Understanding And Complying With Federal And State Franchise Laws
With extensive experience handling franchise law matters, the Franchise Law Practice Group of Huck Bouma is able to provide business and franchise clients with the personalized and cost-effective legal solutions they need to achieve their business goals while being in compliance with the applicable franchise laws.
What Is A Franchise?
Determining whether or not a business is a franchise can be a complicated process. Some companies may think they can avoid the legal regulation of franchising by calling their arrangement a license agreement, business opportunity or dealership. In reality, it does not matter how an arrangement is labeled, nor does it matter whether or not the parties intended to create a franchise relationship.
When three specific characteristics are present in a business relationship, it is a franchise, regardless of what it is called and regardless of the parties’ intent. Under federal law, these factors include:
- Use of trademark: The franchisee sells goods or services that are identified by the franchisor’s trademark or service mark.
- Control or assistance: The franchisor exercises or has the authority to exercise significant control over the franchisee’s method of operation, or gives the franchisee significant assistance.
- Fee: The franchisee is required to make a payment to the franchisor or a person affiliated with the franchisor as a condition of obtaining or commencing the business.
When offering a franchise in a particular territory, you must comply with applicable state and federal franchise laws. If your business arrangement falls within the definition of franchise, you must comply with state and federal franchise laws.
Variations of the “control or assistance” prong of the franchise definition exist in specific state franchise laws. For example, in some states the “control or assistance” characteristic is replaced by the presence of a marketing plan or system prescribed or suggested by a franchisor. In other states, the “control or assistance” characteristic is replaced by the presence of a community of interest in the marketing of goods or services.
There are some exclusions and exemptions under state and federal franchise laws, that allow the arrangement to be offered without complying with the registration and/or disclosure requirements.
When offering a franchise in a particular territory, you must comply with applicable state and federal franchise laws. If your business arrangement falls within the definition of franchise, you must comply with state and federal franchise laws.
What Laws Apply To A Franchise?
The Amended FTC Franchise Rule applies to the offer and sale of franchises in all 50 states. The federal law allows states to impose greater requirements on franchisors, including franchise registration and additional disclosure requirements.
The following states have their own franchise laws that apply to the offer and sale of franchises in their state or to prospective franchisees in their state:
- California
- Hawaii
- Illinois
- Indiana
- Maryland
- Michigan
- Minnesota
- New York
- North Dakota
- Rhode Island
- South Dakota
- Virginia
- Washington
- Wisconsin
These laws give protection to franchisees that reside in the state or establish a franchise business in the state and also impose additional obligations to franchisors and subfranchisors desiring to offer and sell franchises in their state.
If you are a franchisor or subfranchisor/master franchisee, you need to be aware of the state law requirements. A franchisor cannot offer or sell a franchise in a franchise registration state until it has obtained a franchise registration or met conditions for an exemption from registration.
Address Your Compliance Concerns
When starting a business, failing to comply with applicable federal and state franchise laws can have significant financial and legal consequences. The government may investigate your company and determine that your agreement with the licensee or dealer is unenforceable. The licensee or dealer may later claim that you failed to comply with franchise laws in selling them a license or dealership, or may claim rights under franchise termination and nonrenewal laws.
The franchise attorneys at Huck Bouma are committed to helping you take the right steps to become or remain in compliance with the law. The franchise law attorneys at the firm can review your proposed or existing business arrangement to ensure that you are in compliance with applicable federal and state franchise laws. Alternatively, if your business model permits, the structure the arrangement of your business can be reviewed to avoid the creation of a franchise.
If you intend to operate as a franchise company, the franchise attorneys at Huck Bouma who have extensive experience in representing franchisors nationwide will guide you through the legal requirements to ensure your compliance with all applicable federal and state franchise laws. Consultations with our DuPage County attorneys help you structure your business correctly and minimize compliance concerns. Call today at 630-221-1755 or send an email through the online contact form.
