|September 1, 2014|
Previously published on August 28, 2014
A bill on the verge of becoming law in California will sharply narrow the grounds for termination of franchises in that state, and may require re-examination of the terms of franchise agreements. Existing California law bars termination of franchises prior to expiration of their terms “except for good cause”, which is defined in a relatively broad and open-ended way. “Good cause” includes “failure . . . to comply with any lawful requirement of the franchise agreement” after notice and no more than 30 days to cure the failure. At least equally important, the “good cause” definition is expressly not limited to breach of contractual requirements, opening the door to contentions that franchisee misconduct not provided for in the franchise agreement could nevertheless warrant termination.
SB 610, if signed into law, would forbid termination except for “a substantial and material breach . . . of a lawful requirement of the franchise agreement.” It does not provide for the possibility of termination based on non-contractual defaults. Even in the case of contractual defaults, the new language will open the door to fact-intensive disputes over whether an established breach is “substantial and material”. Thus, for example, a 10% quota shortfall would seem ample to support termination under existing law, whereas the substantiality requirement in the proposed amendment would arguably make the justifiability of termination on that basis a jury question.
Enactment of SB 610 would make it prudent for franchisors to examine their agreements in order to ensure that they impose at some level of abstraction all requirements that franchisors feel are essential to ensure that franchise businesses operate effectively and in conformance with the franchisors’ business models. This may require, for example, express provisions that franchisees will obey all national, state, and local laws; that they will treat their employees and prospective employees with dignity and in accordance with legal requirements; and that they will avoid conduct that, if publicized, would risk damaging the franchisors’ name or impairing the integrity of its marks.