On April 16, 2013, the California Senate Judiciary Committee, voting along party lines 5 to 2, reported Senate Bill No. 610 (pdf) out of committee to the California Senate Floor.

This bill would amend the California Franchise Relations Act to add certain provisions to the Act.  The original Act was enacted to govern the relationships between franchisors, subfranchisors and franchisees in California in order to prevent unfair practices in the termination, renewal or transfer of a franchised business.  See California Corporations Code, Division 8, Chapter 5.5, Sections 20000 through 20043.

The new bill, if passed, would strengthen the franchisee’s rights under the Act by adding the following provisions:

  1. Add the standard of "good faith" to govern the dealings of parties to a franchise agreement in the enforcement and performance of the franchise agreement.  Good faith is defined in the bill as "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade". 
  2. In addition, a franchisor or subfranchisor cannot restrict a franchisee’s right to join or participate in a franchisee association to the extent prohibited by existing law.
  3. Provides for a private right of action for breach of the above-described provisions for damages, rescission or other relief the court deems appropriate and clarifies that the court may increase the award to three times actual damages sustained, as well as reasonable costs and attorney’s fees to a prevailing plaintiff.  Note that this does not say the prevailing party – just the prevailing plaintiff.
  4. Allowing any franchisor or subfranchisor who becomes liable under these provisions to recover contributions from any other person who would have been liable under these provisions if sued separately.

As one would expect, there is much interest in this bill and vigorous arguments are being made on both sides by industry associations.  Pro, of course, argues that the franchisor/franchisee relationship gives too many rights to the franchisor and that this will level the playing field. Click here for more "pro" arguments.  Con argues that it will weaken the franchisor’s ability to protect its brand’s integrity, which benefits its system and franchisees, by preventing the franchisor from being able to pursue remedies against underperforming franchisees and will, ultimately, harm consumers.  Click here for more "con" arguments "con".

We will keep you posted on developments with this legislation.