Legislator Fires Broadside At Franchisors

Posted on March 12, 2013 by Keith Paul Bishop

California has not one, but two franchise laws.  The Franchise Investment Law ("FIL"), Corporations Code Section 31000 et seq., is administered and enforced by the the Commissioner of Corporations.  The Franchise Relations Act ("FRA") is located in the Business & Professions Code (Section 20000 et seq.) and is not administered or enforced by the Commissioner.  Assembly Member Brian Dahle recently introduced a bill, AB 1141,  that would significantly amend both the FIL and the FRA.

There is no need to guess about this legislator's feelings about franchisors.  In proposed legislative findings, he levels the following accusations:

  • As a result of one-sided franchise agreements, California franchisees have been the victims of economic opportunism of franchisors.
  • Many franchisees have lost their substantial investments and sometimes more, including their homes, and others have had to file for bankruptcy.
  • California franchisees have also been victimized by territorial encroachment, franchisor lack of competence and negligence, unfair required purchases, and other misconduct.
Among the many changes to the FRA, this bill would define "good cause" for purposes of termination to consist of a "substantial and material breach" of any lawful requirement of the franchise agreement.  Termination must be made in accordance with terms and standards applicable to all franchisees, except with respect to any classification of, or discrimination between, franchisees that is reasonable, is based on proper and justifiable distinctions considering the purposes of the FRA, and is not arbitrary.  The bill would also requires that double the cure period from 30 to 60 days.  Assembly Member Dahle would also impose a duty competence on franchisors.
 
The bill would also make extensive changes to the FIL.  For example, the bill provides:

All no representation, no reliance, and choice of law, other than California law, clauses in the offer or sale of franchises, including in the franchise agreement, franchise disclosure document, or separate disclaimer, are void and of no effect.

The foregoing is just a sampling of the many changes that Assembly Member Dahle would like to see made to both the FRA and the FIL.  Like the margins of Diophantus' Arithmetica, this blog doesn't provide enough space to cover them all ("Hanc marginis exiguitas non caperet.").

To the extent that this bill would re-write existing franchise agreements, there is the small matter of the Article I, Section 10 of the United States Constitution which provides:

No State shall . . . pass any . . . law impairing the Obligation of Contracts . . . .

There is also the matter of Article I, Section 9 of the California Constitution which similarly provides:

A . . . law impairing the obligation of contracts may not be passed.

Lest I be accused of idle fantasizing, the Delaware Supreme Court in 1971 found that the application of the Delaware Franchise Security Law to a preexisting franchise relationship violated Article I, Section 10 of the United States Constitution.  Globe Liquor Co. v. Four Roses Distillers Co., 281 A.2d 19 (1971).