The Meaning of Franchise Under the California Franchise Investment Law

DATE DOWNLOADED: Wed Jan 05:38:48 2022 SOURCE: Content Downloaded from HeinOnline Citations: Bluebook 21st ed Stephen C Root, Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The , 30 MCGEORGE L REV 1163 (1999) ALWD 7th ed Stephen C Root, Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The , 30 McGeorge L Rev 1163 (1999) APA 7th ed Root, S C (1999) Meaning of Franchise under the California Franchise Investment Law: Definition in Search of Concept, The McGeorge Law Review, 30(4), 1163-1220 Chicago 17th ed Stephen C Root, "Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The ," McGeorge Law Review 30, no (Summer 1999): 1163-1220 McGill Guide 9th ed Stephen C Root, "Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The " (1999) 30:4 McGeorge L Rev 1163 AGLC 4th ed Stephen C Root, 'Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The ' (1999) 30 McGeorge Law Review 1163 MLA 8th ed Root, Stephen C "Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The " McGeorge Law Review, vol 30, no 4, Summer 1999, p 1163-1220 HeinOnline OSCOLA 4th ed Stephen C Root, 'Meaning of Franchise under the California Franchise Investment Law: A Definition in Search of a Concept, The ' (1999) 30 McGeorge L Rev 1163 Your use of this HeinOnline PDF indicates your acceptance of HeinOnline's Terms and Conditions of the license agreement available at https://heinonline.org/HOL/License The search text of this PDF is generated from uncorrected OCR text To obtain permission to use this article beyond the scope of your license, please use: Copyright Information Articles The Meaning of "Franchise" Under the California Franchise Investment Law: A Definition in Search of a Concept Stephen C Root* TABLE OF CONTENTS I INTRODUCTION 1164 II FRANCHISE LAW: THE HISTORICAL AND LEGISLATIVE BACKGROUND 1167 A The Birth of the FranchiseForm of Business 1167 B The FranchiseForm's Painful Childhood 1167 C The CaliforniaFranchiseInvestment Law: A Solution to Early Abuses 1169 III THE DIFFICULTY OF DEFINING "FRANCHISE" 1173 A The Importance of Defining "Franchise" 1173 B Attempts to Define the Term "Franchise" 1176 IV.LEGISLATIVE DEFINITIONS OF "FRANCHISE" A The "Community of Interest" Approach B The "MarketingPlan" Definition C The CFIL's Solution D The CFIL's FourComponents The FirstElement: Grantingthe Right to Do Business The Second Element: OperatingPursuantto a Marketing Plan The ThirdElement: Sharingan Identity The FourthElement: Paying the FranchiseFee Convergence of the Elements 1178 1179 1179 1179 1180 1180 1181 1182 1183 1185 V RECENT COURT DECISIONS DEFINING "FRANCHISE" UNDER THE CFIL 1188 A Kim v Servosnax 1188 B Gentis v Safeguard Business Systems, Inc 1198 VI CONCLUSION 1217 * Assistant Professor, Thomas Jefferson School of Law; J.D., cum laude, University of Pennsylvania; B.A., cum laude, M.A., Ph.D., University of California San Diego The author sincerely thanks Ms Lisa Ciraolo for her invaluable assistance in researching and preparing the subject matter of this Article Professors Hadley Batchelder, Colin Crawford and Ellen Waldman also materially improved this Article by kindly providing editorial comments 1163 1999 /The Meaning of "Franchise" I INTRODUCTION Although its remarkable popularity as a business form is of rather recent advent, franchising as a way of doing business has come to constitute a sizable proportion of the economy and has continued to burgeon.' As might be expected, concomitant with the growth of franchising, a number of concerns regarding the nature and effects of such a method of doing business have arisen Preeminent among these concerns has been the perception of a need to protect prospective franchisees from abuses in connection with the offering and selling of franchises.2 California has been a leader in the regulation of franchising To address the need to protect prospective franchisees, California became the first jurisdiction in the United States to regulate the offer and sale of franchises by enacting the California Franchise Investment Law (CFIL).3 In the twenty-nine years since the CFIL's enactment, similar regulations have been adopted by the Federal Trade Commission and eighteen states, as well as the District of Columbia.4 California's preeminence in this area is due to the fact that not only was California first to act, but also that the definition of "franchise" contained in section 31005 of the CFIL is, essentially, the same definition used by the Federal Trade Commission and a majority of the states As a result, problems or concerns that arise in connection with the definition of a franchise under the CFEL have wide implications, at both state and federal levels Because the business relationships that