Franchising Law: Who Does It Apply To?

Franchise laws are a combination of federal and state laws that govern the registration, offer and sale of franchises, as well as the legal relationship between franchisors and franchisees. The Federal Franchise Rule is the overarching federal franchise law that governs all franchise transactions throughout the United States. The Federal Trade Commission (FTC) enforces the Federal Franchise Rule, which requires franchisors to disclose a franchise disclosure document before the offer or sale of any franchise. The franchise disclosure document (FDD) is a comprehensive agreement that includes detailed information about the franchisor and the overall franchise opportunity. The FDD must be provided to potential franchisees at least 14 calendar days before they sign any agreement or pay any money to the franchisor.

In addition to the Federal Franchise Rule, each state has its own set of franchise laws that must be followed. Differing by state, state franchise laws could require additional disclosures and documentation or provide further protections for franchisees. Franchisors must comply with both federal and state franchise laws to legally offer franchises in the United States.

The Federal Trade Commission (FTC) enforces the Franchise Rule, which is an overarching federal law that governs all franchise transactions in the United States

The Federal Trade Commission (FTC) enforces the Franchise Rule, an overarching federal law that governs all franchise transactions in the United States.

The FTC's Franchise Rule requires franchisors to provide prospective franchisees with a franchise disclosure document (FDD) containing detailed information about the franchisor and the franchise opportunity. This includes the franchisor's history, how the franchise system operates, the required initial investment, ongoing royalties and other fees, territory restrictions, and other important details. The FDD is provided to potential franchisees before they sign any agreement or pay any money to the franchisor.

The FDD is intended to help franchisees make an informed decision about the franchise and whether or not to invest in it. The FTC can take legal action against franchisors that violate the Franchise Rule, including those that fail to provide the required disclosure documents, provide incomplete disclosure documents, or misrepresent information.

In addition to the Franchise Rule, each state has its own set of franchise laws that must be followed. These laws could require additional disclosures and documentation or provide further protections for franchisees. Franchisors must comply with both federal and state franchise laws to legally offer franchises in the United States.

The FTC Franchise Rule requires franchisors to provide a franchise disclosure document (FDD) to potential franchisees before the offer or sale of any franchise

The FTC Franchise Rule requires franchisors to provide a franchise disclosure document (FDD) to potential franchisees at least 14 days before they make any payment or sign a binding agreement. This is to ensure that franchisees have the information they need to make an informed decision about investing in a franchise. The FDD contains 23 items of information, including details about the franchisor's history, the franchise system, the required initial investment, ongoing royalties and fees, territory restrictions, and more.

The FDD is a crucial document that helps franchisees understand the risks and benefits of investing in a particular franchise. It is important for franchisees to carefully review the FDD with the help of legal and financial professionals before making any commitments.

The FTC has the authority to investigate and take legal action against franchisors who fail to comply with the Franchise Rule, including those who do not provide the FDD, provide incomplete or misleading information, or engage in other deceptive practices. Non-compliance with the Franchise Rule can result in fines and private lawsuits.

In addition to the FTC Franchise Rule, there are also state-specific franchise laws that franchisors and franchisees must comply with. These laws vary by state and may include additional disclosure requirements, protections for franchisees, and registration or filing procedures. It is important for franchisors and franchisees to be aware of and comply with both federal and state franchise laws to ensure a smooth and legal franchising process.

The FDD must include information about the franchisor's history, how the franchise system operates, the required initial investment, ongoing royalties and other fees, territory restrictions, and other important details related to the franchise

The Franchise Disclosure Document (FDD) is a legal document that must be provided to potential franchisees by the franchisor at least 14 days before the sale of a franchise or the receipt of any fees. The FDD is a comprehensive document that includes detailed information about the franchisor and the franchise opportunity. The FDD must be registered with a state examiner in "franchise registration states" before the sale of a franchise within that state.

The FDD must include the following 23 disclosure items:

• Information about the franchisor, any parent companies, and predecessors.
• Information about the franchisor's management team, including their employment history.
• Litigation history of the franchisor, its affiliates, predecessors, and management team.
• Bankruptcy history of the franchisor, its affiliates, predecessors, and management team.
• Initial fees that a franchisee must pay to the franchisor before opening the franchised business.
• Ongoing fees that a franchisee must pay to the franchisor.
• A low to high estimate of the cost for a franchisee to establish and open the franchised business.
• Products and supplies that the franchisee must purchase from the franchisor or designated suppliers.
• A summary of the franchisee's obligations under the franchise agreement.
• Whether the franchisor offers franchisees financing for initial fees.
• The type of assistance, advertising requirements, and computer systems that the franchisor will provide to the franchisee.
• Whether the franchisee will be awarded a protected territory, and how the territory will be determined.
• Information about the trademarks of the franchise system, including registration status.
• Information about any patents, copyrights, and other proprietary information related to the franchise system.
• Obligations, if any, of the franchisee to participate in the day-to-day operations of the franchised business.
• Control the franchisor has over what the franchisee may or may not sell as part of the franchised business.
• Legal rights and obligations related to the renewal, termination, and transfer of the franchised business, and how legal disputes must be resolved.
• Whether there are any celebrities or public figures hired to promote the franchise system.
• Whether the franchisor is making any financial performance representations, and if so, specific details.
• A summary of the number of franchised and corporate outlets over the past three years and a projection of future openings in the next year.
• The franchisor's financial statements.
• A list of all contracts that a franchisee must sign with the franchisor, including a sample franchise agreement.
• Two copies of the receipt page that the franchisee must sign to confirm receipt of the FDD.

The FDD must be provided to franchisees at least 14 days before they sign any agreement or pay any money to the franchisor

The Franchise Disclosure Document (FDD) is a legal document that must be provided to franchisees at least 14 days before they sign any agreement or pay any money to the franchisor. This is a requirement of the Federal Trade Commission's Franchise Rule, which governs all franchise transactions in the United States. The FDD contains detailed information about the franchisor and the franchise opportunity, including the franchisor's history, the required initial investment, ongoing royalties and other fees, territory restrictions, and other important details. The FDD helps franchisees make an informed decision about the franchise as a whole and whether or not to invest in it.

The FTC can take legal action against franchisors that violate the Franchise Rule

The FTC Franchise Rule requires franchisors to make key disclosures upfront before people make a major investment. The FTC Act prohibits material misrepresentations about any business opportunity, including franchises. The FTC Bureau of Consumer Protection holds franchisors accountable for illegal practices.

The FTC Franchise Rule is the overarching federal franchise law that governs all franchise transactions throughout the United States. The Federal Trade Commission enforces the Federal Franchise Rule. The FTC Franchise Rule imposes a pre-sale disclosure requirement that applies to all states, obligating franchisors to furnish prospective franchisees with information and data regarding the material terms of the franchise relationship.

The FTC has taken action to ensure that the franchise business model remains a ladder of opportunity for honest small business owners. The FTC has also taken steps to increase protections for franchisees, including issuing a ban on Non-Compete Clauses. The FTC has published guidance reminding franchisors that it is illegal to charge and collect undisclosed fees.

The FTC Franchise Rule does not provide a private right of action for franchisees to sue their franchisors for disclosure violations. However, franchisees may be able to use state statutes that prohibit unfair or deceptive practices to challenge conduct that violates the Franchise Rule.

Frequently asked questions