📋 Franchise Dispute Overview

Franchise disputes arise when franchisors breach their obligations to franchisees, whether through territorial encroachment, wrongful termination, or failure to provide required disclosures. California provides strong protections for franchisees through the California Franchise Investment Law (CFIL), which supplements federal FTC Franchise Rule requirements. When franchisors violate these laws, franchisees can recover substantial damages and in some cases rescind the franchise agreement entirely.

When to Use This Guide

Use this guide if your California franchisor has:

🎯 Territorial Encroachment

Opened or permitted competing locations in your protected territory, diluting your customer base

❌ Wrongful Termination

Terminated or refused to renew your franchise without proper cause or required notice

📄 Disclosure Violations

Failed to provide required FDD disclosures or made material misrepresentations before you signed

💰 Fee Disputes

Improperly calculated royalties, advertising fund contributions, or imposed unauthorized charges

Types of Franchise Violations

🎯 Encroachment Claims

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Encroachment occurs when a franchisor opens or permits another franchisee to open a location too close to your territory, violating express or implied territorial protections. Even without an exclusive territory clause, California courts have found implied duties of good faith prevent franchisors from destroying the franchisee's ability to profit from the franchise.

Examples: Franchisor opens a company-owned location 2 miles from your store despite promising "protected territory"; franchisor sells franchise to competitor across the street; franchisor establishes alternative distribution channels (online, grocery stores) that compete with you.

❌ Termination/Non-Renewal Violations

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California Business and Professions Code Section 20020-20022 restricts franchise terminations and non-renewals. Franchisors must provide written notice and an opportunity to cure most defaults. Termination without good cause or failure to provide renewal opportunities may violate both California law and the franchise agreement.

Examples: Termination for minor violations without cure opportunity; pretextual termination to take over profitable location; refusal to renew after franchisee invested substantially in the business; termination based on fabricated compliance issues.

📄 Disclosure Violations

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Both the FTC Franchise Rule and California Franchise Investment Law require franchisors to provide a Franchise Disclosure Document (FDD) at least 14 days before any payment or signing. The FDD must contain 23 specific items of information. Material omissions or misrepresentations create liability and may entitle the franchisee to rescission.

Examples: Failure to disclose prior litigation; understating initial investment costs; inflated financial performance representations (Item 19); failure to disclose required supplier rebates; not disclosing franchisor bankruptcy history.

💰 Fee and Royalty Disputes

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Franchisors may improperly calculate royalties, impose unauthorized fees, or misuse advertising fund contributions. California law requires franchisors to act in good faith in administering the franchise relationship, including transparent fee calculations.

Examples: Royalties calculated on gross sales when agreement specifies net; advertising fund used for franchisor's general corporate purposes; mandatory supplier purchases at inflated prices with undisclosed rebates to franchisor; technology fees imposed after signing without consent.

👍 What You Can Recover for Franchise Violations

  • Rescission - Full refund of all amounts paid to the franchisor
  • Actual damages - Lost profits, investment losses, out-of-pocket expenses
  • Consequential damages - Economic losses caused by the franchisor's conduct
  • Attorney fees - Often recoverable under California franchise law
  • Punitive damages - Available for fraud or intentional misconduct

⚠ Statute of Limitations

California has strict time limits for filing franchise claims. For more details on California contract claims, see our California Breach of Contract Statute of Limitations guide.

  • CFIL claims (rescission): 4 years from sale or 1 year from discovery (Corp Code 31303)
  • Fraud claims: 3 years from discovery (CCP 338(d))
  • Contract claims: 4 years from breach (CCP 337)

Do not delay - the discovery rule may not apply in all situations.

🔍 Evidence Checklist

Gather these documents before sending your demand letter. Click to check off items as you collect them.

📄 Franchise Documents

  • ✓ Franchise Disclosure Document (FDD) with all exhibits
  • ✓ Signed franchise agreement and all amendments
  • ✓ Territory map or description from FDD/agreement
  • ✓ Operations manual (if available)

📩 Communications

  • ✓ Pre-sale communications (emails, texts, call notes)
  • ✓ Earnings claims or performance projections made verbally
  • ✓ Correspondence about territory or encroachment
  • ✓ Termination or default notices received
  • ✓ Your responses and cure attempts

💰 Financial Records

  • ✓ Initial franchise fee payment records
  • ✓ Royalty and advertising fund payment history
  • ✓ Total investment documentation (buildout, equipment, inventory)
  • ✓ Profit and loss statements for your franchise
  • ✓ Sales data before and after encroachment (if applicable)

🎯 Encroachment Evidence

  • ✓ Maps showing your location and competing locations
  • ✓ Sales decline data correlated with new openings
  • ✓ Customer surveys or complaints about confusion
  • ✓ Announcements of new locations in your area

📄 Disclosure Violation Evidence

  • ✓ Proof of when you received the FDD (or didn't)
  • ✓ Evidence of misrepresentations made before signing
  • ✓ Undisclosed litigation or bankruptcy records
  • ✓ Comparison of actual costs to FDD estimates

❌ Termination Evidence

  • ✓ All default and termination notices
  • ✓ Your compliance history and cure efforts
  • ✓ Evidence of pretextual reasons for termination
  • ✓ Treatment of similarly-situated franchisees

🔒 Request Your Franchise File

Under California law, you may be entitled to records the franchisor maintains about your franchise. Request copies of all inspection reports, compliance reviews, correspondence, and internal notes about your franchise. These records may reveal pretextual termination grounds or inconsistent treatment.

