Franchisors Operating in California Face New Challenges: The New California Franchise Relations Act

On January 1, 2016, the California Franchise Relations Act (“CFRA”) will be amended resulting in the expansion of franchisee rights when it comes to termination, renewal, and transfer of franchise agreements. The key terms of the new CFRA include:

Application of the Amended CFRA

The amended CFRA applies to franchise agreements that are entered into or renewed after January 1, 2016, and to any franchise agreement of indefinite duration that permits either party to terminate the agreement without cause. The new CFRA will not apply to franchise agreements executed before January 1, 2016 even if the termination or sale occurs after that date.

Termination

A franchisor may continue to terminate a franchise agreement for material and egregious defaults without giving the franchisee the right to cure. For all other defaults, the new CFRA requires the franchisor to meet a more stringent “good cause” standard. The new CFRA gives the franchisee 60 days to cure a breach instead of 30 days as provided in the current law. After 2016, the definition of “good cause” will be expanded to mean the franchisee’s failure to “substantially comply” with any lawful requirement of the franchise. Currently, “good cause” means the franchisee’s failure to comply with any lawful requirement of the franchise agreement.

Remedies for Terminations and Nonrenewals

Under the new CFRA, a franchisor that terminates or fails to renew a franchise without meeting the new “good cause” standard is liable to a franchisee for the fair market value of the franchised business plus any other damages the franchisee can demonstrate it sustained. In situations where the franchisor lawfully terminates or refuses to renew a franchise and retains site control, the franchisor must pay the former franchisee for its original cost less depreciation of inventory, supplies, equipment, fixtures and furnishings purchased by the franchisee when the franchisee gives the franchisor clear title. The amended CFRA allows a franchisor to offset any amounts owed by the franchisee to the franchisor.

Transfer

Under the new CFRA, a franchisor may not prevent a franchisee from selling or transferring the franchise to a person that otherwise meets the franchisor’s lawful standards for new franchisee sale or transfer. Also, the franchisor will be unable to enforce contractual terms that provide it discretion to summarily reject buyers while allowing a franchisor to exercise a right of first refusal.

The new CFRA will be viewed by franchisees as affording them more power in the contractual relationship and making it more difficult for franchisors to terminate the franchise agreement and greatly limiting the franchisor’s ability to unreasonably withhold consent to the transfer of franchises. Franchisors will be concerned that the new CFRA lowers the standards to which a franchisee must comply and limits their ability to protect system standards because all that a franchisee need do is “substantially comply” with a franchise agreement. Only time and a multitude of lawsuits will tell to what extent the new CFRA will change the franchise relationship.

This document is intended to provide you with information about business solutions law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

November 13, 2015