Negotiated Sales in California

Vol. 15, No. 2

By

Armstrong Teasdale LLP

One of the unique-to-California features of its Franchise Investment Law is its regulation of negotiated sales. Cal. Corp. Code §31109.1 (the “statute”) and Cal. Code of Regs., § 310.10.2 (the “regulation”). These provisions require a franchisor (which is otherwise registered in California) to make available to certain California-based prospective franchisees any terms different from those contained in the franchisor’s disclosure document that have been negotiated with franchisees in the state during the previous twelve months.

The interplay between the statute and regulation can be confusing to even experienced franchise practitioners. The statute requires a franchisor to disclose to prospective franchisees with whom it wishes to negotiate “a summary description of each material negotiated term that was negotiated for a California franchise during the 12-month period.” This summary description does not have to be included as an exhibit to the FDD but, instead, can be given to a prospect as a “separate appendix.” The franchisor must also provide to the prospective franchisee a statement that copies of the actual negotiated terms (as opposed to the summary description) are available on request. Importantly, the statute does not require the franchisor to file either the summary description or copies of the actual negotiated changes with the California Department of Corporations (the “DOC”). In addition, if a franchisor does not negotiate with a prospective franchisee, the requirements of the statute do not apply to that prospect.

The regulation is different from the statute in two ways. First, under the regulation, a franchisor is required to file a “Notice of Negotiated Sale of Franchise” with the DOC within fifteen business days after a negotiated sale is consummated. Second, the franchisor is required to amend its FDD to state that it has made negotiated changes and to attach all negotiated sales notices as an exhibit to the FDD it uses with all prospective franchisees in California, including those with which it does not intend to negotiate.

A franchisor is required to comply with the more rigorous requirements of the regulation where the negotiated terms, taken as a whole, do not confer additional benefits to the franchisee. If the provisions do, on the other hand, confer additional benefits to the franchisee, the franchisor has two separate and distinct paths available for compliance – it can follow either the statute or the regulation. Most franchisors will prefer to follow the statute, since the regulation’s filing requirement creates more work and (due to the state’s publicly-available filing system) makes the negotiated provisions visible even to franchisees who do not live in the state.

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