The Franchise Investment Law generally regulates the offer and sale of franchises and provides for oversight of these transactions by the Commissioner of Business Oversight. The law prohibits, among other things, the offer or sale of a franchise that is not registered with the commissioner, unless exempted from this registration requirement. The law exempts from this registration requirement the offer and sale of a franchise on terms that are different from the terms of a registered offer, if certain conditions are met. Those conditions include, among others, that a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months, as specified, and that the negotiated terms, on the whole, confer additional benefits on the franchisee.

This bill would modify the conditions for an exemption to the registration requirement by removing these 2 conditions and instead imposing the condition that the cover page, a state cover page, or a state addendum of a disclosure document include a specific statement regarding the ability to agree to the franchise agreement and to negotiate changes to the franchise agreement and other agreements. The bill would also make technical and conforming changes to this modification, including, among others, the removal of authority for the commissioner to prescribe by rule or order the format and content for a franchisor to provide information regarding terms the franchisor negotiated during the previous 12 months.

The Franchise Investment Law generally regulates the offer and sale of franchises and provides for oversight of these transactions by the Commissioner of Business Oversight. The law prohibits, among other things, the offer or sale of a franchise that is not registered with the commissioner, unless exempted from this registration requirement. The law exempts from this registration requirement the offer and sale of a franchise on terms that are different from the terms of a registered offer, if certain conditions are met. Those conditions include, among others, that a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months, as specified, and that the negotiated terms, on the whole, confer additional benefits on the franchisee.

This bill would modify the conditions for an exemption to the registration requirement by removing these 2 conditions and instead imposing the condition that the cover page, a state cover page, or a state addendum of a disclosure document include a specific statement regarding the ability to agree to the franchise agreement and to negotiate changes to the franchise agreement and other agreements. The bill would also make technical and conforming changes to this modification, including, among others, the removal of authority for the commissioner to prescribe by rule or order the format and content for a franchisor to provide information regarding terms the franchisor negotiated during the previous 12 months.

The Franchise Investment Law generally regulates the offer and sale of franchises and provides for oversight of these transactions by the Commissioner of Business Oversight. The law prohibits, among other things, the offer or sale of a franchise that is not registered with the commissioner, unless exempted from this registration requirement. The law exempts from this registration requirement the offer and sale of a franchise on terms that are different from the terms of a registered offer, if certain conditions are met. Those conditions include, among others, that a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months, as specified, and that the negotiated terms, on the whole, confer additional benefits on the franchisee.

This bill would modify the conditions for an exemption to the registration requirement by removing these 2 conditions and instead imposing the condition that a disclosure document states that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the disclosure document. include a specific statement regarding the ability to agree to the franchise agreement and to negotiate changes to the franchise agreement and other agreements. The bill would also make technical and conforming changes to this modification, including, among others, the removal of authority for the commissioner to prescribe by rule or order the format and content for a franchisor to provide information regarding terms the franchisor negotiated during the previous 12 months.

The Franchise Investment Law generally regulates the offer and sale of franchises and provides for oversight of these transactions by the Commissioner of Business Oversight. The law prohibits, among other things, the offer or sale of a franchise that is not registered with the commissioner, unless exempted from this registration requirement. The law exempts from this registration requirement the offer and sale of a franchise on terms that are different from the terms of a registered offer, if certain conditions are met. Those conditions include, among others, that a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months, as specified, and that the negotiated terms, on the whole, confer additional benefits on the franchisee.

This bill would modify the conditions for an exemption to the registration requirement by removing these 2 conditions and instead imposing the condition that a disclosure document states that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the disclosure document. The bill would also make technical and conforming changes to this modification, including, among others, the removal of authority for the commissioner to prescribe by rule or order the format and content for a franchisor to provide information regarding terms the franchisor negotiated during the previous 12 months.

The Franchise Investment Law generally regulates the offer and sale of franchises and provides for oversight of these transactions by the Commissioner of Business Oversight. The law prohibits, among other things, the offer or sale of a franchise that is not registered with the commissioner, unless exempted from this registration requirement. The law exempts from this registration requirement the offer and sale of a franchise on terms that are different from the terms of a registered offer, if certain conditions are met. Those conditions include, among others, that a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months, as specified, and that the negotiated terms, on the whole, confer additional benefits on the franchisee.

This bill would modify the conditions for an exemption to the registration requirement by removing these 2 conditions and instead imposing the condition that a disclosure document states that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement contained in the disclosure document. The bill would also make technical and conforming changes to this modification, including, among others, the removal of authority for the commissioner to prescribe by rule or order the format and content for a franchisor to provide information regarding terms the franchisor negotiated during the previous 12 months.

GOVERNOR'S VETO

GV Bill Id:AB 2637

Author:(Wilk)

As Enrolled Ver:September 12, 2016

2/3 vote

Original Committee Reference: B. & F.

SUMMARY: Makes changes to the California Franchise Investment Law (CFIL). Specifically, this bill:

1. Eliminates some of the conditions that must be met in order for a franchisor to claim the exemption from the franchisor having to amend its franchise registration in connection with a negotiated sale:
   1. Deletes the requirement that the franchisee must receive all of the following in a separate written appendix to the franchise disclosure document (FDD):
      1. That a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months;
      2. A statement indicating that copies of the negotiated terms are available upon written request; and,
      3. The name, telephone number, and address of the representative of the franchisor to whom requests for a copy of the negotiated terms may be obtained.
   2. Deletes a requirement that provides the negotiated terms, on the whole, confer additional benefits on the franchisee.
2. Deletes a requirement that the franchisor provide a copy of the negotiated terms to the prospective franchisee within five business days following the request of the franchisee.
3. Adds a requirement that provides the cover page, a state cover page, or a state addendum of the disclosure document to state "You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes."

The Senate amendments deleted the requirement that the disclosure document states that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the disclosure document and instead added a requirement that must be stated in the disclosure document, "You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes."

EXISTING LAW:

1. Prohibits the sale of a franchise in California unless prior to the sale the franchisor has, among other things, prepared a FDD and registered with the Commissioner of the Department of Business Oversight (DBO) (Commissioner) to sell franchises in California. (Corporations Code, Sections 31000 et seq.)
2. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered with the Commissioner, or qualifies under one of several specified exemptions. (Corporations Code, Section 31110)
3. Requires an application for registration to be accompanied by a proposed FDD, which shall contain the material information set forth in the application for registration, as specified by rule of the commissioner, and such additional disclosures as the Commissioner may require. (Corporations Code, Section 31114)
4. Makes it unlawful to sell any franchise in this state that is subject to registration without first providing to the prospective franchisee, at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt of any consideration, whichever occurs first, a copy of the franchise disclosure document, together with a copy of all proposed agreements relating to the sale of the franchise. (Corporations Code, Section 31119 (a))
5. Provides an exemption when the prospective franchisee receives the offering, he or she also receives copies of all Notices of Negotiated Sale of Franchise filed with the Commissioner within the last 12 months, if any. (California Code of Regulations section 310.100.2)
6. Exempts certain negotiated sales of franchises. Provides the statutory exemption eliminates the requirement that a franchisor must amend its franchise registration in connection with a negotiated sale if specified conditions are met. (Corporations Code, Section 31109.1)

FISCAL EFFECT: According to the Assembly Appropriations Committee, negligible state costs.

