On September 22, 2016, California Governor Brown vetoed two pieces of franchise legislation which had been passed by both houses. Both of these bills originated with the State Bar of California’s Franchise Law Committee.
The first bill is Assembly Bill 1782. Effectively, Bill 1782 provided for a Limited Trade Show Exemption, which means that a franchisor can attend a trade show in California without being registered in California. The provisions of the bill included numerous conditions for allowing a franchisor to attend these trade shows, including submission of a detailed notice to the commissioner regarding the franchisor, the posting of a conspicuous sign at the show stating that the franchisor is not legally able to offer a franchise for sale in California and the payment of a fee. Other states, such as New York, make certain allowances for franchisors to attend trade shows in state without being registered.
The Governor vetoed this legislation stating the following reasons: “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.”
The second bill is Assembly Bill 2637. Bill 2637 removed the present provision in California franchise regulation requiring that a franchisor disclose to a prospective franchisee all terms of the franchise agreement and related agreements which the franchisor had negotiated with other franchisees in the past 12 months in order to be exempt from an additional registration requirement for sales on terms different than those reflected in the registered franchise disclosure document. The proposed legislation added the requirement that the original offer was of the documents registered with the state and that language must be added to the cover page or state addendum in the franchise disclosure document to the effect that the franchisor is able to negotiate the terms of the franchise agreement and related documents.
The Governor vetoed this legislation stating the following reasons: “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 the 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.”
Both veto responses seem to misunderstand some of the effects of this legislation. With respect to the trade show legislation, no transactions may take place without registration so I am not sure what additional protection this may provide. I suspect that many trade shows may be looking for alternative venues. Even more obvious to me, however, is the second veto. The result will be that many franchisors will continue to refuse to negotiate or give any requested concessions to their franchisees in California.