Federal franchise law is complex and nuanced. And to complicate matters further, franchising laws vary from state to state.
For a detailed understanding of the legalities of becoming a franchisor or franchisee, it’s important that you consult with an experienced business and franchise lawyer in your community.
Meanwhile, it may be helpful for you to understand some of the basics of federal franchising law.
What Is a Franchise Under Federal Law?
Franchising is regulated by the U.S. Federal Trade Commission (FTC). The FTC considers a franchise to be an ongoing commercial relationship or arrangement characterized by three key elements:
- In a franchise system, a franchisee is given the right to operate a business or distribute goods or services associated with the franchisor’s trademark.
- The franchisee’s methods of business operation are under the authority of the franchisor. Franchisors are legally capable of exerting a significant amount of control over or assisting franchisees with managing their operations.
- As a condition of opening a franchise, federal law dictates that franchisees must make a payment to the franchisor or their affiliate.
What Does Federal Franchise Law Regulate?
Franchise law is divided into three general categories: disclosure, registration and relationship.
- The FTC regulates disclosure laws, and they cover the period prior to the franchise sale. Examples include regulations on the information the franchisor is required to reveal prior to the sale, the mandatory pre-sale cooling-off period and prohibited sale practices.
- Registration laws regulate any necessary official registrations of the franchise system. However, registration is controlled at the state level, not by the FTC.
- Relationship laws are also regulated by the states, rather than the federal government. These laws govern specific aspects of the franchisor-franchisee relationship. For instance, state law may dictate grounds for termination and renewal as well as equal treatment of franchisees.
What Happens if a Franchisor Violates Federal Franchise Law?
A violation of franchise law, such as a franchisor failing to provide all required disclosures or making misrepresentations to prospective franchisees, can result in a number of stringent penalties.
Government punishments for federal law violations can include fines, frozen assets and monetary damages for victims. Penalties can be applied to the franchisor or to the directors and managers of the franchising system. In some cases, franchisors can be banned from engaging in franchising.
At the state level, violations are typically treated as a deceptive and fraudulent business practice. Laws vary by state as to whether this is considered a misdemeanor or felony.
Understanding the basic premise of franchise law is helpful for anyone interested in purchasing a franchise, or franchising a business concern. However, to fully protect your legal and financial interests, consult with a business lawyer who specializes in this complex aspect of the legal system.
The experienced professional attorneys at Franchise & Business Law Group can explain state and federal franchise law in further detail and assist you in your franchising and business endeavors. To learn more, contact our Salt Lake City, Utah, office to schedule a consultation with one of our franchise law attorneys.