In our last post, we looked briefly at a dispute involving the question of whether franchisors can be held liable for the labor law violations of their employees. The case is an interesting one from a legal perspective, and as we noted, could have an impact on the agreements franchisors strike with investors.
Franchising, like many areas of business, is subject to certain regulations. Under the federal Franchise Rule, specific requirements are imposed on franchisors, not only with regard to disclosures prior to franchise sales, but other areas as well. Complying with the law requires that franchisors file the proper documents with the Federal Trade Commission, make the proper disclosures under the law, and avoid certain fraudulent and prohibited practices.
Among the areas in which information must be disclosed under the law are: information regarding the franchisor and its parents, predecessors and affiliates; the franchisor’s business experience; litigation; bankruptcy filings; initial and other fees; the estimated initial investment; restrictions on sources of products and services; the franchisee’s obligations; terms relating to financing; the details regarding assistance, advertising, computer systems and training to be provided by the franchisor; territories; trademarks, patents, copyrights, and proprietary information; any contractual obligations to participate in the operation of the franchise; restrictions on what the franchisee is allowed to sell; renewal, termination, transfer and dispute resolution; use of public figures in the franchise; financial performance representations; outlets and franchisee information; financial statements; contracts; and receipts.
As can be seen from the sheer number of required areas of disclosure under the Franchise Rule, there is a lot of legwork that must be done to ensure compliance. In our next post, we’ll continue looking at this issue and how an experienced business law attorney can help.