can be characterized as franchises take a great number of forms and encompass a vast range of business activities, the drafters of the CFIL sought to incorporate into the law a definition of "franchise" that was elastic enough to cover a broad range of possible business arrangements However, such a broad definition of what constitutes a franchise has resulted in an Citing figures provided by the International Franchise Association, one recent article reports that "one of every 12 businesses in the United States is a franchise operation," and that "franchising accounts for about 40% of all U.S retail sales." S J Kelly, Small Business;Forum;Is Your Future in Franchising?Assess the Opportunity and Risk, L.A TIMES June 3, 1998, at D7; see also HAROLD BROWN, FRANCHISING: REALITIES AND REMEDIES 1-2 to 1-6 (rev ed 1999) (recognizing the growing popularity of business franchises); W MICHAEL GARNER, FRANCHISE AND DISTRIBUTIoN LAW AND PRACTICE §§ 1:01, 1:08-10 (1990 & Supp 1997) (same); Robert W Emerson, FranchisingCovenantsAgainstCompetition, 80 IOWAL REV 1049,1050-51, 1051 n.6 (1995) (same); Corliss J Harrell & Carol F Ensinger, Boom T-onesfor the FranchiseIndustry, 80 J LENDING & CREDIT RISK MGMT (1997) (same) For an interesting discussion of the appropriateness of franchise regulation in the context of "business format franchises" franchises in which a franchiser offers a complete package, including a method of operation-see Byron E Fox and Henry C Su, FranchiseRegulation-Solutionsin Searchof Problems,20 OKLA CrrY U L Ray 241 (1995) 1970 Cal Stat ch 1400, sec at 2645-2663 (enacting CAL CORP CODE § 31001-31516 The CFIL became effective January 1, 1971 BUSINESS FRANCHISE GUIDE (CCH) 3050 (1998) See infra notes 25-27 and accompanying text (explaining the FTC rule and listing the states that have enacted some form of franchising law) See infra Part I (discussing the emergence of franchising as a method of business, and California's regulatory response) 1164 McGeorge Law Review / Vol 30 amorphous standard that can be extended to cover business arrangements that were not meant to fall under the CFIL.6 Despite the vast number and range of business arrangements subject to the CFIL, and despite a considerable body of case law applying various provisions of the CFIL, no systematic analytical treatment of the meaning of the term "franchise" has yet been undertaken.7 In the hope of taking an initial step towards remedying that lacuna, this Article will argue that the definition of a "franchise" under the CFIL must be tied to a clear conception of the peculiar blend of independence and dependence that constitutes the particular business arrangement that is franchising On the one hand, in a franchise relationship, the franchisee possesses an independence conferred by the franchisor insofar as the franchisee is granted the right to actually operate and own the franchise business Part and parcel of this business independence is also financial independence; concomitant with the task of running the business, the franchisee bears the risk of failure if the business is not successful Indeed, the franchisee actually purchases the right to operate and own the business from the franchisor by paying a "franchise fee." On the other hand, the franchisee is also peculiarly dependent upon the franchisor insofar as the success of a franchise depends, in part, upon the method of operation provided by the franchisor and, in The need to address the amorphous nature of the various definitions of "franchise" that have been incorporated into legislation has been well-documented by one of the participants in the American Bar Association's Forum on Franchising, who, in the context of discussing the distinction between franchises and traditional distribution arrangements, noted: Franchise and business opportunity laws were not written to reach all types of product distributorships, yet those laws are singularly unhelpful in distinguishing between "franchised" distributorships on the one hand and "non-franchised" distributorships on the other Judicial regard for the differences between the two is inconsistent At best, what can be said is that the differences are subtle and not consistently present themselves with the same markings or degree Perhaps, more accurately, it should be said that the lack of objective criteria for identifying "franchised" distributorships has resulted in incongruous and sometimes illogical results Kennedy A Brooks, When Does a ProductDistributionSystem Become a Franchiseor Business Opportunity?, A.B.A F ON FRANCHISING, Oct 1991, at While Mr Brooks' remarks concerning the subtle and sometimes inconsistent differences between franchises and other forms of business arrangements are undoubtedly correct, it is also