While many franchise requirements vary from state to state, the sale of every franchise across the country must meet federal requirements. Most of the federal obligations are contained in the Federal Franchise Rule at 16 C.F.R. §436 et seq. and related regulations promulgated by the Federal Trade Commission (the “FTC”).
Is a franchise regulated by the federal government?
Franchising is regulated at the federal level by the Federal Trade Commission. However, many states also have their own franchise and business opportunity laws. Franchisors must be compliant with the laws in the state in which they are headquartered and in each state in which they will offer franchises for sale.
Is there a relationship law for franchisors?
Some states, however, have relationship laws but have enacted no franchise disclosure/registration law. State relationship laws typically address (e.g., restrict) the franchisor’s ability to terminate or fail to renew the franchise.
What is the purpose of the Franchise Rule?
Franchise Rule. The Franchise Rule defines acts or practices that are unfair or deceptive in the franchise industry in the United States. The Franchise Rule is published by the Federal Trade Commission. The Franchise Rule seeks to facilitate informed decisions and to prevent deception in the sale of franchises by requiring franchisors...
What are the laws for selling a franchise in other states?
A number of other states have “business opportunity” laws which regulates the sale of business opportunities in those states. Although franchises and business opportunities are different, these states will require, under certain circumstances, that franchises be filed before they can sell franchises.
What are the requirements for franchising?
What is required in a franchise disclosure?
What is the purpose of the Franchise Rule?
How much is the FTC penalty?
When did the FTC start making franchises?
When did franchisors have to use franchise disclosure documents?
What is the FTC Act?
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The 8 Rules Franchisees Must Follow
In franchising it’s all about the rules. That’s how the business model was setup. And because of that, it works.
What is the FTC Franchise Rule?
The FTC Franchise Rule is a federal regulation which requires franchisors to prepare an extensive disclosure document and give a copy of this document to any prospective franchise purchaser. The disclosure document typically used to comply with the Rule is called a Franchise Disclosure Document (FDD), which replaced the prior Uniform Franchise Offering Circular, or UFOC, in 2008.
Franchise Compliance | Complying with Rules and Regulations
If you need help ensuring that your franchise is in compliance with the appropriate rules and regulations, speak with our team.
FR ANCHISE RULE 16 C. F.R. Part 436 - Federal Trade Commission
INTRODUCTION This Compliance Guide is intended to help franchisors comply with the Federal Trade Commission’s amended Franchise Rule. The original Franchise Rule went into effect on
What is 'The Franchise Rule' and what should I know about franchising?
In short, it is: 16 Code of Federal Regulation (CFR) Parts 436 and 437 More specifically, the Franchise Rule gives prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment.
Why do we draft FDDs?
When we draft FDDs for new franchisors, we initially draft them so that they are compliant with the FTC Rule, the registration state Little FTC Acts, and the NASAA guidelines and commentary. This is a best practice as the franchisor’s documents are compliant across all three levels from the beginning. After that, the franchisor can learn how to maintain compliance in its sales program by properly using the FDD and selling franchises. If you need help with franchise compliance with both the FTC rule and state laws, reach out to our team today.
Why do we call states registration states?
We call these states “registration states” because they require registration in some form before the franchisor can offer franchises for sale within the state. Each of these states’ franchise laws modify the FDD and the terms of the franchise agreement in various ways.
How long do you have to have FDD before you can sell franchises?
The FTC Rule also regulates how the FDD must be used to sell franchises. For example, a prospective franchisee must have the FDD for a full 14 days before they can sign a franchise agreement or pay any money to the franchisor. The FTC Rule goes into further detail about who must be provided with the FDD and several exemptions for large franchisees and other specific situations. The FTC Rule is complex, and it is only the first step in maintaining compliance for a franchisor.
What is the FTC rule?
The FTC Rule is complex , and it is only the first step in maintaining compliance for a franchisor.
How many states have business opportunity laws?
Additionally, there are 27 states that have business opportunity laws. These laws regulate “business opportunities,” which, by definition in all of these states, include franchises. However, many of these states exempt franchisors from their business opportunity registration requirements and regulations if the franchisors’ FDD is compliant with ...
What is the FTC rule for franchising?
In the industry, this is referred to as the “FTC Rule.” The FTC Rule prescribes the exact format and layout of the franchisor’s franchise disclosure document (FDD).
Is NASAA a franchise?
NASAA has issued guidelines and additional franchise regulations for over a decade, and their requirements are often stricter than those found in the FTC Rule.
What is the law regarding franchises?
