When it comes to California, an earthquake is nothing to joke about. Neither is SB 610. It is a bill working its way through the state legislature that could have big implications on franchise relationships.
What Is SB 610?
Before discussing what the bill would do, let’s talk about what it is. Right now California is the most franchisee-friendly state in the U.S. If passed, SB 610 would strengthen abilities for the franchisee. For example, this bill would prevent a franchisor from terminating franchise agreements with a franchisee unless it can demonstrate that a substantial and material breach of a lawful requirement has taken place.
There are a couple of potential problems here. First of all, what constitutes a “substantial and material breach”? Is the failure to pay royalties the only the only definable breach that would fall under this heading? This broad language could actually open up franchisors to a floodgate of litigation. Because who determines the meaning of “substantial and material breach”? Franchisor’s will take one position, and the franchisee litigators will argue that they are wrong. That is how this bill will encourage, not discourage litigation.
It will also make it more difficult for franchisors to enforce brand standards. There are a lot of requirements involved in an agreement between a franchisor and franchisee. Not all of them relate to money, and some of those that don’t can have a substantial impact on a franchisor’s business. If a franchisor can’t enforce its brand, what is to stop a franchisee from doing what they want without any consequences?
What Happens Now?
The bill itself is a polarizing topic. Proof of that might be how long it’s taking for it to reach this point. SB 610 was introduced to the State Senate in February 2013. As of this moment, it has passed the Senate, and now is before the State Assembly for consideration. If approved there, it will move on to the Governor for approval.
Only time will tell how something like this will affect California’s economy, and the franchise model as a whole. Early implications are that this could create a huge shift. Are you ready California?