Focused on Franchise Law - October 2012

by Lewitt Hackman


Last month we looked at four exemptions franchisors use to avoid the registration and presale disclosure requirements of California's Franchise Investment Law. Several lesser known exemptions that can be used by franchisors are: 


     A.  Fractional Franchise Exemption: An offer is exempt from registration and disclosure if: 1) the purchase involves adding a new product line to the purchaser's existing business; AND, 2) the purchaser (or one of its officers, directors or managing agents who has held his/her position for the 24 month immediately preceding the purchase) has for the 24 months immediately preceding the purchase operated a business offering "substantially similar" products and services; AND, 3) the franchise will be operated from the same location as the purchaser's current business; AND, 4) the parties anticipate in good faith that sales of the franchised business will not exceed 20% of the purchaser's total sales on an annual basis; AND, 5) the purchaser is not controlled by the franchisor; AND, 6) the franchisor files the specified notice with the DOC and pays a fee prior to the sale. While this is a very useful exemption and rather frequently relied upon, it requires considerable advance analysis, which may include financial analysis relating to potential sales percentages by the purchaser's accountants.


     B.  Seasoned Franchisor Exemption: An offer is exempt from registration, BUT NOT DISCLOSURE, if: 1) the franchisor's net worth is at least $5 million, OR the franchisor's net worth is $1 million and the franchisor's parent's net worth is $5 million, and the parent guarantees franchisor's obligations under the franchise agreement; AND, 2) the franchisor or franchisor's parent has either, or in combination, for 5 years immediately preceding the offer or sale conducted the franchised business OR had 25 franchisees conducting the same franchised business; AND, 3) the franchisor discloses the franchisee in writing with a California compliant FDD at least 10 days before the franchisee executes any franchise document and before the franchisee pays any monies to franchisor relating to the sale; AND, 4) the franchisor files the specified notice with the DOC and pays a fee prior to the sale. In all cases, audited financial statements are required to establish net worth.


     C.  Sales by Franchisees: Sales by franchisees of their franchises for their own account (transfers or assignments) are exempt from registration and disclosure for the selling franchisee and the franchisor. Requirements in the franchise agreement that the franchisee obtain the franchisor's consent prior to the transfer do not negate eligibility for this exemption.



Running a franchised business in California just got a bit easier. On September 19, 2012, SB 1186, a bill designed to help stop "shakedown lawsuits" and to encourage greater compliance with the Americans with Disabilities Act of 1990 ("ADA") became law. The bill was a bipartisan political breakthrough, which was supported by franchisees, other small businesses and the disabled community.


The ADA has gone a long way toward ensuring equal access in "public accommodations" (private businesses that offer goods and services to the public) for the disabled. Under the Unruh Civil Rights Act, technical violations of the ADA, regardless of knowledge or intent, are actionable and allow for recovery of statutory damages and attorneys' fees. Unfortunately, though, loopholes in that law have led to abuse. For example, franchisees that refused to pay-up after receiving vague, threating "demand for money letters" for unspecified ADA violations have faced litigation with no opportunity to cure. This problem was highlighted by the California Supreme Court in Munson v. Del Taco, Inc. (2009)-a case in which a wheelchair bound plaintiff brought suit against a Del Taco franchisee alleging he encountered architectural barriers that denied him access to the parking lot and restrooms. To close the loopholes, the new law: 

  • Prohibits "demand for money letters" by plaintiff's attorneys for potential violations or infractions and provides for professional discipline of attorneys who violate this prohibition;
  • Requires that plaintiffs "verify," or swear under oath, all disability access claims made in their complaints;
  • Provides incentives for small business owners to proactively identify and correct problems by reducing statutory damages and allowing extended cure periods for businesses that have obtained Certified Access Specialist (CAS) inspections in advance; and,
  • Requires that letters demanding the correction of potential equal access violations, which are still allowable, provide specifics of the barrier encountered and how it interfered with the complainant's full and equal enjoyment of the facility; and, if such letter is sent by an attorney, it must include the attorney's state bar number and be sent to the State Bar.

To make the most of this new legislation, franchisees should be proactive: have a CAS inspection performed and correct any deficiencies as soon as possible.



Barry Kurtz was recently selected by ALM Media and LexisNexis Martindale-Hubbell as one of Southern California's Top Rated Lawyers with an AV Preeminent Peer Review Rating, the highest rating in legal ability and ethical standards.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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