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Calif. adopts limits on franchisors

Restaurant franchisees in California were granted new rights and protections in dealings with their franchisors under a bill signed into law yesterday by Governor Jerry Brown.

The measure protects franchisees from being terminated even if they fail to meet all the requirements of a franchise contract and limits the circumstances under which a franchisor can block the sale of a franchise to a third party.

If a franchise is terminated or not renewed, the franchisor is required to buy the business’ “inventory, supplies, equipment, fixtures, and furnishings,” the bill stipulates.

The measures amount to “the strongest franchise protection rules in the U.S.,”  according to BlueMauMau.org, a website for franchisees nationwide.

The heart of the bill is a provision that redefines when a franchise can be rescinded. Previously, franchisors were required in California to show good cause, such as a failure by the franchisee to fulfill the stipulations of the franchise contract. The franchisee was usually given 30 days to meet the requirements before the franchise was yanked.

Under the new law, franchisees need only “substantially comply with the lawful requirements of the franchise agreement,” and have up to 75 days to correct any lapse that would still warrant termination.

The bill also outlaws the stipulation common in franchise contracts that requires the franchisee to get the franchisor’s approval before selling the business to a third party.  The law specifies that the franchisee must still get the franchisor’s written approval before consummating a deal, but limits the circumstances under which the franchisor can deny an okay.

The full text of the bill can be viewed here.

California is the largest restaurant market in the country.

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