Maybe you are an international company with a successful brand that sold a master franchise or area representative right in California without knowing the robust state franchise registration laws. Maybe you are an up-and-coming pizza joint operating in Los Angeles that decide to sell a business associate the right to operate a location under you brand with your recipes in exchange for a fee without considering if it was a “franchise.”
You did not mean to violate the California Franchise Investment Act but it turns out you did. What can you do? Is there any way to “fix” your violation? The answer is yes. Although, California has a very robust and stringent state registration and disclosure process, it also provides a fair remedy for curing these non-compliance issues. The state wants to encourage self-reporting and rewards a franchisor’s attempt to do so by offering a process to bring finality to an illegal sale.
If you or your franchise system client sold a franchise in California without pre-registering with the California Department of Business Oversight, then you will need to prepare a Notice of Violation. Instructions on preparing a compliant Notice of Violation can be found here. This is a separate application than the general application for registering the franchise offering. Once approved, you will submit the Notice of Violation to the franchisee. The Notice of Violation will describe to the franchisee the nature of the violation and the franchisee’s rights under the law. However, delivery of the Notice of Violation will also start a 90 day statute of limitations clock running shortening the statute of limitation of 4 years from the illegal act or 1 year from when the franchisee discovers the violation.
In most cases, this is a much better option for a franchise system rather than waiting to see if a franchisee becomes disgruntled and reports the system to the California regulators.