Two state laws govern franchising in California: the California Franchise Investment Law (Cal Corp Code 31000 et seq), which governs the offer and sale of franchises in California; and the California Franchise Relations Act (Cal Bus & Prof Code 20000 et seq), which governs the termination and non-renewal of franchises. Both laws are in flux: pro-franchisee amendments to the California Franchise Relations Act were passed in late 2015 and pro-franchisor amendments to the California Franchise Investment Law are pending.
California Franchise Relations Act amendments
In October 2015 California Governor Jerry Brown signed AB 525,(1) which substantially amended the California Franchise Relations Act. The final version of AB 525 resulted from a compromise between the International Franchise Association and the Coalition of Franchisee Associations after a more onerous version was originally proposed. The modified act applies to franchise agreements entered into or renewed on or after January 1 2016, and to any franchise agreement of indefinite duration that may be terminated without cause. It does not apply to franchise agreements executed before January 1 2016, even if the relevant termination, non-renewal or transfer occurs in 2016 or later.
The California Franchise Relations Act prohibits a franchisor from terminating a franchise agreement prior to the expiration of its term unless it can articulate ‘good cause’ for early termination. Under the prior version of the law, ‘good cause’ included a franchisee’s failure to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity to cure the failure within 30 days. The amended act limits ‘good cause’ to a franchisee’s failure to ‘substantially comply’ with the lawful requirements of the franchise agreement and requires franchisors to give franchisees at least 60 days to cure the breach. Franchisors may continue to terminate franchisees upon 10 or fewer days’ notice for certain egregious material defaults (eg, failure to timely pay amounts due to the franchisor, abandonment or unauthorised transfers).