Civil Remedies for Breach of the California Franchise Investment Law

• Publication year: 2016
• Citation: Vol. 2016 No. 1
• Author: Brian H. Cole

Civil Remedies for Breach of the California Franchise Investment Law

Brian H. Cole

Brian H. Cole is a sole practitioner with the Law Offices of Brian H. Cole, and is also Of Counsel to Chase Law Group, P.C., both in Manhattan Beach. Mr. Cole is a Certified Specialist in Franchise and Distribution Law and has been practicing in the franchise area for over 25 years. Mr. Cole is currently Chair of the Franchise and Distribution Law Advisory Commission to the State Bar Board of Legal Specialization, and has previously served three terms as Chair of the Franchise Law Committee of the Business Law Section.

T he California Franchise Investment Law ("CFIL")¹ regulates the offer and sale of franchises in California. The CFIL generally provides that franchises cannot be offered or sold in California unless they are registered²with what is now the California Department of Business Oversight³ or exempt from registration.⁴ If a franchisor violates the CFIL, the franchisor is subject to criminal prosecution,⁵ administrative remedies imposed by the Commissioner of Business Oversight,⁶ and—the focus of this analysis—civil liability to the aggrieved franchisee.⁷ The primary civil remedy is recovery of damages caused by the violation. With respect to some (but not all) violations, if the violation is willful, then the franchisee may also sue for rescission.

This article discusses the sources of civil liability under the CFIL, reviews the principles for damages or rescission under California law, briefly addresses the issue of reliance (and whether the reliance must be reasonable), and finally discusses practical application of these principles to the types of claims likely to arise under the CFIL.

Sources of Statutory Liability

Although other sections of the CFIL impose civil liability, the principal sources of civil liability for violation of the CFIL are sections 31300 and 31301 of the California Corporations Code.⁸ In broad strokes, section 31300 allows for damages for an offer or sale of a franchise that is neither registered nor exempt under the CFIL.⁹ Section 31300 also provides damages for violation of section 31200 of the Corporations Code, which prohibits inclusion of any untrue information in materials filed with the Department of Business Oversight.¹⁰ If the violation of section 31300 is willful, the aggrieved franchisee may also sue for rescission.¹¹ By contrast, section 31301 allows for recovery of damages for offers or sales of a franchise pursuant to written or oral communications that are not filed with the Department of Business Oversight.¹²

Damages as a Remedy for Breach

Damages are the basic civil remedy prescribed for violation of the CFIL. The CFIL does not define damages, but the California Civil Code contains a comprehensive discussion of "Relief" (remedies), which is found at sections 3274 through 3424.¹³ Section 3274 of the Civil Code provides:

As a general rule, compensation is the relief or remedy provided by the law of this State for the violation of private rights, and the means of securing their observance; and specific and preventive relief may be given in no other cases than those specified in this Part of the Civil Code.¹⁴

In Spreckels v. Hawaiian Commercial & Sugar Co.,¹⁵ the California Supreme Court held that sections 3274 through 3424 are "intended as a comprehensive statement of the entire law upon the subject [of remedies]."¹⁶

This part of the Civil Code on remedies has several instructive sections. For instance, section 3281 defines damages as monetary compensation, stating: "Every person who suffers detriment from the unlawful act or omission of another, may recover from the person in fault a compensation therefor in money, which is called damages."¹⁷ The term "damages" in Civil Code section 3281 "is intended to represent the plain and ordinary meaning of the word 'damages.'"¹⁸ As the court explained in AIU Insurance Co. v. Superior Court, "[w]hatever their semantic differences, the statutory and dictionary definitions of damages share several basic concepts. Each requires there to be compensation, in money, recovered by a party for loss or detriment it has suffered through the acts of another."¹⁹

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The term "detriment" as used in Civil Code section 3281 is defined in Civil Code section 3282 as "a loss or harm suffered in person or property."²⁰ Civil Code section 3283 provides that "[d]amages may be awarded, in a judicial proceeding, for detriment resulting after the commencement thereof, or certain to result in the future."²¹ Putting all of these sections together, damages may be awarded for any loss or harm that is incurred by the aggrieved franchisee before a lawsuit is commenced or that is certain to be incurred by the franchisee in the future.