COMMENTS: Under AB 2637, franchisors would notify the prospective franchisees in California that the negotiation of franchise agreements is permitted by law and that California law does not prohibit or compel negotiations. This notice should ensure that prospective franchisees will not be misled into believing that California law disallows negotiations.

In California, franchisors have two different statutory frameworks they can work under in regards to negotiated sales: one being the California Code of Regulations Section 310.100.2 established in 1989 and the second, Corporations Code, Section 31109.1 established in 2004.

Under the California Code of Regulations, conditions for exemption include:

1. The initial offer must be registered;
2. Within 15 business days after consummating a negotiated sale, the franchisor must file a "Notice of Negotiated Sale" with DBO. The Notice of Negotiated Sale lists, among other things, a description of the changes that were made by reference to the relevant section of the franchisor's registered disclosure document;
3. When a prospective franchisee receives the franchisor's disclosure document, he or she must also receive copies of all Notices of Negotiated Sale filed by the franchisor in the last 12 months; and,
4. The franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirement of the regulation, if this exemption is claimed.

Under the Corporations Code, the exemption eliminates the requirement that a franchisor must amend its franchise registration in connection with a negotiated sale if the following conditions are met:

1. The initial offer (the franchisor's disclosure document) is registered;
2. Within five business days after a request by the prospective franchisee, franchisor must provide to the franchisee:
   1. A summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the previous 12 months; and,
   2. A statement indicating that copies of the negotiated terms themselves are available upon written request, the name, phone number, and address of a franchisor representative from whom the franchisee may obtain the negotiated terms.
3. The negotiated terms, on the whole, must benefit the prospective franchisee; and,
4. The franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirements of the statute, if this exemption is claimed.

This bill eliminates conditions that must be met in order to claim the exemption which includes 2) and 3) above. This bill adds a new condition which will require that the franchisor's disclosure document discloses that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement contained in the disclosure document.

Background:

Franchises subject to the CFIL may only be offered or sold after compliance with various registration and disclosure obligations. In general, most franchises are sold pursuant to the terms of the franchise agreement drafted by the franchisor, which address the needs of the franchisor but may not contemplate requirements or needs of franchisees in special circumstances. In some cases, the prospective franchisees or their counsel may request changes to the franchise agreement or other terms of sale from those registered with the DBO. Depending on the circumstances, the franchisor may be willing to make some or all of the requested changes, and a negotiation process may ensue, which sometimes involves a degree of "give and take" by both parties.

The CFIL states that only a franchise agreement that is described in a disclosure document that has been registered with the DBO can be offered and sold to a resident of California or to a franchisee whose franchise will be located in California. This can lead to issues if a franchise agreement is changed as a result of negotiations between the parties. Under existing law, the franchisor would be required to amend its registration before completing the sale. If the franchisor did not want to offer the same amended franchise agreement to all future franchisees in California, the franchisor then needs to re-amend its registration to return to the original document.

Both the regulation and the amendment of the CFIL were intended to facilitate the ability of franchisors to comply with requests for modification of franchise agreements, by eliminating the need to re-register before selling a negotiated franchise agreement.

According to the sponsor, the Business Law Section, Franchise Law Committee of the California State Bar, "both the statute and the regulation have created significant disincentives for franchisors to negotiate the terms of sales with franchises. While virtually all franchisors are willing to negotiate with some prospective franchisees under some circumstances, the statute and the regulation actually serve to decrease the numbers of situations in which most franchisors are willing to negotiate with franchisees in California. At this time, California is the only state that currently imposes restrictions on the ability of franchisees and franchisors to negotiate or that requires the disclosure of negotiated changes."

The sponsors go on to state, "If a franchisor negotiates with a franchisee in California, then the results of that negotiation become publicly available, including the franchisees who are not even located in California. Many franchisors are concerned that this disclosure will cause the negotiated change to become a "new normal" with future franchisees expecting to get not only every change that was negotiated in the past but additional changes as well. To avoid this consequence, many franchisors refuse to negotiate any changes in California- even under circumstances in which they would be willing to negotiate with a similarly-situated franchisee in another state."

GOVERNOR'S VETO MESSAGE:

I am returning Assembly Bill 2637 without my signature.

This bill allows franchisors to negotiate changes to a franchise agreement without disclosing the terms to the Department of Business Oversight (Department) or to other prospective franchisees.

While it is important to promote bringing new business into California, doing so at the expense of transparency could be detrimental to potential franchisees, as this bill proposes to do. The current process, which allows the Department to review contract changes, ensures that franchisees are not placed at a disadvantage in their final agreement.

Analysis Prepared by: Kathleen OMalley / B. & F. / (916) 319-3081 FN: 0005070

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2637

Author:(Wilk)

As Amended Ver:June 16, 2016

Majority vote

Original Committee Reference: B. & F.

SUMMARY: Makes changes to the California Franchise Investment Law (CFIL). Specifically, this bill:

1. Eliminates some of the conditions that must be met in order for a franchisor to claim the exemption from the franchisor having to amend its franchise registration in connection with a negotiated sale:
   1. Deletes the requirement that the franchisee must receive all of the following in a separate written appendix to the franchise disclosure document (FDD):
      1. That a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months;
      2. A statement indicating that copies of the negotiated terms are available upon written request; and,
      3. The name, telephone number, and address of the representative of the franchisor to whom requests for a copy of the negotiated terms may be obtained.
   2. Deletes a requirement that provides the negotiated terms, on the whole, confer additional benefits on the franchisee.
2. Deletes a requirement that the franchisor provide a copy of the negotiated terms to the prospective franchisee within five business days following the request of the franchisee.
3. Adds a requirement that provides the cover page, a state cover page, or a state addendum of the disclosure document to state "You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes."

The Senate amendments delete the requirement that the disclosure document states that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the disclosure document and instead added a requirement that must be stated in the disclosure document, "You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes."

EXISTING LAW:

1. Prohibits the sale of a franchise in California unless prior to the sale the franchisor has, among other things, prepared a FDD and registered with the Commissioner of the Department of Business Oversight (DBO) (Commissioner) to sell franchises in California. [Corporations Code, Sections 31000 et seq.]
2. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered with the Commissioner, or qualifies under one of several specified exemptions. [Corporations Code, Section 31110]
3. Requires an application for registration to be accompanied by a proposed FDD, which shall contain the material information set forth in the application for registration, as specified by rule of the commissioner, and such additional disclosures as the Commissioner may require. [Corporations Code, Section 31114]
4. Makes it unlawful to sell any franchise in this state that is subject to registration without first providing to the prospective franchisee, at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt of any consideration, whichever occurs first, a copy of the franchise disclosure document, together with a copy of all proposed agreements relating to the sale of the franchise. [Corporations Code, Section 31119 (a)]
5. Provides an exemption when the prospective franchisee receives the offering, he or she also receives copies of all Notices of Negotiated Sale of Franchise filed with the Commissioner within the last 12 months, if any. [California Code of Regulations section 310.100.2]
6. Exempts certain negotiated sales of franchises. Provides the statutory exemption eliminates the requirement that a franchisor must amend its franchise registration in connection with a negotiated sale if specified conditions are met. [Corporations Code, Section 31109.1]

FISCAL EFFECT: According to the Assembly Appropriations Committee, negligible state costs.

COMMENTS: Under this bill, franchisors would notify the prospective franchisees in California that the negotiation of franchise agreements is permitted by law and that California law does not prohibit or compel negotiations. This notice should ensure that prospective franchisees will not be misled into believing that California law disallows negotiations.

