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California's Governor Newsom Signs Amendments to California Franchise Laws
Practical Law Legal Update w-037-2039 (Approx. 6 pages)
California's Governor Newsom Signs Amendments to California Franchise Laws
by Practical Law Commercial Transactions
| Published on 11 Oct 2022 • California |
On September 29, 2022, California Governor Gavin Newsom signed amendments to the California Franchise Investment Law (CFIL) and the California Franchise Relations Act (CFRA) that affect the relationship between franchisors and franchisees both pre- and post-investment.
On September 29, 2022, California Governor Gavin Newsom signed Assembly Bill No. 676, Chapter 728, effective January 1, 2023, which amends:
- The California Franchise Investment Law (CFIL) (Cal. Corp. Code §§ 31000 to 31516), which regulates franchise relationships pre-investment (for example, the offer and sale of a franchise).
- The California Franchise Relations Act (CFRA) (Cal. Bus. & Prof. Code §§ 20000 to 20043), which regulates franchise relationships post-investment (for example, the right to terminate or renew a franchise).
The legislation makes significant changes to the CFIL and the CFRA that impact the franchisor-franchisee relationship and franchise contracts in California, including:
- Waivers. The new law makes any provision of a franchise agreement requiring the franchisee to waive the provisions of the CFRA contrary to public policy, and, as a result, void and unenforceable (Cal. Bus. & Prof. Code § 20015(b)).
- Disclaimers. The new law makes disclaiming or denying any of the following in a provision of a franchise agreement, franchise disclosure document, acknowledgment, questionnaire, or other writing, including any exhibits, contrary to public policy and therefore void and unenforceable:
- representations made by the franchisor or its personnel or agents to a prospective franchisee;
- reliance by a franchisee on any representations made by the franchisor or its personnel or agents;
- reliance by a franchisee on the franchise disclosure document, including any exhibit; and
- violations of any provision of the CFIL.
(Cal. Corp. Code § 31512.1.) - Setoff rights at termination. Franchisors can now only setoff any amounts owed to the franchisee against amounts the franchisee owed franchisor if the franchisee agrees to the amount or the franchisor receives a final adjudication (Cal. Bus. & Prof. Code § 20022(h)). Contractual terms previously controlled setoff rights.
- Franchise transfers. While franchisors still can exercise a right of first refusal or impose additional requirements on franchisee-to-franchisee sales, franchisors will have additional requirements dealing with franchisees transferring franchises:
- after receiving a transfer application, franchisors must notify prospective franchisees as soon as practicable in writing of any additional documents or requirements needed;
- if a franchisee requests required forms or information on approval standards, the franchisor must provide within 15 calendar days of receiving the request; and
- after receiving all the required information, the franchisor must notify the prospective franchisee of their approval or disapproval within 60 days.
(Cal. Corp. Code § 31126.) - Civil liability. The amendments expand civil liability under the CFIL by eliminating the prior limitation of liability only arising from violation of the law explicitly stated in the CFIL. The language now provides 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." (Cal. Corp. Code § 31306.)
- Refusing to grant assistance to franchisees. The new law provides further protections to franchisees by prohibiting franchisors from refusing to grant or provide financial assistance to a franchisee or prospective franchisee if the basis for the refusal constitutes a violation of California's Unruh Civil Rights Act (Cal. Civ. Code §§ 51 to 53.7) (based on age, disability, race, religion, or sexual orientation) (Cal. Corp. Code § 31212).
- Making assistance related to state or federal emergencies a condition to receive assistance. Under the new law, franchisors cannot modify a franchise agreement or require a general release in exchange for any assistance related to state or federal emergencies (Cal. Bus. & Prof. Code § 20044).
- Powers of the Commissioner of Financial Protection and Innovation. The new law expands the grounds allowing the commissioner to issue a stop order denying the effectiveness of or suspending or revoking effectiveness of any registration where:
- the franchisor's method of business includes or would include activities that are or would be illegal where performed; and
- the franchise agreement contains a provision that is contrary to law.
The new law limits the application of the above changes to:
- A franchise agreement entered into, amended, except as specified, or renewed on or after January 1, 2023.
- Franchises of an indefinite duration that may be terminated without cause.
For more information about California's franchise laws see Practice Notes:
For a 50-state survey of state franchise laws regarding pre-sale registration, filing, and disclosure, including charts that categorize each state as either a non-registration state (a state that defers to the Federal Trade Commission's FTC Rule), a registration state, or a filing state, see Practice Note, State Pre-Sale Franchise Registration and Disclosure Laws Charts: Overview.