On September 29, 2022, California Governor Gavin Newsom signed AAFD sponsored AB-676 (Holden, D-Pasadena) into law. The signing of this legislation is a clear victory for fair franchising advocates. AB-676 is a technical and incremental update to the two existing California franchise laws, the California Franchise Investment Law (CFIL) and the California Franchise Relationship Act (CFRA).
Let us look first at the improvements to the CFIL.
- It clarifies that the CFIL applies to a franchise purchase when the franchise business is intended to be or will be operated in California. Simply, if the location is in California, the CFIL is the law.
- It clarifies that the state commissioner can deny, suspend, or revoke a franchise registration for any of the previous violations, and adds if the franchise includes illegal activities where performed or the franchise agreement has a provision that is contrary to law. This gives the state commissioner’s office more authority to take action against franchisors that violate the law.
- Makes certain requirements on a franchisor when a prospective franchisee is purchasing an existing franchise. The franchisor will be required to provide the prospective buyer with the existing standards for approval, shall notify the buyer of approval or disapproval within 60 days of receipt of the application, and if disapproved, must provide the reasons in writing.
- Provides protections against discrimination when granting a franchise or providing financial assistance.
- Removes the limitation that no civil liability in favor of a private party arises from a violation of the CFIL. This should expand the civil liability against franchisors for violations of the CFIL.
- Makes any provision of a franchise agreement, disclosure document, acknowledgement, questionnaire, or other writings that disclaim or deny representations or reliance on information they have received contrary to public policy and shall be void and unenforceable. This includes representations made to a perspective franchisee or reliance by a franchisee on representations made by the franchisor or its personnel or agents. This is huge! If you relied on information that was told to you, not in the FDD or Franchise Agreement, the franchisors can not make you sign a document saying you did not get that information or you did not rely on it. If you’ve signed a franchise agreement, you have likely initialed and signed a long questionnaire with these disclaimers.
And here are the updates to the CFRA.
- States that any provision of a franchise agreement requiring the franchisee to waive the provisions of the CFRA will be deemed contrary to public policy and shall be void and unenforceable. If it is the franchise law in California, California franchisees cannot be forced to waive the law.
- On a termination or non-renewal, existing law requires the franchisor purchase your equipment, fixtures, and inventory at book value. It also allows them to offset any payment by the amount a franchisee owes the franchisor. AB-676 clarifies that this offset cannot be determined unilaterally by the franchisor but must be agreed to by the franchisee or decided by a court.
- Prohibits a franchisor from modifying a franchise agreement, or requiring a general release, in exchange for any assistance related to a declared state or federal emergency. This is in response to many franchisors requiring changes to the franchise agreement and/or signing a general release during the pandemic, often for very little assistance, such as only deferring minimum royalties when the business was shut down.
- The new provisions go into effect on January 1, 2023 for any franchise agreement that has been signed, renewed, or amended after that date. “Amended” is a new addition to the laws going into effect and is meant to provide the new protections when franchisors amend an existing agreement, such as when you sign an additional agreement and it amends your previous agreements. The amended clause will not impact an initial agreement if the amendment was initiated by the franchisee to negotiate better terms.
Many organizations participated in promoting, supporting, and advocating for this legislation. The bill sponsors were the American Association of Franchisees and Dealers (AAFD) and Franchisee Advocacy Consulting. Registered supporters were the Asian American Hotel Owners Association (AAHOA) and Equity for All. All of the franchisee organizations attended hearings and testified in support of the bill, in addition to contacting representatives to educate and support. While this was a victory, franchisee advocates must continue to push for additional changes, not only California, but in each state and federally, to protect the franchise model, so it is sustainable to all stakeholders, especially the true local investors, the franchisees.