Is it a problem if the franchisee owner of a cookie store or print shop decides to ignore a franchise-wide promotion on a product or service? How about a franchisee hotel owner deciding to ignore training procedures, or not maintain cleanliness standards, or refuse to have wi-fi?
Yes, these are problems.
Is it okay for a restaurant franchisee to purchase ingredients from unapproved sources to save a few dollars, even if it makes a difference in the quality or taste of the product?
No, it is not okay.
Under SB 610—new legislation written by trial lawyers that is on the governor’s desk—these kinds of issues will become open to litigation. Further complicating the issue, agreements already in place would become fodder for the courts.
Once again, California is on the brink of creating new barriers for businesses to operate smoothly in the Golden State…SB 610 seeks to solve a problem that does not exist.
In the real world, franchisors want franchisees to succeed. Terminating franchise agreements is costly and disruptive…even in the most egregious cases. Franchisors generally work very hard to help franchisees succeed, and there is no evidence that California is suffering from a preponderance of franchisors terminating agreements over minor infractions.
What’s more, each franchisee already has the statutory right to correct minor violations.
Under the existing version of the California Franchise Relations Act (CFRA), franchisors are prohibited from terminating a franchise agreement without good cause. The system works because good cause includes the franchisees failure to comply with any lawful requirement of the franchise agreement after being given notice and a reasonable opportunity to resolve the problem.
Franchise systems work because customers get a consistent, predictable experience from location-to-location…this is the hallmark of a good franchise. Franchisors have no incentive to be bullies, but the brand is also weakened when the consumer experience is different than what is promised, so it’s critical for franchisees like me to maintain those standards.
The crux of the problem in this legislation is a new proposed standard for termination. SB 610 says a ‘substantial and material breach’ of the franchise agreement must take place before a separation is justified. Unfortunately, the legislation does not define either “substantial” or “material”, and that failure leaves this new language, without precedent, open to the interpretations of battling lawyers.
This definition is purposefully vague in the legislation and is not found in any other state franchise relationship law. If signed by the governor, the language will substantially alter a decades-long relationship between franchisors and franchisees by subjecting every term of the franchise agreement to litigation.
A franchise works because consumers know the level of service they can reasonably expect when they seek out a particular brand. The confusion brought by SB 610 harms the consumer, meddles in a relationship that generally already is working, and is another windfall for lawyers at the expense of California business.
Gov. Brown should say no to this needless and troublesome legislation.