California Expands Franchise Regulation
California Expands Franchise Regulation

On January 1, 2023, Assembly Bill (“AB”) 676 will go into effect, significantly amending the California Franchise Relations Act and Franchise Investment Law.  The provisions of AB 676 will only apply to franchise agreements entered into, amended or renewed on or after January 1, 2023.  If the amendment was initiated by the franchisee and the amendment does not adversely impact the franchisee’s rights, that amendment is not subject to AB 676.

AB 676 prohibits franchise agreements from including a provision requiring the franchisee to disclaim their reliance on representations made by the franchisor or its agents and reliance on the franchise disclosure documents.  It adds section 31512.1 of the Corporations Code, which provides that these provisions are void as contrary to the state’s public policy.  This means that if a provision in a franchise agreement or disclosure document requires a franchisee to disclaim and deny that it relied on representations made by the franchisor or made in franchise disclosure documents, that provision will not be enforced by a court.

The law also provides new standards governing the transfer of an existing franchise to a new franchisee that will likely result in additional lawsuits in this area.  These standards are codified in section 31126 of the Corporations Code.  Specifically, a franchisor must notify a prospective franchisee of the approval or disapproval of the transfer application within 60 days after the prospective franchisee has submitted an application.  If the franchisor disapproves of the transfer, the franchisor must notify the prospective franchisee of the reason for disapproval. In any legal action in which the franchisor’s disapproval of a transfer is at issue, the “reasonableness of the franchisor’s decision shall be a question of fact requiring consideration of all relevant circumstances.” 

The law adds section 31212 to the Corporations Code, which provides that “no franchisor shall refuse to grant a franchise, or refuse to provide financial assistance, to a franchisee or prospective franchisee that has been granted or provided to other similarly situated franchisees or prospective franchisees based solely on any characteristic of the franchisee or prospective franchisee, or any characteristic of the composition of the neighborhood or geographic area where the franchise is located or the proposed franchise would be located…”  This does not prohibit a franchisor from granting a franchise to a prospective franchisee as part of a program to make franchises available to persons lacking the capital, training, business experience, or other qualifications ordinarily required of franchisees, or any other affirmative action program adopted by the franchisor.

AB 676 provides additional protections for franchisees during a state or federal emergency, codified in section 20044 of the Business and Professions Code.  Franchisors are prohibited from modifying a franchise agreement or requiring a general release from the franchisee in order for the franchisee to be eligible for any assistance related to a declared state or federal emergency. The assembly floor bill analysis indicates that lawmakers included these protections because franchisors extended relief to struggling franchisees, such as by deferring or waiving royalty payments, during the COVID-19 public health emergency, but asked them to waive certain rights in exchange for that relief. That practice will no longer be legal for franchisors going forward.

The law clarifies that the Franchise Investment Law applies to sales between franchisors and franchisees who reside outside of California if the franchise business is intended to or will be operated in the state of California.  This amends section 31013 of the Corporations Code.

California lawmakers intend AB 676 to correct the imbalance in bargaining power between the franchisor and the franchisee and provide more rights and remedies to both franchisees and potential franchisees. AB 676 expands the regulation of franchisors, who must pay close attention to the disclaimer provisions in franchise agreements and disclosure documents, and their existing process for approving transfers of franchises from one franchisee to another.


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