The Basics of Federal Franchise Law

 If you’re immersed in the franchise world, you’ve likely heard of the Federal Trade Commission, or FTC, a federal agency that sets forth standards for franchises. However, in the day-to-day grind of running your business, you may not be familiar with just how the law impacts you, as a business owner, on a high level.

Although wading through legal jargon may not be enjoyable, the laws impose very real, tangible risks for business owners. As such, it’s vital to understand both the laws that impact your business and the penalties you may face if you (intentionally or inadvertently) run afoul.

What Does the FTC Do?

The answer is simple as far as franchisors are concerned: Not much. In fact, the federal government rarely enforces laws addressing disclosure to prospective franchisees and the relationship between the franchisor and franchisee. Furthermore, individuals do not have a private right of action to bring claims that franchisors violated the law. Nevertheless, you can face liability and various penalties in the states in which your business operates because states more actively enforce franchise laws.

Who Actually Regulates Franchises?

The FTC Franchise Rules matter, as they form the basis of state laws. Most states enforce what franchise lawyers call “Little FTC” laws which govern the conduct of franchise owners within the state and impose certain punishments for noncompliance. For example, North Carolina’s Unfair and Deceptive Trade Practices Act allows franchisees to sue franchisors for violation of the State’s consumer protection statutes, which cover violations of the FTC Act. In other words, although North Carolina does not regulate franchising directly, the Unfair and Deceptive Trade Practices Act is a “Little FTC” law by which franchisees can sue for violations of FTC rules and regulations.

On the other hand, some states actively regulate franchises. States known as “registration states” require franchisors to register their FDDs. This means that you must physically send your FDD to a “regulator” within the state, who will review and scan it for deficiencies. If the regulator identifies any issues, he or she can send it back with comments, often initiating a negotiation (ideally guided by a franchise attorney) over revisions. In a registration state, failing to submit an FDD, or running a business under an FDD that’s been deemed deficient, can lead to civil liability: A franchisee can sue for violation of the state’s FTC laws or, if the state has specific laws or regulations like an unfair and deceptive trade practices act, franchisees can invoke their protection as well.

Man Controlling Trade – Michael Lantz 1942 (outside FTC building)

 

What Can Happen to Me If I Don’t Comply?

Operating a franchise in a state subjects you to that state’s laws. Many states create departments specifically designated to investigate possible franchise law violations. These states engage “regulators” to investigate business’ conduct within the state.

The penalties for non-compliance are generally harsh. Franchisors who run afoul of the law face civil liability (i.e., a franchisee can sue you in that state). You may also face fines, asset freezing, and monetary damages to aggrieved franchisees. In some cases, you may even be banned from operating your franchise in that state.

Understanding the Impact

A state lawsuit, as well as other penalties, are real risks for franchisors. As such, it is vital to be aware of the laws in your particular state, as awareness is the first step in ensuring compliance.

It is critical to engage a franchise attorney if you’ve been identified by a regulator as violating franchise law. The law is complex and creates a minefield for unsuspecting franchisors, so a skilled attorney can guide you through your options – from salvaging your right to operate your business in a state, to defending you in court should you be sued, to negotiating with aggrieved franchisees to reduce your exposure.

If you are feeling unsure of your business’ compliance with your state’s laws, or you fear you may be running afoul of them, an attorney can help you get back on track. Even if you aren’t concerned, it is still advisable to engage an attorney who is knowledgeable about the franchise laws in your state. Finding a partner to help you operate your business legally will ensure greater success in the long term.

Photo of Ritchie Taylor, CFE Ritchie Taylor, CFE

Ritchie founded and leads the firm’s franchise practice where for 20 years he has served as the primary franchise counsel to hundreds of franchisors, franchisees, and dealer networks in their franchise and business matters. He has decades of experience helping domestic and international…

Ritchie founded and leads the firm’s franchise practice where for 20 years he has served as the primary franchise counsel to hundreds of franchisors, franchisees, and dealer networks in their franchise and business matters. He has decades of experience helping domestic and international franchisors design and grow their franchise systems with innovative, but compliant, franchise disclosure documents, franchise agreements, area development agreements, and master franchise agreements.  Ritchie’s clients benefit from his wealth of experience representing both sector leading franchisors as well as innovating emerging concepts.  He has substantial experience representing franchise systems operating in the hospitality, restaurant, retail, and home services industries.

As the leader of the largest franchise law practice in the Carolinas, Ritchie represents franchisor clients as their strategic advisor through all phases of growing and protecting their brand including franchise compliance, advertising fund administration, and state enforcement actions.

Ritchie guides franchise clients through mission-critical transactions including equity and debt transactions as well as mergers and acquisitions. He has served as the member of deal teams conducting merger, acquisition, and joint venture transactions in almost all 50 states and internationally, with aggregate transaction value exceeding $3 billion.  Private equity funds retain him to both advise them on franchise due diligence during a transaction and to represent their franchisor portfolio companies post-transaction.

Ritchie is a recognized thought leader in franchising across the Carolinas and nationally. He supports franchising through his active involvement in the International Franchise Association (“IFA”) as a long-time member of the IFA Membership and Legal/Legislative Committees. Ritchie also serves on the IFA Supplier Forum’s Board of Directors and as a member of the IFA’s Emerging Franchisor Task Force. Additionally, he is the first North Carolina attorney to receive the Certified Franchise Executive (“CFE”) designation awarded by the Institute of Certified Franchise Executives (“ICFE”). For the last 6 years, Ritchie served on the ICFE’s Board of Governors, which develops the CFE curriculum as the premier training program for franchise executives.

He is a member of the North Carolina Bar Association Business Law Section Council and is the founding chair of the North Carolina Bar Association Committee on Franchising. For the last decade, Ritchie has been the course planner and taught continuing education programs on franchise law for other North Carolina attorneys.  Ritchie’s peers chose him as the first North Carolina attorney ever listed in both Super Lawyers and The Best Lawyers in America for his work in franchise law.