Does the California Franchise Investment Law Preempt Common Law Fraud?

There has been uncertainty in the preceding years surrounding whether the California Franchise Investment Law, Cal. Corp. Code § 31000 et seq. (“CFIL”) preempts common law fraud claims.  The relevant language of the CFIL provides:

 

Except as explicitly provided in this chapter, no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder.  Nothing in this chapter shall limit any liability which may exist by virtue of any other statute or under common law if this law were not in effect.

 

Cal. Corp. Code § 31306.  Some practitioners cite to Samica Enterprises, LLC v. Mail Boxes Etc. USA, Inc., 637 F. Supp. 2d 712 (C.D. Cal. 2008), for the proposition that the CFIL preempts common law fraud claims.  The Samica court determined that: “Section 31306 bars claims that may otherwise be brought under the CFIL—i.e., those claims alleging misrepresentations and omissions covered by such provisions as 31200 and 31201 . . . The [second sentence of Section 31306] is properly read as ensuring that any claims beyond the CFIL’s coverage may be brought independently.”  The court further stated in a footnote:

 

Whether section 31306 is read as preempting certain allegations of fraud, as this court finds, or merely limiting common law fraud by dispensing with common law tolling principles, as SpeeDee Oil [People ex rel. Dep’t of Corps. v. SpeeDee Oil Change Sys., Inc., 116 Cal. Rptr. 2d 497, 508 (Cal. Ct. App. 2002)] provides, it cannot be said . . . that all allegations of fraud are independently actionable under both theories-aside from the plain redundancy of such exercise.

 

(emphasis added).  In Anderson v. Griswold International, LLC, No 14-CV-02560-EDL, 2014 WL 12694138, at *1 (N.D. Cal. Dec. 16, 2014), however, the court determined that a franchisees’ fraud, negligent misrepresentation, and fraudulent concealment claims were not preempted by the CFIL.

 

In Anderson, franchisees filed suit against the franchisor alleging causes of action for both fraud and CFIL violations.  The franchisor cited Samica Enterprises for the proposition that the CFIL preempted the franchisees’ fraud claims because such claims were premised on the same alleged misrepresentations and false statements which the franchisees’ CFIL claims were based.

 

Nevertheless, the court found the franchisees’ argument persuasive that the phrase “‘[n]othing in this chapter shall limit any liability which may exist . . . under common law,’ allows Plaintiffs to bring ‘viable and independent claims from common law fraud, negligent misrepresentation, and fraudulent concealment that set forth plausible claims for relief independent of the CFIL.’”  Further, the “plain language of the statute preserves preexisting common law and statutes enacted before the CFIL that would apply if it had not been enacted.”  Therefore, the court allowed the franchisees to pursue both their fraud claims in addition to their CFIL claims.

 

Takeaway: Whether or not the CFIL preempts common law fraud claims is not firmly established.  Both Samica Enterprises and Anderson are still good law, and recent cases still cite to Samica Enterprises for the proposition that the CFIL preempts common law fraud claims—despite Anderson’s conflicting stance.  See, e.g., Flip Flop Shops Franchise Co., LLC v. Neb, No. CV 16-7259-JFW (EX), 2017 WL 2903183, at *8, fn. 7 (C.D. Cal. Mar. 14, 2017) (citing Samica Enterprises for the proposition that “under Section 31306 of the CFIL, claims alleging misrepresentations that fall within the scope of Section 31300 and 31301 can only be brought under the CFIL, and any other claims of fraud based on such violations are preempted.”).  That being said, franchisees should not be deterred from using Anderson when pursuing both fraud and CFIL violations.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.