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.
What is the legal definition of a franchise?
In legal terms, a franchise involves a business owner granting a license to another business owner. The licensed business becomes a franchise and falls under the terms and regulation of the license agreement. With the license, the franchisor will be allowing the new business to use its: Trade name. Operating system.
What is the legal structure of a franchise?
The most common legal structure options are S-corporations, C-corporations, sole proprietorships, general partnerships and limited liability companies. S-corps are becoming more popular in recent years among franchisees due to the tax benefits afforded to smaller businesses with fewer stakeholders.
Does franchise law vary by state?
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”).
What is the liability of a franchise?
Liability for Actions by the Franchisee’s Employees. The franchisor is liable for the actions of the franchisee’s employees if the franchisee is an agent of the franchisor. However, the employee’s actions must be within the scope of employment in addition to the franchisee being an agent of the franchisor for the franchisor to be liable.
What is a franchise business law?
Franchise is commonly used to refer to a relationship wherein a business organization, called a franchiser, in exchange for a fee and with the franchisor's guidance, allows another business, called the franchisee, to operate under the franchiser's trade name and offer the franchiser's products or services.
What is the purpose of the franchise Act?
Federal franchise law The purpose of the law is to require franchisers to give franchisees the information that they need in order to determine if the franchise is a sound business investment.
What is a franchise simple definition?
A franchise (or franchising) is a method of distributing products or services involving a franchisor, who establishes the brand's trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor's name and system.
What is franchise law in the Philippines?
There are no specific laws governing franchising in the Philippines. Franchise agreements are regulated by the applicable provisions of the: Intellectual Property Code (IPC). Civil Code.
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 are the legal requirements for a franchise?
Generally, the offer and sale of franchises find legal basis in laws such as:The Indian Contract Act, 1872.The Foreign Exchange Management Act, 1999 (FEMA).The Competition Act, 2002.The Trademarks Act, 1999.The Copyright Act, 1957.The Patents Act, 1970.The Design Act, 2000.The Income Tax Act, 1961.More items...
What is an example of franchise?
Understanding Franchises Examples of well-known franchise business models include McDonald's (NYSE: MCD), Subway, United Parcel Service (NYSE: UPS), and H&R Block (NYSE: HRB).
What is franchise give example?
Franchising is a business relationship between two entities wherein one party allows another to sell its products and intellectual property. For example, several fast food chains like Dominos and McDonalds operate in India through franchising.
How do franchise work?
In franchising, a franchise owner partners with a corporate brand to open a business under the brand's umbrella. The franchisee owns and operates that location using the franchisor's brand name, logo, products, services and other assets.
What is RA 8293 of the Philippines?
Republic Act No. 8293 [An Act Prescribing the Intellectual Property Code and Establishing the Intellectual Property Office, Providing for Its Powers and Functions, and for Other Purposes] otherwise known as the Intellectual Property Code of the Philippines.
Who regulates franchises in the Philippines?
Under EO 169, franchise holders of MSMEs are now required to have franchise agreements registered with the Department of Trade and Industry (DTI), and all future agreements are to be in line with the required terms and conditions set out in EO 169.
Who regulates franchise?
the Federal Trade CommissionAt 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.
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.
What is the purpose of Federal Trade Commission Rule 436?
According to Rule 436, “The franchisee must be required to pay the franchisor (or an affiliate of the franchisor), as a condition of obtaining or commencing the franchise operation, a sum of at least $500 . . . within six months. . .” Required payments include franchise fees, royalties, or even from training fees, ...
What is involved in a franchise agreement?
A franchise agreement is a contract under which the franchisor grants the franchisee the right to operate a business, or offer, sell, or distribute goods or services identified or associated with the franchisor's trademark.
What is a franchise disclosure document FDD and why is it important?
The franchise disclosure document (FDD) is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise as part of the pre-sale due diligence process. The document contains information essential to potential franchisees about to make a significant investment.
What is a franchise?
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name, or advertising symbol (the franchisor) and someone who seeks to use that identification in a business (the franchisee). For example, McDonald's restaurants all share the same branding and menu items but are individually owned by ...
What are franchise disclosures?
Franchise Disclosures: States have laws governing which types of disclosures franchisors must make to prospective franchisees, and the manner in which these disclosures must be made (such as average profit, operating costs, etc.).
