JUNE 29th STATE SENATE HEARING TO DISCUSS PROPOSED NEW LAW (June 22nd hearing postponed to June 29th.  See http://sbp.senate.ca.gov/agenda )

On May 14, 2015, the California state assembly passed AB 525, and on June 15th, it was last amended.  AB 525 would amend the California franchise law to give franchisees greater protection.  This may be the most significant expansion of franchisee statutory legal protection since the Iowa franchise relations law was passed (and later amended to soften it after franchisors organized a boycott) two decades ago.  

The law has not been approved by the state Senate or signed by the governor, and last year a similar law was vetoed.  Proponents hope that changes in this years’ law, and strong union support, will overcome the governor’s objections.  The state assembly vote was 54-10, a very lopsided union victory.  The current version of AB 525 as last amended June 15, 2015 is at http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201520160AB525.

KEY CHANGES:

The California Franchise Relations Act, like most state franchise laws, already prohibits a franchisor from terminating a franchisee without good cause and a 30 day cure period. AB 525 would change the definition of ‘good cause’ to a franchisee’s failure substantially to comply and would extend the notice and cure period to 60 days, with some common exceptions.

The proposal would make it unlawful for a franchisor agreement to prevent a franchisee from selling the franchise to a person qualified under the franchisor’s current standards for the approval of new franchises.

The new law would require a franchisor that violates the franchise law (including its termination, transfer, or renewal provisions), at the election of the franchisee, to either reinstate the franchisee and pay all resulting damages; or to pay the franchisee the fair market value of the franchise and franchise assets.

An early version of AB 525 prohibited a franchisor from not renewing a franchise agreement unless the franchisee had failed substantially to comply with the franchise agreement, which would have potentially created perpetual franchise renewal rights.  This provision is currently dropped, but could be resurrected in the Senate. Only one other state, New Jersey, has a similar provision.

An early version also allowed a franchisee to “monetize” any equity that it may have developed in the franchised business prior to termination (except for certain defined exceptions like abandonment by the franchisee) or non-renewal of the franchise agreement.  “Monetization” would be a new concept in state franchise laws, and would mean that it is entitled to sell to a third party or to receive an appraised value (presumably from the franchisor).  The current version of the bill dropped the “monetization” concept, and instead states that “upon a lawful termination or nonrenewal of a franchisee, the franchisor shall compensate the franchisee, at the value of price paid minus depreciation, of all inventory, supplies, equipment, and furnishings. . . ”

UNION IS DRIVING THIS:

The Service Employees International Union (SEIU) is backing the bill with a significant lobbying effort.  The SEIU strategy is that driving a wedge between franchisors and franchisees could indirectly help labor’s efforts to organize fast food and other retail and service workers. (Other such indirect efforts include the $15 minimum wage movement, which is not generally supported by franchisees.)  With this legislation, SEIU is also hoping to gain franchisee support for its more direct efforts to attack the franchising model, such as the NLRB joint employer effort described in an earlier blog.

WHY IT MATTERS:

Franchisors have been working hard since last year’s veto to amend the legislation to something that is more in line with franchise laws in other states.  Many changes have been made, but concerns remain, including that by using the word “substantially” comply, franchisors will be handicapped in enforcing system standards.  Also the damage remedy of payment of fair market value of the franchise may be unfair in the situation of partial or minor violations by the franchisor.  Franchisors are also concerned that dropped provisions could be resurrected in the Senate.

California’s law making post-term non-competes generally not enforceable in franchise agreements is another problem for franchisors, but they have generally found work-arounds.  California continues to be a difficult state for franchisors, and some may delay or halt their entry into the state depending on the outcome of this legislation

NEXT STEPS:

The relevant California Senate committee will hold a hearing on AB 525 on Monday, June 29 (originally set for June 22).  The International Franchise Association (IFA) is calling on franchise stakeholders in the state to register their opposition to bill and to suggest further amendments; contact: ckrueger@franchise.org for details.