Franchise law is a complex combination of common law, statutory law, and regulatory law. The wide breadth of issues that arise in franchising has led to the emergence of franchise law as a distinct specialty, but it also draws from numerous practice areas including contracts, securities, trademarks and copyright, advertising, fraud and misrepresentation, antitrust, employment, and dispute resolution. Franchise attorneys generally are divided between regulatory compliance and counseling on the one hand, and dispute resolution on the other.
Regulatory Compliance and Counseling
Federal Presale Disclosure. Franchising is a heavily regulated industry. At the federal level, the FTC Franchise Rule requires franchisors to provide prospective franchisees with a detailed prospectus (Franchise Disclosure Document (“FDD”)) that contains information about the franchisor, the franchise system, the franchisor’s financial statements, and required agreements. Franchisors cannot make “financial performance representations” about the success of their franchisees unless the franchisor has substantiation and the information is included in the FDD. FDDs must be updated annually or more often if there are material changes to the FDD disclosures.
State Franchise Laws. Fifteen states have enacted laws that regulate pre-sale disclosure and registration. Some of the laws have disclosure requirements that vary from the FTC Franchise Rule, so the FDD may contain state-specific addenda or multiple FDDs may be necessary. These states require FDDs to become registered with a state agency before the franchisor is permitted to offer or sell franchises in the state. In addition, many states have passed laws that are designed to protect franchisees from what is perceived to be their inferior bargaining position compared to franchisors. These laws restrict the right of franchisors to terminate franchise agreements, disapprove transfers of franchises, discriminate between franchisees, require disputes to be resolved out of state, and similar limitations.
Counseling. Franchise attorneys must know the businesses and industries of their clients. They should be able to assist franchisors with franchise sales law compliance, negotiation of franchise agreements and supply arrangements, franchise agreement enforcement, system changes, franchisee renewals, franchisee terminations, franchisee transfers, pricing issues, and international franchising.
Franchise agreements are typically long-term relationships. It is not unusual for franchisors and franchisees to have disputes that result in mediation, arbitration, and litigation. These disputes often stem from franchisees who are unprofitable or less profitable than expected, or franchisees may disagree with decisions made by the franchisor. Disputes also may result when a franchisor is unhappy with the way in which a franchisee is operating the franchise or when a franchisee refuses to pay royalties. Franchise disputes frequently involve allegations such as:
- Fraud and misrepresentation
- Breach of contract
- Overcharging for supplies
- Termination or non-renewal disputes
- Violation of brand standards
- Franchisee discrimination
- Territory or encroachment issues
- Transfer issues
- Pricing and antitrust issues
- Vicarious liability issues
- Post-termination noncompetition covenants
Steven B. Feirman