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IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In

December 19, 2013

Is Franchising Regulated?IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In


“Prospective franchisees can feel safe investing in a franchise,” many a franchise salesman has stated, “Because franchising is highly regulated, and there are severe penalties for non-compliance.” The International Franchise Association and other opponents of franchisee-protection legislation also argue that franchising is already a “highly regulated industry.”

This contention seems highly suspect considering the many blatant stories on UnhappyFranchisee.Com of shady companies that violate franchise disclosure laws with impunity, and established franchisors who seem to hold all the cards in the franchise relationship. So we are asking the nation’s top franchisee attorneys: “Is Franchising Highly Regulated?”

Jerry Marks Franchise Attorney

Jerry Marks – Marks & Klein (Profile)

Is franchising truly a “highly regulated industry”?  No, because the FTC Rule does not grant individuals a “private right of action,” which is the right to bring legal action in their own name if the provisions of the FTC  act were violated in connection with the sale or operation of a franchise. The FTC Rule only gives the vastly under-staffed members of the FTC the right to bring an action, which is statistically insignificant compared to all the franchise litigation that exists.

Moreover, the FTC does not, unlike the states of New York, or California or Maryland review FDDs (franchise disclosure documents) prepared in accordance with Rule 436.  The FTC merely requires a franchisor to prepare an FDD in accordance with its rules but it never checks if the FDD is accurate. Finally, the FTC has many other matters besides franchise cases that it attends to and consequently the FTC Rule is like a “toothless tiger” when it comes to franchise regulation.

Having said that however, there are state franchise statutes that provide protection to some degree but generally not a sweeping as the FTC Rule.

Do my franchisee clients believe there is more protection in place than there actually is?   Yes, because the FTC gives prospective franchisees the logical idea that since the FDD is prepared in accordance with FTC guidelines, it must have been reviewed and accepted by the FTC

If strict government oversight is just a franchise myth, how damaging a myth is it?  It is very damaging, because prospective franchisees mistakenly believe – with good cause – that the government has in some way approved the franchise they are considering.

Cary Ichter Franchise Attorney

Cary Ichter – Ichter Thomas (Profile)

“There is, for all practical purposes, no franchise regulation on the Federal level because the FTC has nullified its own regulations through its lack of enforcement and by not allowing for a private right of action… even when its regulations have been clearly violated. “Regulations having to do with selling franchises typically come from the FTC Franchise Rule and the FTC apparently doesn’t have the resources to enforce that rule, or even go after franchises that are out there pulling some sort of scam. The FTC, as far as I can tell, doesn’t do much of anything to enforce franchising regulations.” Read: Attorney Cary Ichter: There is No Federal Franchise Regulation

Jonathan Fortman Franchise Attorney Jon Fortman – Fortman Law (Profile)”Franchisors use the line that franchise industries are ‘highly regulated’ as a ploy to ease investors’ anxieties. However, it is our experience that the exact opposite is true. Franchisees commonly mistake the Federal Trade Commission (FTC) as protecting their investment. When in fact, the FTC merely provides rules with no means of enforcement. It is only after a franchisee has been defrauded that he or she quickly realizes the FTC Franchise Rule does not provide them with a private cause of action. Not to mention, the FTC also does nothing to regulate the information contained in Franchise Disclosure Documents. While it may have rules and regulations for franchisors, they are merely used as smoke screens for franchisors to withhold pertinent information from its investors. “Furthermore, in twenty-four states, franchise registration is not even required, but the FTC Franchise Rule must be followed, which provides minimal protection for franchisees. There are some states that have franchisee protection statutes, nonetheless they still do not provide enough protection. While some protection is better than none, these still do not provide the franchise industry with the status of ‘highly regulated.’ No one is there to enforce the rules leaving the franchise industry rife with fraud. The need for the franchise industry to be not only highly regulated, but regulated at all, has been long overdue.”
Peter Lagarias

Peter C. Lagarias – Lagarias Law Offices

”When the International Franchise Association and franchisors complain of excessive regulation in franchising, they should be firmly corrected. Repeatedly asserting a position does not make it so. And while everyone is entitled to their own opinions, everyone is not entitled to their own facts. The facts are that franchise laws do not cover the bulk of the three core areas of franchise relationships: 1. the initial period involving sale of franchises; 2. the franchise relationship during its term, and 3. the end of the relationship via termination, non-renewal or transfers.” Read: Over-Regulation of Franchising is a Myth Whose Time Has Passed , Peter C. Lagarias, Esq. [Coming Soon]

