February 18, 2026|Franchise Frontlines
February 18, 2026 | United States District Court for the Eastern District of California | Unpublished Opinion
Executive Summary
In an unpublished decision, Magistrate Judge Jeremy D. Peterson of the United States District Court for the Eastern District of California denied a franchisee’s motion to amend its answer to assert new defenses under the California Franchise Investment Law (“CFIL”) and denied its motion for summary judgment seeking to invalidate the franchise agreement. The franchisor, Badger Daylighting Corp., alleged that the franchisee breached the parties’ franchise agreement. More than a year after the scheduling order’s amendment deadline, the franchisee sought to add affirmative defenses alleging willful violations of various provisions of the California Corporations Code and arguing that the agreement was illegal. The court held that Rule 16’s “good cause” standard governed the motion to amend and that the franchisee failed to demonstrate diligence. The court further concluded that the franchisee had not established statutory violations or illegality sufficient to defeat the franchisor’s breach claim at summary judgment.
Relevant Background
Badger Daylighting Corp. filed suit alleging that Dig Alert Done Right, LLC breached the parties’ franchise agreement. The franchisee answered and asserted counterclaims. More than a year after entry of the pretrial scheduling order, and after the close of discovery, the franchisee moved to amend its answer to add seven new affirmative defenses, including alleged willful violations of California Corporations Code sections 31101, 31125, and 31201, and an “illegality of contract” defense. The franchisee simultaneously moved for summary judgment based on those proposed defenses.
The scheduling order, entered on October 31, 2024, provided that no further amendments would be permitted except upon a showing of good cause. Discovery ultimately closed in October 2025. The franchisee filed its motion to amend in November 2025, contending that it had received the franchisor’s Franchise Disclosure Document (“FDD”) through discovery in May 2025 and that the FDD revealed additional potential defenses.
The franchisor opposed both motions, arguing that Rule 16 governed the amendment request, that the franchisee lacked diligence, and that the proposed statutory defenses failed on the merits.
Decision
The court first addressed the motion to amend. Although Rule 15 instructs courts to grant leave to amend freely, the court emphasized that where a scheduling order sets limitations on amendments, Rule 16 controls. Under Rule 16, the moving party must demonstrate “good cause,” which primarily turns on diligence.
The court rejected the franchisee’s argument that Rule 15 governed because the scheduling order did not specify a future date for amendment. The order clearly stated that no further amendments would be permitted absent good cause, which the court deemed sufficient to trigger Rule 16’s more demanding standard.
The franchisee asserted that it first received the FDD in May 2025 and that the document revealed additional defenses. The court found that assertion inconsistent with the record. Evidence showed that the franchisee’s principal had confirmed receipt of the FDD in February 2022—before the parties executed the franchise agreement and well before litigation commenced. Because the franchisee had knowledge of the FDD when it filed its original answer and counterclaim, it failed to demonstrate that the need for amendment was newly discovered or unforeseeable. The court also noted that even accepting the franchisee’s version of events, it waited more than six months after allegedly receiving the FDD to seek amendment. On that basis, the court denied the motion to amend for lack of diligence.
The court then addressed the motion for summary judgment. Although the affirmative defenses were not in the operative answer, the court allowed them to be considered at summary judgment because the franchisor had not shown prejudice from their late assertion. The court proceeded to analyze the substance of the franchisee’s statutory arguments.
First, the franchisee contended that the franchisor failed to satisfy the exemption requirements of California Corporations Code section 31101 by not providing financial statements and an unconditional guaranty. The court found a genuine dispute of material fact as to whether those documents were provided, noting that the franchisee’s principal had previously confirmed receipt. That dispute alone precluded summary judgment.
Second, the franchisee argued that the franchisor violated section 31125 by materially modifying the franchise agreement before execution. The court rejected that argument as a matter of law because section 31125 applies to material modifications of an existing franchise. At the time of the proposed changes, no franchise relationship yet existed.
Third, the franchisee asserted that the FDD contained material misrepresentations or omissions under sections 31200 and 31201. The court analyzed three alleged misrepresentations: limitations on customers, prior experience with certain work categories, and promised pre- and post-opening assistance.
As to customer limitations, the court observed that even if there were tension between the FDD and the franchise agreement’s territorial provisions, the franchisee was aware of the relevant restrictions before signing the agreement. Evidence showed that the parties discussed the territory and related work requirements in detail prior to execution. That knowledge undermined the franchisee’s claim of material misrepresentation.
Regarding the franchisor’s experience, the court concluded that the franchisee failed to show that any omission was both required and willful. Moreover, the record reflected that the franchisee knew of the franchisor’s experience (or lack thereof) before executing the agreement.
Finally, the franchisee argued that the franchisor misrepresented its intent to provide robust assistance and allow use of trademarks. The court emphasized that under California law, a promise constitutes actionable fraud only if made without intent to perform. Allegations of later nonperformance, without evidence of contemporaneous intent not to perform, were insufficient. On that record, the franchisee failed to establish a statutory violation or illegality sufficient to invalidate the agreement.
The court therefore denied summary judgment.
Looking Forward
This decision illustrates several recurring themes in franchise litigation.
First, scheduling orders matter. Courts may apply Rule 16’s diligence standard rigorously when a party seeks to amend pleadings after the deadline. Franchisees asserting new statutory defenses late in the case may face a substantial burden to show that the basis for those defenses was not known—and could not reasonably have been known—earlier.
Second, CFIL-based “illegality” arguments remain highly fact dependent. Alleged disclosure deficiencies, territorial inconsistencies, or performance disputes do not automatically render a franchise agreement void. Knowledge of relevant facts before execution, confirmation of receipt of disclosure materials, and the absence of evidence of willful misconduct may significantly narrow the viability of such defenses.
Third, courts may distinguish between nonperformance and fraudulent intent. Under California law, a franchisor’s alleged failure to perform contractual obligations does not, by itself, establish that the original promise was fraudulent. Absent evidence that a promise was made without intent to perform, summary judgment on illegality grounds may be difficult to obtain.
Franchisors should not view this ruling as eliminating CFIL exposure. The opinion is unpublished and fact specific, and CFIL claims can present significant risk where disclosures are incomplete or inconsistent. At the same time, the case reinforces the importance of disciplined documentation practices, careful FDD delivery records, and clear pre-signing communications regarding territory, scope of operations, and operational expectations.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
