Claims Under the California Franchise Investment Law
What claims can be brought under the California Franchise Investment Law (“CFIL”) and what protections are provided to franchisees. The CFIL regulates the sale and disclosure of franchise opportunities in California as well as the sale of franchises to California citizens or in some cases out of state sales by a California franchisor. It’s intent, as stated in California Corporations Code Section 31001, is three-fold:
- “provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered,”
- “prohibit the sale of franchises where the sale would lead to fraud or a likelihood that the franchisor’s promises would not be fulfilled,” and
- “protect the franchisor and franchisee by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship.”
At times, the CFIL offers a franchisee the opportunity to pursue a private right of action or claim against a franchisor, but these laws can be complicated. Below, we’ll discuss the complexity of these claims under the CFIL and explain the protections they provide franchisees.
What Claims Can be Brought Under the California Franchise Investment Law?
CFIL Section 31300
Franchisees can bring suit if the franchisor violates any of the following CFIL Sections:
States the “minimum net worth, experience, disclosure, and notice filing requirements” that a franchisor can satisfy in order to be exempt from registering their franchise disclosure document with the state.
Prohibits the offer or sale of a franchise without first registering it with the state and is also not exempt from the registration requirement.
The franchisor must provide the franchisee with the current franchise disclosure document at least 14 days prior to either signing the franchise agreement or receiving payment for the franchise, whichever comes first.
The franchisor must report any major modifications or change to the franchise system by updating its franchise registration materials (including franchise disclosure document).
It’s “unlawful for any person willfully to make any untrue statement of a material fact in any application, notice or report filed with the commissioner under this law, or willfully to omit to state in any such application, notice, or report any material fact which is required to be stated therein or fail to notify the commissioner of any material change as required by Section 31123.”
It’s “unlawful for any person willfully to make any untrue statement of a material fact in any statement required to be disclosed in writing pursuant to Section 31101, or willfully to omit to state in any such statement any material fact which is required to be stated therein.”
Claims here are usually brought for a failure to abide by the proper disclosure period, failure to properly sell an exempt franchise or misrepresentations or omissions in the franchise disclosure document. Standing is typically construed as limited to franchisees or subfranchisees who purchased a franchise.
While a franchisee can bring suit if the franchisor violates any of the above CFIL Sections, violation alone will not prove liability. In DT Woodard, Inc. v. Mail Boxes Etc., Inc. (Cal. Ct. App., Oct. 17, 2007, No. B194599) 2007 WL 3018861, the California Court of Appeal explained that in order to prevail on a claim, franchisees are required to show causation, reliance, and damages.
Additionally, if the franchisee can prove that the franchisor’s conduct resulting in the violation was willful, the franchisee may also sue for rescission. If this happens, courts can attempt to restore parties to their pre-contract status and order any relief necessary to adjust inequities between the parties. If the recission is, in fact, granted, the aggrieved party can also be awarded complete relief, which includes being put back into the place the party was prior to purchasing a franchise, reimbursing all the costs incurred including arguably lost wages.
CFIL Section 31301
This section provides a private right of action for CFIL Section 31201, which states that it is unlawful for a franchisor to make an untrue statement of material fact or material omission to a potential franchisee that is not contained in the application, notice, or report on file with the Department of Business Oversight. This section often relates to claims based on sales materials, financial projections and salesperson statements.
Under Section 31301, a franchisor who violated Section 31201 is liable to a franchisee who relied upon such statement when purchasing a franchise, unless the franchisor proves that the franchisee knew the facts concerning the untrue statement or omission or that the franchisor exercised reasonable care and did not know about the untrue statement or omission.
A claim for damages brought under Section 31301 is subject to the same reliance, causation, and damages analysis as described above when discussing violations of CFIL Section 31300.
CFIL Section 31302.5
A franchisor cannot (directly or indirectly) restrict or inhibit the right of its franchisees to join a trade association or prohibit the right of free association among franchisees for any legal purpose. If they do, a private right of action claim under Section 31302.5 may be pursued.
Liability Extends Beyond the Franchisor to Its Management
It’s important to note that the above-mentioned private claims arising out of the CFIL are not limited solely to the franchisor. Claims may also be asserted against the following:
- A person who controls the franchisor, either directly or indirectly,
- Any principal executive officer or director of the franchisor,
- Anyone with a similar status or performing similar functions to the franchisor,
- Every employee of franchisor who helps in the act or transaction constituting a violation.
Suppose any of the above-mentioned individuals are found liable. In that case, the franchisee may recover damages from the individual, regardless of that individual’s actual share of responsibility. The involvement of the above-mentioned individuals can also result in there being insurance coverage on claims, which may help to resolve a dispute.
Work With an Experienced Franchise Attorney
Claims brought under the CFIL are complex and complicated. There are strict statute of limitations that need to be heeded. And careful analysis should be given to whether fraud (intentional or negligent misrepresentation claims) claims can also be brought in conjunction with the CFIL claims.
We are experienced in advising franchisors and franchisees on the California Franchise Investment Law. We have represented both sides in litigating the CFIL. If you need an experienced franchise lawyer to analyze, bring or defend claims, contact Luther Firm, PC, to schedule a consultation.