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Federal Franchise Laws regarding Franchisors and Franchisees

Buying a franchise business is not like buying or starting a normal small business.  There are different risks, different opportunities, and different commitments.  You have to investigate the franchise opportunity, put together a business plan, negotiate a fair franchise agreement, and conduct much due diligence.  On the other hand, existing businesses and prospective franchisors, whether young, growing, or mature, face difficult problems as well.  Franchisors need to adopt systematic methods, resolve problems with franchisees, and manage risk across widely dispersed operations.  Regardless of whether you are a franchisee or franchisor, you need to comply with franchise laws and work with franchising agreements.

Many states have enacted statutes and regulations governing the sale of franchises, and the Federal Trade Commission (“FTC”) has adopted regulations as well.  The current franchise industry is subject to complex rules that include the FTC rules, multiple state statutes regarding the sale of franchises and similar business opportunities, and industry specific regulations.  In addition, the franchise industry is subject to a host of other bodies of substantive law, such as intellectual property, trade regulation, commercial leasing, employment, and other contractual matters

Often, the primary hurdle with any franchise-related issue is figuring out which statutes and regulations apply.  For instance, the FTC Franchise Rule (16 C.F.R. § 436 et seq.) only applies  if 1) the goods and services are identified by the franchisor’s trademark or commercial symbol, 2) the franchisor exercises a significant amount of control over the franchisee, and 3) the franchisee pays a large enough fee.  If the FTC Franchise Rule applies, then detailed information related to the sale of the franchise, such as descriptions of products, descriptions of the competition, and other background information related to the franchisor, is required to be disclosed. The FTC Franchise Rule also provides an obligation on behalf of the franchsior to furnish various documents about the franchise to the potential franchisee.  Unlike many state franchise laws, this federal law does not regulate the franchise relationship itself nor requires any specific filings.

As always, it is important to pay attention to both federal and state laws, which work together to regulate franchise relationships and franchise sales..


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