In California, franchisors have two different statutory frameworks they can work under in regards to negotiated sales: one being the California Code of Regulations Section 310.100.2 established in 1989 and the second, Corporations Code, Section 31109.1 established in 2004.

Under the California Code of Regulations, conditions for exemption include:

1. The initial offer must be registered;
2. Within 15 business days after consummating a negotiated sale, the franchisor must file a "Notice of Negotiated Sale" with DBO. The Notice of Negotiated Sale lists, among other things, a description of the changes that were made by reference to the relevant section of the franchisor's registered disclosure document;
3. When a prospective franchisee receives the franchisor's disclosure document, he or she must also receive copies of all Notices of Negotiated Sale filed by the franchisor in the last 12 months; and,
4. The franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirement of the regulation, if this exemption is claimed.

Under the Corporations Code, the exemption eliminates the requirement that a franchisor must amend its franchise registration in connection with a negotiated sale if the following conditions are met:

1. The initial offer (the franchisor's disclosure document) is registered;
2. Within five business days after a request by the prospective franchisee, franchisor must provide to the franchisee:
   1. A summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the previous 12 months; and,
   2. A statement indicating that copies of the negotiated terms themselves are available upon written request, the name, phone number, and address of a franchisor representative from whom the franchisee may obtain the negotiated terms.
3. The negotiated terms, on the whole, must benefit the prospective franchisee; and,
4. The franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirements of the statute, if this exemption is claimed.

This bill eliminates conditions that must be met in order to claim the exemption which includes 2) and 3) above. This bill adds a new condition which will require that the franchisor's disclosure document discloses that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement contained in the disclosure document.

Background:

Franchises subject to the CFIL may only be offered or sold after compliance with various registration and disclosure obligations. In general, most franchises are sold pursuant to the terms of the franchise agreement drafted by the franchisor, which address the needs of the franchisor but may not contemplate requirements or needs of franchisees in special circumstances. In some cases, the prospective franchisees or their counsel may request changes to the franchise agreement or other terms of sale from those registered with the DBO. Depending on the circumstances, the franchisor may be willing to make some or all of the requested changes, and a negotiation process may ensue, which sometimes involves a degree of "give and take" by both parties.

The CFIL states that only a franchise agreement that is described in a disclosure document that has been registered with the DBO can be offered and sold to a resident of California or to a franchisee whose franchise will be located in California. This can lead to issues if a franchise agreement is changed as a result of negotiations between the parties. Under existing law, the franchisor would be required to amend its registration before completing the sale. If the franchisor did not want to offer the same amended franchise agreement to all future franchisees in California, the franchisor then needs to re-amend its registration to return to the original document.

Both the regulation and the amendment of the CFIL were intended to facilitate the ability of franchisors to comply with requests for modification of franchise agreements, by eliminating the need to re-register before selling a negotiated franchise agreement.

According to the sponsor, the Business Law Section, Franchise Law Committee of the California State Bar, "both the statute and the regulation have created significant disincentives for franchisors to negotiate the terms of sales with franchises. While virtually all franchisors are willing to negotiate with some prospective franchisees under some circumstances, the statute and the regulation actually serve to decrease the numbers of situations in which most franchisors are willing to negotiate with franchisees in California. At this time, California is the only state that currently imposes restrictions on the ability of franchisees and franchisors to negotiate or that requires the disclosure of negotiated changes."

The sponsors go on to state, "If a franchisor negotiates with a franchisee in California, then the results of that negotiation become publicly available, including the franchisees who are not even located in California. Many franchisors are concerned that this disclosure will cause the negotiated change to become a "new normal" with future franchisees expecting to get not only every change that was negotiated in the past but additional changes as well. To avoid this consequence, many franchisors refuse to negotiate any changes in California- even under circumstances in which they would be willing to negotiate with a similarly-situated franchisee in another state."

Analysis Prepared by: Kathleen OMalley / B. & F. / (916) 319-3081 FN: 0004023

 THIRD READING  

Bill No: AB 2637

Author:

:

Vote:

SENATE BANKING & F.I. COMMITTEE: 7-0, 6/15/16

AYES: Glazer, Vidak, Galgiani, Hall, Hueso, Lara, Morrell

SENATE JUDICIARY COMMITTEE: 7-0, 6/28/16

AYES: Jackson, Moorlach, Anderson, Hertzberg, Leno, Monning, Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 7-0, 8/11/16

AYES: Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen

ASSEMBLY FLOOR: 79-0, 4/21/16 (Consent) - See last page for vote

SUBJECT:

SOURCE: Franchise Law Committee of the Business Law Section of the

California State Bar

DIGEST: This bill exempts a franchisor from the requirement to re-register its franchise disclosure document with the Department of Business Oversight (DBO), each time the franchisor negotiates changes to a franchise agreement described in that disclosure document with a franchisee, as specified.

ANALYSIS: Existing law exempts a franchisor from the requirement to re-register its franchise disclosure document with DBO, every time it negotiates an amendment to a franchise agreement described in that disclosure document, as long as all of the following requirements are met (Corporations Code Section 31109.1):

1. The initial franchise offer was registered.
   
2. Each prospective franchisee is provided with all of the following in a separate written appendix to the franchise disclosure document:
   
   1. A summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the 12-month period ending in the calendar month immediately preceding the month in which the negotiated offer or sale was made.
      
   2. A statement indicating that copies of the negotiated terms are available upon written request.
      
   3. The name, telephone number, and address of the franchisor to whom requests for a copy of the negotiated terms may be obtained.
      
3. The franchisor certifies or declares in an appendix to its application for renewal that it has complied with the requirements of the exemption.
   
4. The negotiated terms of the amended franchise agreement, on the whole, confer additional benefits on the franchisee.
   
5. The franchisor provides a copy of the negotiated terms to a prospective franchisee within five business days of request by the prospective franchisee.
   
6. The franchisor maintains copies of all material negotiated terms for a period of five years from the effective date of the first agreement containing the relevant negotiated term and makes these copies available to the Commissioner of Business Oversight (commissioner) upon request. In the context of this requirement, “material” means that a reasonable franchisee would view the terms as important in negotiating the franchise.

This bill exempts franchisors from the requirement to re-register a franchise disclosure document with DBO, every time they negotiate an amendment to a franchise agreement described in that disclosure document, if all of the following conditions are met:

1. The initial franchise offer was registered.
   
2. The cover page, a state cover page, or a state addendum of the disclosure document states, “You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes.”
   
3. The franchisor certifies or declares in an appendix to its application for renewal that it has complied with the requirements of the exemption.
   
4. The franchisor maintains copies of all material negotiated terms for a period of five years from the effective date of the agreement containing the relevant negotiated term and makes these copies available to the commissioner upon request.

Background

The Franchise Law Committee of the Business Law Section of the California State Bar is sponsoring this bill to mitigate the unintended consequences of a law change the Business Law Section sponsored in 2004, which has hampered the ability of franchisees and franchisors to negotiate franchise agreements.

