California Enacts Strongest Franchise Protection Rules in the U.S.

BLUE MAUMAU– Governor Jerry Brown of California signed a new franchise protection law Sunday afternoon that gives California franchise owners the strongest rights in the United States. The law protects franchise owners from franchisors who seek to terminate their business on a whim or who desire to take possession of a lucrative franchise without compensating the franchise owner.

The essence of the signed law is that it gives franchisees more rights against termination. It helps pin down that franchisors must use “good cause” in terminating a franchise and what that means. It adds transparency to a franchisor’s selection or dismissal of a buyer of a franchisee’s business. It also puts teeth in the law to give consequences for a franchisor’s improper termination or nonrenewal of a franchise.

California law allows franchises to be monetized for their equity

“Franchise corporations should not be able to use their dominance to rob franchisees of their livelihood,” said California’s Assembly Majority Leader Chris Holden, the law’s author, earlier in the year about franchisors. “They should not be able to destroy someone’s future by hiding behind an unjust contract and weak state laws.”

The International Franchise Association vehemently objected to AB 525, but finally gave in when its leaders assessed that franchisee lobbying power was too strongly stacked against it. A deal was negotiated between delegates of the Coalition of Franchisee Associations and the International Franchise Association. Regarding the California deal, Tennessee-based attorney Joel R. Buckberg of Baker Donelson observed in his firm’s newsletter with franchisor clients: “This amendment is the product of industry negotiations that resulted from the realization that a bill was going to pass, whether or not franchisors agreed to the changes.”

The International Franchise Association’s weak hand and need to sell how effective it was to its members played against it. At the insistence of the IFA, the Coalition of Franchisee Associations allowed for the law’s wording that the failure of the franchisee to act on “any lawful requirement [by the franchisor]” be changed to read “substantially comply with the lawful requirement.” That wording actually provided better protection for franchisees in that a breach of a franchisor’s requirement had to be a substantial one before the franchise could be terminated. Franchisors also asked that the language when a franchisor blocked a franchise sale not be that franchisees were to be “compensated” for their assets, but rather that a franchisee’s assets be “purchased” by the franchisor. Franchisees acquiesced. The IFA pressed for specifics on what was a reasonable standard between one brand and another, and one sector and another, in allowing the sale of a franchise. The Coalition agreed, running with that logic to negotiate that franchisors should publicly provide approval standards in writing to the franchisees. That may be better as far as transparency between franchisor and franchisee, but unfortunately for franchisors, that negotiated amendment is something that no other state requires of franchisors.

A few weeks later, Steve Caldeira, the International Franchise Association’s chief executive and president,left the organization and Robert Cresanti, the government affairs vice president who had been with the group for a year, took over.

In the end, Assemblymember Holden’s law had the rare privilege of unanimously passing the state assembly and senate floors with unanimous bipartisan support. The law updates the California Franchise Relations Act, which 35 years ago was the first in the country to provide basic franchisee protections once a franchise contract is signed.

But not all are happy with the new law.

“For the first time in the United States, and most likely, anywhere in the world, franchisors will be required to purchase from franchisees who are properly terminated or not renewed in compliance with a franchise relationship law, ‘all inventory, supplies, equipment, fixtures and furnishings purchased or paid for under the terms of the franchise agreement or any ancillary or collateral agreement…'” groused Minneapolis-based law firm Grey Plant Moody in a memorandum a few days ago to their franchisor clients about the new obligations of franchisors to franchisees in California. “And they [franchisors] will be required to have written standards for approving orders or disapproving a transfer [the sale of a franchisee’s established franchise to a buyer],” further objected the law firm.

Strange political bedfellows that proved to be a winning alliance

The signing of the California bill marks a significant coming of age in lobbying efforts by franchisees and their independent associations against the International Franchise Association, which for decades had allied itself with the Chamber of Commerce and other powerful big business lobbyists. After hitting a brick wall of big business lobbyists, franchisee associations allied themselves with Small Business California and an unlikely friend, the Service Employees International Union. They also sought the help of Assembly Majority Leader Holden and Assembly Speaker Atkins.

It worked.

The SEIU had wanted to use its lobbying know-how to reach out beyond workers to small business owners. “The governor’s signature today means that these small-business owners should no longer fear a franchisor’s whim will cost them their livelihoods or the money and sweat they’ve invested,” states Mary Kay Henry, international president of the Service Employees International Union. “It signals that when workers and small businesses join together, we can force multinational corporations to take a step back and treat us more fairly. That’s why SEIU and fast-food workers have been proud to fight alongside franchised small business owners to win this historic victory.”

Advocates say still more work to do

Now that the bill is law, Peter Lagarias, a California attorney who testified for the bill and helped draft parts of it, thinks the work is not over. There is more legislative work ahead. Lagarias says the franchise relationship needs further changes under California law because franchise contracts are non-negotiated, one-sided contracts in which franchisors are able to skirt basic business obligations. “There are a number of areas in which the contracts provide essentially no rights to franchisees – areas such as territory encroachment, required purchase of products where kickbacks occur, and failure to provide meaningful advertising. There is still need for legislation,” says Lagarias.

The new law that Governor Brown signed is not retroactive. Only franchise agreements that are crafted and signed after January 1, 2016 will need to adhere to California’s new protections.

Chairman of the Coalition of Franchisee Associations Keith Miller is thankful for Governor Brown signing AB525, and for Majority Leader Holden and Speaker Atkins in leading the bill’s enactment into law. “This is not the end of the journey,” says Miller. His task is to take franchisee protection bills to other states. “There are still few states with meaningful franchise laws to protect franchisees. CFA will continue to work on behalf of franchisees to ensure their investments are protected and that they have the opportunity to profit and receive a fair return on their investments.”