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Revisions to California Franchise Relations Act to Provide Greater Protections for Franchisees

The California Senate is putting the final touches on revisions to the California Franchise Relations Act. The law, when enacted, will increase franchisee protections against unilateral termination, provide more notice in the event of non-renewal of their franchise agreement, and require the franchisor to purchase the inventory, supplies, equipment, fixtures and furnishings from the franchisee. Under the revised statute, a franchisor will be required to provide a minimum of 60 days’ notice to a franchisee of intent to terminate the franchise agreement for failure to substantially comply with the agreement terms. In addition, the franchisee will be provided a reasonable opportunity to cure for up to 75 days before a termination may proceed. In the event that a franchisor elects not to renew a franchise agreement at the end of its contract term, the franchisor will be required to provide a minimum of 180 days’ notice to the franchisee of that decision. Finally, the proposed new language will provide that:

[u]pon a lawful termination or nonrenewal of a franchisee, the franchisor shall compensate the franchisee, at the value of price paid, minus depreciation, for all inventory, supplies, equipment, fixtures, and furnishings purchased or paid for under the terms of the franchise agreement or any ancillary or collateral agreement by the franchisee to the franchisor or its approved suppliers and sources, that, at the time of the notice of termination or nonrenewal, are in possession of the franchisee or used in the franchise business.”

The proposed revisions to the California Franchise Relations Act reflect escalating concerns regarding franchisees having business livelihoods and investments in franchise equipment and inventory threatened, in the event of an abrupt unilateral termination of their franchise agreement. The International Franchise Association has argued that the proposed revisions are unnecessary and that existing franchise disclosure protections in the California Franchise Relations Act already exceed the protections in the Federal Trade Commission’s Franchise Rule. Nevertheless, the revisions are widely expected to be adopted by the California Senate within the next few weeks.  

This article is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.