Editor’s note: This month, Independent Joe offers an updated look at the legal impact from California’s Franchsie Relations Act, which has been covered extensively in this magazine. Franchise attorney Peter Lagarias provides this review of the statutory changes and how they affect Dunkin’ Donuts franchise owners.
The landmark California Franchise Relations Act (CFRA), which went into effect in 1981, gave franchise owners in that state important new protections for the equity they have in their businesses. Last year new amendments were added to the law, providing franchisees with additional new protections when their agreements are transferred, terminated, or not renewed. The amendments are not retroactive, and therefore apply to franchise agreements signed in California
Hailed as a game changer in franchising, the CFRA gave Dunkin’ Donuts franchisees across the nation hope that other states would follow California’s lead. Without statutory protections, franchise transfers, terminations and renewals would be solely governed by the one-sided provisions of Dunkin’ Donuts Franchise Agreement. Under typical franchise agreements, franchisees have no right to renew under the same terms, have only a limited ability to sell or transfer their franchises, and can be terminated for many, often trivial, reasons.
Under the amended CFRA, there are significant new protections for California franchisees’ equity. While franchisors will always be able to terminate franchisees for certain egregious misconduct, the statute now stipulates that a franchisee can only be terminated for substantial non-compliance with the overall lawful requirements of the franchise agreement. In contrast, the old version of the statute permitted termination for breach of any single lawful requirement.
The amended CFRA also provides both procedural and substantive protections of a franchisee’s right to transfer his or her franchise agreement. Procedurally, a franchisor must respond to a franchisee’s request to approve a transfer within 60 days of receiving specified information about the transfer, or the transfer will be deemed approved by statute. Substantively, the franchisor must approve the transfer if the proposed buyer meets the franchisor’s then-existing standards for new franchisees and the terms of transfer comply with the provisions of the franchise agreement.
Regarding renewal, a franchisor must give 180 days notice of its decision not to renew the franchise agreement, and allow the franchisee to sell the franchise business. The sale would be subject to
the new standards for approval of transfers.
The amended CFRA recognizes that franchisees create and own equity in their businesses. The statute requires the franchisor, with certain exceptions, to compensate the franchisee by purchasing from the franchisee, for the price paid less depreciation, all inventory, supplies, equipment, fixtures and furnishings purchased from the franchisor or its approved suppliers in the event of certain non-renewals or lawful terminations.
Dunkin’ Donuts franchisees in California now have these statutory rights. But the existence of the California statute can help franchisees in other states in negotiations with Dunkin’ Donuts for better terms in their future franchise agreements. In addition, if changes to the franchise agreements cannot be achieved, franchisees now have a model of a statute to provide improved protection for their substantial investments. •
Peter C. Lagarias, Esq., is the founding partner of Lagarias & Napell, LLP, a franchise law firm in San Rafael, California.