In 2004, the Business Law Section of the California State Bar sponsored a change to the Franchise Investment Law, which was intended to help franchisees by promoting transparency (AB 2921, Cox, Chapter 458, Statutes of 2004). One section added to the codes in 2004 (Corporations Code Section 31109.1), allows a franchisor to avoid having to re-register a new franchise disclosure document with DBO every time it negotiates a change with a franchisee to a franchise agreement described in that disclosure document, as long as that franchisor discloses the negotiated terms to future prospective franchisees. At the time this change was promoted, its sponsors believed that the transparency the change would require would promote fairness among franchisees. They believed that, if a franchisor agreed to an amendment that benefitted one franchisee, future prospective franchisees should be made aware of that amendment.

Unfortunately, rather than helping franchisees, Section 31109.1 has had the opposite effect, by discouraging franchisors from negotiating with franchisees. Many franchisors are concerned that disclosing previously negotiated terms to prospective franchisees will cause the negotiated changes to become the starting point for all future negotiations. Franchisors observe that the circumstances of each franchisee are different, and that terms appropriate to one franchisor-franchisee agreement may be inappropriate to another agreement negotiated between that franchisor with a differently situated franchisee. Yet, logically, future franchisees expect to receive at least all the franchise benefits negotiated with prior franchisees, and possibly additional benefits.

Because of the requirement that they disclose previously negotiated terms if they wish to take advantage of the exemption from re-registration, many franchisors are refusing to negotiate any changes to franchise agreements in California, even under circumstances in which they would have been willing to negotiate with a similarly situated franchisee in another state. According to this bill’s sponsor, Section 31109.1 is the only provision of its kind in the United States.

Comments

The provisions of this bill were developed by the Franchise Law Committee, which counts among its membership attorneys who primarily represent franchisees and attorneys who primarily represent franchisors. Reportedly, attorneys representing both parties have witnessed the chilling effects of Section 31109.1 on franchise negotiations in California. They hope that the language of this bill, which informs franchisees that negotiations are permitted, but does not require franchisors to disclose the terms of prior negotiations, will reverse the chilling effects of Section 31109.1 and encourage more negotiations.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, this bill will have unknown, but potentially significant costs to DBO to investigate any reported violations of the bill’s provisions. This bill also has the potential to result in minor cost savings to DBO through a reduction in DBO’s administrative workload associated with processing revised franchise disclosure documents.

SUPPORT: (Verified 8/11/16)

Franchise Law Committee of the Business Law Section of the California State Bar (source)

Coalition of Franchisee Associations

International Franchise Association

Small Business California

OPPOSITION: (Verified 8/11/16)

None received

ARGUMENTS IN SUPPORT: The International Franchise Association supports the bill, because it “will modify the conditions for an exemption and make it easier for franchisors and potential franchisees to negotiate with each other...AB 2637 will encourage franchise growth in California and lead to more entrepreneurs opening businesses and providing more jobs and revenue to California.”

The Coalition of Franchisee Associations supports the intent of the bill “to make it easier for franchisees to negotiate their franchise agreement in Calkifornia.”

ASSEMBLY FLOOR: 79-0, 4/21/16

AYES: Achadjian, Alejo, Travis Allen, Arambula, Atkins, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Quirk, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Rendon

NO VOTE RECORDED: Ridley-Thomas

Prepared by:

8/15/16 20:22:27

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

AB 2637 (Wilk) - Franchise investments: offer and sale of registered franchises: registration exemption

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2637 would exempt a franchisor from the requirement to re-register its franchise disclosure document with the Department of Business Oversight (DBO) each time it negotiates changes to the franchise agreement described in that disclosure document with a franchisee, as specified.

Fiscal Impact:

• Unknown, but potentially significant costs to DBO to investigate any reported violations. (State Corporations Fund)
• Potential minor cost savings to DBO due to a reduction in administrative workload for filing exempted franchise disclosure documents. (State Corporations Fund)

Background:

The California Franchise Investment Law (CFIL) regulates franchise investment opportunities by subjecting various aspects of the franchise relationship to filing, review, and oversight by DBO.

In 2004, the Business Law Section of the California State Bar sponsored AB 2921 (Cox, Chapter 458, Statutes of 2004) to makes changes to the CFIL to help franchisees by promoting transparency. The Franchise Law Committee of the Business Law Section of the California State Bar is sponsoring this bill to mitigate unintended consequences of Corporations Code Section 31109.1, created by AB 2921, which hindered the ability of franchisees and franchisors to negotiate franchise agreements.

The intended purpose of Section 31109.1 was to create full disclosure to promote fairness among franchises. However, according to the sponsors, Section 31109.1 actually served to decrease the number of situations in which franchisors were willing to negotiate with franchisees.

Proposed Law:

This bill would remove the following conditions that must be met in order for a franchisor to claim an exemption from having to amend its franchise registration in connection with a negotiated sale:

• Within five days, a prospective franchisee must receive a summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the prior 12 months.
• A prospective franchisee must receive a statement indicating that copies of the negotiated terms are available upon written request.
• A prospective franchisee must receive, upon request, the name, telephone number, and address of the representative of the franchisor.
• The negotiated terms, on the whole, confer additional benefits on the franchisee.

This bill would instead add to the requirements that a franchisor must meet that the cover page, a state cover page, or a state addendum of the disclosure document specifically states, “You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes.”

Related Legislation:

AB 2921 (Cox, Chapter 458, Statutes of 2004) revises the conditions that are required to be satisfied for the exemption from registration for a franchise agreement with an existing franchisee of a franchisor.

Staff Comments:

The provisions of this bill have the potential to create a new category of fraud and abuse that would be investigated and enforced by DBO. DBO would be able to enforce any violations under Section 31400 of the Corporations Code which states that “whenever it appears to the commissioner that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this law or any rule or order hereunder, the commissioner may in the commissioner’s discretion bring an action, or the commissioner may request the Attorney General to bring an action in the name of the people of the State of California, in the superior court to enjoin the acts or practices or to enforce compliance with this law or any rule or order hereunder. Upon a proper showing a permanent or preliminary injunction, restraining order or writ of mandate shall be granted and a receiver or conservator may be appointed for the defendant or the defendant’s assets.” As such, DBO would be able to investigate violations to the extent that they are aware of violations. DBO currently has an Enforcement Division that takes enforcement actions and orders issued by the commissioner.

-- END --

SENATE JUDICIARY COMMITTEE

Senator Hannah-Beth Jackson, Chair

2015-2016 Regular Session

Bill No: AB 2637 (Author:Wilk)

Version: June 16, 2016

Hearing Date: June 28, 2016

Fiscal: Yes

Urgency: No

Consultant: RD

SUBJECT

Franchise investments: offer and sale of registered franchises: registration exemption

DESCRIPTION

This bill would revise an exemption to the California Franchise Investment Law’s general requirement that a franchisor re-register its franchise disclosure document with the Department of Business Oversight each time it negotiates changes to the franchise agreement described in that disclosure document with a franchisee, as specified.

BACKGROUND

The California Franchise Investment Law (CFIL) regulates franchise investment opportunities by subjecting franchise offers and various other aspects of the franchise relationship to filing, review, and oversight by the Department of Business Oversight (DBO). The CFIL seeks to provide prospective franchisees with the information necessary to make an intelligent decision regarding franchise offers, and to prohibit the sale of franchises where they would lead to fraud or a likelihood that a franchisor's promises would not be fulfilled.

In 2004, AB 2921 (Cox, Ch. 458, Stats. 2004) was brought by the Franchise Law Committee of the State Bar’s Business Law Section, the same sponsor of this bill, to create additional exemptions in situations where the sponsor argued regulatory intervention is unnecessary and/or not cost efficient. In doing so, AB 2921 enacted Section 31109.1 of the Corporations Code, the subject of this bill, to exempt re-registration of agreements after subsequent negotiations with franchisees which result in material changes to the final agreement.

