California Franchise Bills Draw Mixed Opinions

SACRAMENTO – Two franchise bills, Assembly Bills 2637 and 1782, seem to be moving through the California legislature with little fanfare and opposition.

AB 1782 seeks to change current California franchise law regarding the offer and sale of franchises at trade shows, and allow franchisors to sell at the events without being registered in California.

AB 2637 proposes to eliminate the current requirement that franchisors who negotiate changes to the contract be required to disclose in their FDD what terms were negotiated and also eliminate the requirement that these changes substantially benefit the franchisee. 

The International Franchise Association has worked with the California Franchise Bar Association and its sponsors on the structure and language of the bills, and has shown its support through letters.

But not everyone is buying into the proposed changes.

One seasoned franchise attorney in San Francisco feels the proposed law changes are bad for prospective franchisees because they eliminate current state requirements and disclosure, designed to protect buyers. He asks, “When was less franchise disclosure ever a good thing?”

The International Franchise Association has expressed to the California Assembly Appropriations Committee its strong support for AB 2637 in an April 13, 2016 letter from Jeff Hanscom, IFA director of state government relations. He states the bill will amend the conditions for an exemption from the prohibition on the offer or sale of a franchise opportunity which is not currently registered with commissioner of business oversight. “Current California law prohibits the offer or sale of a franchise that is not registered with the commissioner, unless already exempted.” Hanscom adds that AB 2637 will make it easier for franchisors and potential franchisees to negotiate with each other.

The IFA director also reminds in his letter of support that franchising accounts for over 925,000 jobs across more than 82,700 franchise establishments contributing over $94 billion in economic activity each year. He said, “AB 2637 will encourage franchise growth in California and lead to more entrepreneurs opening businesses and providing more jobs and revenue to California.”

Attorney Kevin B. Murphy, who has practiced franchise law in California for the past 34 years and is also a former franchisee, said he definitely has a problem with the proposed changes addressed in AB 2637 regarding the negotiated sale.

“Currently, prospective franchisees must receive disclosure of what terms of the contract the franchisor negotiated with others during the previous 12 months and that the negotiated terms confer, on the whole, additional benefits on the franchisee.” Murphy said AB 2637 proposes to eliminate these two conditions, which is definitely not in keeping with full disclosure principles.

He asks, “Why eliminate these?” Murphy said it certainly is not in the interests of prospective franchisees the California Franchise Investment Law was enacted to protect. “It would help franchisors negotiate terms in secret, including unfair ones, with franchisees who are excited to buy, which is why franchisors want the law change. The statement that AB 2637 would help franchisees negotiate changes has no logic,” Murphy declared.

Murphy said the general rule is reputable franchisors don’t negotiate anything, except perhaps the size of a protected territory if one has not been generally disclosed in the FDD in advance, like a one-mile radius around the store.

“The current requirement is that franchisors who do negotiate must disclose what was negotiated and it has to be generally favorable to the franchisee. That acts as a safeguard against the minority of franchisors that cut deals,” Murphy explained. He said, “If the bill passes, no one but they will know what was negotiated and whether or not it was favorable to the franchisee.”

“Allowing rogue franchisors to police their own activity has not been seen since the days of no franchise oversight and regulation,” he added.

On Assembly Bill 1782, Hanscom expressed IFA’s support in his June 15, 2016 letter to the California Senate Banking & Financial Institutions Committee. Again, promoting that IFA represents all three segments of the franchise model—franchisees, franchisors, and the supplier industry—the government relations director states that AB 1782 will amend current California law to remove the requirement that a prospective franchisor, or a franchisor who is not currently offering a franchise for sale in California register with the state’s Department of Business Oversight in order to secure a space at the franchise trade show. Hanscom explains that in short, the bill will permit franchisors who are not engaged in business in California to attend the trade show in order to gauge potential franchisee interest without requiring registration with the state in order to simply provide information to potential franchisees.

Director Hanscom told the Banking and Financial Institutions Committee that for many years the West Coast Franchise Expo had been held in California. Then he explained, “However, as a result of current law, the Expo elected to move to Denver, Colorado.” He suggested that the passage of AB 1782 “will put California in a better position to retain and attract not only trade shows like the West Coast Franchise Expo and others, but will also lead to greater exposure of entrepreneurial opportunities to California residents.”

In closing, Hanscom told the committee, “AB 1782 will encourage franchise growth in California and lead to more small business owners who will in turn provide more jobs and revenue to California.”

Why haven’t the bills created more discussion and controversy?

Attorney Murphy, also founder of Franchise Foundations, thinks franchisors are trying to keep the bills under the radar. He said only California franchise attorneys, most of whom represent franchisors, would be familiar with the ramifications of the proposed bills. 

The IFA told Blue MauMau that it has not received opposition comments from any IFA members, nor has IFA talked directly with California’s Department of Business Oversight regulators. Jeff Hanscom said he does not believe opposition from DBO has been raised in any of the various hearings, and the bills have gone through thus far.

Phone calls and emails to the commissioner’s office of the California Department of Business Oversight seeking comments on the proposed bills were not returned.