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California Senate Sends Fair Franchising Bill to Gov. Brown

Sacramento dome from the inside
Inside view of Sacramento capitol dome. photo/KatieCarr

SACRAMENTO—The California state senate voted 23 - 9 late Thursday in favor of SB 610, a bill that strengthens franchisor good faith relations with franchisees. It is now ready for Governor Jerry Brown's signature to become law. Although its proponents considered the bill a small tweak in franchise law, a clarification that would diminish lawsuits, opponents thought the opposite and have fiercely fought against its passage. The Los Angeles Times called the battle between franchisees, such as 7-Eleven and McDonald's owners, and the large franchising firms that control the franchisees' business operations one of the top business legal fights of the year for California.

Senator Hannah-Beth Jackson asks for senators to give SB610 an aye vote
Senator Hannah-Beth Jackson asks for an aye vote

"[SB] 610 will protect franchisees from unfair contract terminations while continuing to allow franchisors to terminate poor performers and those who hurt the franchise brand," said the bill's author, Senator Hannah-Beth Jackson, in introducing it to the floor of the state senate earlier in the afternoon for a vote. Senator Jackson pointed out that the right in the bill for franchisees to sell their businesses to qualified third parties were created for auto dealer franchises in 1973 under then-Governor Reagan. She added, "The bill reaffirms franchisees' right to free association and the implied covenant of good faith and fair dealing that already applies to all contracts under California contract law."

The International Franchise Association (IFA), a Washington, D.C.-based association formed in 1960 by a group of franchisors, has fiercely fought to stop the bill. "SB 610 has been, and continues to be, a solution in search of a problem that does not exist," says the association's chief executive Steve Caldeira.

But the majority of California lawmakers did not see it that way. They voted for the bill's passage.

"IFA's broad-based, pro-business coalition will continue to vigorously fight to defeat this bill," insists Steve Caldeira, the association's CEO. "We are truly disappointed that the senate passed such a burdensome bill for the franchise industry in California." His opponents encountered attorneys of multinational corporations, who queued up to kill the bill. One small business franchise owner recalled stepping into an office for an appointment with a senator only to see five individuals with expensive suits, whom he recognized from the IFA and their alliance of lobbying groups, stepping out.

"It was apparent that a lot of out-of-state money was spent to stop the bill," says Keith Miller, who owns three franchise sandwich shops near Sacramento.

Robert Purvin, chairman and CEO of the Southern California-based American Association of Franchisees and Dealers (AAFD), which sponsored the bill, was ecstatic over its passage. The organization is a 20-year association that acts to protect franchisees. "Today we celebrate a monumental success in protecting the rights and equity of franchise owners in this state, a victory that was achieved against long odds and aggressive opposition," Purvin said.

What is striking about this win is that franchised small business owners have, through one failure after another in state after state, quickly gained a better understanding of winning strategies to implement against the overwhelming odds of big Wall Street companies, deep funding and at least half a century of established lobbying might.

These small business owners saw their efforts produce results. Senate Bill 610 was first passed by the Senate Judiciary Committee. It passed a full vote by a margin of one on the senate floor. Franchisees managed to pass the bill in the Assembly Judiciary Committee, and then it passed the assembly's Business, Professions and Economic Development Committee.

The IFA's Caldeira wants to paint this as a battle between his organization and the mighty unions. "It is now crystal clear that there has been a blatant misinformation campaign against our industry led by organized labor, and in particular, the Service Employees International Union (SEIU)," says the IFA's chief executive.

What he is referring to is that as the political arena became tougher and doors shut, these small business owners realized that they needed to do something different if they wanted to win, something to change the long built-up resistance of the establishment and the status quo. They looked at broadening their coalition to include an unlikely partner, one that typically is regarded as an untouchable enemy – labor unions. Likewise, the SEIU realized that if they ever wanted to increase employee wages, they had to help increase the profit margins of franchise owners.

"We believe that the near absolute power that franchisors currently have is bad for every other stakeholder in the franchise business, including both franchisees and workers," states the California spokesperson for the SEIU, Christopher Calhoun. "Bringing more fairness and balance back to small businesses will ultimately help workers too."

That broader coalition helped with passage in the Professions and Consumer Protection Committee. Then came a squeaker of a vote by 41, the minimal number to pass in the assembly. Next came the vote on the floor of the state senate. But even with the help of the well seasoned Service Employees International Union, Sacramento watchers gave the bill only a 50-50 chance of passage against the heavy lobbying against it, despite the bill having passed the senate before. It had to go back to a vote on the senate floor after amendments were made to add more clarity to the well-established legal term "good faith and fair dealing."

Franchisees stepped up. In the end, the bill gained more votes in the senate compared to the first time around last year.

Keith Miller thinks Thursday's passage of the bill shows that the strategy is paying off. Thursday was a good day. "Franchisees have overcome overwhelming odds to get the bill this far," says the multi-unit franchisee, who is also chairman of the 7-year-old Coalition of Franchisee Associations based in Washington, D.C. It represents franchisees from some of the country's largest chains – Burger King, 7-Eleven, Supercuts, Holiday Inn and many others. Miller thinks what was key to this win was hundreds of California franchisees contacting their legislators.

Whatever the lobbying strategy used, Caldeira says that the end result of Governor Brown signing the bill will be harm to California's economy. "If signed into law, SB 610 would without question shift franchise brands to more company-owned stores, thereby taking away ownership opportunities for both existing and prospective entrepreneurs in the state and would severely hinder franchise small business growth throughout California," he says.

But Mr. Jaspreet Dhillon, a franchise owner of a Reseda 7-Eleven, reminds Mr. Caldeira that sellers of franchises sell where there is strong demand. And strong demand comes where investors in franchises feel better protected. "With SB 610 on his desk, Governor Brown now has the opportunity to help small businesses like mine grow and succeed." Dhillon urges the governor to protect small businesses and California jobs by signing the bill into law.

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