Many states have seen attempts over the past several years to enact new franchise relationship legislation. California’s bills have made it further in the legislative process than those of other states, and by Sept. 30, we should know whether the latest attempt, bill AB 525, will make it all the way.

The smart money is betting that California Gov. Jerry Brown will sign the new bill that modifies certain provisions of the California Franchise Relations Act. The purpose of the bill is to give more protections to franchisees. Last year, the governor vetoed a similar but more franchisee-friendly bill (SB 610).

An Aug. 26 editorial in The New York Times, “A Better Deal for Franchisees and Workers,” urging Brown to approve AB 525, caused significant buzz in the franchise community. To be sure, the editorial included several misstatements and mischaracterizations about franchising. However, even if the bill is enacted, it will not be earth-shattering and will not likely cause franchisors to stop doing business in a state as important to the national economy as California. California already has some of the most expansive and restrictive business laws and regulations, but these do not seem to have impaired the state’s growth.

The details of AB 525

The key provisions of the proposed law include:

Termination: Good cause for termination would be limited to the failure of the franchisee to substantially comply with the lawful requirement of the franchise after being given 60 days’ advanced notice (instead of 30 days as provided under current law). Franchisors are, however, permitted to terminate the franchise without an opportunity or a limited opportunity to cure for certain breaches such as:

  • Bankruptcy
  • Abandonment of the business
  • Material misrepresentations relating to the acquisition of the franchise
  • Engaging in conduct that reflects materially and unfavorably on the operation and reputation of the franchise business or system
  • Noncompliance with laws after 10 days’ notice
  • Repeated noncompliance with the franchise agreement
  • Conviction of a felony or other criminal misconduct relevant to the operation of the franchise
  • Failure to pay amounts due to the franchisor or its affiliate within five days after notice
  • The franchisor’s determination that continued operation will result in an imminent danger to public health or safety

Sale of a franchise: A franchisor will not be able to prevent a franchisee from selling or transferring a franchise to a person who is qualified under the franchisor’s then-existing and reasonable standards for franchisees’ sales or transfers, and the franchisor’s approval to a transfer cannot be unreasonably withheld.

Repurchase: Upon a lawful termination or nonrenewal of a franchise, the franchisor would be required to purchase all inventory, supplies, equipment, fixtures and furnishings purchased by the franchisee from the franchisor or its affiliates at the value of the price paid less depreciation. (The current law only requires a franchisor under these circumstances to purchase the franchisee’s resalable current inventory). If the franchisor terminates or fails to renew the franchise in violation of the act, the franchisee would be entitled to receive the fair market value of the business, plus damages from the franchisor.

Applicability: Changes to the existing law will apply only to franchise agreements entered into or renewed on or after Jan. 1, 2016, or to franchises of an indefinite duration that may be terminated by the franchisee or franchisor without cause.

As with almost all legislation, some of the bill’s provisions are unclear, and interpretations by and guidance from the courts will follow over time. Franchisors may consider revising their California franchise agreements in light of the new law, assuming the governor signs it. And, although California was the first state to enact a franchise disclosure and registration law that predated the FTC Franchise Rule by more than eight years, it remains to be seen whether other states will follow California’s lead. Even if some do, however, franchising will remain a viable vehicle for business expansion and this type of legislation should not, alone, impact the growth of franchising in California or elsewhere.

The bill can be found online at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160AB525

If you have questions about this topic or other franchise law matters, the attorneys in Greensfelder’s Franchising & Distribution Practice Group are here to help.