Civil Code section 3333 provides guidelines for measuring damages that were not caused by a breach of contract. Section 3333 states:

For the breach of an obligation not arising from contract, the measure of damages, except where otherwise expressly provided by this Code, is the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not.²²

Occasionally, people refer to section 3333 as the measure of damages for tort, which is true, but this section is not exclusively reserved for tort liability. As noted in Spreckels, supra, this part of the Civil Code is a comprehensive discussion of remedies in California.²³ Sections 3300 to 3322 address damages for breach of contract, while sections 3333 to 3343.7 address all non-contractual causes of action, including statutory violations.²⁴ For example, Bounds v. Figurettes, Inc.,²⁵ involved allegations of the sale of an unregistered franchise in violation of CFIL section 31300, false advertising in violation of California Business & Professions Code section 17500, and sale of an "endless chain" in violation of Penal Code section 327.²⁶ While the court did not address whether the arrangement at issue was an unregistered franchise, because it found violations of the other two statutes, the court directed the lower court to follow Civil Code section 3333 on remand for a determination of damages.²⁷

The measure of damages for non-contractual liability varies slightly from the measure of damages for breach of contract. Section 3300 of the Civil Code, the provision addressing damages for breach of contract, omits the phrase "whether it could have been anticipated or not," which is included in section 3333 (the provision addressing damages for matters other than a breach of contract).²⁸ Case law construing these two sections clarifies that while the measure of damages under either section is frequently identical,²⁹ this is not always the case.³⁰ In Overgaard, the court stated that "the measure of damages in Civil Code section 3333 and Civil Code section 3300 is not the same (although in a given factual situation the result may be the same)."³¹ In particular, damages for breach of contract are limited to those reasonably anticipated by the parties at the time of contracting, but there is no such limit on damages for violations that do not arise from a breach of contract.³²

In addition to the other provisions that address damages for breach of contract (Civil Code section 3300, et seq.) and non-contractual obligations (Civil Code section 3333, et seq.), the same part of the Civil Code also addresses recovery for fraud, in section 3343.³³ Although the CFIL does not address fraud per se, Corporations Code sections 33000 and 33001 have been compared to a fraud statute.³⁴ However, a comparison of the remedies for civil fraud to the statutory remedies for breach of the CFIL is beyond the scope of this article.

Rescission as a Remedy for Breach

As noted above, Corporations Code section 31300 (but not other provisions of the CFIL addressing civil liability) allows the franchisee to sue for rescission if a violation of the CFIL is "willful."³⁵ Under the holdings in People v. Gonda³⁶ and Dollar System, Inc. v. Avcar Leasing System, Inc.,³⁷ the willfulness required for purposes of this section is "an act that is committed knowingly and intentionally. There is no requirement of a showing of an intent to violate the law, an evil motive, or a purpose to gain undue advantage."³⁸

When rescission is available,³⁹ it is governed by Civil Code sections 1688, 1691, 1692, and 1693.⁴⁰ The term "rescission" is not defined in the Civil Code [, but] ... means to restore the parties to their former position .... The consequence of rescission is not only the termination of further liability, but also the restoration of the parties to their former positions by requiring each to return whatever consideration has been received.⁴¹

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Generally, if a franchisee wants to rescind, the franchisee must notify the franchisor and offer to restore to the franchisor everything of value received from the franchisor in exchange for return by the franchisor of all things of value received from the franchisee.⁴² A filed complaint can serve as the notice of rescission and the offer to return the benefits received.⁴³

Rescission is available under the grounds described in Civil Code section 1689.⁴⁴ For instance, rescission is available when provided under a statute. ⁴⁵ As noted above, Corporations Code section 31300 provides for rescission on the basis of specified violations of the CFIL, if those violations are willful.⁴⁶

It is permissible to seek both damages and rescission simultaneously. Civil Code section 1692 provides:

A claim for damages is not inconsistent with a claim for relief based upon rescission. The aggrieved party shall be awarded complete relief, including

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