Code Section Group

Corporations Code - CORP

TITLE 4. SECURITIES [25000 - 31516]

  ( Title 4 added by Stats. 1949, Ch. 384. )

DIVISION 5. FRANCHISE INVESTMENT LAW [31000 - 31516]

  ( Division 5 added by Stats. 1970, Ch. 1400. )

PART 1. DEFINITIONS [31000 - 31019]
  ( Part 1 added by Stats. 1970, Ch. 1400. )

31000.
  

This division may be known as the “Franchise Investment Law.” References in this division to “this law” refer to the applicable provisions of this division.

(Added by Stats. 1970, Ch. 1400.)

31001.
  

The Legislature hereby finds and declares that the widespread sale of franchises is a relatively new form of business which has created numerous problems both from an investment and a business point of view in the State of California. Prior to the enactment of this division, the sale of franchises was regulated only to the limited extent to which the Corporate Securities Law of 1968 applied to those transactions. California franchisees have suffered substantial losses where the franchisor or his or her representative has not provided full and complete information regarding the franchisor-franchisee relationship, the details of the contract between franchisor and franchisee, and the prior business experience of the franchisor.

It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where the 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 franchisee with regard to their business relationship.

(Amended by Stats. 2004, Ch. 458, Sec. 1. Effective September 10, 2004. Operative January 1, 2005, by Sec. 19 of Ch. 458.)

31001.1.
  

(a) To enhance the uniform and efficient administration, and the effective enforcement, of this division, it is the intent of the Legislature that the commissioner shall maintain a risk-based process of reviewing franchise applications as described in this section.

(b) Under the risk-based review process, the commissioner shall focus on reviewing application information posing the most risk to prospective franchisees in accordance with Section 31115, with emphasis on risks associated with the franchisor’s financial condition, the franchisor’s compliance record, and significant deficiencies with the franchisor’s application.

(c) When reviewing franchise filings under this section, the commissioner shall concentrate on helping to prevent misappropriation, mismanagement, and misrepresentation in connection with the offer or sale of any franchise subject to this division.

(d) The commissioner shall consider guidelines, or other information developed by the North American Securities Administrators Association that are in effect, to assist in the implementation of the risk-based review process. The risk-based review procedures implemented by the commissioner shall be considered internal management criteria and guidelines within the meaning of subdivisions (d) and (e) of Section 11340.9 of the Government Code.

(Added by Stats. 2004, Ch. 458, Sec. 2. Effective September 10, 2004. Operative January 1, 2005, by Sec. 19 of Ch. 458.)

31002.
  

Unless the context otherwise requires, the definitions in this part apply throughout this division.

(Added by Stats. 1970, Ch. 1400.)

31003.
  

“Advertisement” means any written or printed communication or any communication by means of recorded telephone messages or spoken on radio, television, or similar communications media, published in connection with an offer or sale of a franchise.

(Added by Stats. 1970, Ch. 1400.)

31003.5.
  

“Business days” are all days other than every Saturday, every Sunday, and such other days as are specified or provided for as holidays in the Government Code.

(Added by Stats. 1973, Ch. 539.)

31004.
  

“Commissioner” means the Commissioner of Business Oversight.

(Amended by Stats. 2013, Ch. 353, Sec. 45. Effective September 26, 2013. Operative July 1, 2013, by Sec. 129 of Ch. 353.)

31005.
  

(a) “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(1) 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; and

(2) 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

(3) The franchisee is required to pay, directly or indirectly, a franchise fee.

(b) For the purposes of this division, the term “franchise” also means the following:

(1) Any contractual agreement between a petroleum corporation or distributor and a gasoline dealer, or between a petroleum corporation and distributor, under which the petroleum distributor or the gasoline dealer is granted the right to use a trademark, trade name, service mark, or other identifying symbol or name owned by the other party to the agreement, or any agreement between a petroleum corporation or distributor and a gasoline dealer, or between a petroleum corporation and distributor, under which the petroleum distributor or the gasoline dealer is granted the right to occupy premises owned, leased, or controlled by the other party to the agreement, for the purposes of engaging in the retail sale of petroleum and other products of the other party to the agreement.

