What Is Franchising Law?

Selling your own product is satisfying but carries an element of risk. Some small-business owners like the confidence that a known product provides. For these owners, franchise opportunities are the chance to start a business with the support of an established company.

A franchise is a legal business relationship between the owner of an existing brand (the franchisor) and someone who licenses the brand for sale (the franchisee). McDonald's restaurants are examples of a franchise business. The McDonald's Corp. owns the brand, but a franchisee owns and operates each franchise.

State and federal laws regulate franchisors' operations. The Federal Trade Commission (FTC) requires all franchisors to provide prospective franchisees with a 23-element list of disclosures. The Franchise Rule applies to all legal issues surrounding franchise purchases.

FindLaw's Consumer Guide to Buying a Franchise has more information about franchise laws.

Elements of Franchise Law

A business relationship must have three key elements to be a franchise. Entrepreneurs considering purchasing a franchise should ensure that all elements are part of the franchise agreement before signing.

• The franchisee must have the right to use the franchise owner's trademark, logo, or other symbol.
• The franchisor must keep control of the franchisee's business or provide significant help to the franchise development.
• The franchisee must pay a fee to the franchisor for the use of the trademark or services. This is not optional. Part of the franchise system requires the exchange of fees and services between the franchisor and franchisee.

There are different types of franchise contracts, depending on the parties' business goals. In one type, product franchising, the franchisee has the right to sell the franchise owner's trademark or product. Auto dealerships and shoe stores are examples of product franchising.

Business-model franchising creates a long-term relationship between the parties. In this franchise model, the franchisee operates a business using the franchisor's corporate system. Fast-food franchises are the best-known example of business-model franchising.

Buying a Franchise? Why You May Need a Lawyer

The FTC enforces the Franchise Rule. Franchisees have the right to file lawsuits against franchisors for unfair trade practices. The franchise agreement is a binding legal document and must contain specific information. Franchisors must provide a franchise disclosure document (FDD) as well. This must contain:

• Information about the franchisor's legal history, bankruptcy filings, and so on
• The franchisor's business background and other franchise ownership
• The franchisee's rights and obligations
• The franchise location and territory

Failure to provide the franchise disclosure document (FDD), providing an incomplete FDD, or misrepresenting information are all grounds for legal action.

The FDD may contain red flags about the franchisor or the nature of the new business. Potential franchisees should remember that this is a business contract, and you are entitled to legal representation to protect your rights.

FindLaw's Franchise Agreement Questionnaire is a convenient way to review any concerns you may have with the agreement or FDD and discuss them with a franchise lawyer.

Related Practice Areas

• Intellectual Property Law
• Business and Commercial Law

Get Legal Advice

State and federal laws regulate the franchise industry. If you want to buy a franchise, you need an experienced franchise attorney to protect your interests. Contact a business attorney specializing in franchise law in your area.