Bill Text: CA AB2305 | 2011-2012 | Regular Session | Introduced
Bill Title: Franchises.
Spectrum: Partisan Bill (Democrat 2-0)
Status: (Introduced - Dead) 2012-07-03 - From committee without further action pursuant to Joint Rule 62(a). [AB2305 Detail]
Download: California-2011-AB2305-Introduced.html
BILL NUMBER: AB 2305 INTRODUCED
BILL TEXT
INTRODUCED BY Assembly Member Huffman
(Coauthor: Assembly Member Ammiano)
FEBRUARY 24, 2012
An act to amend Sections 20020, 20021, 20025, 20027, 20030, 20035,
20040, and 20040.5 of, to amend the heading of Article 6 (commencing
with Section 20035) of Chapter 5.5 of Division 8 of, to add Sections
20000.5, 20028, 20038, 20039, and 20044 to, to add Article 2.5
(commencing with Section 20016) to Chapter 5.5 of Division 8 of, to
repeal Section 20026 of, and to repeal and add Section 20036 of, the
Business and Professions Code, and to amend Sections 31001, 31012,
31220, 31300, 31302, 31302.5, 31303, 31306, and 31512 of, to add
Section 31110.5 to, to repeal Sections 31301 and 31304 of, and to
repeal and add Section 31201 of, the Corporations Code, relating to
franchises.
LEGISLATIVE COUNSEL'S DIGEST
AB 2305, as introduced, Huffman. Franchises.
(1) Existing law provides for the regulation of franchises and
establishes certain duties, obligations, and remedies for parties to
a franchise agreement. The California Franchise Relations Act sets
forth certain requirements related to the termination, nonrenewal,
and transfer of franchises, among other things. The Franchise
Investment Law sets forth various powers of the Commissioner of
Corporations relative to the registration of an offer or sale of a
franchise, unless exempted, and prohibits certain fraudulent and
unfair practices.
This bill would revise both the California Franchise Relations Act
and the Franchise Investment Law.
(A) With respect to the California Franchise Relations Act,
existing law generally prohibits a franchisor from terminating a
franchise prior to expiration of its term except for good cause,
which is defined to include the failure of a franchisee to comply
with any lawful requirement of the franchise agreement after being
given notice and a reasonable opportunity, which need not exceed 30
days, to cure the failure.
This bill would 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 also require the termination to be
in accordance with the current terms and standards equally applicable
to all franchisees, with limited exceptions.
Existing law provides that immediate termination of a franchise is
deemed reasonable without an opportunity to cure upon the occurrence
of certain events. One of those events is the failure by the
franchisee to pay franchise fees or other amounts due with 5 days of
receiving written notice that these amounts are overdue.
This bill would exempt situations where the franchisee establishes
that the event was caused in substantial manner by conduct of the
franchisor. The bill would require certain noncompliance by the
franchisee allowing immediate termination to be substantial and
material. The bill would provide 60 rather than 5 days for the
franchisee to pay overdue amounts.
Existing law requires at least 180 days written notice to the
franchisee of the franchisor's intention not to renew the franchise.
Existing law imposes certain requirements on the franchisor in that
regard relative to the franchisee's interests.
This bill would delete these provisions 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 continue to
require 180 days' written notice if the franchisor has grounds not to
renew the franchise. The bill would also prohibit a franchisor, upon
termination or expiration of a franchise, from enforcing against the
franchisee any covenant not to compete.
Existing law provides that a franchisor, for a reasonable time
after the death of the franchisee, may not deny the surviving spouse,
heirs, or estate of the franchisee the opportunity to participate in
the ownership of the franchise under the then-current qualifications
and standards applicable to franchisees.
This bill would require the qualifications and standards to be
reasonable.
Existing law requires a franchisor that terminates or fails to
renew a franchise other than as permitted under the act to offer to
repurchase the franchisee's resalable current inventory, as
specified.
This bill would instead require the franchisor to reinstate the
franchisee and to pay all associated damages, or to pay to the
franchisee the fair market value of the franchise or franchise
assets.
Existing law allows a franchisor and franchisee to agree to
binding arbitration of claims arising under the act.
This bill would require the arbitration procedures and costs to
allow franchisees the opportunity to vindicate their rights under the
act.
This bill would also add new provisions to the California
Franchise Relations Act. The bill would require the parties to a
franchise agreement to deal with each other in good faith. The bill
would provide that certain acts and practices by a franchisor or
subfranchisor are unfair or deceptive acts or practices or an unfair
method of competition. The bill would provide certain rights to a
franchisee if the franchisor develops a new location or grants a new
franchise in essentially the same market in unreasonable proximity to
an existing franchise. The bill would provide that franchisors owe a
duty of competence to franchisees. The bill would provide that a
condition, stipulation, or provision in a franchise agreement
requiring the application of the law of another state is void. The
bill would provide additional remedies for violations of provisions
governing actions of franchisors relative to termination, nonrenewal,
and transfer of franchises, including specified damages in certain
cases, injunctive relief, and an award of attorney's fees and costs
to a franchisee prevailing in an action.
