With respect to franchise business arrangements, California has one of the strongest regulatory schemes that is designed to protect franchisees. In general, a business arrangement is considered a “franchise” if three characteristics are found:

  • The local franchise will be “substantially associated” with the main/national franchisor’s trademarks and/or service marks
  • The franchisor has a marketing plan or business system which must be used by the franchisee and
  • The franchisor requires that the franchisee pay fees — directly or indirectly — for the right to use the trademarks, service marks, and business system/plan

Many people invest in franchises and the franchises become their livelihood. As a result of abuses by franchisors, California enacted two main statutes to protect franchisees from abusive franchise agreements. The main statutes governing franchise arrangements in California are the Franchise Relations Act (Cal. Bus. & Prof. Code, §20000 et seq.) and the California Franchise Investment Act (Cal. Corp. Code, §31000 et seq.).

One of the abuses that commonly occurred in the past was the use of different franchise agreements for different franchisees. As an example, a franchisor could negotiate a 10% royalty fee with one franchisor and then negotiate a 15% royalty fee with a different franchisee. Through the use of confidentiality and nondisclosure provisions, the franchisees would be prohibited from discussing the material terms of their respective agreements and, thus, the franchisor’s unequal treatment would remain secret.

San Diego Franchise Law: Notice of Negotiated Changes

To combat this practice, the California State Assembly created a registration regime here in California under the Franchise Investment Act. In order for a franchisor to offer a franchise for sale, the franchisor must file various forms with the California Department of Business Oversight. Among the various items that must be included in the filings with the California Department of Business Oversight is a copy of the then-in-use franchise agreement or a summary of the main terms. A franchisor cannot offer for sale a franchise that has a substantially different franchise agreement that the one on file with the California Department of Business Oversight. See Cal. Corp. Code, §31125(b). Further, the franchisor must make available to any potential franchisee copies of any and all filings made with the California Department of Business Oversight in the previous 12 months. Importantly, modifications to the terms of the franchise agreement must also be registered with the California Department of Business Oversight.

In addition to registering changes made to the franchise agreement, the Franchise Investment Act requires that the franchisor send notice of negotiated changes to all franchisees for 12 months after the closing of the franchise purchase and make copies of the changes available upon request. There are certain exemptions where notice is not required such as where a legal dispute between a franchisor and franchisee is resolved. See Cal. Corp. Code, §31125. But, in general, the law ensures that all franchisees obtain basically the same information on what terms are contained in the franchise arrangement.

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal. Contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has many years of experience helping San Diego residents buy and sell their businesses and franchises.

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