Is Franchising a highly regulated industry?
Do those big fat Franchise Disclosure Documents (FDD) and references to “registration states” and the FTC “Franchise Rule” mean that Big Brother is out there keeping watch for evil-doers and protecting the rights of franchisees, prospective franchisees and their families?
The answer depends on whom you ask.
Franchise salesmen, brokers and others who benefit financially by promoting a false sense of security in franchise investing will argue that it is.
The IFA (International Franchise Association) argues that franchising is “highly regulated” and therefore legislation intended to make the franchisee-franchisor playing field even minutely more level is completely unnecessary.
UnhappyFranchisee.Com has asked leading franchisee attorneys – those who deal with franchise regulation (and the lack thereof) on a daily basis – whether the characterization of franchising as “highly regulated” is accurate.
According to Ohio-based franchise attorney Stanley Dub, Franchising as a “highly regulated industry” is a myth.
“Except for the generally applicable pre-sale disclosure obligations,” writes Dub, “Franchisors are mostly allowed to run their franchise businesses as they like.”
Read Dub’s response to our inquiry below.
(For other responses and discussion, see IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In).
Franchising is NOT Highly Regulated
Franchising is NOT a highly regulated industry, in the traditional sense of those words.
At the federal level, there is only a pre-sale disclosure obligation imposed by the Federal Trade Commission, and the FTC makes little or no effort to police it. All the enforcement activity occurs at the state level, and this differs significantly from state to state. Only about a third of the states have an agency dedicated to franchise enforcement, and even those states generally regulate only pre-sale disclosures, with some also placing a few limits on the terms that can be included in a franchise agreement. Other states have laws on the books that allow a franchisee to sue for disclosure violations, but roughly a third of the states do not even have that sort of law on their books.
Except for the generally applicable pre-sale disclosure obligations, franchisors are mostly allowed to run their franchise businesses as they like.
They can usually get away with commingling franchisee advertising payments and using them for a variety of purposes, including soliciting new franchisees. They can impose sometimes-unnecessary quality standards and dictate which vendors the franchisee uses, and they can collect and retain rebates on these purchases. They can restrict a franchisee’s ability to operate a competing business after termination, and can give themselves rights to buy the franchisee’s assets or take over the franchisee’s lease and phone number. They can restrict the dispute resolution process by requiring expensive arbitration procedures in far away places. While a few states place restrictions on some contract provisions which they regard as abusive, no state takes a comprehensive approach to these issues. Negotiated changes in the Franchise Agreement are only rarely made. From the franchisee’s point of view, it typically appears as though it’s “take it or leave it”. While this may be justified if the franchisor is a successful operator like McDonald’s, franchise attorneys routinely load up their franchise contracts with similar restrictions, even if they are drafting these agreements for a first-time franchisor.
As a franchise attorney who represents clients on both sides, I urge my franchisor clients not to include restrictive contract language that they don’t really need. However, the contracts I write for franchisors still come out significantly favoring the franchisor. How these relationships should be treated by state and federal governments makes for an interesting debate. But we should at least be clear that the imbalance currently favors the franchisor, and franchising is currently not heavily regulated
Attorney Stanley Dub’s Cleveland/Akron, Ohio-based practice emphasizes franchise law. Services include drafting Franchise Agreements and Disclosure Documents (“FDD’s”); Reviewing franchise documents for buyers; franchise-related negotiation and litigation; expert witness on franchise law. Stanley will begin teaching Franchise Law at Akron University Law School in January, 2014.
WHAT DO YOU THINK? IS FRANCHISING “HIGHLY REGULATED” AS THE IFA AND FRANCHISE SALESPEOPLE CLAIM? SHARE YOUR OPINION BELOW.
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