Steven E. Springer
GOVERNOR SIGNS NEW CALIFORNIA FRANCHISE LAW
On October 11, 2015, Governor Jerry Brown signed into law Assembly Bill 525 which amends the California Franchise Relations Act. The amendments significantly change what is required for the termination or transfer of a franchise agreement and it creates new remedies for violations of the statute. Assembly Bill 525 does not apply retroactively; however, it is limited to franchise agreements entered into after January 1, 2016.
Terminating Franchise Agreements
Previously, franchisors were permitted to terminate a franchise relationship for good cause, which only required a failure to comply with the agreement’s lawful conditions.
The amendments significantly change the termination and renewal requirements in the following ways:
- The “good cause" requirement has been discarded in favor of a “substantial compliance” standard;
- A franchisee possesses 60 days to remedy the problem; and
- Immediate ending of the franchise agreement is only allowed when a franchisee does adhere to the law, as long as the franchisee is provided with at least 10 days’ warning.
Exceptions to Immediate Termination
A franchisor can still end a franchise agreement without offering the other party a chance to remedy when:
- The franchisee chooses to file for bankruptcy;
- The franchisee fails to operate the business for five consecutive days;
- The parties mutually agree to terminate;
- The franchisee makes misrepresentations pertaining to the acquisition of the business or acts in a manner that reflects negatively on the franchise;
- The franchisee, after remedying a defect, engages in the same noncompliance;
- The franchisee continuously fails to adhere to an agreement’s requirement:
- The franchise business is seized by the government or a creditor;
- The franchisee is convicted of a felony;
- The franchisee fails to pay a fee within five days of receiving a written notice; or
- The operation of the franchise will lead to a danger to the safety or health of the public.
If a franchise agreement is lawfully terminated, the franchisor is required to compensate the franchisee for inventory, supplies, equipment, fixtures, and furnishings that are used in the business.
Transferring Existing Franchises
Unlike current law, the amendments regulate transfer of a current franchise. For instance, the new law forbids a franchisor from prohibiting a franchisee from selling a franchise to another person, as long as the buyer is qualified under the existing approval standards. However, completion of the transfer still requires the franchisor to provide written authorization within 60 days of receiving written notice. Generally, a franchisor cannot withhold his or her signature unless the parties do not comply with the transfer conditions.
Any franchisor that violates the new requirements may be forced to pay the franchisee the fair market value of the business, assets, and any other damages caused by the violation. Additionally, the amendments allow for injunctive relief to help a franchisee halt termination when violations have been alleged.
If you are considering forming a franchise relationship and have questions about how the amendments will affect you, please contact a skilled Morgan Hill business attorney at The Law Offices of Steven E. Springer or call 408-779-4700 for a free initial consultation, in Morgan Hill, San Jose or Fremont.