Amendments to California Franchise Laws Proposed

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

California has recently introduced legislation that would make numerous modifications and additions to both the Franchise Relations Act and the Franchise Investment Law.

Franchise Relations Act

The "Level Playing Field for Small Businesses Act of 2012" would amend the Franchise Relations Act to provide that good cause in a termination case consists of a substantial and material breach of the franchise agreement after the franchisee is given written notice and 60 days to cure the failure.

The bill would would be require terminations to be in accordance with the current terms and standards equally applicable to all franchisees, with limited exceptions. Exempted would be situations in which immediate termination of a franchisee was reasonable where the franchisee establishes that the event was caused in substantial manner by conduct of the franchisor.

Under the measure, immediate termination would not be permitted unless the franchisee’s noncompliance was substantial and material. The proposal would delete existing provisions regarding nonrenewals by a franchisor and instead require a franchisor to renew a franchise unless the franchisee has substantially and materially breached the franchise agreement, and would require the renewal to be under the same terms as the existing agreement, or if the franchisee elects, under the franchise terms then being offered to new franchisees.

The bill would also prohibit a franchisor, upon termination or expiration of a franchise, from enforcing against the franchisee any covenant not to compete and require the parties to a franchise agreement to deal with each other in good faith.

Franchise Investment Law

The measure would amend the Franchise Investment Law by making it unlawful for a person offering or selling a franchise to intentionally misrepresent, among other things, the prospects or chances for success of a franchise, the known required total investment for a franchise, and efforts to sell or establish more franchises than a market or market area can sustain.

Under the proposal, it would be unlawful for a franchisor to refuse to recognize and deal fairly and in good faith with an independent franchisee association. In addition, civil liability for damages would be extended to any violation of the Franchise Investment Law.

The proposal, Assembly Bill No. 2305, was introduced February 24, read the first time on February 27, and referred to Committees on the Judiciary on March 26. Text of the bill appears here on the California Legislative Information website.