Franchisor Legal Compliance
Franchising your business is complex. There are statutes and regulations that you must follow. At Bundy & Fichter PLLC, our attorneys have over 50 years of experience in franchise law. In addition to representing franchisors and franchisees, our attorneys have been involved in the legislative and regulatory processes. We understand—and ensure that you understand how to comply with—all relevant laws and regulations. We can train you and your staff to get the job done right.
Franchising your business is not something you can do in an afternoon with the help of ChatGPT or a template you found online. To franchise a business properly and with full legal compliance requires a lot of planning, time, and a significant financial investment. If you do it right, you may be able to set yourself and your franchisees up for success.
Basic Legal Requirements For Franchising.
The United States Federal Trade Commission (FTC) Franchise Rule sets the minimum requirements for offering or selling a franchise anywhere in the United States. It requires detailed pre-sale disclosures that you must deliver to the franchisee at least fourteen calendar days before you either accept any money from a franchisee or have them sign any binding contract. The FTC requires the information to be contained in a Franchise Disclosure Document (FDD) and organized into 23 sections, called “Items”. Other than the FDD and its contents, timing, and delivery requirements, there are no other franchise-specific federal requirements.
State Registration Requirements.
Fourteen states require registration of the franchise offering unless the offering is exempt. Those states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. These fourteen states are generally referred to as the “registration states”. Each state has unique requirements before you can offer or sell franchises in its state, and each requires a written application, a copy of the proposed FDD, and a filing fee. Most of the fourteen require a state-specific addendum to the FDD and franchise agreement, which may inform about state laws or, in some cases, amend the franchise agreement and FDD.
Substance of Disclosure Requirements.
The registration states have, collectively, through the North American Securities Administrators Association (NASAA) promulgated detailed interpretations of the FTC disclosure rule, which are variously called “commentaries”, “guidelines” or “statements of policy”. Many of the registration states have adopted some or all of the NASAA interpretations. In order to be compliant with all applicable laws, one must understand not only the FTC Franchise Rule, but also the franchise statutes of all the registration states and the NASAA interpretations. In addition, it is helpful to understand some of the unwritten interpretations imposed by various states. Only a very small number of lawyers have the knowledge and experience to do an FDD competently, even if they are able to obtain all of the necessary information from their client. If you are thinking of offering franchises, you should consult with one of those experienced franchise lawyers.
What About The Other 36 States?
Many of the non-registration states have special laws that a franchisor must consider and comply with. Approximately 25 states have variations of Business Opportunity Fraud Laws. California uses the name “Seller Assisted Marketing” law. Those statutes may or may not apply in a particular state, depending upon the franchisor’s circumstances. For example, some states exempt offerings that “comply” with the FTC Franchise Rule. Some exempt offerings where the franchisor’s trademark is registered. In a few states, applicability depends on whether the franchisor makes a certain “guarantee”. Unless the offering is exempt from the Business Opportunity Fraud law of a state and otherwise meets the state’s definition of a “business opportunity”, most states require registration and some form of formal pre-sale disclosure. To further complicate matters, the Federal Trade Commission has a separate business opportunity rule that requires a short form of pre-sale disclosure for every business opportunity in every state, regardless of state law. It is complex and there is no uniform way to comply as there is in franchising. If there is a chance that the business opportunity law of a state the franchisor is considering offering or selling in applies, it is important to consult with experienced franchise or business opportunity counsel.
In addition, in many states without franchise registration laws, courts have used state unfair trade practices laws (sometimes referred to as “little FTC acts”) to enforce the FTC Franchise Rule and to prohibit unfair and deceptive acts and practices.
What About The Anti-Fraud Laws?
At least twenty-one states have franchise-specific anti-fraud laws. The typical law provides that it is unlawful to offer or sell a franchise with a false statement or to fail to disclose any material fact necessary to make the other information given not deceptive or misleading. The words vary slightly, but the effect is the same. It is illegal to make a false statement or to omit a necessary material fact. The statutes vary in terms of the franchisee’s remedy, but many provide that the franchisee can seek rescission or damages, and some permit the award of attorneys' fees and costs. In a few instances, the statutes (or common law) permit exemplary (punitive) damages. It is particularly easy to fall into the trap of leaving out material information that might have affected a franchisee’s decision. To try to avoid such omissions and to be sure that every affirmative statement is true, it is important to work closely with experienced franchise counsel.
Requirements After The Sale.
A handful of states regulate the relationship between the franchisor and franchisee after the sale is completed (often called “relationship statutes”). Those states tend to regulate termination, non-renewal, discrimination, kickbacks, and other such major actions by franchisors. The typical relationship statute also imposes a duty of good faith on both parties. If you are offering or selling franchises, you need to understand the laws of the state(s) where your franchisees are located. If there is a relationship statute, it is important to have systems in place to comply with it. An experienced franchise lawyer can help you with these things.
You Need Experienced Legal Advice
The lawyers at Bundy & Fichter have been helping franchisors comply with the franchise and related laws for decades. The lawyers at Bundy & Fichter would be happy to help you. Please contact us.