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Finding Fairness in California Franchise Law

Adhesion Contract: Generally, an agreement between two parties in which one side has all the bargaining power and uses it to write the contract primarily to his or her advantage.

Many franchise agreements can be fairly characterized as an “adhesion contract” because, to become a franchisee, an individual typically must enter into the franchise agreement in its current form, absent the benefit of negotiation. As a result, franchise agreements are generally extremely favorable to the franchisor and unfair and often frustrating to the franchisee.

Indeed, due to recent decisions by the U.S. Supreme Court, most franchise agreements may lawfully require franchisees to purchase supplies and materials from vendors designated by the franchisor (often times, at an above market price), prohibit franchisees from forming a class to litigate a common issue (thereby effectively precluding franchisees from litigating matters with relatively small amounts in controversy) and require arbitration. See AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011).

Fortunately, however, California franchise law offers several significant protections to franchisees, notwithstanding the provisions of their respective franchise agreements.

The California Franchise Relations Act (“CFRA”), as codified in Business and Professions Code § 20000 et. seq., serves to protect California franchisees from abuses by franchisors in connection with the non-renewal and termination of their franchises. 1-800-Got Junk, LLC v. Superior Court, 189 Cal. App. 4th 500, 515 (2010). In furtherance of this protection, courts are required to construe the CFRA broadly to carry out its legislative intent, which is to protect franchisees. See id.

The CFRA applies to any franchise in which: (1) the franchisee is domiciled in the State of California; or (2) the franchised business is or has been operated in California. Bus. & Prof. Code § 20015. Accordingly, franchisees are afforded the rights and protections of the CFRA notwithstanding a franchise agreement’s requirement that the terms of the agreement be interpreted and construed in accordance with the laws of another state.

Indeed, pursuant to CFRA § 20020, a franchisor may not terminate a franchise agreement prior to the expiration of its term, except for good cause. Good cause includes, but is not limited to, the failure of the franchisee to comply with any lawful requirement of the franchise agreement only after being given notice thereof and a reasonable opportunity to cure the failure (unless certain exceptions apply). Business and Professions Code § 20020.

Also, pursuant to Bus. and Prof. Code § 20025, no franchisor may fail to renew a franchise unless such franchisor provides the franchisee at least 180 days prior written notice of its intention not to renew and one of several additional conditions are met. Accordingly, to the extent that a franchisor seeks to terminate a franchise, the franchisor may be doing so in violation of the law and in contravention of the rights afforded to a franchisee under California law.

As a franchisee, it is important that you know your rights under California law. Otherwise, you may fail to take advantage of significant protections that can help save the franchise in which you invested substantial time, resources and capital. If you have an important legal question, contact a San Francisco attorney regarding your rights.


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