Franchise Law Article

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, 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 of 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. This document used to be called a Uniform Franchise Offering Circular ("UFOC") and is now called a Franchise Disclosure Document (“FDD”).

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;
• making 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 violations 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 generally 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.