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GENERAL INFORMATION
Silldorf | Levine, LLP has represented both Franchisees and Franchisors. Due to the nature of the relationship between many franchisees and franchisors, disputes often arise during the term of the franchise. There are many requirements that must be followed by franchisors in the state of California. Often, in their haste to begin selling their franchise, franchisors often fail to follow the rules. This leads to problems for the franchisor and problems for the franchisee.
In California, a franchisor must provide all prospective franchisees a Uniform Offering Circular ("UFOC"). Before the UFOC can be given to prospective franchisees, the franchisor must have the UFOC reviewed by the California Department of Corporations. Often, the state will have comments and require many revisions to the document. The UFOC is not considered to be completed until all of the revisions are made and the California Department of Corporations approves the document.
Approval of the UFOC by the state does not mean that the information contained in the document is accurate. Franchisors often oversell their franchises in an effort to get prospective franchisees excited about going into their own business. The UFOC is designed to provide all prospective franchisees with a minimum amount of information that may be used in making a decision as to whether to become a franchisee of a particular franchisor.
This page generally does not apply to franchises for automobile dealerships and/or gas station/dealers. There is a separate body of law to cover these franchises.
FREQUENTLY ASKED QUESTIONS
What is a Franchisee?
What is a Franchisor?
What is an Area Franchise?
What is a Franchise?
Does California Law Apply to my Franchise?
Can a Franchisor Require a Franchisee to Litigate/Arbitrate Outside the State of California?
Can a Franchisor Terminate my Franchise Prior to the Expiration of the Term of the Agreement Without Cause?
Can a Franchisor Terminate my Franchise Prior to the Expiration of the Term of the Agreement With Cause and Without an Opportunity to Cure?
When is a Franchisor Required to Deliver the Uniform Offering Circular to Prospective Franchisees?
What Information is Required to be Included in the Uniform Offering Circular?
What is a Franchisee?
A "franchisee" is a person to whom a franchise is granted. California Business and Professions Code §20002.
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What is a Franchisor?
A "franchisor" is a person who grants or has granted a franchise. California Business and Professions Code §20003
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What is an Area Franchise?
An "area franchise" means any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. California Business and Professions Code §20004.
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What is a Franchise?
A franchise is a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
(a) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and
(b) The operation of the franchisee's business purusant to that plan or system is substantially associated with the franchisor's trademark, service mark, tradename, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
(c) The franchisee is required to pay, directly or indirectly, a franchise fee. California Business and Professions Code §20001.
A franchise can be a franchise despite language in a written agreement stating that the relationship is not a franchisor-franchisee relationship. In fact, California Business and Professions Code §20010 states that:
Any condition, stipulation or provision purporting to bind any person to waive compliance with any provision of this law is contrary to public policy and void.
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Does California Law Apply to my Franchise?
The provisions of California Law apply to any franchise where either the franchisee is domiciled in the state of California or the franchised business is or has been operated in the state of California. California Business and Professions Code §20015.
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Can a Franchisor Require a Franchisee to Litigate/Arbitrate Outside the State of California?
No. A provision in a franchise agreement restricting venue to a forum outside the state of California is void with respect to any claim arising under or relating to a franchise agreement involving a franchise business operating within the state of California. California Business and Professions Code §20040.
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Can a Franchisor Terminate my Franchise Prior to the Expiration of the Term of the Agreement Without Cause?
No. No franchisor may terminate a franchise prior to the expiration of its term, except for good cause. Good cause is defined as:
The failure of the franchisee to comply with any lawful requirement of the franchise agreement after being given notice thereof and a reasonable opportunity, which in no event need be more than 30 days, to cure the failure. California Business and Professions Code §20020.
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Can a Franchisor Terminate my Franchise Prior to the Expiration of the Term of the Agreement With Cause and Without an Opportunity to Cure?
Yes. If during the period of the franchise is in effect, there occurs any of the following events which is relevant to the franchise, immediate notice of termination without an opportunity to cure, shall be deemed reasonable:
(1) The franchisee or the business which the franchise relates is declared bankrupt or judicially determined to be insolvent.
(2) The franchisee abandons the franchise by failing to operate the business for five consecutive days during which the franchisee is required to operate the business under the terms of the franchise, or any shorter period after which is is not unreasonable under the facts and circumstances for the franchisor to conclude that the franchisor to conclude that the franchisee does not intend to continue to operate the franchise, unless such failure to operate is due to fire, flood, earthquake or other similar causes beyond the franchisee's control.
(3) The franchisor and franchisee agree in writing to terminate the franchise.
(4) The franchisee makes any material misrepresentations relating to the acquisition of the franchise business or the franchisee engages in conduct which reflect materially and unfavorably upon the operation and reputation of the franchise business or system.
(5) The franchisee fails, for a period of 10 days after notification of noncompliance, to comply with any federal, state or local law or regulation applicable to the operation of the franchhse.
(6) The franchisee, after curing any failure engages in the same noncompliance whether or not such noncompliance is corrected after notice.
(7) The franchisee repeatedly fails to comply with one or more requirements of the franchise, whether or not corrected after notice.
(8) The franchisee is convicted of a felony or any other criminal misconduct which is relevant to the operation of the franchise.
(9) The franchisee fails to pay any franchise fees or other amounts due to the franchisor or its affiliate within five days after receiving written notice that such fees are overdue.
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When is a Franchisor Required to Deliver the Uniform Offering Circular to Prospective Franchisees?
California law requires that the Franchisor deliver to a prospective franchisee, a Uniform Offering Circular prior to the Earlier of the Following:
(1) 10 days before the execution of any binding agreement; or
(2) 10 days before the franchisor receives consideration from the franchisee.
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What Information is Required to be Included in the Uniform Offering Circular?
The Uniform Offering Circular must contain the following subjects within the document:
(1) A summary of the Franchisor, its Predecessors and Affiliates.
(2) A summary of the business experience of the owners/officers/directors and key employees of the franchisor.
(3) A disclosure of any past or current litigation related to franchising.
(4) Whether the franchisor has ever filed for Bankruptcy Protection.
(5) The amount of the Initial Franchise Fee.
(6) A summary/listing of any other Fees.
(7) A summary/listing of the initial investment required by a franchisee.
(8) Any restrictions upon the franchisee with respect to the purchasing of products and/or services from certain sources.
(9) Obligations of the Franchisee.
(10) Whether the ranchisor provides financing to franchisees.
(11) Obligations of the Franchisor.
(12) The territory of the franchise.
(13) A listing of the Trademarks of the franchisor.
(14) A listing of patents, copyrights and proprietary information belonging to the franchisor and provided to the franchisee.
(15) Whether there is any obligation on the part of the owner(s) of the franchise to participate in the daily operation of the franchised business.
(16) Whether there are any restrictions on what the franchised business may sell.
(17) The terms for renewal, termination, transfer and dispute resolution.
(18) Whether the franchise uses public figures to promote the business.
(19) Earnings claims by the franchisor.
(20) A list of franchises. This includes both past and present franchises.
(21) Financial statements of the franchisor.
(22) A copy of any contracts that will need to be signed by the prospective franchisee.
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