Franchise business arrangements are covered by laws in every country. Several nations, including Australia and the U.K., have recently updated theirs. Should the U.S. do the same?
Franchises are governed in the U.S. primarily by the U.S. Federal Trade Commission (FTC). The definition of a franchise includes three elements:
• A trademark the franchisor licenses the franchisee to use
• “Significant control” by the franchisor over the business systems and practices of the franchisee
• Payment by the franchisee to the franchisor for the first two items on the list
If those elements are present, you have a franchise situation.
States also have franchise laws that apply only in their jurisdictions, and their definitions of a franchise are generally fairly similar, but not identical.
Federal laws about franchises begin with disclosure. Franchisors have to disclose certain information to prospective franchisees. These are contained in a disclosure document.
There are also regulations about the kinds of sales practices franchisors may use, and there is a cooling-off period during which a franchisee can change his or her mind. These laws are designed to prevent franchisors from painting unrealistically rosy pictures that mislead a potential franchise investor.
There are laws about the relationship between franchisor and franchisee, too, including restrictions on how a franchisor can terminate or fail to renew a franchise. This is one of the most common areas of disputes.
When disputes arise, a franchisor can be fined or in extreme cases kept from offering franchises. Defendants may be awarded damages, and if it is determined that a franchisor intentionally defrauded a franchisee, there could even be a jail sentence involved.
Australia has recently introduced stiffer penalties for failing to “act in good faith.” Marketing fund payments can be audited if franchisees vote for such an audit, and the Australian oversight agency can levy fines against franchisors without going to court.
Some Australian experts worry that the “good faith” is not clear enough to be enforceable, while others worry that U.S. franchisors will hesitate to work with Australian franchisees, since they could be fined without court orders.
Canada has extended franchise disclosure laws and the UK, which historically has not had disclosure laws for franchises, is putting them in place. The tough new SPAM laws in Canada also affect how franchisors can communicate with prospective franchisees.
The UK laws, which are part of a new Consumer Rights legislative package, are much tougher than those in the U.S. They extend to the relationship between franchisees and their end customers, too, and include some features that might seem extreme to us in the U.S.
For example, the virtual buttons people click to order at websites must clearly say that people who order have to pay. A pizza franchise, for example, can’t have a button saying “Submit Order” or “Order My Pizza!” The recommended phrasing is, “order with obligation to pay.”
However, the new requirements take into account the digital world, with its far greater opportunities for communication. The U.S. has disclosure laws, of course, but they have not been updated in some time. Kudos to the U.S. for having franchise disclosure laws early, but it might be time for the U.S. to re-examine them.