What’s New in 2023 for Franchisors
On September 29, 2022, the California Legislature passed AB 676, which makes various changes to the Franchise Investment Law and the California Franchise Relations Act, and creates new requirements and prohibitions for franchise agreements, effective January 1, 2023.
Changes to the Franchise Investment Law
AB 676 amends the Franchise Investment Law in the following ways:
- AB 676 expands the reasons for the Commissioner to issue a stop order. Specifically, the Commissioner may summarily issue a stop order denying the effectiveness, or suspending or revoking effectiveness, of any registration for the following two additional reasons: (1) The franchisor’s method of business includes or would include activities that are or would be illegal where performed, or (2) the franchise agreement contains a provision that is contrary to law.
- AB 676 protects franchisees against discrimination based on protected characteristics. Specifically, a franchisor may not refuse to grant a franchise or provide financial assistance, based on certain characteristics of a franchisee or the composition of the neighborhood of the prospective franchise. These characteristics include sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, primary language, or immigration status.
- AB 676 requires a franchisor to notify a franchisee of the approval or disapproval of an application within 60 days.
- AB 676 prohibits a franchisor from disclaiming or denying representations made to a franchisee, or reliance by a franchisee on any representations as provided. See below for further guidance.
Changes to the California Franchise Relations Act
AB 676 amends the California Franchise Relations Act in the following ways:
- AB 676 prohibits a franchisor from requiring a franchisee to waive any of the protections of the California Franchise Relations Act.
- AB 676 clarifies that upon the termination or nonrenewal of a franchise, a franchisor may only offset the amount owed to the franchisee with amounts owned by the franchisee if the franchisee agrees to the amount owed or the franchisor has a judgment for that amount.
- AB 676 prohibits a franchisor from modifying a franchise agreement or requiring a general release in exchange for assistance related to a declared state or federal emergency.
The Prohibition on Disclaiming Representations, Reliance or Violations
Corporations Code section 31512.1, added by AB 676, provides that any provision of a franchise agreement or related document requiring the franchisee to waive specific provisions of the law is contrary to public policy and is void and unenforceable. Further, no provision in a franchise agreement or related document may disclaim or deny any representations made by a franchisor to a franchisee. The law applies to all offers and sales in California, regardless of whether the franchisor is registered or exempted from registration.
Corporations Code section 31512.1
Any provision of a franchise agreement, franchise disclosure document, acknowledgment, questionnaire, or other writing, including any exhibit thereto, disclaiming or denying any of the following shall be deemed contrary to public policy and shall be void and unenforceable:
(a) Representations made by the franchisor or its personnel or agents to a prospective franchisee.
(b) Reliance by a franchisee on any representations made by the franchisor or its personnel or agents.
(c) Reliance by a franchisee on the franchise disclosure document, including any exhibit thereto.
(d) Violations of any provision of this division.
What can a franchisor do to comply?
- Review the requirements of AB 676.
Franchisors should review the changes to the law made by AB 676 to ensure their business practices, agreements and disclosures are in compliance with the new requirements of the law.
- Review the franchise documents and remove provisions, including questionnaires and acknowledgements, that violate Corporations Code section 31512.1.
Franchisors should remove from their Franchise Disclosure Document (FDD), franchise agreement and related documents any language that is contrary to public policy, void and unenforceable under Corporations Code section 31512.1.
Under section 31512.1, franchisors may not disclaim or deny any representations they or their representatives make to franchisees, require franchisees to waive reliance on any such representations or on the FDD, or disclaim or deny any violations of the Franchise Investment Law. Franchisors may not put these disclaimers or waivers in an FDD or in any exhibit to the FDD, such as the franchise agreement, questionnaire, or acknowledgment. Requiring franchisees to sign representations or acknowledgements that the franchisor did not make certain representations or statements or that the franchisee did not receive or rely on certain representations or statements made by franchisor is prohibited under this statute.
If you have any questions, please send an email to SRD_Support@dfpi.ca.gov.