New amendments to California franchising law broaden its regulations on franchisors. California Assembly Bill 676, signed by Governor Newsom on September 29, 2022, amends the California Franchise Relations Act (“CFRA”) and the California Franchise Investment Law (“CFIL”), which apply to the termination, nonrenewal, and transfer of franchises. The law’s sponsor, Assembly-member Chris Holden, claims the amendments to California franchise law will “rectify the unbalanced relationship between franchisee and franchisors.”
The amendments make a multitude of changes to the CFRA and CFIL. In particular, franchisors will need to consider how the following changes made by California Assembly Bill 676 will impact their franchise contracts and relationships:
Waivers and Disclaimers
The most impactful change on businesses franchising in California will likely be the new restrictions on waivers and disclaimers. The amendments declare certain waivers and disclaimers as contrary to public policy, and therefore void and unenforceable. This includes disclaimers of representations made by the franchisor, the franchisee’s reliance on any such representations, or related to the franchisee’s reliance on the franchise disclosure document or its exhibits. Franchise agreements and Franchise Disclosure Documents typically require a franchisee to disclaim reliance on statements made outside of the documents themselves. These are often reflected in merger or integration clauses, and they verify that the final, signed documents represent the parties’ final agreed-upon terms. As a result, franchisors should revisit their franchise documents and consider whether any updates are needed to address this California-specific prohibition.
It is likely that these prohibitions will be the subject to future litigation. For example, the prohibition may create uncertainty on the interplay with the parol evidence rule, which prevents evidence outside of a fully integrated, final agreement from being presented in court. Further, the import of integration clauses by the courts is uncertain. Depending on the answers to these issues, franchisors may be concerned that statements made during negotiation—even if not reflected in the final terms of the agreements—may be presented in court and taken out of context.
Setoff at Termination
Another significant change by the amendments is regarding treatment of debts owed after termination or nonrenewal of a franchisee. Formerly, consistent with the parties’ contractual terms, a franchisor could offset any amounts owed to the franchisee against the amounts that the franchisee owed. Now, a franchisor can only offset the amounts owed, if the franchisee agrees to the amount or if the franchisor received a final adjudication. Though this may seem like a minor change, this could prove costly and time intensive for franchisors. Particularly in situations where a franchisee is terminated for failure to meet financial obligations or maintain appropriate records.
The amendments potentially expand civil liability against franchisors. Prior to the changes, civil liability under CFIL could only arise against a private party for violations of the law as explicitly stated in the chapter. These amendments removed that limitation, and now provide that “[n]othing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect.”
Other Franchisee Protections
The amendments provide additional protections for franchisees:
- Franchisors are now prohibited from refusing to grant, or provide financial assistance, to a franchisee or prospective franchisee that has been provided to similarly situated franchisees based solely on any characteristic (of the franchisee/prospective franchisee or neighborhood/location) that is protected under California’s civil rights act (Unruh Civil Rights Act), e.g., age, disability, race, religion, sexual orientation.
- Franchisors are prohibited from modifying a franchise agreement, or requiring a general release, in exchange for any assistance related to state or federal emergencies.
Finally, the amendments impose additional requirements on franchisee-to-franchisee sales. After receiving an application to transfer, a franchisor must notify the prospective franchisee in writing as soon as practical of any additional documents or information needed. Further, if a franchisee requests required forms or information on the standards of approval, the franchisor must provide it within 15 calendar days of receiving the request. Finally, after receiving all the required information, the franchisor must notify the prospective franchisee of their approval or disapproval within 60 days. However, these new provisions do not prohibit a franchisor from exercising a right of first refusal or imposing additional requirements on franchisee-to-franchisee sales.
If you franchise or plan to franchise in California, these amendments make important changes that you should consider with respect to your existing contracts, franchise disclosure documents, as well as your conduct during and at the conclusion of any franchise relationship. You may wish to discuss the impacts these changes may have on your existing and future franchise relationships with your legal counsel.