This bill, sponsored by the Franchise Law Committee of the State Bar’s Business Law Section, now seeks to remove many of the conditions that must be met to be exempt from re-registration under Section 31109.1.

This bill was heard in the Senate Banking & Financial Institutions Committee on June 15, 2016, and passed out on a vote of 7-0.

CHANGES TO EXISTING LAW

Existing law, the California Franchise Investment Law (CFIL), generally requires any offers and sales of franchises in California to be registered with the Department of Business Oversight (DBO), unless it otherwise qualifies for an exemption, as specified. (Corp. Code Sec. 31000 et seq.) Specifically, existing law provides that it shall be unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered under this part or exempted under specified laws. (Corp. Code Sec. 31110.) 

Existing law, the CFIL, generally defines a franchise as a contract or agreement, either expressed or implied, whether oral or written, between two or more persons, by which all of the following occur:

• a franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor;
• the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
• the franchisee is required to pay, directly or indirectly, a franchise fee. (Corp. Code Sec. 31005(a).)

Existing law requires franchisors subject to the CFIL to register their offerings by submitting an application accompanied by a proposed franchise disclosure document to DBO containing specified material information about their businesses and the franchises they are offering. Existing law requires franchisors to provide a copy of that disclosure document, together with copies of all proposed agreements pertaining to the sale of the franchise, to a prospective franchisee at least 14 calendar days before entering into any contract with or receiving any payment from a prospective franchisee (whichever occurs first). (Corp. Code Secs. 31114, 31119.)

Existing law requires a franchisor to promptly notify DBO in writing, by an application to amend the registration, of any material change in the information contained in the application as originally submitted, amended or renewed. The commissioner may by rule further define what shall be considered a material change for such purposes, and the circumstances under which a revised offering prospectus must accompany such application. (Corp. Code Sec. 31123.)

Existing law requires that material modifications to a franchise agreement be registered with DBO pursuant to a specified application, except as otherwise provided. Existing law provides that, except as otherwise provided, it is unlawful to solicit the agreement of a franchisee to a proposed material modification of an existing franchise without first delivering to the franchisee a written disclosure, in a form and containing information as the commissioner may by rule or order require, identifying the proposed modification, either five business days prior to the execution of any binding agreement by the franchisee to the modification or containing a statement that the franchisee may, by written notice mailed or delivered to the franchisor or a specified agent of the franchisor within not less than five business days following the execution of the agreement, rescind the agreement to the material modification. (Corp. Code Sec. 31125.)

Existing law, among other things, exempts from the above, any modification of a franchise agreement with an existing franchise of a franchisee if the modification is offered on a voluntary basis and does not substantially and adversely impact the franchisee’s rights, benefits, privileges, duties, obligations, or responsibilities under the franchise agreement. (Corp. Code Sec. 31125(d).)

Existing law, Section 31109.1 of the Corporations Code, exempts a franchisor from the requirement to re-register its franchise disclosure document with DBO, every time it negotiates an amendment to a franchise agreement described in that disclosure document, as long as all of the following requirements are met:

• the initial franchise offer was registered, as specified;
• each prospective franchisee is provided with all of the following in a separate written appendix to the franchise disclosure document:
• a summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the 12-month period ending in the calendar month immediately preceding the month in which the negotiated offer or sale was made;
• a statement indicating that copies of the negotiated terms are available upon written request; and
• the name, telephone number, and address of the franchisor [from] whom requests for a copy of the negotiated terms may be obtained.
• the franchisor certifies or declares in an appendix to its application for renewal that it has complied with the requirements of the exemption; and
• the negotiated terms of the amended franchise agreement, on the whole, confer additional benefits on the franchisee. (Corp. Code Sec. 31109.1(a).)

Existing law requires the franchisor to also:

• provide a copy of the negotiated terms to a prospective franchisee within five business days of request by the prospective franchisee; and
• maintain copies of all material negotiated terms for a period of five years from the effective date of the first agreement containing the relevant negotiated term and makes these copies available to the commissioner upon request. (Corp. Code Sec. 31109.1(b), (c).)

Existing law defines “material” to mean that a reasonable franchisee would view the terms as important in negotiating the franchise. (Corp. Code Sec. 31109.1(d).)

This bill would strike many of the existing requirements of the Section 31109.1 exemption and, instead, require that a franchisor meet all of the following to avoid re-registration of terms different from the terms of the registered offer:

• the initial franchise offer was registered, as specified;
• the cover page, a state cover page, or a state addendum of the disclosure document setting for a specific statement relating to the ability of the franchisor and franchisee to negotiate changes to the franchise agreement; and 
• the franchisor certifies or declares in an appendix to its application for renewal that it has complied with the requirements of the exemption.

This bill would repeal the requirement that a franchisor provide a copy of the negotiated terms to a prospective franchisee within five business days of a request by a prospective franchisee, and would revise the existing requirement that the franchisor maintain copies of all material negotiated terms for which this exemption is claimed for a period of five years from the effective date of the first agreement containing the relevant negotiated term. Instead, the franchisor would have to maintain copies for a period of five years from the effective date of the agreement containing the relevant negotiated term.

COMMENT

1. Stated need for the bill

According to the author:

The idea behind enacting [Corporations Code Section] 31109.1 was that full disclosure should promote fairness among franchises. The reasoning was that where one franchisee is savvy enough to negotiate the terms of her or his agreement, notice of the additional benefits and protections of the negotiated agreement should be made available to subsequent franchisees.

While it was well-intentioned, Cal. Corp. Code [Sec.] 31109.1 creates a significant practical problem for franchisors and franchisees in California. Even though virtually all franchisors are willing to negotiate with some prospective franchisees under some circumstances, [Sec.] 31109.1 actually serves to decrease the number of situations in which most franchisors are willing to negotiate with franchisees in California. Many franchisors are concerned that requiring disclosure of past negotiated terms to subsequent franchisees will cause the negotiated changes to become a “new normal,” with future franchisees expecting to get not only every change that was negotiated in the past (whether or not they present circumstances similar to those that led the franchisor to negotiate before), but additional changes as well. Other franchisors are concerned that not all franchisees are similarly situated to one another, and the circumstances that led to the franchisor’s willingness to negotiate with one franchisee may not be the same for another franchisee. To avoid this consequence, many franchisors refuse to negotiate any changes in California—even under circumstances in which they otherwise would be willing to negotiate with a similarly-situated franchisee in another state. [ . . . ] In other words, instead of protecting franchisees, [Sec.] 31109.1 has actually caused more harm to them by creating impediments to negotiating deals.

Assembly Bill 2637 proposes to amend Corporations Code Section 31109.1 to address the existing unintended consequences caused by 31109.1. Under the proposed revision, franchisors would be permitted to negotiate changes to the franchise agreement provided the franchisor has made certain additional disclosures in its [franchise disclosure document (FDD)] that would provide prospective franchisees with more information about the negotiation and sales process. [ . . .]

AB 2637 will also require a franchisor who claims the exemption under [Sec.] 31109.1 to certify in any application for renewal of its registration with the DBO that it has complied with the statute. Finally, the franchisor will be required to maintain copies of all material negotiated terms claimed under the exemption for a period of five years, and make them available to the DBO for review upon request. These amendments will help facilitate the negotiation process between parties and, as a result, help improve operation of franchises within California.

