California law is known for its protection of franchisee rights; however, new protections are slated to go into effect in January. These amendments to California’s franchise law curb the power that franchisors have over franchisees. The new provisions apply to franchise agreements entered into or renewed on or after January 1, 2016, and to franchises of indefinite duration that can be terminated without cause.

Termination of Franchise Agreements

One of the main provisions of Assembly Bill 525, which Governor Jerry Brown signed into law in October, deals with a franchisor’s ability to terminate franchise agreements. A franchisor is prohibited from terminating a franchise agreement before the expiration of the term, unless the termination is for good cause. Good cause exists when a franchisee fails to substantially comply with the lawful requirements of the franchise agreement. Currently, the law permits termination if a franchisee fails to comply with any lawful provision of the franchise agreement, and does not require a substantial breach. Further, the franchisor must give the franchisee 60–75 days to cure the breach, rather than the current 30 days.

The law preserves a franchisor’s current justifications for immediate termination of the franchise agreement, with no cure period. These include situations when a franchisee becomes insolvent, abandons the business, fails to obey the law, is convicted of a felony, or fails to pay certain overdue fees.

Compensation to Franchisees

If a franchise agreement is lawfully terminated or not renewed, the new law requires the franchisor to purchase all equipment, supplies, inventory, fixtures, and furnishings that the franchisee purchased pursuant to the franchise agreement. The franchisor would be required to pay the price the franchisee paid, minus depreciation.

If the franchisor unlawfully terminates the franchise without meeting the good cause standard, however, the franchisor is required to pay the franchisee the fair market value of the franchise plus compensation for any damages caused by violation.

Transfer of the Franchise

Under the amendments, franchisors are prohibited from stopping franchisees from selling franchises to people who are qualified, according to the standards for new or renewing franchisees. This prohibition applies whether the sale is total or for part of the franchise, for a controlling interest, or for a non-controlling interest.

The franchisor, however, keeps any right of first refusal that it has per the terms of the franchise agreement. Additionally, the franchisee must give prior written notice of any proposed sale, after which the franchisor has 60 days to approve or disapprove the transfer.

If you are involved in or are considering a franchise agreement, it is important to understand how these new amendments will affect your legal rights. Please call a skilled Morgan Hill business law attorney at The Law Offices of Steven E. Springer at 408-779-4700 for a free 20-minute initial consultation with an attorney in Morgan Hill, San Jose or Fremont.


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