The Unregistered Franchise Broker and the Finder's Fee
A California franchisor hires an independent sales consultant to find prospective franchisees. The consultant is paid a $10,000 commission for each franchise sale. The consultant is not registered as a franchise broker in California. The consultant places an advertisement online that includes earnings claims not contained in the franchisor's FDD. The consultant also meets with prospects and answers questions about the franchise. The franchisor's FDD is properly registered. A prospect who saw the ad and met with the consultant signs a franchise agreement. The prospect later discovers that the consultant was not registered and that the earnings claims were not in the FDD. The prospect complains to the DFPI. The franchisor argues that the consultant is an independent contractor and that the franchisor is not responsible for the consultant's actions.
1. Is the consultant required to be registered as a franchise broker in California? What are the consequences of the failure to register?
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Under California Corporations Code section 31110, any person who offers or sells a franchise in California must be registered as a franchise broker unless exempt. The consultant is engaged in the offer and sale of franchises by soliciting prospects and communicating with them. The consultant is not exempt. Therefore, the consultant must be registered. The failure to register is a violation of the law. The DFPI may impose fines and order the consultant to cease and desist. The franchisor may also be liable for the consultant's actions because the consultant is acting as the franchisor's agent in the offer and sale. The franchisor cannot avoid liability by labeling the consultant an independent contractor if the consultant is performing activities that require registration. The franchisor should have verified the consultant's registration.
2. What is the franchisor's liability for the consultant's unauthorized earnings claims and unregistered status?
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The franchisor is likely liable for the consultant's actions under agency principles and the California Franchise Investment Law. The consultant's advertisement with earnings claims not in the FDD violates section 31200, which prohibits untrue statements or omissions of material fact. The franchisor is responsible for ensuring that all offers and sales comply with the law, including those made by its agents. The franchisor's argument that the consultant is an independent contractor may not shield it because the consultant was acting on behalf of the franchisor in the sale. The franchisor should have supervised the consultant and ensured that the consultant was registered and that all marketing materials complied with the FDD. The consequences include rescission rights for the franchisee, civil penalties, and administrative action against both the franchisor and the consultant. The franchisor may also face liability for the unregistered broker's activities under section 31300.