Legislation Proposes Sweeping Changes to California Franchise Law

Legislation introduced to the California State Assembly on February 24, 2012 would provide strong protection to franchisees by significantly amending California’s existing Franchise Relations Act. Among other changes, the “Level Playing Field for Small Businesses Act” would:

1. provide franchisees with 60 days to settle overdue fees;
2. absent “substantial and material” breach by the franchisee, provide for the automatic renewal of franchise agreements under, at the franchisee’s election, either the original terms of the agreement or the franchise terms then being offered to new franchisees;
3. provide a 60-day cure period for breaching franchisees;
4. prohibit franchisors from seeking to enforce non-compete covenants following the termination or expiration of a franchise agreement;
5. impose significant penalties on franchisors for the wrongful termination of, or failure to renew, a franchise agreement;
6. prohibit franchisors from establishing new units in “unreasonable proximity” to existing franchisees;
7. expand the definitions of “fraud,” “deceit,” “misrepresentation,” and “omissions” beyond their common law definitions to provide that knowledge and reasonable reliance are no longer required for recovery;
8. require franchisors to deal with franchisee associations in good faith;
9. prohibit merger/integration clauses;
10. require that all franchise agreements be governed by California law; and
11. impose on franchisors a “duty of competence” to their franchisees.

While franchisor groups, including the International Franchise Association, have expressed immense concern over the proposed legislation, many franchisee associations have come out in support of the bill. The full text of Assembly Bill 2305 is available here. SGR’s Franchise and Distribution Group will track the progress of this legislation and will provide updates regarding its progress as they become available.

Vermont Franchise Relationship/Termination Legislation

Vermont legislators have proposed a new franchising relationship and termination law. Among other things, House Bill 694 would: 1) prohibit a franchisor from terminating a franchise prior to the expiration of its term except for “good cause”; 2) impose a duty of good faith on parties to a franchise agreement; 3) and prohibit restrictions on a franchisee’s right to associate with other franchisees. The legislation also includes provisions regulating the transfer and sale of franchises, encroachment, and sources of goods or services.

The bill’s definition of a “franchise” is similar to the definition found in other state statutes. Among other things, machinery dealerships, motor vehicle manufacturers, service station operators, oil companies, and alcoholic beverage companies are specifically excluded from the law’s definition of a “franchise.” The bill was referred to the Commerce and Economic Development Committee on January 31, 2012. We are aware of no action on the bill since that time. The text of House Bill 694 is available here.

House Bill Proposes 20 Percent Small-Business Tax Cut

Republicans in the U.S. House of Representatives have proposed a one-year, 20 percent tax cut for businesses that have fewer than 500 employees. The value of the proposed deduction would be limited to 50 percent of wages paid to employees who are not owners. Additionally, income from the sale of capital assets and income from dividends, interest, royalties, and annuities would not qualify. Such limitations would prevent many investment funds from qualifying for the tax break. Unlike previous versions of the proposal, however, the bill would not prevent any specific industry from qualifying for the deduction.

This bill is being touted by Republican leaders as short-term relief for business owners while Congress continues to pursue long-term tax reform and deficit reduction. Several business groups, including the International Franchise Association, have expressed support for the measure.