What Constitutes Illegal Franchising, and What is the Remedy?

Suppose you have a business, one that is not too big yet not that small. It shares the same name as another company from a few miles down the road. It also has the same logo, products, and overall customer base. You are running an honorable franchise business, expanding to reach more customers with the help of a trusted franchise investor. You gain a decent revenue from royalty fees when, suddenly, you receive a notice of violation of California’s franchise law. So, what just happened?

Illegal Franchises Exist

In the state of California, franchises should be registered under the Department of Financial Protection & Innovation (DFPI) before they can be declared as legal franchises. This does a lot, both for the franchise investors and for the government, to ensure that the franchise owner has no intention of committing fraud, among other things.

This is a requirement for all franchises in California. However, if a business from California sells a franchising license to an investor in another state, then the franchising parties should both comply with the franchising laws of that state.

Franchise Fraud

One of the reasons why Franchise Investment Law exists is to protect potential investors from being lulled into franchise fraud or pyramid schemes. This type of fraud focuses on selling franchises to other people, which then gives them a commission for every person they bring into the scheme.

Unlike their legitimate counterparts, pyramid schemes tend to eventually go bankrupt because they thrive solely on investor money and not on the products they sell. When this happens, the franchise owner would run away with most of the investor money, leaving everyone else waiting for a commission that will never come. You could say that these schemes were meant to fail in the first place, with the franchise owner leaving before they can ever be caught.

What if I am Legitimate but Unregistered?

The problem still remains. If you have a legitimate business franchise and have no intention to commit fraud, then you should file an application at the nearest DFPI office. At best, you could be allowed to keep doing what you have been doing, with some slight penalties or none at all. Some may face suspension, but these suspensions are made for good reasons, such as for complying with the other state regulations and having you send the right papers in case you sent the wrong ones.

On the other hand, you could be given a cease and desist order if the authorities find that you have been running an unregistered franchise all this time. Whether or not it is legitimate, an unregistered franchise is still illegal under the law; it will be best if you get this fixed as soon as you can. In fact, it can be hard to appeal such an order, especially if you can not prove your intentions to file in the first place.

A Trusted Lawyer on Franchise Law

If you are stuck with a problem in your franchising business, our lawyers at SAC LLP can help you. These issues should be resolved as soon as possible so we can make sure that your business continues to run just as smoothly, both for your customers and for your employees. Please just contact us at (408) 716-1790 for a free case evaluation today.