California Amends Franchise Law: What Restaurants Need to Know

On January 1, 2023, Assembly Bill (“AB”) 676 went into effect, significantly amending the  California Franchise Relations Act and Franchise Investment Law. These provisions will apply to franchise agreements entered into, amended or renewed on or after January 1, 2023. If the amendment was initiated by the franchisee and the amendment does not adversely impact the franchisee’s rights, that amendment is not subject to AB 676.

AB 676 prohibits franchise agreements from including a provision requiring the franchisee to disclaim their reliance on representations made by the franchisor or its agents and reliance on the
franchise disclosure documents. It adds section 31512.1 of the Corporations Code, which provides that these provisions are void as contrary to the state’s public policy. This means that if a provision in a franchise agreement or disclosure document requires a franchisee to disclaim and deny that they relied on representations made by the franchisor or made in franchise disclosure documents, that provision will not be enforced by a court. Restaurant franchisees should review their existing franchise agreements and disclosure documents for these types of provisions.

The law also provides new standards governing the transfer of an existing franchise to a new franchisee that are important for potential transferees to understand. Specifically, a franchisor
must notify a prospective franchisee of the approval or disapproval of the transfer application within 60 days after the prospective franchisee has submitted an application. If the franchisor disapproves of the transfer, the franchisor must notify the prospective franchisee of the reason for disapproval. In any legal action in which the franchisor’s disapproval of a transfer is at issue, the “reasonableness of the franchisor’s decision shall be a question of fact requiring consideration of all relevant circumstances.”

The law adds section 31212 to the Corporations Code, which provides that “no franchisor shall refuse to grant a franchise, or refuse to provide financial assistance, to a franchisee or prospective franchisee that has been granted or provided to other similarly situated franchisees or prospective franchisees based solely on any characteristic of the franchisee or prospectivefranchisee, or any characteristic of the composition of the neighborhood or geographic area where the franchise is located or the proposed franchise would be located…” This does not prohibit a franchisor from granting a franchise to a prospective franchisee as part of a program to make franchises available to persons lacking the capital, training, business experience, or other qualifications ordinarily required of franchisees, or any other affirmative action program adopted by the franchisor.

AB 676 provides additional protections for franchisees during a state or federal emergency, codified in section 20044 of the Business and Professions Code. Franchisors are prohibited from modifying a franchise agreement or requiring a general release from the franchisee in order for the franchisee to be eligible for any assistance related to a declared state or federal emergency. The assembly floor bill analysis indicates that lawmakers included these protections because franchisors extended relief to struggling franchisees, such as by deferring or waiving royalty payments, during the COVID-19 public health emergency, but asked them to waive certain rights in exchange for that relief. That practice will no longer be legal for franchisors going forward.

AB 676 clarifies that the Franchise Investment Law applies to sales between franchisors and franchisees who reside outside of California if the franchise business is intended to or will be operated in the state of California. 

California lawmakers stated that they intended for AB 676 to correct the imbalance in bargaining power between the franchisor and the franchisee and provide more rights and remedies to both franchisees and potential franchisees.