USA – CALIFORNIA Law and Practice Contributed by: Dawn Newton and Hayley M. Lenahan, Donahue Fitzgerald
1. An Introduction to Franchising 1.1 Franchise Market Overview California is the most populous state in the USA, with over 39 million residents, and is the third largest state by geographic size. In 2025, California’s gross domestic product (GDP) reached USD4.25 trillion, and it is home to some of the largest companies in the world. California’s median household income is approximately USD99,000. As a result, California is home to franchised business units from a significant portion of the franchise brands operating in the USA. Starbucks, Subway and McDonald’s each have over 1,000 franchised business outlets in California, and it is estimated that California has the second larg - est number of franchised business units in the USA, exceeded only by Texas. California is also one of the most diverse states in the country. It has no single racial or ethnic majority group. As a result, a wide variety of businesses are popular in the state. Many international franchise systems oper - ate in California, including: • Jollibee, a Filipino fast-food concept; • Paris Baguette and TOUS les JOURS, South Korean bakery-café concepts; • Gong cha, a Taiwanese bubble tea concept; • Bonchon, a South Korean fried chicken concept; and • Haraz Coffee House, a Yemeni specialty coffee concept. 1.2 Franchise Regulation California was one of the first US jurisdictions to reg - ulate franchising, creating the California Franchise Investment Law (CFIL) in 1970. Today, California has both the CFIL, a sales regulation, and the California Franchise Relations Act (CFRA), a relationship law. The CFIL is enforced by California’s Department of Financial Protection and Innovation (DFPI) and also allows a private right of action. It requires franchisors to register their disclosure document with the DFPI prior to either offering or selling a franchise in the state. It also prohibits fraudulent practices, and these prohibitions apply equally to franchisors who may qualify for many exemptions from the registration
requirement. Franchisors are also required to register their printed or targeted advertising materials at least three business days prior to using them. Non-target - ed advertisements that are online, such as franchisor website pages promoting franchise opportunities, are not subject to the registration requirement. The CFIL also requires franchise brokers to register, although the DFPI website notes as of September 2026 that the funding to support this requirement has not yet been secured, so the DFPI is not yet collecting broker registrations. One of the most unusual provisions of the CFIL, com - pared to other state franchise laws, is the negotiated sales rule. In California, a franchisor is permitted to negotiate the terms of its franchise offer with pro - spective franchisees, but only if the franchisor sub - sequently discloses the terms it negotiated to subse - quent California prospective franchisees for a period of 12 months. To comply with the negotiated sales condition, the franchisor must either file a Notice of Negotiated Sale of Franchise with the DFPI after each sale and provide copies of those Notices to future prospective franchisees, or provide a written appendix to future prospective franchisees of the modifications it has made in the prior 12 months. The legislative intent of California’s negotiated sales rule is to enhance California franchisees’ power to negotiate with the franchisor, knowing the terms they have previously modified for others. However, the practical effect that is observed by practitioners is often that franchisors are less likely to negotiate in California than they are in other states where they will not be required to disclose their negotiations beyond what is required by the Federal Trade Commission (FTC) Franchise Rule. An aggrieved franchisee can bring a claim under the CFIL for its damages and for rescission. Any person who engages in or materially aids in a violation of the CFIL is jointly and severally liable under the rule, and it is not unusual for civil suits to name franchisor execu - tives individually, in addition to naming the franchisor entity.
102 FRANCHISING 2026
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