Selected Developments in Franchise Law

• Publication year: 2015
• Author: Tal Grinblat and Kevin Adams

Selected Developments in Franchise Law

Tal Grinblat and Kevin Adams

This article summarizes selected California legislative and administrative actions during the year 2014, and highlights noteworthy developments in California case law.

Legislative and Administrative Actions:

Amendment to Automatic Effectiveness Statute; Acceptance of Electronic Records

Assembly Bill ("AB") 2289 amended the California Franchise Investment Law (Corporations Code sections 31116 and 31121) to provide that, unless a stop order is issued, a franchise registration automatically becomes effective on the 30^th business day (as opposed to the 15^th business day) after filing a complete application with the Department of Business Oversight ("DBO"), and similarly extended the time for the automatic effectiveness of a renewal application.

AB 2289 defines a "complete application" as an application that contains the appropriate filing fee, a Franchise Disclosure Document, and all additional exhibits, including financial statements that conform to the regulations of the Commissioner of the DBO. The "complete application" provision was not previously required for franchisors to take advantage of the automatic effectiveness statute, thereby requiring the DBO to issue stop orders for incomplete applications. The bill eliminated the need for the DBO to issue stop orders for incomplete applications, and doubled the time in which the DBO can now issue orders approving or denying a complete franchise application.

AB 2289 also amended Corporations Code section 31158 and Financial Code sections 12201, 17201, 22101, and 23305 to authorize the Commissioner to prescribe circumstances under which the DBO will accept electronic records and electronic signatures. The bill became effective on January 1, 2015.

NASAA Adopts Commentary Restricting Disclosure of Different Types of Franchise Arrangements in One Disclosure Document

On September 16, 2014, the Franchise and Business Opportunity Project Group of the North American Securities Administrators Association, Inc. ("NASAA") issued a Multi-Unit Commentary ("Commentary") to provide guidance to practitioners for disclosing certain multi-unit franchising arrangements, which have become common in franchising but were not specifically addressed under NASAA's 2008 Franchise Registration and Disclosure Guidelines or the Federal Trade Commission's Franchise Rule.

Previously, there were no specific prohibitions on a franchisor's disclosing several types of franchise arrangements in one disclosure document. For example, a franchisor could offer and disclose a prospective unit franchisee and prospective subfranchisor within the same disclosure document. The Commentary defines a "subfranchise arrangement" as an arrangement where a person is granted, for consideration paid to the franchisor,

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rights related to granting unit franchises to third parties, generally within a delineated geographic area.

Similarly, a franchisor previously could use the same disclosure document for a unit franchisee and an area representative. The Commentary defines an "area representative" as a person that is granted, for consideration paid to the franchisor, the right to solicit or recruit third parties to enter into unit franchise agreements with the franchisor and/or to provide support services to third parties entering into unit franchise agreements with the franchisor.

With the adoption of the Commentary, NASAA clarified that a franchisor may not offer both...