Complying with Franchise Relationship Laws

Franchise Relationship Laws

Most franchise laws are designed to protect franchisees from various actions by franchisors because typically franchisors have more bargaining power. Franchise disclosure laws address concerns before a franchisee buys a franchise, while franchise relationship laws regulate certain franchisor behavior after purchase of the franchise. Franchise relationship laws are more varied and complex than disclosure laws. As a result, it is important to consult with an experienced franchise attorney to understand when and how they apply.

Federal and State Laws

Unlike the Federal Trade Commission’s disclosure rule, there is no franchise relationship law that generally applies at the federal level. However, there are several statutes specific to a select group of franchisees, like automobile dealerships and gas stations.

At the state level, however, franchisees have greater protections as several states have specific franchise relationship laws. Puerto Rico, the U.S. Virgin Islands, and the following 19 states now have laws governing franchise relationships: Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Maryland, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, Virginia, Washington and Wisconsin.

Prohibited Actions

While no two state laws are alike, they all generally establish limitations on a franchisor’s rights regarding:

  • Terminating the franchise
  • Failing to renew the franchise
  • Failing to approve a franchisee’s transfer of ownership.

For example, many states require that a franchisor have good cause to terminate the franchise and give the franchisee written notice of a default and an opportunity to cure. In addition, there may be a buyback requirement in the event of termination. However, what qualifies as good cause, the notice and cure period, and when/if the buyback applies varies by state. 

Additionally, some states prohibit other franchisor practices including:

  • Restricting free association among franchisees
  • Discriminating between franchisees
  • Prohibiting changes in management without good cause
  • Encroaching on a franchisee’s territory
  • Receiving payment from third parties based on the business dealings of such parties with franchisees
  • Requiring litigation or arbitration outside the franchisee’s state.

Franchisor Liability

In order to avoid liability under franchise relationship laws, franchisors must consult legal counsel to determine whether their actions are regulated by statute and what procedures must be followed. Franchisees have the right to sue a franchisor who fails to comply with federal or state laws. 

If you are a current or prospective franchisor, it is essential to understand the laws and regulations that apply to your franchise. Lusthaus Law has extensive experience advising franchisors regarding franchise relationship laws. Contact us to discuss your franchise.