BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Hannah-Beth Jackson, Chair
2015-2016 Regular Session
AB 1782 (Maienschein)
Version: March 10, 2016
Hearing Date: June 28, 2016
Fiscal: Yes
Urgency: No
RD
SUBJECT
Franchises: offer to sell: trade show
DESCRIPTION
This bill would provide that an offer to sell is not made in
this state for purposes of the California Franchise Investment
Law (CFIL) merely because a franchisor, or a franchisor who is
not then offering a franchise for sale in California and has not
registered an offering under the CFIL, as specified, secures a
space at a franchise trade show from which it offers information
about its products, services, or system to the general public,
if the franchisor or prospective franchisor complies with
certain requirements. This bill would define "franchise trade
show" to mean an event in this state, displaying multiple
franchise brands and open to multiple franchisors, that is
advertised to, and invites, the general public to that event
where franchisors who satisfy the reasonable criteria of the
franchise trade show's organizer may secure a space from where
they can inform the members of the general public in attendance
about their existing and prospective products, services, or
systems.
BACKGROUND
The California Franchise Investment Law (CFIL) was enacted in
1970 to regulate franchise investment opportunities in order to
protect California investors from flimsy or fraudulent franchise
investments. The CFIL generally requires franchisors to provide
prospective franchisees with the information necessary to make
an intelligent decision regarding franchise offers, and
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prohibits the sale of franchises where they would lead to fraud
or likelihood that a franchisor's promises would not be
fulfilled. (Corp. Code Sec. 31000 et seq.)
This bill would allow franchisors to display their concepts at
franchise trade shows, as defined, in California, without first
having to register their offerings with the Department of
Business Oversight, as specified.
This bill was heard in the Senate Banking & Financial
Institutions Committee on June 15, 2016, and passed out on a
vote of 7-0.
CHANGES TO EXISTING LAW
Existing law , the California Franchise Investment Law (CFIL),
generally requires any offers and sales of franchises in
California to be registered with the Department of Business
Oversight (DBO), unless it otherwise qualifies for an exemption,
as specified. (Corp. Code Sec. 31000 et seq.; Corp. Code Sec.
31110.)
Existing law , the CFIL, generally defines a franchise as a
contract or agreement, either expressed or implied, whether oral
or written, between two or more persons, by which all of the
following occur:
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;
the operation of the franchisee's business pursuant to such
plan or system is substantially associated with the
franchisor's trademark, service mark, trade name, logotype,
advertising or other commercial symbol designating the
franchisor or its affiliate; and
the franchisee is required to pay, directly or indirectly,
a franchise fee. (Corp. Code Sec. 31005(a).)
Existing law requires franchisors subject to the CFIL to
register their offerings by submitting an application
accompanied by a proposed franchise disclosure document to DBO
containing specified material information about their businesses
and the franchises they are offering. Existing law requires
franchisors to provide a copy of that disclosure document,
together with copies of all proposed agreements pertaining to
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the sale of the franchise, to a prospective franchisee at least
14 calendar days before entering into any contract with or
receiving any payment from a prospective franchisee (whichever
occurs first). (Corp. Code Secs. 31114, 31119.)
Existing law contains several exemptions from the CFIL. (See
Corp. Code Secs. 31100-31109.1). For example, some of the
entities exempted from the CFIL include franchisors with high
net worth and significant experience conducting the businesses
they are franchising and franchisors who sell franchises
exclusively to persons with high net worth and knowledge and
experience in financial and business matters, as specified. (See
Corp. Code Secs. 31101, 31106, 31109.) The franchisor must,
among other things, file with the commissioner a notice of
exemption and pay a fee, as specified.
Existing law provides that an offer or sale of a franchise is
made in this state when an offer to sell is made in this state,
or an offer to buy is accepted in this state, or, if the
franchisee is domiciled in this state, the franchised business
is or will be operated in this state. Existing law further
provides that an offer to sell is made in this state when the
offer either originates from this state or is directed by the
offeror to this state and received at the place to which it is
directed. An offer to sell is accepted in this state when
acceptance is communicated to the offeror in this state; and
acceptance is communicated to the offeror in this state when the
offeree directs it to the offeror in this state reasonably
believing the offeror to be in this state and it is received at
the place to which it is directed. (Corp. Code Sec. 31013(a),
(b).)
Existing law specifies that an offer to sell is not made in this
state merely because:
(1) the publisher circulates, or there is circulated on his
behalf, in this state any bona fide newspaper or other
publication of general, regular, and paid circulation which has
had more than two-thirds of its circulation outside this state
during the past 12 months; or (2) a radio or television program
originating outside this state is received in this state.
(Corp. Code Sec. 31013(c).)