2. Bill reduces disclosure obligations of franchisors seeking exemption from re-registration of modified franchise agreements

The CFIL seeks to protect California investors from flimsy or fraudulent franchise investments by setting forth a general rule that all franchise offers must be reviewed by the Department of Business Oversight (DBO) to ensure that they are valid and accurate. Accordingly, the CFIL prohibits a person from offering or selling any franchise in this state unless the franchise offer has been registered or is explicitly exempt from registration. The DBO reviews registered offers for financial soundness and misrepresentations, and also conducts a background check on franchisor principals. The DBO also reviews modifications to franchise agreements, and pursues legal action against individuals for fraudulent or unlawful conduct in connection with a franchise offer. (Corp. Code Sec. 31000 et seq.)

Over the years, however, the CFIL has been amended to exempt various franchise offers in situations where the Legislature believed the risk to California investors was not significant enough to warrant regulatory intrusion. For example, franchise offers by large and well-established franchisors are exempt from review. Similarly, franchise agreements where a franchisee has significant experience in a substantially similar business are exempt from review. Underlying such exemptions is a recognition that unlike “ordinary” investing, franchise investing sometimes bears more resemblance to a transaction between businesses than the usual business-to-consumer or business-to-investor situation where the law often seeks to protect the less knowledgeable or sophisticated consumer/investor.

As noted in the Background, in 2004, AB 2921 (Cox, Ch. 458, Stats. 2004) was enacted to add additional exemptions from registration (or re-registration, in this case) in situations where the sponsor of that bill, the Franchise Law Committee of the State Bar’s Business Law Section, argued regulatory intervention is unnecessary/not cost efficient. At the time it was heard, this Committee’s analysis of AB 2921 acknowledged that re-registration could be burdensome, but suggested also that the proposed exemption potentially went too far:

The bill’s supporters argue that this re-registration is unnecessary and burdensome [ . . . and] deters franchisors from negotiating changes to the registered offer, which sometimes hurts franchisees who are seeking better terms. However, in recognition of the fact that subsequent changes could also operate unfairly on franchisees, the bill provides that this exception would apply only if the franchisee was provided with a summary of, and an opportunity to review in detail, other material departures from the registered offer negotiated by the franchisor in this state. The bill’s supporters argue that this information will help protect franchisees from outlandish modifications by providing them with information on what other franchisees had agreed to.

While Committee staff realizes that re-registration can often be redundant and burdensome, it also has some concerns over the breadth of this exception. If franchisors are allowed to significantly depart from the registered offer, what is the point of requiring registration in the first place? Also, there would seem to be considerable risk that unscrupulous franchisors could use this exception to evade detection by the Department. Finally, Committee staff is not convinced that franchisees are protected when they are provided with information on other changes agreed to by other franchisees. This information would not protect franchisees if many other franchisees had agreed to (or been duped into) unfair terms; nor would the information protect early franchisees, who would be provided little information. [ . . . ] (Sen. Judiciary Com. analysis of AB 2921 (2003-2004 Reg. Session) Jun. 29, 2004, pp. 6-7.)

With this bill, the sponsors are now seeking to reduce the obligations placed on the franchisors who wish to avoid re-registration under the AB 2921 exemption. Seemingly, because AB 2921 required that each prospective franchisee be provided a summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the 12-month period immediately preceding the month in which the negotiated offer or sale was made, proponents assert that franchisors have been less willing to negotiate agreements with franchisees as a result.

Accordingly, the bill would strike various existing requirements, including that a prospective franchisee receive, among other things: (1) a summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the 12-month period ending in the calendar month immediately preceding the month in which the negotiated offer or sale is made under this section; and (2) a statement indicating that copies of the negotiated terms are available upon written request. Along these lines, this bill would also repeal the requirement that the franchisor provide a copy of the negotiated terms to the prospective franchisee within five business days following the request of the franchisee. Instead, the bill would require that the cover page, a state cover page, or a state addendum of the disclosure document specifically state to the prospective franchisee that: “You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes.” 

By revising the law such that a franchisor would have to inform franchisees that negotiations are permitted, but not have to disclose the terms of prior negotiations, the sponsor believes this bill would reverse the reported “chilling effects” of Section 31109.1 and encourage more negotiations. The International Franchise Association (IFA) writes in support of the bill, arguing that the bill will encourage franchise growth in California and lead to more entrepreneurs opening businesses and providing more jobs and revenue to California.

Support: International Franchise Association

Opposition: None Known

HISTORY

Source: Franchise Law Committee of the Business Law Section of the State Bar

Related Pending Legislation: None Known

Prior Legislation: AB 2921 (Cox, Ch. 458, Stats. 2004) See Background and Comment 2.

Prior Vote:

Senate Banking and Financial Institutions Committee (Ayes 7, Noes 0)

Assembly Floor (Ayes 79, Noes 0)

Assembly Appropriations Committee (Ayes 20, Noes 0)

Assembly Banking and Finance Committee (Ayes 12, Noes 0)

**************

SENATE COMMITTEE ON

BANKING AND FINANCIAL INSTITUTIONS

Senator Steven Glazer, Chair

2015 - 2016 Regular

Bill No: AB 2637 Hearing Date: June 15, 2016

Subject: Franchise investments: offer and sale of registered franchises: registration exemption

SUMMARY

Exempts a franchisor from the requirement to re-register its franchise disclosure document with the Department of Business Oversight (DBO), each time the franchisor negotiates changes to a franchise agreement described in that disclosure document with a franchisee, as specified.

DESCRIPTION

1. Lessens the burden on franchisors who wish to avoid having to re-register a franchise disclosure document with DBO, every time they negotiate an amendment to a franchise agreement described in that disclosure document. Under the provisions of this bill, a franchisor is exempt from the requirement to re-register a franchise disclosure document, if all of the following conditions are met:
   
   1. The initial franchise offer was registered.
      
   2. The cover page of the disclosure document states, “You and the franchisor may agree to sign the forms of franchise agreement and other agreements attached to this disclosure document. However, California law does not prohibit you and the franchisor from negotiating changes to the franchise agreement and other agreements, nor does it require you or the franchisor to negotiate any changes.”
      
   3. The franchisor certifies or declares in an appendix to its application for renewal that it has complied with the requirements of the exemption.
      
   4. The franchisor maintains copies of all material negotiated terms for a period of five years from the effective date of the agreement containing the relevant negotiated term and makes these copies available to the Commissioner of Business Oversight (commissioner) upon request. In the context of this requirement, “material” means that a reasonable franchisee would view the terms as important in negotiating the franchise.
      

EXISTING LAW

1. Exempts a franchisor from the requirement to re-register its franchise disclosure document with DBO, every time it negotiates an amendment to a franchise agreement described in that disclosure document, as long as all of the following requirements are met:
   
   1. The initial franchise offer was registered.
      
   2. Each prospective franchisee is provided with all of the following in a separate written appendix to the franchise disclosure document:
      
      1. A summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the 12-month period ending in the calendar month immediately preceding the month in which the negotiated offer or sale was made.
         
      2. A statement indicating that copies of the negotiated terms are available upon written request.
         
      3. The name, telephone number, and address of the franchisor to whom requests for a copy of the negotiated terms may be obtained.
         