(B) With respect to the Franchise Investment Law, existing law
makes it unlawful for a person to offer or sell a franchise by means
of a communication that includes an untrue statement of a material
fact or omits to state a material fact necessary in order for the
statements made to not be misleading.
This bill would also make it unlawful for a person offering or
selling a franchise to intentionally misrepresent certain matters,
including 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.
Existing law provides that any person who willfully employs,
directly or indirectly, any device, scheme, or artifice to defraud in
connection with the offer or sale of a franchise or who engages in
other willful acts that operate as a fraud or deceit is guilty of a
crime.
This bill would allow these matters to also be the subject of
civil litigation, as specified.
Existing law imposes various duties on the Commissioner of
Corporations with respect to franchise offers.
This bill would prohibit the commissioners from registering any
franchise offer that restricts venue for resolution of dispute solely
to a forum outside this state.
Existing law makes it unlawful for a franchisor to restrict or
inhibit the right of franchisees to join a trade association or to
prohibit the right of free association among franchisees for lawful
purposes. A plaintiff may seek injunctive relief and damages for a
violation of this provision.
This bill would also make it unlawful for a franchisor to refuse
to recognize and deal fairly and in good faith with an independent
franchisee association.
Existing law provides that a person who offers or sells a
franchise in violation of specified provisions of the Franchise
Investment Law shall be liable for damages to the franchisee or
subfranchisor, with certain exceptions. Existing law also provides
rescission as a remedy for willful violations of these provisions.
This bill would extend civil liability for damages to any
violation of the Franchise Investment Law. The bill, following
purchase of a franchise, would allow a franchisee or subfranchisor to
seek rescission, restitution, and ancillary damages without the
requirement for the violation to be willful. The bill would extend
liability for any violation of the Franchise Investment Law, on a
joint and several basis, to various other parties associated with the
franchisor. The bill would also provide for injunctive relief for
any violation of the Franchise Investment Law.
Existing law imposes time limits of one, 2, or 4 years for the
bringing of an action to enforce specific liabilities under the
Franchise Investment Law. Existing law provides that if the
franchisor delivers a written notice to the franchisee disclosing a
violation of certain disclosure provisions, an action must be brought
within 90 days.
This bill would require the written notice to include an offer of
restitution of investment and ancillary damages and would extend the
time for bringing an action to 180 days. The bill would allow 4 years
to bring other actions to enforce liabilities under the Franchise
Investment Law.
Existing law provides that any condition, stipulation, or
provision purporting to bind any person acquiring a franchise to
waive compliance with the Franchise Investment Law is void.
This bill would provide that certain other provisions, if included
in the offer or sale of a franchise and associated documents, are
also void.
Existing law provides that a willful violation of any provision of
the Franchise Investment Law is a crime, unless specifically
excepted. Because the bill would change the definition of certain
crimes, it would impose a state-mandated local program.
(2) The bill would make other related changes.
(3) The California Constitution requires the state to reimburse
local agencies and school districts for certain costs mandated by the
state. Statutory provisions establish procedures for making that
reimbursement.
This bill would provide that no reimbursement is required by this
act for a specified reason.
Vote: majority. Appropriation: no. Fiscal committee: yes.
State-mandated local program: yes.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. This act shall be known, and may be cited, as "The
Level Playing Field for Small Businesses Act of 2012."
SEC. 2. Section 20000.5 is added to the Business and Professions
Code, to read:
20000.5. The Legislature hereby finds and declares all of the
following:
(a) The widespread use of one-sided and nonnegotiable franchise
agreements has created numerous problems for franchisees in
California. Many franchisees lack knowledge and experience with
franchise agreements, knowledge of particular industries and their
franchisors' system, and equality in bargaining power. In addition,
many franchisees invest their substantial assets, take loans
sometimes secured by their family homes, and enter into long-term
commercial leases and other obligations while looking to their
franchise businesses for their livelihoods.
(b) Unlike investments in securities, an investment in a franchise
may lead to substantial additional losses well beyond the initial
risk capital. Unlike employment, due to long-term contractual and
lease obligations, franchisees generally cannot resign and leave
without substantial liabilities.
(c) The inability of many franchisees to negotiate on an equal
footing extends not only to individual first-time franchisees, but
also to experienced multiunit and well-represented franchisees. As a
result of one-sided franchise agreements, California franchisees have
been the victims of economic opportunism of franchisors. Many
franchisees have lost their substantial investments and sometimes
more, including their homes, and others have had to file for
bankruptcy. California franchisees have also been victimized by
territorial encroachment, franchisor lack of competence and
negligence, unfair required purchases, and other misconduct. The
California Franchise Relations Act is designed to protect franchisees
and end abuses from those practices and unfair contract provisions.
SEC. 3. Article 2.5 (commencing with Section 20016) is added to
Chapter 5.5 of Division 8 of the Business and Professions Code, to
read:
Article 2.5. Relationships Between Franchisor or Subfranchisor
and Franchisees
20016. Without limiting the other provisions of this chapter, the
following specific rights and prohibitions shall govern the
relations between the franchisor or subfranchisor and its
franchisees:
(a) (1) The parties shall deal with each other in good faith in
the performance and enforcement of the franchise agreement.
