Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: California legislation to protect franchisees awaits Governor’s signature, (Sep 25, 2015)

By Jody Coultas, J.D.

A bill to amend the California Franchise Relations Act that would prohibit the termination of franchises for minor violations of the franchise agreement and protect franchise operators from other predatory practices by franchisors was unanimously approved by the state Legislature and is waiting for approval by Governor Jerry Brown.

The California Franchise Relations Act currently prohibits a franchisor from terminating a franchise prior to the expiration of its term, except for good cause, which includes, but is not limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity to cure the failure within 30 days.

The current legislation would limit “good cause” to the failure of the franchisee to substantially comply with the lawful requirements of the franchise agreement imposed on the franchisee after being given notice at least 60 days in advance and would require that the period for a reasonable opportunity to cure the failure be no less than 60 days from the date of the notice of noncompliance. The period for curing the failure would be capped at 75 days.

The bill would also make it unlawful for a franchise agreement to prevent a franchisee from selling or transferring a franchise, the assets of the franchise business, or a controlling or noncontrolling interest in the franchise business, to another person, provided that the person is qualified under the franchisor’s then-existing and reasonable standards for approval of new or renewing franchisees, as specified, and the parties comply with specified transfer provisions. A sale, transfer, or assignment of a franchise would require the franchisor’s written consent, but the bill would prohibit that consent from being withheld unless the buyer, transferee, or assignor failed to meet standards for new or renewing franchisees or the parties failed to meet specified transfer provisions.

Under the proposed legislation, franchisees would be able to seek legal protection before being forced to give up a franchise and would be entitled to fair compensation for the franchise.

Assembly Bill 525 was introduced on April 6 by Assembly Members Chris Holden (D-Pasadena), Toni G. Atkins (D-San Diego), Bill Dodd (D-Napa), and Scott Wilk (R-Santa Clarita), which is a modified version of Senate Bill 610, which was vetoed by Gov. Brown. Gov. Brown noted that SB 610 would alter the franchisor/franchisee relationship by “changing the standard required to terminate a franchise agreement from ‘good cause’ to a ‘substantial and material breach.’ While the ‘good cause’ standard is common and well understood, the standard provided in this bill is new and untested.” Brown said that he needed “a better explanation of the scope of the problem so I am certain that the solution crafted will fix those problems and not create new ones.” The current legislation purports to address the concerns voiced by Gov. Brown

The International Franchise Association (IFA) is opposed to the revised 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.

News: FranchisingDistribution CaliforniaNews