true that the confusion and logical discord generated by such subtlety and inconsistency are compounded by the lack of a clear conceptual grounding See GARNER, supra note 1, § 1:02 (discussing the sometimes-blurred lines between franchises and distributorships) See Steven D Wiener, Gentis v Safeguard Business Systems, Inc.; Liberal Constructionof Remedial Statutes: What Is a Franchise?,17 FRANCHISE L J 115 (1998) (discussing the holdings in Kim and Gentis) Perhaps the commentary that comes the closest is Hans A Mattes' 1972 article The FranchiseConcept, authored during his tenure as the Assistant California Department of Corporations Commissioner in Charge of the Department's Office of Policy See Hans A Mattes, The FranchiseConcept, 47 CAL ST B J 300,passim (1972) (analyzing the scope and applicability of the recently passed CFIL) Although Mattes' article is helpful in many ways, having been written shortly after the adoption of the CFIL and containing valuable glosses on sections of the CFIL incorporating the revised Department of Corporations' release discussing various CFIL provisions, DEPARTMENT OF CORPORATIONS RELEASE 3-F (REVISED) (June 1994) [hereinafter RELEASE 3-F (REVISED)], the article does not explore in-depth the conceptual basis of what constitutes a "franchise" under the CFIL; rather, the article generally surveys the elements of the definition in section 31005 and discusses practical considerations impacting whether or not a particular business arrangement would fall within the ambit of that definition Mattes, suprapassim 1165 1999 / The Meaning of "Franchise" part, upon the preeminence and popularity of the commercial identity embodied in the franchisor's proprietary marks This particular convergence of independence and dependence is the hallmark of a franchise Two recent decisions of the California Courts of Appeal, Kim v Servosnax, Inc and Gentis v Safeguard Business Systems, Inc.,9 have demonstrated that attempts by the judiciary to determine whether a particular business is a franchise under the CFEL can result in the courts mistakenly construing certain business arrangements to be franchises, when, in reality, they are not.'" As discussed below, such decisions illustrate that, absent a clear conception of franchising as a peculiar blend of independence and dependence, a significant danger exists that the CFIL will be applied to situations in which it has no proper employment, inappropriately and unexpectedly subjecting other legitimate business arrangements to unwarranted regulation and liability In order to provide an adequate context for an exploration of these issues, the rest of this Article is divided into five parts Part 1E[ briefly canvasses the concerns that prompted franchise regulation and discusses the legislative responses, focusing in particular on the CFIL In addition, Part II reviews specific COIL provisions, highlighting the significant regulatory and legal impacts these provisions have on a business determined to be a franchise under the CFIL Part III focuses on the difficulties encountered by both regulators and legislators in defining what constitutes a franchise In particular, Part I discusses regulators', commentators', analysts' and legislators' concerns that the CFIL's definition of franchise both properly include and exclude appropriate business arrangements Part IV examines the legislative approaches to the definition of franchise After a brief discussion of the two dominant approaches, Part IV considers the text of the "franchise" definition in section 31005(a) of the CFIL," and argues that a particular conception of what constitutes a franchise underlies that section Part V critically examines the application of the definition of franchise in section 31005(a) of the CFIL by the California Courts of Appeal in Kim and Gentis Part V argues that these decisions exhibit a failure by these courts to 10 Cal App 4th 1346 (1992) 60 Cal App 4th 1294 (1998) 10 The remarkable nature of the Kim and Gentis decisions, upon which this Article focuses, has not gone unnoticed One commentator has provided a useful discussion of the two cases oriented towards informing practitioners of the import of the decisions; however, that discussion generally confines its analysis to characterizing the two decisions as liberal constructions of the CFIL's definition of what constitutes a franchise See generally Wiener, supra note 7, at 116-18 (discussing the results of Kim and Gentis) The present Article is premised on the notion that a much more critical assessment of these decisions is necessary As this Article will argue, these decisions not represent liberal interpretations so much as they represent fundamentally ungrounded and misconceived constructions of the CFIL's definition