(2) "Good faith" for purposes of this subdivision means honesty in
fact and the observance of reasonable commercial standards of fair
dealing in the trade.
(b) For the purposes of this chapter and without limiting its
general application, it shall be an unfair or deceptive act or
practice or an unfair method of competition for a franchisor or
subfranchisor to do any of the following:
(1) Restrict the right of a franchisee to join or participate in
an association of franchisees to the extent the restriction is
prohibited by Section 20016.4 or Section 31220 of the Corporations
Code.
(2) Require a franchisee to purchase or lease goods or services in
a manner prohibited by Section 20016.3.
(3) Discriminate between franchisees in the charges offered or
made for royalties, goods, services, equipment, rentals, advertising
services, or in any other business dealings, unless and to the extent
that any classification of or discrimination between franchisees is
any of the following:
(A) Based on franchises granted at materially different times, and
the discrimination is reasonably related to differences in time.
(B) Related to one or more programs for making franchises
available to persons with insufficient capital, training, business
experience, or education, or who lack other qualifications.
(C) Related to local or regional experimentation with, or
variations in, product or service lines or business formats or
designs.
(D) Related to efforts by one or more franchisees to cure
deficiencies in the operation of franchise businesses or defaults in
franchise agreements.
(E) Based on other reasonable distinctions considering the
purposes of this chapter and is not arbitrary.
(4) Obtain money, goods, services, anything of value, or any other
benefit from any other person with whom the franchisee does business
on account of that business unless the franchisor advises the
franchisee in advance of the franchisor's intention to receive that
benefit.
(5) Establish a similar business or grant a franchise for the
establishment of a similar business at a location within a
geographical area specifically designated as the exclusive territory
in a franchise previously granted to another franchisee in a
currently effective agreement, except under the circumstances or
conditions prescribed in the agreement. The fact that other
franchisees or the franchisor may solicit business or sell goods or
services to people residing in that geographical territory shall not
constitute the establishment of a similar business within the
exclusive territory.
(6) Require a franchisee at the time of entering into a franchise
to assent to a release, assignment, novation, or waiver that would
relieve any person from liability imposed by this chapter. Any
condition, stipulation, or provision purporting to bind any person
acquiring any franchise to waive compliance with any provision of
this chapter shall be void. This paragraph shall not bar or affect
the settlement of disputes, claims, or civil suits arising or brought
under this chapter.
(7) Impose on a franchisee by contract, rule, or regulation,
whether written or oral, any unreasonable and arbitrary standard of
conduct.
(8) Terminate a franchise in violation of Article 3 (commencing
with Section 20020), refuse to renew a franchise in violation of
Article 4 (commencing with Section 20025), or refuse to permit a
transfer of a franchise in violation of Article 4.4 (commencing with
Section 20027).
(c) The provisions of this chapter shall apply to all written or
oral arrangements with the franchisee including, but not limited to,
the franchise offering, the franchise agreement, sales of goods or
services, leases and mortgages of real or personal property, promises
to pay, security interest, pledges, insurance contracts, advertising
contracts, construction or installation contracts, servicing
contracts, and all other arrangements in which the franchisor or
subfranchisor has any direct or indirect interest.
(d) In any proceedings, damages may be based on reasonable
approximations but not on speculation.
20016.1. (a) The commission of any unfair or deceptive act or
practice or unfair method of competition prohibited by Section 20016
shall constitute an unfair or deceptive act or practice pursuant to
Chapter 5 (commencing with Section 17200) of Part 2 of Division 7.
(b) Any person who sells or offers to sell a franchise in
violation of this chapter shall be liable to the franchisee or
subfranchisor, who may sue for damages caused thereby or for
rescission or other relief as the court may deem appropriate.
Rescission shall not be available to the plaintiff if the defendant
proves that the plaintiff knew the facts concerning the untruth or
omission or that the defendant exercised reasonable care and did not
know, or, if the defendant had exercised reasonable care, would not
have known, of the untruth or omission.
(c) The suit authorized under subdivision (b) may be brought to
recover the actual damages sustained by the plaintiff together with
the cost of the suit, including reasonable attorney's fees, and the
court may in its discretion increase the award of damages to an
amount not to exceed three times the actual damages sustained.
(d) Any person who becomes liable to make payments under this
section may recover contributions from any persons who, if sued
separately, would have been liable to make the same payment.
(e) A final judgment, order, or decree rendered against a person
under antitrust laws or this chapter shall be regarded as evidence
against that person in an action brought by any party against that
person under subdivision (a) or (b) as to all matters with respect to
which the judgment, order, or decree would be an estoppel between
the parties.