💰 Damages & Remedies

California franchise law provides robust remedies for franchisees harmed by franchisor misconduct. Understanding your potential recovery is essential for settlement negotiations.

Remedy Type Description
Rescission For CFIL disclosure violations, you may be entitled to void the franchise agreement and recover all amounts paid to the franchisor, including franchise fees, royalties, advertising contributions, and required purchases. This is the most powerful remedy available.
Lost Profits Profits you would have earned but for the franchisor's conduct. For encroachment, this includes the profit decline attributable to the competing location. For termination, this includes profits through the end of the franchise term.
Investment Losses Your unrecovered investment in the franchise, including buildout costs, equipment, inventory, leasehold improvements, and working capital losses. Measured by what you invested minus what you recovered.
Consequential Damages Out-of-pocket losses caused by the violation, including lease termination costs, employee severance, loan prepayment penalties, personal guarantee exposure, and credit damage.
Attorney Fees Under Corp Code 31300, prevailing franchisees in CFIL actions may recover attorney fees and costs. Many franchise agreements also contain fee-shifting provisions that may favor the franchisee in breach cases.
Punitive Damages Available for fraud, intentional misrepresentation, or malicious conduct under Civil Code 3294. Requires clear and convincing evidence of oppression, fraud, or malice.

Rescission Under CFIL

💰 The Power of Rescission

Under Corporations Code Section 31300, if the franchisor sold the franchise through material misrepresentations or omissions, or failed to comply with registration and disclosure requirements, you may rescind the franchise and recover:

  • The full franchise fee paid
  • All royalties and advertising fund contributions
  • Required equipment and inventory purchases (at cost)
  • Interest from the date of payment
  • Attorney fees and costs

Calculating Lost Profits

Lost profits require proving both the fact of damages and the amount with reasonable certainty:

  • Before/after comparison: Compare your profits before and after the encroachment or breach
  • Yardstick method: Compare your performance to similar franchises unaffected by the violation
  • Expert testimony: A damages expert can project future lost profits based on historical performance
  • Profit margins: Document your actual profit margins to calculate the dollar impact of lost sales

📊 Sample Damages Calculation

Example: Encroachment and Disclosure Violations

Franchise fee paid $50,000
Royalties paid over 3 years (6% of $1.2M) $72,000
Advertising fund contributions (2% of $1.2M) $24,000
Initial buildout and equipment investment $185,000
Lost profits from encroachment (2 years) $120,000
Lease termination and wind-down costs $45,000
Prejudgment interest (approx.) $35,000
Compensatory subtotal $531,000
Attorney fees and costs (estimated) $125,000
POTENTIAL TOTAL RECOVERY $656,000+

💡 Mitigation of Damages

You have a duty to mitigate your damages. This means taking reasonable steps to minimize your losses, such as attempting to sell the business, reducing expenses, or finding alternative employment. However, you need not accept unreasonable franchisor settlement demands or abandon valid legal claims.

📝 Sample Language

Copy and customize these paragraphs for your California franchise dispute demand letter.

