Overview of Franchise and Dealership Law

A franchise is a licensing agreement between a franchisor and franchisee. Franchisees pay fees and royalties to the franchisor for training, support, and use of the trademark license. The franchise agreement spells out the rights and obligations of each party, including termination and renewal restrictions.

Federal and state laws regulate franchise registration, disclosure requirements, and dispute resolution. Under the Federal Trade Commission (FTC) Franchise Rule, franchisors must provide a Franchise Disclosure Document (FDD). Disclosures provide transparency for the business model, so the franchisee can make an informed decision before signing an agreement. For more information about franchise and dealership law, contact an experienced attorney.

What Is Franchise Law?

Franchise law is the legal practice area related to franchise relationships, contracts, and disputes. A franchise is a licensing relationship in which the franchisor licenses its business format package to a franchisee who operates the business.

McDonald’s, Subway, and KFC are all well-known franchises, though franchises can include businesses other than fast food restaurants. Other types of franchise businesses include hotel chains, car rental companies, cleaning services, and real estate agencies.

Franchise laws protect potential franchise owners from unfair business practices, misrepresentation, and uneven bargaining power. Franchise laws have disclosure requirements so potential investors can make an informed decision about the risks and benefits.

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What Is Dealership Law?

Dealership law is related to franchise law. It involves car dealership franchises.

Vehicle manufacturers provide support, brand recognition, and warranties. The individual dealers run the day-to-day operations of a dealership. Automobile dealerships have additional state and federal regulations related to buying, selling, financing, and repairing motor vehicles.

Understanding the Franchisor-Franchisee Relationship

The franchisor establishes a business system and offers to license the system to others. The franchisee gets a license from the franchisor to start a business. The relationship between the franchisor and franchisee is based on the franchise agreement, which lays out the basic rights and obligations of the parties.

Under FTC franchise rules, a franchise is a continuing commercial relationship that uses the franchisor’s trademark, requires franchise payment, and over which the franchisor exerts significant control or provides assistance.

The franchise owner creates the system, provides instructions for operation, and monitors the franchise performance. Franchisors and distributors offer training, support, and marketing for their brand. The franchisee takes care of daily operations to operate their own local business. Franchisees pay for the initial investment and continue to pay royalties to the franchisor.

Most dealer franchises are not one-time operations. There is an ongoing relationship between the franchisor and franchisee. The franchisor continues to provide marketing, support, and brand protection. The franchisee must meet franchise standards and continue to pay royalties and franchise fees.

The Franchise Disclosure Document (FDD)

The Franchise Disclosure Document (FDD) is a legal disclosure that the franchise must provide to prospective franchisees before entering a business relationship. The disclosure requirement provides basic information about the terms of the franchise so the franchisee can make an informed decision.

Under the Federal Trade Commission Amended Franchise Rule, a franchisor must include 23 items in the FDD, including information about:

• Franchisor, parents, predecessors, and affiliates
• Business experience
• Financial statements
• Litigation and bankruptcy
• Initial fees and estimated investments
• Territory and franchisee’s obligations
• Franchise termination, renewal, transfer, and dispute resolution

Key Federal and State Franchise Regulations

Franchise laws can involve federal, state, and local law. Federal franchise laws mandate minimum disclosure standards to protect potential investors.

State laws vary in franchise filing and registration requirements. About half of states do not have specific regulations for franchise offerings. The other half of states required filing a franchise with the state or registration and annual reporting. Franchise registration states require initial filings and annual renewal filings with the state. States requiring franchise registration include California, Illinois, and New York.

Some states, like Texas, only require a one-time filing with the state. Other states like Florida and New Jersey don’t require state filing, but still have state franchise practice laws. To understand your state franchise laws, talk to a local attorney about your rights and registration requirements.

Common Legal Disputes in Franchising

Franchise litigation involves disputes between the franchisee and franchisor. Many disputes involve the limitations of franchise and dealership agreements. Franchise agreements have restrictions on territories, competition, renewal, termination, and sale of franchises.

Common types of legal disputes include:

• Breach of contract
• Noncompliance with franchise standards
• Unpaid licensing and royalties fees
• Failure to disclose material information in the FDD
• Intellectual property infringement
• Territorial disputes
• Misrepresentation or fraud
• Wrongful nonrenewal

Franchise parties can resolve legal issues through the civil court system. However, some franchise agreements require the parties to go through binding arbitration instead of litigation. Arbitration is generally less expensive and takes less time to resolve than litigation. It is also confidential.

Why You Need a Franchise Law Attorney

Starting and running a franchise involves a lot of money, time, and effort. They can be great business opportunities but involve serious financial risk. A franchise law attorney can help you protect your investment. Before signing a franchise agreement, an attorney can review the disclosure documents and help you understand the risks and benefits involved. An attorney can also review the franchise contract to make sure you understand what you’re getting into.

If there are disputes with the franchisor or distributor, your attorney can represent your best interests. An attorney can explain your legal options and take legal action to resolve any disputes. Your attorney can also negotiate a settlement so you can avoid going to court. Contact a local franchise law attorney for legal advice.