USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
The CFRA restricts a franchisor from terminating a franchisee without good cause and without an oppor - tunity to cure, except in limited circumstances. Gener - ally, a 60-day cure period is required, which can be extended to 75 days, although for monetary defaults a five-day cure period is sufficient. Among the excep - tions to the requirement for a cure period are: • an imminent threat to public health or safety; • abandonment of operation of the franchised busi - ness for five or more consecutive days; • repeated defaults; and • franchisee misrepresentations in the acquisition of the franchise. Under certain circumstances, termination will trigger an obligation for the franchisor to purchase inventory, supplies, equipment, furniture and fixtures that the franchisee purchased in connection with the opera - tion of the franchised business. The CFRA also restricts a franchisor’s right to refuse renewal to a franchisee. Franchisors must give 180 days’ prior written notice of an intent not to renew a franchise, and must also comply with certain other statutory conditions if they refuse to renew. A fran - chisor that realises it does not wish to renew a fran - chisee less than 180 days prior to the end of an exist - ing franchise agreement may offer an extension of the existing franchise agreement term in order to provide the required 180 days’ prior written notice. With respect to transfers, the CFRA enshrines a right for the surviving spouse, heirs or estate of a deceased franchisee to pursue qualifications sufficient to take over the deceased franchisee’s business. Franchisors are required to provide a “reasonable time” for such individuals to satisfy the franchisor’s then-current standards for franchise ownership, provided however that the franchisor may exercise a legal right of first refusal in the franchise agreement on its terms. Equal - ly, the statute protects a franchisee’s right to transfer their business to a buyer who meets the franchisor’s then-current qualifications for ownership, provided that the seller and buyer comply with all other transfer requirements stated in the franchise agreement and that the franchisor is not prohibited from exercising any right of first refusal contained in the agreement.
Violations of the CFRA trigger civil liability, and an aggrieved franchisee’s damages are the fair market value of the franchised business plus any other dam - ages the franchisee has suffered. The practical result of this is that a franchisor error in termination or non- renewal could trigger a claim for the entire value of the business, including all of its assets. The CFIL contains one provision which might other - wise be part of a relationship law: it enshrines a right of franchisees to engage in free association and join a trade association. Franchisors are prohibited from penalising a franchisee for associating with other fran - chisees, and the inclusion of this provision within the CFIL means that the DFPI can investigate violations of this provision, unlike violations of the CFRA. 1.3 Definition of a Franchise Agreement In California, a franchise exists when any agreement (including implied or oral contracts) contains three specific terms. First, it allows a licensee to engage in a business offering goods or services under a “mar - keting plan or system” identified in substantial part by the licensor. Second, the operation of the business is “substantially associated” with the licensor’s trade mark. Third, the licensee is required, directly or indi - rectly, to pay a “franchise fee”. A franchise fee is any fee or charge that the franchisee pays for the right to engage in the business, other than the bona fide wholesale price of resaleable inventory or goods. It must exceed USD500 per year (total), or it qualifies for the de minimis exemption. The CFIL requires franchisors to make a franchise dis - closure to a prospective franchisee, except where an exemption applies to the transaction. The disclosure document must comply with the FTC Franchise Rule requirements and with California guidelines. Regulations expressly permit issuance of the Fran - chise Disclosure Document (FDD) by electronic means, but require that the disclosure be delivered as a single, integrated document or file. The recipi - 2. Franchise Disclosure 2.1 Mandatory Disclosure
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