A Roadmap for Companies Trying to Avoid the “Franchisor” Classification.

Inadvertent Franchises and the Graybar Hotel

By James M. Mulcahy on November 08, 2012

The Orange County Lawyer, the official publication of the Orange County Bar Association, has published James Mulcahy and Gerard Davey’s article “Inadvertent Franchises and the Graybar Hotel” in its June, 2010 issue. This article addresses the problems that can befall a business that inadvertently operates as a “franchisor” under Federal or California franchise law and provides a roadmap to companies that are trying to avoid the “franchisor” classification.

Misjudgments about what constitutes a “franchise” can sometimes lead to disastrous consequences. In the case of John Gonda, such a misjudgment resulted in a criminal conviction for the sale of unregistered franchises inbCalifornia. People v. Gonda, 138 Cal.App.3d 774 (1983). In G o n d a, the California Court of Appeals found that the trial court properly excluded testimony of a business attorney whom the defendants had consulted and who allegedly advised them that “their contract was not a registrable franchise and ‘they therefore were not breaking any laws.’” The Court concluded that: “Reliance on advice of counsel provides no defenses to the charges here.” Incompetent legal advice has potential implications for more than just the personal liberty of clients. It may impact the giving legal advice, as well.

In a Connecticut case, the misjudgments about whether a franchise should be registered under the Connecticut business opportunity law led to disastrous consequences for a law firm. In the case of Beverly Hills Concepts, Inc. v. Schatz & Schatz, Ribico & Kotkin, 247 Conn. 48 (1998), the Court affirmed a $16 million malpractice judgment against a Connecticut law firm, which had misjudged whether or not to register a franchise concept under the Connecticut business opportunity laws. The court concluded that the “claims by the defendants that Goldman (partner in the defendant law firm) analyzed the situation and declared that BHC (plaintiff) was operating in a gray area was, in the face of the overwhelming evidence available to him, only further evidence of incompetence.”

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