SECTIONS 31000-31019 - California Statutes

CORPORATIONS CODE

SECTION 31000-31019

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.

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.

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.

31002. Unless the context otherwise requires, the definitions in
this part apply throughout this division.

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.

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.

31004. "Commissioner" means the Commissioner of Corporations.

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.

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.

31006. A "franchisee" is a person to whom a franchise is granted.

31007. A "franchisor" is a person who grants a franchise.

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.

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.

31009. A "subfranchisor" is a person to whom a subfranchise is
granted.

31010. Where used in this law, unless specifically stated
otherwise, "franchise" includes "area franchise" and "subfranchise."

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.

31012. "Fraud" and "deceit" are not limited to common law fraud or
deceit.

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.

31014. "Order" means a consent, authorization, approval,
prohibition or requirement applicable to a specific case issued by
the commissioner.

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.

31016. "Publish" means publicly to issue or circulate by newspaper,
mail, radio or television, or otherwise to disseminate to the
public.

31017. "Rule" means any published regulation or standard of general
application issued by the commissioner.

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.

31019. "State" means any state, territory, or possession of the
United States, the District of Columbia and Puerto Rico.