Chalk this one up as a big win for franchisees and a big loss for franchisors.
California's State Assembly passed a bill on Thursday that expands franchisee rights, making it significantly more difficult for a franchisor to terminate franchise agreements. The bill passed by a vote of 41 to 27 and has returned to the state Senate for final approval.
The SB 610 bill requires franchisors to provide evidence of a "substantial and material breach on the part of the franchisee of a lawful requirement of the franchise agreement" prior to terminating a franchisee. It additionally prohibits franchise agreements that bar a franchisee from selling or transferring a franchise.
Franchisee groups such as the American Association of Franchisees and Dealers (AAFD), the Coalition of Franchise Associations (CFA) and the Asian American Hotel Owners Association (AAHOA) argue that the bill is necessary to protect franchisees. Franchisees hope the bill has the power to cut "churning," a ploy in which franchisors terminate franchise agreements and resell locations to cash in on fresh franchise fees.
"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, but severely limit a franchisee’s rights in the franchise relationship," the AAFD said in a statement in June. "SB-610, as amended in 2014, takes a small but important step in recognizing and protecting franchisee rights."
The bill also received some somewhat surprising support from labor activists. The Service Employees International Union (SEIU), a labor union most recently noted for its financial backing of fast food strikes across the U.S., launched the website Franchisee Fairness and released a number of radio ads supporting SB 610.
Outside of its efforts with SB 610, SEIU has also supported measures that limit or draw attention to the limitations of franchisees' independence. In July, the union supported The National Labor Relations Board's (NLRB) designation of McDonald's as a joint employer for workers at franchised restaurants, a decision opposed by both franchisors and many franchisees.
In the case of SB 610, the SEIU argues that if franchisees are given increased freedom, both franchisees and employees will benefit.
"With greater protections from unfair corporate practices and costs, these small businesses will have the ability to treat their workers right," states the SEIU-backed Franchisee Fairness website.
While employees and franchisees may support the bill, it comes as a blow for franchisors with locations in California. Franchisors and the International Franchise Association (IFA) argue that the new bill makes it more difficult for franchises to protect their brand reputation by terminating franchisees when the relationship goes sour. Opponents to the bill claim that it could scare potential franchisees from expanding in California and rack up litigation costs for franchisors and franchisees.
Recent lawsuits have directed national attention to the franchise model, highlighting tension in franchisee-franchisor relationships. One such case that is particularly notable with the passage of SB 610 is Californian 7-Eleven franchisees' lawsuit against their franchisor.
The franchisees argue that South Asian franchisees have been forced out of the system as a part of a profit scheme by corporate 7-Eleven offices. Meanwhile, 7-Eleven attests that certain franchisees needed to be terminated due to violations of their franchise agreements that threatened the company's profits and the 7-Eleven brand.
Had SB 610 been in place prior to 7-Eleven's termination of franchisees involved in the lawsuit, these store owners may still be running shops across California. Or, the franchisees may have been terminated, with a great deal more effort on 7-Eleven's part.
In any case, under SB 610 Californian franchisees will rest a little easier, knowing that their rights as franchisees just got a little stronger.