Franchise Law

Franchising is a method of doing business wherein a franchisor in lieu of annual remuneration licensees trademark and tried and proven method of doing business to franchisee. Various businesses like advertising, educational institutes, food outlets, etc. are commonly made available by the entity licensing the ‘chain store’ or franchise outlet (commonly shortened to the one word: franchise). And may the franchisor required audited books and may subject the franchisee or the outlet to periodic and surprise spot checks. Failure of such tests typically involves non-renewal or cancellation of franchise rights.

Financial Times states “if sales by US franchise businesses were translated into national product, they would qualify as the 7th largest economy in the world”.

Legal Aspects

In the United States, franchising falls under the jurisdiction of a number of state and federal laws. Franchisors are required by the Federal Trade Commission to have a Uniform Franchise Offering Circular “UFOC” to disclose potential franchisees about their purchase. This disclosure must take place 10 days prior to solicitation. Each state may require the UFOC to contain specific requirements. This means that many franchisors have a unique UFOC for each state or sometimes are able to include all state specific requirements into one document. FRANDATA estimates that on average, 100 documents are distributed per franchisor per year. This represents 200,000 UFOCs distributed each year in the US alone. FRANDATA also estimates the cost of each UFOC to be near $100.

Electronic UFOC

In October 1999, the Commission published for comment in the Federal Register a Notice of Proposed Rulemaking (“NPR”) in connection with the Franchise Rule, 16 C.F.R. (Code of Federal Regulations)Part 436. The NPR sought comment on a wide range of issues, including proposed instructions enabling franchisors to furnish disclosure documents electronically, including through the Internet. Among other things, the proposed instructions would:

  • Require prior consent by a prospective franchisee before a franchisor could comply with the Rule electronically
  • Afford a prospective franchisee the right to obtain a paper disclosure document until the time of sale
  • Require franchisors to provide a prospective franchisee with a paper summary document, which includes, among other things, the disclosure document’s table of contents, as well as an admonition to download or otherwise preserve the electronic disclosure document
  • Specify the general format of an electronic disclosure document to ensure that it can be downloaded or otherwise preserved, that the disclosures are clear and conspicuous, and that the disclosures do not contain extraneous or distracting features (such as animation or pop-up screens) and
  • Permit the use of navigational tools to review a disclosure document, such as scroll bars, search features, and internal links.

Contrary to what might be expected, there is no federal registry of franchising or any federal filing requirements for information, rather, states are the primary collectors of data on franchising companies, and enforce laws and regulations regarding their spread.