Civil Liability under the Franchise Law

Corporations Code Title 4, Division 5, Part 4, Chapter 1 deals with civil liability in enforcing the California Franchise Investment Law.

Section 31300 provides that any person who offers or sells a franchise in violation of specified laws is liable to the franchisee or subfranchisor, who may sue for damages caused thereby. If the violation is willful, the franchisee may also sue for rescission, unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission, or that the defendant exercised reasonable care and did not know, or, if they had exercised reasonable care, would not have known, of the untruth or omission.

Any franchise broker who offers or sells a franchise in violation of law is liable to the franchisee, who may sue for damages caused thereby. Any franchise broker who offers or sells a franchise is liable to the franchisor, who may sue for damages or may assert claims of indemnity against the franchise broker caused by the violation, including indemnity for any damages awarded in connection with rescission awarded to the franchisee.

Section 31301 makes any person who violates a specified law liable to any person (not knowing or having cause to believe that such statement was false or misleading) who, while relying upon such statement purchased a franchise, for damages, unless the defendant proves that the plaintiff knew the facts concerning the untruth or omission or that the defendant exercised reasonable care and did not know, (or if he had exercised reasonable care would not have known) of the untruth or omission.

Section 31302 provides that every person who directly or indirectly controls a person liable under law, every partner in a firm so liable, every principal executive officer or director of a corporation so liable, every person occupying a similar status or performing similar functions, every employee of a person so liable who materially aids in the act or transaction constituting the violation, are also liable jointly and severally.

Section 31302.5 states that persons who violate a specified law may be sued in the superior court in the county in which the defendant resides or where a franchise affected by the violation does business, for temporary and permanent injunctive relief and for damages, if any, and the costs of suit, including reasonable attorneys’ fees.

A plaintiff does not have to allege or prove that actual damages have been suffered in order to obtain injunctive relief. No action can be maintained to enforce any liability unless it is brought before the expiration of two years after the violation upon which it is based or the expiration of one year after the discovery by the plaintiff of the facts constituting such violation, whichever occurs first.

Section 31303 prohibits any action from being maintained to enforce any liability created under Section 31300 unless brought before the expiration of four years after the act or transaction constituting the violation.

Section 31304 prohibits any action from being maintained to enforce any liability created under Section 31301 unless brought before the expiration of two years after the violation upon which it is based.

Section 31305 provides that every cause of action under this chapter survives the death of any person who might have been a plaintiff or defendant.

Section 31306 notes that nothing in this chapter limits any liability which may exist by virtue of any other statute or under common law if this law were not in effect.