California franchise laws - private right of action

Private Right of Action Under the CFIL

By Mulcahy LLP on September 16, 2013

Unlike the federal franchise laws – which can only be enforced by the Federal Trade Commission – the California Franchise Investment Law (CFIL) provides individual franchisees (and subfranchisors) with a private right of action against the franchisor.1

This private right of action arises if the franchisor:

  • (1) sold the franchise without first registering it with the State;2
  • (2) fails to provide the prospective franchisee with a copy of the offering circular at least 14 days before the earlier of either signing the franchise agreement or receiving any payment for the franchise;3
  • (3) files a document with the California Department of Business Oversight that contains any material inaccuracies;4 or
  • (4) sells a franchise through the use of any written or oral communication of a material fact or omission of which the franchisee relied upon in purchasing the franchise.5

Private claims arising out of the CFIL are not limited to the franchisor – but may also be asserted against

  • (1) any person “who directly or indirectly controls” the franchisor,
  • (2) every principal executive officer or director of the franchisor,
  • (3) every person occupying a similar status or performing similar functions, and
  • (4) every employee of the franchisor who materially aids in the act or transaction constituting the violation.6

The liability of these individual defendants will be joint and several with that of the franchisor. In other words, if the individual is found liable, the franchisee may recover all of its damages from the individual regardless of the individual’s actual share of responsibility.

To avoid liability, the individual defendant must be able to show that he/she had no knowledge or reasonable grounds to believe that the facts giving rise to the alleged liability existed.7 This is the only defense available to the individual separate and apart from any defenses that may be available to the franchisor.

With the private right of action incorporated into the CFIL, both the Department of Business Oversight and California franchisees police the franchisors’ compliance with the California franchise laws.

Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact Mulcahy LLP.

[1] See California Corporations Code § 31300.
[2] Id. at §31110.
[3] Id. at §31119.
[4] Id. at §31200.
[5] Id. at §31201.
[6] Id. at §31302.
[7] Id. at §31302; also see Spahn v. Guild Industries Corp. (1979) 94 Cal. App. 3d 143,158.




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