There is no generally applicable federal franchise relationship statute, but there are federal and state laws that govern franchise relationships in specific industries, such as: gas station operations; automobile dealerships; hardware distributors; real estate brokerage firms; farm equipment machinery dealerships; recreational vehicle dealerships; and liquor, beer and/or wine distributorship. For example, under the Federal Petroleum Marketing Practices Act, gas station franchisors or refiners cannot terminate the relationship with franchisees without “good cause”. Good cause in relationship laws generally means that the franchisee has not “substantially complied” with the material terms of the agreement or has engaged in acts that have damaged the franchisor. Such acts, include, but are not limited to, the franchisee: (i) voluntarily abandoning the franchised business; (ii) becoming insolvent; or (iii) selling competing goods. If sufficient grounds for termination exist, some states may require the franchisor to provide the franchisee with notice of termination (60 days advance notice is a common requirement) and give the franchisee an opportunity to cure such violations (cure periods typically range from 30 to 90 days). In the event that a franchisor elects not to renew a franchise agreement, the franchisor (under certain circumstances) must either: (i) offer to buy the franchise, if the franchisee owns the gas station; or (ii) give the franchisee the opportunity to purchase the premises from the franchisor, if the franchisor owns the gas station.
What is copyright protection?
§§101 et seq. ), copyright protection is available for “original works of authorship fixed in any tangible medium of expression”. The Copyright Act broadly protects literary works, musical works, dramatic works, pictorial, graphic and sculptural works, sound recordings, motion pictures and audio-visual works, and architectural works. These categories may be viewed broadly, but also carefully. For example, software code may be registerable even if it is not a “literary work” in the literal sense. On the other hand, a recipe consisting of a mere list of ingredients is not protectable under the Copyright Act. Tradenames, slogans, phrases and logos, all of which are crucial to the franchise model, are generally protected under trademark law but not under the Copyright Act. It is advisable for franchisors to pursue copyright protection where appropriate, because of the relatively low cost of registering copyrights, and the valuable rights provided under the Act, including, but without limitation, the right to pursue statutory damages and attorneys’ fees in federal court.
What is the legal definition of franchise?
1.1 What is the legal definition of a franchise? The U.S. Federal Trade Commission (“FTC”) promulga ted 16 C.F.R. Part 436 (the “FTC Franchise Rule”) to regulate the offer and sale of franchises throughout the United States.
What is joint employer?
The “joint employer” doctrine is a concept in employment law. It expands the definition of “employer” to include additional persons or entities that exert sufficient influence or control over the “terms and conditions” of employment (directly, or sometimes, even indirectly), so that they will be considered a “joint” employer by law. Notably, the joint employer doctrine only applies in connection with, and is therefore limited to, violations of employment law (for example, violations of the Fair Labor Standards Act, 29 U.S.C. 201 et seq., or National Labor Relations Act, 29 U.S.C. §151 et seq. ).
Do franchisees have to disclose their franchisees?
Yes. While federal law in the U.S., e.g., the Amended FTC Franchise Rule, governs the requirements with respect to how franchisors must provide proper disclosure to prospective franchisees, federal law does not govern any aspect of the franchisor-franchisee relationship after the parties enter into a franchise agreement. While there have been discussions about Congress providing a “private right of action” under the FTC Franchise Rule, to date, no such legislation has been enacted. However, almost half of all states in the U.S. (and U.S. territories of Puerto Rico and the U.S. Virgin Islands) have so-called “relationship laws” that govern one or more substantive aspects of the franchisor-franchisee relationship. Common examples include: restrictions on termination, non-renewal, and/or transfer; limitations on the franchisor’s ability to open a new company-owned or -franchised unit in the vicinity of the franchisee’s location (“encroachment”); limits on post-term non-competition agreements; permitting “free association” among franchisees; requiring that a franchisor act in good faith or with reasonableness when dealing with its franchisees; and the inclusion of “non-waiver” provisions with respect to the state statute’s protections. Beginning in the 1970s, these relationship statutes were enacted by state legislatures in an attempt to correct some of the significant perceived abuses that franchisors were committing against prospective and current franchisees. State relationship laws vary considerably, both in terms of the breadth of the issues that are addressed, and with respect to the specific provisions and restrictions that are contained within them. Some relationship laws are made part of the state’s franchise registration or disclosure statute, while others are set forth in a separate statute from the state’s disclosure/registration laws. Some states, however, have relationship laws but have enacted no franchise disclosure/registration law.
What is a franchise system?
Franchise systems that depend upon customer presence within their facilities, such as gyms or health spas, may even want to consider waivers of liability by customers or members, so as to place the risk of transmission upon the customer or member, to the extent practicable to permissible under the law . 11.
What is competition law?
Competition Law. 3.1 Provide an overview of the competition laws that apply to the offer and sale of franchises. In the U.S., “competition law” is generally referred to as “antitrust law”. In contrast to other jurisdictions, such as the E.U., “antitrust” laws do not directly regulate the offer and sale of franchises.
