Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: California bill strengthening franchisee rights passes second house, (Aug 18, 2014)

By John W. Arden, J.D., LL.M.

A California Senate bill that would strengthen franchisee rights with regard to terminations, transfers, nonrenewals, and the right of association passed the state Assembly on August 14 and awaits Senate concurrence in the Assembly’s amendments.

Senate Bill 610 would revise various provisions of the California Franchise Relations Act by adding key provisions pertaining to the franchise relationship. Specifically, the measure would (1) render void as against public policy any contractual provision purporting to waive the covenant of good faith and fair dealing; (2) prohibit restrictions on the franchisee’s right to join a franchisee association; (3) permit the franchise to transfer all or part of its interest in a franchise, subject to the franchisor’s consent, which may not be unreasonably withheld; (4) preclude franchise termination except for a substantial and material breach of the franchise agreement and with 30 days in which to cure the failure; and (5) require a franchisor terminating or refusing to renew a franchise to offer to repurchase the franchise inventory at the fair wholesale market value or the price paid by the franchisee.

The measure was introduced in the Senate on February 22, 2013. It passed the Senate by a 22-12 margin on May 28, 2013 and was introduced in the Assembly the next day. The bill was amended three times before the Assembly passed it by a 41-28 vote last week. The Senate concurrence in Assembly amendments is pending.

According to an August 15 Senate Floor Analysis, the legislation is supported by the American Association of Franchisees and Dealers, franchisees, the California Labor Federation, and franchisee associations. Among those opposing the bill are a number of franchisors, the International Franchise Association, and the California Chamber of Commerce.

The California Labor Association asserts that Senate Bill 610 will impact more than 83,000 franchised establishments, which employ more than 925,700 workers in California, by protecting franchisees from franchisor abuse and giving them the opportunity to grow profitable businesses, achieve financial security, and pass these gains to their workers in the form of higher wages and benefits. The Service Employee International Union contends that the legislation would provide significant steps toward rebalancing the relationship between franchisors and franchisees.

A broad coalition of opponents claim that the legislation would create ambiguity in the enforcement of franchise agreements and promote litigation between franchisees and franchisors, resulting in sub-standard products and services being delivered to customers. The opponents allege that the imposition of an amorphous concept of good faith and fair dealing on franchise relationships would create uncertainty in contracts and standards and that the new renewal provision could require franchisors to remain in contracts with underperforming and/or uncooperative franchisees in perpetuity. The coalition maintains that the legislation is unnecessary, since California and the Federal Trade Commission already regulate franchising, and would hurt small business owners by damaging brands and limiting their expansion throughout the state.

A version of the California Franchise Relations Act, as amended by the proposed legislation, appears here on the California Legislative Information website.

News: FranchisingDistribution CaliforniaNews