Protecting California Franchise Buyers
The California Department of Business Oversight (DBO) protects consumers and oversees financial service providers and products. It supervises the operations of state-licensed financial institutions, including banks, credit unions and money transmitters, and licenses and regulates a variety of financial service providers. These include securities brokers and dealers, investment advisers, payday lenders and other consumer finance lenders.
The DBO recently issued three orders against franchisors for violating California’s franchise laws, which serve as reminders to those in franchises to comply with state law, particularly when it comes to registering a franchise.
Inaccurate Franchise Disclosure Document
Senior’s Choice, Inc. has run afoul of California Franchise Law for several years, dating back to 2007. The company sells franchises to provide in-home companion care services to senior citizens.
In 2013, a franchisee signed Senior’s Membership Agreement and paid an initial franchise fee of $25,000. Instead of charging a franchise of $45,000.00, which reflected the 2013 terms registered with the Commissioner, Senior’s negotiated the price down, and its offer and sale of a franchise to the franchisee were on terms different from the terms of the offer registered with the Commissioner.
Senior’s provided stale (2012 versions) of the Uniform Franchise Disclosure Document (UFDD) and Membership Agreement, rather than the most current (2013 versions) that were currently registered with the Commissioner.
The California Department of Business Oversight held that Senior’s violated that law by: (i) not providing the current FDD; (ii) selling a franchise on terms that differ from the registered offer; and (iii) violating a 2007 Desist and Refrain order for unlawfully selling franchises without registration. The DBO ordered Senior Choice directors, officers and managers to attend remedial education, or training on franchise law compliance, as well as to pay a $7,500 penalty and have no further violations.
The DBO will object when franchisors act to benefit franchisees by lowering fees or accidentally providing the wrong Uniform Franchise Disclosure Document.
Failing to Renew Franchise Registration
Los Angeles-based Great Khan operated fast- food restaurants throughout California. It registered its franchise system with the Commissioner in late 2000, and the registration was effective from October 2001 to April 2002. However, Great Khan failed to renew the registration after that period. In 1999, Great Khan entered into at least five franchise agreements with California residents who each paid an initial franchise fee of at least $25,000. The DBO held that all five franchise sales occurred outside the registration period. Additionally, the franchises were not exempt from registration.
Great Khan and its principals were ordered to Desist and Refrain from any further offers or sales until their franchises were registered or exempt from the state’s registration requirements.
Failing to Register a Franchise
Likewise, in another case, the DBO found that Los Angeles-based World Coffee Kiosk (WCK) offered and sold franchises without registration. In January 2013, Eugene Chun, the principal control person of World Coffee Kiosk, on its behalf, sold a franchise to a franchisee in California pursuant to a written agreement granting the right to operate a coffee kiosk under the trademark, “The Café”. The business operator paid an initial franchise fee of $25,000 and would sell approved coffee drinks, food products, and merchandise in an assigned territory from kiosks at malls. The operator was also required to use approved signage and advertising and operate under WCK’s plan, manual, policies, standards and procedures. The franchise was to operate under World Coffee Kiosk’s “distinctive plan for the operation of retail kiosks,” as expressed in the Operations Manual. WCK could also require an operator to relocate.
The DBO found this was a franchise that was not registered or exempt. The company was ordered to Desist and Refrain from further offers or sale of franchises until they registered or satisfied an exemption. WCK’s corporate status is currently suspended by the California State Franchise Tax Board.
These recent decisions demonstrate how failing to renew a registration or failing to register in the first place can have significant consequences and serious penalties.
Andrew Rogerson is a business expert and has worked with franchisors and franchisees for many years. He can help you with deciding on an appropriate franchise, location, financing, as well as answering all of your questions. Take the time to speak with Andrew about buying a franchise or determining how to franchise your business.