   3. The franchisor certifies or declares in an appendix to its application for renewal that it has complied with the requirements of the exemption.
      
   4. The negotiated terms of the amended franchise agreement, on the whole, confer additional benefits on the franchisee.
      
   5. The franchisor provides a copy of the negotiated terms to a prospective franchisee within five business days of request by the prospective franchisee.
      
   6. The franchisor maintains copies of all material negotiated terms for a period of five years from the effective date of the first agreement containing the relevant negotiated term and makes these copies available to the commissioner upon request. In the context of this requirement, “material” means that a reasonable franchisee would view the terms as important in negotiating the franchise.

COMMENTS

1. Purpose: The Franchise Law Committee of the Business Law Section of the California State Bar is sponsoring this bill to mitigate the unintended consequences of a law change the Business Law Section sponsored in 2004, which has hampered the ability of franchisees and franchisors to negotiate franchise agreements.
   
2. Background: In 2004, the Business Law Section of the California State Bar sponsored a change to the Franchise Investment Law, which was intended to help franchisees by promoting transparency (AB 2921, Cox, Chapter 458, Statutes of 2004). One section added to the codes in 2004 (Corporations Code Section 31109.1), allows a franchisor to avoid having to re-register a new franchise disclosure document with DBO every time it negotiates a change with a franchisee to a franchise agreement described in that disclosure document, as long as that franchisor discloses the negotiated terms to future prospective franchisees. At the time this change was promoted, its sponsors believed that the transparency the change would require would promote fairness among franchisees. They believed that, if a franchisor agreed to an amendment that benefitted one franchisee, future prospective franchisees should be made aware of that amendment.
   
   Unfortunately, rather than helping franchisees, Section 31109.1 has had the opposite effect, by discouraging franchisors from negotiating with franchisees. Many franchisors are concerned that disclosing previously negotiated terms to prospective franchisees will cause the negotiated changes to become the starting point for all future negotiations. Franchisors observe that the circumstances of each franchisee are different, and that terms appropriate to one franchisor-franchisee agreement may be inappropriate to another agreement negotiated between that franchisor with a differently situated franchisee. Yet, logically, future franchisees expect to receive at least all the franchise benefits negotiated with prior franchisees, and possibly additional benefits.
   
   Because of the requirement that they disclose previously negotiated terms if they wish to take advantage of the exemption from re-registration, many franchisors are refusing to negotiate any changes to franchise agreements in California, even under circumstances in which they would have been willing to negotiate with a similarly situated franchisee in another state. According to this bill’s sponsor, Section 31109.1 is the only provision of its kind in the United States.
   
3. Discussion: The provisions of this bill were developed by the Franchise Law Committee, which counts among its membership attorneys who primarily represent franchisees and attorneys who primarily represent franchisors. Reportedly, attorneys representing both parties have witnessed the chilling effects of Section 31109.1 on franchise negotiations in California. They hope that the language of this bill, which informs franchisees that negotiations are permitted, but does not require franchisors to disclose the terms of prior negotiations, will reverse the chilling effects of Section 31109.1 and encourage more negotiations.
   
4. Summary of Arguments in Support:
   
   1. The Franchise Law Committee of the Business Law Section of the California State Bar is sponsoring this bill for the reasons stated above.
      
   2. The International Franchise Association (IFA), which represents all three segments of the franchise model, including franchisees, franchisors, and suppliers, supports the bill, because it will encourage franchise growth in California and lead to more entrepreneurs opening businesses and providing more jobs and revenue to California. IFA is particularly supportive of the amendment, discussed immediately below, to clarify where key information about the negotiation process should be presented.
5. Summary of Arguments in Opposition: None received.
6. Amendments:
   1. This bill’s author plans to propose the following minor technical and clarifying amendment in Committee:
      
      Page 2, line 14, amend as follows: (2) The cover page, state-specific cover page, or state-specific addendum of the disclosure document specifically states
7. Prior and Related Legislation:
   
   1. AB 2921 (Cox), Chapter 458, Statutes of 2004: Made several changes to the FIL, one of which created the code section this bill would significantly amend. Sponsored by the Business Law Section of the California State Bar.
      

LIST OF REGISTERED SUPPORT/OPPOSITION

Support

Franchise Law Committee of the Business Law Section of the California State Bar (sponsor)

International Franchise Association

Opposition

None received

-- END --

Date of Hearing: April 13, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 2637

Author:(Wilk) – As Amended Ver:March 28, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill modifies the conditions that must be met in order for a franchisor to claim an exemption from certain registration and disclosure requirements. Specifically, this bill:

1. Eliminates the following conditions that must be met in order for a franchisor to claim an exemption from having to amend its franchise registration in connection with a negotiated sale:
   1. A potential franchisee must receive summary information of material terms negotiated by the franchisor for a California franchise in the prior 12 months within five business days, upon request of the franchisee.
   2. A statement indicating that copies of the negotiated terms are available upon request and the name, telephone number, and that the address of the representative of the franchisor for a copy of those terms may be obtained.
   3. That the negotiated terms, on the whole, confer additional benefits to the potential franchisee.
2. Adds a condition that the disclosure document states that California law does not prohibit a franchisor from negotiating the standard franchise agreement contained in the disclosure document.

FISCAL EFFECT:

Negligible state costs.

COMMENTS:

1. Purpose and background. This bill is intended to facilitate negotiation between a franchisor and potential franchisees. According to the sponsor, the Franchise Law Committee of the Business Law Section of the State Bar of California, current law stifles negotiations by making the results of the negotiations publicly available.

Franchises subject to the California Franchise Investment Law (CFIL) may only be offered or sold after compliance with various registration and disclosure obligations. Under existing law, any franchise agreement being offered or sold in California must be registered with the Department of Business Oversight (DBO). However, that registration requirement may be exempted in the case of a negotiated sale. In these instances, a franchisor and a potential franchisee negotiate the terms of the franchise agreement, resulting in a change to the franchise agreement originally registered with DBO. In those cases, the franchisor does not need to amend the original registration as long as certain conditions are met. Those conditions include:

• 1. The initial offer is registered;
  2. Within 5 business days after the request by a prospective franchisee, a franchisor must provide to the potential franchisee a summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the previous 12 months and a statement indicating that copies of the negotiated terms themselves are available upon written request.
  3. The negotiated terms, on the whole, must benefit the prospective franchisee,
  4. And the franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirements of the statute, if this exemption is claimed.

This exemption helps prospective franchisees understand the terms that other franchisees received in negotiations with a franchisor. However, the sponsor of AB 2637 argues that this policy has actually resulted in franchisors being unwilling to negotiate with potential franchisees in California because the terms of those negotiations become widely known, possibly becoming a “new normal.” AB 2637 would replace the conditions b) and c) described above and replace them with a condition that the disclosure document in California law does not prohibit a franchisor from negotiating the standard franchise agreement.

