Source: http://www.mulcahyllp.com/blog/navigatingtheprivaterightofactionunderthecaliforniafranchiseinvestmentlaw.html
Timestamp: 2019-04-20 16:57:49+00:00

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The California Franchise Investment Law (“CFIL”) regulates both the sale and disclosure of franchise opportunities within the state. The law was enacted to “provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered” and 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.” Violation of the CFIL can give rise to damages, rescission, and, under certain circumstances, impose personal liability on the directors, officers and other employees of the offending franchisor.
Unlike the Federal Trade Commission’s (“FTC”) Amended Franchise Rule that can only be enforced by the FTC, the CFIL provides individual franchisees with a private right of action. This private right of action is granted by Sections 31300, 31301 and 31302.5 of the CFIL. However, navigating these sections of the CFIL can be complicated.
This article explores these private right of action sections of the CFIL, including, the underlying violations that trigger these sections, the elements a franchisee must show to prevail on a claim under these sections, and the applicable limitations periods in which to bring such a claim.
Violation of the above CFIL sections alone will not result in liability under Section 31300. Instead, Section 31300 provides that a franchisee must also show “damages caused thereby” before it can prevail on the claim.
In the non-published opinion DT Woodard, Inc. v. Mail Boxes Etc., Inc. (Cal. Ct. App., Oct. 17, 2007, No. B194599) 2007 WL 3018861, the California Court of Appeal explained that the language of Section 31300 requires the plaintiff to show causation, reliance, and damages to prevail on the claim. In a fraud action, causation involves actual reliance and damage resulting from such reliance. “Justifiable reliance exists when the misrepresentation or nondisclosure was an immediate cause of the plaintiff's conduct which alters his legal relations, and when without such misrepresentation or nondisclosure he would not, in all reasonable probability, have entered into the contract or other transaction.” The court found this to also be true for a claim under Section 31300. Although Section 31300 does not include the word “reliance” (unlike section 31301, discussed below), the California Court of Appeal found that Section 31300 expresses the concept of reliance as part of its causation requirement. The element of reasonable reliance for a Section 31300 was later found to exist by the Ninth Circuit in Samica Enterprises LLC v. Mail Boxes Etc., Inc. (9th Cir. 2011) 460 Fed.Appx. 664, 665 (“Reasonable reliance is required under [Section 31300].”).
In the Mail Boxes Etc. case, above, the California Court of Appeal found that the additional showing of “willfulness” does not negate the elements of reliance and causation for a Section 31300 claim. Instead, to obtain the remedy of rescission, the plaintiff must prove that (i) the statutory violation was willful, (ii) the plaintiff relied on the statutory violation in entering the contract, and (iii) the violation caused damages to the plaintiff.
Section 31301 is narrower in scope than Section 31300 and provides a private right of action for only a single section of the CFIL – Section 31201. Section 31201 makes it unlawful for any person to make any statement of untrue material fact or material omission to a prospective franchisee not contained within the application, notice or report filed with the Department of Business Oversight. In contrast, any untrue material fact or omission contained within a franchisor’s filing with the Department of Business Oversight is subject to Section 31200, referenced above, not Section 31201.
As a result, a claim for damages brought under Section 31301 is subject to the same reliance, causation, and damages analysis articulated by the California Court of Appeal in the Mail Boxes Etc. case discussed above.
Moreover, a claim under Section 31301 has a potentially shorter statutory limitation period than a claim under Section 31300. Section 31304 provides that a claim under Section 31301 must be “brought before the expiration of two years after the violation upon which it is based, expiration of one year after discovery by the plaintiff of the facts constituting such violation, or 90 days after delivery to the franchisee of a written notice disclosing any violation of Section 30201 or 31202 which notice shall be approved as to form by the commissioner, whichever shall first expire.” Section 31301’s two-year limitation period is half of that provided for in Section 31300 (four years).
The third and final section of the CFIL providing franchisees with a private right of action is Section 31302.5. A claim under Section 31302.5 may be pursued if a franchisor, directly or indirectly, violates Section 31220 by restricting or inhibiting the right of its franchisees to join a trade association or otherwise prohibits the right of free association among franchisees for any lawful purpose.
 Cal. Corp. Code § 31001.
 Cal. Corp. Code § 31300.
 Molko v. Holy Spirit Assn., 46 Cal.3d 1092, 1108 (1988).
 See also Samica Enterprises LLC v. Mail Boxes Etc., Inc. (9th Cir. 2011) 460 Fed.Appx. 664, 665 (“Reasonable reliance is required under [Section 31300].).
 Dollar Systems, Inc. v. Avcar Leasing (C.D. Cal. 1987) 673 F. Supp. 1493, 1503 (“[W]illful” is defined as “an act that is committed knowingly and intentionally,” and does not require a showing of “an intent to violate the law, an evil motive, or a purpose to gain undue advantage.”).
 Cal. Corp. Code § 31300 (emphasis added).
 Ca. Civ. Code § 1692.
 2007 Cal. App. Unpub. LEXIS 8388.
 DT Woodard, Inc. v. Mail Boxes Etc., Inc. (Cal. Ct. App., Oct. 17, 2007, No. B194599) 2007 WL 3018861, *23 (“If this were not the case, a ‘willful’ statutory violation would give the plaintiff the opportunity to rescind, even if the franchisee did not rely on the franchisor’s violation and even if the franchisor’s violation caused no harm to plaintiff franchisee. It is illogical to condition the more expansive remedy of rescission (which includes restitution of benefits conferred by the contract, and which is not inconsistent with a claim for damages, according to Civil Code section 1692) on a lesser quantum of proof. To obtain the greater remedy of rescission should require plaintiff to prove everything necessary to obtain the lesser remedy of damages, as well as the ‘willful’ violation of the statute.”).
 Cal. Corp. Code § 31303 (emphasis added).
 Cal. Corp. Code § 31301.
 Cal. Corp. Code § 31301 (emphasis added).
 DT Woodard, Inc. v. Mail Boxes Etc., Inc. (Cal. Ct. App., Oct. 17, 2007, No. B194599) 2007 WL 3018861, *32; see also Samica Enterprises LLC v. Mail Boxes Etc., Inc. (9th Cir. 2011) 460 Fed.Appx. 664, 665 (“Reasonable reliance is required under [Section 31301].”).
 Cal. Corp. Code § 31304 (emphasis added).
 Cal. Corp. Code §§ 31220, 31302.5.
 Cal. Corp. Code § 31302.5 (emphasis added).

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