A Review of Exclusive Remedy Provisions in Franchise Statutes
By Filemon Carrillo and Allard Chu on October 27, 2021
Franchise litigation often begins with shotgun-style pleadings featuring claims for statutory violations and various theories of liability under common law. Mounting a defense to these complaints entails analyzing every pleaded theory, including its elements, remedies, and defenses, such as applicable limitations periods. While the same set of facts may apply to multiple claims, the viability of each claim may differ. As a result, a franchisor’s motion to dismiss may dispose of some legal claims but leave others intact, potentially resulting in a Pyrrhic victory and protracted litigation. For the franchisee plaintiff in this scenario, however, the strategy to pursue every viable claim is more likely to result in claims that survive initial motion practice.
In a common scenario, a franchisee plaintiff will assert a claim for a violation of statutory antifraud provisions or of registration or disclosure laws. The franchisee will also assert common law claims for breach of contract, fraud, and negligence, among others, based on the same violations of the franchise statutes. Further still, creative franchisee counsel will leverage “unfair trade” or consumer protection statutes to assert additional theories of liability and expand the menu of potential remedies.
The good news for those defending these overlapping claims, and a hurdle of which plaintiffs’ counsel should be aware, is that there may be a statutory basis to narrow the scope of a complaint effectively and efficiently early on in litigation. Some franchise statutes contain preemption language that may narrow the scope of a suit from the outset, or even dispose of the suit altogether. However, the proper interpretation of the preemption language is not necessarily settled in case law. This article discusses common preemption provisions in franchise statutes, the provisions’ unsettled history of judicial interpretation, and brief arguments in favor of and against interpreting the provisions to create broad preemptive powers.
Franchise Statute Preemption Provisions
Some but not all franchise regulatory schemes include preemption or exclusive remedy provisions. For example, the California Franchise Investment Law (the “CFIL”) provides:
Except as explicitly provided in this chapter, no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder. Nothing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect.
Cal. Corp. Code § 31306. Other jurisdictions include a virtually identical limitation. See, e.g., Mich. Comp. Laws Ann. § 445.1534; N.Y. Gen. Bus. Law § 691.
This article shall refer to the first sentence of CFIL § 31306 as the exclusive remedy provision and the second sentence as the savings clause. On the one hand, the exclusive remedy provision provides that civil liability is limited to that which is created by the franchise statute. On the other hand, the savings clause preserves liability that would exist under any other statute or under the common law if the CFIL “were not in effect.” Judicial efforts to reconcile these seemingly contradictory provisions have resulted in divergent outcomes. Below are a few examples of courts confronting these provisions.
An Unsettled History of Interpretation
Samica Enterprises, LLC v. Mail Boxes Etc. USA, Inc., 637 F. Supp. 2d 712 (C.D. Cal. 2008)
In Samica, a group of UPS Store franchisees filed suit against the franchisor and affiliated entities. They alleged that the franchisor “duped” them into investing in the franchises, which were allegedly unviable economically. Samica, 637 F. Supp. 2d at 715. In addition to pursuing claims for violations of the CFIL, the franchisees asserted common law fraud and misrepresentation claims based on the same acts and omissions that formed the basis for the CFIL claims. The franchisor moved for summary judgment, arguing, in part, that the CFIL’s exclusive remedy provision preempted the common law claims.
The Central District of California agreed with the franchisor, finding that the CFIL preempted allegations of common law fraud that are based on the same facts that constitute CFIL violations, while this was not the case for claims independent of CFIL violations. The Samica court concluded that the exclusive remedy provision “bars claims that may otherwise be brought under the CFIL—i.e., those claims alleging misrepresentations and omissions covered by” the CFIL’s provisions. Id. at 722. Because the bases for the franchisees’ claims were alleged misrepresentations covered by the CFIL, the exclusive remedy provision precluded their common law claims. See also Pinkberry Ventures, Inc. v. Penninsular Group, LLC, 13-CV-02146 & 13-CV-02662, 2013 WL 12145606, at *2 (C.D. Cal Dec. 17, 2013) (“It appears clear from the CFIL that common law claims that could be brought as CFIL claims are displaced and therefore barred by Cal. Corp. Code § 31306.” (citing Samica)); Flip Flop Shops Franchise Co., LLC v. Neb, 16-CV-7259, 2017 WL 2903183, at *8 n.7 (C.D. Cal. Mar. 14, 2017) (“Under Section 31306 of the CFIL, claims alleging misrepresentations that fall within the scope of Section 31300 and 31301 can only be brought under the CFIL, and any other claims of fraud based on such violations are preempted.” (also citing Samica)).
Andersen v. Griswold Int’l, LLC, No. 14-cv-02560, 2014 WL 12694138 (N.D. Cal. Dec. 16, 2014)
The Andersen court disagreed with the holding in Samica. In Andersen, franchisees sued their franchisor for misrepresentations it allegedly made when marketing to potential franchisees. The franchisees asserted claims for violations of the CFIL as well as common law fraud and misrepresentation, among others. The franchisor filed a motion to dismiss arguing in part that the exclusive remedy provision preempted the common law fraud claims, citing Samica.
