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

1. STARTING AND GROWING A FRANCHISE:
THE LEGAL NUTS AND BOLTS OF FRANCHISING
Thomas W. France
Venable LLP
February 9, 2012
© 2008 Venable LLP
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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 LLP
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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
franchisor's 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 LLP
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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 LLP
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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 LLP
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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 LLP
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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 LLP
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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 LLP
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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 LLP
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