The franchise legislations are an amalgam of federal and state laws that govern the registration, offer, sale of franchises, and the legal relationship between franchisors and franchisees. Franchise Laws are classified as franchise disclosure laws and franchise relationship laws. You might get confused between different state franchise acts and federal franchise acts. This blog will resolve your doubts regarding fundamentals of franchising laws and will educate you with the requirement of franchise legislation mandate.
Meaning of ‘Franchise’ as Per Federal Franchise Acts
The United States Federal Trade Commission (FTC) is the body to regulate franchising. The Federal Trade Commission defines a franchise as an ongoing business connection or arrangement that consists of three critical components:
- A franchisee is granted the right to operate a business or distribute goods or services bearing the franchisor’s brand.
- The franchisor has authority over the franchisee’s company operations. Franchisors are legally permitted to exercise extensive influence over franchisees’ activities or help franchisees manage their operations.
- Federal law requires franchisees to pay the franchisor or their affiliate as a condition of launching a franchise.
At the same time, many franchise requirements vary from state to state, and the sale of each franchise across the country has to meet the above federal requirements. Federal franchise acts require a Franchisor to give each prospective franchise a properly-drafted Franchise Disclosure Document (FDD) the first time they meet in person. The contents and format of the FDD are detailed in federal franchise laws.
Franchise Acts at Federal Laws
The United States Federal Trade Commission (FTC) rule requires that franchisors provide certain pre-contractual disclosures to potential franchisees. In extension to this, the FTC Rule prohibits certain unfair and deceptive trade practices and contradicts the information provided in an FDD. The FTC rule is a ‘disclosure-only measure’, which means there is no need to impose an obligation of federal registration and no need to regulate the franchise relationship after the sale. Importantly, the FTC Rule does not include a private right of action and, therefore, only the federal government has the standing to enforce the FTC Rule.
State Level Franchise Laws
In 15 states, franchise regulations require a franchisor to register with the appropriate state agency before offering franchises for sale in the peculiar state. State franchise decrees typically require registration if:
- The Franchisor is located in a registration state,
- The franchise is offered to residents of a registration state, or
- The franchise will be operated in the registration state.
State agencies are empowered by state franchise orders to review and require changes to the FDD before granting registration. This can be true even when the FDD meets federal franchise order. If any state has not enacted its own state franchise laws and regulations then federal franchise law is applicable to the state.
Ramifications of Violating Franchise Ruling
Franchise laws regulate law disclosure, registration, and the relationship between Federal Trade Commission (FTC) and franchisees; state law may provide criteria for franchise termination and renewal and fair treatment of franchisees. Violation of franchise ruling can be financially devastating as the FTC or state agencies are able to impose fines, require rescission of prior franchisee sales, or prohibit future franchise sales. The franchisor may receive the brunt of the penalties. Meanwhile, Franchisees can sue franchisors for failure to comply with applicable laws. Violations are often prosecuted as deceptive and fraudulent business activities at the state and federal level.
Final Words
A franchise gives franchisors the opportunity to leverage their business format plan using management by franchisers who have a vested effort in the success of the business. However, the franchise laws give business owners the stability of a tested business model along with the freedom to manage day-to-day operations. We hope the above information help you understand the fundamental tenets of franchise law and turn out beneficial if you are considering buying a franchise or franchising a business.
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