On April 6 2015 California legislators reintroduced legislation to modify the California Franchise Relations Act, which governs certain requirements relating to the termination and non-renewal of franchises. This update summarises the proposed legislation, known as AB 525.(1)

Termination

The California Franchise Relations Act currently prohibits a franchisor from terminating a franchise agreement prior to the expiration of its term unless it can articulate good cause for early termination. 'Good cause', as defined by the act, includes a franchisee's failure 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. AB 525 seeks to restrict the definition of 'good cause' to a franchisee's failure substantially to comply with any lawful requirement of the franchise agreement and would double the mandatory notice and cure period from 30 days to 60 days.

Non-renewal

Current California law allows a franchisor to choose not to renew a franchise agreement as long as it provides the franchisee with written notice of its intention not to renew at least 180 days prior to the expiration of the franchise agreement and certain conditions are met. The proposed AB 525 would limit a franchisor's discretion in this regard because, in addition to the 180-day notice requirement, it would prohibit a franchisor from not renewing a franchise agreement unless the franchisee had failed substantially to comply with the franchise agreement. AB 525 would allow the franchisee to renew for the same duration as provided in the expiring franchise agreement and would require the renewal to be under the terms that are being offered to new franchisees at that time. In addition, the bill would prohibit a franchisor from seeking to enforce against the franchisee any covenant not to compete following termination or expiration of the franchise.

Transfer

The proposed AB 525 would also add additional provisions to the California Franchise Relations Act regarding franchise transfers or sales. The proposed AB 525 would make it unlawful for a franchise agreement to prevent a franchisee from selling or transferring a franchise or part of an interest of a franchise to another person, as long as that person is qualified under the franchisor's current standards for the approval of new franchises. Under the proposed bill, a franchisee would be required to notify the franchisor in writing prior to any sale, assignment or transfer. Within 60 days of the franchisee's request, the franchisor would be required to serve the franchisee either personally or via certified mail, return receipt requested, with written notice of the franchisor's approval or disapproval. A franchisee's proposed sale, assignment or transfer would be deemed approved unless the franchisor identified reasonable grounds to disapprove such request in the time and manner required by the proposed AB 525.

Remedies and monetisation

The proposed AB 525 would also greatly expand a franchisee's available statutory remedies if a franchisor violates the California Franchise Relations Act. The act currently requires a franchisor that improperly terminates or fails to renew a franchise to offer to repurchase from the franchisee the franchisee's resaleable current inventory. AB 525, on the other hand, would require a franchisor that improperly terminates or fails to allow the renewal, sale, assignment or transfer of a franchise, at the election of the franchisee, either:

  • to reinstate the franchisee and pay all resulting damages; or
  • to pay the franchisee the fair market value of the franchise and franchise assets.

Finally, AB 525 would add a provision to the act that would allow a franchisee to monetise any equity that it may have developed in the franchised business prior to termination of the franchise agreement.

Prior veto of similar bill

A similar bill (SB 610) was approved by California legislators in 2014, but was vetoed by Governor Jerry Brown. In his letter to the Senate, Brown noted that "[t]he bill's changes would significantly impact California's vast franchise industry that relies on the certainty of well-settled laws".(2) Brown indicated that he was:

"open to reforming the California Franchise Relations Act to give more protections to franchisees if there are indeed unacceptable or predatory practices by franchisors. I need, however, 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."(3)

For further information on this topic please contact Jess A Dance at Perkins Coie LLP by telephone (+1 303 291 2300) or email (jdance@perkinscoie.com). The Perkins Coie LLP website can be accessed at www.perkinscoie.com.

Endnotes

(1) The full text of AB 525 is available online at http://leginfo.ca.gov/pub/15-16/bill/asm/ab_0501-0550/ab_525_bill_20150406_amended_asm_v98.pdf.

(2) Letter from Edmund G Brown Jr, Governor, State of California, to California State Senate Members (September 29 2014), available at http://gov.ca.gov/docs/SB_610_Veto_Message.pdf.

(3) Id.

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