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California Strengthens Protections for Franchise Owners

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Franchising is very important to California’s economy. California franchising employs almost one million people through over 80,000 establishments, and contributes over $94 billion per year to the state.

On October 11,  California Governor Jerry Brown signed into law AB525 Franchise relations: renewal and termination. This legislation amends existing franchise law to protect owners who operate franchises. The essence of the law is that it prevents a franchisor from terminating a franchisee for minor violations of the franchise agreement. It’s a tactic some franchisors have utilized to shut down a successful franchise in order to turn around and resell it to the new owner at a higher price. The law also protects franchise owners from unfair interference when they decide to sell or transfer their business. Changes to the existing law will apply only to franchise agreements entered into or renewed on or after Jan. 1, 2016.
Key Aspects of AB 525
Termination: Updated law prevents franchisors from terminating a franchisee without a narrowly defined good cause. Good cause is limited to the failure of the franchisee to substantially comply with the lawful requirement of the franchise after being given 60 days’ advanced notice (instead of 30 days in the previous version of the law). Franchisors are also allowed to immediately terminate franchisees without an opportunity to cure for reasons such as failure, for a period of 10 days after notification of noncompliance, to comply with any federal, state, or local law or regulation, including, but not limited to, all health, safety, and labor laws or regulations applicable to the operation of the franchise.
Repurchase: If the franchisor terminates or fails to renew the franchise in violation of the amended law, the franchisor must pay the fair market value of the franchise. Upon a lawful termination or nonrenewal of a franchise, the franchisor would be required to purchase all inventory, supplies, equipment, fixtures and furnishings purchased by the franchisee from the franchisor or its affiliates at the value of the price paid less depreciation.
Sale of Business: A franchisor is prohibited from unreasonably withholding its consent to a transfer or sale of business by the franchisee to another person provided that the person is qualified under the franchisor’s then-existing standards for the approval of new or renewing franchisees.

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