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California enacts protections for franchisees regarding termination

Every year, California enacts new laws affecting businesses. One noteworthy law in 2016 is Assembly Bill 525. Bill 525 resulted from a compromise between franchisors and franchisees regarding when a franchisor can terminate a franchise prior to the end of the term.

Bill 525 creates new protections for franchisees. Many are citing California as the state with the toughest protections for franchisees in the country.

Termination requires substantial breach of contract

The new law makes it more difficult for a franchisor to terminate a contract absent good cause. To show good cause requires findings a failure of the franchisee to substantially comply with the lawful requirements of the franchise agreement imposed on the franchisee. The law also increases the time a franchisee has to comply with the requirements of the contract to 60 days, up from the 30 days previously given franchisees. The law does allow an exception for certain motor vehicle franchises.

What is "good cause" to terminate?

There are still numerous valid reasons a franchisor can terminate an existing contract prior to the end of the term. These include:

  • Bankruptcy
  • Misrepresentation
  • Criminal activity
  • "Material" conduct that reflects unfavorably on the franchise
  • Failure to pay franchise fees

Franchisees have historically argued that it is too easy for a franchisor to terminate a relationship, whether or not there was cause or a failure to perform under the terms of the franchise agreement.

Other provisions in the new law involve reselling, repurchasing

In addition, the law provides that franchisors must repurchase goods from the franchisee "at the value of price paid, minus depreciation" at termination. These goods include inventory, supplies, equipment and other items. However, the franchisor is not obligated to repurchase assets if the termination is mutually agreed upon or if the franchisee declines to renew.

Finally, franchisees can resell the franchise to a third party if that party is qualified under the existing standards of the contract. While the franchisor must approve the sale, they can only reject it on the grounds that the third party does not meet the existing standards.

Effects of the new law still unclear

Because the law is new, and unique to California, it is still unclear how much affect the new law will have on franchisor/franchisee relationships and contracts in the state.

If you have questions about your current franchise arrangement, including options for termination or resale, contact Diemer & Wei, LLP.

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