False alarm for the California franchise industry: a bill intended to expand franchisee rights is being returned to the Senate unsigned by the governor.
California Gov. Jerry Brown vetoed SB 610 on Monday, saying the bill "alters the relationship between franchisors and franchisees." The bill would have made it significantly more difficult for a franchisor to terminate franchise agreements and prohibited agreements that prevent a franchisee from selling or transferring a franchise.
"The bill's changes would significantly impact California's vast franchise industry that relies on the certainty of well-settled laws," Brown said in a letter to the members of the California State Senate. Brown reports that he is open to reforming California Relations Act, but is not convinced at this point that the new bill would do anything more than create new problems for the industry.
"Additionally, the parties supporting and opposing this bill have diametrically different views," Brown's letter continues. "Given the polarized positions, it is in the best interest of all that a concerted effort be made to reach a more collaborative solution."
The party wholeheartedly in favor of the veto is the International Franchising Association (IFA), a trade group that argued the new bill would discourage franchisors from opening new locations in California and create unnecessary litigation in the franchise industry. Franchisors, the IFA argued, need to have the option to easily terminate subpar franchisees who are weakening a brand's reputation.
"Franchise businesses employ nearly 1 million workers in California and generates $94 billion in revenue at over 82,000 franchise locations," IFA president Steve Caldeira said in a statement on Monday. "Governor Brown clearly recognized the importance of franchising to the state of California’s ongoing economic recovery and rightly decided to choose economic opportunity and job growth over appeasing special interest groups, led by the Service Employees International Union (SEIU)."
The SEIU, best known recently for its financial backing of fast-food workers' strikes, has supported SB 610 through a number of radio ads as well as launching the website Franchise Fairness. While the IFA has been quick to note that some franchisees have stood with franchisors in opposing the bill, most franchise associations have supported the legislation. Pro-SB 610 organizations include the national Coalition of Franchisee Associations, American Association of Franchisees and Dealers (AAFD), the Coalition of Franchise Associations (CFA) and the Asian American Hotel Owners Association (AAHOA).
“California’s small business franchisees are disappointed in Governor Browns’ veto, but we are proud of the work we’ve done to bring this critical legislation this far," Kathryn Slater-Carter, a McDonald's franchisee who had one of her restaurants taken away by the company at the end of her franchise term, said in a statement. "The majority of Assembly members and Senators recognized that California’s economy will be stronger when franchisees can operate under a fair system that rewards investment in California jobs.”
One of the major reasons franchisees have supported SB 610 is because fears surrounding "churning," a ploy in which franchisors terminate franchise agreements for minor infractions and resell locations to turn a quick profit. In July, a group of 7-Eleven franchisees in California filed a lawsuit against their franchisor, claiming in part that certain South Asian franchisees had been forced out of the system as part of corporate 7-Eleven's profit scheme. The company attests that it did nothing wrong, and that the franchisees had been terminated due to violations of franchise agreements.
SB 610 would have also granted franchisees the right to pass on their franchise to their children or to sell the location to qualified buyers, something that some companies do not allow in their franchise agreements. Additionally, the bill protected franchisees from corporate retaliation if they join franchisee associations, something franchisees allege many franchisors discourage.
The bill's supporters argue that its passage would actually be good for business in California. While the IFA has argued that the new legislature would drive businesses away from the state, supporters of the bill say the opposite is true. A report from the Pacific Management Consulting Group claims that states that have enacted legislation to protect franchisees have experienced 12 percent higher franchise growth in the last decade than states without laws that ensure a fair franchise relationship.
“This report shows that giving basic protections to franchisees actually improves the business climate in a state, and that only makes sense," John A. Gordon, the founder of Pacific Management Consulting Group, said in a statement last week. "It’s the small-business owners who are investing, working to build the business, and really making the franchise model succeed.”
Whether you support or oppose SB 610, it is clear that Governor Brown is right about one thing: the two sides' polarized views. Since franchisors and franchisees are theoretically working towards a common goal, their antagonism in California is a dark sign for an industry struggling to define the franchisee-franchisor relationship.