Doing Business in DC | Starting and Growing a Franchise | The Legal Aspects of Franchising


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Washington, DC Economic Partnership’s Doing Business in DC program on the Legal Aspects of Franchising featuring Thomas France, Partner at Venable LLP.

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Doing Business in DC | Starting and Growing a Franchise | The Legal Aspects of Franchising

  1. 1. STARTING AND GROWING A FRANCHISE:THE LEGAL NUTS AND BOLTS OF FRANCHISING Thomas W. France Venable LLP February 9, 2012 © 2008 Venable LLP 1
  2. 2. Regulation of Franchise Business Relationships  A franchise business relationship is subject to regulation under Federal law and in states that have adopted laws governing franchises  Federal law – U.S. Federal Trade Commission – 16 Code of Federal Regulations Part 436 – Disclosure Requirements – Federal Disclosure Documents – Enforcement – Administrative actions/civil and criminal penalties  State law – Disclosure and Registration – Franchise Relationship Laws © 2011 Venable LLP2
  3. 3. What is a Franchise?  The Federal Trade Commission has adopted regulations defining what types of business relationships constitute a franchise. Under these regulations, a commercial business arrangement is a franchise if it satisfies each of the following three elements: (1) the franchisee will obtain the right to operate a business that is identified or associated with the franchisor’s trademark, or to offer, sell or distribute goods, services or commodities that are identified or associated with the franchisors trademark; (2) the franchisor will exert or has authority to exert a significant degree of control over the franchisee’s method of operation, or will provide significant assistance in the franchisee’s method of operation; and (3) the franchisee is required to make a minimum payment of at least $500 during the first 6 months of operations.  States that regulate franchises also have adopted laws defining what constitutes a franchise - these laws generally are similar to Federal law, but may include different formulations – marketing plan/community of interest © 2011 Venable LLP3
  4. 4. Disclosure Requirements  Federal and state law require franchisors to disclose certain information to potential franchisees prior to the sale of a franchise  Federal Disclosure Documents – Required Disclosure Topics – franchisor and its affiliates – business experience of officers, directors and managers – litigation and bankruptcy – fees that franchisee must pay – estimate of franchisee’s initial investment – restrictions the franchisor imposes on products and services – franchisee’s obligations during the relationship – financing, if any, available from the franchisor – franchisor’s obligations to provide assistance and information about advertising, computer systems and training © 2011 Venable LLP4
  5. 5. Disclosure Requirements  Disclosure Requirements (cont.) – territorial rights – franchisor’s trademarks and other intellectual property – franchisee’s obligation to participate in the operation of the business – restrictions on what the franchisee may sell – information about renewal, termination, transfer and dispute resolution – any public figures who endorse the franchise – optional financial performance representations – information about outlets and franchisees – franchisor’s financial statements – lists and forms of required contracts  A potential franchisee must be given time to review the required disclosures before paying any initial fee or signing the franchise agreement © 2011 Venable LLP5
  6. 6. Acquiring a Franchise  New Development – structure and organization of franchisee • corporation/LLC/partnership • investors – franchise agreement – real estate purchase/lease agreement – development activities – zoning/construction  Acquisition of Existing Business – purchase agreement/diligence – structure and organization of franchisee – franchise – franchisor consent/assignment/new agreement – upgrading/renovation © 2011 Venable LLP6
  7. 7. What Governs the Franchise Relationship?  Federal and state law disclosures  State Law – regulation of franchise relationship – jurisdiction/which law governs – terminations – good cause and notice and opportunity to cure – limitations on franchisor’s right to consent to transfers – franchisee right to franchise association – discrimination of similarly situated franchisees – purchases of goods and services from franchisor or approved sources – litigation forum clauses  Contract Law – the franchise agreement © 2011 Venable LLP7
  8. 8. The Franchise Relationship  The Franchise Agreement – License – right to use trademark and franchise – Fees • franchise fees/royalty • advertising/marketing contributions – Term of Franchise – Territorial Protection – Construction/Renovation Requirements • new development • lease/landlord • ongoing obligations – Advertising and Marketing • local • system – Operations • system standards/manual/operating procedures • employees – Training/Franchisor Support © 2011 Venable LLP8
  9. 9. The Franchise Relationship  The Franchise Agreement (cont.) – Intellectual Property/Confidentiality – Non-Compete • restrictions during term • post-termination – Accounting and Reports – Liability • indemnification • insurance – Restrictions on Transfer • transfers of business • ownership interests in franchisee – Default and Termination  Other Agreements – Guaranty – Lease/Owner Agreement – Development Agreement/Right of First Refusal – Management Agreements © 2011 Venable LLP9