Franchise Update
August 2004

Appellate Court Clarifies Franchise Relations Act Remedies


Since the adoption of the Franchise Investment Law in the early 70s, California has been a leader in recognizing the inequalities inherent in franchising, and in offering California franchisees some legal protections. California's Franchise Investment Law was the first state law requiring franchisors to provide specific information to prospective franchisees. In the early 80s, California adopted the Franchise Relations Act ("FRA"), which required franchisors to treat franchisees fairly with regard to the termination and renewal of their agreements. Specifically, the FRA provides that a franchisor can only terminate a franchise agreement before its expiration for good cause, and that it must give a franchisee 180 days notice of its intent not to renew a franchise agreement.

The FRA also provides that if a franchisor gives less than 180 days notice of non- renewal, it must repurchase the franchisee's unsold inventory. This provision lead to some confusion regarding whether or not a franchisee could sue for damages if its franchisor breached the FRA. The confusion was fueled mainly by a 1987 decision of the 9th Circuit Court of Appeal entitled Boat & Motor Mart v. Sea Ray Boats, Inc. In Sea Ray, the franchisor terminated the agreement in violation of the FRA, and asserted that the franchisee's only remedy was to require the repurchase of its inventory. The franchisor was correct in that case, because the franchise agreement specifically provided for a waiver of damages. However, in its opinion the 9th Circuit made the (unnecessarily) broad statement that repurchase of inventory was the only remedy for breach of the FRA.

Franchisors seized on the court's statement, and since 1987 have consistently asserted that the only remedy for breach of the FRA is repurchase of inventory. While this argument has always seemed wrong, franchisees did not have a court opinion supporting their position to refer to whenever franchisors trotted out Sea Ray. Until now.

Earlier this year, a California appellate court decided JRS Products, Inc., v Matsushita Electric Corporation of America, and finally addressed the obvious problems with Sea Ray. In JRS Products, JRS was a franchised distributor of Panasonic fax machines. Matsushita terminated the franchise without good cause, and JRS sued for breach of contract based on the FRA's good cause requirement, as well as for interference with prospective advantage (for destroying JRS's continuing relationships with its customers). Matsushita was granted summary judgment on the contract claim, on the basis that JRS's sole remedy was repurchase of inventory. The case proceeded to trial on the tort claim of interference with prospective advantage, and JRS was awarded over $3.2 million in compensatory and punitive damages. Both parties appealed. The Court of Appeal held that repurchase of inventory is not the exclusive remedy under the FRA, and that to hold it was would be "absurd" because the FRA was "designed to expand, not retract, a franchisee's remedies." The court specifically limited the holding in Sea Ray to its specific facts - where the franchisee had contractually waived damages. Equally significantly, the court expressly stated that a franchisee can base a claim for damages for breach of contract on the franchisor's termination of the franchise agreement in violation of the FRA. Unfortunately for JRS, the court also held that breach of the FRA is contractual and not a tort. It reversed the multimillion dollar award, and sent the breach of contract claim back for trial.

This update is only a summary. The Law Offices of Peter A. Singler can help you understand the full impact this law may have on your business. If you have any question, please contact Bruce Napell at (707) 823-8719 or BJN@singler-law.com.


Law Offices of Peter A. Singler copyright ©1999-2004.