector, and fast food workers and franchisees,
mostly small-business people, share a common problem - the
unchecked power of big corporations. SB 610 protects
franchisees against franchisor abuse, giving franchisees the
opportunity to grow profitable businesses, achieve financial
security, and pass some of their gains to their workers in the
form of higher wages and benefits."
According to Service Employees International Union, "[the
provisions of SB 610] are significant steps towards rebalancing
the relationship between franchisors and franchisees.
Prohibiting unfair terminations and non-renewals ensures that
franchisees who play by the rules have the opportunity to
thrive, while still providing franchisors with authority to
terminate or not renew franchisees who don't meet franchise
standards. Protecting franchisees' rights to transfer their
business means that franchisees can pass their franchise on to
their children or sell it and reap the reward of their labor and
investment. And protecting franchisees' right to join
franchisee associations without retaliation means that
franchisees can work together to address problems in their
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franchise system.
"The relationship between franchisees and franchisors needs to
be more balanced to ensure that small business owners have more
say in running their business, including the ability to improve
conditions for their employees."
ARGUMENTS IN OPPOSITION : A broad coalition of opponents
writes, "The proposed bill would create ambiguity in the
enforcement of franchise contracts and to promote litigation
between franchisees and franchisor, resulting in sub-standard
services and products being delivered to consumers?SB 610 would
introduce ambiguity into the franchise contractual relationship
by layering on an amorphous concept of 'good faith' and 'fair
dealing'?in the context of detailed franchise contracts which
govern complex and ongoing business relationships, it creates
uncertainty as to the enforceability of the contracts and
standards.
"Additionally, the provision that the franchise has an automatic
right of renewal unless there is a substantial and material
breach has serious consequences. Possible harmful consequences
include: requiring that franchisors remain in contracts with
underperforming and/or uncooperative franchisees in perpetuity;
potentially overturning longstanding law that, if applied to
existing leases, would effectively sanction business and
residential 'squatters'; discouraging franchisors from offering
discounted franchise fees during tough economic times for fear
of never being allowed to raise them; and creating a situation
in which the quality of a franchisor's brand is diminished by
the franchisor's inability to remove substandard operators from
the system, harming both the franchisor and all of its
franchisees as a result. "
ASSEMBLY FLOOR : 41-28, 8/14/14
AYES: Alejo, Ammiano, Bloom, Bonilla, Bonta, Bradford, Ian
Calderon, Campos, Chau, Chesbro, Dababneh, Dickinson, Fong,
Garcia, Gatto, Gomez, Gonzalez, Gordon, Hall, Roger Hern�ndez,
Holden, Jones-Sawyer, Lowenthal, Mullin, Muratsuchi, Nazarian,
Pan, John A. P�rez, V. Manuel P�rez, Quirk, Rendon,
Ridley-Thomas, Skinner, Stone, Ting, Weber, Wieckowski, Wilk,
Williams, Yamada, Atkins
NOES: Allen, Bigelow, Ch�vez, Conway, Cooley, Dahle, Daly,
Donnelly, Fox, Frazier, Beth Gaines, Gorell, Grove, Hagman,
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Harkey, Jones, Levine, Logue, Maienschein, Medina, Melendez,
Nestande, Olsen, Patterson, Perea, Quirk-Silva, Salas, Wagner
NO VOTE RECORDED: Achadjian, Bocanegra, Brown, Buchanan,
Eggman, Gray, Linder, Mansoor, Rodriguez, Waldron, Vacancy
AL:d 8/15/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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