(2) Any contract between a refiner and a petroleum distributor, between a refiner and a petroleum retailer, between a petroleum distributor and another petroleum distributor, or between a petroleum distributor and a petroleum retailer, under which a refiner or petroleum distributor authorizes or permits a petroleum retailer or petroleum distributor to use, in connection with the sale, consignment, or distribution of gasoline, diesel, gasohol, or aviation fuel, a trademark which is owned or controlled by such refiner or by a refiner which supplies fuel to the petroleum distributor which authorizes or permits such use. The term “franchise” as defined in this paragraph includes the following:

(A) Any contract under which a petroleum retailer or petroleum distributor is authorized or permitted to occupy leased marketing premises, which premises are to be employed in connection with the sale, consignment, or distribution of fuel under a trademark which is owned or controlled by such refiner or by a refiner which supplies fuel to the petroleum distributor which authorizes or permits such occupancy.

(B) Any contract pertaining to the supply of fuel which is to be sold, consigned, or distributed under a trademark owned or controlled by a refiner, or under a contract which has existed continuously since May 15, 1973, and pursuant to which, on May 15, 1973, fuel was sold, consigned, or distributed under a trademark owned and controlled on such date by a refiner.

(C) The unexpired portion of any franchise, as defined by the preceding provisions of this subdivision, which is transferred or assigned as authorized by the provisions of such franchise or by any applicable provision of state law which permits such transfer or assignment without regard to any provision of the franchise.

(c) For purposes of this division, the term “franchise” does not include a nonprofit organization operated on a cooperative basis by and for independent retailers which wholesales goods and services primarily to its member retailers and to which all of the following is applicable:

(1) Control and ownership of each member is substantially equal.

(2) Membership is limited to those who will avail themselves of the services furnished by the organization.

(3) Transfer of ownership is prohibited or limited.

(4) Capital investment receives no return.

(5) Substantially equal benefits pass to the members on the basis of patronage of the organization.

(6) Members are not personally liable for obligations of the organization in the absence of a direct undertaking or authorization by them.

(7) Services of the organization are furnished primarily for the use of the members.

(8) Each member and prospective member is provided with an offering circular which complies with the specifications of Section 31111.

(9) No part of the receipts, income, or profit of the organization is paid to any profitmaking entity, except for arms-length payments for necessary goods and services, and members are not required to purchase goods or services from any designated profitmaking entity.

(d) The nonprofit organization is subject to an action for rescission or damages under Section 3343.7 of the Civil Code if the organization fraudulently induced the plaintiff to join the organization.

(Amended by Stats. 1989, Ch. 1380, Sec. 3.)

31005.5.
  

For the purposes of this division and in respect only to a franchise as defined in subdivision (b) of Section 31005, the following terms shall have the following meanings:

(a) “Franchisor” means a refiner or petroleum distributor who authorizes or permits, under a franchise, a petroleum retailer or petroleum distributor to use a trademark in connection with the sale, consignment, or distribution of fuel.

(b) “Franchisee” means a petroleum retailer or petroleum distributor who is authorized or permitted, under a franchise, to use a trademark in connection with the sale, consignment, or distribution of fuel.

(c) “Refiner” means any person engaged in the refining of crude oil to produce fuel, and includes any affiliate of such person.

(d) “Petroleum distributor” means any person, including any affiliate of such person, who either purchases fuel for sale, consignment, or distribution to another, or receives fuel on consignment for consignment or distribution to his or her own fuel accounts or to accounts of his or her supplier, but shall not include a person who is an employee of, or merely serves as a common carrier providing transportation service for, such supplier.

(e) “Petroleum retailer” means any person who purchases fuel for sale to the general public for ultimate consumption.

(f) “Marketing premises” means, in the case of any franchise, premises which, under such franchise, are to be employed by the franchisee in connection with the sale, consignment, or distribution of fuel.

(g) “Leased marketing premises” means marketing premises owned, leased, or in any way controlled by a franchisor and which the franchisee is authorized or permitted, under the franchise, to employ in connection with the sale, consignment, or distribution of fuel.

(h) “Contract” means any oral or written agreement. For supply purposes, delivery levels during the same month of the previous year shall be prima facie evidence of an agreement to deliver such levels.

