Franchise law is the body of law that relates to making, operating and ending franchise relationships. Franchise law encompasses laws and regulations at all levels of government that govern how corporations and individuals may enter into franchise relationships. The practice of franchise law involves helping clients understand and comply with franchise laws. It may also include enforcing franchise laws or advocating for changes to the law.
What is a franchise?
A franchise is the legal use of another company’s business secrets, copyrights and other business identifiers. A franchiser offers use of these items in exchange for a fee. The franchisee uses these items in order to establish and conduct business. To the consumer, franchise locations may look very similar, but each location is owned and operated by a local business owner.
The person who operates the local business is an independent business owner. The franchiser may control some aspects of the business and receive a percentage of income as payment, but ultimately, it’s the independent business owner who may make a profit or loss from operation of the local business. The purpose of a franchise is to operate the business with features that are similar to other franchises in other locations. Customers who choose to frequent a franchise business know what to expect whether they’re entering a franchise location in New York, California, or any other location in the United States or even beyond.
There are three hallmark characteristics of a franchise:
- The franchisee may use the franchise’s trademarks, name, logos and products.
- The franchisee pays the franchiser. Often, the franchisee pays a percentage of their gross income to the franchise as royalties.
- The franchiser has significant control over the way the franchisee conducts their business.
Where does franchise law come from?
Franchise law comes from a mix of federal laws and regulations, state law and common law. Because many franchises operate in more than one state, there are strong federal laws that regulate franchising in the United States. A handful of states add to federal laws and regulations by adding state law.
The federal and state laws that regulate franchising have not overridden common laws that may apply to franchise businesses. Common law that addresses contracts, fraud, employment and other business-related issues still apply to franchise businesses. Franchise attorneys must navigate the myriad of laws, regulations and common laws that exist at all levels.
Attorneys that work on behalf of the franchise may need to know the laws of many states in order to conduct business. In addition, some franchise business offer franchises in multiple countries. Franchise attorneys may need to know the laws of these countries and work effectively with attorneys in these countries in order to help the franchise expand into new territory.
Federal franchise law
Federal franchise law comes from 16 CFR parts 436 and 437. The purpose of the law is to require franchisers to give franchisees the information that they need in order to determine if the franchise is a sound business investment. Franchisers must give prospective franchisees information on a variety of topics including the following:
- The owner of the franchise, their parent company and affiliates
- Bankruptcy information
- Estimate of startup costs
- Restrictions on the business
- Obligations of the independent business owner
- Assistance provided to owners
- Advertising provided
- Territorial rights and limitations
- Names of celebrity endorsers
- Dispute resolution procedures
- Optional financial performance representations
The Federal Trade Commission
The Federal Trade Commission (FTC) is the U.S. Government agency tasked with implementing federal franchise regulations. The purpose of the (FTC) is to protect consumers and ensure economic competition. The agency creates policy, conducts investigations, receives complaints and may bring lawsuits in order to enforce federal law. The FTC has used several approved formats for franchise disclosures over the years. The current acceptable format is the Amended Franchise Rule.
A minority of states go above and beyond federal franchise regulations. They require franchisees to register in the state. States with franchise laws may have their own administrative bodies for handling violations. Franchise businesses are also subject to other business and health regulations in the state where they do business.
What kinds of legal issues arise in franchise law?
Franchise law may cover any one of a number of topics. Topics that may arise in the practice of franchise law include:
- Dispute resolution
Alternative dispute resolution
A franchise relationship is a mutually beneficial relationship. It’s not always in the best interest of either party to litigate as aggressively as possible when an issue arises. Franchise attorneys must be skilled at knowing how to approach an issue.
Alternative dispute resolution is an important area of franchise law. Lawyers must work carefully to negotiate with their counterparts when disputes arise. They must also know when it’s best to pursue litigation instead of mediation or direct negotiations.
A critical and often disputed area of franchise law is the question of territorial limitations. Independent business owners often want to know that if they agree to open a franchise business in a location, the franchiser will not allow another business to operate a franchise in the same geographic location. Independent business owners want to know what their exclusive territorial rights are. When other franchise locations open up close by, it can be grounds for a dispute between the parties as to whether the franchiser is in violation of the operating contract.
Who practices franchise law?
Franchise attorneys work in private practice law firms, as in-house counsel for franchisers and as government employees who enforce federal and state regulations. Large franchises are likely to have their own in-house counsel who work exclusively on franchise issues. Hiring in-house counsel attorneys can be a cost-effective way for large companies to meet their legal needs which can be a significant part of their operations.
Franchisers may also work with mid-size or large law firms to perform this work on a contract basis. To be an effective franchise attorney, you must know your client’s business thoroughly. Franchise attorneys often become experts in their client’s industry as well as helping their clients understand and navigate franchise laws.
Franchisees rely on legal counsel to help them make wise decisions, comply with the law and negotiate for their best interests. A franchisee may choose a small or solo legal practitioner, or they may work with a larger law firm. A franchisee may work with an attorney as they begin their business, or they may work with an attorney as questions and problems arise during the franchising relationship. An attorney who represents the independent business owner needs to know the state regulations where the business owner intends to operate. For that reason, they’re likely to work in the state where the business owner intends to operate their business.
An attorney who practices franchise law might focus in one area of franchise law like contract law or litigation. In that case, they might help a client when the client has a problem in their area of expertise. Other attorneys may help clients with any of the issues that arise in the course of beginning, operating and ending a franchise business. An attorney that works on behalf of the franchising company may need to be well-versed in all of these areas of law in order to identify and address issues as they arise.
Why Become a franchise lawyer?
Franchise law is a challenging area of law that encompasses many areas of expertise. If you enjoy helping people do business, franchise law may be for you. There are opportunities to work as in-house counsel, in private practice or for the government so there is a career path available to suit many different tastes. Because franchise lawyers have a wide skill set including contract law, dispute resolution and litigation, franchise law provides an opportunity for a lawyer to become well-rounded in many areas of legal practice. Attorneys often work with industries that are known nationwide.
With more than 900,000 franchise establishments in the United States, franchise law is big business. Franchise lawyers have the unique opportunity to help business owners establish, manage and end franchise relationships. These relationships serve as a critical part of the American economy. If you enjoy helping business owners and you want to hone your skills in a variety of practice areas, franchise law may be for you.