20016.2. (a) If a franchisor develops, or grants to a franchisee
the right to develop, a new outlet or location that sells essentially
the same goods or services under the same trademark, service mark,
trade name, logotype, or other commercial symbol as an existing
franchisee and the new outlet or location is in unreasonable
proximity to the existing franchisee's outlet or location and has an
adverse effect on the gross sales of the existing franchisee's outlet
or location, the existing adversely affected franchisee has a cause
of action for monetary damages in an amount calculated pursuant to
subdivision (b), unless any of the following apply:
(1) The franchisor has first offered the new outlet or location to
the existing franchisee on the same basic terms and conditions
available to the other potential franchisee and the existing
franchisee meets the reasonable current qualifications of the
franchisor including any financial requirements, or, if the new
outlet or location is to be owned by the franchisor, on the terms and
conditions that would ordinarily be offered to a franchisee for a
similarly situated outlet or location.
(2) The adverse impact on the existing franchisee's annual gross
sales, based on a comparison to the annual gross sales from the
existing outlet or location during the 12-month period immediately
preceding the opening of the new outlet or location, is determined to
have been less than 6 percent during the first 12 months of
operation of the new outlet or location.
(3) The existing franchisee, at the time the franchisor develops,
or grants to a franchisee the right to develop, a new outlet or
location, is not in compliance with the franchisor's then current
reasonable criteria for eligibility for a new franchise, not
including any financial requirements.
(4) The existing franchisee has been granted reasonable
territorial rights and the new outlet or location does not violate
those territorial rights.
(b) In establishing damages under a cause of action brought
pursuant to this section, the franchisee has the burden of proving
the amount of lost profits attributable to the compensable sales. For
purposes of this subdivision, "compensable sales" means the annual
gross sales from the existing outlet or location. Compensable sales
shall exclude any amount attributable to factors other than the
opening and operation of the new outlet or location.
(c) Any cause of action brought under this section shall be filed
within two years of the opening of the new outlet or location.
20016.3. (a) A franchisor shall not require that a franchisee
purchase goods, supplies, inventories, or services exclusively from
the franchisor or from a source or sources of supply specifically
designated by the franchisor where those goods, supplies,
inventories, or services of comparable quality are available from
sources other than those designated by the franchisor, unless
necessary for a lawful purpose that is justified on business grounds.
(b) The publication by the franchisor of a list of approved
suppliers of goods, supplies, inventories, or services, or the
requirement that goods, supplies, inventories, or services comply
with specifications and standards prescribed by the franchisor, does
not constitute designation of a source under subdivision (a).
Additionally, the reasonable right of a franchisor to disapprove a
supplier does not constitute a designation of source under
subdivision (a).
(c) This section does not apply to the principal goods, supplies,
inventories, or services manufactured by the franchisor, or any
goods, supplies, inventories, or services entitled to protection as a
trade secret.
20016.4. A franchisor shall not restrict a franchisee from
associating with other franchisees or from participating in a trade
association, and shall not retaliate against a franchisee for
engaging in these activities.
20016.5. The duty of good faith is imposed in situations
including, but not limited to, where the franchisor opens a new
outlet or location that has an adverse impact on an existing
franchisee. A determination of whether the duty of good faith with
respect to a new outlet or location has been met shall be made
pursuant to the provisions, standards, and procedures in Section
20016.2. "Good faith" for purposes of this section shall have the
same meaning as defined in paragraph (2) of subdivision (a) of
Section 20016.
20016.6. Franchisors shall owe a duty of competence to
franchisees operating in the state regarding all goods, services,
programs, advertising, and operating manuals required to be used or
provided to franchisees for their use.
SEC. 4. Section 20020 of the Business and Professions Code is
amended to read:
20020. Except as otherwise provided by this chapter, no
franchisor may terminate a franchise prior to the expiration of its
term, except for good cause , and in accordance with the current
terms and standards established by the franchisor then equally
applicable to all franchisees, except with respect to any
classification of, or discrimination between, franchisees that is
reasonable, is based on proper and justifiable distinctions
considering the purposes of this chapter, and is not arbitrary. In
any proceeding under this section, the franchisor shall have the
burden of proving that a classification or discrimination meets the
requirements of this section . Good cause in a termination
case shall include, but not be limited to, the
failure of the franchisee to comply with any consist
of a substantial and material breach of any lawful requirement
of the franchise agreement after being given written
notice thereof and a reasonable opportunity, which in no
event need be more than 30 60 days ,
to cure the failure.
