A new state franchise law goes into effect on January 1 which is much more favorable to franchisees. It makes it more costly for franchisors to pull out of agreements and gives franchisees more time to correct any alleged breach of a franchise agreement.
The new California Franchise Relations Act will cover any franchise agreement signed or renewed after January 1 as well as any franchise agreements that have an indefinite duration which may be terminated by the franchisee or franchisor without cause.
The part of the new law that should have the biggest effect on franchisor/franchisee relations are the new repurchase requirements.
- Under prior law a franchisor could terminate a franchise agreement or not renew it with no requirement to repurchase the franchise’s assets so long as such a termination or nonrenewal was done following the terms of the franchise agreement and the Act.
- Under the new law with a franchise termination or nonrenewal franchisors must buy from the franchisee at the value of price paid (minus depreciation) all inventory, equipment, fixtures and furnishings purchased or paid for by the franchisee under the terms of the franchise agreement or any connected agreements.
- The prior law required franchisors to repurchase the franchisee’s resalable current inventory if a termination or failure to renew an agreement was done in violation of the Act.
- Franchisors that terminate or fail to renew a franchise in violation of the new version of the Act must pay the franchisee the fair market value of the franchised business, its assets and any other damages incurred by the franchisee. The franchisor can deduct from such payments amounts owed to it by the franchisee.
Other changes are fairly simple and are consistent with franchise laws in other states.
- Except as otherwise provided by the Act the new language limits a franchisor’s ability to end a franchise for good cause, which would be the failure of the franchisee to substantially comply with the franchise agreement after getting sixty days’ notice (the period was thirty days in the prior version of the law) before such termination.
- Franchisors won’t be allowed to restrict the sale or transfer of a franchise to another person if the transferee is qualified under the franchisor’s standards for new or renewing franchisees.
The bill was co-authored by Assembly member Chris Holden. He had testified on behalf of the new law, according to his website, “As a former small business franchise owner, I can tell you that the one-sided nature of a franchise relationship quickly becomes apparent after signing these documents.” The changes were modeled after franchise laws in Minnesota, Nebraska, New Jersey, Rhode Island and Wisconsin.
Holden’s website states a statewide survey of franchisees found that 40% of respondents reported their agreement could be terminated due to acts they took that they thought were appropriate to operate their business. When asked if they would recommend franchising to others 65% said no.
The relationship between a franchisee and franchisor can be a difficult one and is bound by state statutes as well as contract law principles developed in state courts over the years. Before signing a franchise agreement I’ts critical you understand all the possible effects of the contract. Contact our office if you have questions about such an agreement, want it reviewed or you’ve already signed such a contract and are having serious problems with the other party. We can talk about your contract, applicable laws and your best options.