Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION: California amends Franchise Relations Act to provide further protections to franchisees, (Oct 13, 2015)

By Pete Reap, J.D., LL.M.

Amendments to the California Franchise Relations Act (CFRA), that are generally limited in their application to a franchise agreement entered into or renewed on or after January 1, 2016, were signed into law by Governor Jerry Brown on October 11. Text of the amending law appears here on the California Legislature’s website.

The amendments modify the statute’s definition of good cause for termination or nonrenewal and provide that in the event a franchisor terminates or fails to renew a franchisee in violation of the CFRA, the franchisee shall be entitled to receive from the franchisor the fair market value of the franchised business and franchise assets and any other damages caused by the violation.

“Good cause.” Under the existing CFRA, a franchisor is permitted to terminate a franchise prior to the expiration of its term only for “good cause, which “shall include, but not be limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice thereof and a reasonable opportunity, which in no event need be more than 30 days, to cure the failure.”

Under the amendments, “good cause (subject to the exceptions set out in Sec. 20021, which exist under both the current law and, with slight changes, under the amended law) shall be limited to the failure of the franchisee to substantially comply with the lawful requirements imposed upon the franchisee by the franchise agreement after being given notice at least 60 days in advance of the termination and a reasonable opportunity, which in no event shall be less than 60 days from the date of the notice of noncompliance, to cure the failure.”

Repurchase obligation. The amendments require a franchisor, with certain exceptions, “upon a lawful termination or nonrenewal of a franchisee, the franchisor shall purchase from the franchisee, at the value of price paid, minus depreciation, all inventory, supplies, equipment, fixtures, and furnishings purchased or paid for under the terms of the franchise agreement or any ancillary or collateral agreement by the franchisee to the franchisor or its approved suppliers and sources, that are, at the time of the notice of termination or nonrenewal, in the possession of the franchisee or used by the franchisee in the franchise business.

Exceptions include: (1) “when franchisee declines a bona fide offer of renewal from the franchisor,” (2) “when the franchisor does not prevent the franchisee from retaining control of the principal place of the franchise business,” and (3) “any termination or nonrenewal of a franchise due to a publicly announced and nondiscriminatory decision by the franchisor to completely withdraw from all franchise activity within the relevant geographic market area.”

Transfers of franchises. The amendments make it “unlawful for a franchisor to prevent a franchisee from selling or transferring a franchise, all or substantially all of the assets of the franchise business, or a controlling or non-controlling interest in the franchise business, to another person provided that the person is qualified under the franchisor’s then-existing standards for the approval of new or renewing franchisees.”

This prohibition is clarified by stating that (a) a franchisee shall not have the right to transfer a franchise without written consent of the franchisor except that consent shall not be withheld unless the transferee does not meet the franchisor’s standards; and (b) a franchisor is not prohibited from exercising the contractual right of first refusal to purchase a franchise under certain circumstances.

Unlawful terminations or nonrenewals. The amendments provide that if “a franchisor terminates or fails to renew a franchisee, in violation of this chapter, the franchisee shall be entitled to receive from the franchisor the fair market value of the franchised business and franchise assets and any other damages caused by the violation.” Under the current version of the CFRA, franchisors that terminate or fail to renew a franchise in violation of the law are required to offer to repurchase the franchisee’s resaleable current inventory meeting the franchisor’s standards.

IFA opposition. The International Franchise Association (IFA) was opposed to the legislation. “The IFA has serious concerns about some of the provisions included in the bill, particularly those that introduce vague and ambiguous language into the enforceability of franchise contracts,” said Matt Haller, spokesman for the IFA.

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