With a new year comes a new law. Fresh off of ushering in 2023, franchisors must now heed California Assembly Bill 676 (“AB 676”) which amends the California Franchise Relations Act (“CFRA”) and the California Franchise Investment Law (“CFIL”). Fortunately for franchisors, AB 676 is forward-looking as it only applies to franchise agreements entered into, amended, or renewed on or after January 1, 2023. Along the same lines, amendments to a franchise agreement that a franchisee initiates and that do not adversely impact the franchisee’s rights, will not be subject to AB 676. See Cal. Bus. & Prof. Code § 20041(c). 

As discussed below, AB 676 impacts numerous areas of California franchise law, including waivers, disclaimers, termination, civil liability, transfers, and application of the CFIL. In doing so, AB 676 imposes various additional protections for franchisees—and even prospective franchisees—at the expense of franchisors. The protections include the following:

Waivers and Disclaimers: AB 676 adds Cal. Corp. Code § 31512.1, which prohibits any provision of a franchise agreement, franchise disclosure document, acknowledgement, questionnaire, or other writing from disclaiming or denying:

• Representations made by the franchisor or its personnel or agents to a prospective franchisee;
• Reliance by a franchisee on any representations made by the franchisor or its personnel or agents;
• Reliance by a franchisee on the franchise disclosure document; and
• Violations of any provision of the CFIL

Setoff at Termination: AB 676 amended Cal. Bus. & Prof. Code § 20022(h), which now states that “[u]pon termination or nonrenewal of a franchise, a franchisor may offset against the amounts owed by the franchisee to the franchisor, provided the franchisee agrees to the amount owed or the franchisor has received a final adjudication of any amounts owed.” (emphasis added). This is a significant reversal in favor of franchisees. 

Franchise Transfers: AB 676 adds Cal. Corp. Code § 31126, which creates various hurdles in connection with a franchisor’s ability to control and approve the transfer of a franchise. Importantly, it imposes the following requirements:

• If a franchisor’s standards for approval of a franchise transfer are not reasonably available to a prospective franchisee, a franchisor must communicate such standards to the prospective franchisee within 15 calendar days of receiving a written request for the standards. See Corp. Code § 31126(b)(2).
• As soon as practical, a franchisor must notify a prospective franchisee in writing of any additional information or documentation necessary to complete a transfer application. See Corp. Code § 31126(c).
• Franchisors must notify prospective franchisees of the approval or disapproval of their transfer application within 60 days after receiving the information required from the franchisee. The franchisor’s notice must be in writing and delivered to the prospective franchisee by email, courier, or certified mail. If the prospective franchisee’s application is denied, the franchisor’s notice must set forth the reasons for the disapproval. See Corp. Code § 31126(d)(1).
• In legal actions where a franchisor’s disapproval of a transfer is at issue, the reasonableness of the franchisor’s decision is a “question of fact requiring consideration of all relevant circumstances.” See Corp. Code § 31126(d)(2).
• Fortunately for franchisors, Cal. Corp. Code § 31126(e) clarifies that franchisors are not prohibited from exercising a right of first refusal or imposing additional requirements on franchisee-to-franchisee sales.

Application of the CFIL: AB 676 also amends Cal. Bus. & Prof. Code § 20015 and deems contrary to public policy—and therefore void and unenforceable—any provision of a franchise agreement requiring the franchisee to waive the provisions of the CFIL. See Cal. Bus. & Prof. Code § 20015(b). 

Civil Liability: AB 676 significantly expands civil-liability exposure under CFIL by amending Cal. Corp. Code § 31306. Previously, civil liability under CFIL could only arise for violations of the law as explicitly stated in the CFIL. AB 676 removed that explicit limitation, and now the CFIL provides no safeguards from liability under any other statute or under common law.

Other Additional Franchisee Protections: Less controversial, but still equally important, AB 676 also targets unlawful discrimination by franchisors and tying certain emergency aid to concessions or a release from franchisees.

• Franchisors now cannot refuse to grant a franchise or refuse to provide financial assistance to a franchisee or prospective franchisee that has been granted or provided to other similarly situated franchisees or prospective franchisees based solely on any characteristic of the franchisee or prospective franchisee, or any characteristic of the composition of the neighborhood area where the franchise is located or the proposed franchise would be located. See Corp. Code § 31212. The law also states that franchisors are not prohibited from granting a franchise to a prospective franchisee as part of a program to make franchises available to persons lacking the capital, training, business experience, or other qualifications ordinarily required of franchisees, or any other affirmative action program adopted by the franchisor.
• AB 676 also gave birth to Cal. Bus. & Prof. Code § 20044, which is a result of COVID-19. Under the new law, franchisors are prohibited from modifying a franchise agreement, or requiring a general release in exchange for any assistance related to a declared state or federal emergency.

With the most widescale amendments to California’s franchise laws in the past several years, franchisors should pay close attention to their policies, practices, and franchise agreements to avoid being caught in the crosshairs of AB 676’s franchisee-friendly changes to California franchise law. Many standard practices that previously passed muster under California law—disclaimers in FDDs, broad use discretion in approving franchise transfers, and requiring releases from franchisees—may now run afoul of AB 676’s changes. Compliance with AB 676 should be on any franchisor’s list of resolutions.