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Why State Legislature May Require Franchisors to Act in Good Faith

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The  SB 610 Fair Franchisee Bill passed via a 5 to 2 vote yesterday at Senate Judiciary Committee.

It is will now go the Senate floor for full Senate vote.  If it passes, then it must pass the Assembly and be signed into law by the Governor.

"This bill would modify the California Franchise Relations Act (CFRA) to enhance the protections for and rights of franchisees in the performance and enforcement of the franchise agreement. 

As noted in the Background, the CFRA governs the ongoing relationships between franchisors (including subfranchisors) andfranchisees to generally prevent unfair practices in the termination, renewal, or transfer of a franchise.

Consistent with the general goal of the CFRA, this bill would require franchisors, subfranchisors and franchisees to deal with each other in good faith in the performance and enforcement of the franchise agreement. The bill would define good faith for these purposes to mean honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade.

franchisor or subfranchisor who violates this provision could be sued by the franchisee for specified damages.

In opposition to the bill, a coalition comprised of the International Franchise Association, California Chamber of Commerce, Civil Justice Association of California, California Grocers Association, and California Retailers Association, raise concerns with the good faith requirement, arguing that it is an "amorphous term . . . to be applied to the franchisor in its relationship with the franchisee.

The concept of 'good faith' was created in the Uniform Commercial Code to fill in the blankson short form contracts for the sale of goods. However, it provides no benefit in the context of detailed franchise contracts which govern complex and ongoing business relationships."

In response, co-sponsor American Association of Franchisees and Dealers states that "modern franchise relationships are most always governed by one-sided 'take it or leave it' adhesion contracts that elicit substantial monetary investment from franchise owners, provide substantial protection for 
franchisors, but severely limit a franchisee's rights in the franchise relationship.

Creating a statutory affirmative duty of good faith in franchise relationships will inhibit the enforcement of one-sided franchise agreements in an abusive 
manner."  (Other details of the California Bill, click here.)

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About this Entry

This page contains a single entry by Michael Webster published on April 18, 2013 7:08 PM.

What is the New Test for an Independent Contractor? was the previous entry in this blog.

When Are You Exempt from the FTC Franchise Rule? is the next entry in this blog.

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