Hot Topics in Franchise Law

There are a few areas that are generally contentious between the franchisee and the franchisor, no matter how good the franchise is, how successful the operation is, or how profitable it is for everyone. A franchise attorney can help the franchisee navigate what can be sticky spots between the franchisee and the franchisor, as well as franchise law and other areas of law that are relevant to a business operation.

Territorial Limitations

A successful franchisee will want to reduce the competition, especially from competing franchise or corporate locations. The franchisor will want the franchise to be as profitable as possible, so that usually means additional locations.

The franchisor and franchisee may disagree about the amount and locations of franchises for each owner. The franchisor may have a development agreement or territory limitations, which specifically prohibit or require the franchisee to operate or not operate in certain locations.

The franchisee and franchisor each want as much control as possible, and circumstances and finances change. A good franchise lawyer can assist the franchisee in protecting its rights to its territory and make sure the development agreement is understood and equitable.

Vicarious liability

If a franchisee acts or fails to act in a certain way, how much responsibility does the franchisor have for the franchisee? The franchisor will want the control and the benefits, but will also want to reduce its liability and risk, especially financially. If the franchisee acts at the instruction if the franchisor, for example,

In a trademark issue, how much responsibility does the franchisor have when the franchise carries out the instruction? These questions are very technical and very situation and fact-specific.

A franchise attorney with a good business background can help guide a franchisee through this risk assessment. The risk that the franchisor is willing to share with the franchisee, since the franchisor has the brand reputation, is important to assess, as well as the information in the FDD that discusses any lawsuits.

Social media
Everyone knows that social media is a great way to grow exposure of a brand and to gain customers through advertising and other promotional methods. A social media account promoting a franchise is different and may have rules and restrictions about what can, what cannot, and what must be posted.

For example, a franchisee shouldn’t make false claims, leave false reviews (for their business or anyone else’s) and should not hassle or harass other brands. The social media account may not be completely the property of the franchisee, and there is no expectation of privacy.

Also, what happens if the franchisee ceases to operate? There are a lot of abandoned social media accounts (sometimes called orphan accounts) that can throw off search results and damage the reputation of a brand, as well as have other legal or financial consequences.

The franchisee, the franchisor and the business operations of the franchisee might all be in different locations, or different states. Not only can this bring up issues of jurisdiction or venue (which law controls in the event of a dispute), but there are also financial issues, especially tax issues, that can change completely, possibly costing more money than anticipated, depending on what’s agreed to in the franchise relationship.

The state where the business entity is incorporated might not be where it is operating, and so there are compliance issues that have to be considered, as well as tax consequences in each state, as well as federal issues.

The franchise attorney will know about the different tax issues to be aware of and can help the franchisee make an informed business decision about the consequences of taxation and corporate governance issues related to the operations.

Federal franchise law requires 23 different items that have to be disclosed in a franchise in order to be compliant. States have individual registration and filing requirements, as well.

“I didn’t know” or “they didn’t tell me” isn’t an excuse- the franchisee is responsible for complying with state, federal and location regulations, regarding the franchise and the operation of a business, as well as franchise law and rules set out by the Federal Trade Commission (FTC). It’s a lot to keep track of, and the franchisee wants to focus on operations and profit, not compliance.

So it’s important for the successful franchisee to have a team in place, including a good franchise attorney that can make sure the operation is legal and stays that way. There’s also the franchisor, which must also comply with franchise and business laws.

The franchisor has also created the franchise disclosure document (FDD), and the franchisee must comply with that as well! A three-way agreement, such as with a landlord or another vendor, can make compliance and business issues tricky, but that doesn’t make them any less important.

I hope this information has been helpful.  I’m Jenna Zebrowski, and I’m a real estate lease lawyer, but I’m not your lawyer yet.  This information is provided not as specific counsel, but as general information to help you make an informed decision about your commercial lease.  Remember, hiring a lease lawyer in often much cheaper than getting in a bad business situation.  Give me a call if I can help (817) 841-5762.


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