SEC. 5. Section 20021 of the Business and Professions Code is
amended to read:
20021. If during the period in which the franchise is in effect,
there occurs any of the following events which is relevant to the
franchise, immediate notice of termination without an opportunity to
cure , shall be deemed reasonable unless the
franchisee establishes that the event was caused in substantial
manner by conduct of the franchisor :
(a) The franchisee or the business to which the franchise relates
has been the subject of an order for relief in bankruptcy, judicially
determined to be insolvent, all or a substantial part of the assets
thereof are assigned to or for the benefit of any creditor, or the
franchisee admits his or her inability to pay his or her debts as
they come due;
(b) The franchisee abandons the franchise by failing to operate
the business for five consecutive days during which the franchisee is
required to operate the business under the terms of the franchise,
or any shorter period after which it is not unreasonable under the
facts and circumstances for the franchisor to conclude that the
franchisee does not intend to continue to operate the franchise,
unless such failure to operate is due to fire, flood, earthquake or
other similar causes beyond the franchisee's control;
(c) The franchisor and franchisee agree in writing to terminate
the franchise;
(d) The franchisee makes any material misrepresentations relating
to the acquisition of the franchise business or the franchisee
engages in conduct which reflects materially and unfavorably upon the
operation and reputation of the franchise business or system;
(e) The franchisee fails, for a period of 10 days after
notification of noncompliance, to comply substantially
with any federal, state , or local law or regulation
applicable and material to the operation of the franchise;
(f) The franchisee, after curing any failure in accordance with
Section 20020 , engages in the same substantial and
material noncompliance whether or not such
the noncompliance is corrected after notice;
(g) The franchisee repeatedly fails to comply with one or more
substantial and material requirements of the franchise,
whether or not corrected after notice;
(h) The franchised business or business premises of the franchise
are seized, taken over, or foreclosed by a government official in the
exercise of his or her duties, or seized, taken over, or foreclosed
by a creditor, lienholder or lessor, provided that a final judgment
against the franchisee remains unsatisfied for 30 days (unless a
supersedeas or other appeal bond has been filed); or a levy of
execution has been made upon the license granted by the franchise
agreement or upon any property used in the franchised business, and
it is not discharged within five days of such levy;
(i) The franchisee is convicted of a felony or any other criminal
misconduct which is relevant and material to the operation
of the franchise;
(j) The franchisee fails to pay any franchise fees or other
amounts due to the franchisor or its affiliate within five
60 days after receiving written notice that
such the fees are overdue; or
(k) The franchisor makes a reasonable determination that continued
operation of the franchise by the franchisee will result in an
imminent danger to public health or safety.
SEC. 6. Section 20025 of the Business and Professions Code is
amended to read:
20025. (a) No franchisor may fail to renew
a franchise unless such franchisor provides the
franchisee at least 180 days prior written notice of its
intention not to renew; and has substantially and
materially breached the franchise agreement. If the franchisee has
not substantially and materially breached the franchise agreement at
time of renewal, the franchisee may renew for the same
term as the previous term. The renewal shall be under the same terms
as the existing franchise agreement, or at the election of the
franchisee, under the franchise agreement terms then being offered
new franchisees. If the franchisor has grounds not to renew a
franchise under this chapter, then the franchisor shall provide at
least 180 days' prior written notice of its intention to not renew as
set forth in this chapter.
(a) During the 180 days prior to expiration of the franchise the
franchisor permits the franchisee to sell his business to a purchaser
meeting the franchisor's then current requirements for granting new
franchises, or if the franchisor is not granting a significant number
of new franchises, the then current requirements for granting
renewal franchises; or
(b) (1) The refusal to renew is not for the purpose of converting
the franchisee's business premises to operation by employees or
agents of the franchisor for such franchisor's own account, provided,
that nothing in this paragraph shall prohibit a franchisor from
exercising a right of first refusal to purchase the franchisee's
business; and
(2) Upon expiration of the franchise, the franchisor agrees not to
seek to enforce any covenant of the nonrenewed franchisee not to
compete with the franchisor or franchisees of the franchisor; or
(c) Termination would be permitted pursuant to Section 20020 or
20021; or
(d) The franchisee and the franchisor agree not to renew the
franchise; or
(e) The franchisor withdraws from distributing its products or
services through franchises in the geographic market served by the
franchisee, provided that:
(1) Upon expiration of the franchise, the franchisor agrees not to
seek to enforce any covenant of the nonrenewed franchisee not to
compete with the franchisor or franchisees of the franchisor; and
(2) The failure to renew is not for the purpose of converting the
business conducted by the franchisee pursuant to the franchise
agreement to operation by employees or agents of the franchisor for
such franchisor's own account; and
(3) Where the franchisor determines to sell, transfer, or assign
its interest in a marketing premises occupied by a franchisee whose
franchise agreement is not renewed pursuant to this paragraph:
(A) The franchisor, during the 180-day period after giving notice
offers such franchisee a right of first refusal of at least 30 days'
duration of a bona fide offer, made by another to purchase such
franchisor's interest in such premises; or
(B) In the case of the sale, transfer, or assignment to another
person of the franchisor's interest in one or more other controlled
marketing premises, such other person in good faith offers the
franchisee a franchise on substantially the same terms and conditions
currently being offered by such other person to other franchisees;
or
(f) The franchisor and the franchisee fail to agree to changes or
additions to the terms and conditions of the franchise agreement, if
such changes or additions would result in renewal of the franchise
agreement on substantially the same terms and conditions on which the
franchisor is then customarily granting renewal franchises, or if
the franchisor is not then granting a significant number of renewal
franchises, the terms and conditions on which the franchisor is then
customarily granting original franchises. The franchisor may give the
franchisee written notice of a date which is at least 30 days from
the date of such notice, on or before which a proposed written
agreement of the terms and conditions of the renewal franchise shall
be accepted in writing by the franchisee. Such notice, when given not
less than 180 days before the end of the franchise term, may state
that in the event of failure of such acceptance by the franchisee,
the notice shall be deemed a notice of intention not to renew at the
end of the franchise term.
