There are franchise laws and regulations that protect franchisees from being defrauded and unfairly losing their investment. Today we will provide brief overviews of the FTC Franchise Rule, State Disclosure Laws and State Relationship Laws. By understanding how these laws relate to the Franchise Disclosure Document (“FDD”), you – the franchisee – will have a better understanding of your rights before operating any location.
The FTC Franchise Rule
The Federal Trade Commission Rule on Franchising (“FTC Rule”) gives prospective purchasers of franchises material information to help them weigh the risks and benefits of such an investment. The FTC Rule requires franchisors to provide all potential franchisees with an FDD containing 23 specific items of information about the franchisor and its officers, the offered franchise, the estimated investment and the status of franchise and corporate units. The FTC Rule also protects franchisees by prohibiting misrepresentations by franchise sellers.
The FTC seeks public comment on a wide range of questions and issues in an effort to make periodic updates to the FTC Rule. The most recent call for feedback was in 2019 when the public was offered the opportunity to offer direct insight to the FTC on topics such as:
- Whether prospective franchisees have benefitted from the FTC Rule,
- Whether it should be modified,
- The costs of compliance,
- If the FTC Rule should be amended to account for technological or economic changes, and more.
The Franchise Disclosure Document
Provision of the FDD is required by the FTC Rule and state disclosure laws. It is required under federal and state law to enable franchisees to make informed decisions about whether to purchase the franchise. This documentation is crucial to protecting franchisees and they should seek legal representation to ensure they are well-informed before entering into an agreement.
The FDD contains items of information to assist prospective franchisees in evaluating the franchise offering. The FDD must include mandated information about the franchisor, the business to be operated and the franchisee’s initial investment as well as agreements that the franchisee may be required to sign. There is obviously more to review, and a detailed description of all 23 FDD items is available in a previous Lusthaus Law post.
State Franchise Sales Laws
Some states, including New York, require franchisors to register their FDD or file a notice prior to offering a franchise within that state. Franchisors may also have to file a copy of all proposed advertising prior to using the advertising in the state. Other state requirements may include filing a Franchise Seller Disclosure Form for each person who will be involved in the sale of franchises and separate registration for third-party brokers.
Laws vary by state, and a franchise lawyer will help verify which laws apply. Franchisors may not advertise, make offers to sell, or make actual sales, in any state unless they have complied with these rules.
Franchisees should maintain a healthy skepticism of claims regarding potential or historical unit earnings, simply because you may not always reach those revenue levels. However, franchisors are not required to include a financial performance representation in the FDD – for several reasons. If no financial performance representation is included, then discussing projected revenues is prohibited – whether it is spoken or written on the back of the proverbial cocktail napkin. If a performance representation is included in the FDD and the numbers are ultimately inaccurate or misleading, the franchisee can sue and the franchisor and its owners may be held personally liable and even face criminal charges.
Franchise Relationship Laws
Franchise relationship laws regulate franchisor behavior following the purchase of the franchise. They establish limitations on a franchisor’s rights regarding terminating the franchise, failing to renew, or failing to approve a franchisee’s transfer of ownership.
As previously discussed, franchise relationship laws do not exist in every state and the requirements can vary. These laws spell out the liability that franchisors face, but are also critical for franchisees to understand.
Lusthaus Law Can Help
Franchisees must be aware of how their businesses may be affected by the franchisor’s requirements, because operating a franchise is often a long-term relationship.
Lusthaus Law P.C. has a proven record of assisting franchisees and franchisors with their business operations at every stage of development. We are committed to our clients’ success and keep our finger on the pulse of the industry to ensure that we provide the best and most up-to-date franchise law counsel. Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path towards your franchise’s successful future.
