Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: California legislation to protect franchisees vetoed, (Sep 30, 2014)

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

California Governor Jerry Brown on Monday vetoed legislation that would have strengthened franchisees’ rights with regard to terminations, transfers, nonrenewals, and the right of association. The measure (Senate Bill No. 610), sponsored by Senator Hannah-Beth Jackson (D-Santa Barbara), would have prohibited franchisors from putting franchisees out of business unless they have committed a “substantial and material breach" of the franchise agreement. The bill also would have protected franchisees' ability to sell or transfer the business without unreasonable interference.

Brown wrote in his veto message that the bill “alters the relationship between franchisors and franchisees by, among other things, 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 was open to reforming the state’s Franchise Relations Act to provide more franchisee protections; however, 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.”

Given the “polarized positions” of the parties supporting and opposing this bill, “it is in the best interest of all that a concerted effort be made to reach a more collaborative solution,” Brown added.

Senate Bill 610 would have revised various provisions of the California Franchise Relations Act by adding key provisions pertaining to the franchise relationship. Specifically, the measure would have (1) rendered void as against public policy any contractual provision purporting to waive the covenant of good faith and fair dealing; (2) prohibited restrictions on the franchisee’s right to join a franchisee association; (3) permitted the franchisee to transfer all or part of its interest in a franchise, subject to the franchisor’s consent, which may not be unreasonably withheld; (4) precluded 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) required 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.

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

The California Labor Association asserted that Senate Bill 610 would have impacted 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 contended that the legislation would have provided significant steps toward rebalancing the relationship between franchisors and franchisees.

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

News: FranchisingDistribution CaliforniaNews