Legislation Proposes Sweeping Changes to California Franchise Law

Legislation introduced to the California State Assembly on February 24, 2012 would provide strong protection to franchisees by significantly amending California’s existing Franchise Relations Act. Among other changes, the “Level Playing Field for Small Businesses Act” would:

  1. provide franchisees with 60 days to settle overdue fees;
  2. absent “substantial and material” breach by the franchisee, provide for the automatic renewal of franchise agreements under, at the franchisee’s election, either the original terms of the agreement or the franchise terms then being offered to new franchisees;
  3. provide a 60-day cure period for breaching franchisees;
  4. prohibit franchisors from seeking to enforce non-compete covenants following the termination or expiration of a franchise agreement;
  5. impose significant penalties on franchisors for the wrongful termination of, or failure to renew, a franchise agreement;
  6. prohibit franchisors from establishing new units in “unreasonable proximity” to existing franchisees;
  7. expand the definitions of “fraud,” “deceit,” “misrepresentation,” and “omissions” beyond their common law definitions to provide that knowledge and reasonable reliance are no longer required for recovery;
  8. require franchisors to deal with franchisee associations in good faith;
  9. prohibit merger/integration clauses;
  10. require that all franchise agreements be governed by California law; and
  11. impose on franchisors a “duty of competence” to their franchisees.

While franchisor groups, including the International Franchise Association, have expressed immense concern over the proposed legislation, many franchisee associations have come out in support of the bill. The full text of Assembly Bill 2305 is available here. SGR’s Franchise and Distribution Group will track the progress of this legislation and will provide updates regarding its progress as they become available.

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