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”).
Full Answer
What are the laws for franchising a business?
Federal Franchise Laws. At the federal level franchising is regulated by the Federal Franchise Rule and the franchise regulations implemented and enforced by the Federal Trade Commission. Franchisors must disclose a properly issued and current franchise disclosure document 14 days before to the offer or sale of a franchise.
Why is it so hard to sell a franchise?
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.
Do you need a franchise lawyer to start a franchise?
In Connecticut, Maine, North Carolina, and South Carolina, franchisors without a federally registered trademark must comply with registration requirements. The laws and obligations vary considerably from state to state, so it is wise to consult a franchise lawyer for assistance in compliance with state franchise requirements.
What states have franchisee laws?
For example, the laws of California, Illinois, Indiana, Iowa, Maryland, Michigan, North Dakota, Oregon, Rhode Island, Virginia, Washington, and Wisconsin provide that a “franchise” exists if under the terms of the contract:
Can the Franchisor Be Taken to Court in the Franchisee’s Home State?
Do Some States Have More Stringent Franchise Laws?
About this website
What type of law is franchise law?
Franchise law is the body of law that relates to making, operating and ending franchise relationships. Franchise law encompasses laws and regulations at all levels of government that govern how corporations and individuals may enter into franchise relationships.
Who regulates the franchise industry?
Federal Trade CommissionFranchise Rule | Federal Trade Commission.
Do franchises follow corporate rules?
Those "franchise" rules get put in place by the franchisor (the corporation). These rules apply to all franchises across the board. If those rules aren't followed, it could result in the loss of your franchise business.
What legal entity is a franchise?
A franchise is owned and operated by an entity, but it operates under license from the parent company. A corporation runs all of its business locations; it doesn't bring in other companies. A franchise that's incorporated enjoys the same legal protections as any incorporated business.
How is a franchise governed?
The relationship between a franchisor and franchisee is ultimately governed by a Franchise Agreement which will be contractually binding on both parties. It is therefore fundamental to ensure that the Franchise Agreement is tailored to the nature of the franchise and accurately reflects the terms that have been agreed.
How many states have franchise laws?
The Federal Franchise Rule is the overarching federal law that governs the offer and sale of franchises throughout the United States, in all fifty states.
What is the difference between a franchise and corporate?
A franchise is owned and operated by an entity but operates under license from the parent company. A corporation runs all of its business outlets. Both types of businesses seek continual growth but utilize different means.
What type of organization is a franchise?
Franchising is a form of business organization that involves a franchisor, the company supplying the product or service concept, and the franchisee, the individual or company selling the goods or services in a certain geographic area.
What rules do you have to comply with as a franchise?
We'll look at what each rule is, why it's important, and what could happen if you breach the franchise rules.Payment of fees. ... Operations. ... Franchisor approved supplier list. ... Employment obligations. ... Premises licence and territory provisions. ... Renewal provisions and transfer provisions. ... Consequences of non-compliance.
Is a franchise a separate legal entity?
For example, a single company franchise is where a proprietary limited company operates the franchise. This company operates as a separate legal entity that owns its own assets and incurs its own liabilities.
Is McDonald's a franchise or a corporation?
As a franchisor, McDonald's primary business is to sell the right to operate its brand. It gets its money from royalties and rent, which are paid as a percentage of sales.
Is a franchise a public or private company?
Most franchises remain privately owned, many by private equity firms and larger franchisor groups after being acquired. Franchises are unique business models, and are a world apart from most on any exchange.
What laws & Government agencies regulates the offer and sale of franchise?
At the federal level, by the Federal Trade Commission (the “FTC”) through its FTC Franchise Rule, and at the state level, by various states' franchise registration/disclosure laws; franchise relationship laws; business opportunity laws; and “little FTC” acts.
Which laws and government agencies regulate the offer and sale of franchise?
What laws and government agencies regulate the offer and sale of franchises? At the federal level, franchising is regulated by the Federal Trade Commission (FTC) primarily through the FTC's Franchise Rule (the FTC Rule). The FTC also has a Business Opportunity Rule that can apply to franchises.
How does the government help protect franchise?
A franchise cannot be revoked arbitrarily unless that power has been reserved by the legislature or proper agency. The 15th, 19th, and 24th Amendments to the U.S. Constitution guarantee the rights of franchise, or suffrage, to all citizens.
Why law and regulation in franchising is important?
The franchising specific law help to ensure that franchisees are provided with proper information to assist them to make a well-informed investment decision, substantive rules guide franchising parties to better conclude and perform the franchise agreements.
Can the Franchisor Be Taken to Court in the Franchisee’s Home State?
This will depend on the state law and, if consistent with state law, the franchise agreement. Many franchise agreements provide that all disputes must be settled out of court in arbitration, forbidding any lawsuits, unless the state does not permit that type of dispute resolution structure within the agreement.
Do Some States Have More Stringent Franchise Laws?
The intention of high-regulation states is to reduce fraudulent business practices. A state can deny the registration of a franchise business if it feels that franchise documents contain false or misleading information. These states may also deny registration if there are circumstances in which selling the franchise would be deceptive in some manner. The FTC website has information about which states have these comprehensive franchise laws.
What is a franchise disclosure document?
Franchisors must develop, maintain, register, and disclose a uniform Franchise Disclosure Document ( FDD ). The FDD must be registered in the franchise registration states, filed in the franchise filing states, and disclosed in every state to a prospective franchisee. Franchisors must manage and maintain their FDD, franchise disclosures and franchise relationships in compliance with a broad range of state franchise regulations and state franchise relationship laws.
How long do you have to disclose a franchise before selling?
Franchisors must disclose a properly issued and current franchise disclosure document 14 days before offering or selling a franchise.
