What Are the Franchise Laws?
The franchise laws are comprised of a combination of federal and state laws that govern the offer and sale of franchises. The Federal Franchise Rule is the overarching federal franchise law that governs all franchise transactions throughout the United States, in all fifty states. The Federal Franchise Rule is enforced by the Federal Trade Commission and the central requirement of the Federal Franchise Rule and the FTC's enforcement activities relate to a franchisor's disclosure of a franchise disclosure document prior to the offer or sale of any franchise.
The Federal Franchise Rule sets the minimum standards regarding a franchisor's disclosure obligations and leaves open to each individual state the option to supplement the federal law with state specific franchise laws and requirements. In addition to the Federal Franchise Rule, franchise laws are also comprised of state specific franchise laws and regulation relating to a franchisor's disclosure obligations, the relationship between franchisor and franchisee and the review and registration franchise disclosure documents.
States that require the registration of a FDD with the local state administrator are known as "franchise registration states". States that require the filing of a notice or exemption request with a state administrator - but not the registration or filing of a FDD - are known as "franchise filing states". States that require neither registration nor a filing are typically referred to as "non-registration states". For additional information about state franchise laws, whether or not a state is a franchise registration state, a filing state, or a non-registration state and the applicable laws of each state, visit state specific franchise laws page.
Franchise Law Summary:
- Federal and State Law: The Franchise Laws are comprised of a combination of both federal and state laws.
- Federal Franchise Rule: The Federal Franchise Rule is the overarching federal law that governs the offer and sale of franchises throughout the United States, in all fifty states. The Federal Franchise Rule is issued by the Federal Trade Commission and may be found here.
- Federal Trade Commission: The Federal Trade Commission is the federal agency charged with enforcing and upholding the Federal Franchise Rule and federal franchising law.
- State Franchise Laws: The franchise laws also include franchise laws, rules and regulations that may be enacted by each state. If a state has not enacted its own franchise laws then only the federal franchise rule shall be applicable in that state. Many states have enacted their own franchise laws, rules and regulations. A listing of each state and the state specific franchise laws may be found here.
- Franchise Registration States: A franchise registration state is a state that requires franchisors to register their FDD prior to offering or selling a franchise within that state.Franchisors must renew and update their FDD state registrations no less frequently than annually. Franchise registration states include: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, Virginia, Washington, and Wisconsin. Although Michigan is a registration state and requires a filing that must be reviewed and registered with the State of Michigan, Michigan does not require submission of a franchisor’s FDD. Also, special circumstances exist in the State of Connecticut. In the State of Connecticut if a franchisor’s primary trademark is not registered with the United States Patent and Trademark Office, then the franchisor must treat Connecticut as a franchise registration state and register its FDD with the state.
- Non-Registration States: Non-registration states are states that, unlike registration states or filing states, do not require a franchisor to register the franchisor's FDD or submit a filing or notice with a local state regulator. Non-registration states include: Alabama, Alaska, Arizona, Arkansas, Colorado, Delaware, District of Columbia. Georgia, Idaho, Iowa, Kansas, Louisiana, Massachusetts, Mississippi, Missouri, Montana Nevada, New Hampshire, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Pennsylvania, Tennessee, Vermont, West Virginia, and Wyoming.
- Filing States: Filing states are states that do not require the registration of a franchisor’s FDD, but does require the filing of a notice with the state. Filing states include: Connecticut (provided that the franchisor has a federally registered trademark), Florida, Kentucky, Maine, Nebraska, North Carolina, South Carolina, South Dakota, Texas, and Utah. The filings within these states vary and the frequency of the filings also vary with some filing states requiring a one-time filing and others requiring annual filings.
- Franchise Disclosure Laws and Franchise Relationship Laws: Franchise laws are typically differentiated between franchise disclosure laws and franchise relationship laws. The primary franchise disclosure law relates to the federal mandate that a franchisor must disclose and provide to a prospective franchisee the franchisor's current and compliant franchise disclosure document no less than 14 days prior to signing any franchise agreement or accepting any funds from the franchisee. At the state level the franchise registration states have supplemented the federal law by requiring franchisor's to register their FDD and obtain state approval of their FDD. In addition to these disclosure laws certain states (including non-registration states) have enacted franchise relationship laws which govern how the contractual relationship between a franchisor and franchisee should be interpreted and in certain instances have afforded supplemental protections to franchisees irrespective of the terms of the franchise agreement.
What Franchise Laws Govern?
Within almost every franchise agreement is a choice of law provision where franchisor and franchisee typically agree that the laws of the state where the franchisor is located governs. When it comes to properly disclosing a FDD, at all times, a franchisor must comply with the Federal Franchise Rule and the federal FDD disclosure obligations. When a franchise transaction involves a particular state (i.e., the franchisor is selling franchises from within a particular state, a prospective franchisee is a resident of a particular state, the franchisor is a resident of a particular state or the franchised business will be located within a particular state) then the respective state franchise laws will also govern.
Where Does the FDD Get Registered or Filed?
At the federal level the Federal Franchise Rule does not require that a franchisor register or file its FDD with the FTC or any other federal agency. Under federal law a Franchisor must monitor its own internal compliance and ensure that it properly prepares, maintains, issues and discloses its FDD in accordance with the requirements of federal law. If the franchise transaction involves or may involve a franchise registration state then the franchisor must have obtained registration of its FDD with the particular state prior to offering or selling a franchise.
Find out about our Franchise Counsel Program and learn how we can assist your brand in successfully managing your FDD registrations and notice filings. To learn more about particular state franchise laws, visit our state specific franchise laws page.