On May 14, 2015, the California state Assembly passed AB 525, a bill that would amend the existing California Franchise Relations Act (Business and Professions Code §§ 20000 – 20010) (“CFRA”) by expanding the protections for existing franchisees. As currently written, AB 525 would amend the CFRA in the following ways:
- “Good Cause” Restricted to Substantial Compliance. Under the CFRA, a franchisor is permitted to terminate a franchise prior to the expiration of its term only for “good cause,” which includes (but is not limited to) the failure of a franchisee to comply with any lawful requirement of the franchise agreement after being given notice and an opportunity to cure the failure. Under AB 525, “good cause” would be limited to the failure of the franchisee to substantially comply with the franchise agreement.
- 60 Day Cure Period. AB 525 would create a mandatory period of at least 60 days for the franchisee to cure a material default under the franchise agreement, which cure period would apply in all but a few defined circumstances.
- Right of Sale. A franchisor would be prohibited from withholding its consent to the sale of an existing franchise except where the buyer does not meet the franchisor’s standards for new franchisees.
- Notification of Approval / Disapproval of Proposed Sale. A franchisor would be required to notify the requesting franchisee of its approval or disapproval of a contemplated sale of a franchise within 60 days of receiving from the franchisee certain mandated forms and information regarding the sale. If a franchisor does not provide its written approval or disapproval with the 60 day period, the sale will be deemed to have been approved.
- Reinstatement or Purchase of Franchise. In the event that a franchisor either terminates or fails to allow the franchisee to renew or sell its franchise in violation of the CFRA, the franchisor would be required to, at the election of the franchisee, either: (a) reinstate the franchise and pay the franchisee damages; or (b) pay the franchisee the fair market value of the franchise and the franchise assets.
- Monetization of Equity. A franchisee must have the opportunity to “monetize its equity” (obtain the fair market value of the franchise and its assets) prior to the franchise agreement being terminated or not renewed by the franchisor, except under certain limited circumstances.
AB 525 is now in the Senate for consideration.