Franchise laws cover more than the business format franchise that we all recognize
as a franchise. License
and distribution agreements of many varieties can fall within the scope
of the franchise and business opportunity
At Pitegoff Law Office PLLC, we assist businesses in determining whether their
planned business falls within the scope of the franchise
laws. These laws vary from state to state. A business may
constitute a franchise under the laws of one state, but may be exempt or excluded
from the definition in another state. Although a business may not be a franchise,
it may constitute a “business opportunity” that requires registration
or disclosure. In other cases, clients are surprised to learn that the license
or distribution structure they contemplate is, in fact, a franchise. We help
companies formulate business plans in light of the requirements of the franchise
laws and related laws.
Some companies want to avoid franchising because franchising is highly regulated.
Compliance has a cost that some companies do not want to incur. Where the business
model permits, we assist clients in structuring their businesses that do not
fall within the scope of the franchise laws.
In many cases, this approach is the first step toward a planned franchise
launch. A company that prepares a franchise disclosure document and complies
with the franchise sales laws has a wide degree of latitude in the way
it conducts business. Put another way, once a company decides that its
arrangement is a franchise and that the company will comply with the franchise
sales laws, there is no longer any danger that the arrangement may be challenged
as being a franchise. Selling franchises in violation of the franchise
laws can result in government injunctions against future sales as well
as monetary damages and even criminal liability. The initial cost of compliance
may save higher costs later on, and may even save the business.
FACT:
A franchisee who suffers as the result of a violation
of the Federal
Trade Commission's Rule on Franchising (FTC Rule) cannot
bring a lawsuit on that basis. The Rule is enforced
by the Federal Trade Commission, not through private
lawsuits by franchisees. In legal terminology, violation
of the Rule does not give rise to a “private
right of action.”
FACT: The Federal Trade Commission
is empowered to enforce the FTC Rule by seeking permanent injunctions,
rescission and restitution in federal court without initiating
administrative proceedings. A federal district court may exercise
equitable powers and order any relief necessary to make permanent
relief possible. Such relief may include an assets freeze,
consumer redress and criminal liability.
FACT: Failure to comply with the state franchise
laws can result in both administrative proceedings and private actions by franchisees
for rescission, damages, injunctive or declaratory relief, attorneys' fees, and
costs. Where the violation is willful, the states allow for punitive damages
and criminal liability.
For some companies, the question of what constitutes a franchise
arises in the context of a claim by a licensee or distributor
that the company has violated the state franchise law. This
claim commonly arises in connection with the termination or
nonrenewal.
Franchise laws of a number of states require good
cause for termination or nonrenewal. The scope of these laws
can be very
broad, covering license and distribution arrangements that
would not otherwise be viewed as “franchises”.
We analyze the facts in such cases and counsel clients on their
best course of action.
CASE IN POINT: A national day-trading
company came to us for advice when the managers
of branch offices in various states alleged that
the company had sold franchises in violation of
the franchise laws. In each case, we provided specific
reasons why the offices were not franchises. We
also assisted the company in modifying its system
to minimize the likelihood that branch office managers
would make similar claims in the future.
For more information, click to The Inadvertent Franchisor
Home » Franchising » What's a Franchise?
Franchise laws cover more than the business format franchise that we all recognize
as a franchise. 
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