What are Franchise Laws?

Franchise laws exist in many areas of law, including antitrust law, contract law, intellectual property law and international law. Franchise laws are any laws that regulate franchise relationships. They establish requirements for each of the parties in these relationships in order to protect each party from being defrauded by the other party. These laws can vary from place to place, but they generally are similar.

A franchise relationship is an agreement between one or more parties to engage in a business relationship. One party is the franchisor, and the other is a franchisee. The franchisor agrees to allow a franchisee to use a particular system or method of selling a particular product or service that the franchisor developed. In return, the franchisee pays the franchisor various fees.

Franchising occurs on a worldwide basis. Each country has its own franchise laws that will regulate these relationships. For example, in the United States, the Federal Trade Commission (FTC) regulates franchising. Franchisors must comply with the FTC Franchise Rule, which requires a franchisor to provide a franchise disclosure document (FDD) to a prospective franchisee.

The FDD contains the litigation history of the company, what type of assistance the franchisor provides to a franchisee, territorial restrictions and other critical information. These disclosures provide a potential investor with a means of making an informed decision before entering a relationship with a franchisor. The rule also helps to protect prospects against fraud. A franchisor must give the FDD to a potential franchisee prior to entering into any agreements. Failure to comply could result in fines and serve as a basis for a franchisee to cancel a contract.

Mexico, China, Australia and Spain are countries that also have enacted specific franchise laws. Like the U.S., these countries require franchisors to provide certain disclosures to prospective franchisees. Numerous other countries have similar franchise laws. A U.S. franchisor that desires to expand into foreign markets must comply with the franchise laws of the other countries. U.S. embassies can provide information about franchise laws in countries that might be of interest to U.S. franchisors.

A franchise lawyer must have a wide base of legal knowledge to advise his or her clients, because franchise laws will differ regionally, nationally and internationally. The legal disclosure requirements of simply offering a franchise likely will differ in each jurisdiction.

Franchise laws also will differ based on country's legal system. A civil law system and an Islamic law system will not operate in the same manner as a common law system. For example, the U.S. has a common law legal system, which relies on judicial precedents to make rulings. Countries with civil law systems are not obligated to enforce contracts in the same manner as courts in common law systems. A civil law system allows courts to look beyond the terms of a contract to make a decision.