What is FDD in franchising?
The FDD, which includes disclosures required by state laws, covers the franchisor's business experience, litigation history, bankruptcy filings, fees, initial investment, restrictions, franchisee's obligations, territory, trademarks, dispute resolution, and more. An experienced franchise attorney will be able to compare any given FDD with industry averages.
What is royalty in business?
Royalties: A share of the profit or product reserved by the grantor; a payment made to an author or composer for each copy of a work sold or to an inventor for each article sold under a patent (or, in this case, payment made by the franchisee to the franchisor based on a percentage of sales or a set rate).
What to do if you are considering buying a franchise?
If you are considering purchasing a franchise, it makes sense to contact a business attorney with experience handling such procedures. They will be able to help you better assess the likelihood of success (based on financial data and other pertinent information), navigate the regulations, and secure funding. See Consumer Guide to Buying a Franchise to learn more.
Is a franchise agreement binding?
After you have done some research and reviewed various franchise options, you will be presented with the franchise agreement, a legally binding contract. The agreement and the franchise disclosure document (FDD) usually are written in thick "legalese" and can be better interpreted by an attorney. To become better prepared, fill out FindLaw's Franchise Agreement Questionnaire and go over the answers with your attorney.
Is a franchise contract non-negotiable?
Franchisors almost always tell prospective buyers that their contracts are non-negotiable, but that is not the case. Remember, buying a franchise is an agreement between two parties; so you should protect yourself just as rigorously as the franchisor will protect itself. Intellectual Property Law. Business and Commercial Law.
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.
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:
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.
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.
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 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 are the disadvantages of franchising?
The disadvantage of franchising is that approximately twenty states have laws governing at least a portion of the ongoing franchise relationship. These laws may include provisions affecting the termination and renewal rights of a franchisee, including the franchisee's right to cure a default under the franchise agreement. The laws also affect other franchise agreement provisions such as: governing law, jurisdiction and venue of litigation and arbitration, discrimination, the franchisor's right to injunctive relief, general releases upon renewal and transfer of the franchise agreement, and the franchisor's right to vary the terms of the franchise by amending the operations manual for the franchise system. The franchise relationship is also subject to Section 5 of the Federal Trade Commission Act 15 U.S.C. §45 which prohibits unfair or deceptive trade practices in commerce or competition. Many states have also enacted "Little FTC" or "Baby FTC" Acts which prohibit unfair and deceptive practices and which often provide the franchisee a private right of action against the franchisor.
Which states have franchise laws?
States with business opportunity laws or that are considered filing requirements include: Connecticut. Florida. Georgia.
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.
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.
What Is a Franchise?
A franchise is a type of license that grants a franchisee access to a franchisor's proprietary business knowledge, processes, and trademarks , thus allowing the franchisee to sell a product or service under the franchisor's business name . In exchange for acquiring a franchise, the franchisee usually pays the franchisor an initial start-up fee and annual licensing fees .
What is franchise contract?
Franchise Basics and Regulations. Franchise contracts are complex and vary for each franchisor. Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights, or trademark, from the franchisor in the form of an upfront fee.
What Are the Risks of Franchises?
Disadvantages include heavy start-up costs as well as ongoing royalty costs. By definition, franchises have ongoing fees that must be paid to the franchisor in the form of a percentage of sales or revenue. This percentage can range between 4.6% and 12.5%, depending on the industry.
How Does the Franchisor Make Money?
Typically, a franchise agreement includes three categories of payment to the franchisor. First, the franchisee must purchase the controlled rights , or trademark , from the franchisor in the form of an upfront fee. Second, the franchisor often receives payment for providing training, equipment, or business advisory services. Finally , the franchisor receives ongoing royalties or a percentage of the operation's sales.
What does a franchisor receive?
Finally, the franchisor receives ongoing royalties or a percentage of the operation's sales. A franchise contract is temporary, akin to a lease or rental of a business.
How long does a franchise contract last?
It does not signify business ownership by the franchisee. Depending on the contract, franchise agreements typically last between five and 30 years, with serious penalties if a franchisee violates or prematurely terminates the contract.
When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product?
When a business wants to increase its market share or geographical reach at a low cost, it may franchise its product and brand name. A franchise is a joint venture between franchisor and franchisee. The franchisor is the original business. It sells the right to use its name and idea. The franchisee buys this right to sell the franchisor's goods or services under an existing business model and trademark .
