Contributed by Tom Kent

Legislation has been introduced in California that would significantly expand the protections afforded to franchisees under California’s Franchise Relations Act and California’s Franchise Investment Law. Assembly Bill No. 2305 known as “The Level Playing Field For Small Business Act of 2012” should be grabbing the attention of the franchise community, if it hasn’t already. Section 1 of the proposed bill begins: “The widespread use of one-sided and nonnegotiable franchise agreements has created numerous problems for franchisees in California.” What follows is perhaps the most aggressive legislative effort to date to constrain franchisors’ contractual rights and remedies.

As drafted, the Act would modify the California Franchise Relations Act by, among other things; prohibiting a franchisor from terminating a franchise absent good cause that consists of a substantial material breach of the franchise agreement; providing the franchisee sixty (60) days after receiving written notice to cure monetary defaults (expanding the existing five (5) day cure period); requiring the franchisor to renew a franchise under the same terms as the existing franchise agreement absent a substantial and material breach of the franchise agreement by the franchisee; and, prohibiting the franchisor from enforcing any covenant not to compete upon the expiration or termination of a franchise agreement.

 

Further, the Act expands the California Franchise Relations Act to require that franchisees and franchisors deal with one another in good faith. Good Faith is defined as “honesty in fact and the observance of reasonable commercial standards of fair dealing in trade.” The Act would further subject franchisors to a duty of competence to franchisees “regarding all goods, services, programs, advertising, and operating manuals required to be used or provided to franchisees for their use.”  The Act would render void any provision in a franchise agreement that requires an application of a law other than that of California.

 

The Franchise Investment Law would be expanded to make it unlawful for any person selling a franchise to misrepresent the prospects or chances for success of a franchise, the known required total investment for a franchise as well as efforts to establish more franchises than a market can sustain. The Act requires that franchisors deal fairly and in good faith with independent franchisee associations. Significantly, the Act would extend civil liability for damages for any violation under the Franchise Investment Law to parties who “directly or indirectly control a person liable” under the Act including every principal, partner, executive officer and/or director associated with the franchisor.

 

At its core, “The Level Playing Field for Small Business Act of 2012” is driven by the perception that the franchisor/franchisee relationship is inherently inequitable, placing the franchisee at a tremendous disadvantage. The contrary view is that the franchise relationship is one based in contract that an individual franchisee may choose to enter, or not. Depending upon your outlook, you may view this proposed legislation as a necessary expansion of existing law in California, or, as the latest effort by a legislative body to curtail free enterprise. In either case, we will be sure to keep an eye on this pending legislation as it progresses through the California Legislature and provide updates as they occur.

  • Tom, what do you think this part of the legislation means:

    “The Act requires that franchisors deal fairly and in good faith with independent franchisee associations. ”

  • Tom Kent

    Michael, The additional language proposed to amend section 31220 of the Corporations Code will prohibit franchisors “to refuse to recognize and deal fairly and in good faith with any independent franchise association.” The proposed bill includes the following broad definition of good faith in it’s amendment of the Business and Professions Code:

    “Good faith for purposes of this subdivision means honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.”

    If the bill becomes law, franchisors in California would not only be legally obligated to “recognize”, and presumably negotiate, with franchisee associations on behalf of their franchisee members, but to apply “reasonable commercial standards of fair dealing.” This language begs broad interpretation and would likely cause a significant increase in litigation among franchisees, franchisee associations and franchisors in California.