Rescinding a Franchise Purchase Under the California Franchise Investment Law

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

Franchise rescission is the unwinding of a franchise purchase because the seller violated the California Franchise Investment Law. A franchisee may sue for rescission when a registration or disclosure violation was willful, and for damages in either case. (Corp. Code, § 31300, subd. (a).) Untrue or misleading projections given outside the disclosure document can support a separate statutory claim for damages, and may support rescission for fraud under contract law. Both statutory claims can expire one year after discovery. Kolmogorov Law, P.C. litigates these disputes for franchisees and franchisors.

Call (909) 235-6116 or contact us online to discuss a franchise sold on late or inaccurate disclosure.

Two statutory claims, and only one carries rescission

Two civil liability sections of the Franchise Investment Law matter here.

Section 31300 covers the registration and disclosure rules. It applies to a person who offers or sells a franchise in violation of any of these sections:

Section 31110, which requires registration or an exemption.
Section 31119, which requires delivery of the disclosure document and all proposed agreements at least 14 days before signing or payment, whichever comes first.
Section 31101, the net worth and experience exemption, which carries its own 14-day written disclosure.
Sections 31200 and 31202, which bar willful misstatements in state filings and in that exemption disclosure.

The franchisee may sue for the damages caused. If the violation was willful, the franchisee may also sue for rescission. (Corp. Code, § 31300, subd. (a).)

Section 31301 covers other sales statements. It is unlawful to offer or sell a franchise by any other written or oral communication that includes an untrue statement of a material fact or a misleading omission. (Corp. Code, § 31201.) A buyer who relied on the statement, without knowing or having cause to believe it was false, may recover damages. The seller escapes liability by proving that the buyer knew the facts, or that the seller used reasonable care and did not know. (Corp. Code, § 31301.)

What "willful" means for rescission

The Ninth Circuit has read the word to mean an act or omission committed knowingly and intentionally. Intent to break the law, or knowledge of what the law required, is not needed. (Dollar Systems, Inc. v. Avcar Leasing Systems, Inc. (9th Cir. 1989) 890 F.2d 165.)

The court reasoned that the reasonable care defense is written only for violations of sections 31200 and 31202, so it does not excuse a failure to register or to disclose on time. The court affirmed rescission and observed that the late disclosure alone was enough.

That is a federal court's reading of a California statute, and the opinion noted that no California case had analyzed the term in section 31300. A California Court of Appeal had given the word a similar meaning in a criminal prosecution under the same law. (People v. Gonda (1982) 138 Cal.App.3d 774, 779.) Treat the federal reading as persuasive, not settled.

Earnings claims outside the disclosure document

A franchise seller generally may not give a prospective franchisee a financial performance representation unless the franchisor has a reasonable basis and written substantiation for it, and the representation appears in Item 19 of the disclosure document. (16 C.F.R. § 436.9(c).) Exceptions cover the actual operating results of a specific outlet offered for sale and a written supplement to an Item 19 representation. (16 C.F.R. § 436.5(s)(4), (5).) A franchisor that makes no such representation must say so in Item 19, and must add that it does not authorize its employees or representatives to make one. (16 C.F.R. § 436.5(s)(2).)

A projection emailed by a salesperson that appears nowhere in Item 19 can therefore be important evidence in a section 31301 claim. The buyer must still show it was untrue or misleading. Disclaimers may not erase it. A provision in a franchise agreement, acknowledgment, or questionnaire that disclaims the franchisor's representations, or the franchisee's reliance on them, is void. (Corp. Code, § 31512.1.)

Section 31301 gives damages only, so rescission on these facts must rest on another ground. A party may rescind when its consent was obtained through fraud. (Civ. Code, § 1689, subd. (b)(1).) Our page on fraudulent inducement covers that claim.

What franchise rescission returns, and what it costs

The aggrieved party is awarded complete relief, including restitution of benefits conferred and consequential damages, without duplicate recovery. The court may also require the rescinding party to compensate the other side and may adjust the equities between them. (Civ. Code, § 1692.)

