What is New With California Franchise Relations Law?
The relationship between a franchisor and franchisee is governed by the California Franchise Relations Act (“CFRA”) codified at Cal. Bus. & Prof. Code, § 20000 et seq. The CFRA covers renewal, nonrenewal and termination of franchises. There have been some recent changes in the CFRA. Here is what is new.
San Diego Franchises: What is a Franchise?
Franchises are common in our everyday life. Fast food restaurants are often franchises. A franchise is a store — or something as small as a pretzel cart — that is owned by a person or small group of people who operate under the business model of a larger franchising business. The franchise relationship is a contractual arrangement where a “franchisor” allows “franchisees” to use their business logo, name, and business system. The franchisor often closely monitors the franchisee for compliance with the business model. There is a franchise fee that must be paid and often the franchisee must buy materials, goods, and services from the franchisor. Many franchisors, like McDonald’s, have both “company restaurants” and “franchise restaurants.”
Because the relationship is contractual, at the end of the contract, either or both parties are free to end the relationship. People who buy franchises often spend large sums of money to rent retail space, buy materials, hire employees, etc. Moreover, in general, the franchisee is making money and making a living from the business. As such, mostly, franchisees want to continue the contractual relationship and do not want their franchises terminated or non-renewed without good reason. By contrast, the franchisor wants and needs as much flexibility as possible. Given the large number of franchises in the marketplace and given the importance of protecting the investments of both franchisors and franchisees, California has a statute — the CFRA — that governs franchisor-franchisee relations. The 2015 amendments gave additional protections to franchisees.
San Diego Franchises: Recent Amendments to the CFRA
Back in 2015, the California General Assembly amended the CFRA effective with respect to franchise agreements entered into or renewed after January 1, 2016. Here is a news article from Fortune Magazine about the law from 2014.
Under the revised statute, termination is more difficult. Now, a franchisor cannot terminate a franchisee for non-substantial violations of the franchise agreement. The CFRA has always mandated “good cause” for a termination, but prior to the amendment, “good cause” could be any violation of the franchise agreement as long as notice and a reasonable opportunity to cure were given. After the amendment, the “good cause” must be a failure to “substantially comply” with the franchise agreement and the cure period is now set at 60 days. The CFRA still allows quick and immediate termination for a long list of serious and egregious violations of the franchise agreement. See § 20021.
Further, under the amended statute, a franchisor must allow a franchisee to sell or transfer the franchise to a person or entity that meets the franchisor’s standards for new or renewal franchisees. The amended CFRA requires various notices to be sent and the franchisor has 60 days to accept the new franchisee. Further, there is now a default. In the absence of notice of disapproval in those 60 days, the sale or transfer is deemed approved. If there is a disapproval, the franchisor must identify “reasonable grounds” for the disapproval.
In addition, as noted, many franchisees invest heavily in their franchise. They are often required to buy substantial amounts of goods and services from the franchisor. Termination or nonrenewal was bad enough since the business was put to an end. However, the franchisee often had substantial inventory. Prior to the 2015 revisions, the franchisor was required to buy back “resalable current inventory.” The new statute requires the franchisor to buy back/purchase “all inventory, supplies, equipment, fixtures, and furnishings” at the price paid minus depreciation. There are various exceptions set forth in the revised statute. See § 20022.
The amended CFRA also increased the potential damages that a franchisee can recover if a franchisor terminates or fails to renew unlawfully. In addition, courts are now empowered to enjoin violations or threatened violations of the CFRA.
San Diego Franchises: No New Case Law Under the Revised CFRA
As far as our research has uncovered, there are no new cases interpreting the revised CFRA. There appears to be no substantial outcry from franchisors or any news reports of substantial “flight” of franchises from California. This is probably not too surprising. Along with California, 17 other states have some sort of franchisee protection act that restricts a franchisor’s right to terminate or non-renewal without good cause.
Contact San Diego Corporate Law
Mr. Leonard can help you understand all elements of franchise laws in California, including the new provisions of the CFRA. Be aware that selling a franchise is governed by the California Franchise Investment Law which requires franchisors to register with the California Department of Business Oversight (“DBO”) and provide disclosures. So, as said, if you are thinking about buying a franchise, you need an attorney skilled in franchising law. Contact Mr. Leonard today via email or by calling (858) 483-9200.