Franchise law at the federal level is complicated and subtle. Additionally, franchising laws differ by state. To understand the legal requirements for franchising or franchising, you need to consult an experienced business and franchise lawyer in your neighborhood. Meanwhile, it may be beneficial for you to familiarize yourself with some of the fundamentals of federal franchising law.
Franchise as Per Federal Law
The United States Federal Trade Commission regulates franchising (FTC). The Federal Trade Commission defines a franchise as an ongoing business connection or arrangement that consists of three critical components:
- A franchisee is granted the right to operate a business or distribute goods or services bearing the franchisor’s brand.
- The franchisor has authority over the franchisee’s company operations. Franchisors are legally permitted to exercise extensive influence over franchisees’ activities or help franchisees manage their operations.
- Federal law requires franchisees to pay the franchisor or their affiliate as a condition of launching a franchise.
What Does Federal Franchise Law Regulate?
Three broad categories of federal franchise law exist disclosure, registration, and relationship.
- The Federal Trade Commission regulates disclosure regulations that apply to the franchise sale period. Several examples include legislation requiring the franchisor to disclose certain facts before the sale, an obligatory pre-sale cooling-off period, and prohibited sales methods.
- Registration laws govern any essential formal franchise system registrations. On the other hand, registration is regulated at the state level, not by the FTC.
- Additionally, rather than the federal government, states regulate relationship laws. These statutes regulate particular facets of the franchisor-franchisee relationship. For example, state law may provide criteria for franchise termination and renewal and fair treatment of franchisees.
Consequences of Violating the Law
- An infringement of the franchise law, such as a franchisor failing to make all required disclosures or making false statements to potential franchisees, can result in severe penalties.
Government penalties for infractions of federal law may include fines, asset freezing, and monetary compensation to victims. Penalties may be assessed against the franchisor or the franchising system’s directors and managers. In rare instances, franchisors may be prohibited from franchising.
Violations are often prosecuted as deceptive and fraudulent business activities at the state level. State laws vary about whether this is a misdemeanor or felony.
Understanding the fundamental tenets of franchise law is beneficial for anyone considering purchasing a franchise or franchising a business. However, to ensure that your legal and financial interests are adequately protected, speak with a business lawyer specializing in this complex legal system area.
Franchise & Business Law Group’s experienced professional attorneys explain state and federal franchise law in further detail and assist you with your franchising and business pursuits.
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