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Posted on Blog November 4, 2015
On October 11, 2015, California Governor Jerry Brown signed Assembly Bill No. 525 into law, which amended certain portions of the California Franchise Relations Act. As a backdrop, the California Franchise Relations Act sets forth certain requirements related to the termination, nonrenewal, and transfer of franchises. Except for the grounds for immediate termination enumerated in the statute, California has long required “good cause” to terminate a franchisee prior to the expiration of a franchise agreement. Previously, “good cause” was defined to include, but was not limited to, “the failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice thereof and a reasonable opportunity, which in no event need to be more than 30 days, to cure the failure.” Cal. Bus. & Prof. Code § 20020 (2014). In Assembly Bill No. 525, the definition of “good cause” was limited “to the failure of the franchisee to substantially comply with the lawful requirements imposed upon the franchisee by the franchise agreement.” Assembly Bill No. 525, § 1 (emphasis added). In addition, Assembly Bill No. 525 expanded the cure period to 60 days from 30 days. Id. While “substantially comply” is not defined in Assembly Bill No. 525 and will likely be the subject of franchise termination/nonrenewal litigation for the distant future, the amended language is certainly favorable to franchisees in California. And a violation by the franchisor of the termination/nonrenewal provisions in the California Franchise Relations Act entitles the franchisee to receive “the fair market value of the franchised business and franchise assets and any other damages.” Id. at § 8.
Assembly Bill No. 525 also added Section 20022 to the California Business and Professions Code. Assembly Bill No. 525, § 3. Section 20022 requires that, upon a lawful termination or nonrenewal, the franchisor must purchase “all inventory, supplies, equipment, fixtures, and furnishings purchased or paid for under the terms of the franchise agreement” by the franchisee at the depreciated value. Id. Assembly Bill No. 525 included several enumerated exclusions, namely, when the franchisee declines a bona fide offer of renewal, when the franchisor decides to cease all franchise activity in the geographic area, and where the franchisee and franchisor mutually agree to terminate or not renew the franchise. Id. A franchisor can offset the purchase price with any amounts owed by the franchisee. Id. Again, this addition to the California Franchise Relations Act is a win for franchisees because instead of simply having the option to purchase the physical assets (which is commonplace in franchise agreements), a franchisor is now required to purchase “all inventory, supplies, equipment, fixtures, and furnishings” unless one of the enumerated exceptions applies.
Further, Section 4 of Assembly Bill No. 525 increased the scope of the California Franchise Relations Act by adding Section 20028, which places certain limitations on the ability of a franchisor to block a franchisee from selling or transferring the franchised business. Assembly Bill No. 525, § 4. While the language in Section 20028 appears to be largely on par with the transfer language commonplace in franchise agreements (i.e., the transferee must be qualified under the then-existing standards and transfer must be effectuated in accordance with the terms of the franchise agreement), the standards must “consistently be applied to similarly situated franchisees operating within the franchise system.” Id. The addition of this qualifying language certainly poses an extra burden on franchisors and may provide franchisees a statutory cause of action against the franchisor in the event a sale or transfer is blocked.
In short, Assembly Bill 525 appears to be largely a positive for California franchisees who enter franchise agreements or renewal agreements on or after January 1, 2016, which is when the amendments take effect.