Garner, Ginsburg & Johnsen, P.A. Law Offices

Know Your Rights Before You Buy a Franchise in California

If you are a franchisee or potential franchisee in California, you may have rights not available to individuals in other states. This is because California has two comprehensive laws regulating franchising: the California Franchise Investment Law and the California Franchise Relations Act. 

Together, these California franchise requirements serve to protect franchisees during every stage of franchise ownership – from what must be disclosed to potential franchisees before they buy a franchise in California, to under what circumstances a franchisor can terminate or refuse to renew a franchise agreement. 

The California Franchise Investment Law

The California Franchise Investment Law sets forth the registration and disclosure requirements all franchisors must comply with before offering or selling franchises in California. As a California franchise law, It is designed to protect franchisees, prevent fraud, and ensure that prospective franchisees have enough information to make an informed purchase decision. Among other things, it requires franchisors to register their franchise disclosure documents with the state every year, and then provide those disclosure documents to potential franchisees at least 14 days before any documents are signed or money exchanges hands. The disclosure documents must contain information pertinent to a potential franchisee’s decision to buy a franchise in California – from the names of all the franchisor’s executives to the franchisor’s litigation history and audited financial statements. 

Protections Placed for Franchisees in the California Franchise Investment Law

Although federal law also requires franchisors to provide useful information to individuals looking to buy a franchise in California, the California Franchise Investment Law takes this one step further by allowing franchisees who do not receive the appropriate disclosures to rescind, or cancel, their franchise agreements and recover monetary damages in many circumstances. Franchisors cannot require franchisees to waive compliance with the law, so franchisees in California can still claim the Law’s protections even if their franchise says another state’s law should apply.

The California Franchise Relations Act

While the California Franchise Investment Law covers pre-purchase considerations, the California Franchise Relations Act governs the ongoing relationship between franchisors and franchisees. In particular, it limits franchisors’ ability to terminate, refuse to renew, or refuse to approve the transfer or sale of a franchise to an individual looking to buy a franchise in California.

When it comes to terminations, the California Franchise Relations Act says that franchisors may only terminate a franchisee for “good cause,” which is limited to a franchisee’s failure to substantially comply with the franchise agreement. It also mandates that franchisees receive at least 60 days’ notice before the termination, and at least 60 days to attempt to remedy the default, except for certain, time-sensitive defaults including if the franchisee abandons the franchise or if the franchisee is endangering public safety. The Act also requires franchisors to repurchase certain inventory, supplies, equipment, and fixtures from the franchisee after the franchisee is terminated. This California franchise requirement helps ensure that franchisors may only terminate franchise agreements for legitimate, as opposed to pretextual, reasons and that former franchisees are not left with unsaleable goods after the agreement is terminated. 

Protections Placed for Franchisees in the California Franchise Relations Act

As with the termination provisions, the California Franchise Relations Act also requires franchisors to provide franchisees with sufficient notice, at least 180 days, of their intent not to renew a franchise agreement when the term expires. Similarly, according to this California franchise law, franchisors must have good cause to not renew the franchise, must waive any non–compete provisions in the franchise agreement, or must allow the franchisee to sell the franchise to a qualified buyer before the term expires. As with termination, franchisors must repurchase the franchisee’s inventory, supplies, equipment, and fixtures. By treating non-renewals similarly to terminations, the Act makes franchising a safer investment for franchisees, as it provides protection from unfair nonrenewals that would wipe out the franchisees’ investment in the studio during the initial franchise term.

What Happens If a Franchisor Violates the Act?

If a franchisor terminates or fails to renew a franchisee in violation of the Act and California franchise requirements, the franchisee may recover the fair market value of its franchise and all franchise assets, plus any other monetary damages caused by the franchisor’s violation. The Act also allows franchisees to ask a court to prohibit a termination or nonrenewal before it happens, therefore preventing their business from having to close at all. 

Finally, the Act limits a franchisor’s ability to refuse to allow a franchisee to sell its franchise, or a portion of its franchise, to a qualified purchaser – meaning a purchaser that meets the franchisor’s then-current requirements for new franchisees. Unless a franchisor can express a legitimate reason for denying a transfer within 60 days, the transfer will be deemed approved. This will simplify a franchisee’s exit strategy in many instances and helps protect them from arbitrary refusals. 

Seek Assistance From California Franchise Law Experts

Combined, these two laws help make sure that California residents have the necessary information to make an informed decision when purchasing a franchise and are protected from franchisor overreach after becoming a franchisee. If you are a California franchisee and are experiencing a dispute with your franchisor, contact us and our experienced franchise lawyers at Garner, Ginsburg & Johnsen P.A. to see if these laws may protect you.