California Makes Significant Changes to the California Franchise Investment Law and Franchise Relations Act

California Assembly Bill 676, which Gov. Gavin Newsom signed Sept. 29, 2022, makes significant changes to California franchising law. The new law applies to franchises entered into, amended or renewed on or after Jan. 1, 2023, and amends both the California Franchise Investment Law (CFIL), which regulates the offer and sale of franchises, and the California Franchise Relations Act (CFRA), which regulates the franchise relationship (e.g., termination and nonrenewal).

Changes to the CFIL include:

• Expanding civil liability by eliminating the prior limitation of liability only arising from violation of the law explicitly stated in the CFIL. This amendment may overrule cases that held that the CFIL preempts common law claims for intentional and negligent misrepresentation.
• Prohibiting franchisors from disclaiming a franchisee’s reliance on certain representations, such as a representation made by a franchisor, its personnel or agents, or any representation in the franchise disclosure document, including exhibits.
• Prohibiting franchisors from refusing to grant a franchise or provide financial aid to a franchisee or prospective franchisee based solely on the composition of a geographic area, or a characteristic protected by the state’s civil rights law.
• New standards, processes and timelines governing the transfer of an existing franchise to a new franchisee that will require franchisors to communicate directly with the prospective franchisee, as well as with the franchisee seller. Under the new law, franchisors can still exercise a right of first refusal and impose additional requirements on franchisee-to-franchisee sales.
• Expanding the grounds allowing the Department of Financial Protection and Innovation to issue a stop order revoking the effectiveness of a franchise registration if the Commissioner finds that (a) the franchisor’s method of business includes or would include activities that are, or would be, illegal where performed; or (b) the franchise agreement contains a provision that is contrary to law.
• Clarifying the application of the CFIL to sales between franchisors and franchisees who reside outside California if the franchise will be located in California.

Changes to the CFRA include:

• Limiting a franchisor’s right to offset amounts owed by the franchisee against the franchisor’s repurchase requirement upon lawful termination or expiration by requiring the offset amount to be agreed to by the franchisee or reflected in a judgment. Contractual terms previously controlled setoff rights.
• Prohibiting any provision of a franchise agreement requiring the franchisee to waive the provisions of the CFRA.
• Prohibiting a franchisor from modifying a franchise agreement or requiring a general release in exchange for assistance related to a declared state or federal emergency.