In Dollar Systems the court approved a reduction for the franchisee's own conduct and sent the case back for findings on the income the franchisee had earned. Our page on rescission of a contract explains notice and the offer to restore.

Who else is liable

Persons who control the seller, its partners, its principal executive officers and directors, and employees who materially aid in the transaction are jointly and severally liable. Each has a defense if he or she had no knowledge of, or reasonable grounds to believe in, the facts. (Corp. Code, § 31302.)

Section 31300 was amended effective January 1, 2025 to add franchise brokers. As amended, it makes a broker who offers or sells a franchise in violation of the antifraud chapter or the broker part liable to the franchisee for damages, and to the franchisor for damages or indemnity. (Corp. Code, § 31300, subd. (b).) The broker part becomes operative on the later of July 1, 2026, or one year after the Legislature funds it. (Corp. Code, § 31528.) The state regulator reports that the 2026 budget funded it and that broker registration becomes mandatory on July 1, 2027. A claim that a broker violated the antifraud chapter does not wait for that date.

The deadlines are short

A section 31300 claim must be filed within four years after the violation or one year after the franchisee discovers it, whichever ends first. (Corp. Code, § 31303.) A section 31301 claim has a two-year outer limit in place of four. (Corp. Code, § 31304.) For some violations, a written notice in a form approved by the state commissioner cuts the time to 90 days after delivery. Our franchise disputes guide covers these deadlines with the other franchise claims.

If you are the franchisor facing a rescission demand

Pull the dated receipt for the disclosure document and count the 14 days.
Confirm the registration or exemption in force on the date of sale.
Compare each alleged statement with Item 19.
Evaluate the limitations periods.

If the demand follows a default or termination notice, see our page on franchise termination and nonrenewal.

What to bring to the first meeting

The disclosure document, the signed receipt, and the franchise agreement.
Every projection, spreadsheet, email, and text from the sales process.
Proof of payments made and the unit's financial statements.
Any notice received from the franchisor.

Frequently asked questions

The franchisor gave me revenue projections that were never in the disclosure document, and the store is failing. Can I undo the deal?

Possibly. Under California's Franchise Investment Law, an untrue or misleading statement used to sell a franchise supports a damages claim by a buyer who relied on it. Statutory rescission requires a willful violation of the registration or disclosure sections, such as late delivery of the disclosure document. Rescission for fraud under general contract law is a separate route.

We are a franchisor and a franchisee is demanding rescission because the disclosure document arrived late. How exposed are we?

It depends on the dates. California requires delivery of the disclosure document and proposed agreements at least 14 days before signing or payment. A federal appeals court has read willful to mean an intentional act or omission, not knowledge that the law was being broken, and has affirmed rescission for untimely disclosure.

What is the statute of limitations for a California franchise disclosure claim?

A claim under California Corporations Code section 31300 must be filed within four years after the violation or one year after the franchisee discovers it, whichever ends first. A claim under section 31301 has a two-year outer limit. For some violations, a written notice approved by the state commissioner can shorten the time to 90 days.

Can a franchisee get rescission and damages in California?

Section 31300 allows a damages claim for a registration or disclosure violation and adds rescission when the violation was willful. When rescission is granted, California Civil Code section 1692 calls for complete relief, including restitution and consequential damages, without duplicate recovery. The court may require compensation to the franchisor and may adjust the equities.

Who can be sued besides the franchisor?

California makes several people jointly and severally liable with the seller: those who control it, its partners, its principal executive officers and directors, and employees who materially aid the transaction. Each has a defense only if he or she neither knew of the underlying facts nor had reasonable grounds to believe in them. Corporations Code section 31300, as amended effective 2025, separately addresses franchise brokers.

Talk to a California franchise dispute attorney

If a franchise was sold on late or false disclosure, or you have received a rescission demand, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is in Irvine, California. We handle the civil dispute. We do not prepare registrations or disclosure documents.

Related reading: our franchise dispute practice and business litigation.

This page provides general information about California and federal law and is not legal advice. Outcomes depend on the documents, the dates, the facts, and the court or arbitrator.