California’s AB 676 went into effect on January 1, 2023. It includes several important changes to the California Franchise Relations Act and the Franchise Investment Law establishing new requirements for franchisors and franchisees related to offers and sales of franchises. All franchise agreements entered into, amended, or renewed after January 1, 2023, must comply with the changes. Franchisors doing business in California should review their franchise agreements to identify potential issues going forward and revise them to address any such issues in connection with their upcoming annual renewal or earlier FDD amendment.
Waivers and Disclaimers
First, franchise agreements, FDDs, acknowledgments, questionnaires, or other writings may no longer disclaim or deny franchisors’ representations or franchisees’ reliance upon them. The prohibition on such disclaimers, which follows the new policy issued by NASAA last year, eliminates an important tool for franchisors to spot and control potential sales issues. Franchisors must not only remove prohibited disclaimers from their documents, they must also look for new ways to vet prospective franchisees about potential sales issues, and continue to emphasize the importance of best sales practices with their development teams.
Second, franchisors must follow new standards and procedures for franchise transfers. First, the prospective transferee must apply for the transfer with specified information and documentation. Next, the franchisor must notify the prospective transferee as soon as practicable in writing of any additional information or documentation necessary to complete the application. If a required form or document is not reasonably available to the prospective franchisee, the franchisor must provide it within 15 days of request. After receiving the completed application, the franchisor must then notify the prospective transferee of its decision within 60 days, including the reasons for any disapproval. These changes, which impose new duties on franchisors to prospective transferees, will likely result in more disputes over transfers. In the event of litigation, the changes provide that the reasonableness of a franchisor’s decision to disapprove a transfer is a question of fact requiring consideration of all relevant circumstances. The changes permit franchisors to continue to require compliance with their franchise agreements’ transfer conditions so long as they also comply with the established standards and procedures for transfers.
Third, the Franchise Investment Law no longer limits liability that may exist under any other statute or common law, meaning that it may not serve as the exclusive remedy for its violations. This change will only increase shotgun-style pleadings in California where its numerous causes of action already make it a notoriously expensive place to litigate.
Setoff Rights at Termination
Fourth, franchisors may no longer offset amounts owed to franchisees against any amounts owed by franchisees upon termination or nonrenewal. In order to offset, the franchisee must either agree to the amount or it must be established by a final adjudication. This effectively forces franchisors to use litigation to recover amounts owed by franchisees who refuse to pay instead of offsetting any amounts owed to them.
Fifth, the Franchise Investment Law now clarifies that it applies to sales between non-resident franchisors and franchisees so long as the franchise is operated in California.
Powers of the Commissioner of Financial Protection and Innovation
Sixth, the Commissioner of Financial Protection and Innovation is now empowered to summarily stop any registration based on failure to comply with the Franchise Investment Law, the Commissioner’s rules, or orders, fraud, misrepresentation, or deceit, or unreasonable risk to prospective franchisees.
Discrimination & Assistance
Last, franchisors are prohibited 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. Franchisors are also prohibited from modifying a franchise agreement or requiring a general release in exchange for any assistance related to a declared state or federal emergency.