To the surprise of many, California Governor Jerry Brown has vetoed the proposed changes to California’s franchise laws that were discussed in our Client Alert on August 28, 2014. In his veto message, Governor Brown criticized the bill’s substitution of “substantial and material breach” for “good cause” as the standard for determining justifiability of franchise terminations – a key change discussed in our Client Alert. He explained that the familiar “ ‘good cause’ standard is common and well understood,” whereas the proposed replacement standard “is new and untested.”

Pointing to the importance attached by the franchise industry on “the certainty of well-settled law”, the veto message called on franchisors and franchisees to make “a concerted effort... to reach a more collaborative solution” to any problems that franchisees felt warranted “more protections” for their position. The message warned that a clear explanation of the scope of “unacceptable or predatory practices by franchisors” would be necessary before new measures would be signed into law.

It seems unlikely that the “collaborative solution” optimistically called for by the veto message will emerge. Nor is it clear whether pursuit of the vetoed measure was motivated by actual abusive behavior on the part of some franchisors or simply reflected a desire by franchisees to make involuntary termination, even on the basis of clear performance deficiencies, a sufficiently dubious proposition that franchisors would be motivated to buy out poorly performing franchisees rather than face the hazards and uncertainties of litigation under elastic and poorly defined legal criteria. In either event, it seems certain that the battle is not over and that the antagonists will find themselves engaged in legislative battle once more in the next session of the California Legislature.