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My Franchisor is Not Registered in California, Can They Still Sue Me as a Franchisee in California?

Franchisors must register their franchise offering with the California Department of Business Oversight in order to sell franchises in California. If a franchisor was properly registered and properly sold a franchise, but has since become not registered (by not renewing its registration), this means that franchisor can not sell any future franchises in California. It does NOT mean they can not enforce a franchise agreement with an existing franchisee in California. Having said that, if a franchisor is incorporated out of state and failed to register to do business with the California Department of Corporations (and file California tax returns, and pay California taxes), then such company can NOT bring an action in California against its franchisee for any reason. California has laws to protect its citizens, and any company who is doing business in California, without properly registering its corporation or LLC, can not avail itself of the laws and protections afforded by the California Courts. Having a California located franchise IS doing business under California laws since that franchisee pays royalties or other fees, in exchange for the franchise, license and related services. If you are a California franchisee with an out of state franchisor threatening legal action, an experienced California Franchise Attorney, such as myself, can help you determine your rights and options.

Do I have to go to arbitration in my franchisor's home state, across the country?

Will an arbitration case be in the home state of the franchisor instead of California?  Not always. Many state's laws trump what's in the franchise agreement. Depending on the state the franchisee is located, that state law may overrule arbitration required locations outside the franchisee's state, regardless of the franchise agreement says. It is imperative that you have an experienced franchise arbitration attorney review both your franchise agreement and your states franchise laws once you are notified of a new arbitration against you. If the franchisor has to come across the country because of your state's laws, they may not want to do that, particularly if they have to drag 3 corporate witness and stay for 2 nights. If your state favors local arbitration and you have defenses and claims perhaps YOU as the franchisee may want to initiate an arbitration rather than having to react to a franchisor's demand for arbitration in an inconvenient location. If your state law is not in your favor, there are still potential solutions that may allow you to stay put such as determining if the franchisor potentially violated registration or disclosure laws Franchise law is highly regulatory and attention to detail is necessary. Sometimes those details are missed. This gives you the franchisee alternative arguments, for example where the franchisor has not given you a proper Franchise Disclosure Document with some state required extra language, or contains the required audited financial statements, or other current information which may contain errors. You may have more alternatives that you think on your side. Call me today for a review of your situation.

What is arbitration anyway?

Arbitration is an expedited and less expensive process for a dispute to get resolved. Mandatory arbitration is used in many industries and becoming the norm for franchise agreements. Franchisors utilize arbitration as a quick and easy way to perhaps collect its past due royalties. A franchisee may also seek to use arbitration to resolve a dispute with a franchisor. Many times the franchise relationship does continue even though there is an arbitration preceding in process. Depending on the arbitration tribunal indicated in the arbitrate clause, your dispute will be heard before an experienced attorney or a judge or retired judge. There may be more than 1 arbitrator required by your agreement. In general, the matter will be scheduled for hearing in about 4-6 months after the initial case is filed, much quicker than traditional litigation. In addition arbitration is much more informal, no courtroom, no jury no bailiff, no court reporter, just a conference room everyone sits around. Both sides call their witnesses and present their exhibits, and there is cross examination. However the atmosphere is less formal, the rules of evidence are less formal, and generally witnesses can say what they want, without objection. The arbitrator hears the evidence and testimony and makes a ruling, generally within 14-30 days after the end of the hearing, and the ruling is binding, unless there was some kind of provable arbitration misconduct or bias. Arbitration is an efficient method of resolving disputes. And the disputes many times resolve themselves before the hearing. If you are contemplating arbitration or have been given a demand for arbitration call me today to discuss your situation and strategy.

My franchisor will not approve the sale of my franchise to a qualified buyer.

The franchise agreement contained in the Franchise Disclosure Document or FDD generally has detailed provisions for the approval process of a buyer of your franchise, but a franchise agreement can be more vague and just say within a reasonable period of time. Sometimes the franchisor will take more than a reasonable time in attending to this matter for a multitude of reasons. Perhaps the buyer is not exactly what they want but can not really deny the qualifications. Perhaps the longer the franchisor delays the more fees you rack up they will demand at closing. Perhaps they want to buy the franchise back from you but do not like the terms they would have to meet and want your buyer to go away so they can make you a lower offer. All of these actions are unreasonable actions potentially causing a franchisee damages. If this is happening to you, an experienced franchise attorney can help you make the appropriate demands onto the franchisor and outlining your rights and potential damages. Franchisors generally will not take your complaints too seriously when coming from you the franchisee, but should take those demands from an experienced franchise attorney representing you very seriously. Where there are very real damages (lost a good buyer), the matter becomes must more serious and the Franchisor does need to understand the legal ramifications of the inaction.

If my franchise agreement is terminated can I stay in the same business?

Most franchise agreements have some sort of post termination non-competition clauses. This is where a franchisee's particular state laws, most notably California laws, favor franchisees (ex-franchisees). California Business and Professions Code §16600 voids any provision in a contract which is a restraint on trade meaning, If you are a California ex-franchisee, the franchisor can not enforce the non-competition clause in your franchise agreement. They should not even be threatening to do so, and certainly can not bring an action against you for being in a similar business. So you are free to engage in the same or similar and competing business after the term of your franchise agreement. Be aware however, other prohibitions such as prohibition against soliciting clients of the former franchise, or against soliciting employees of the former franchise or of another franchisee, or against using any proprietary information gained by being a franchise, are very much enforceable. If you are intending to be in a competing business or are in one after your franchise agreement is terminated, it is wise to seek legal counsel to be sure you stay within the laws and not buy yourself a lawsuit which can potentially put you out of business for good. Caution is also recommended that you do not start up the competing business while your franchise agreement is still in effect.

