Last time, we began looking at the federal Franchise Rule and the various disclosure requirements under the law. As we pointed out, compliance with the rule involves a lot of detailed record-keeping and can be quite time-consuming for business.
There are, of course, good reasons for the requirements under the Franchise Rule. The purpose of the disclosure requirements is to ensure that investors have truthful and sufficient information regarding the franchisor and the offerings it is making to investors. This protects franchisees, of course, but it can also help franchisors to clarify their contractual arrangements with investors and can be used as an opportunity to ensure the success of a business’ franchise operations.
The Franchise Rule can be enforced with both civil and criminal penalties, and compliance is critical to ensure that franchisors avoid liability and the detriment to their business that would result from violations of the law. The key difference between criminal and civil liability will be whether the violation is willful or merely negligent. Companies accused of failure to abide by disclosure requirements should certainly work with experienced legal counsel to ensure their rights are protected and their exposure to litigation minimized.
Ideally, of course, businesses take a proactive approach to compliance and ensure they put in place effective processes for meeting the requirements of the law and handling disputes that arise in connection with franchise agreements, but sometimes even the best precautions cannot prevent business litigation.
In any case, working with an experienced business law attorney can help a franchise navigate its legal responsibilities and liabilities.