The Right Answer for your Legal Issues
The Right Answer for your Legal Issues
Franchise law is simple and, at the same time, complex. The point is that there are both federal and state laws governing franchising. However, these laws are generally not uniform or consistent from state to state.
Basically, there are two general categories of laws regulating franchises: (1) disclosure laws; and (2) registration laws. There are also laws that govern the relationship between franchisors and franchisees and govern the grounds for terminating the relationship and/or renewing the relationship, as well as equal treatment of franchisees.
Disclosure laws regulate the following:
Registration laws require:
Violation of franchise laws can result in governmental penalties, including fines, permanent bans on engaging in franchising, freezing of assets, money damages for victims, and even jail sentences. These governmental penalties can be assessed on the franchisor, and to its officers, directors, and managers who are involved in the formulation of the franchise or who direct or control the franchisor's activities. In certain cases, the violation of franchise laws can result in the cancellation of the franchise agreement and reimbursement of all fees paid to the franchisor.
The Federal Franchise Disclosure Law
The principal law governing what a franchisor must disclose to prospective franchisees is a federal law called the Federal Franchise Rule. This rule provides that prior to offering or selling a franchise in any state, franchisors are required to provide to prospective franchisees a document setting forth certain disclosures about the franchise. This document is referred to as the Franchise Disclosure Document (“FDD”). In certain states, franchisors are required to register the FDD with the state. Federal law does not require registration of the FDD.
The following documentation is what is generally required to franchise a business:
Requirements of the Franchise Disclosure Document
As discussed above, the FDD is a legal document that is provided to a prospective franchisee regarding the operation of a franchise.
The Basics of an FDD
Under federal franchise law, franchisors must provide prospective franchisees with any and all necessary information required for such prospective franchisee to make a well-informed decision as to whether or not to become a franchisee in the company. This is done by providing the prospective franchisee with the FDD.
The FDD must be provided to the prospective franchisee no more than 14 days prior to signing the franchise agreement. The 14-day period begins when the prospective franchisee signs a receipt for having received the FDD.
Information that Must be Included in the FDD
Registration Laws
The principal registration laws are state laws. While Federal Law provides an overriding franchise regulation framework, the following states require the registration of the franchisor’s FDD:
In the foregoing states, franchisors must file and register their FDD prior to offering or selling a franchise.
The information on this website is for general information purposes only. Nothing on this site should be taken as legal advice for any individual case or situation. This information is not intended to create, and receipt or viewing does not constitute, an attorney-client relationship.
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