How can I get out of my franchise agreement?

Many franchisees come to me asking for a way to get out of their franchise agreement. They generally owe money and just want out of the franchise, and have not had any meaningful help from their franchisor or their franchisor has thwarted any recovery by its own failures. This is where I am pretty good at what I do, having been an in-house counsel for 2 decades. The first thing I do is compare the FDD the franchisee received with the FDD and exhibits on file with the California Office of Business Oversight. You would be surprised at how often franchisors mess up on dates, exhibits or just plain give out the wrong disclosure or the wrong California Addendum. Generally neither party knows this until and experienced franchise registration attorney scours the documents. Many times, there are technical violations which in the scheme of things may not seem like a big deal, but a violation of California law is a violation of California law, and depending on the timing, severity, and potential damages caused, remedies include everything up to and including full rescission of the franchise agreement. At a minimum it is the basis for negotiating out of your debt. The point is there are possible solutions that a grieving franchisee may not even know exist without an experienced California franchise attorney on your side.

What Happens If My Franchisor Changes the Franchise System?

Franchisors will change the system of doing business which you purchased, whether it is for style and design changes, or to change the required equipment package, or other required elements of operating the franchise. The question is, how much is too much too soon, and what does the existing franchisee have to do to. There are various options when this happens and depending on the changes,and the cost and why the franchise agreement states, will depend on your options. If the franchise agreement is silent about updates to the franchise system in terms of cost or frequency, then there is always room to negotiate with the franchisor about timing of implementation or reductions in fees to fund the cost of improvements. Franchisors are generally willing to work with a franchisee in order to have the updated system reflected in the network. However if the franchisor will not work with you and the updates are unreasonable in cost, timing of implementation or are not being required of every franchise similarly situation, you have rights in not being forced to expend unreasonable sums in an unreasonable timeframe. If not all similarly situated franchisees are being required to make the updates, this is called selective enforcement and is similar to discrimination. In a nutshell, selective enforcement in this manner is completely improper. I can help you negotiate a workable solution or if necessary negotiate a termination of your franchise agreement.

When Should I Go to Arbitration with My Franchisee...with My Franchisor?

In most franchise agreements there is a provision for dispute resolution requiring mandatory arbitration. Arbitration is usually quicker, cheaper and less complicated than litigation. Either a franchisor or a franchisee may initiate an arbitration proceeding. The result is binding and may/will be entered as a judgment by the prevailing party against the party who loses. Counterclaims are allowed and should be brought in arbitration if they exist. In California, the Franchise arbitration law requires arbitration to take place in California if the franchisee is located in California, regardless of what the Franchise Agreement says, and even if the out of state Franchisor attempts to start an arbitration elsewhere. Conversely a California Franchisor may be forced to arbitrate our of state if the franchise law of the state where the franchisee is located also provides a similar law (and there are several). Arbitration can be an effective way to get to a settlement when there have been poor communication attempts at negotiation of a dispute. Even after an arbitration is filed both parties are free to negotiate and settle a matter even in the middle of the arbitration hearing. Even after the hearing is over before the award is handed down. Settlement is always encouraged. Sometimes it takes a more serious knock at the door before both parties can see and understand the other party's point of view. Whether you believe you have been seriously wronged by the other party or you just want to get their focused attention on your issues, I am committed to a fair playing field for all. If you are my client I will simultaneously pursue your position while at the same time offer realistic, pragmatic, and economic solutions.

What is "Non-Compliance" from the Perspective of Franchise Law in California

In California franchise law, Non Compliance relates to the failure of one of the parties to operate within the specified terms, conditions and operational procedures established by the "Franchise Agreement". For example, inappropriate use of the franchisor's name or logo in advertising or social media, failing to maintain proper operating hours, or closing a store to go on a personal vacation might all qualify as "non-compliance". The relationship between a franchisor and franchisee should tightly specify all areas of business operations, training, management, processes, and reporting. There are also issues concerning insurance and liability, compliance (federal, state and local), wage and hour laws and operational safety that must be clearly established and adhered to. The relationship between the parties is established within the "Franchise Agreement" and an experienced California franchise law attorney should help you to anticipate all potential risks and liabilities so that compliance with the agreements is not only specified but enforceable.

Can You Negotiate Details of a California Franchise Agreement?

The "Franchise Agreement" is the actual contract between the franchisor and the franchisee. While a Franchise Agreement in general may appear to be a negotiable contract, there are very specific California legal requirements should a Franchisor and Franchisee proceed to negotiate the terms of a California based franchisee or franchisor. These requirements are so strict and cumbersome that most California franchisors simply shy away from even attempting to comply since any violation of California Franchise Negotiated Changes laws can spell disaster for a franchisor. You will often times hear, "California Franchise Laws do not allow us to negotiate changes." Well sort of. Even so, the Franchise Agreement should be carefully reviewed with an experienced and proven California franchise attorney. There are often silent areas, gray areas, or inconsistencies that can leave a prospective franchisee vulnerable in the future. I'm a firm believer that "the dollars you fail to invest to protect yourself today will cost you thousands of dollars in the future." It is important that you as a franchisee thoroughly understand this document, and the resulting impact on your future business operations including how you will get out of it if you choose to at some point in the future.

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