California Legislature Passes Franchise Relations Bill

This week, the California legislature nearly unanimously approved Assembly Bill 525, which would (if signed by Gov. Brown) amend the existing California Franchise Relations Act ("CFRA").

The version of AB 525 that was passed differed from the one that originally sailed through the Assembly in May of this year. The current version represents a "compromise bill" that was hammered out between the IFA and the Coalition of Franchisee Associations, and notably is also supported by the Service Employees International Union.

If signed by Gov. Brown, AB 525 would amend the CFRA as follows:

  • Termination for “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. As amended, “good cause” would be limited to the failure of the franchisee to substantially comply with the lawful requirements of the franchise agreement.
  • 60 Day Cure Period. A franchisee will have a mandatory period of at least 60 days to cure a material default under the franchise agreement after receiving notice of the default from the franchisor, which cure period would apply in all but a few defined circumstances. Importantly, this 60 day period would not apply, and the CFRA would continue to permit immediate termination without the franchisee having further opportunity to cure, where the franchisee fails to pay amounts due to the franchisor or its affiliate within five days after receiving notice that the fees are overdue.
  • Right of Sale. A franchisor would be prohibited from withholding its consent to the sale of an existing franchise except where: (a) the buyer does not meet the franchisor’s standards for new or renewing franchisees; or (b) the parties fail to comply with the transfer provisions specified in the franchise agreement.
  • 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. The franchisor would further be required to communicate to the selling franchisee its standards for approval of new or renewing franchisees, as well as the reasons for disapproval if the sale is not approved. 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 by the franchisor.
  • Payment of Fair Market Value for Franchised Business, Plus Damages. In the event a franchisor terminates or fails to renew a franchisee in violation of the CFRA, the franchisor will be required to pay the franchisee "the fair market value of the franchised business and franchise assets and any other damages caused" by the franchisor's violation of the CFRA.

Critically, AB 525, if signed by Gov. Brown, will not apply retroactively to existing franchise contracts. AB 525's application will be limited to franchise agreements entered into or renewed after January 1, 2016, or to franchises of an indefinite duration that may be terminated without cause.

The text of the bill, as passed, is available for download here.

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