of what constitutes a franchise 11 CAL CORP CODE § 31005(a) (West 1997) 12 Id 1166 McGeorge Law Review / Vol 30 appreciate the "franchise" concept Part V further provides a thorough examination of the steps taken by those courts in their analyses, along with a careful scrutiny of the characterizations and terminology they employed Finally, Part VI sets forth the conclusions of this Article II FRANCHISE LAW: THE HISTORICAL AND LEGISLATIVE BACKGROUND A The Birth of the FranchiseForm of Business Franchising as a method of business operation burgeoned in the years following World War II t3 Although various forms of business arrangements that could be characterized as franchises existed before the war, franchising had not yet emerged as a prominent form of business operation According to the Federal Trade Commission (FTC), there were less than 100 franchise businesses and 100,000 franchise outlets in 1950 By 1965, there were 1,200 franchise businesses and 350,000 franchise outlets.15 More recently, an industry survey reported that franchise operations generated over $803.2 billion in sales of retail goods and services in 1992, constituting more than 40.9 percent of all U.S retail sales, employing more than million people in over half a million outlets.' B." The FranchiseForm's Painful Childhood The rapid growth of franchising was accompanied by an increased outcry on the part of franchisees, who aired a variety of concerns and complaints.' Particularly prominent were franchisees' claims of abusive conduct by franchisors in connection with the offer and sale of franchises.' In the FTC's Statement of Basis and Purpose 13 For a brief overview of the development of franchising in the United States, see Thomas M Pitegoff, FranchiseRelationship Laws: A Minefieldfor Franchisors,45 Bus LAW 289,290-92 (1989); see also Norman D Axelrad, Franchising-ChangingLegal Skirmish Lines orArmageddon?,26 Bus LAW 695, 607-719 (1971) (discussing regulatory and legislative responses to franchising); sources cited above at supra note (chronicling the growth of franchising as a business form) 14 See Pitegoff, supranote 13, at 291 (reviewing the historical background and nature of laws regulating franchising); see also Mattes, supranote 7, at 300-01 (analyzing the scope and applicability of the recently passed CFIL) 15 BUSINESS FRANCHISE GUIDE (CCH) 105 (1998) 16 Ld.; INTERNATIONAL FRANCHISE ASSOCIATION, INDUSTRY AND TRADE SUMMARY ON FRANCHISING (1995); see Robert W Emerson, Franchise Contract Clauses and the Franchisor'sDuty of Care Toward Its Franchisees,72 N.C L REV 905,908-09 (1994) (discussing contract issues between franchisors and franchisees) 17 For a brief survey of the problems faced by franchisees in California, along with a short description of a particular franchisee's plight, see Franklin L Damon, Franchise Investment Law, PAC LJ 27, 27-29 (1971) Mr Damon's article is particularly illuminating with regard to the intent and focus of the CFIL due to the fact that Mr Damon was the California State Senate coordinator of the CFIL See also GARNER, supra note 1, §§ 1:08-1:10 (describing the growth of franchising and its accompanying abuses, and the legislative responses thereto); Mattes, supra note 7, at 302-03 (analyzing the scope and applicability of the recently passed CFIL) 18 Axelrad, supra note 13, at 704-06 1167 1999 /The Meaning of "Franchise" Relating to Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures ("Statement of Basis and Purpose"), the FTC cited the findings of the federal Small Business Administration concerning the problems with franchising: The franchise industry *** has been plagued by numerous cases of abuses and misrepresentations aimed at unsophisticated prospective franchisees Widespread instances have been documented involving such malpractices as high pressure franchise sales tactics, unscrupulous and inexperienced franchisors, financially unstable franchisors, hidden fee requirements and kick-backs, failure to provide information on services and training to be furnished to the franchisee, and use of coercive methods to get quick large deposits.' Later, in the same document, the FTC set forth conclusions based upon its hearings regarding the state of franchising The FTC found substantial evidence of a number of abuses in the offering and selling of franchises, including misrepresentations, inflated or unsubstantiated claims, refusals to honor refund provisions and failures to disclose material facts.20 The FTC noted that these abuses were not solely confined to one type of franchise operation, but were present in many different franchise contexts.2' 19 Statement of Basis and Purpose Relating to Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, 43 Fed Reg 59,614, 59,625 (1978) [hereinafter Statement of Basis and Purpose] 20 Statement of Basis and Purpose, supranote 19; BUsINEss FRANCH.E GUIDE (CCH) 6305-09 21 The FrC wrote: The public record contains over 400 complaints contained in over 5,700 pages, principally from franchisees alleging abuses by over 170 franchisors These franchisors are involved in the distribution of a broad spectrum of products and services In addition to complaints concerning the more widely known types of franchised businesses, such as fast-food restaurants, motels, service stations and convenience food stores, the public record contains complaints involving franchising of such varied products as recreational campgrounds, swimming pools, water conditioners, hairpieces, and watches The initial investments of those complaining varied greatly These complaints, as well as prior Commission proceedings in this area, indicate that misrepresentations and failure[s] to disclose material facts are widespread in franchising Such abuses often have not been satisfactorily resolved through available legal remedies On the basis of the record to this proceeding, the Commission concludes that franchises have been marketed through (A) misrepresentation of material facts relevant to the nature and value of the franchise; (B) unsubstantiated claims regarding the potential sales, income, gross or net profit of franchises; (C) unfair refusal by franchisors to honor refund provisions; and (D) failure to disclose material facts about the franchise offering Statement of Basis and Purpose, supranote 19, at 59,627-28 (footnote omitted); see Emerson, supra note 16, at 909-10 (discussing contract issues between franchisors and franchisees); John M Tifford & Craig Tregillus, The Federal Trade Commission FranchiseRule, in Franchising1990: Business Strategiesand Compliance Issues, 525 P.L.L COMM L & PRAC 189, 193 (1990) (discussing the impact of FTC Rule 436 on franchising) See generally Harold Brown, The 20-YearAgreement, 208 N.Y LJ 3,4 (1992) (same); Andrew A Caffey & Jeffrey E Kolton, Solving the Continuing Problemswith EarningsClaims, FRANCmsE L DIG (1986) (same) 1168 McGeorge Law Review / VoL 30 C The CaliforniaFranchiseInvesfnent Law: A Solution to Early Abuses The response to the identification of such abuses in franchising was a wave of legislation designed to protect prospective franchisees from abuses connected with the offer and sale of franchises.2 The first piece of legislation generally regulating the sale of franchises was the California Franchise Investment Law (CFIL), which became effective on January 1, 1971.24 The California legislation was followed by action at the federal level in the form of an FTC Rule,25 and at the state level with enactments in nineteen jurisdictions, including: 26 Alabama, Arkansas, Florida, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, Mississippi, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, Wisconsin and the District of Columbia.2Y 22 See Axelrad, supra note 13, at 710-17 (noting regulatory and legislative responses to franchinsing); Pitegoff, supranote 13, at 290-92 (discussing the historical background and nature of laws regulating franchising) 23 This legislation is currently codified at California Corporations Code sections 31000 through 31516 CAL CORP CODE §§ 31000-31516 (West 1998) 24 1BUSINESS FRANCHISE GUIDE (CCH) 3050 25 The FTC adopted its rule concerning Disclosure Requirements and Prohibitions Concerning Franchises and Business Opportunity Ventures, 16 C.F.R 436 (1978) [hereinafter FTC Rule] pursuant to the Federal Trade Commission Act, 15 U.S.C.A 41 (1984) (West 1974) The FTC Rule mandates that specified written disclosures be made at specified times and in specified formats in connection with the offering and sale of franchises and business opportunities 16 C.F.R 436 n.1 (1978) While its status as a federal regulation would generally cause the FTC Rule to preempt state and local legislation and regulations to the extent that such provisions are in inconsistent with it, the FTC Rule itself notes that it does not preempt state laws providing protection equal to or greater than that afforded by the FTC Rule 16 C.F.R 436 n.2 (1978) 26 The legislation referred to is confined to regulating the offering and sale of franchises in general and does not include regulation of the franchise relationship itself, or the regulation of special industries, such as petroleum distributorships, car dealerships, liquor retail outlets or the like See BusNEss FRANCHISE GUIDE (CCH) 2001 (setting forth in tabular form various types of state and foreign laws regulating franchising) In addition to the legislation directly aimed at franchising, the Texas Business Opportunity Act, TEX BUS & COM CODE ANN §§ 41.001-41.303 (1997), generally