By Michael Seid, CFE

Gov. Jerry Brown of California reset the bar for the consideration of state relationship laws nationwide through his veto of SB 610 in September.  If enacted, the measure would have substantially changed the California Franchise Relations Act by imposing new restrictions on franchisors in their contractual relationship with their franchisees and in their ability to manage their franchise systems. Under the bill that Brown vetoed, franchisors would have been restricted in their ability to select and approve the franchisees who operated under their brands. Additionally, the bill would also have impeded the ability of the franchisors to manage their franchise systems sufficiently to protect consumers and other franchisees by allowing for the repetitive breaches of the franchisor’s brand standards by franchisees. ov. Jerry Brown of California reset the bar for the consideration of state relationship laws nationwide through his veto of SB 610 in September.  If enacted, the measure would have substantially changed the California Franchise Relations Act by imposing new restrictions on franchisors in their contractual relationship with their franchisees and in their ability to manage their franchise systems. SB 610 would also have superimposed ill-defined legislative terms into the contractual relationship between franchisors and franchisees, thereby heightening the probability of increasing unnecessary disputes and costly litigation to settle formerly routine disagreements between the parties. In his veto letter Brown stated: “This bill alters the relationship between franchisors and franchisees by, among other things, changing the standard required to terminate a franchise agreement from ‘good cause’ to a ‘substantial and material breach.’  While the ‘good cause’ standard is common and well understood, the standard provided in this bill is new and untested.” He went on to state that: “The bill’s changes would significantly impact California’s vast franchise industry that relies on the certainty of well settled law.” In raising the bar for other legislators nationwide who might be considering the imposition of restrictions on franchisors, he set two sensible hurdles for them to meet:

  1. That there be some proof that there is a systemic problem of  “unacceptable or predatory practices by franchisors;” and,
  2. That “the solution crafted will fix those problems and not create new ones.”

SEIU’s Rationale

Throughout the debate on SB 610, the major proponents of the bill, the Service Employees International Union, the Coalition of Franchisee Associations and the American Association of Franchisees and Dealers, advanced the notion that there were significant problems in California on how franchisors manage and operate their franchise systems.  SEIU’s rationale for becoming involved in a non-labor issue was apparently for the purpose of weakening franchising in California sufficient to support the recruitment of a new class of worker, and to further strengthen its nationwide push to organize fast-food workers to replenish its steadily dwindling private-sector union membership ranks and financial coffers. Much of what the proponents presented in support of SB 610 was in the form of anecdotal narratives that were shown to be inaccurate assertions unsupported by the facts in those instances.  Supporters portrayed the termination of franchisees for defaulting on their contractual relations as being unfair to the franchisees even when it was the franchisee who was personally responsible for violating those franchise agreements. Proponents also raised the possibility of future acts by franchisors as reasons that SB 610 was required to protect the equity of franchise owners, but were unable to sustain their argument that those potential acts by franchisors actually occur.  The proponents’ failure to show that problems in the franchise model as practiced in California, actually exist. This was the rationale and overall basis for Brown’s rightful decision not to sign the bill.

SB 610’s Overreaching Changes

In opposition, the International Franchise Association was able to show that the contrary position was accurate by reflecting on the growth of franchising in the state and the limited number of litigation cases that had been filed in California. The IFA was able to sustain its argument that SB 610’s inclusion of overreaching changes to the terms franchisors include in franchise agreements and limiting a franchisor’s ability to select to whom franchise rights were granted was also problematic. Brown’s requirement that before a bill be inserted into the law that there first must be proof that a problem actually exists and that the bill not create new issues or have unintended consequences is common-sense governance. The governor suggested that some collaboration between franchisors and franchisees be considered before a similar measure is brought to his desk again. With an understanding that the baseline requirements he set need to prove that a broad based problem in franchising exists in California, and that any legislation not have unintended consequences, limits the likelihood that effective discussions can happen. Proponents will first need to come to the table with clear, precise, factual and measurable evidence that the franchise model is systemically flawed and not working in California in order for any collaboration to occur. Simply arguing that the relationship is not balanced is insufficient because no licensing relationship can truly be balanced if it requires the licensor to limit how it protects its intellectual property and dictates to whom the franchisor provides those license rights. To be certain, SB 610 will not be the last effort to legislatively change the franchise relationship we will see in the United States. But opponents of those measures will have the ability to present to legislators the bar set by the California governor — that there actually needs to exist material problems — before recasting the franchise relationship.  Unsupported and limited anecdotal information by proponents and assertions that bad acts that don’t currently exist might occur in the future (supported by organized labor with its own, separate agenda) will be insufficient for legislators to consider changing a method of business working well in their states. 

Michael Seid, CFE, is chief concept officer of CFWshops and a member of the IFA board of directors, as well as managing director of MSA Worldwide. Find him at fransocial.franchise.org.

Veto of California SB 610 — A Victory for Franchising?  Definitely.A Permanent Win?  Definitely Not.

“The veto of California SB 610 saved franchising from unimaginable damage. Franchisees and franchisors worked together in defeating the bill and owe Gov. Jerry Brown an enormous debt of gratitude. However, we fully expect the proponents of SB 610 to reintroduce similar legislation in 2015.  Rest assured, the International Franchise Association will remain steadfast in its message that governmental intervention is not the answer to resolving conflicts between franchisees and franchisors. While much has been written on California SB 610, the following article by Michael Seid, CFE, IFA board member, provides an excellent analysis of not only the legislation, but also the subsequent veto by Gov. Brown.”

Robert Cresanti International Franchise Association Executive Vice President Government Relations and Public Policy  

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