Franchise Disputes FAQ

California has comprehensive franchise disclosure requirements under the California Franchise Investment Law (CFIL), codified in Corporations Code Sections 31000-31516. Franchisors must register with the California Department of Financial Protection and Innovation before offering or selling franchises in the state. The franchisor must provide a Franchise Disclosure Document (FDD) to prospective franchisees at least 14 calendar days before the franchisee signs any binding agreement or pays any consideration.

The FDD must contain 23 specific items including the franchisor's business experience, litigation history, bankruptcy history, initial and ongoing fees, franchisee obligations, territory rights, renewal and termination provisions, financial performance representations if any, and audited financial statements. California also requires franchisors to update their FDD annually and file amendments for material changes. The Department reviews FDDs for compliance and may issue stop orders preventing franchise sales if disclosure requirements are not met. Violations can result in civil liability, rescission rights for franchisees, and administrative penalties.

California franchise law provides significant protections against arbitrary termination under Corporations Code Section 31512 and related provisions of the California Franchise Relations Act. Franchisors cannot terminate a franchise agreement without good cause, which typically requires a material breach by the franchisee. Before termination for curable defaults, the franchisor must provide written notice specifying the default and allow a reasonable opportunity to cure, generally at least 30 days for most defaults and 60 days for defaults requiring longer correction periods.

Some violations, such as abandonment, conviction of a felony, or repeated violations of the same provision, may not require a cure period. Franchisors must also act in good faith in administering the franchise relationship. Franchisees who believe they have been wrongfully terminated can seek remedies including injunctive relief to prevent termination, damages for lost investment and profits, and rescission of the franchise agreement. Courts may also award attorney fees in franchise disputes. The burden typically falls on the franchisor to prove good cause existed for termination.

Territory encroachment disputes are among the most contentious issues in franchise relationships, and California law addresses them through both contractual interpretation and the implied covenant of good faith and fair dealing. The FDD Item 12 must disclose the franchisee's territorial rights, any exclusivity, and the franchisor's right to establish competing units or alternative distribution channels. If the franchise agreement grants exclusive territory rights, the franchisor generally cannot operate competing units within that territory.

However, many agreements reserve rights for the franchisor to sell through alternative channels such as internet sales, catalog sales, or institutional accounts, even within franchisee territories. When agreements are ambiguous about territorial rights, California courts will consider the reasonable expectations of both parties and apply the implied covenant of good faith. Franchisors may not act in bad faith to deprive franchisees of the benefits of their agreements, such as opening nearby units specifically to capture the franchisee's customers without legitimate business justification.

California provides robust remedies for franchisees who were induced to purchase franchises through misrepresentations. Under Corporations Code Section 31300, it is unlawful to offer or sell a franchise by means of any written or oral communication which includes an untrue statement of a material fact or omits a material fact necessary to make the statements not misleading. Franchisees can sue for rescission and damages under Section 31301, recovering the consideration paid plus interest and attorney fees, less any amounts received from the franchise.

Common misrepresentations include overstated earnings claims, understated costs, misrepresented territory rights, and false statements about the franchisor's experience or support. Item 19 of the FDD governs financial performance representations, and any earnings claims must comply with strict requirements. Oral earnings claims not in the FDD may constitute fraud. The statute of limitations is generally four years from discovery of the misrepresentation, but franchisees should act promptly upon discovering potential fraud. Additionally, common law fraud claims under Civil Code Section 1709 may provide additional remedies including punitive damages.

California courts have addressed the enforceability of general releases required as conditions of franchise renewal or transfer. While California Business and Professions Code Section 20010 of the California Franchise Relations Act prohibits provisions requiring franchisees to waive compliance with the law, courts have sometimes enforced releases that were knowingly and voluntarily signed. However, releases obtained through economic duress or coercion may be voidable.

If a franchisee has no realistic alternative but to sign the release to protect their investment, courts may find the release unenforceable. California Civil Code Section 1668 voids contracts exempting parties from liability for fraud, willful injury, or violation of law, meaning releases cannot waive claims for these violations. Releases typically cannot waive claims based on the franchisor's failure to provide required disclosures or violations of the FDD. Franchisees facing renewal release requirements should carefully review what claims they are releasing, document any objections, and consider whether the release meets legal requirements for enforceability before signing.