What is a franchise?
Franchise. A special privilege to do certain things that is conferred by government on an individual or a corporation and which does not belong to citizens generally of common right, e.g., a right granted to offer Cable Television service. A privilege granted or sold, such as to use a name or to sell products or services.
What is a franchise in business?
In its simplest terms, a franchise is a license from the owner of a trademark or Trade Name permitting another to sell a product or service under that name or mark.
Why are franchisees being victimized?
In states without "good cause" laws, franchisees claim that they are being victimized by franchisors who want to reclaim outlets that have proven to be highly profitable. They allege that the franchisor imposes impossible or ridiculous demands that cannot be met to harass the franchisee into selling the store back to the franchisor at a fraction of its value. Company-owned outlets yield a greater profit to the franchisor than the royalty payments received from the franchisee. Other franchisees claim that their licenses have been revoked or not renewed upon expiration because they complained to various state and federal agencies of the ways in which the franchisors operate. Such controversies usually are resolved in the courtroom.
How long do franchisors have to disclose background?
A franchisor must disclose the background of the company—including the business experience of its high-level executives—for the previous five years; and whether any of its executives, within the last seven years, have been convicted of a felony, have pleaded nolo contendere to Fraud, have been held liable in a civil action for fraud, are subject to any currently effective court order or Administrative Agencyruling concerning the franchise business or fraud, or have been involved in any proceedings for bankruptcy or corporate reorganization for insolvency during the previous seven years.
What is the purpose of a government franchise?
The consideration that is given by a person or corporation in order to receive a franchise from the government can be an agreement to pay money, to bear some burden, or to perform a public duty. The primary objective of all grants of franchises is to benefit the public; the rights or interests of the grantee, the franchisee, ...
How do franchises get derived?
A franchise can be derived indirectly from the state through the agency that has been duly designated for that purpose, such as the local transportation agency that can grant a franchise for bus routes. Franchises are usually conferred on corporations, but natural persons can also acquire them.
When did franchisors have to disclose their franchises?
In late 1978, it issued regulations, effective October 21, 1979, that require franchisors and their representatives to disclose material facts necessary to make an informed decision about the proposed purchase of a franchise and that establish certain practices to be observed in the franchisor-franchisee relationship.
Federal Franchise Rule
- 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. The Federal Franchise Rule is issued by the Federal Trade Commission and may be found here.
Federal Trade Commission
- The Federal Trade Commission is the federal agency charged with enforcing and upholding the Federal Franchise Rule and federal franchising law.
State Franchise Laws
- The franchise laws also include franchise laws, rules and regulations that may be enacted by each state. If a state has not enacted its own franchise laws then only the federal franchise rule shall be applicable in that state. Many states have enacted their own franchise laws, rules and regulations. A listing of each state and the state specific franchise laws may be found here.
Franchise Registration States
- A franchise registration state is a state that requires franchisors to register their FDD prior to offering or selling a franchise within that state. Franchisors must renew and update their FDD state registrations no less frequently than annually. For franchisors that maintain federally registered trademarks, the franchise registration states include: 1. California 2. Hawaii 3. Illinois …
Filing States
- Filing states are states that do not require the registration of a franchisor’s FDD but do require a filing or a notice with the state. For franchisors that maintain a federally registered trademark, the filing states include: 1. Connecticut (one time filing) 2. Florida (annual filing) 3. Kentucky (one time filing) 4. Nebraska (one time filing) 5. North Carolina (one-time filing) 6. South Carolina (one tim…
Non-Registration States
- Non-registration states are states that, unlike registration states or filing states, do not require a franchisor to register the franchisor’s FDD or submit a filing or notice with a local state regulator. For franchisors that maintain a federally registered trademark the non-registration states include: 1. Alabama 2. Alaska 3. Arizona 4. Arkansas 5. Colorado 6. Delaware 7. District of Columbia 8. G…
Franchise Disclosure Laws and Franchise Relationship Laws
- Franchise laws are typically differentiated between franchise disclosure laws and franchise relationship laws. The primary franchise disclosure law relates to the federal mandate that a franchisor must disclose and provide to a prospective franchisee the franchisor’s current and compliant franchise disclosure document no less than 14 days prior to signing any franchise agr…