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USA

Franchise regulation

The Federal Trade Commission (FTC) Franchise Rule covers the law at the federal level. There are further laws at state level.

Pre-contractual disclosure requirements

The FTC Franchise Rule requires franchisors in all 50 states and USA territories to make prescribed disclosures to prospective franchisees 14 calendar days before the prospective franchisee can either:

  1. sign a binding agreement relating to the franchise; or
  2. pay any money to the franchisor or its affiliates.

There are further disclosure obligations imposed in several states which go above and beyond what is required at state level.

The matters that need to be disclosed are generally uniform but certain states have additional disclosure requirements which vary from state to state, but most franchisors are able to incorporate all disclosures into one disclosure document.

Registration

Federal registration is not required but 14 states require registration of the franchise before offers or sales can be made. Several other states have “business opportunity” laws. These are not franchise laws but extend to the franchise relationship. They can be minimised by filing exemptions at a low cost and some will exempt a franchisor that licenses a federally registered trade mark.

There is no legal requirement to register the brand's trade mark before offering or selling a franchise, although registration is advisable. Without a federally registered mark, some states will require additional disclosure obligations and the exemptions from business opportunity laws may not be available.

Other issues

The FTC Franchise Rule prohibits a franchisor from disclaiming, or requiring a prospective franchisee to waive reliance on, any representation made in the disclosure document.

There are no “mandatory” clauses in a franchise agreement as such but there are clauses which may be invalidated by state statutory law. These clauses are often related to end of relationship situations such as termination and transfers.

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Certain states such as New York do not allow franchisors to speak to a franchisee before a disclosure document is provided.