General - Federal Laws
What Laws Govern Franchising?
Franchising is considered a heavily regulated industry. There are state and federal laws that govern required disclosures to prospective franchisees, registration of the franchise offering, restrictions on transfers and renewals and the termination of the franchise relationship. The following provides only an overview of the relevant laws.
Franchise Disclosure and Registrations Laws
The sales of franchises are regulated by a multitude of federal and state laws that are designed to protect the prospective franchisee and to provide the prospect with much of the information that he or she will need to make an informed decision on whether to purchase the franchise. These laws are consumer protection type laws that are intended to protect the prospective franchisee. These prospects are perceived as having less bargaining power and less available relevant information with which to make an informed decision on whether to invest in the purchase of a franchise.
Only the franchisor has obligations under these laws; the prospective franchisee does not have any obligations. The franchisor's obligations under these laws apply only before the sale of the franchise is completed. Once the sale has been completed and the franchisee has signed a binding franchise agreement, the franchisor no longer has any responsibility to provide its existing franchisees with updated disclosures.
There is one federal law that governs the sale of franchises. This law is known as "Disclosure Requirements and Prohibitions Concerning Franchising" (the "FTC Rule"). This law covers the sale of franchises in each of the 50 states, the District of Columbia and in each of the United States' territories, such as Puerto Rico and the U.S. Virgin Islands. The FTC Rule requires that the franchisor provide each prospective franchisee with a required disclosure document, including all required exhibits, within the statutorily required time frames. The FTC Rule is a disclosure only law and does not require the franchisor to register its franchise offering before the franchisor begins selling the franchises. State
There are two types of state level laws that may cover the sales of franchises. The first are franchise registration and/or disclosure laws and the second are business opportunity registration and/or disclosure laws. All of these laws require that certain disclosures be made to prospective franchisees. In addition, certain of these laws also require that the franchisor register its franchise offering before it attempts to sell its franchises to prospective franchisees. In those states that require the franchisor to register its franchise offerings, the franchisor cannot lawfully grant franchises until it has complied with the registration requirements. The states that require registration of franchises include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
Business Opportunity Laws
Business opportunities are generally described as being somewhat similar to franchises, but generally the business is much smaller that a true franchise. Examples of business opportunities include vending machine routes, display racks, pay phones, medical billing, work-at-home, and some Internet-related business opportunities. The definitions of business opportunities are very broad and often will include franchises. Business opportunities are regulated by a federal law called Disclosure Requirements and Prohibitions Concerning Business Opportunities. The states that also regulate business opportunities include: Alaska, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Michigan, Minnesota, Nebraska, New Hampshire, North Carolina, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, Washington, and Wisconsin. In those states that regulate both franchises and business opportunities, franchises that comply with the franchise law are exempt from compliance with the business opportunity law. In addition, franchises that operate under a federally registered trademark are exempted from compliance with most business opportunity laws.
Franchise Relationship Laws
Franchise relationship laws are generally intended to provide for a fair procedure by which a franchise is terminated, not renewed, or transferred by the franchisee. These laws are designed to protect the consumer (franchisee) and compliance with these laws therefore generally is the franchisor's responsibility. Most franchise relationship laws provide the types of situations in which the franchise can be terminated and generally require "good cause" for any termination by the franchisor. In addition, these laws provide that a certain type of notice be provided to the franchisee within certain time limits, in order for the termination to be effective. Some laws also provide the franchisee with a certain time in which to cure most defaults before the franchise can be terminated. Most franchise relationship laws contain similar provisions governing the renewals and transfers of franchises. Franchise relationship laws will govern the termination, non-renewal and transfer of franchises even if the franchise agreement has conflicting provisions.
At the present time, there is no federal franchise law that governs the ongoing relationship between a franchisor and franchisee. There are 20 states that have franchise relationship laws, including Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, South Dakota, Virginia, Washington, Wisconsin, and the District of Columbia.
Consumer Protection Laws and Unfair Trade Practices Laws (Little FTC Acts)
Many states have consumer protection-type laws that are designed to protect the residents of the state from deceptive or unfair trade practices. Franchisees may use these laws to protect themselves from actions of their franchisor, if the franchisees can establish that the franchisor engaged in fraudulent, deceptive or abusive business practices. Not all of these state laws will provide a remedy to a franchisee, since some states' laws provide a remedy only to individuals (not to corporations or other business entities) and some states' laws provide protection only for "consumer transactions", which may or may not include the purchase of a franchise or the ongoing relationship between a franchisor and franchisee.
While the required proof in a claim under an unfair and deceptive trade practice law will vary by state, the victim will generally have to prove the following:
- That the franchisee is a person or entity protected by the state's law
- That the franchisee sought or acquired goods or services by purchase or law (the purchase of the franchise is the good or service), and
- The goods or services acquired form the basis of the complaint.
If a franchisee is successful in bringing a claim under a state unfair and deceptive trade practices act, the franchisee could obtain any of the following remedies:
- An injunction prohibiting the franchisor from engaging in the offensive behavior in the future
- Compensatory damages for the franchisee's actual damages
- Punitive damages (damages designed purely to punish the offender), which may equal up to 3 times the compensa tory damages
- Recovery of attorneys' fees, and
- Recovery of costs incurred to pursue the litigation.
State Offices Administering Franchise Disclosure Laws
Fifteen states have franchise investment laws that require franchisors to provide pre-sale disclosures, known as "offering circulars," to potential purchasers. Thirteen of these state laws treat the sale of a franchise like the sale of a security. They typically prohibit the offer or sale of a franchise within their state until a franchise offering circular has been filed on the public record with, and registered by, a designated state agency. Two of the fifteen states do not require a filing of offering circulars, as noted in the list of state offices below.
These state laws give franchise purchasers important legal rights, including the right to bring private lawsuits for violation of the state disclosure requirements. We encourage potential franchise purchasers who reside in these states to contact their state franchise law administrators for additional information about the protection these laws provide.
California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, Wisconsin
Department of Corporations
1515 K Street
Sacramento, CA 95814
Franchise & Securities Division
State Department of Commerce
P.O. Box 40
Honolulu, HI 96813
Office of Attorney General
500 South Second Street
Springfield, IL 62706
Office of Secretary of State
302 W. Washington St.
Indianapolis, IN 46204
Division of Securities
200 St. Paul Place - 20th Floor
Baltimore, MD 21202
Consumer Protection Division
PO Box 30213
Lansing MI 48909
Department of Commerce
133 East Seventh St.
St. Paul, MN 55101
Franchise & Securities Division
State Department of Law
New York NY 10271
Office of Securities Commission
600 East Boulevard - 5th Floor
Bismarck, ND 58505
Corporate Securities Section
Dept. of Insurance & Finance
Labor & Industries Bldg.
Salem, OR 97310
Division of Securities
233 Richmond St. - Suite 232
Providence, RI 02903
Division of Securities
910 E. Sioux Avenue
Pierre, SD 57501
State Corporation Commission
1300 E. Main St.
Richmond, VA 23219
The Department of Financial Institutions
P.O. Box 9033
Olympia, WA 98507-9033
Voice: (360) 902-8760
Fax: (360) 586-5068
P.O. Box 1768
Madison, WI 53701