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Unique Aspects of Franchise Laws

The U.S. federal government and the governments of many states have laws that govern franchising. Violating these laws will expose you, as a franchisor, to costly litigation, damages, and penalties.

Complying with franchising laws is critical for risk minimization. To help ensure that you comply with the federal and state franchise laws, you should consult The Johnson Franchise Law Firm before you begin the franchising process.

Changes to the Franchise Rule

In 2007, the U.S. Federal Trade Commission (the “FTC”) issued revised regulations governing franchise disclosure. These rules are found in the U.S. Code of Federal Regulations, 16 C.F.R. Part 436. These rules are referred to, collectively, as the “FTC Franchise Rule” or, more simply, as the “Franchise Rule.”

The Franchise Disclosure Requirement

The Franchise Rule requires most franchisors to provide prospective franchisees with information. This process is called “disclosure.” There are some exemptions; i.e., situations where a franchisor is selling a franchise, but where the franchisor does not have to comply with the Franchise Rule. These exemptions include:

  • A minimum payment exemption (where required payments to a franchisor total less than $500 during the first six months of operation)
  • A fractional franchise exemption (where the franchisee’s management already has experience in the business being franchised and the sales of the franchise will be 20% or less of the franchisee’s revenues)
  • A large franchise investment exemption (where the investment in the franchise is at least $1 million, excluding the cost of land and franchisor-provided financing)
  • A large franchisee exemption (where the franchisee is likely to be a particularly sophisticated business operator)

The Franchise Rule specifies the form and content of the disclosures a franchisor must give. The disclosures are shown in a “Franchise Disclosure Document,” or an “FDD.” The predecessor of the FDD was the “Uniform Franchise Offering Circular,” or the “UFOC.” The Franchise Rule also specifies the timing of delivery of the FDD. The federal Franchise Rule is the law in all jurisdictions in the United States.

The Franchise Disclosure Document

The FDD must disclose literally hundreds of facts about the franchisor, the franchise transaction, and the franchise documents. These facts are consolidated into sections of the FDD called “Items.” The FDD must contain 23 Items, including:

  • A description of the franchisor and any parents, predecessors, and affiliates
  • Profiles of key management and staff personnel, and their business experience
  • The franchisor’s litigation and bankruptcy history
  • Initial and ongoing fees required to operate the franchised business
  • The amount of the franchisee’s initial investment
  • Restrictions on the franchisee’s purchases of goods and services
  • The franchisee’s obligations
  • Financing, if any, that the franchisor may offer prospective franchisees
  • Assistance the franchisor provides
  • The parties’ territorial rights and obligations
  • The intellectual property, like trademarks and copyrights, associated with the franchise
  • Renewal and termination provisions
  • Information about franchised and company-owned outlets
  • Audited financial statements

At The Johnson Franchise Law Firm, we advise you how to avoid violating the franchise laws. We also draft your franchise documents and update them, and keep your state registration filings current. As franchise attorneys, we advise you on the complex exemptions that may be available to you under the federal Franchise Rule and state franchising laws.

Contact our franchise law firm

At The Johnson Franchise Law Firm, our focus is on franchise laws. With over 20 years of experience, attorney Rick Johnson understands the ins and outs of franchising laws and guides your company away from costly pitfalls. To take your business to the next level through domestic or international franchise development, please contact The Johnson Franchise Law Firm today.