U.S. Franchise Law Basics
What is franchise law?
Franchise Law isn’t the most straightforward area of legal study. While there exists federal regulation of franchising, laws also vary from state to state. Understanding the basics behind franchise law can give both the franchisor and franchisee a better grasp of the rules and regulations they need to follow.
What Constitutes a Franchise?
A franchisor must satisfy three elements, according to the Federal Trade Commission (FTC):
A trademark or other symbol must be provided to the franchisee. However, before the franchisor can give out a trademark license, their mark must be registered. This process can be lengthy and complicated but must be completed before the trademark is used. Once a franchisee purchases a franchise, they gain the right to use and sell products bearing the trademark name.
The franchisor has primary, overarching control over operation of the business. This can include site approval, hours of operation, personnel policies, among other categories. The franchisor also sets the business practices, methods and services. In other words, they establish the business, which the franchisee later carries out.
Depending on the terms of The Franchise Agreement, the franchisee is expected to pay an initial investment fee. There are also fees and royalties associated with the franchise purchase. All fees that the franchisee must pay are detailed in the Franchise Disclosure Document (FDD).
Trademark, authority and payment
Given that a business satisfies these three categories, it is considered a franchise under the FTC Franchise Rule. State definitions of a franchise vary, however. Nevertheless, there are characteristics that many states use to define a franchise. In California, Illinois, Indiana, Iowa, Maryland, Michigan, North Dakota, Oregon, Rhode Island, Virginia, Washington and Wisconsin, a business must have a marketing plan, association with trademark, and required fee to qualify as a franchise.
Marketing Plan: A key part of any franchise is the sale of a good or service, which is promoted and advertised through the help of a developed marketing plan. Each franchisee is also given the right to sell or distribute the company’s goods within the preexisting marketing plan.
Association with Trademark: As with the FTC, the above states require that a franchise be associated with a trademark.The franchisee’s business, too, must be directly associated with the trademark in order to qualify as a franchise.
Required Fee: Any franchisee is required to pay fees to the franchisor in order to purchase their own branch of the franchise.
In Hawaii, Minnesota, Mississippi, Nebraska, and South Dakota, the franchise must have an association with a community of interest rather than a marketing plan. In other words, these states require that a business have a specific desired demographic, association with trademark and required fee.
Violations and Penalties
There are some common types of franchise law violations, including failure to provide disclosure agreements to the Uniform Franchise Offering Circular (UFOC) or incorrect franchise termination, according to Vinson Franchise Law Firm. Franchise law violations are typically classified as fraudulent or deceptive trade practices. Depending on the nature of the violation, different penalties or fines apply. These penalties can include fines, freezing of assets, and, in extreme cases, even jail sentences.