Howard Bundy

Howard Bundy – Bundy Law PLLC

“Franchising is not highly regulated. In truth, one could say that it is hardly regulated at all. If you want to see regulations, look at industries like securities, insurance, banking, construction and health care. Ask any contractor standing in line for a permit or waiting for an inspection about regulation. Ask an insurance executive as they are negotiating the details, including pricing, of their policy agreements with 50 state insurance officials. Franchising is subject to only a light touch of regulations—for the most part only even touching on what the franchisor can say before the sale. In almost all states, the franchisor can do anything to the franchisee after the sale with no risk of governmental action or liability.” Read: Attorney Howard Bundy: Franchising is Hardly Regulated at All

Stanley Dub 100

Stanley M. Dub – Stanley M. Dub Co. LPA

“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.” Read: Attorney Stanley Dub: Franchising is NOT Highly Regulated

Richard Solomon

Richard A. Solomon

”Franchising is not a regulated industry in any real sense, It has to deal with certain “paperwork” laws requiring FDDs and registrations, but these laws have no enforcement teeth because they are all unfunded mandates. Enforcement is left to private civil litigation in over 99 % of situations. The claim that it is regulated is just a convenient sales pitch for those who don’t know what regulation is. By comparison, parking your car overtime on a parking meter is a regulated activity – far more so than franchising.”

Josh Brown

Josh Brown

“Most people I meet with do believe that the industry is policed more than it actually is. They usually are not so sure about the regulations, but they erroneously believe that the stack of docs they receive that make up the FDD & other related agreements somehow legitimizes the franchisor… They unfortunately believe that the FDD contains everything that they need to know, and they blindly believe what is told to them by franchisors. I really don’t think, though, that the myth of the highly policed nature of franchises is that damaging… It may serve as some sort of comfort to them when they are told how highly regulated the industry is, but I really don’t believe it moves the decision-making meter. More of a danger is the damaging way in which some franchisors seduce would-be buyers to believe that the systems are better organized and more profitable than they actually are, which is is just downright misleading and unethical.” Read Attorney Josh Brown: Legal Docs Don’t Legitimize a Franchisor

Louis Sousa

Louis A. Sousa

”Laws are in place but the protections do not go far enough to protect franchisee’s interests. Repeated attempts to balance them in the legislative process are vigorously fought by the franchisors. For example, few states have laws requiring a franchisor to renew a franchise agreement at its expiration, stripping an otherwise compliant franchisee of value as term expires. Few state laws restrict termination of a franchise agreement to good cause shown. Within the last decade Rhode Island’s legislature passed a law expanding franchisee rights and the franchisor lobby immediately descended upon the state house resulting in a substantial withering of the statute.”

Terrence Dunn

Terrence Dunn

“Government regulation does not presume governmental oversight. Government regulation and/or oversight in an open economy should be employed judiciously and is never a substitute for intelligent due diligence and careful legal advice. The franchise landscape is regulated in the sense that all offerings are supposed to follow a rigid format. There is little oversight. The law is applied in different states in varying ways and it has little teeth to it. There is room for the unscrupulous to take advantage of the unwary. That is always the case in a free market. Too many cases arise because buyers don’t fully investigate the presented opportunity. That is avoidable. Hire a good franchise lawyer.”

Dan Davis Franchise Attorney

Dan Davis – Ichter Thomas LLC (Profile)

”Franchising is a highly-regulated industry, but the nature of that regulation is limited in ways that prospective franchisees may not understand. The Federal Trade Commission’s (‘FTC’) Franchise and Business Opportunities Rule imposes extensive disclosure requirements on franchisors. The FTC’s Compliance Guide, for example, is 154 pages long. It is important to understand, however, that the Franchise Rule does not regulate the substance of franchise agreements. All the Franchise Rule does is to require franchisors to disclose certain information so prospective franchisees can make more informed (and therefore presumably better) decisions.”   Read: Attorney Dan Davis: Is Franchising Highly Regulated?

Mitchell Kassoff

Mitchell Kassoff

“The first answer to that question is yes, franchising really is a highly regulated industry. There is a very detailed Franchise Disclosure Document required to be given to each prospective franchisee, plus registration requirements in many states. “The second answer to that question is the effect of this regulation. It is time consuming and expensive to draft a Franchise Disclosure Document and then to have it registered in the states that require registration, especially since each state requiring registration has its own special requirements. The result is a detailed and complex document that is so detailed and complex that many prospective franchisees give up and don’t even bother to read it. The effect of this regulation is an expensive document, that many prospective franchisees don’t read and which increases the cost to purchase a franchise.”