(b) Upon the termination or expiration of the franchise, the
franchisor shall not seek to enforce, against the franchisee, any
covenant not to compete.
SEC. 7. Section 20026 of the Business and Professions Code is
repealed.
20026. Nothing in Section 20025 shall prohibit a franchisor from
offering or agreeing before expiration of the current franchise term
to extend the term of the franchise for a limited period in order to
satisfy the time of notice of nonrenewal requirement of that section.
SEC. 8. Section 20027 of the Business and Professions Code is
amended to read:
20027. (a) No franchisor shall deny the surviving spouse, heirs,
or estate of a deceased franchisee or the majority shareholder of the
franchisee the opportunity to participate in the ownership of the
franchise under a valid franchise agreement for a reasonable time
after the death of the franchisee or majority shareholder of the
franchisee. During that time the surviving spouse, heirs, or estate
of the deceased shall either satisfy all of the then current and
reasonable qualifications for a purchaser of a franchise or
sell, transfer, or assign the franchise to a person who satisfies the
franchisor's then current and reasonable standards for
new franchisees. The rights granted pursuant to this section shall be
granted subject to the surviving spouse, heirs or estate of the
deceased maintaining all standards and obligations of the franchise.
(b) Nothing in subdivision (a) shall prohibit a franchisor from
exercising the right of first refusal to purchase a franchise after
receipt of a bona fide offer to purchase the franchise by a proposed
purchaser of the franchise.
(c) This article shall not apply to any agreement or contract in
effect prior to January 1, 1984, except an agreement or contract of
an indefinite duration. This section shall not apply to any bequest
or intestate succession that took effect prior to January 1, 1984.
SEC. 9. Section 20028 is added to the Business and Professions
Code, to read:
20028. (a) (1) No franchisor shall refuse to permit a transfer of
ownership of a franchise, or of a proprietorship, partnership,
corporation, or other business entity that is a franchisee or
subfranchisor, except for good cause.
(2) For purposes of this subdivision, good cause shall include,
but not be limited to, any of the following:
(A) The failure of a proposed transferee to meet any of the
franchisor's or subfranchisor's reasonable qualifications or
standards then in effect for a franchisee or subfranchisor.
(B) The fact that the proposed transferee or any affiliated person
of the proposed transferee is a competitor of the franchisor or
subfranchisor.
(C) The inability or unwillingness of the proposed transferee to
agree in writing to comply with and be bound by all lawful
obligations imposed by the franchisor, including, without limitation,
all instruction and training obligations, and to sign the current
form of the franchise agreement used by the franchisor or
subfranchisor.
(D) The failure of the franchisee or proposed transferee to pay
any sums owing to the franchisor and to cure any default in the
franchise agreement or other agreements with the franchisor existing
at the time of the proposed transfer.
(b) A franchisor or subfranchisor shall have 30 days after being
notified in writing of a proposed transfer to approve or disapprove
in writing a proposed transfer of ownership or control of a
franchise, or of a proprietorship, partnership, corporation, or other
business entity that is a franchisee or subfranchisor, stating its
reason for disapproval. If a franchisor or subfranchisor fails to
approve or disapprove a proposed transfer in writing within that
period, the franchisor or subfranchisor shall be deemed to have
approved such transfer.
SEC. 10. Section 20030 of the Business and Professions Code is
amended to read:
20030. All notices of termination or nonrenewal required by this
chapter:
(a) Shall be in writing;
(b) Shall be posted by registered, certified or other receipted
mail, delivered by telegram , or personally delivered to
the franchisee; and
(c) Shall contain a statement of intent to terminate or not renew
the franchise:
(1) Together with all of the reasons therefor, and
(2) The effective date of such termination or nonrenewal
or expiration .
SEC. 11. The heading of Article 6 (commencing with Section 20035)
of Chapter 5.5 of Division 8 of the Business and Professions Code is
amended to read:
Article 6. Offers to Repurchase Inventory
Remedies
SEC. 12. Section 20035 of the Business and Professions Code is
amended to read:
20035. In the event a franchisor terminates or fails to renew a
franchise other than in accordance with the provisions of this
chapter, the franchisor shall offer to repurchase from the
franchisee the franchisee's resalable current inventory meeting the
franchisor's present standards that is required by the franchise
agreement or commercial practice and held for use or sale in the
franchised business at the lower of the fair wholesale market value
or the price paid by the franchisee. The franchisor shall not be
liable for offering to purchase personalized items which have no
value to the franchisor in the business which it franchises
reinstate the franchisee in accordance with the provisions of
this chapter and pay all damages caused thereby, or at the
election of the franchisee, shall pay to the franchisee the fair
market value of the franchise or the fair market value of the
franchise assets .
SEC. 13. Section 20036 of the Business and Professions Code is
repealed.
20036. The franchisor may offset against any repurchase offer
made pursuant to Section 20035 any sums owed the franchisor or its
subsidiaries by the franchisee pursuant to the franchise or any
ancillary agreement.