(i) “Trademark” means any trademark, trade name, service mark, or other identifying symbol or name.

(j) “Fuel” means gasoline, diesel, gasohol, or aviation fuel.

(k) “Affiliate” means any person who, other than by means of a franchise, controls, is controlled by, or is under common control with, any other person.

(l) “Petroleum corporation” means any corporation or person owning, managing, or controlling the exploration, production, processing, transportation, or sale of crude or refined petroleum or any petroleum product.

(Added by Stats. 1981, Ch. 90, Sec. 11.)

31006.
  

A “franchisee” is a person to whom a franchise is granted.

(Added by Stats. 1970, Ch. 1400.)

31007.
  

A “franchisor” is a person who grants a franchise.

(Added by Stats. 1970, Ch. 1400.)

31008.
  

“Area franchise” means any franchise between a franchisor and a franchisee whereby the franchisee is granted the right to operate more than one unit within a specified geographical area.

(Amended by Stats. 1988, Ch. 562, Sec. 1.)

31008.5.
  

“Subfranchise” means any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for that right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor. A contract or agreement which is a franchise does not become a subfranchise merely because under its terms a person is granted the right to receive compensation for referrals to a franchisor or subfranchisor or to receive compensation for acting as a sales representative on their behalf.

(Added by Stats. 1988, Ch. 562, Sec. 2.)

31009.
  

A “subfranchisor” is a person to whom a subfranchise is granted.

(Amended by Stats. 1988, Ch. 562, Sec. 3.)

31010.
  

Where used in this law, unless specifically stated otherwise, “franchise” includes “area franchise” and “subfranchise.”

(Amended by Stats. 1988, Ch. 562, Sec. 4.)

31011.
  

“Franchise fee” means any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any payment for goods and services.

However, the following shall not be considered the payment of a franchise fee:

(a) The purchase or agreement to purchase goods at a bona fide wholesale price if no obligation is imposed upon the purchaser to purchase or pay for a quantity of the goods in excess of that which a reasonable businessperson normally would purchase by way of a starting inventory or supply or to maintain a going inventory or supply.

(b) The payment of a reasonable service charge to the issuer of a credit card by an establishment accepting or honoring that credit card.

(c) Amounts paid to a trading stamp company under Chapter 3 (commencing with Section 17750) of Part 3 of Division 7 of the Business and Professions Code by a person issuing trading stamps in connection with the retail sale of merchandise or service.

(Amended by Stats. 2002, Ch. 664, Sec. 54. Effective January 1, 2003.)

31012.
  

“Fraud” and “deceit” are not limited to common law fraud or deceit.

(Added by Stats. 1970, Ch. 1400.)

31013.
  

(a) 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.

(b) 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.

(c) 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.

(Added by Stats. 1970, Ch. 1400.)

31014.
  

“Order” means a consent, authorization, approval, prohibition or requirement applicable to a specific case issued by the commissioner.

(Added by Stats. 1970, Ch. 1400.)

31015.
  

“Person” means an individual, a corporation, a partnership, a limited liability company, a joint venture, an association, a joint stock company, a trust or an unincorporated organization.

(Amended by Stats. 1994, Ch. 1010, Sec. 95. Effective January 1, 1995.)

31016.
  

“Publish” means publicly to issue or circulate by newspaper, mail, radio or television, or otherwise to disseminate to the public.

(Added by Stats. 1970, Ch. 1400.)

31017.
  

“Rule” means any published regulation or standard of general application issued by the commissioner.

(Added by Stats. 1970, Ch. 1400.)

31018.
  

(a) “Sale” or “sell” includes every contract or agreement of sale of, a contract to sell, or disposition of, a franchise or interest in a franchise for value.

(b) “Offer” or “offer to sell” includes every attempt to dispose of, or solicitation of an offer to buy, a franchise or interest in a franchise for value.

(c) The terms defined in this section do not include the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchisee; provided, that a material modification of an existing franchise, whether upon renewal or otherwise, is a “sale” within the meaning of this section.

(Amended by Stats. 1977, Ch. 762.)

31019.
  

“State” means any state, territory, or possession of the United States, the District of Columbia and Puerto Rico.

(Added by Stats. 1970, Ch. 1400.)

CORPCorporations Code - CORP