There are significant benefits to operating a franchise. Franchisors use other people’s money to expand the business. Franchise fees and ongoing royalties allow franchisors to grow without sacrificing control. The influx of capital funds marketing, improves quality of goods and services, and builds the brand. Franchisees benefit by having an established business model to follow, with a centralization of functions such as marketing, training and support, customer lead generation, websites, and call centers.
Franchise law is complex. There are many federal and state laws governing franchising that operate as a patchwork system with many traps for the unwary. Franchise laws are not uniform and vary from state to state. A single franchise can fall under the jurisdiction of multiple state and federal laws. To further complicate, there are state and federal laws that regulate “business opportunities” and “seller-assisted marketing plans” that may also apply to franchising.
If you are a operating a franchise or contemplating such a business opportunity, contact the franchise law attorneys at Maginnis Law, PLLC. Maginnis Law is a Raleigh civil litigation firm that has handled a wide range of franchise issues including assistance with franchise litigation, and review of operations manuals/franchise disclosure documents. Contact the firm at 919.526.0450 or submit a new case inquiry here.
Franchising is governed by various state agencies and the U.S. Federal Trade Commission, entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” (FTC Franchise Rule). The FTC Franchise Rule applies throughout the United States. North Carolina does not have a separate statute governing franchise relationships. Oftentimes, however, principles set forth in N.C. Gen. Stat. 75-1.1 dealing with monopolies, trusts, and consumer protections may apply. Multiple states can govern the same franchise. Typically, a state’s franchise laws apply if the:
- Offer or sale of a franchise is made in the state; or
- Franchised business will be located in the state; or
- Franchisee is a resident of the state.
Under the FTC Franchise Rule, there are 3 elements of a franchise:
- Trademark – the distribution of goods or services, which are associated with the franchisor’s trademark or commercial symbol;
- Significant Control or Assistance – the franchisor’s exercise of significant control over, or giving significant assistance to, the franchise, including:
- approval of the site;
- requirements for site design or appearance;
- designated hours of operation;
- specified production techniques;
- required accounting practices;
- required participation in promotional campaigns;
- training programs; and
- providing an operations manual.
- Required Payment – the franchisee’s payment to the franchisor of at least $500 prior to the expiration of the first six months of the operation of the franchised business. These include franchise fees, royalties, training fees, payments for services, and payments from the sale of products.
If all 3 elements are present, the relationship will be a franchise under the FTC Franchise Rules. When a franchise exists, the rules require a franchisor give written pre-sale disclosures to prospective franchisees on precise timelines. The disclosure must contain certain information about the franchise including, a description and identifying information of the franchise, the business experience of its owners and officers, litigation and bankruptcy history, required fees and purchase of the franchisee, and an estimated total initial investment arraignment. These must be updated on an annual basis.
Oftentimes, a franchisee relationship will exist without purposefully creating such a relationship. This can cause major problems to an unaware business. With the assortment of state and federal laws relating to franchising and the seriousness of FTC and state rule violations, it is important to consult with an attorney who understands the nuances of franchise law. Contact the civil litigation attorneys at Maginnis law, PLLC to speak with one of our attorneys today. We regularly represent clients throughout the Triangle including Raleigh, Durham, Chapel Hill, Cary, Apex, Knightdale, Morrisville, and Garner. Our firm offers a variety of billing arrangements such as hourly, retainer, and flat rate. To speak our civil attorneys, contact the firm at 919.526.0450, or send a confidential email inquiry using our contact page.