SEC. 14. Section 20036 is added to the Business and Professions
Code, to read:
20036. Any franchisee establishing a reasonable probability of
prevailing in an action under this chapter shall be entitled to a
temporary restraining order and preliminary injunction enjoining
termination or nonrenewal pending trial without any showing of
irreparable injury or posting bond.
SEC. 15. Section 20038 is added to the Business and Professions
Code, to read:
20038. Any franchisee prevailing in an action under this chapter
shall be entitled to an award of reasonable attorney's fees and
costs.
SEC. 16. Section 20039 is added to the Business and Professions
Code, to read:
20039. A condition, stipulation, or provision in a franchise
agreement requiring the application of the law of another state in
lieu of this chapter is void.
SEC. 17. Section 20040 of the Business and Professions Code is
amended to read:
20040. Nothing contained in this chapter shall limit the right of
a franchisor and franchisee to agree before or after a dispute has
arisen to binding arbitration of claims under this chapter, provided
that:
(a) The standards applied in such the
arbitration are not less than the requirements specified in
this chapter; and
(b) The arbitrator or arbitrators employed in such
the arbitration are chosen from a list of
impartial arbitrators supplied by the American Arbitration
Association or other impartial person.
person; and
(c) The arbitration procedures and costs allow franchisees the
opportunity to vindicate their rights under this chapter.
SEC. 18. Section 20040.5 of the Business and Professions Code is
amended to read:
20040.5. A provision in a franchise agreement restricting venue
solely to a forum outside this state is void with respect
to any claim arising under or relating to a franchise agreement
involving a franchise business operating within this state.
SEC. 19. Section 20044 is added to the Business and Professions
Code, to read:
20044. This chapter shall be liberally construed to effectuate
its purposes.
SEC. 20. Section 31001 of the Corporations Code is amended to
read:
31001. The Legislature hereby finds and declares that the
widespread sale of franchises is a relatively new form of business
which that has created numerous
problems both from an investment and a business point of view in the
State of California. Prior to the enactment of this division, the
sale of franchises was regulated only to the limited extent to which
the Corporate Securities Law of 1968 applied to those transactions.
California franchisees have suffered substantial losses where the
franchisor or his or her representative has not provided full and
complete information regarding the franchisor-franchisee
relationship, the details of the contract between franchisor and
franchisee, and the prior business experience of the franchisor.
It is the intent of this law to provide each prospective
franchisee with the information necessary to make an intelligent
decision regarding franchises being offered. Further, it is the
intent of this law to prohibit the sale of franchises where the sale
would lead to fraud or a likelihood of deceit or that the
franchisor's promises would not be fulfilled, and to protect the
franchisor and franchisee by providing a better understanding of the
relationship between the franchisor and franchisee with regard to
their business relationship.
SEC. 21. Section 31012 of the Corporations Code is amended to
read:
31012. "Fraud" and "deceit" "Fraud,"
"deceit," "misrepresentation," and "omissions" are not limited
to common law fraud or deceit , and scienter and reasonable
reliance are not required for recovery for fraud, deceit,
misrepresentation, or omissions under this division .
SEC. 22. Section 31110.5 is added to the Corporations Code, to
read:
31110.5. The commissioner shall not register any franchise offer
that contains a provision in a franchise agreement, contrary to
Section 20040.5 of the Business and Professions Code, restricting
venue for resolution of disputes solely to a forum outside this
state.
SEC. 23. Section 31201 of the Corporations Code is repealed.
31201. It is unlawful for any person to offer or sell a franchise
in this state by means of any written or oral communication not
enumerated in Section 31200 which includes an untrue statement of a
material fact or omits to state a material fact necessary in order to
make the statements made, in the light of the circumstances under
which they were made, not misleading.
SEC. 24. Section 31201 is added to the Corporations Code, to read:
31201. (a) It is unlawful for any person in connection with the
offer, sale, or purchase of any franchise, or in any filing with the
commissioner, to do any of the following, directly or indirectly:
(1) Employ any device, scheme, or artifice to defraud.
(2) Make any untrue statements of a material fact or omit to state
a material fact necessary to make the statement, in light of the
circumstances under which they are made, not misleading.
(3) Engage in any act that operates or that would operate as a
fraud or deceit upon any person.
(b) It is unlawful for any person when offering or selling a
franchise to do any of the following:
(1) Intentionally misrepresent the prospects or chances for
success of a proposed or existing franchise.
(2) Intentionally misrepresent, by failure to disclose or
otherwise, the known required total investment for a franchise.
(3) Intentionally misrepresent, or fail to disclose, efforts to
sell or establish more franchises than is reasonable to expect the
market or market area for the particular franchise to sustain.
SEC. 25. Section 31220 of the Corporations Code is amended to
read:
31220. It shall be a violation of this division for any
franchisor, directly or indirectly, through any officer, agent ,
or employee, to restrict or inhibit the right of franchisees
to join a trade association or to prohibit the right of free
association among franchisees for any lawful purposes
purpose, or to refuse to recognize and deal fairly and
in good faith with any independent franchisee association .
