If you have been exploring franchise opportunities, you have likely discovered that all franchisors have a Franchise Disclosure Document (FDD) that looks fairly similar. But do you know why this is the case? It isn’t because franchisors want to make disclosures or simply copy their competitors, but rather because the FDD is required under a set of federal regulations commonly known as the “FTC Franchise Rule.”
While federal regulations establish disclosure requirements for franchisors, they don’t do much else to govern the franchise sales process or the franchise relationship. Instead, this is left to the states—and while some states have adopted franchise disclosure and relationship laws, many have not.
So, does your state have a franchise law? If so, why does it matter? National franchise attorney Jeffrey M. Goldstein explains:
Understanding State Franchise Laws
State franchise laws fall into two broad categories: There are state laws that establish disclosure requirements for franchisors (franchise disclosure laws), and there are state laws that give franchises rights during the franchise relationship (franchise relationship laws).
- State Franchise Disclosure Laws – State franchise disclosure laws require franchisors to provide certain information to prospective franchisees during the sales process. While many of these disclosure requirements mirror the requirements in the FTC Franchise Rule, there are some state-specific requirements as well. In addition to mandating certain disclosures, many state franchise disclosure laws also require franchisors to register their FDDs.
- State Franchise Relationship Laws – State franchise relationship laws give active franchisees certain legal rights vis-à-vis their franchisors. While relationship laws vary from state to state, these laws typically provide protections such as restricting franchisors’ ability to terminate (or refuse to renew) and requiring franchisors to act in good faith.
States with Franchise Disclosure Laws
About half of the states have adopted some form of franchise disclosure law. Broadly speaking, these laws take one of four primary forms: (i) requiring approval of the franchisor’s FDD before the franchisor can sell franchises in the state; (ii) requiring approval of the franchisor’s FDD only if the franchisor does not have a trademark registered with the U.S. Patent and Trademark Office (USPTO); (iii) requiring a notice filing before the franchisor sells franchises in the state; and (iv) requiring a notice filing for franchisors without a federally registered trademark.
States that Require Approval of the Franchisor’s FDD
- California
- Hawaii
- Illinois
- Indiana
- Maryland
- Michigan
- Minnesota
- New York
- North Dakota
- Rhode Island
- Virginia
- Washington
- Wisconsin
States that Require Approval of the Franchisor’s FDD (Without a Federally Registered Trademark)
- Connecticut
- South Carolina
- North Carolina
States that Require a Notice Filing (With a Federally Registered Trademark)
- Connecticut
- Florida
- Kentucky
- Nebraska
- North Carolina
- South Carolina
- South Dakota
- Texas
- Utah
States that Require a Notice Filing (Without a Federally Registered Trademark)
- Georgia
- Louisiana
- Maine
For franchisees, the big question is: What happens if a franchisor violates their state’s franchise disclosure law? The short answer is, “It depends.” In some cases, disclosure violations can trigger a right of rescission (essentially, a right to exit the franchise system and receive a refund of the initial franchise fee without further consequences), and franchisees may also be entitled to additional damages. In others, violations have little to no practical effect.
States with Franchise Relationship Laws
Franchise relationship laws are similar in that some have much more significant consequences than others. In some states, franchisors’ violations of their statutory obligations can give franchisees strong causes of action for injunctive relief, specific performance or damages. In others, franchisees’ protections are much weaker, and their remedies are much more limited.
Currently, the states with franchise relationship laws are:
- Alaska
- Arkansas
- California
- Connecticut
- Delaware
- Hawaii
- Idaho
- Illinois
- Indiana
- Iowa
- Maryland
- Michigan
- Minnesota
- Mississippi
- Nebraska
- New Jersey
- North Dakota
- Rhode Island
- South Dakota
- Virginia
- Washington
- Wisconsin
As you can see, while some states have both franchise disclosure laws and franchise relationship laws, many states only have one or the other. As a franchisee, it is important to know which protections you have available—so that you can use them to your advantage if necessary.
Filing a Statutory Claim Against Your Franchisor
Let’s say you bought a franchise, and you are dissatisfied with your purchase. You want to get out, and your state has a franchise disclosure or relationship law that gives you this opportunity. In this scenario, what are your next steps?
To assert your rights under your state’s franchise relationship or disclosure law, you will need to hire an experienced franchise attorney to represent you. If you demand rescission and a refund based on your state’s franchise law, you can be certain that your franchisor will reject your claim, and it may even take adverse action against you. By hiring an experienced franchise attorney to assert your state law rights on your behalf, you can ensure that your claim is taken seriously, and you can rely on your attorney to deal with your franchisor on your behalf.
In some cases, it will be possible to resolve state franchise law claims without litigation. If your franchisor acknowledges that it made a mistake (or if your franchisor’s lawyers convince it that settling your claim is the best path forward), then going to court may not be necessary. However, if your franchisor disputes your state franchise law claim, then you may need to initiate litigation against your franchisor to assert your statutory rights.
In any case, you will want to take action promptly, as time limits may apply—and as unnecessary delays can make asserting your statutory rights more challenging. When you hire an experienced franchise attorney, your attorney will help you evaluate your options, determine your next steps and take full advantage of the protections you have available.
Request a Free and Confidential Consultation with Franchise Attorney Jeffrey M. Goldstein
Do you have questions about your state rights as a franchisee? If so, we encourage you to contact us promptly for more information. To request a free and confidential consultation about your state franchise law claim with national franchise attorney Jeffrey M. Goldstein, please call 202-293-3947 or get in touch online today.
