California About To Make Franchise Terminations Harder

SB 610, if signed into law, would forbid termination except for "a substantial and material breach . . . of a lawful requirement of the franchise agreement." It does not provide for the possibility of termination based on non-contractual defaults. Even in the case of contractual defaults, the new language will open the door to fact-intensive disputes over whether an established breach is "substantial and material". Thus, for example, a 10% quota shortfall would seem ample to support termination under existing law, whereas the substantiality requirement in the proposed amendment would arguably make the justifiability of termination on that basis a jury question.

Enactment of SB 610 would make it prudent for franchisors to examine their agreements in order to ensure that they impose at some level of abstraction all requirements that franchisors feel are essential to ensure that franchise businesses operate effectively and in conformance with the franchisors' business models. This may require, for example, express provisions that franchisees will obey all national, state, and local laws; that they will treat their employees and prospective employees with dignity and in accordance with legal requirements; and that they will avoid conduct that, if publicized, would risk damaging the franchisors' name or impairing the integrity of its marks.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.