How to Cleverly Navigate Franchise Law
Business is changing fast, and competition keeps growing. That’s great for the economy, but only if everyone plays by the rules.
“If you want to enter into a franchise agreement with any institution or individual, it is crucial to understand the federal and state laws that govern this business step. When you don’t follow the rules, you may see everything you have worked for go down the drain,” says Jason Power of Franchise.Law.
This article explains franchise law and how to handle franchise conflicts.
Legal Duties in Franchise Relationships
Franchising is a unique law specialization governed by the federal and state governments. The Federal Trade Commission (FTC) regulates franchising in the United States. It outlines guidelines for how a franchisor markets its business models to potential purchasers (franchisees).
Different states build on this foundation to enact franchise laws. The laws explain how a franchisor can sell a franchise in the jurisdiction, steps to terminate a franchisee, handling post-term covenants (like non-competition agreements), and managing the franchisor-franchisee relationship during conflicts. The laws also establish terms for mediation, arbitration, and litigation.
Hence, you need a local franchise law attorney to guide your operations when securing a franchise deal with anyone. The laws are complex, and you need a legal representative who can quickly interpret them to ensure you satisfy all the requirements.
Common Legal Disputes in Franchising
To understand franchise disputes, it helps to know which issues come up most often. One of the most common franchise disputes is when a franchisee is uncomfortable with the franchise relationship and wants to end it. This dispute often ends through negotiations and discussions.
The biggest questions usually involve non-compete agreements and money, especially when a franchisee wants to leave before the contract ends. Parties will discuss how to end the contract mutually. It can take some time for both sides to agree on the terms of ending the partnership.
Intellectual property disputes are another common cause of franchising disagreement. These arise when a franchisee uses an unauthorized trademark or when a franchisor protects its trademarks from infringers.
During this dispute, the plaintiff will accuse the defendant of violating federal or state franchise laws. The case will proceed to trial if they cannot resolve their differences through mediation and arbitration. Other accusations in these instances include misrepresentation, lack of fair dealing, breach of good faith covenant, and fraud.
Misrepresentation and fraud claims often come up when the franchisor gives false or misleading financial information during the sale. Disputes will follow when the franchisee realizes the numbers weren’t accurate.
Steps to Resolving a Franchise Conflict
Franchise law firms explore negotiation first in franchise disputes. They believe the case can be resolved through settlement discussions when both parties are willing. However, when discussions fail, the case will proceed to litigation.
If the dispute involves a state-specific issue, like a contract governed by state law, it will be handled in that state’s court system. In these cases, state law takes priority, so it’s smart to work with a local attorney who knows the state’s franchise rules.
Some franchise disputes are resolved with arbitration. For it to be seamless, all parties need a chance to share their evidence and concerns. This will help the arbitrator make a fair decision.
The Best Way Franchise Owners Can Avoid Disputes
First, ensure you hire a reputable local franchise law attorney to prepare your franchise disclosure agreement. This will ensure that the document satisfies all legal requirements.
Furthermore, you must be diligent during franchise sales. While you must not hide necessary information from the buyer, you must also not disclose more information than is required. You can allow a lawyer to guide you through the process.
When you under or over-reveal information, it may be the basis of misrepresentation or fraud allegations. Hence, you can avoid these claims when you are more diligent.
Franchisor and franchisee must also be honest and transparent with each other. Franchisees should also disclose their past experience or financial status. You must not buy a franchise if you lack the financial resources to sustain it.
Concluding Remarks
Franchisor and franchisee should do their due diligence before signing a franchise agreement. Before signing any document, have a franchise attorney review the deal first.
The franchisor and the franchisee must also adopt a cooperative approach for franchise systems to work effectively. When a franchisor signs a franchisee, they must support and train them to acquire the desired level of competence. And as a franchisee, never refuse franchisor support.
