Definitions - Franchise Relations - Business & Professions - CA

Section § 20000

This section names the law as the California Franchise Relations Act.

This chapter shall be known and may be referred to as the California Franchise Relations Act.

California Franchise Relations Act franchise law franchise relationships

Section § 20001

This section defines what counts as a 'franchise' in California. A franchise is a deal where a franchisee gets to sell goods or services using a franchisor’s marketing plan and is closely linked with the franchisor’s brand marks or symbols. The franchisee also has to pay a franchise fee. However, this definition excludes certain scenarios: franchises under specific federal petroleum law, certain in-store lease or license arrangements within a retail store, and specific nonprofit organizations run by retailers on a cooperative basis. These nonprofits have strict rules about ownership, membership, income distribution, and liability.

As used in this chapter, “franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(a) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and

(b) The operation of the franchisee’s business pursuant to that plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and

(c) The franchisee is required to pay, directly or indirectly, a franchise fee.

(d) “Franchise” does not include any of the following:

(1) Any franchise governed by the Petroleum Marketing Practices Act (P.L. 95-297).

(2) Lease departments, licenses, or concessions at or with a general merchandise retail establishment where the lease department, licensee, or concessionaire is incidental and ancillary to the general commercial operation of the retail establishment. Sales of a leased department, license, or concessionaire are incidental and ancillary to the general commercial operation of the retail establishment if they amount to less than 10 percent of the establishment’s sales.

(3) A nonprofit organization operated on a cooperative basis by and for independent retailers which wholesales goods and services primarily to its member retailers and in which all of the following is applicable:

(A) Control and ownership of each member is substantially equal.

(B) Membership is limited to those who will use the services furnished by the organization.

(C) Transfer of ownership is prohibited or limited.

(D) Capital investment receives no return.

(E) Substantially equal benefits pass to the members on the basis of patronage of the organization.

(F) Members are not personally liable for obligations of the organization in the absence of a direct undertaking or authorization by them.

(G) Services of the organization are furnished primarily for the use of the members.

(H) Each member and prospective member is provided with an offering circular which complies with the specifications of Section 31111 of the Corporations Code.

(I) No part of the receipts, income, or profit of the organization are paid to any profitmaking entity, except for arms-length payments for necessary goods and services and members are not required to purchase goods or services from any designated profitmaking entity.

(J) The nonprofit organization is subject to an action for rescission or damages under Section 3343.7 of the Civil Code if the organization fraudulently induced the plaintiff to join the organization.

franchise definition franchisee franchisor

Section § 20002

This law defines a 'franchisee' as the person or entity who receives the rights to operate a business under the franchise agreement.

A “franchisee” is a person to whom a franchise is granted.

franchisee definition franchise agreement business rights

Section § 20003

This section simply defines the term 'franchisor' as someone who gives out a franchise.

A “franchisor” is a person who grants or has granted a franchise.

franchisor franchise granting a franchise

Section § 20004

An "area franchise" is a type of contract where a franchisor allows a subfranchisor to sell or coordinate the sale of franchises for a fee. This means the subfranchisor can find new franchisees on behalf of the main franchisor.

“Area franchise” means any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, for consideration given in whole or in part for such right, to sell or negotiate the sale of franchises in the name or on behalf of the franchisor.

area franchise subfranchisor franchisor

Section § 20005

This law defines a 'subfranchisor' as someone who receives the rights to manage an area under a franchise agreement.

A “subfranchisor” is a person to whom an area franchise is granted.

subfranchisor area franchise franchise agreement

Section § 20006

In this law, whenever the term 'franchise' is used, it also includes 'area franchise,' meaning any agreements or laws applying to franchises also apply to area franchises.

“Franchise” includes “area franchise.”

franchise definition area franchise inclusion franchise agreements

Section § 20007

This law defines what a 'franchise fee' is, which means any fee a franchisee pays to start or run a business under a franchise agreement. It includes payments for goods and services. However, certain payments aren't considered franchise fees. These exceptions include buying goods at a genuine wholesale price without excessive purchase obligations, reasonable credit card service charges, payments for trading stamps, small annual franchise fees up to $100, and paying up to $1,000 annually for necessary business fixtures or equipment if this doesn't exceed market costs.

“Franchise fee” means any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including, but not limited to, any payment for goods and services.

However, the following shall not be considered the payment of a franchise fee:

(a) The purchase or agreement to purchase goods at a bona fide wholesale price if no obligation is imposed upon the purchaser to purchase or pay for a quantity of goods in excess of that which a reasonable businessperson normally would purchase by way of a starting inventory or supply or to maintain a going inventory or supply.

(b) The payment of a reasonable service charge to the issuer of a credit card by an establishment accepting or honoring that credit card.

(c) Amounts paid to a trading stamp company under Chapter 3 (commencing with Section 17750) of Part 3 of Division 7 by a person issuing trading stamps in connection with the retail sale of merchandise or service.

(d) The payment, directly or indirectly, of a franchise fee which, on an annual basis, does not exceed the sum of one hundred dollars ($100).

(e) The payment of a sum of not exceeding one thousand dollars ($1,000) annually on account of the purchase price or rental of fixtures, equipment, or other tangible property to be utilized in, and necessary for, the operation of the franchised business, if the price or rental so charged does not exceed the cost which would be incurred by the franchisee acquiring the item or items from other persons or in the open market.

franchise fee subfranchisor franchisee payments

Section § 20008

This section defines 'person' to include not just individuals, but also a variety of entities like corporations, partnerships, LLCs, joint ventures, associations, joint stock companies, trusts, and unincorporated organizations.

“Person” means an individual, a corporation, a partnership, a limited liability company, a joint venture, an association, a joint stock company, a trust or an unincorporated organization.

corporation partnership limited liability company

Section § 20009

This law section clarifies that the guidelines and opinions from the Commissioner of Financial Protection and Innovation help determine if an agreement is a 'franchise.' These guidelines are considered initial proof of what a franchise is. However, if you claim that something is not a franchise because of an exemption or exception, it's up to you to prove it.

The regulations, releases, guidelines, and interpretive opinions of the Commissioner of Financial Protection and Innovation under the Franchise Investment Law (Division 5 (commencing with Section 31000) of Title 4 of the Corporations Code) regarding whether or not an agreement constitutes a “franchise” within the meaning of that law shall be prima facie evidence of the scope and extent of coverage of the definition of “franchise” under this chapter; provided, however, the burden of proving an exemption or an exception from a definition is upon the person claiming it.

Commissioner of Financial Protection and Innovation Franchise Investment Law franchise definition

Section § 20010

This law states that any agreement asking someone to give up their legal rights under this particular law is automatically invalid and goes against public policy.

Any condition, stipulation or provision purporting to bind any person to waive compliance with any provision of this law is contrary to public policy and void.

waive compliance binding agreements void provisions

Franchise Relations

Franchise RelationsDefinitions

Section § 20000

Section § 20001

Section § 20002

Section § 20003

Section § 20004

Section § 20005

Section § 20006

Section § 20007

Section § 20008

Section § 20009

Section § 20010

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