Blue MauMau recently published an article entitled, “Shattering the Myth: The Franchise Industry Is Heavily Regulated?!?” It is a click-worthy headline, no doubt, but what about its implications: Is franchise regulation really a myth?
The “Myth” of Franchise Regulation
The article goes on to state some indisputable, and relevant, facts about franchise regulation. For example, while the franchise industry falls within the oversight of the Federal Trade Commission (FTC), the FTC does not actually review franchisors’ Franchise Disclosure Documents (FDDs). Additionally, although the FTC’s enforcement efforts targeting franchisors are minimal, the FTC’s Franchise Rule does not provide franchisees with a private right of action. In the words of the article’s author, Keith Miller, “Who would consider a filled-out document, which is actually not reviewed by any regulatory agency, to be a heavily regulated document?”
The article also goes on to note that there is no federal franchise “relationship” law, and less than half of all states have these laws in place. However, the article omits any reference to state franchise “disclosure” laws, of which there are several, and many of which do require review of franchisors’ FDDs.
There are some other issues with the article as well.
For example, the article asks rhetorically, “[W]hy do the vast majority of franchise agreements require the franchisee sign it as an individual and not as a business?” While this is not directly relevant to the issue of regulation, it is also not entirely accurate. Legitimate franchisors today universally allow franchisees to form business entities, and many prefer this to personal franchise ownership (in fact, there are a variety of reasons why forming a business entity is in the best interests of both parties). By asking franchise owners to sign personal guarantees, franchisors can still obtain the security of targeting individual franchise owners’ personal assets in litigation just as if they had signed their franchise agreements personally.
The article also posits, “Except in those states that have franchise relations laws that a State Attorney General might enforce, there really are NO laws available to a franchisee.” This is categorically incorrect. State franchise relationship laws provide franchisees with private rights of action (and state disclosure laws provide additional protections); and, despite what the article says, franchisees have a number of potential common law causes of action in litigation with their franchisors.
Lack of Regulation Versus Lack of a Level Playing Field
Of course, this does not mean that the franchise relationship is a level playing field. Without a doubt, franchisors have the upper hand. But, for prospective franchisees seeking to protect their investments, and for active franchisees who need help extricating themselves from toxic circumstances, it is important not to assume that no options are available.
Contact Franchise Litigation Attorney Jeffrey M. Goldstein
Jeffrey M. Goldstein is a franchise litigation attorney with more than 30 years of experience representing franchisees and dealers. If you are thinking about buying a franchise or have questions about your legal rights as an active franchisee, you can call (202) 293-3947 or contact the Goldstein Law Firm online for a free and confidential consultation.