Notwithstanding Section 31410, a violation of this section shall not
constitute a crime.
SEC. 26. Section 31300 of the Corporations Code is amended to
read:
31300. Any person who offers or sells a franchise in violation of
Section 31101, 31110, 31119, 31200, or 31202, or in
violation of any provision of this division that provides an
exemption from the provisions of Chapter 2 (commencing with Section
31110) of Part 2 or any portions of Part 2, this
division shall be liable to the franchisee or subfranchisor,
who may sue for damages caused thereby, and if the violation
is willful, the franchisee may also sue following the
purchase of the franchise, or for rescission ,
restitution, and ancillary damages , unless , in the
case of a violation of Section 31200 or 31202, the
defendant proves that the plaintiff knew the facts concerning the
untruth or omission, or that the defendant exercised reasonable care
and did not know, or, if he or she had exercised reasonable care,
would not have known, of the untruth or omission.
SEC. 27. Section 31301 of the Corporations Code is repealed.
31301. Any person who violates Section 31201 shall be liable to
any person (not knowing or having cause to believe that such
statement was false or misleading) who, while relying upon such
statement shall have purchased a franchise, for damages, unless the
defendant proves that the plaintiff knew the facts concerning the
untruth or omission or that the defendant exercised reasonable care
and did not know, (or if he had exercised reasonable care would not
have known) of the untruth or omission.
SEC. 28. Section 31302 of the Corporations Code is amended to
read:
31302. Every person who directly or indirectly controls a person
liable under Section 31300 or 31301 this
chapter , every partner in a firm so liable, every principal
executive officer or director of a corporation so liable, every
person occupying a similar status or performing similar functions,
every employee of a person so liable who materially aids in the act
or transaction constituting the violation, are also liable jointly
and severally with and to the same extent as such person, unless the
other person who is so liable had no knowledge of or reasonable
grounds to believe in the existence of the facts by reason of which
the liability is alleged to exist.
SEC. 29. Section 31302.5 of the Corporations Code is amended to
read:
31302.5. (a) Any person who violates Section 31220
any provision of this chapter may be sued in the
superior court in the county in which the defendant resides or where
a franchise affected by the violation does business, for temporary
and permanent injunctive relief and for damages , if any,
and the costs of suit, including reasonable attorneys' fees
. A plaintiff shall not be required to allege or prove that actual
damages have been suffered in order to obtain injunctive relief.
(b) No action shall be maintained to enforce any liability created
under Section 31220 unless brought before the expiration of two
years after the violation upon which it is based or the expiration of
one year after the discovery by the plaintiff of the facts
constituting such violation, whichever occurs first.
(b) A plaintiff prevailing in a claim for violation of any
provision of this chapter shall also be awarded costs of suit,
including reasonable attorney's fees.
SEC. 30. Section 31303 of the Corporations Code is amended to
read:
31303. No action shall be maintained to enforce any liability
created under Section 31300 under this
chapter unless brought before the expiration of four years
after the act or transaction constituting the violation ,
the expiration of one year after the discovery by the plaintiff of
the fact constituting the violation, or 90
180 days after delivery to the franchisee of a
written notice disclosing any violation of Section 31110 or 31200,
which notice shall be approved as to form by the commissioner
, whichever shall first expire . The notice
shall include an offer of restitution of investment and ancillary
damages to the franchisee.
SEC. 31. Section 31304 of the Corporations Code is repealed.
31304. No action shall be maintained to enforce any liability
created under Section 31301 unless brought before the expiration of
two years after the violation upon which it is based, expiration of
one year after the discovery by the plaintiff of the facts
constituting such violation, or 90 days after delivery to the
franchisee of a written notice disclosing any violation of Section
31201 or 31202 which notice shall be approved as to form by the
commissioner, whichever shall first expire.
SEC. 32. Section 31306 of the Corporations Code is amended to
read:
31306. Except as explicitly provided in this chapter, no civil
liability in favor of any private party shall arise against any
person by implication from or as a result of the violation of any
provision of this law or any rule or order hereunder.
31306. Nothing in this chapter shall preempt,
supersede, limit , or repeal any liability
which that may exist by virtue of any other
statute or under common law if this law were not in effect ,
including, but not limited to, common law fraud .
SEC. 33. Section 31512 of the Corporations Code is amended to
read:
31512. Any condition, stipulation , or provision
purporting to bind any person acquiring any franchise to waive
compliance with any provision of this law or any rule or order
hereunder is void and of no effect, without limitation. All no
representation, no reliance, and choice of law, other than California
law, clauses in the offer or sale of franchises, including in the
franchise agreement, franchise disclosure document, or separate
disclaimer, are void and of no effect .
SEC. 34. No reimbursement is required by this act pursuant to
Section 6 of Article XIII B of the California Constitution because
the only costs that may be incurred by a local agency or school
district will be incurred because this act creates a new crime or
infraction, eliminates a crime or infraction, or changes the penalty
for a crime or infraction, within the meaning of Section 17556 of the
Government Code, or changes the definition of a crime within the
meaning of Section 6 of Article XIII B of the California
Constitution.