excludes most franchise offerings from most of its provisions, but often requires notice to the state in connection with franchise offerings TEX Bus & COM CODE ANN § 41.004(b)(8); BUSINESS FRANCHISE GUIDE (CCH) 3438.04 27 See ALA CODE §§ 8-19-1 to 8-19-15 (Michie 1991) (constituting a basic anti-fraud statute); ARK CODE ANN §§ 4-72-201 to 4-72-210 (Michie 1997) (same); FLA STAT ANN § 817.416 (West 1987) (same); HAW REV STAT § 482E (West 1999) (consisting of extensive regulation of the offer and sale of franchises); 815 ILL COMp STAT T 705/1 to 705/44 (West 1993) (same); IND CODE ANN 23-2-2.5-1 to 23-2-2.5-51 (1975) (same); MD CODE ANN., BUs REG §§ 14-201 to 14 -233 (Michie 1996) (same); MICH COMP LAWS ANN §§ 445.1501 to 445.1546 (West 1999) (same); MINN STAT ANN §§ 80C.01 to 80C.30 (West 1990) (same); MISS CODE ANN §§ 75-24-51 to 75-24-61, 75-77-1 to 75-77-19 (1995) (prohibiting misrepresentations concerning franchise earnings); N.Y GEN BUS LAW §§ 680-695 (McKinney 1980) (consisting of extensive regulation of the offer and sale of franchises); N.D CENT CODE §§ 51-19-01 to 51-19-17 (1978) (same); OR REV STAT §§ 650.005 to 650.250 (1987) (regulating the offer and sale of franchises); ILL GEN LAWS §§ 19-28-1 to 19-28-34 (1994) (consisting of extensive regulation of the offer and sale of franchises); S.D CODIFIED LAWS ANN §§ 37-5A-1 to 37-5A-87 (Michie 1994) (same); VA CODE ANN §§ 13.1-557 to 13.1-574 (Michiel993) (same); WASH REv CODE ANN §§ 19.100.010 to 19.100.940 (West 1995) (same); WIS STAT ANN §§ 553.01-553.78 (West 1998) (same); D.C CODE ANN §§ 28-3901 to 28-3909 (1996) (constituting a basic anti-fraud statute); see also BUSINESS FRANCHISE GUIDE (CCH) 3107-517 (setting forth relevant provisions of the respective state laws) 1169 1999 / The Meaning of "Franchise" The motive behind, and the ends sought by, these various pieces of legislation are exemplified by section 31001 of the CFIL, which sets forth the legislative findings and intent of the statute: The Legislature hereby finds and declares that the widespread sale of franchises is a relatively new form of business which has created numerous problems both from an investment and a business point of view in the State of California Prior to the enactment of this division, the sale of franchises was regulated only to the limited extent to which the Corporate Securities Law of 1968 applied to such transactions California franchisees have suffered substantial losses where the franchisor or his representative has not provided full and complete information regarding the franchisorfranchisee relationship, the details of the contract between franchisor and franchisee, and the prior business experience of the franchisor It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered Further, it is the intent of this law to prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship 28 To provide effective protection for franchisees, the CFIL created a suite of statutory obligations and liabilities.29 Foremost, the CFIL requires that any offer or sale of a franchise in the State of California3° must be registered with the California Department of Corporations unless an exemption applies.3 ' Registration of an offer 28 CAL CORP.CODE § 31001 (West 1997) 29 See Damon, supra note 17, at 32-53 (reviewing the array of regulatory requirements, potential civil and criminal liability and administrative powers created by the CFIL) As noted above, Mr Damon's article is particularly insightful due to the fact that he served as the California State Senate coordinator of the CFIL Supra note 17 30 A sale "in this state" under the CFIL is defined very broadly See CAL CORP CODE § 31013 (West 1997); CAL CODE REOs tit 10, § 310.100.1 (1998) (excluding "out of state sales," defined as: any offer or sale of a franchise to a resident ofa foreign state, territory or country who is neither domiciled in this state to the knowledge of the seller nor actually present in this state, if the franchised business is not to be operated, wholly or partially, in this state, and if the sale of such franchise is not in violation of any law of the foreign state, territory or country concerned or of the United States.) 