what is franchise law

Full Answer

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 legal definition?

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 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.

What is a franchise in land law?

A privilege granted or sold, such as to use a name or to sell products or services. 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.

What is a franchise with 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.

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.

What is the main purpose of franchise?

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. Franchises are a popular way for entrepreneurs to start a business, especially when entering a highly competitive industry such as fast food.

Who is known as franchise?

The franchisee is the individual who buys into the original company by purchasing the right to sell the franchisor's goods or services under the existing business model and trademark. The relationship between a franchisee and franchisor is inherently one of advisee and advisor.

What is meaning of franchising?

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.

Who controls a franchise?

Assuming you will be the majority shareholder and will take day-to-day responsibility for the operation of the business then you will be most definitely in control. However, remember that the purpose of that business will be to operate, under licence, an outlet of the franchisor's system.

What are the 4 types of franchising?

The four types of franchise business you can invest inJob or operator franchise. These owner operator franchises are usually home based, which keeps overheads down to a minimum. ... Management franchise. ... Retail and fast food franchises. ... Investment franchise.

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 are the franchising requirements in the Philippines?

Required Documents to Be Submitted to the FranchisorLetter of Intent to Franchise. A Letter of Intent is used in most business transactions like franchising. ... Application Form. ... Site Location Proposal. ... Business Name Registration (Department of Trade and Industry) ... Barangay Clearance. ... Business or Mayor's Permit.

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 are the legal obligations of a franchise?

Your Ongoing Obligations To act in good faith. To comply with the franchise business model as per the contract documentation. To meet your financial obligations. To run your business lawfully.

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.

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.

Where does franchise law originate from?

Franchise law is an amalgamation of federal laws and regulations, state law and common law. As many franchises operate in more than a single state, there are robust federal laws that control franchising in the US.

What is a franchise?

A franchise involves the legal use of another company’s business secrets, copyrights, and other business identifiers. A franchiser allows the use of these items for a fee.

What is franchising law?

Franchising is a business practice that allows the franchising company to license its business model, intellectual properties (such as logos, trademarks, and patents), and corporate goodwill to another company or individual.

What is a franchisee's obligation?

The franchisee, on the other hand, is obligated to carry out the services for which the trademark has been made prominent or famous . There is a great deal of standardization required, and this is usually enforced through strict, carefully worded contracts known as franchising agreements. For example, the franchisee normally has to display the franchisor's signs, logos, and trademark prominently, must adhere to dress policies, must meet certain minimum customer service standards, etc. Failing to do so can result in a breach of the franchising agreement and termination of the right to use the franchisor's model, name, and logos (effectively putting the franchisee out of business). Additionally, the franchisee must handle day-to-day employment issues, procurement of supplies not provided by the franchisor, health code standards, and many others.

What is the role of franchisor in a franchise?

The franchisor is involved in securing protection for the trademark, controlling the business concept, and securing the know-how of its business model.

What is franchising parent company?

In franchising, the franchisor (the licensing parent company) licenses the use of its business model to other companies that are allowed to open their own operations using the franchisor's name, trade marks, distribution network, and products/services.

What is a single owner chain store?

The single owner, or 'chain store' model, requires significant investment by the owner at both startup and throughout the operation of the satellite locations. Meanwhile, franchising allows the parent company to pass much of the expense of expansion on to the persons or entities who license the business franchise rights.

How many franchised businesses were there in 2005?

As of 2005, there were 909,253 established franchised businesses, generating $880.9 billion of output and accounting for 8.1 percent of all private, non-farm jobs. This amounts to 11 million jobs, and 4.4 percent of all private sector output.

Who pays royalty to franchisor?

The franchisee (the child company that wants to buy into the franchisor's business model) pays a royalty to the franchisor for use of the business model, marks, and name, and is normally granted access to the franchisor's distribution network from which it buys its products. As a result, the franchisor usually acts as not just the originator ...

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.

What Is A Franchise?

Where Does Franchise Law Originate from?

• Franchise law is an amalgamation of federal laws and regulations, state law and common law. As many franchises operate in more than a single state, there are robust federal laws that control franchising in the US. A few states augment federal laws and regulations by adding state law. The federal and state laws that control franchising do not overri...

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