Inadvertent Franchising

Inadvertent Franchising

The complexity of franchise laws means that a company may be franchising without realizing it. Parties may think they are entering into a distribution, license or partnership agreement but are actually undertaking a franchise relationship. This inadvertent franchising can result in significant penalties. To avoid this, franchisors must understand and comply with the law. Lusthaus Law advises franchisors on how to prevent or mitigate the damage from franchising mistakes.

Is it a Franchise?

Although different states have different definitions, generally, a franchise is a form of licensing arrangement whereby one party licenses another party’s business system and trademark for a fee or payment. Therefore, as soon as someone pays you a fee to use your trademark and system of operation, you may have created a franchise relationship. Even if someone just invests in your concept and together you open a store, service center, restaurant, etc., you may have sold your first franchise.

Lusthaus Law helps business owners determine whether they want to franchise their business and either franchise it properly or avoid an inadvertent franchise.

What are the Consequences of an Inadvertent Franchise?

The problem in accidentally creating a franchise is that before a franchise opportunity can be legally offered for sale, the seller must prepare a Franchise Disclosure Document (FDD) which must include specific state- and/or federally-mandated information. In addition, in many states, the FDD must be registered with the state or a notice must be filed before it can be shared with any prospective franchise purchaser. If the franchisor fails to comply with these laws, consequences may include injunctions, civil penalties, and criminal penalties. In addition, any franchisee purchasing a franchise without timely receipt of the FDD, may be able to bring a lawsuit against the franchisor for rescission and restitution. If the franchisee wins, the franchisor may be required to reimburse it for its entire investment costs.

How Can You Remedy an Inadvertent Franchise?

In the event you have violated franchise laws, there are several potential remedies. The best option depends on your particular circumstances. An attorney can advise you on whether you should self-report and under what circumstances to inform your franchisees of those potential violations in order to minimize your risks

Ignorance of the law is no excuse. Before you sell your business, enter into a partnership, or license trademark or distribution rights, contact an experienced attorney who can advise you regarding whether you may be creating a franchise. If the transaction is complete and you are concerned you may have accidentally sold a franchise, get legal representation immediately. Similarly, if you think you purchased a franchise without first receiving a franchise disclosure document, talk with a lawyer about your rights and remedies.

Lusthaus Law has advised countless franchisors and franchisees about complying with the law and protecting their franchise. Contact us today regarding inadvertent franchising.