Attorney Jeff Haff

Jeff Haff – Dady & Gardner

Franchising is regulated by the FTC and by certain states. The issue of whether franchising is a “highly regulated industry’ is a vague enough inquiry that it may reasonably be up for debate. For example, would I argue that pro-franchisee changes to the Minnesota Franchise Act are reasonably foreseeable and constitutional because Minnesota already regulates franchising? Certainly, I would. I have made that same argument in other states with existing statutes. But would I say that no more franchise regulation is necessary anywhere in the nation because the industry is already highly regulated? No, I would not.

In most states, franchisees and prospective franchisees enjoy almost no protection from franchisor misconduct, pre-sale or post-sale. The FTC Rule, while helpful in theory, has actually been used as an anti-franchisee weapon by franchisors who go to state legislatures and say that “there is no need for state law, the FTC protects them.’ I would estimate that I, personally, have raised more concerns and brought more actions on behalf of franchisees in the past year than the FTC has in the past 25 years. If there are thousands of franchisors in the U.S., how is it possible that basically none of them have ever done anything to run afoul of the FTC Rule?

When a state has the audacity to propose a new franchisee protection statute that requires a franchisor to act “reasonably and in good faith,” what is the reaction of franchisors and their advocates every time? ‘If you make us act reasonably and in good faith, we will stop franchising in your state altogether.” When franchisors uniformly oppose any regulation that will impact their ability to act unreasonably or in bad faith, and
threaten to boycott any state that protects franchisees in this very basic manner, it should be apparent to anyone, even a casual observer, that the existing laws do not protect franchisees sufficiently. Franchisors demand (and generally achieve) absolute power to do anything they want to their franchisees – does that sound like a “heavily regulated” industry to you?

 Kevin B Murphy

Kevin B. Murphy – Franchise Foundations

Only a small minority of states have franchise relationship laws, and franchise registration laws.  Even in these, there is no due diligence review.    They just collect their filing fee, due a cursory review of the financials to see if a franchise fee deferral is required, and that’s about it.

Unlike China, which requires a number of proven company-owned prototypes and management team in place for several years before franchising is allowed, the U.S.A. has absolutely no requirements or minimum standards to franchise – just provide an FDD before a sale.

Although the federal FTC Rule applies in all states, it is entirely without “teeth.”   There is no private cause of action allowed for injured, defrauded franchisees.   Due to extensive lobbying, only the FTC can initiate its own “enforcement action.”  Of course, this presumes it has the budget to do so.   Not surprisingly, no enforcement actions have been taken by the FTC since the 1990′s.

Read:  Franchise Attorney Kevin Murphy Debunks the Value of the Franchise Disclosure Document (FDD)

Check back as we add more responses from top franchisee attorneys and other franchise insiders. Visit our Directory of Franchise Attorneys. WHAT DO YOU THINK? IS FRANCHISING “HIGHLY REGULATED” AS THE IFA AND FRANCHISE SALESPEOPLE CLAIM? SHARE YOUR OPINION BELOW. Contact UnhappyFranchisee.comTAGS: Franchise regulations, franchise laws, franchise law firms, franchise lawyers, franchise lawyer, franchise compliance, state franchise laws, federal franchise laws, franchise law, franchise attorneys, franchisee attorneys, franchise myths, is franchising safe?, franchise lawsuits, franchise failure rates, franchise complaints, franchise problems

Comments

5 Responses to “IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In”

  1. Joel Libava says:

    Sean et al:

    Some regulation is better than no regulation, that’s for sure.

    Why didn’t you have any attorney’s from the IFA chime in?

    They should have their say, right?

    The Franchise King®

  2. ADMIN says:

    Joel:

    I am intentionally giving attorneys who mostly represent franchisees the first crack at answering, though all are welcome to voice their opinions here. I do think that Franchisee Attorneys are in a unique position to debunk some of the common tall tales and whoppers that the industry has collectively spun. Telling the unpleasant truth does not go against their best interests – unlike most others in the industry.

    The presence of disclosure documents, registrations, SBA Loansand an FTC Rule, IMHO, give the false impression that Big Brother is watching out for franchise investors. However, anyone who spends some time reading through UnhappyFranchisee.Com quickly learns that there are plenty of disreputable snake oil salesmen in the franchise industry who pretty much do whatever the hell they want… and there’s no agency or individual (other than a franchisee attorney) who will do a durn thing about it.

  3. […] Read more: http://www.unhappyfranchisee.com/is-franchising-regulated/ […]

  4. Joel Libava says:

    I agree, although there are a few good men and women in franchising.

    Like you. man.

    The Franchise King®

  5. […] We’ve already received a great response for our call to debunk the Myth of Franchise Regulation. […]

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