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What is Franchise Law?
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Table of Contents
What Is Franchise Law
Franchise law refers to the body of laws relating to franchised businesses, how they operate, and the relationship between franchisors and franchisees.
In other words, franchise law regulates the creation, operation, and termination of franchise relationships.
For example, McDonald’s is probably one of the most well-known franchised businesses in the world.
This means that an entrepreneur can enter into a franchise agreement with McDonald’s to own and operate a McDonald’s restaurant.
Typically, franchisors will impose a set of obligations on franchisees to make sure that there is uniformity in price, quality, and service across the entire organization.
If you walk into a McDonald’s restaurant anywhere in the world, you would expect to see the same menu, food that tastes the same, and a restaurant that looks like a McDonald’s.
What’s important in franchised businesses is that the franchisor may have a trade secret, know-how, copyrights, and trademarks that are highly valuable to its business.
The franchisor will allow a franchisee to use its unique business know-how, branding, and image for a fee.
It’s like the franchisee is “renting” the franchisor’s image, commercial know-how, and brand.
Keep reading as I will further break down the meaning of franchise law and tell you how it works.
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How Does A Franchise Work
A franchise refers to a business where the business owners authorize other entrepreneurs to use their company brand, name, and secrets in exchange for a franchise fee.
From a customer’s perspective, a franchise business at one location will look very similar to another franchise business at another location although they may be owned by different parties.
In a franchise relationship, the franchisee is generally responsible for the day-to-day operation of a particular franchise business at a specific location.
The franchisee owns the business and can benefit from business gains but remain liable for business losses.
For the franchisee to use the franchisor’s name, brand, and business secrets, it will pay the franchisor a certain fee as mutually negotiated by the party (generally imposed by the franchisor).
The franchisor will generally provide support to the franchisees such as marketing support, operational support, and other types of support as needed.
However, although the franchisee owns and operates a particular store at a certain location, the franchisor will remain in control of how business is done or should be done.
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What Does Franchise Law Include
In the United States, franchise law is composed of federal laws, state laws, and common law.
Generally, federal and state laws do not override the common law that has been developed in the franchise segment.
At the federal level, you have the 16 CFR parts 436 and 437 that govern franchises where franchisors are required to disclose certain information to franchisees so they can assess the viability of the business.
Accordingly, franchisors are required to give information relating to franchise ownership, startup costs, business restrictions, bankruptcy information, franchisee obligations, advertising aspects, territorial limits, dispute resolution mechanics, celebrity endorsements, financial performance representations, and so on.
The objective is to ensure that franchisees are not misled into believing that they are investing in a profitable and low-risk business when in reality it’s the opposite.
In addition, the Federal Trade Commission (FTC) is the agency that is mandated to adopt federal franchise regulations to ensure fair competition in the segment.
On top of the federal franchise law, you have some states that have also adopted franchise laws and may have designated their own agencies to regulate the sector.
Furthermore, next to federal and state laws, you have common law that applies.
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Legal Areas Related To Franchise Law
Franchise lawyers are required to know everything about franchise law but also have a good understanding of how other areas of the law may apply to their clients.
Franchise businesses operate in complex legal landscapes, particularly those that do business beyond state and national borders.
Franchise lawyers should have a solid understanding of other areas of law, such as contract law, copyright law, trademark law, intellectual property law, employment law, advertising law, tort law, and many other areas.
In addition, since franchisors and franchisees may have conflicts and issues to resolve, franchise lawyers should have a good understanding of dispute resolution strategies and litigation.
Franchisors and franchisees need to find ways to work with one another collaboratively and in a way that mutually benefits both parties.
As a result, franchise lawyers are regularly required to find the right balance in this natural push and pull that takes place between franchisors and franchisees.
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Franchise Law FAQ
What does franchise law mean?
Franchise law refers to the body of laws that govern the registration of franchised businesses, the offer and sale of franchises, and the relationship between franchisors and franchisees.
There are federal laws and regulations, state laws and regulations, and common law that can apply to franchised businesses.
In the United States, the Federal Franchise Rule governs all franchise transactions in the country and it is enforced by the Federal Trade Commission.
Who practices franchise law?
Someone looking to practice franchise law can do so in a law firm, as an in-house attorney for a franchisor or franchisee, or be employed at the government enforcing franchise laws.
Small to mid-sized franchise companies are likely to work with franchise lawyers in law firms as they do not have the means to hire a full-time in-house counsel.
However, larger companies may have the financial capacity to hire a franchise lawyer internally rather than pay high legal fees to external advisors.
What is the legal meaning of a franchise?
In the United States, federal law defines a franchise to be a continuing commercial relationship where a party gives the right to another to use its trademark, has significant control over the other or provides assistance, and is paid a fee.
Businesses should understand the legal definition of a franchise so they do not inadvertently become subject to franchise laws without knowing it.
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Takeaways
So there you have it folks!
What does franchise law mean?
In a nutshell, franchise law refers to the combination of federal and state laws, along with applicable common law, governing franchised businesses and the relationship between franchisors and franchisees.
In the United States, franchise laws govern disclosure requirements, registration requirements, and the relationship between the parties.
According to reports, one out of nine retail businesses in the United States is a franchised business.
Franchise relationships are complex requiring franchise lawyers to have a good understanding of franchise laws and many other related applicable laws.
Now that you know what franchise law means and how it works, good luck with your research!
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