If you are a new franchisor, you must be aware of not only the federal franchise law that requires disclosure of certain information to a prospective investor in a franchise, but you must also be aware of state franchise laws.
FEDERAL FRANCHISE LAW
Federal law is governed by the Federal Trade Commission’s Franchise Rule and the case law and opinions and comments issued by the Federal Trade Commission on the Rule. The Rule requires that a franchisor provide a prospective franchisee with a Franchise Disclosure Document (FDD) at least 14 calendar days prior to offering a franchise or selling a franchise. Unlike certain states, the Rule does not require that the FDD be registered with the FTC or filed anywhere. In addition, there is no private right of action, meaning that an aggrieved franchisee has no right to bring suit for any violation of the federal franchise law, only the federal government can enforce the Rule.
STATE FRANCHISE LAWS
Each state’s laws are different on whether there are franchise laws and what those franchise laws require of a franchisor. Most U.S. states do not have laws that regulate the offer and sale of franchises. However, those that do, fall within two basic categories, registration states and notice filing states.
Certain states, known as the “registration states” require that the FDD be registered with them before a franchisor can offer or sell franchises in that state. Depending on the state, the examiner reviewing the FDD may decide to require changes to the FDD and may require that specific state addenda be added evidencing certain risks that the state decides should be disclosed. The registration states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. Failure to abide by these states’ laws can result in fines and penalties being imposed by the state and the requirement that a franchisor rescind (void) the franchise agreement and refund all monies paid to the franchisor by the franchisee. These laws are intended to protect a franchisee and often provide for a private right of action (right to sue) by a franchisee that the federal Rule does not provide.
NOTICE FILING STATES
Other states merely require that a franchisor provide notice to that state indicating that they intend to sell franchises in that state. These states require that the FDD be filed with them (usually for a fee), but typically they do not review the FDD or require changes to the FDD. The states that require a notice be filed with them are Connecticut, Florida, Kentucky, Maine, Nebraska, North Carolina, Oregon, South Carolina, Texas and Utah.
It is important that any business looking to expand through franchising retain experienced franchise counsel that can advise the business on the best methods of moving forward and the various laws that apply.