31 The requirement that a franchise offering be registered is set forth in section 31110 of the California Corporations Code CAL CORP CODE § 31110 (West 1997) The most important exemption from the registration requirement is the "blue chip" exemption set forth in section 31101, which is available to substantial franchisors who have been operating a minimum number of franchises for a specified period of time In addition to the "blue chip" exemption in section 31101, there are other exemptions provided in the body of the Franchise Investment Law, or that have been promulgated by the Commissioner of the Department of Corporations pursuant to rule making powers of section 31100 which explicitly grant to the Commissioner the power to exempt "any other 1170 McGeorgeLaw Review / Vol 30 constitutes a significant financial and administrative burden on business enterprises In addition to the time, effort, and expense entailed in the preparation of necessary transaction and disclosure documents, a business applying for registration must also file additional documentation with the Department of Corporations.3 The Department of Corporations then reviews and must approve the registrant's offering No offer or sale of franchises can take place until the Department of Corporations has completed its review and allowed the registration to become effective.3 If the review of the franchise offering indicates that the applicant "has failed to demonstrate that adequate financial arrangements have been made to fulfill the franchisor's obligations" to the franchisee, the Department of Corporations can require a registrant to create an escrow or impound account to hold funds until certain obligations are met, or the registrant can, at the department's option, provide an approved surety bond.' Once the Department of Corporations has approved the offering, the registrant must make additional filings to notify the Department of any material changes or amendments to the registration, 35 to make any material modifications of the existing franchises, 36or to renew its registration 37 A registrant must also file any advertisements with the Department of Corporations three business days before their publication in California.38 Franchise offerings that are exempt from registration-su6h as the "blue chip" exemption in section 31 10139 -are still subject to disclosure requirements requiring transaction which the commissioner by rule exempts as not being comprehended within the purposes of this law and the registration of which the commissioner finds is not necessary or appropriate in the public interest or for the protection of investors." CAL CORP CODE § 31110 (West 1997) Among the exemptions set forth in the CFIL and the correlate regulations are exemptions for the sale of a franchise or area franchise by a franchisee or subfranchisor on their own account, iU.§ 31102 (West 1997), certain transfers of franchises to persons outside the state of California, 14 § 31105 (West 1997), certain offers, sales or transfers of franchises involving the wholesale distribution or marketing of petroleum products, ict § 31104 (West 1997), or involving franchisees' possessing certain levels of experience and sophistication, Ud § 31106 (West 1997), transactions relating to "bank credit card plans," i § 31103 (West 1997), transactions in which the franchise fee is no more than $100, CAL CODE REGS tit 10, § 310.011, or the amounts paid for fixtures, equipment and the like are no more than $1,000 annually, as long those amounts are not more than comparable wholesale prices, id § 310.011.1 (West 1998) 32 CAL CORP CODE § 31111 (West 1997); CAL CODE REGS.tt 10, § 310.111 (1997) The "Guidelines for Franchise Registration" [hereinafter Registration Guidelines] supplied by the Department of Corporations to applicants for fianchise regulation lists the following forms to be supplied with the registration: Application cover page; supplemental information page; sales agent disclosure form; offering circular, form for consent to service of process; and customer authorization form Registration Guidelines at i-i 33 CAL CORP CODE §§ 31115-31116 (West 1997) 10, §§ 310.113-310.113.5 (1998) 34 Id § 31113 (West 1997); CAL CoDEREGS tit 10, § 310.123 (1998) 35 CAL CORP CODE §§ 31112,31123-31124 (West 1997); CAL CODE REGS tit 10, § 310.125 (1998) 36 CAL CORP CODE § 31125 (West 1997); CAL CODE REGs.tit 37 CAL CORP CODE §§ 31121-31122 (West 1997); CAL CODE REGs ti.10, § 310.111 (1998) 38 CAL CORP CODE § 31156 (West 1997); CAL CODE REGS ti.10, §§ 310.156-310.156.2 (1998) The 10, § 310.156 (1998) three-day period can be shortened per the Code CAL CODE REGS tit 39 See supra note 31 (describing the exemption for substantial franchisors) 1171 ... 1999 /The Meaning of "Franchise" fee-recognizes the independence of the franchisee from the franchisor The payment of a fee by the franchisee signals that the franchisee is buying something of value... prospective franchisees from abuses connected with the offer and sale of franchises.2 The first piece of legislation generally regulating the sale of franchises was the California Franchise Investment Law. ..Articles The Meaning of "Franchise" Under the California Franchise Investment Law: A Definition in Search of a Concept Stephen C Root* TABLE OF CONTENTS I INTRODUCTION 1164 II FRANCHISE LAW: THE