This bill would add that an offer to sell is not made in this
state merely because a franchisor, or a franchisor who is not
then offering a franchise for sale in California and has not
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registered an offering, as required by the CFIL, secures a space
at a franchise trade show from which it offers information about
its products, services, or system to the general public if the
franchisor or prospective franchisor does all of the following:
Notifies the commissioner, in a form established by the
commissioner, of its intent to attend and display its concept
at the franchise trade show at least 14 days before the show,
accompanied by the following:
o a document, in a form approved by the commissioner, that
includes, at a minimum: the franchise concept brand name
and a brief description of the potential franchise
offering; the legal name of the franchisor or prospective
franchisor, and the address where it is domiciled; the
names of the principal officers of the franchisor or
prospective franchisor; and the address where the
franchisor or prospective franchisor may be served legal
process; and
o if the franchisor or prospective franchisor already
possesses a current franchise disclosure document not yet
registered in California, a copy of the franchise
disclosure document.
Conspicuously posts in public view within its franchise trade
show booth a notice, in a form established by the
commissioner, that states, at a minimum, all of the following:
o the franchisor or prospective franchisor is not offering
a franchise for sale in California;
o the franchisor or prospective franchisor is not legally
able to offer a franchise for sale in California;
o if anyone associated with the franchisor or prospective
franchisor offers a franchise for sale or solicits an offer
to purchase a franchise in California, that action should
be reported to the commissioner; and
o the contact information of the commissioner.
This bill would require that the form described, above, be in
the form and content prescribed by the commissioner, but, at a
minimum, state that it is unlawful for any person to offer or
sell a franchise in California unless the offer of the franchise
has been registered with the commissioner or is otherwise
exempt.
This bill would define "franchise trade show" to mean an event
in this state, displaying multiple franchise brands and open to
multiple franchisors, that is advertised to, and invites, the
general public to that event where franchisors who satisfy the
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reasonable criteria of the franchise trade show's organizer may
secure a space from where they can inform the members of the
general public in attendance about their existing and
prospective products, services, or systems.
COMMENT
1. Stated need for the bill
According to the author:
The California Franchise Investment Law (CFIL) generally
requires a franchisor to register with the Department of
Business Oversight (DBO) before an offer or sale of a
franchise and provides that a willful violation of the law is
a crime. [ . . . ] Currently, the DBO views non-registered
franchisors exhibiting at trade shows as an "offer' to sell a
franchise under the CFIL, which is prohibited unless the
franchisor has first registered the franchise offering or has
satisfied an exemption from registration. This creates a
potential barrier for franchisors interested in assessing the
public's interest in their franchise concepts by participating
in trade shows in California before undertaking the cumbersome
and costly registration process. This discourages rather than
encourages new franchise investment in California and limits
the public's exposure to potential business opportunities that
may become available in California if there is interest.
AB 1782 would amend the CFIL to permit a franchisor who does
not have a currently effective franchise registration and/or a
disclosure document to display at a franchise trade show for
the limited purpose of determining whether there is sufficient
interest in its franchise to warrant the time and expense of
preparing a franchise disclosure document and pursuing a
California registration. Such participation would be
conditioned on the franchisor giving the DBO prior notice of
its intent to participate at the trade show, and posting a
conspicuous notice that it does not have a currently
registered disclosure document and that it is not offering
franchises for sale in California at this time.
The International Franchise Association writes in support that,
"for many years the West Coast Franchise Expo had been held in
California. However, as a result of current law, the Expo
elected to move to Denver, Colorado. Passage of AB 1782 will
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put California in a better position to retain and attract not
only trade shows like the West Coast Franchise Expo and others,
but will also lead to greater exposure of entrepreneurial
opportunities to California residents. In California alone,
franchising accounts for over 925,000 jobs across more than
82,700 franchise establishments contributing over $94 billion in
economic activity each year. AB 1782 will encourage franchise
growth in California and lead to more small business owners who
will in turn provide more jobs and revenue to California."
2. Bill would authorize unregistered franchisors to exhibit at
franchise trade shows
As noted in the Background, the offer and sale of private
franchises in California is governed, in large part, by the
Franchise Investment Law (Corp. Code Sec. 31000 et seq.;
hereinafter CFIL) which set forth registration and disclosure
requirements with which prospective franchisors must comply. In
enacting the CFIL, the Legislature declared its intent to
provide each prospective franchisee with the information
necessary to make an intelligent decision regarding franchises
being offered, to prohibit the sale of franchises where such
sale would lead to fraud or a likelihood that the franchisor's
promises would not be fulfilled, and to protect the franchisor
and franchisee by providing a better understanding of the
relationship between the franchisor and the franchisee regarding
their business relationship. (Corp. Code Sec. 31001.) Even
though it is clear that courts are required to construe the CFIL
broadly to carry out legislative intent, that intent is to
protect franchise investors, that is, those who pay for the
right to enter into a business. (34A Cal Jur Franchises from
Private Parties Sec. 15.) Franchisors and prospective
franchisors seeking to offer or sell franchises in this state
generally must register their franchise or prospective franchise
with the Department of Business Oversight (DBO), unless
otherwise subject to an exemption under the CFIL. Even then,
the franchise must, among other things, file with the
commissioner a notice of exemption and pay a fee, as specified.
(See e.g. Corp. Code Secs. 31101, 31106, 31109.)