When franchisors fail to provide support and assistance promised in the FDD or franchise agreement, franchisees may have claims for breach of contract, breach of the implied covenant of good faith and fair dealing, or fraud if the promises were made without intention to perform. The FDD Item 11 must describe the principal obligations of the franchisor, and Item 5 describes initial assistance. Franchisees should document all promises made during the sales process and compare them to actual support received.

Common support failures include inadequate training, failure to provide marketing assistance, lack of operational guidance, and unavailable helplines or field support. Damages may include the costs of obtaining support elsewhere, lost profits attributable to the failure, and in some cases, rescission of the franchise agreement. California's implied covenant of good faith requires franchisors to act fairly in performing their obligations and not deliberately deprive franchisees of contract benefits. Courts examine whether the franchisor's actions were consistent with the franchisee's reasonable expectations based on representations made during the sales process.

Mandatory arbitration clauses in California franchise agreements are generally enforceable under both federal and state law, but with important limitations. The Federal Arbitration Act establishes a strong policy favoring arbitration of commercial disputes, which applies to most franchise agreements involving interstate commerce. However, California courts scrutinize arbitration provisions for procedural and substantive unconscionability.

Procedurally unconscionable elements include contracts of adhesion where franchisees had no meaningful opportunity to negotiate, small print, or hidden arbitration clauses. Substantively unconscionable provisions include those requiring arbitration in distant locations, prohibiting class actions for claims more efficiently resolved collectively, or severely limiting remedies. California Business and Professions Code Section 20040.5 voids provisions requiring California franchisees to litigate disputes in other states, and courts have applied this to arbitration venue requirements. If a franchise agreement requires out-of-state arbitration, California franchisees may argue this provision is void. Courts may sever unconscionable provisions while enforcing the remainder of the arbitration agreement.

Franchise transfers and sales are governed by the franchise agreement and California law. Most franchise agreements require franchisor consent before any transfer, and the FDD Item 17 must disclose transfer conditions and fees. Franchisors typically have the right to approve prospective buyers based on their financial qualifications, business experience, and character. The California Franchise Relations Act under Business and Professions Code Section 20030 provides that franchisors may not unreasonably withhold consent to transfers if the proposed transferee meets the franchisor's current qualifications and agrees to comply with the franchise agreement.

Unreasonable refusals to consent may give rise to breach of contract claims. Franchisors may require the new franchisee to sign the then-current franchise agreement, complete training, pay a transfer fee, and in some cases, require the selling franchisee to sign a general release. First refusal rights allowing the franchisor to match any purchase offer are common and generally enforceable. Sellers should carefully review transfer provisions and allow adequate time for franchisor approval before committing to sale agreements.

Franchisees may pursue collective legal action against franchisors through class actions or multi-plaintiff lawsuits, subject to procedural requirements and any contractual limitations. Class actions under California Code of Civil Procedure Section 382 allow one or more plaintiffs to represent a class of similarly situated franchisees when common questions of law or fact predominate over individual issues. Common franchise class actions involve systemic disclosure violations, misrepresentations in FDDs, or uniform contractual breaches affecting all franchisees.

However, many franchise agreements contain class action waivers, which courts generally enforce under federal arbitration law unless they prevent franchisees from effectively vindicating their statutory rights. Even with class waivers, franchisees may join together in multi-plaintiff lawsuits or coordinate individual arbitrations. California permits representative actions under the Private Attorneys General Act (PAGA) for labor violations, which cannot be waived. Franchisees considering collective action should review their arbitration clauses, consult with experienced franchise attorneys, and consider whether their claims are more effectively pursued individually or collectively.

California provides comprehensive remedies for franchise law violations under the California Franchise Investment Law and California Franchise Relations Act. Rescission under Corporations Code Section 31301 allows franchisees to recover consideration paid plus interest and attorney fees when franchises were sold through material misrepresentations or without required disclosures. Damages for breach of contract or fraud may include lost profits, loss of investment, and out-of-pocket expenses. Punitive damages may be available for fraud claims involving malice, oppression, or fraud under Civil Code Section 3294.

Injunctive relief can prevent franchisors from taking threatened actions like wrongful termination or encroachment. The California Department of Financial Protection and Innovation can issue stop orders preventing franchise sales, impose administrative penalties, and refer matters for criminal prosecution. Prevailing franchisees in CFIL actions may recover attorney fees under Section 31301. Courts may also order specific performance of franchise agreements or declaratory relief clarifying parties' rights. The statute of limitations varies: four years for written contract claims, three years for fraud with discovery tolling, and specific periods for statutory claims.