What is the FDD in franchising?
and related regulations promulgated by the Federal Trade Commission (the “FTC”). One of the critical directives in federal law is that a franchisor must provide prospective franchisees an appropriate franchise disclosure document (a “FDD”) ...
What is a franchise disclosure document?
The Franchise Disclosure Document. Federal laws and many state laws place considerable emphasis on the contents and distribution of a franchisor’s disclosure document. Some states require franchisors to register their FDDs annually with the state regulatory agencies.
What information do franchisors need?
Franchisors must supply information about the business experience of its principals, any litigation involving the franchisor or parent companies, financial information about the franchisor, and all of the franchisee’s financial and other obligations.
What states require franchise registration?
Registration states currently include: California. Hawaii. Illinois. Indiana. Maryland. Michigan. Minnesota.
What information is required for a franchise FDD?
Under the FTC’s Franchise Rule, a franchisor’s FDD must include basic information, including specified contact information, the trademark that the franchisees will use, and a description of the business.
Why is selling a franchise a complex undertaking?
State Franchise Laws. Selling a franchise is a complex undertaking because the seller must comply with both state and federal franchise laws. The way some state franchise laws are written, businesses may find that their contractual dealings put them in a franchisor/franchisee situation even if they had no intention of selling a franchise.
Which states have franchise laws?
States with business opportunity laws or that are considered filing requirements include: Connecticut. Florida. Georgia.
What are the requirements for franchising?
The Franchise Rule requires franchisors to make material disclosures in five categories: 1 (1) the nature of the franchisor and the franchise system; 2 (2) the franchisor's financial viability; 3 (3) the costs involved in purchasing and operating a franchised outlet; 4 (4) the terms and conditions that govern the franchise relationship; and 5 (5) the names and addresses of current franchisees who can share their experiences within the franchise system, thus helping the prospective franchisee to verify independently the franchisor's claims.
What is required in a franchise disclosure?
Required Franchise Disclosure Document topics include: the franchise's litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations."
What is the purpose of the Franchise Rule?
The Franchise Rule seeks to facilitate informed decisions and to prevent deception in the sale of franchises by requiring franchisors to provide prospective franchisees with essential information prior to the sale. It does not, however, regulate the substance of the terms that control the relationship between franchisors and franchisees.
How much is the FTC penalty?
(10) The FTC Act authorizes courts to impose civil penalties of not more than $11,000 per compliance violation.
When did the FTC start making franchises?
In 1971 the FTC began a formal rule making proceeding, to possibly develop a regulation requiring disclosure and prohibiting unfair practices in offering and selling franchises. These developments resulted in promulgation of the FTC Franchise Rule in 1979. The FTC enforces the Federal Trade Commission Act ("FTC Act"), ...
When did franchisors have to use franchise disclosure documents?
After July 2008, all franchisors in the United States are to use the Franchise Disclosure Document with potential franchisees.
What is the FTC Act?
The FTC enforces the Federal Trade Commission Act ("FTC Act"), which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The FTC Act also empowers the Commission to prescribe rules that define with specificity acts or practices that are unfair or deceptive.
What are the requirements for franchising?
The Franchise Rule requires franchisors to make material disclosures in five categories: 1 (1) the nature of the franchisor and the franchise system; 2 (2) the franchisor's financial viability; 3 (3) the costs involved in purchasing and operating a franchised outlet; 4 (4) the terms and conditions that govern the franchise relationship; and 5 (5) the names and addresses of current franchisees who can share their experiences within the franchise system, thus helping the prospective franchisee to verify independently the franchisor's claims.
What is required in a franchise disclosure?
Required Franchise Disclosure Document topics include: the franchise's litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations."
What is the purpose of the Franchise Rule?
The Franchise Rule seeks to facilitate informed decisions and to prevent deception in the sale of franchises by requiring franchisors to provide prospective franchisees with essential information prior to the sale. It does not, however, regulate the substance of the terms that control the relationship between franchisors and franchisees.
How much is the FTC penalty?
(10) The FTC Act authorizes courts to impose civil penalties of not more than $11,000 per compliance violation.
When did the FTC start making franchises?
In 1971 the FTC began a formal rule making proceeding, to possibly develop a regulation requiring disclosure and prohibiting unfair practices in offering and selling franchises. These developments resulted in promulgation of the FTC Franchise Rule in 1979. The FTC enforces the Federal Trade Commission Act ("FTC Act"), ...
When did franchisors have to use franchise disclosure documents?
After July 2008, all franchisors in the United States are to use the Franchise Disclosure Document with potential franchisees.
What is the FTC Act?
The FTC enforces the Federal Trade Commission Act ("FTC Act"), which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce. The FTC Act also empowers the Commission to prescribe rules that define with specificity acts or practices that are unfair or deceptive.
