Franchise Law: What Franchisors Must Do and Franchisees Can Enforce

The FTC Franchise Rule at 16 CFR Part 436 requires franchisors to provide a Franchise Disclosure Document at least fourteen calendar days before any agreement is signed or fee is paid. Providing an FDD that omits required disclosures, contains materially false information, or is delivered fewer than fourteen days before signing violates the FTC Franchise Rule and triggers potential rescission liability. Franchise laws counsel advising a franchisor should confirm whether the FDD has been updated within the required annual renewal period and whether all material changes have been disclosed.

Approximately fourteen states require franchisors to register their FDD with a state regulatory agency before offering franchises in that state. California, Maryland, New York, and Washington are among the states with detailed franchise registration requirements, and selling an unregistered franchise in these states can void the agreement and require a full fee refund. Business compliance counsel advising on multi-state expansion should confirm which states require registration and whether the FDD satisfies each state's disclosure standards.

The franchise agreement must specify the royalty fee structure, which typically includes an ongoing percentage of gross sales and a contribution to a cooperative advertising fund. Territorial exclusivity provisions define whether the franchisee has the right to operate without competition from other franchisees or company-owned units within a defined geographic area. Dealership agreement and franchise law counsel reviewing on behalf of a franchisee should confirm whether territorial rights are adequately defined.

Every franchise relationship involves a license to use the franchisor's trademarks, trade dress, and operating systems. A franchisee who deviates from brand standards risks receiving a default notice and, if not corrected within the cure period, faces termination of the franchise agreement. Intellectual property and franchise law counsel advising a franchisor should confirm whether the operations manual and audit procedures support a termination decision.

The franchise agreement sets out grounds for termination, which typically include failure to pay royalties, abandonment, criminal conviction, and repeated brand violations. Many state franchise relationship laws require advance written notice and a reasonable cure period before terminating for curable defaults. Breach of contract suit and franchise law counsel advising a franchisee who received a termination notice should confirm whether the notice complies with state cure requirements.

Franchise agreements typically grant renewal rights subject to conditions, including signing a new agreement on the franchisor's current terms, completing required training, and bringing the business into compliance with updated standards. The franchise agreement requires the franchisee to obtain the franchisor's prior written consent before transferring or selling the business, and the franchisor may have a right of first refusal at the offered price. Franchise resales and franchise law counsel advising on a sale should confirm what consent conditions the franchisor may impose and whether any state law limits the ability to deny transfer.

A franchisee who believes the franchisor breached the franchise agreement may pursue claims for actual damages, including lost profits over the remaining term and the value of the franchisee's investment. Franchisors may pursue breach claims against franchisees for failure to pay royalties, unauthorized use of intellectual property after termination, and violation of post-termination non-compete obligations. Business dispute and franchise law counsel evaluating a breach claim should confirm whether the dispute resolution clause requires arbitration and what law governs the claim.

A franchisee who was misled through false or incomplete FDD disclosures may pursue rescission of the franchise agreement and recovery of all fees paid under both federal and state franchise law. The FTC Franchise Rule does not create a private right of action for damages, but many state franchise investment laws allow franchisees to sue franchisors directly for FDD disclosure violations and misrepresentation. Franchise insolvency and franchise law counsel advising on a misrepresentation claim should confirm whether the state provides a private right of action.