California Assembly Bills 1782 and 2637, which would have improved the regulatory climate for franchises in the state, have been vetoed by Governor Jerry Brown after being passed by an overwhelming majority of the legislature.
Assembly Bill 1782 would have created a new exemption to the California Franchise Investment Law (the “CFIL”) that would have permitted a franchisor or prospective franchisor to exhibit at a trade show in California without first having to register with the Department of Business Oversight. AB 1782 provided that a prospective or actual franchisor seeking to take advantage of this new exemption would be required to file an exemption form with the DBO (in a format the DBO determines) and post a sign in its booth at the trade show explaining that the franchisor is not registered, and that it must become registered before it can legally offer a franchise for sale in California.
AB 2637 would have amended the CFIL by changing the existing law regarding negotiated sales. California has a unique requirement that requires a franchisor to make certain disclosures to prospective franchisees regarding terms that were negotiated with prior California franchisees that amended the standard agreement contained in the registered FDD. The bill would have modified the exemption by permitting a franchisor to freely negotiate with California prospects so long as the franchisor: 1) included a statement in its FDD that CA law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the FDD; 2) retained copies of the material negotiated terms for a period of 5 years; and 3) certified in its annual renewal application that it has complied with the statute. The requirement that a franchisor disclose (in any form) terms that it has negotiated previously with other California franchisees would have been deleted.
The two bills were originated by the California Franchise Law Committee (the “FLC”). The FLC, which is comprised of attorneys that represent primarily franchisees as well as attorneys that primarily represent franchisors, had worked on the bills for many years. The bills were widely favored by both constituencies of the franchise community, with the International Franchise Association (“IFA”), the Coalition of Franchisee Associations, and the American Association of Franchisees and Dealers all speaking publicly in favor of both laws. Following this widespread support, the California Assembly and Senate overwhelmingly passed both bills.
The veto messages by Governor Brown were as follows:
AB 1782 (Limited Trade Show Exemption): “Registration gives the Department of Business Oversight the opportunity to review franchise disclosure documents and ensure that franchisors are providing accurate information to potential customers. Allowing unregistered franchisors to market at these events without verifying their eligibility to do business in California is a step in the wrong direction.”
AB 2637 (Negotiated Sales): “While it is important to promote bringing new businesses into California, doing so at the expense of transparency could be detrimental to potential franchisees, as this bill proposes to do. The current process, which allows the Department to review contract changes, ensures that franchisees are not placed at a disadvantage in their final agreement.”
These vetoes disappointed many in the franchise community. The IFA issued the following press release in response:
It is disappointing Gov. Brown has chosen to reject these bipartisan supported bills, both having passed the legislature unanimously, rather than promote franchise small business growth in California. Given the unanimous bipartisan support for this bill in the legislature, his veto of this pro-business legislation sends a signal to franchises and other small businesses that California is not open for business.
AB 2637 would have simplified the process by which prospective franchisees and franchisors negotiate with each other, thereby promoting small business growth in California. Current California law has a chilling effect on negotiations between prospective franchisees and franchisors. Passage of AB 1782 would have put California in a better position to retain and attract trade shows, while also leading to greater exposure of entrepreneurial opportunities to California residents. For years the West Coast Franchise Expo was hosted in California, but has now moved to Denver, Colorado.
We are interested to see and understand the Governor’s reasoning to veto legislation that was unanimously passed by the bipartisan legislature and supported by California franchisees and franchisors.
As a member of the FLC and having testified several times before the California Legislature in support of these bills, I am personally very disappointed in the vetoes. It is unlikely that these bills will be brought back on the table for consideration for many years.