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Franchising Bill Moves Forward In California

An update to my previous post regarding the "fair franchising bill" being considered in California's Senate: on Tuesday, April 16, 2013, the California Senate Judiciary Committee approved the proposed legislation (SB 610), which is being supported by the American Association of Franchisees and Dealers ("AAFD") and opposed by the International Franchise Association ("IFA"). 

If passed, SB 610 would make the following amendments to the California Franchise Relations Act ("CFRA"):

  • The parties to a franchise relationship would be required to deal with one another in good faith (essentially, making the implied covenant of good faith and fair dealing an express statutory requirement); and

  • Franchisors (or subfranchisors) would be prohibited from restricting a franchisee from joining or participating in an association of franchisees.

SB 610 would also amend the CFRA by permitting a franchisee to sue a franchisor or subfranchisor who violates the CFRA for damages, rescission, or other relief deemed appropriate by a court.  Moreover, SB 610 would authorize a court in its discretion to award treble (3 times) damages to the suing franchisee, as well as reasonable costs and attorney's fees. 

The AAFD, in support of the bill, argues that:

Modern franchise relationships are most always governed by one-sided "take it or leave it" adhesion contracts that elicit substantial monetary investment from franchise owners, provide substantial protection for franchisors, but severely limit a franchisee's rights in franchise relationship.  Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive manner.

The IFA, on the other hand, argues that the good faith requirement is problematic because "good faith" is:

[An] amorphous term to be applied to the franchisor in its relationship with the franchisee.  The  concept of "good faith" was created in the Uniform Commercial Code to fill in the blanks on short form contracts for the sale of goods.  However, it provides no benefit in the context of detailed franchise contracts which govern complex and ongoing business relationships.

The bill was passed in the California Senate Judiciary Committee with a vote of 5-2.  Next, the bill will be voted on by the full Senate.  If passed, it would go before the California Assembly for consideration. 

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About this Author

Armstrong Teasdale lawyers practice extensively in the areas of franchising and distribution, including the development of new franchise systems, preparation of franchise offering circulars, compliance with federal and state requirements, contract negotiation, trials and appeals in all courts, representation in arbitration proceedings, mediation, and assistance in evaluating the impact of these areas on other client operations.

Franchise and distribution lawyers review, analyze and stay current with legislation and regulations promulgated by government authorities. Additionally,...