Under the CFIL, an offer or sale of a franchise is made in this
state when an offer to sell is made in this state, or an offer
to buy is accepted in this state, or, if the franchisee is
domiciled in this state, the franchised business is or will be
operated in this state. Existing law further provides, in
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relevant part, that an offer to sell is made in this state when
the offer either originates from this state or is directed by
the offeror to this state and received at the place to which it
is directed. (Corp. Code Sec. 31013(a), (b).)
At the same time, the CFIL specifies that an offer to sell is
not made in this state merely because: (1) the publisher
circulates or there is circulated on his behalf in this state
any bona fide newspaper or other publication of general,
regular, and paid circulation which has had more than two-thirds
of its circulation outside this state during the past 12 months;
or (2) a radio or television program originating outside this
state is received in this state. (Corp. Code Sec. 31013.)
This bill would now specify that an offer to sell is also not
made in this state merely because a franchisor, or a franchisor
who is not then offering a franchise for sale in California and
has not registered an offering, as required under specified law,
secures a space at a franchise trade show from which it offers
information about its products, services, or system to the
general public, so long as the franchisor or prospective
franchisor takes certain steps, including notifying the DBO
commissioner, and conspicuously posting in public view within
its franchise trade show booth a specified notice. First, to
fall under this "safe harbor," the franchisor or prospective
franchisor (who is unregistered with the DBO), must notify the
commissioner, in a specified form established by the
commissioner, of its intent to attend and display its concept at
the franchise trade show at least 14 days before the show. That
notice must be accompanied by both: (1) a document, in a form
approved by the commissioner, that includes, at a minimum: the
franchise concept brand name and a brief description of the
potential franchise offering; the legal name of the franchisor
or prospective franchisor, and the address where it is
domiciled; the names of the principal officers of the franchisor
or prospective franchisor; and the address where the franchisor
or prospective franchisor may be served legal process; and (2) a
copy of the franchise disclosure document if the franchisor or
prospective franchisor already possesses a current franchise
disclosure document not yet registered in California.
Second, the franchisor or prospective franchisor must
conspicuously post in public view within its franchise trade
show booth a notice that states at a minimum, and in a form
established by the commissioner, all of the following:
the franchisor or prospective franchisor is not offering a
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franchise for sale in California;
the franchisor or prospective franchisor is not legally able
to offer a franchise for sale in California;
if anyone associated with the franchisor or prospective
franchisor offers a franchise for sale or solicits an offer to
purchase a franchise in California, that action should be
reported to the commissioner; and
the contact information of the commissioner.
Presumably, any franchisor or prospective franchisor that
violates these provisions could face action by DBO, assuming
that they provided information to DBO as required by this bill
so that DBO could locate them, and assuming that DBO would have
presence at these trade shows to enforce the provision. The
sponsor of this bill, Franchise Law Committee of the State Bar's
Business Law Section, has relayed to Committee staff that DBO
would be able to enforce any violations under Section 31400 of
the Corporations Code, "[w]henever it appears to the
commissioner that any person has engaged or is about to engage
in any act or practice constituting a violation of any provision
of this law or any rule or order hereunder, the commissioner may
in the commissioner's discretion bring an action, or the
commissioner may request the Attorney General to bring an action
in the name of the people of the State of California, in the
superior court to enjoin the acts or practices or to enforce
compliance with this law or any rule or order hereunder. Upon a
proper showing a permanent or preliminary injunction,
restraining order or writ of mandate shall be granted and a
receiver or conservator may be appointed for the defendant or
the defendant's assets." (Corp. Code Sec. 31400(a).)
Furthermore, the sponsor notes, Section 31400(b) of the
Corporations Code provides that "[i]f the commissioner
determines it is in the public interest, the commissioner may
include in any action authorized by subdivision (a) a claim for
ancillary relief, including, but not limited to, a claim for
restitution or disgorgement or damages on behalf of the persons
injured by the act or practice constituting the subject matter
of the action, and the court shall have jurisdiction to award
that additional relief." Therefore, it appears clear that DBO
would be able to bring an action for violations of the trade
show exemption under this bill's proposed addition to the CFIL
to the extent that they are aware of violations.
The sponsor contends that the bill will benefit not only
franchisors and prospective franchisors, but also prospective
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franchisees:
[T]he exemption [from registration] will enhance prospective
franchisee knowledge of the potential types of franchises that
may, at some point, be available within California for the
particular market. The exemption will also drive competition
between franchise systems, including those already registered
in California, to improve products and innovate their systems
to the benefit of current franchisees and consumers. In
addition, the exemption will drive competition between
franchisors to attract new franchisees, thereby potentially
enhancing the terms extended to potential franchisees.
Support : International Franchise Association
Opposition : None Known
HISTORY
Source : Franchise Law Committee of the Business Law Section of
the State Bar
Related Pending Legislation : None Known
Prior Legislation : None Known
Prior Vote :
Senate Banking and Financial Institutions Committee (Ayes 7,
Noes 0)
Assembly Floor (Ayes 76, Noes 0)
Assembly Appropriations Committee (Ayes 18, Noes 0)
Assembly Judiciary Committee (Ayes 8, Noes 0)
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