States Upping The Ante For Franchisors – A Legislative Update

Laws focusing on the franchisees’ rights are referred to as relationship laws, and in recent months, franchisee groups fighting for new relationship laws have been noticeably successful, scoring legislative victories in several states. There are some significant differences among the bills currently being considered or that have recently passed, but most are intended to restrict the power of franchisors to terminate, not renew, or deny consent to the transfer of franchise agreements without good cause. Some are aimed at leveling the playing field when a dispute arises between a franchisee and its franchisor and many seek to mandate “good faith” dealings between the parties to franchise agreements.

Maine, California and Massachusetts all have sweeping new franchise relationship bills currently pending in their legislatures. The Maine Small Business Investment Protection Act (“LD 1458”) is designed to build upon California’s 33 year-old Franchise Relationship Law and to be the first law of the 21st Century to truly address commercial problems in franchising, thus making it a model for other states. If passed, LD 1458 would, among other things, require franchisors to: (1) provide franchisees additional time to cure defaults; (2) allow franchisees to assemble in trade groups without fear of retaliation; (3) renew franchise agreements without increasing royalty rates or imposing new fees; and (4) compensate damaged franchisees for placing outlets within their territories.

California’s legislature is currently considering two bills. The California Small Business Investment Protection Act, AB 1141, aims to revise California law to: (1) provide franchisees greater freedom to transfer their businesses; (2) require automatic renewal of franchise agreements absent a material breach; (3) protect franchisees from unreasonable terminations; (4) require the parties deal with each other in “good faith”; and (5) provide franchisees the right to assemble in trade groups without fear of retaliation. In addition, California’s SB 610, if passed, would require parties to franchise agreements to deal with each other in “good faith” and would protect franchisees that participate in franchisee associations.

Colorado’s legislature recently passed legislation aimed at bolstering franchisee protections for motor vehicle dealers in that state, which its Governor is expected to sign. And late last year, Ohio amended its Business Opportunity Plan Law to give damaged franchisees the right to sue for errors in the disclosure document they were provided, absent proof of fraud. The Ohio amendment also requires disputes between Ohio franchisees and their franchisors to be governed by Ohio law, notwithstanding the terms of the franchise agreement, and requires arbitration hearings relating to franchise disputes to take place in Ohio. More importantly, the Ohio amendment provides franchise purchasers the right to cancel their agreements any time within 12 months of signing their franchise agreement, under certain circumstances.

No doubt, franchisors are starting to feel the heat. Regardless, the winds of change are blowing and franchisors must pay attention as states bolster laws governing the franchise relationship in favor of franchisees.

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