Feb 19, 2021 - Blog, Franchise Articles by |

On February 16, 2021, the California Department of Financial Protection and Innovation (DFPI) issued an order requiring Burgerim, a startup burger franchise, to offer rescission and full restitution to its franchisees. As reported by the Franchise Times, Burgerim sold 1,550 franchises over approximately five years, but only about 130 of its franchisees were ultimately able to open for business. As franchise lawyer Jeffrey M. Goldstein explains, Burgerim committed various disclosure violations and engaged in various other forms of improper conduct as well.

Burgerim Ordered to Make Its Franchisees Whole

In its order, the California DFPI said that Burgerim must offer rescission to all 1,550 of its franchisees and to, “financially place the franchisees in the position they were in before they entered into the franchise agreement.” Beyond refunding franchisees’ initial franchise fees, this is intended to include refunding any royalty payments and advertising contributions, as well as any and all costs franchisees incurred in building out their burger franchises.

The California DFPI also ordered Burgerim to pay nearly $4 million in administrative penalties–$2,500 apiece for the company’s 1,583 separate violations of California’s Franchise Investment Law. Some examples of the violations cited in the California DFPI’s order include:

  • Selling franchises without providing prospective franchisees with a copy of the Franchise Disclosure Document (FDD) at least 14 days prior to signing;
  • Willfully making “untrue statements of material fact” in its franchise registration applications;
  • Misrepresenting that franchisees were being required to pay a 5-percent royalty when in fact the franchisor was not collecting royalty payments during the relevant time period;
  • Stating in the FDD that the initial franchise fee was non-refundable despite telling prospective franchisees that they could obtain a refund;
  • Providing prospective franchisees with projected and historical profits, profit margins and revenue despite making a “negative disclosure” in Item 19 of the FDD;
  • Commingling funds with Burgerim’s affiliate entity; and,
  • Telling prospective franchisees that they could cancel their franchise agreements and obtain a refund in order to “boost sales,” but then using new franchisees’ payments to pay existing franchisees’ refunds.

With the cost to build out a burger franchise easily in the mid to high six figures, and with an initial franchise fee of $50,000, at this point, it is not clear how – or if – Burgerim will be able to meet its obligation to make its franchisees whole. But, the California DFPI’s action against Burgerim is nonetheless notable for its expansive scope and the substantial relief the agency is seeking for aggrieved franchisees.

While this situation is unfortunate, it appears that many of Burgerim’s franchisees missed substantial red flags during the buying process. Many of Burgerim’s violations should have been apparent to franchisees who conducted adequate due diligence, and a careful review of Burgerim’s FDD by an experienced franchise lawyer likely would have identified significant concerns as well.

Contact National Franchise Lawyer Jeffrey M. Goldstein

Jeffrey M. Goldstein is a national franchise lawyer who represents prospective, current and former franchisees. If you have questions or concerns about a franchise opportunity or your existing (or former) franchise, you can call 202-293-3947 or contact us online to arrange a free consultation. 

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