“What are my legal rights as a franchisee?” As a franchisee law firm, we hear this question all the time. Most often, it comes from individual franchisees who are struggling to get by and who want to know what options they have—if any—to try to protect their investment.
Whether you own a struggling franchise or you are considering delving into the world of franchising, it is important to have a clear understanding of your legal rights. Protecting your legal rights is important, and while the hope is that everything will go smoothly, this doesn’t always happen. Various issues can arise, and franchisees can (and often will) find themselves facing situations in which they either (i) need to consider taking legal action or (ii) need to respond to legal action from their franchisors.
The Four Main Sources of Franchisees’ Legal Rights
Before we can talk about franchisees’ legal rights, we first need to address where these rights exist—you’ll see why as we get into our discussion. Franchisees’ rights come from four main sources:
- The Federal Trade Commission (FTC) Franchise Rule – The FTC Franchise Rule requires franchisors to provide Franchise Disclosure Documents (FDDs) to prospective franchisees. It also establishes timing requirements for franchisors’ disclosures, and it specifies the information that franchisors must include in each of the FDD’s 23 “Items.”
- Franchise Agreement – Your franchise agreement is a binding contract, and it serves as the primary source of both franchisees’ and franchisors’ rights. Franchisors have substantial discretion to draft one-sided franchise agreements, and while there are limits to what franchisors can require, most franchise agreements heavily favor the franchisor.
- State Franchise Laws – Some states have adopted laws that apply specifically to the franchise sector. These state franchise laws generally fall into two categories: (i) disclosure laws that add on to the FTC Franchise Rule’s requirements; and (ii) relationship laws that establish standards of dealing.
- Common Law – Court decisions handed down over the years also play an important role in determining franchisees’ legal rights. This includes court decisions addressing the legality of franchise agreement terms and interpreting state franchise laws, as well as court decisions dealing with antitrust, unfair trade practices and other commercial issues.
Understanding Your Legal Rights As a Franchisee
With this in mind, what are your legal rights as a franchisee? While individual franchisees’ rights vary depending on the terms of their franchise agreements and the governing law, broadly speaking, franchisees’ rights include:
1. The Right to Accurate and Non-Misleading Disclosures
As a prospective franchisee, you have the right to receive the information you need to make an informed buying decision. Franchisors’ FDDs must contain accurate and up-to-date disclosures, and they may not contain half-truths or other attempts to mislead prospective franchisees.
2. The Right to Operate In Accordance with Your Franchise Agreement and Operations Manual
Once you buy a franchise, you have the right to operate your franchise in accordance with your franchise agreement and the Operations Manual. Your franchisor can only terminate your franchise in accordance with the terms of your franchise agreement and applicable state law.
3. The Right to Hold Your Franchisor to Its End of the Bargain
While your franchisor has the right to enforce the terms of the franchise agreement against you (i.e., by issuing a notice of termination if you commit a breach that you fail to cure), you also have the right to hold your franchisor to its end of the bargain. Your franchisor must also comply with the terms of the franchise agreement, and if it doesn’t, you can take appropriate legal action.
4. The Right to Initiate Dispute Resolution if Necessary
In most cases, taking legal action as a franchisee involves pursuing mandatory mediation or arbitration. Most franchise agreements require franchisees to pursue mediation or arbitration (or both) instead of taking their claims to court. If you need to take legal action against your franchisor, you will need to have a franchisee law firm review the dispute resolution clauses in your franchise agreement to determine what requirements, deadlines and other restrictions apply.
5. The Right to Call Out Fraudulent Franchise Practices
Fraud is a very real concern in franchising. From omitting material disclosures to telling prospective franchisees one thing and then doing another, franchisors can (and do) commit fraud in a variety of ways. Franchisees can (and should) hold their franchisors accountable for fraud, and state franchise disclosure laws provide defrauded franchisees with specific legal rights—including the right to rescission—in many cases.
6. The Right to Challenge Unconscionable Franchise Agreement Terms
As a franchisee, you are bound by the terms of your franchise agreement—right? While this is generally true, there are some exceptions. For example, many states have placed restrictions on the enforceability of post-termination non-competition covenants. If your franchise agreement includes a non-competition covenant that is overly broad and unduly burdensome, a franchisee law firm may be able to help you challenge its enforceability.
7. The Right to Enforce Your State’s Franchise Laws (if Any)
If your state has a franchise relationship or disclosure law, you have the right to enforce your state’s law to the fullest extent of the protections it affords. In some cases, franchisees can pursue state franchise law claims in court even if their franchise agreements require mediation or arbitration. But, regardless of what you need to do to assert your legal rights, if your franchisor has violated them, you can—and should—take action. The costs of doing nothing can be substantial, and issues within the franchisor-franchisee relationship generally don’t go away on their own.
Contact Goldstein Law Firm | A National Franchisee Law Firm
Do you need to know more about your legal rights as a franchisee? If so, we invite you to contact us for more information. We represent franchisees in mediation, arbitration and litigation nationwide. To schedule an appointment with firm founder and franchise attorney Jeffrey M. Goldstein, please call 202-293-3947 or request a free initial consultation online today.