OVERVIEW OF CALIFORNIA FRANCHISE INVESTMENT LAW 1. Overview and Purpose of the Statute In 1970, the California Legislative enacted one of the first franchise disclosure laws in the country. The statute, popularly known as the California Franchise Investment Law, generally requires franchisors to register, with the State of California prior to offering and selling franchises in California. The California Franchise Investment Law also requires that the registration disclosure document and the final franchise agreement be provided to a prospective franchisee at least ten business days prior to the sale of a franchise. The purpose of the pre sale disclosure is to provide, fully and truthfully, all material information about the franchisor and its franchise offering to the prospective franchise, prior to a purchase decision. The California Legislature declared this purpose as follows: "The Legislature hereby finds and declares that the widespread sale o f franchises is a relatively new form of business which has created numerous problems both from an investment and a business point of view in the State of California . . . California franchises have suffered substantial losses where the franchisor or his representative has not provided full and complete information regarding the franchisor-franchisee relationship, the details of the contract between franchisor and franchisee, and the prior business experience of the franchisor. It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor by providing a better understanding of the relationship between the franchisor and the franchisee with regard to their business relationships." The central document under the California Franchise Investment Law is the registration and disclosure statement. In most instances, this document is called a Uniform Franchise Offering Circular ("UFOC").
2. Statutory Registration and Disclosure Requirements The California Franchise Investment Law is a complex statute and is amplified by a series of regulations adopted by the California Commissioner of Corporations. In addition, rulings pertaining to the Federal Trade Commission Trade Regulation Rule on franchise disclosure may also be relevant in interpreting the California Franchise Investment Law. The following is a list of some of the more common statutory violations of the California Franchise Investment Law statute which we have observed over the years: failure to register the franchise offering circular with the California Commissioner of Corporations when not exempted; failure to provide the franchise offering circular and franchise agreement to the prospective franchisee at least ten business days before the sale; omitting required information in the franchise offering circular; including false or fraudulent information in the franchise offering circular; and false or improper earnings claims.
The California Franchise Investment Law also has a special provision generally prohibiting franchisors from interfering with franchisee associations.
3. Statutory Remedies for Franchisees The California Franchise Investment Law provides for money damages. In cases of willful damages the statute also provides for rescission of contract. Rescission of contract generally means that both parties to the franchisee agreement give back to each other what they received. Thus the franchisee must give back the franchise and the right to use the trade name, while the franchisor must generally give back the franchisee fee to the franchisee. Lagarias & Boulter, L.L.P. has been successful for franchisees in actions seeking rescission under the California Franchise Investment Law including not only for rescission but also ancillary damages. If you believe your rights have been infringed, for example in the sale of a franchise by fraud or violations of the California Franchise Investment Law, you should seek experienced franchisee counsel at once. There are time limits within which you must sue or risk being barred as untimely. Lagarias & Boulter, L.L.P. is experienced in claims of franchisees and can be reached at (415) 460-0100.
Disclaimer: This article has been prepared by Lagarias & Boulter, L.L.P. for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel. The information contained in this article is provided only as general information which may or may not reflect the most current legal developments.