Franchise relationship laws regulate franchisor behavior after the purchase of the franchise. Generally, they establish limitations on a franchisor’s rights regarding terminating the franchise, failing to renew the franchise, or failing to approve a franchisee’s transfer of ownership. However, these laws do not exist in every state and the requirements can vary greatly. Franchisors should speak to legal counsel regarding when and how these laws apply to avoid liability. Franchisees should also consult an experienced franchise attorney to understand what protections they may have under relationship laws and how to enforce them.
Federal and State Laws
There are no franchise relationship laws that generally apply at the federal level, but there are statutes that regulate certain types of businesses such as automobile dealerships and gas stations.
Some states, Puerto Rico and the U.S. Virgin Islands have relationship laws that apply broadly regardless of industry. However, the rules are complex and inconsistent. As such, franchisors operating franchises in multiple states should review these laws carefully.
The restrictions in franchise relationship laws generally fall into certain categories. These include:
- Good cause to terminate. Many states provide that the franchisor may not terminate the franchise without “good cause.”
- Notice. A franchisor may be required to give the franchisee certain written notice prior to terminating, canceling or failing to renew a franchise.
- Opportunity to cure. Where a franchisee has breached the franchise agreement, a franchisor may be prohibited from terminating the agreement until the franchisee has been given notice and a designated period of time to cure the default.
- Buyback. In the event of termination of the franchise agreement, the franchisor may be required to re-purchase equipment, inventory, and/or furnishings from the franchisee.
- Transfer of ownership. Franchisors may be prohibited from rejecting a sale to another franchisee except if certain criteria are met.
Some states also prohibit other activities such as discriminating between franchisees, restricting changes in management without good cause, and encroaching on a franchisee’s territory.
As noted above, each state is different in what limitations apply and when. For example, the New Jersey Franchise Practices Act (N.J. Stat. Ann. Sections 56:101, et al.) states that a franchisor is required to give franchisees at least 60 days advance notice of termination, cancellation or nonrenewal of the franchise and the reasons for such action. Franchisors also must have good cause to terminate, cancel or fail to renew a franchise. For the purposes of this law, good cause is defined as the failure by the franchisee to substantially comply with its obligations under the agreement.
New Jersey also addresses a franchisee’s transfer of ownership. Franchisees must provide written notice of their intent to transfer or sell. Franchisors then have 60 days to approve or reject the transfer. If rejected, the franchisor must have material and bona fide business reasons as to why the proposed transferee is unacceptable.
The Connecticut Franchise Act (“CFA”) is similar to New Jersey’s law in prohibiting a franchisor from terminating, canceling or failing to renew a franchise except for “good cause.” In addition, franchisors must give at least 60 days advance notice. However, unlike New Jersey, Connecticut has a buyback provision that states franchisors must pay fair and reasonable compensation for the franchisee’s inventory, supplies, equipment and furnishings purchased by the franchisee from the franchisor or its approved sources.
Both of these laws contain other limitations demonstrating why it is necessary to consult an attorney.
Conclusion: Franchise relationship laws are varied and complex. In order to avoid liability or enforce your rights under franchise relationship laws, speak to a knowledgeable franchise lawyer. Lusthaus Law has extensive experience advising franchisors and franchisees regarding franchise relationship laws. Contact us to discuss your franchise.