The Franchise Laws are a combination of both federal and state laws.
Until the 1970s, the only “franchise law” which existed was that body of law affecting business in general. Attempts to prevent, combat, and rectify franchise sales abuse, which became rampant by the early 1970’s, date back to the passage in 1971 of the California Franchise Registration and Disclosure Act. Since then, fourteen other states have enacted laws adopting the franchise registration and offering disclosure requirements pioneered by California–Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
Not surprisingly, California became a hot spot for the “franchising boom” and eventually for franchise regulation. By 1969, California had the largest number of franchisees of any state: approximately 5,600, which was nearly ten percent of the more than 600,000 franchisees in the entire United States. Franchising in the state also generated many franchisee complaints.
Beginning in 1968 with the enactment of disclosure laws in California, various states enacted laws regulating the offer and sale of franchises. Generally, these laws required a franchisor to deliver to a potential franchisee, in advance of a sale, a disclosure document providing specified information on the opportunity.
California became the first state to regulate the sale of franchises by the adoption of the California Franchise Investment Law in 1970. A number of states followed California’s lead, requiring pre-offer and sale disclosure as well as registration of franchise offers.
Over the next 9 years 14 additional states enacted their own regulations. The 15 states with disclosure, registration, and/or notice laws regulating franchise sales include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
All of these states require that a disclosure document be provided to a prospective franchisee prior to sale. Except for Oregon, all of these states also require the franchisor to be registered with the state authorities before selling a franchise. Oregon requires only that a disclosure document that complies with the FTC Rule be given to a prospective franchisee.
These laws range from requiring filing of an annual notice to a full-fledged review of a franchise registration application and a renewal registration application on an annual basis. The states that have enacted laws that regulate the offer and sale of franchises are California, Hawaii, Illinois, Indiana, Maryland, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. Oregon, like the FTC, requires disclosure but not registration.
In states without franchise sales statutes, franchisors must comply with the FTC Rule when selling franchises. In jurisdictions having registration statutes, franchisors must adhere to both the state statute and the FTC Rule before franchise sales can be commenced.
State Franchise Relationship Laws
The FTC Rule and the initial wave of state franchise statutes addressed presale disclosure to franchisees. Subsequently, 16 states have passed “relationship laws” focused on the rights of franchisees in existing franchise relationships.
These laws apply post-sale, to operating franchises. They apply to specific aspects of the franchisor-franchisee relationship. For instance, state law may specify grounds for termination and renewal. They govern certain aspects of the relationship between franchisor and franchisee, such as:
- grounds for terminating a franchise;
- notice and cure periods before termination;
- grounds for not renewing a franchise; and
- equal treatment of franchisees
Relationship laws were passed to restrict the power of franchisors over franchise terminations, renewals, transfers, and certain other aspects of the franchise relationship. The statutes generally apply to franchisees located within a particular state, although coverage of state relationship laws may vary. State relationship laws usually require good cause for termination, which is defined as a material breach of the franchise agreement. State laws often impose a requirement of a notice of default and an opportunity to cure.
These statutes also can restrict a franchisor’s right to refuse to consent to a transfer by the franchisee to situations in which the franchisor has good cause. They often make it unlawful for a franchisor to interfere with franchisees’ right to form a franchise association.
The Franchise Registration Process
As stated above, there is no federal registration of franchise offerings. However, California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin require registration of franchise offerings. In the 14 states that require registration of franchise offerings, registration can be a complicated and often lengthy task. The franchisor or its counsel must submit the FDD and various other forms to the appropriate state officials, typically the state’s Department of Corporations or Attorney General’s office. The entire package is referred to as the registration application. Registration applications must be accompanied by the applicable registration fee, which ranges from $250 to $750. Registrations are effective for one year and generally must be renewed before their expiration date.
It typically takes about 30 calendar days for the state to review the registration application and furnish comments to the franchisor. The franchisor must then respond to these comments. It is not unusual for a franchise registration application to be revised many times before the state registration process is finalized, so the entire registration process can take several months from the date the registration application is first submitted for review. When the registration process is successfully completed, an order declaring the registration effective is issued by the state.