The Franchise Memorandum

Last week, the Governor of California signed AB 676, which includes several significant amendments to the California Franchise Relations Act and Franchise Investment Law.

First, AB 676 includes a prohibition on any provision of a franchise agreement, FDD, acknowledgment, questionnaire, or other writing, disclaiming or denying (a) representations made by the franchisor or its personnel or agents to a prospective franchisee, (b) reliance by a franchisee on any representations made by the franchisor or its personnel or agents, and (c) reliance by a franchisee on the FDD and any exhibits thereto. This prohibition is made in connection with the new NASAA SOP on the Use of Franchise Questionnaires and Acknowledgements. See here for our analysis of the NASAA SOP.
 
Second, AB 676 provides new standards, processes, and timelines governing the transfer of an existing franchise to a new franchisee. Under the new law, a franchisor must notify the prospective transferee of its decision to approve or disapprove of a transfer within sixty days of receiving the required application and documentation. If the transfer is disapproved, the franchisor must notify the prospective transferee of the reasons for disapproval. And in any legal action involving a franchisor’s disapproval of a transfer, the reasonableness of the decision is a “question of fact requiring consideration of all relevant circumstances.” This is a significant change as a franchisor now has obligations to the prospective buyer of an existing franchise in California, not just the existing franchisee.

Third, AB 676 clarifies the application of the Franchise Investment Law to sales between franchisors and franchisees who reside outside California if the location of the franchised business will be in California.

Fourth, AB 676 includes new restrictions on when a franchisor may offset amounts owed to a franchisee against amounts owed by a franchisee upon the termination or nonrenewal of a franchise. Pre-amendment, a franchisor could offset any amounts owed to the franchisee against amounts the franchisee owed. Now, a franchisor can only offset amounts owed if (1) the franchisee agrees to the amount or (2) the franchisor has received a final adjudication establishing the amount owed by the franchisee.

Fifth, AB 676 prohibits franchisors from refusing to grant a franchise or provide financial assistance to a prospective franchisee based on age, ancestry, color, disability, national origin, race, religion, sex, or sexual orientation. AB 676 also prohibits franchisors from modifying a franchise agreement or requiring a general release in exchange for any assistance related to a declared state or federal emergency.
 
The amendments apply to franchise agreements entered into, amended, or renewed on or after January 1, 2023. A redlined version of the law showing the amendments can be found at the link here.

Notably, the same day Governor Newsom signed AB 676, he vetoed SB 1247, a bill which would have required franchisors to disclose to California franchisees rebates the franchisor received as a result of the franchisee’s purchases of goods, services, and other products, and the specific amounts of such rebates by vendor, on an ongoing basis.