Franchise: The Meaning and Franchise Laws
Sponsored by: Franchise Law
Every business owner aspires for more business expansion. One of the strategies by which these businesses accomplish this is through franchising. Franchising allows large corporations to have many branches while also providing other individuals with the opportunity to run their businesses.
“Running an independent business is challenging and even more challenging when you sell some rights of the business to another person,” says Jason W. Power. Purchasing, selling, or running a franchise can be complex. Like other business contracts, it is critical for anyone agreeing to franchise to protect themselves by understanding the franchise laws for long-term franchise success.
What is Franchise Law?
Franchise law is the law that governs the formation, operation, and termination of franchise relationships. Franchise law also controls the laws and regulations at all levels of government that govern how individuals and corporations can enter into franchise relationships.
In general, franchise laws consist of the Federal Franchise Rule and state-specific franchise laws and regulations governing the disclosure obligations of franchisors. It also includes the Franchise Disclosure Documents (FDD) review and registration and the franchisor-franchisee relationship.
What is a Franchise?
A franchise is a commercial and legally binding relationship between the franchisor and the franchisee. The franchisor is the owner of a trademark, copyrights, trade name, and other business identifiers. On the other hand, a franchisee uses the franchisor brand to run a business.
A franchisor allows the franchisee to use these business identifiers in exchange for a certain amount. The franchisee pays for and uses these business identifiers to establish and run a business.
However, the franchisor influences how the franchisees run their business. The goal of a franchise is to run a business similar in features to other franchises in other locations.
Federal Franchise Rule
The Federal Franchise Rule is a broad federal law that governs the offer and sale of franchises across 50 states in the United States. The law requires franchisers to provide franchisees with the information they need to determine whether the franchise is a good business investment or not.
The Franchise Disclosure Document (FDD) is a report that contains this information. The information on the FDD which franchisers must provide to the prospective franchisees includes:
- Provided advertisement
- Territorial rights and limitations
- Names of celebrity endorsers
- Procedures for resolving disputes
- Optional financial performance representations
- The franchisee, their parent company, and affiliates
- Information on bankruptcy
- Startup cost estimate
- The Business restrictions
- Independent business owner obligations
- The assistance to owners
Furthermore, the Federal Trade Commission (FTC) issues the Federal Franchise Rule. The FTC is a federal agency responsible for enforcing and maintaining the Federal Franchise Rule and federal franchising law. The FTC franchise rule controls the kind of information franchisers must disclose in their FDD and how to provide the disclosure to prospective franchisees. However, the FTC does not require federal registration.
When a Franchisor Breaches the Federal Franchise Law
Some franchise law violations include a franchisor failing to provide all the necessary disclosures or making false representations to prospective franchisees. Such violations can lead to a range of harsh penalties. Federal law violations can result in fines, asset freezing, and monetary damages for victims.
Furthermore, penalties may also be franchiser-imposed or on the directors and managers of the franchising system. In certain circumstances, the violation penalty may include banning the franchisors from engaging in franchising.
The state handles violations as deceptive and fraudulent business practices. However, the state laws differ on whether to consider it a misdemeanor or a felony.
Franchise Laws by State
Each state may enact franchise laws, rules, and regulations. The law is referred to as state franchise laws when states pass the laws, rules, and regulations.
Furthermore, if there is no existing enacted franchise law in a particular state, then only the federal franchise rule will be applicable in such a state. However, many states have already passed franchise laws, rules, and regulations.
Franchise State Registration Requirements
Each state has its own set of laws to supervise franchises that enter the state. Before proceeding with franchise expansion, some states require franchisors to file a notice or register their FDD.
However, there are three categories of Franchise State Registration Requirements. They are as follows:
Franchise Registration states
A franchise registration state is one in which franchisors must register their Franchise Disclosure Document (FDD) before offering or selling a franchise in that state. These states require franchisors to renew and update their FDD state registrations annually. Franchise registration states for franchisors with federally registered trademarks include:
- Maryland
- Michigan
- Minnesota
- New York
- North Dakota
- Rhode Island
- Virginia
- Washington
- Wisconsin
- California
- Hawaii
- Illinois
- Indiana
Furthermore, franchisors who do not have a federally registered trademark must register their FDD or franchise offering with additional states. The states include Maine, Connecticut, and North and South Carolina.
Franchise Filing States
Filing states are states that do not require franchisors to register their FDD but do require them to file their FDD with the state before operation. The filing states for franchisors with a federally registered trademark include South Dakota, Texas, Utah, North and South Carolina. Connecticut, Florida, Kentucky, and Nebraska are all part of the filing states.
Furthermore, franchisors who do not have a federally registered trademark must file a notice (consent to service of process) in Georgia and Louisiana. However, filings within these states and the frequency of filings differ (some filing states require a one-time filing while others require annual filings).
Franchise Non-Registration States
Non-registration states, unlike registration or filing states, do not require a franchisor to register its FDD or file a notice with a local state regulator. Some of these non-registration states for franchisors with a federally registered trademark include Alabama, the District of Columbia, Nevada, Idaho, and many others.
Franchise Relationship and Disclosure Laws
The primary franchise disclosure law governs the mandatory requirement that a franchisor disclose and provide to a prospective franchisee. It includes the current and compliant FDD at least 14 days before signing any franchise agreement or accepting any money from the franchisee.
The franchise registration states have enhanced federal law at the state level by requiring franchisors to register their FDD and obtain state approval of their FDD. Aside from these disclosure laws, some states (including non-registration states) have passed franchise relationship laws.
The franchise relationship laws govern the interpretation of the franchisor-franchisee contractual relationship. In some cases, the franchise relationship law has provided additional protections to franchisees regardless of the terms of the franchise agreement.
Final Thoughts
Understanding the fundamentals of franchise law can be helpful for anyone interested in buying a franchise or franchising a business. It is also vital to contact an experienced business attorney to protect your legal and financial interests. The attorneys can explain franchise law in greater detail and help you with your franchising and business ventures.
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