The franchisees challenged the Samica court’s reasoning, arguing that the savings clause allows plaintiffs to bring viable claims independent of the CFIL. The Northern District of California agreed with the franchisees, finding that the “plain language of the statute preserves preexisting common law and statutes enacted before the CFIL that would apply if it had not been enacted.” Andersen, 2014 WL 12694138, at *5.
Both Samica and Andersen involved claims for common law fraud that the franchisees argued were viable independent of the CFIL. The Samica court held that if a claim is viable under the CFIL, then the CFIL preempts all other claims concerning the same facts. On the other hand, the Andersen court allowed the common law theory to go forward by citing to the CFIL’s savings clause. Without an obvious way to reconcile Samica with Andersen, the preemption issue under the CFIL remains an open question. As seen below, this disagreement is not unique to California’s statute.
Toyz, Inc. v. Wireless Toyz, Inc., 799 F. Supp. 2d 737 (E.D. Mich. 2011)
In Toyz, Inc., a group of franchisees sued the franchisor and affiliated companies for violations of the Michigan Franchise Investment Law (the “MFIL”) alleging that the defendants made material misrepresentations. The franchisees asserted common law fraud claims predicated on the same misrepresentations. The defendants moved to dismiss, arguing in part that the MFIL preempted the common law claims. Like the CFIL, the MFIL contains an exclusive remedy provision with a savings clause. The Eastern District of Michigan denied dismissal premised on preemption.
Subsequently, the defendants filed a motion for rehearing on the issue of preemption. In support of their arguments, defendants submitted a then-recent ruling issued by Michigan’s Oakland County Circuit Court – the state’s trial court –in R & B Commc’nss, Inc. v. Wireless Toyz Franchise, LLC (“R & B”), No. 2010-113623-CK. Just two months prior to the Eastern District of Michigan’s order denying dismissal, the R & B court held, based in part on Samica, that the MFIL preempts common law misrepresentation and omission, rescission, and concert of action claims.
The Eastern District of Michigan disagreed with the circuit court. It held that the “plain language of the statute does not limit any other cause of action brought under common law” and, thus, the MFIL did not preempt the common law claims.
In jurisdictions with exclusive remedy provisions like that in the CFIL, whether these preempt common law fraud claims depends on a court’s interpretation of the savings clause. The plain language of the savings clause suggests that common law claims remain viable even with the exclusive remedy provision. But, is this interpretation at odds with the policy underlying franchise statutes and their shortened statutes of limitations?
A Brief Argument in Favor of Samica and Franchise Statute Supremacy
Franchise statutes typically impose broad regulations on franchise transactions. Many require strict compliance with pre-sale procedures and impose a harsh consequence for any violation, including liability for damages and even automatic rescission. Moreover, these regulatory schemes may impose liability on the officers and principals of a franchisor. In so doing, legislatures are expanding protections for franchisees that may be duped into a franchise system based on misrepresentations.
These remedies have a limit, typically in the form of a statute of limitations shorter than that applied to common law fraud claims. The argument in favor of a Samica interpretation is that such shorter statutory period, where applicable, must be respected. Otherwise, franchisees may sit on their claims. If the franchised business is a success, then there is no business purpose for bringing suit. If the franchised business fails, the franchisee can file suit, seek rescission and damages. The intent of the franchise statutes was to amplify protections for franchisees, not grant them two bites from the same apple.
In passing these provisions, the legislature determined the proper remedies and limited availability of those remedies to the statutory period applicable to franchise statutes. Such a comprehensive regulatory scheme displaces the common law. As a policy matter, the savings clause should not eviscerate the limitations period or limitation of remedies in the franchise statute.
A Brief Argument in Favor of Andersen and Saving Common Law Claims
The argument in favor of an Andersen interpretation is that the savings clause preserves preexisting common law claims by its plain terms. Reading the statute to preempt claims that fall squarely into the language of the savings clause renders it meaningless. An interpretation favoring preemption violates the canons of statutory interpretation favoring a construction that gives effect to a statute’s plain, unambiguous language and gives all terms meaning. Liability for common law fraud may exist independent of a franchise statute and, therefore, franchise statutes should not preempt such claims.
It is also important to point out the differences between claims for misrepresentation under a franchise statute, and the common law. The statute of limitations is certainly one of them, but to single it out as the distinguishing factor ignores potential substantive differences. The requisite elements for fraud, for example, may differ between a franchise statute and the common law. Consequently, the factual showing required of the plaintiff may differ based on the claim, even if there is significant overlap. The remedies available may also differ. The savings clause makes clear that while the statute provides an exclusive scope of claims and remedy for any statutory violation, the statute does not alter the claims or remedies that are otherwise available under other statutes or the common law.
Counsel must examine the viability of alternative theories of liability in a franchise dispute. Where statutory language like that discussed in this article is in play, preemption is not guaranteed. From a franchisor’s perspective, keeping a dispute within the confines of franchise statutes and regulations prevents exposure to remedies that may not be available under them. In addition, it prevents franchisees from circumventing the statute of limitations by asserting common law claims whose statutory periods extend beyond the limitations period in franchise statutes. On the other hand, franchisee counsel should not assume that franchise statutes preempt common law claims where the basis for liability overlaps, and should assert both statutory and common law claims if the facts support them. In light of the case law on both sides, counsel on both sides of a franchise dispute should not overlook the scope of the exclusive remedy provision and savings clauses in franchise statutes.