What Is Franchise Law?
There is federal franchise law, which is governed by the FTC, or Federal Trade Commission. The individual states may also have additional state-specific requirements for franchises, and there are common law judicial decisions that also affect franchise law.
Franchise law controls specific aspects of the franchisee-franchisor relationship, such as franchise registration in a state, when required, and the offer and sale process for franchises, as well as their transfer, termination and non-renewal.
Non-franchise areas of law, such as employment, anti-trust, and intellectual property are also important to the operation of a franchise, and the location of the franchise operation can affect which law is applicable.
The laws of the state where the franchise is actually doing business, as opposed to where the franchisor or franchisee is located or lives, is what dictates what law will apply. Different locations of the same franchise could trigger different state laws. There are many hot topics in franchise law that you should look into.
The franchisor has developed a system for selling its goods or services and has standardized the system, so that the consumer will get a consistent experience at all of its locations, even with different operators.
The local operator bears the risk in the business operation, but is paying to reduce that risk by using the franchise system. The local franchisee will implement the system created and approved by the franchisor and maintain the quality level the franchisor and the customers expect. The franchisee has to operate within the restrictions of the system that the franchisor has created and marketed.
The FTC is in charge of protecting consumers and ensuring economic competition in the marketplace. Franchise law developed because while the franchisee isn’t exactly a consumer, there is an overall societal interest in economic fairness and full disclosure of information to make an informed decision.
The franchisor knows all about the operation of its business and the performance of the other locations, but the franchisee doesn’t have the same access to the same level of information. It’s important to understand the franchisor agreement.
The franchisee is still responsible for making the business determination about the investment decision to own a franchise location. The documentation provided by the franchisor must have certain information, but there is not requirement that the information be easy to understand.
A savvy business owner will understand that there is risk in every business transaction and work with experienced legal counsel to understand and reduce the risk whenever possible.
A franchise attorney can assist in reviewing the FDD, or franchise disclosure document, and the operation manual, to make sure the potential franchise understands exactly what the investment situation is and what the liabilities are for entering the franchise, as well as the risk in operating one.
The attorney will not be able to bring the risk to zero, but will be able to represent the franchisee as an impartial advocate. The franchisor has multiple attorneys protecting its interests, and a sophisticated franchisee will also have its own counsel to assist in information gathering and decision making.
There will be many legal questions now and in the future, and it’s important to have a good relationship with a franchise attorney that can act as a guide and resource for future consultation.
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.
Other Helpful Questions About Franchise