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California Small Business Protection Act, Assembly Bill 1141

SECTION 1.  This act shall be known and may be cited, as “The Small Business Investment Protection Act of 2013” 

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) California franchisees are a major force in the state’s economic development.  As opposed to corporate entities that are franchisors and most often reside outside California, franchisees are the local small business owners who personally fund the franchise brand development, sales, use and income tax, and who invest in building, equipment, pay leases, and other spill over investments. 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, including franchisees’ homes, and sometimes filing for bankruptcy. Unlike employment, due to long-term contractual and lease obligations, franchisees generally cannot resign and leave without substantial liabilities. The California Franchise Relations Act is designed to protect franchisees and end abuses from those practices and unfair contract provisions.

   (c) California franchise law is a vitally needed component of franchise regulation that serves the public good as that no substantial oversight or cause of action exists via Federal regulation other than common law 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 prohibition 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) 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 and the franchise agreement.

20016.1. 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.

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 causein a termination case shall include, but not be limited to, the failure of the franchisee to comply with anyconsist of a substantial and material breach of any lawful requirement of the franchise agreement after being givenwritten notice thereof and a reasonable opportunity, which in no event need be more than 3060 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 reasonableunless 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 complysubstantially with any federal, state, or local law or regulation applicableand material to the operation of the franchise;

(f) The franchisee, after curing any failure in accordance with Section 20020, engages in the samesubstantial and material noncompliance whether or not suchthe 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 supersedes 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 relevantand 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 five30 days after receiving written notice that suchthe 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; andhas 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 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.

 (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

SEC. 8. 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. 9. 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. 10. 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 franchisesreinstate 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. 11. 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. 12. 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. 13

. 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 purposespurpose, or to refuse to recognize and deal fairly and in good faith with any independent franchisee association disclosed in the current Franchise Disclosure Document. Notwithstanding Section 31410, a violation of this section shall not constitute a crime.

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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Contact him at +1 (270) 321-1268, @bluemaumau or