Franchise Laws

Franchise Laws

Franchising has a long history in the U.S. but not until the late 1970s did the sale of franchises become the subject of federal and state regulation. The impetus to regulate was due in large part to the fraud surrounding the sale of Minnie Pearl chicken franchises. The exact story is blurred by time and many stories have arisen around Minnie Pearl's failed business venture. However, two of the problematic activities were: 1) the acceptance of large sums of money as initial franchise fees for units that were never developed and 2) the reporting of uncollected fees as revenues for the purpose of driving up the stock price for the Minnie Pearl public company. The entire business venture imploded due to the multitude of fraudulent activities, and the era of extensive regulation of franchises was born.

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FTC Franchise Rule

The Federal Trade Commission promulgated Rule 436 and California (with the backing of Governor Ronald Reagan) passed its own franchise investment law. These laws and regulations are modeled after the laws of the Securities and Exchange Commission and its disclosure policies. The primary remedy to the perceived problem was to require a disclosure document, originally known as the Uniform Franchise Offering Circular ("UFOC"), and, after a recent revision in the FTC Rule, now known as the Franchise Disclosure Document ("FDD"). Several other states followed the lead of California and instituted franchise registration requirements, which either overlap with the FTC Rule or go beyond the FTC Rule and require additional disclosures or impose additional obligations upon the franchisor.

The FTC Rule is primarily self-regulation on behalf of the franchisor. The FTC only becomes involved in the most egregious violations by a franchisor, such as the Minnie Pearl fraud. Another example was a franchise known as "Car Checkers." (FTC v. Car Checkers of America, 1993-1 Trade Case. (CCH) ΒΆ 70,125 (D. N.J. 1993)) This franchise was created for the purpose of the franchisee selling to the public the service of examining the condition and history of used cars and preparing a report. Of course, there is nothing inherently wrong in such a franchise. However, the methods used by the franchisor were less than stellar. For instance, the franchisor would provide the prospective franchisees with the names of "franchisees" to call about their experience with the franchise. Unfortunately, the franchisor had paid certain persons to provide glowing reviews of the franchise and as it turned out, these people were not even franchisees. In such instances, the FTC will get involved and shut down a franchise. There is no private cause of action under the FTC Rule.

The state franchise laws that presently exist can be categorized as:

  • Disclosure laws (variations upon the FTC Rule)
  • Franchise relationship and termination laws (For example, imposing a good cause requirement for termination of the franchise)
  • Legal redress statutes (baby FTC Acts)
  • Industry specific legislation (for example, automobile dealers and petroleum dealers)


The individual state laws and regulations must be taken into consideration, when developing the legal documentation for the franchisor. For example, New Jersey has no disclosure requirements of its own but very specific laws regarding the transfer and termination of franchises, imposing a good cause requirement upon the franchisor, regardless of the franchise agreement itself. Other states have laws allowing franchisees to seek redress against franchisors under baby FTC Acts.

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