Friday, June 18, 2010

Renewal of Franchises Did Not Trigger California Disclosure Obligation

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A gasoline station franchisor did not violate the California Franchise Investment Law (CFIL) by failing to make prescribed disclosures when it renewed the agreements of many of its franchisees, the federal district court in San Jose, California, has ruled.

The franchisor’s motion to dismiss the franchisees’ Franchise Investment Law claim was granted, and the franchisees were given 20 days leave to amend.

Renewal as “Offer” or “Sale”

The CFIL did not require the franchisor to make the disclosures specified in the claim when an existing franchise agreement was renewed, the court held. Franchise renewals were excluded from the statutory definitions of “offer” and “sale.”

The CFIL was enacted to ensure that prospective franchisees were adequately informed of their duties and obligations under franchise relationships before entering into them, the court observed.

The franchisees cited dicta from an unpublished decision to support their argument that disclosure obligations applied whenever a franchise agreement was renewed. The franchisor correctly noted, however, that the cited statement was dicta, the decision an unpublished one, and a subsequent decision in that same case confirmed that the CFIL did not apply to renewals of existing franchises.

Modification of Franchise Agreement

The franchisees contended that service station rent increases put into effect upon nonrenewal constituted “material modifications” of the franchise agreements under the meaning of the CFIL, triggering the disclosure requirements.

Even assuming that the rental increase was a material modification, such modification would not give rise to a suit for damages under the statute for failure to provide the comprehensive disclosures required for an offer or sale of a franchise to a prospective franchisee, the court held.

The June 2, 2010, decision is In re: ConocoPhillips Co., CCH Business Franchise Guide ¶14,397.

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