California’s governor recently vetoed legislation that had intended to make it easier for franchisors and franchisees to do business in the state. While the vetoes came as no surprise, they are disappointing from a franchise perspective.
AB 1782 (Limited Trade Show Exception) and AB 2637 (Negotiated Sales) — which the State Bar of California’s Franchise Law Committee, the International Franchise Association and the Coalition of Franchisee Associations each supported — were vetoed Sept. 22, 2016, by California Gov. Jerry Brown.
AB 1782 would have allowed franchisors who are not registered with the Department of Business Oversight (DBO) an opportunity to advertise their franchises at trade shows in California. Passage of this law would have made it easier for unregistered franchisors to advertise to potential California-based prospective franchisees.
The governor vetoed this bill because he believed the lack of registration deprived the DBO of the ability to “review franchise disclosure documents to ensure franchisors were providing accurate information to potential customers.” In truth, franchisors cannot sell a franchise in California unless they first register with the state and submit the franchisor’s franchise disclosure document (FDD) for the DBO’s review in that process. If AB 1782 had become law, California would have joined New York as the only states that allow unregistered franchisors to advertise their franchise within the state.
AB 2637 would have brought California’s treatment of negotiated franchise sales in line with other states. No other state regulates the negotiation of franchise agreements like California does. Proponents of this bill thought the requirement that franchisors have to disclose negotiated changes to the registered FDD to the government and/or other prospective franchisees dissuaded franchisors from negotiating with prospective franchisees in California.
In California, negotiated franchise agreement terms that differ from the registered FDD are handled in one of two ways. If the new negotiated franchise agreement terms are to the prospective franchisee’s detriment as a whole, the franchisor is required to file the amended agreement for approval by the DBO and prepare a revised FDD to go with it. If franchisors and franchisees negotiate terms that are to the franchisee’s benefit, which is the usual case, the franchisor has to disclose these terms for the next 12 months to prospective franchises.
The governor vetoed AB 2637 on the basis that it “could be detrimental to potential franchisees” because the DBO would not be able to review contract changes to ensure that franchises are not disadvantaged in their final agreements. The governor’s reasoning appears to be based on a misunderstanding of current practices in the franchise industry. For example, most franchise agreement negotiations are done at the prospective franchisee’s request and result in better terms for the franchisee. As a result, franchisors are not required to submit the negotiated agreement for review to the DBO. Instead they can simply disclose a summary of the negotiated terms to future prospective franchisees without regulatory oversight. The restriction on negotiated sales in California also leads to franchisors being unwilling to negotiate their agreements at all, or seeking out some of the many exemptions available from the state franchise registration requirements.
California franchise law has many exemptions, so the harder California makes franchise compliance, the more franchisors will look to available registration exemptions. Time will tell if California will take any additional steps to become a state more supportive of franchise opportunities.