Franchise law is the set of laws that relates to creating, operating and terminating franchise relationships. Franchise law includes enactments and regulations at different levels of government that regulates how corporations and individuals may enter or commence franchise relationships and affiliations.
The practice of franchise law involves rendering legal services in manner that helps a client comprehend and conform with franchise laws. It may also include enforcing franchise laws or pushing for amendments of extant laws.
Legal Meaning of Franchise
A franchise is the legal or officially permitted use of another company’s business name, secrets, Copyright, goodwill and other business identifiers without the infraction of the rights of the other.
The franchiser is the existing successful company who offers the use of her business identifiers in exchange for a fee. The franchisee is the second party or may be a new company who uses these business identifiers of another company in order to establish and conduct business.
The consumer of both companies may not be able to differentiate the locations of the franchiser from that of the franchisee because they may look very similar, though each location is owned and operated by separate local business owner.
A franchise agreement allows the franchisee to operate his local business as an independent business owner while observing the franchise terms and conditions as well as the franchise law. There is usually no hard or fast rule of how an agreement is usually drafted, however in most cases, the franchiser may control some aspects of the business and receive a percentage of income as payment or recompense, but eventually, it is the independent business owner who may make a profit or loss from operation of the local business.
The purpose of a franchise is to run or operate a business with features that are similar to that of other existing businesses or franchises in other locations so as to enjoy their goodwill.
Features of a Franchise
- The franchisee pays the franchiser a percentage of their gross income as royalties for operating a local independent business with the name and features of an existing business
- The franchisee, under the franchise agreement will be allowed use the franchise’s trademarks, name, logos and products as thought they way the owners.
- The franchiser possesses momentous control over the way the franchisee conducts their business.
Sources of Franchise Law
Franchise law is made up of federal laws and regulations, state law and common law. Most franchises operate in more than one state, and there is need for the enactment of federal laws as well as state laws to regulate franchising in the United States in other to sufficiently bridge possible lacuna.
Some states have domesticated the federal enactment and have also added to the federal laws and regulation. The federal and state laws that regulate franchising have not circumscribed or superseded the common laws that may apply to franchise businesses.
Extant laws derived from the Common Law that addresses disputes relating to contracts, fraud, employment and other commercial issues are applicable to franchise businesses.
Federal Franchise Law
Federal Franchise Law is derived pursuant to 16 CFR parts 436 and 437. The purpose of the law is to oblige franchisers to provide franchisees the details or information needed to determine whether or not the franchise will be a profitable business investment.
Franchisers are under duty to provide prospective franchisees information on an array of concerns such as:
- Estimated start-up cost
- The owner of the franchise, details of parent company and affiliates (if any)
- Advertising provided
- Bankruptcy information
- Legal restrictions on the business
- Obligations of the independent business owner
- Assistance provided to owners
- Territorial rights and limitations
- Names of celebrity endorsers
- Dispute resolution procedures
The Federal Trade Commission
The Federal Trade Commission (FTC) is the U.S. Government agency saddled with the responsibility of implementing federal franchise regulations. The primary purpose of the (FTC) is to protect consumers and ensure economic competition.
FTC as an agency creates policy, conducts investigations, receives complaints and may institute lawsuits in order to enforce federal law. The FTC uses approved formats for franchise disclosure and the current acceptable format is the Amended Franchise Rule.
A few states require franchisees to register in the state which seems to be an addition beyond federal franchise regulations. States with franchise laws may also have statutory established have administrative bodies empowered to handling violations.
Possible Legal Issues That May Arise From a Franchise law Relationship
- Contract Violation
- Copyright Infringement
- Trademark Violations
- Employment disputes
- Civil Litigation
- Dispute resolution
Alternative dispute resolution in Franchise Law
A franchise relationship is a reciprocal beneficial relationship designed or intended to always be in the best interest of either party.
Alternative dispute resolution is an important area of franchise law and franchise Attorneys must work circumspectly to bargain with their counterparts when disputes arise. Attorneys must also know the appropriate time to consider the option of litigation instead of mediation or direct negotiations.
Exclusive Territorial Rights and Limitations in Franchise
The question of territorial limitation in franchise law is still a controversial question demanding for answers by Independent business owners. Most business owners will want to enjoy exclusive territorial right to a franchise business in a specific location, thereby disallowing another business from operating same franchise business in the same geographic location. Independent business owners will usually demand for a clear definition of the scope of the exclusivity of their territorial franchise rights.
Opening another franchise location close to a existing one can be a ground for a civil dispute between the parties as to whether the franchiser is in violation of the operating contract.