Franchisor Barred from Making Unregistered Franchise Sales in California

This posting was written by Peter Reap, editor of CCH Business Franchise Guide.

A franchisor of edible fruit bouquet businesses was preliminarily enjoined from making further franchise sales in California until it registered a fully-compliant Uniform Franchise Offering Circular with the state.

The federal district court in Los Angeles found a likelihood that the franchisor violated the California Unfair Competition Law through its violations of California franchise laws and regulations. The franchisor, which did not oppose the motion for injunctive relief, was alleged to have (1) failed to disclose in its UFOC that there was a lawsuit pending in Connecticut against one of its principal; (2) misrepresented in its California franchise registration application that an independent auditor prepared the financial statements, and (3) offered to sell franchises in California before registering.

Although a franchise disclosure/registration law claim is usually brought by a franchisee or prospective franchisee, this action was maintained by a competing franchisor, who contended that the alleged violations caused it irreparable harm by giving the franchisor an unfair competitive advantage in the market for edible fruit bouquet business franchises.

The franchisor’s failure to disclose the litigation in Connecticut was material because the lawsuit involved allegations of deceptive practices and was premised on claims that representatives of the defending franchisor posed as prospective franchise purchasers in order to gain access to competitor’s proprietary information, the court held. A prospective purchaser of a franchise would consider information regarding the suit— and the defending franchisor’s alleged use of the competitor’s proprietary information to create a competing franchise system—important.

The financial statements that the franchisor submitted with its franchise registration application were not prepared by an independent auditor, as required by California Code of Regulations Title 10, Section 310.111.2(a), according to the court. Evidence showed that the accounting firm preparing the statements was run by the father of the franchisor’s principal and employed the principal for 10 years prior to his entering the franchise business. Furthermore, the defending franchisor was shown to have offered to sell franchises in California prior to completing the franchise registration process.

The decision is Edible Arrangements International, Inc. v. Notaris, U.S. District Court for the Central District of California, Case No. CV 06-5945 FMC (PJWx), filed October 19, 2006, CCH Business Franchise Guide ¶13,487.