What is the role of a franchisor in a franchise?
Franchisors must manage and maintain their FDD, franchise disclosures and franchise relationships in compliance with a broad range of state franchise regulations and state franchise relationship laws.
Do franchises have to register FDD?
Under the federal rule, franchise compliance is largely self-regulated and franchisors are not required to file or register their FDD with any federal agency.
States With Franchise Relationship, Registration and Disclosure Laws
Currently, 21 states and the District of Columbia have franchise relationship or franchise registration and disclosure laws (or both). These laws serve different purposes, but the overarching concept is that they are designed to provide at least some measure of protection for franchisees.
What if Your State Does Not Have a Franchise Law?
If your state does not have a franchise law (or even if it does), there still may be other statutes or case law that protect you. For example, many states have industry-specific laws that franchisees and their franchise attorneys can use to their advantage.
How to determine if a franchise is a franchise?
A relationship is deemed a franchise if its meets the definitional elements of a franchise under federal and state law. The federal definition of this term is contained in the FTC Rule, which defines a franchise as any arrangement whereby the franchisor: 1 Renders significant assistance to the franchisee in operating its business or significantly controls the franchisee's method of operation; 2 Licenses the franchisee to distribute goods or services under, or operate using, the franchisor's trademark; and 3 Requires payment of a minimal fee to the franchisor.
How many types of franchises are there in the United States?
There are two basic types of franchises used in the United States:
What is a product franchise?
In a product franchise, the franchisee sells goods that are produced by the franchisor (or under the franchisor's control or direction) and which bear the franchisor's trademark. The product franchisor exercises significant control over the franchisee's method of operation or promises to provide a significant amount of assistance in the franchisee's method of operation. The franchisee is typically required to pay the franchisor for the right to distribute the goods. Payment may take the form of required purchases of trademarked goods or payment of an initial franchise fee. A beer distributorship or automobile dealer is an example of a product franchise.
What is franchise agreement?
A franchise is a form of licensing arrangement whereby one party licenses another to use its business system and trademark. Franchisees typically pay to the franchisor an initial franchise fee and ongoing royalty payments throughout the franchise term. In consideration for these payments, franchisors permit the franchisee to operate the franchised business under the franchisor's principal trademark and typically provide the franchisee a package of initial and ongoing assistance and training. Such assistance and training typically includes site selection assistance; loan of the franchisor's operations manuals; training; opening assistance; advertising materials; participation in buying and advertising materials; and accounting, business, and operating system assistance.
Why is disclosure required for franchising?
State disclosure requirements are important because several states provide a private right of action to prospective franchisees for a franchisor's violation of the state statute. In determining the states in which a franchisor may need to file registration applications, or with which state laws a franchisor may need to comply in terms of providing disclosure to a prospective franchisee, it is necessary to look to each individual state law.
What is a franchise relationship?
A relationship is deemed a franchise if its meets the definitional elements of a franchise under federal and state law. The federal definition of this term is contained in the FTC Rule, which defines a franchise as any arrangement whereby the franchisor:
How often do franchisors need to update their disclosures?
The FTC Rule also requires that the disclosure document be kept "current." Franchisors must update the disclosure document at least once annually. The revisions must be made within ninety days after the close of the franchisor's fiscal year.
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.
Which states have franchise laws?
The states that have enacted laws that regulate the offer and sale of franchises are California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Oregon, like the FTC, requires disclosure but not registration. State Relationship Laws.
What are franchise relationship statutes?
Franchise relationship statutes may provide franchisees with various remedies including an obligation to repurchase unsold inventory, equipment, and other assets, in addition to damages, injunctive relief, and attorneys' fees. There is some case law limiting a franchisor's right to obtain damages where the franchisor has terminated the franchise agreement.
What are the consequences of a violation of the FTC rule?
Consequences of Violations of the Law. The FTC is authorized to bring suit for injunctions and restraining orders against violators of the FTC Rule. By administrative action, the FTC can issue an order requiring a franchisor to cease and desist from further violations of the Rule.
What is a relationship law?
Relationship laws were passed to restrict the power of franchisors over franchise terminations, renewals, transfers, and certain other aspects of the franchise relationship. The statutes generally apply to franchisees located within a particular state, although coverage of state relationship laws may vary.
What is franchising 101?
Franchising 101: Key Issues in the Law of Franchising. Franchising has come of age. According to the International Franchise Association's website, franchising in the United States creates 21 million jobs at 900,000 locations nationwide and contributes $2.3 trillion in economic output annually. Franchisees have the advantage ...
What is the relationship between an employee cafeteria and its licensor?
The contract between an operator of an office building employee cafeteria and its licensor involved substantial association with the licensor's trademark because the property owner was familiar with the reputation of the licensor, and that, the court found, was sufficient to render the contract a franchise agreement.
What is the definition of franchise?
There are three main elements of the definition of a franchise under federal law and most state franchise laws. Substantial Association with Trademark. The business must be substantially associated with the franchisor's trademark or other commercial symbol for the business to be a franchise.
Can the Franchisor Be Taken to Court in the Franchisee’s Home State?
This will depend on the state law and, if consistent with state law, the franchise agreement. Many franchise agreements provide that all disputes must be settled out of court in arbitration, forbidding any lawsuits, unless the state does not permit that type of dispute resolution structure within the agreement.
Do Some States Have More Stringent Franchise Laws?
The intention of high-regulation states is to reduce fraudulent business practices. A state can deny the registration of a franchise business if it feels that franchise documents contain false or misleading information. These states may also deny registration if there are circumstances in which selling the franchise would be deceptive in some manner. The FTC website has information about which states have these comprehensive franchise laws.