Does Your State Have Franchise Disclosure Laws? If Not, Then What?
By Mario Herman, Esq.
Before searching for a franchise opportunity, it’s important to
understand how the State you live in or will operate your franchise,
regulates franchising. In terms of franchise regulations some States do very
little while others have strong requirements.
In addition to the Federal Trade Commission’s laws regarding the sale of
franchises, fifteen states have franchise investment laws that require
franchisors to provide pre-sale disclosures, known as "offering circulars,"
or “franchise disclosure documents,” to potential purchasers: California,
Hawaii, Illinois, Maryland, Michigan, Minnesota, New York, North Dakota,
Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin.
With the exception of Michigan and Oregon, these state laws treat the sale
of a franchise like the sale of a security and typically prohibit the offer
or sale of a franchise within their state until a franchise offering
circular has been filed on the public record with, and registered by, a
designated state agency. Michigan and Oregon do not require the
filing of offering circulars.
These laws vary from state to state. Some apply only to limited
types of franchises. Others apply only to transactions within their
borders or franchises located with their borders, while some apply to offers
made by franchisors within their borders even if the offer is made to
someone in another state. Several states make a franchisor's failure
to comply with the disclosure laws an automatic violation of state law.
It is important for a prospective purchaser of a franchise, and anyone who
wonders if they received proper disclosure before purchasing a franchise, to
check not only the laws of the state in which the franchise is (or is to be)
located, but also the laws of the state in which the franchisor is located,
to see what protection is afforded by the applicable state laws. These
laws provide prospective and existing franchisees with important legal
rights, including the right to bring private lawsuits for violation of the
state disclosure requirements. An attorney experienced in franchise
law will be familiar with the various state laws, and will be able to advise
you of your rights and remedies.
Even if your state does not have a franchise disclosure law, franchisors
are still required to follow the FTC's disclosure rules. Under the FTC
rules, franchisors are not required to file their Franchise Disclosure
Documents (“FDD”) with any federal agency. However, you must be given the
FDD at least 14 days before you sign any franchise or other agreement, or
pay any money to the franchisor. This document must contain specific
information about the franchise being offered, including information on
items such as: the franchisor’s background, current and recent litigation,
bankruptcy filings of the franchisor or its officers, costs related to
staring up and operating the franchised business, restrictions on where you
obtain supplies, territory rights and restrictions, trademark rights and
restrictions, and financial statements of the franchisor. While
franchisors are not required to disclose information regarding potential
income or sales, if the franchisor chooses to do so, it must follow the
FTC’s rules regarding such representations and must have a reasonable basis
for its claims, and must provide the documents which form the basis of such
claims if requested by a prospective franchisee. The FDD must also
include a copy of the franchise agreement that will be signed by the
While there is no private right of action under the Federal Trade Commission
Act (“FTC Act”), disclosure violations under the FTC Act can often be
enforced through the statutory rights and duties found in the unfair
business practices acts or "Little FTC" Acts under state law. Many
states have statutes patterned after Section 5 of the FTC Act, which
prohibit unfair methods of competition and unfair or deceptive acts or trade
practices. These Little FTC Acts prohibit "unfair" conduct as well as
deceptive conduct, and often allow private actions for damages, attorney's
fees, and sometimes treble (multiple) damages. Claims have been successfully
advanced under such Acts to redress violations of the disclosure laws under
the Federal Franchise Rule. An attorney experienced in franchise law
litigation will be able to advise whether your state has a “Little FTC
Act,” and if redress might be available.
Mr. Herman, based in Washington, D.C., represents franchisees domestically
and internationally in negotiation, mediation, arbitration, and litigation.