There is no registered opposition to this bill.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 4, 2016

ASSEMBLY COMMITTEE ON BANKING AND FINANCE

Matthew Dababneh, Chair

ABPCA Bill Id:AB 2637 (

Author:Wilk) – As Amended Ver:March 28, 2016

SUBJECT: Franchise investments: offer and sale of registered franchises: registration exemption

SUMMARY: Makes changes to the California Franchise Investment Law (CFIL). Specifically, this bill:

1. Eliminates some of the conditions that must be met in order for a franchisor to claim the exemption from the franchisor having to amend its franchise registration in connection with a negotiated sale:
   1. Deletes the requirement that the franchisee must receive all of the following in a separate written appendix to the franchise disclosure document (FDD):
      1. That a prospective franchisee receives information regarding terms the franchisor negotiated during the previous 12 months;
      2. A statement indicating that copies of the negotiated terms are available upon written request; and,
      3. The name, telephone number, and address of the representative of the franchisor to whom requests for a copy of the negotiated terms may be obtained.
   2. Deletes a requirement that provides the negotiated terms, on the whole, confer additional benefits on the franchisee.
2. Deletes a requirement that the franchisor provide a copy of the negotiated terms to the prospective franchisee within five business days following the request of the franchisee.
3. Adds a requirement that provides the disclosure document to state that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement or other agreements contained in the disclosure document.

EXISTING LAW:

1. Prohibits the sale of a franchise in California unless prior to the sale the franchisor has, among other things, prepared a FDD and registered with the Commissioner of the Department of Business Oversight (DBO) (Commissioner) to sell franchises in California. [Corporations Code, Sections 31000 et seq.]
2. Makes it unlawful for any person to offer or sell any franchise in this state unless the offer of the franchise has been registered with the Commissioner, or qualifies under one of several specified exemptions. [Corporations Code, Section 31110]
3. Requires an application for registration to be accompanied by a proposed FDD, which shall contain the material information set forth in the application for registration, as specified by rule of the commissioner, and such additional disclosures as the Commissioner may require. [Corporations Code, Section 31114]
4. Makes it unlawful to sell any franchise in this state that is subject to registration without first providing to the prospective franchisee, at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt of any consideration, whichever occurs first, a copy of the franchise disclosure document, together with a copy of all proposed agreements relating to the sale of the franchise. [Corporations Code, Section 31119 (a)]
5. Provides an exemption when the prospective franchisee receives the offering, he or she also receives copies of all Notices of Negotiated Sale of Franchise filed with the Commissioner within the last 12 months, if any. [California Code of Regulations section 310.100.2]
6. Exempts certain negotiated sales of franchises. Provides the statutory exemption eliminates the requirement that a franchisor must amend its franchise registration in connection with a negotiated sale if specified conditions are met. [Corporations Code, Section 31109.1]

FISCAL EFFECT: Unknown.

COMMENTS:

Under AB 2637, franchisors would notify the prospective franchisees in California that the negotiation of franchise agreements is permitted by law and that California law does not prohibit or compel negotiations. This notice should ensure that prospective franchisees will not be misled into believing that California law disallows negotiations.

In California, franchisors have two different statutory frameworks they can work under in regards to negotiated sales: one being the California Code of Regulations Section 310.100.2 established in 1989 and the second, Corporations Code, Section 31109.1 established in 2004.

Under the California Code of Regulations, conditions for exemption include:

1. The initial offer must be registered;
2. Within 15 business days after consummating a negotiated sale, the franchisor must file a "Notice of Negotiated Sale" with DBO. The Notice of Negotiated Sale lists, among other things, a description of the changes that were made by reference to the relevant section of the franchisor's registered disclosure document;
3. When a prospective franchisee receives the franchisor's disclosure document, he or she must also receive copies of all Notices of Negotiated Sale filed by the franchisor in the last 12 months; and,
4. The franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirement of the regulation, if this exemption is claimed.

Under the Corporations Code, the exemption eliminates the requirement that a franchisor must amend its franchise registration in connection with a negotiated sale if the following conditions are met:

1. The initial offer (the franchisor's disclosure document) is registered;
2. Within five business days after a request by the prospective franchisee, franchisor must provide to the franchisee:
   1. A summary description of each material negotiated term that was negotiated by the franchisor for a California franchise during the previous 12 months; and,
   2. A statement indicating that copies of the negotiated terms themselves are available upon written request, the name, phone number, and address of a franchisor representative from whom the franchisee may obtain the negotiated terms.
3. The negotiated terms, on the whole, must benefit the prospective franchisee; and,
4. The franchisor must certify or declare in an appendix to its application for renewal that it has complied with all the requirements of the statute, if this exemption is claimed.

AB 2637 eliminates conditions that must be met in order to claim the exemption which includes #2 and #3 above. AB 2637 adds a new condition which will require that the franchisor's disclosure document discloses that California law does not prohibit a franchisor from negotiating, or require a franchisor to negotiate, the standard franchise agreement contained in the disclosure document.

Background:

Franchises subject to the CFIL may only be offered or sold after compliance with various registration and disclosure obligations. In general, most franchises are sold pursuant to the terms of the franchise agreement drafted by the franchisor, which address the needs of the franchisor but may not contemplate requirements or needs of franchisees in special circumstances. In some cases, the prospective franchisees or their counsel may request changes to the franchise agreement or other terms of sale from those registered with the DBO. Depending on the circumstances, the franchisor may be willing to make some or all of the requested changes, and a negotiation process may ensue, which sometimes involves a degree of "give and take" by both parties.

The CFIL states that only a franchise agreement that is described in a disclosure document that has been registered with the DBO can be offered and sold to a resident of California or to a franchisee whose franchise will be located in California. This can lead to issues if a franchise agreement is changed as a result of negotiations between the parties. Under existing law, the franchisor would be required to amend its registration before completing the sale. If the franchisor did not want to offer the same amended franchise agreement to all future franchisees in California, the franchisor then needs to re-amend its registration to return to the original document.

Both the regulation and the amendment of the CFIL were intended to facilitate the ability of franchisors to comply with requests for modification of franchise agreements, by eliminating the need to re-register before selling a negotiated franchise agreement.

According to the sponsor, the Business Law Section, Franchise Law Committee of the California State Bar, "both the statute and the regulation have created significant disincentives for franchisors to negotiate the terms of sales with franchises. While virtually all franchisors are willing to negotiate with some prospective franchisees under some circumstances, the statute and the regulation actually serve to decrease the numbers of situations in which most franchisors are willing to negotiate with franchisees in California. At this time, California is the only state that currently imposes restrictions on the ability of franchisees and franchisors to negotiate or that requires the disclosure of negotiated changes."

The sponsors go on to state, "If a franchisor negotiates with a franchisee in California, then the results of that negotiation become publicly available, including the franchisees who are not even located in California. Many franchisors are concerned that this disclosure will cause the negotiated change to become a "new normal" with future franchisees expecting to get not only every change that was negotiated in the past but additional changes as well. To avoid this consequence, many franchisors refuse to negotiate any changes in California- even under circumstances in which they would be willing to negotiate with a similarly-situated franchisee in another state."

Related Legislation:

AB 1782 (Maienschein) would authorize prospective franchises that have not registered with DBO to nevertheless exhibit at franchise trade shows in California as long as specified disclosures are made to the DBO and to trade show attendees. Pending in the Assembly Appropriations Committee.

Previous Legislation:

AB 525 (Holden, Atkins, Dodd & Wilk) (Chapter 776, Statutes of 2015) Revised the rights and responsibilities of franchisors and franchisees under the California Franchise Relations Act (CFRA) with respect to the termination of franchise agreements.

REGISTERED SUPPORT / OPPOSITION:

Support

The Franchise Law Committee of the Business Law Section of the State Bar of California

Opposition

None on file.

Analysis Prepared by: Kathleen O'Malley / B. & F. / (916) 319-3081