Opening Paragraph
I am writing on behalf of [FRANCHISEE NAME] to formally demand remediation of [FRANCHISOR NAME]'s violations of the California Franchise Investment Law (Corporations Code Section 31000 et seq.), the FTC Franchise Rule (16 CFR Part 436), and the franchise agreement dated [DATE]. As detailed below, your client's conduct has caused substantial harm to my client and entitles them to rescission, damages, and attorney fees under California law.
Franchise Background
On [DATE], my client purchased a [FRANCHISE BRAND] franchise located at [ADDRESS]. In connection with this purchase, my client paid a franchise fee of $[AMOUNT] and invested approximately $[TOTAL INVESTMENT] in buildout, equipment, inventory, and working capital. My client has operated the franchise in compliance with the franchise agreement and has paid all required royalties and fees totaling approximately $[AMOUNT] over [TIME PERIOD].
Encroachment Violation
Despite the territorial protections in the franchise agreement and the implied covenant of good faith and fair dealing, your client has opened [NUMBER] competing [FRANCHISE BRAND] location(s) within [DISTANCE] of my client's franchise at [COMPETING LOCATION ADDRESS(ES)]. Since these locations opened on [DATE(S)], my client's sales have declined by approximately [PERCENTAGE]%, resulting in lost profits of approximately $[AMOUNT]. This encroachment violates Section [SECTION] of the franchise agreement and breaches the implied covenant of good faith. See Postal Instant Press, Inc. v. Sealy (1996) 43 Cal.App.4th 1704.
Disclosure Violation
Your client violated the California Franchise Investment Law and FTC Franchise Rule by [DESCRIBE VIOLATION - e.g., failing to provide the FDD at least 14 days before my client signed the franchise agreement / making earnings claims not included in Item 19 / failing to disclose material litigation in Item 3 / misrepresenting initial investment costs in Item 7]. These violations entitle my client to rescission under Corporations Code Section 31300, including recovery of all amounts paid to your client plus interest and attorney fees.
Wrongful Termination
Your client's termination of my client's franchise on [DATE] violates the California Franchise Relations Act (Business and Professions Code Section 20000 et seq.). The stated grounds for termination - [STATE GROUNDS] - do not constitute "good cause" under Section 20020 because [EXPLAIN WHY - e.g., the alleged defaults are pretextual / my client was not given reasonable opportunity to cure / the requirements were not uniformly applied to other franchisees / the violations were manufactured by your client]. This wrongful termination entitles my client to damages including lost profits through the end of the franchise term, investment losses, and consequential damages.
Legal Basis - California Law
Under the California Franchise Investment Law, Corporations Code Section 31300, any person who offers or sells a franchise by means of any untrue statement of a material fact, or any omission of a material fact, is liable to the franchisee for rescission or damages. Under the California Franchise Relations Act, Business and Professions Code Section 20020, franchisors may not terminate franchises except for good cause. Your client's conduct violates both statutes, as well as the FTC Franchise Rule (16 CFR Part 436) and the express and implied terms of the franchise agreement. My client is entitled to recover actual damages, consequential damages, attorney fees, and costs. Given the willful nature of your client's conduct, punitive damages may also be appropriate.
Damages Demand
My client hereby demands payment of the following amounts within [30 DAYS] of the date of this letter:

1. Return of franchise fee: $[AMOUNT]
2. Return of royalties and fees paid: $[AMOUNT]
3. Lost profits / Investment losses: $[AMOUNT]
4. Consequential damages: $[AMOUNT]
5. Prejudgment interest: $[AMOUNT]
6. Attorney fees incurred to date: $[AMOUNT]

TOTAL DEMAND: $[TOTAL]

This demand does not include punitive damages, which my client reserves the right to pursue if this matter proceeds to litigation.
Deadline and Consequences
If my client does not receive satisfactory resolution of this matter by [DEADLINE DATE], we will have no choice but to file a lawsuit in the California Superior Court for violations of the California Franchise Investment Law, California Franchise Relations Act, fraud, and breach of contract. In addition to the damages described above, we will seek punitive damages, all attorney fees through trial, and any other relief to which my client may be entitled.

Please also be advised that my client may file a complaint with the California Department of Financial Protection and Innovation (DFPI), which has authority to investigate franchise law violations and take enforcement action. We strongly encourage resolution of this matter before such steps become necessary.

Please direct all further communications to the undersigned.

🚀 Next Steps

What to do after sending your demand letter.

Expected Timeline

Days 1-14

Franchisor receives and reviews demand letter with legal counsel

Days 14-30

Response with settlement offer, counteroffer, or rejection of claims

Days 30+

If no satisfactory response, prepare to file complaint and lawsuit

If They Don't Pay or Respond

  1. Consult a Franchise Attorney

    Franchise disputes are complex and often involve significant damages. Many franchise attorneys offer free consultations and take cases on contingency or hybrid fee arrangements. Given the potential for rescission, fee-shifting, and substantial damages, strong cases are attractive to plaintiffs' attorneys.

  2. File a Complaint with the DFPI

    The California Department of Financial Protection and Innovation (DFPI) regulates franchise sales in California. Filing a complaint creates a regulatory record and may prompt investigation. Visit dfpi.ca.gov to file online.

  3. File a Lawsuit in California Superior Court

    Franchise disputes are typically filed in the Superior Court of the county specified in the franchise agreement's venue clause, or where you operated the franchise. Most cases are unlimited civil (over $25,000). You can pursue CFIL claims, CFRA claims, fraud, and breach of contract.

  4. Consider Arbitration Requirements

    Many franchise agreements contain mandatory arbitration clauses. Review your agreement carefully. Note that some arbitration clauses may be unenforceable under California law if they waive statutory rights or are unconscionable. Consult with an attorney about enforceability.

⚠ Watch the Statute of Limitations

For more information on California contract claims and deadlines, see our California Breach of Contract Statute of Limitations guide.

  • CFIL claims: 4 years from sale or 1 year from discovery (Corp Code 31303)
  • Fraud claims: 3 years from discovery (CCP 338(d))
  • Contract claims: 4 years from breach (CCP 337)
  • CFRA claims: Follow contract limitations periods

Do not delay in taking action to preserve all your rights.

Need Legal Help?

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