AB 2305

Bill Subjects

Abstract

(1) Existing law provides for the regulation of franchises and establishes certain duties, obligations, and remedies for parties to a franchise agreement. The California Franchise Relations Act sets forth certain requirements related to the termination, nonrenewal, and transfer of franchises, among other things. The Franchise Investment Law sets forth various powers of the Commissioner of Corporations relative to the registration of an offer or sale of a franchise, unless exempted, and prohibits certain fraudulent and unfair practices. This bill would revise both the California Franchise Relations Act and the Franchise Investment Law. (A) With respect to the California Franchise Relations Act, existing law generally prohibits a franchisor from terminating a franchise prior to expiration of its term except for good cause, which is defined to include the failure of a franchisee to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity, which need not exceed 30 days, to cure the failure. This bill would provide that good cause in a termination case consists of a substantial and material breach of the franchise agreement after the franchisee is given written notice and 60 days to cure the failure. The bill would also require the termination to be in accordance with the current terms and standards equally applicable to all franchisees, with limited exceptions. Existing law provides that immediate termination of a franchise is deemed reasonable without an opportunity to cure upon the occurrence of certain events. One of those events is the failure by the franchisee to pay franchise fees or other amounts due with 5 days of receiving written notice that these amounts are overdue. This bill would exempt situations where the franchisee establishes that the event was caused in substantial manner by conduct of the franchisor. The bill would require certain noncompliance by the franchisee allowing immediate termination to be substantial and material. The bill would provide 60 rather than 5 days for the franchisee to pay overdue amounts. Existing law requires at least 180 days written notice to the franchisee of the franchisor's intention not to renew the franchise. Existing law imposes certain requirements on the franchisor in that regard relative to the franchisee's interests. This bill would delete these provisions and instead require a franchisor to renew a franchise unless the franchisee has substantially and materially breached the franchise agreement, and would require the renewal to be under the same terms as the existing agreement, or if the franchisee elects, under the franchise terms then being offered to new franchisees. The bill would continue to require 180 days' written notice if the franchisor has grounds not to renew the franchise. The bill would also prohibit a franchisor, upon termination or expiration of a franchise, from enforcing against the franchisee any covenant not to compete. Existing law provides that a franchisor, for a reasonable time after the death of the franchisee, may not deny the surviving spouse, heirs, or estate of the franchisee the opportunity to participate in the ownership of the franchise under the then-current qualifications and standards applicable to franchisees. This bill would require the qualifications and standards to be reasonable. Existing law requires a franchisor that terminates or fails to renew a franchise other than as permitted under the act to offer to repurchase the franchisee's resalable current inventory, as specified. This bill would instead require the franchisor to reinstate the franchisee and to pay all associated damages, or to pay to the franchisee the fair market value of the franchise or franchise assets. Existing law allows a franchisor and franchisee to agree to binding arbitration of claims arising under the act. This bill would require the arbitration procedures and costs to allow franchisees the opportunity to vindicate their rights under the act. This bill would also add new provisions to the California Franchise Relations Act. The bill would require the parties to a franchise agreement to deal with each other in good faith. The bill would provide that certain acts and practices by a franchisor or subfranchisor are unfair or deceptive acts or practices or an unfair method of competition. The bill would provide certain rights to a franchisee if the franchisor develops a new location or grants a new franchise in essentially the same market in unreasonable proximity to an existing franchise. The bill would provide that franchisors owe a duty of competence to franchisees. The bill would provide that a condition, stipulation, or provision in a franchise agreement requiring the application of the law of another state is void. The bill would provide additional remedies for violations of provisions governing actions of franchisors relative to termination, nonrenewal, and transfer of franchises, including specified damages in certain cases, injunctive relief, and an award of attorney's fees and costs to a franchisee prevailing in an action. (B) With respect to the Franchise Investment Law, existing law makes it unlawful for a person to offer or sell a franchise by means of a communication that includes an untrue statement of a material fact or omits to state a material fact necessary in order for the statements made to not be misleading. This bill would also make it unlawful for a person offering or selling a franchise to intentionally misrepresent certain matters, including the prospects or chances for success of a franchise, the known required total investment for a franchise, and efforts to sell or establish more franchises than a market or market area can sustain. Existing law provides that any person who willfully employs, directly or indirectly, any device, scheme, or artifice to defraud in connection with the offer or sale of a franchise or who engages in other willful acts that operate as a fraud or deceit is guilty of a crime. This bill would allow these matters to also be the subject of civil litigation, as specified. Existing law imposes various duties on the Commissioner of Corporations with respect to franchise offers. This bill would prohibit the commissioners from registering any franchise offer that restricts venue for resolution of dispute solely to a forum outside this state. Existing law makes it unlawful for a franchisor to restrict or inhibit the right of franchisees to join a trade association or to prohibit the right of free association among franchisees for lawful purposes. A plaintiff may seek injunctive relief and damages for a violation of this provision. This bill would also make it unlawful for a franchisor to refuse to recognize and deal fairly and in good faith with an independent franchisee association. Existing law provides that a person who offers or sells a franchise in violation of specified provisions of the Franchise Investment Law shall be liable for damages to the franchisee or subfranchisor, with certain exceptions. Existing law also provides rescission as a remedy for willful violations of these provisions. This bill would extend civil liability for damages to any violation of the Franchise Investment Law. The bill, following purchase of a franchise, would allow a franchisee or subfranchisor to seek rescission, restitution, and ancillary damages without the requirement for the violation to be willful. The bill would extend liability for any violation of the Franchise Investment Law, on a joint and several basis, to various other parties associated with the franchisor. The bill would also provide for injunctive relief for any violation of the Franchise Investment Law. Existing law imposes time limits of one, 2, or 4 years for the bringing of an action to enforce specific liabilities under the Franchise Investment Law. Existing law provides that if the franchisor delivers a written notice to the franchisee disclosing a violation of certain disclosure provisions, an action must be brought within 90 days. This bill would require the written notice to include an offer of restitution of investment and ancillary damages and would extend the time for bringing an action to 180 days. The bill would allow 4 years to bring other actions to enforce liabilities under the Franchise Investment Law. Existing law provides that any condition, stipulation, or provision purporting to bind any person acquiring a franchise to waive compliance with the Franchise Investment Law is void. This bill would provide that certain other provisions, if included in the offer or sale of a franchise and associated documents, are also void. Existing law provides that a willful violation of any provision of the Franchise Investment Law is a crime, unless specifically excepted. Because the bill would change the definition of certain crimes, it would impose a state-mandated local program. (2) The bill would make other related changes. (3) The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement. This bill would provide that no reimbursement is required by this act for a specified reason.