Sotos LLP

Global trends in franchise regulation – recent developments

 

Around the World

We have recently witnessed some major changes to franchise legislation in both California and Australia.  Developments in these jurisdictions are of importance to the global franchise world; in particular, shifts in California’s regulatory landscape are significant given its role as a global pioneer of franchise legislation. In fact, California was the first state to enact franchise legislation in 1970.  Australia, on the other hand, toyed with all manner of indirect and voluntary regulation before adopting a fairly stringent regulatory regime in 1998.

Franchising is a global industry – what happens in one jurisdiction often travels to others, albeit sometimes years (or even decades) later. Fundamentally, what drives franchise regulation are edgy business practices, widespread harm, and a receptive political climate. Changes in Australia and California are noteworthy because they represent the latest thinking as to where things are going when the franchising relationship breaks down or becomes unduly frayed.

California

Changes to franchise legislation that came into effect in January 2016 have been referred to as “unprecedented”, “monumental” and a “game-changer”.  The California Franchise Relations Act (the “CFRA”) was amended to provide franchisees with greater protection by imposing additional obligations on franchisors when terminating franchisees, in addition to other amendments.

Key changes under the CFRA include the following:

  • Franchisors may only terminate when there is “substantial noncompliance” – all other terminations are no longer on the table;
  • Franchisors must provide a written explanation for termination and are required to repurchase a franchisees’ assets at the value of the price paid, minus depreciation, upon termination or non-renewal (with specific exceptions carved out);
  • Franchisees have more time to address deficiencies under franchise agreements and are also entitled to a longer notice period in the case of termination (with certain exceptions carved out); and
  • In a wrongful termination, franchisees have additional remedies available – they may be awarded the fair market value of the franchised business and assets.

Australia

Living up to its antipodean geography, Australia recently introduced new legislation which regulates franchising through amendments to the Australian Securities and Investments Commission Act (the “ASICA”) by extending protection to small business contracts under an existing provision on unfair contract terms. Basically, if a franchise agreement falls within the definition of a small business contract, an unfair term in the agreement will be void. An unfair term is defined under ASICA as one that:

  • would cause a significant imbalance to the parties’ rights and obligations under the contract;
  • is not reasonably necessary in order to protect the legitimate interests of the party advantaged by the term; and
  • would cause detriment to a party if it were to be applied or relied on.

A list of examples of unfair terms is provided under ASICA and includes terms (as in California) such as one that permits only one party to vary the terms of the contract and one that limits a party’s right to sue another party.

This sad state of affairs was entirely predictable as it was preventable.  Caution to Canadian colleagues to heed the rule of reason: All successful business relationships are structured so as to balance risks and rewards such that everyone has an opportunity to reap a reasonable return on their investment. Franchise lawyers are uniquely positioned to influence the development of economically sustainable relationships through legal drafting.  Encouraging business arrangements that do not reflect this principle not only do a disservice to clients but also to an industry that has revolutionized the small business world.

Is Canada Next?

What do changes in California and Australia mean for Canadian franchising – will these significant regulatory changes find their way into Canadian legislation? While the relational balance of power is a topic of ongoing discussion, especially in British Columbia with the recent development of franchise legislation, such amendments are not in Canada’s foreseeable future.  Unless unanticipated events transpire in the next few years that forcefully steer discussion towards the need for change, the status quo across provinces will, in all likelihood, prevail.

That being said, the changes discussed above will have an impact on Canadian franchisors who operate internationally or plan to expand into California or Australia – the changes in California affect all franchise agreements entered into or renewed on or after January 1, 2016, while the Australian legislation applies to applicable contracts entered into or renewed on or after November 12, 2016.

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