Unlike most states, California’s registration and disclosure law (the California Franchise Investment Law, or “CFIL”) does not stop applying when the franchise agreement is signed. An agreement between the parties to materially change (or amend) an existing franchise agreement is an event triggering California’s requirement that the franchisor first register the changes and provide the franchisee with a disclosure statement.
Under California Corporations Code §31125, it is unlawful to solicit the agreement of a franchisee to a proposed material modification of an existing franchise contract without first providing a written disclosure statement in a form required by the Department at least five days before the modification is signed. The statute does state, however, that the disclosure statement will not be required if the franchisor complies with the statutory requirements for an exemption.
Specifically, a material modification is exempt from the registration requirement if:
- It is offered on a voluntary basis and does not “substantially and adversely impact the franchisee’s rights, benefits, privileges, duties, obligations, or responsibilities under the franchise agreement.”
- It is not within 12 months of the day the franchise agreement was executed, and does not waive any of the franchisee’s rights under the CFRA; and
- The franchisee receives the complete modification at least five days prior to signing it, or is given a right to rescind it within five days of signing; and
- It is either:
- Made in connection with the resolution of a bona fide dispute between the parties, and is not offered on a system-wide basis; or
- Offered on a voluntary basis to fewer than 25% of the franchisees in the system within any 12-month period.
It is important to note that the statute does not require any type of additional disclosures where the changes made to the franchise agreement are not material. Specifically, where the changes are made as a result of discretionary power reserved to the franchisor under the franchise agreement, the changes are not “material” for the purposes of this section. R.N.R. Oils v. BP W. Coast Prods. LLC, 2011 Cal. App. Unpub. LEXIS 108, 31-33 (Cal. App. 2d Dist. Jan. 6, 2011) (change to a franchisor’s system was not a material modification where franchisor exercised a right expressly reserved in the franchise agreement).
Due to this unique-to-California law, it is important for a franchisor and its legal counsel to understand both the law and the available statutory exemptions any time it seeks to amend an existing franchise agreement with a California-based franchisee.