United States:
California About To Make Franchise Terminations Harder
28 August 2014
Foley & Lardner
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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.
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