Franchise laws in the U.S. are designed to protect franchise buyers. They come in several varieties:
- At the federal level, franchise sales are regulated by the Federal Trade Commission’s trade regulation rule on franchising. The FTC Rule requires franchisors to deliver a franchise disclosure document to each prospective franchisee at least 14 days before the prospect signs any agreement or pays any fee to the franchisor. It does not require registration or filing.
- Franchise law in New York and several other states requires state registration before the franchisor may sell franchises. These franchise laws also require franchisors to deliver a franchise disclosure document to each prospective franchisee before the franchisee signs an agreement or pays a fee.
- Some states without franchise sales laws have business opportunity laws that may require a presale filing similar to a franchise filing. A company that is seeking to avoid franchising may find that it must file or disclose in order to comply with a state business opportunity law.
- Franchise “relationship” laws in a number of states limit the franchisor’s freedom to terminate a franchise or to refuse to renew or to permit the transfer of a franchise without good cause.
Even bordering states differ on their franchise laws and regulations. For example:
- New York has a franchise sales law but no franchise relationship law and no business opportunity law.
Connecticut has a franchise relationship law and a business opportunity law but no franchise sales law.
New Jersey has a franchise relationship law but no franchise sales law and no business opportunity law .
FTC Franchise Enforcement
Failure to comply with the FTC Rule is deemed to be “an unfair or deceptive act or practice” within the meaning of Section 5 of the Federal Trade Commission Act. The FTC can seek permanent injunctions, rescission and restitution in federal court. A federal district court may order any relief necessary, including asset freezes, consumer redress and even criminal liability in appropriate cases.
The FTC Rule does not allow for a private right of action. In other words, if you don’t make the required disclosures, a franchisee can complain to the Federal Trade Commission, but the franchisee cannot bring a lawsuit against the franchisor for violation of the FTC Rule. Only the Federal Trade Commission enforces the FTC Rule.
At the state level, the state franchise authorities enforce the state franchise laws, just as the FTC enforces the FTC Rule. The state authorities can seek injunctions, rescission and restitution, and criminal sanctions in some cases, just as the FTC can do.
But unlike the FTC Rule, violation of the state franchise disclosure laws also gives rise to a private right of action by the franchisee. Franchisees can seek damages, rescission and attorneys’ fees. Officers and directors can also be personally liable in some cases.