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 AB 1782 (Maienschein) Page 2 of ? 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 AB 1782 (Maienschein) Page 3 of ? 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 AB 1782 (Maienschein) Page 4 of ? 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 AB 1782 (Maienschein) Page 5 of ? 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 AB 1782 (Maienschein) Page 6 of ? 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 AB 1782 (Maienschein) Page 7 of ? 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 AB 1782 (Maienschein) Page 8 of ? 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 AB 1782 (Maienschein) Page 9 of ? 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) **************