Will Recent Changes in California’s Franchise Law Blaze a Path for Other States?

California strengthened the hand of in-state franchisees vis-à-vis their franchisors with amendments to the California Franchise Relations Act (CFRA) that went into effect January 1, 2016.  Since 1980, the CFRA has protected California franchisees against termination and nonrenewal without good cause.  But now, good cause means more than failure to comply with the franchise agreement.  Termination or refusal to renew is permitted now only when the franchisee has committed a “substantial and material breach” of the franchise agreement.

Under the revised CFRA, a franchisor that lawfully terminates or fails to renew a franchise may also be required to purchase all inventory, supplies, equipment, fixtures and furnishings used in the operation of the franchised business unless the franchisee declined an offer of renewal or unless the franchisee can retain control of the business premises after termination.

The revised CFRA also protects the franchisee’s right to assign the franchise or an ownership interest in the business if the transferee is qualified under the franchisor’s reasonable standards for the approval of new or renewing franchisees.

In addition, under the amended act, if the franchisor terminates or fails to renew a franchise in violation of the law, the franchisee has the right to receive from the franchisor the fair market value of the business and any other damages caused by the violation of the CFRA.  A court may also grant preliminary and permanent injunctions for a violation or threatened violation of the CFRA.

Is this the beginning of a trend or is this legislative change a one-off event specific to California?

Is this the beginning of a trend or is this legislative change a one-off event specific to California?

My guess is that this change does not signal a trend, but rather represents a specific congruence of interests in California. The fact is that franchise relationship laws have changed little anywhere in the country since 1980.

The California bill was sponsored and supported by the Coalition of Franchisee Associations (CFA) with active support from the Service Employees International Union (SEIU)—the labor organization that has been actively promoting the joint employment concept in franchising.  (Joint employment is the concept under which the NLRB is seeking to hold McDonald’s responsible for alleged labor law violations by its franchisees.)  The California bill was opposed by the International Franchise Association (IFA), but the IFA and CFA managed to negotiate the terms of the proposed legislation and reach a compromise, allowing it to become law.

Organizations like the CFA, the SEIU, The American Franchisee Association (AFA) and the American Association of Franchisees & Dealers (AAFD) will continue to promote changes to franchise laws throughout the U.S. that strengthen franchisee rights against franchisors.

But the IFA keeps a close watch on these initiatives and actively works to oppose legislation that might threaten the franchise business model. The IFA succeeds more often than not in persuading legislators that proposed changes that on their surface appear to benefit franchisees can create remedies to problems that do not exist— likely resulting in needless litigation. Unsuccessful attempts to introduce new pro-franchisee legislation were made in recent years, for example, in Connecticut, Maine, Massachusetts, New Hampshire, New York, and Pennsylvania.

More likely changes in the short term will come in the form of state laws that clarify that franchisors and franchisees are not joint employers and that franchisees themselves are not employees of franchisors.  Such laws were recently passed in Texas (S.B. 652), Louisiana (HB 464) and Tennessee (SB 475).  The joint-employer issue is at the top of IFA’s agenda for 2016.

Last year also saw movement at the federal level. Representative Keith Ellison (D-Minn.) introduced the Fair Franchise Act of 2015 (H.R. 3196).  But that bill died. The act would have prohibited mandatory arbitration.  It would have introduced the dispute-enhancing, vague requirement that franchisors act in good faith, which was removed from the final California law.  In addition, it would have protected franchisees from refusals to renew, from termination without good cause and from refusals to permit transfers. There is no reason to expect that any such bill will become law this year either.

A more interesting idea at the federal level would be to enact a national franchise disclosure law that would preempt state franchise laws and also allow for a private right of action.  But this is equally unlikely to happen any time soon.