Complex of Federal and State Laws Regulates Franchise Operations As Their Popularity Grows - Part I

[Published in the New York State Bar Association Journal]

Franchising is a huge and growing part of the nation's economy. More than 300,000 franchised small businesses operating in the United States account for an estimated $1 trillion worth of income each year and provide jobs for some eight million Americans.[1] Franchising has also entered the Internet era.[2]

The franchising phenomenon is not limited to the United States. In England, for example, franchising is one of the fastest growing sectors of the economy. During the most recent reporting year, the number of franchisees in England rose 17% to 35,200, with yearly turnover reaching 8.9 billion British pounds. Approximately 317,000 people are employed in franchising in England, with 29.3% of all retail trade in England being carried out by franchised businesses.[3]

Franchising in the United States is governed by federal law administered by the Federal Trade Commission[4] and by a variety of state statutes. Filing of documents with the Federal Trade Commission is not required to franchise.[5] Applicable state statutes include franchising laws, business opportunity laws and "Little FTC Acts."[6] In many cases, documentation demonstrating approval by the state must be filed before a franchise is offered for sale within the state. Some states[7] have statutes specific to certain industries. A state is permitted to enact and enforce laws relating to franchising that add to the provisions of federal law.[8] In addition, franchising is increasingly being regulated by other nations.[9]

Unlike securities laws, franchise-related statutes are not designed to be "Blue Sky" laws; instead, their purpose is to provide prospective franchisees with information that can help them determine whether they should purchase a particular franchise.[10] In some states, however, the laws analyze a franchisor's financial statements and franchise agreements and make value judgments about them. If these documents do not meet the requirements of some state agencies, "Risk Factor" notices,[11] escrow requirements[12] and bonding requirements[13] may be imposed or the agencies may even refuse to register a franchise.[14]

  1. ^ International Franchise Association.
  2. ^ "The Electronic Franchise Agreement [Became] Reality October 1"; Franchising World (10/00) P. 21; Klein, Deven; Koch, David. With the deadline for the pending Electronic Signatures in Global and National Commerce Act (E-SIGN) passing its Oct. 1 implementation date, businesses will now be allowed to complete their contracting process online. E-SIGN legislation makes electronic records and electronic signatures as legally binding as ink signatures.
  3. ^ "Be Your Own Boss and Cut the Risks," Birmingham Post (09/27/00) p. 24, Philip Williams.
  4. ^ 16 CFR Part 436, effective October 21, 1979.
  5. ^ Federal Trade Commission Interpretive Guides to Franchising and Business Opportunity Ventures Trade Regulation Rule, 44 Federal Register 49966 (August 24, 1979).
  6. ^ Statutes- Arkansas (Franchise Practices Act, Ark. Code of 1987, Title 4, Chap. 72, 4-72-207), California (Franchise Investment Law, Cal. Corporations Code, Div. 5, Parts 1 to 6, 31000 to 31516 and Contracts for Seller Assisted Marketing Plans, Cal. Civ. Code, Div. 3, Part 4, Title 2.7, 1812.200 to 1812.221), Connecticut (Business Opportunity Investment Act, Conn. Gen'l Stat., Title 36b, Chap. 672c, 36b-60 to 36b-80), Florida (Franchises and Distributorships, Fla. Stat., 1995, Chap. 817, 817.416 and Sale of Business Opportunities Act, Fla. Stat., 1995, Chap. 559 559.80 to 559.815), Georgia (Business Opportunity Sales, Code of Ga., Title 10, Chap. 1, Art. 15, Part 3, 10-1-410 to 10-1-417), Hawaii (Franchise Investment Law, Haw. Rev. Stat., Title 26, Chap. 482E, 482E-1 to 482E5, 482E8, 482E9, 482E11 and 482E12), Illinois (Franchise Disclosure Act of 1987, Ill Laws of 1987, Chap. 85-551 and Business Opportunity Sales Law of 1995, Ill Compiled Statutes of 1996, Chap. 815, 602/5-1 to 602/5-135), Indiana (Ind. Code, Title 23, Art. 2, Chap. 2.5, 1 to 51 and Business Opportunity Transactions, Ind. Code, Title 24, Art. 5, Chap. 8, 1 to 21), Iowa (Business Opportunity Promotions Law, Iowa Code, 1995, Title XX, Chap. 523B, 523B.1 to 523B.13), Kentucky (Sale of Business Opportunities Law, Ky. Rev. Stat. and 1988 Supp., Title XXIX, Chap. 367, 367.801 to 367.819 and 367.990), Louisiana (Business Opportunity Sellers and Agents, Lou. Rev. Stat. of 1950, Title 51, Chap. 21, 51:1801 to 51:804), Maine (Sale of Business Opportunities, Maine Rev. Stat. and 1990 Cum. Pocket Part, Title 32, Chap. 69-B, 4691 to 4700-B), Maryland (Franchise Registration and Disclosure Law, Code of Md. Article-Business Regulation, Title 14, 14-201 to 14-233 and Business Opportunity Sales Act, Code of Md., Title 14, 14-101 to 14-129), Michigan (Franchise Investment Law, Mich. Comp. Laws, 1979, Chap 445, 445.1501 to 445.1545 and Business Opportunities, incorporated into the Consumer Protection Act, Mich. Comp. Laws, 1979, 445.901 to 445.922), Minnesota (Franchises, Minn. Stat. 1996, Chap. 80C, 80C.01 to 80C.22), Mississippi (Miss. Code 1972, Title 75, Chap. 24, 75-24-55), Nebraska, Seller-Assisted Marketing Plan Act, Rev. Stat. of Neb. 1943, Chap. 59, Art. 17, 59-1701 to 59-1761), New Hampshire (Distributorship Disclosure Act, N.H. Rev. Stat., Title XXXI, Chap 358-E, 358-E:1 to 358-E:8), New York (General Business Law, Art. 33, 680 to 695), North Carolina (Business Opportunity Sales Law, Gen. Stat. of N.C., Chap. 66, Art. 19, 66-94 to 66-100), North Dakota (Franchise Investment Law, N.D. Century Code, Title 51, Chap. 51-19, 51-19-01 to 51-19-17), Ohio (Business Opportunity Purchasers Protection Act, Ohio Code, Title 13, Chap. 1334, 1334.01 to 1334.15 and 1334.99), Oklahoma (Business Opportunity Sales Act, Ok. Stat., 1991, Title 71 Chap. 4, 801 to 828), Oregon (Franchise Transactions, Or. Stat., Title 50, Chap 650, 650.005 to 650.085), Rhode Island (Franchise Investment Act, Gen'l Laws of R.I., 1956, Title 19, Chap. 28.1, 19-28.1-1 to 19-28.1-34), South Carolina (Business Opportunity Sales Act, Code of Laws of S.C. 1976, Title 39, Chap. 57, 39-57-10 to 39-57-80), South Dakota (Franchises for Brand-Name Goods and Services, S.D. Codified Laws and 1971 Pocket Supp., Title 37, Chap. 37-5A, 37-5A-1 to 37-5A-87 and Business Opportunities, S.D. Cod. Laws and 1989 Pocket Supp., Chap. 37-25A, 37-25A-1 to 37-25A-54), Tennessee ("Little FTC Act," Tenn. Code, Title 47, Chap. 18, 47-18-101 to 47-18-117), Texas (Business Opportunity Act, Business & Commerce Code, Title 4, Chap. 41, 41.001 to 41.303), Utah ("Little FTC Act," Utah Code of 1953 and 1987 Supp., Title 13, Chap. 11, 13-11-1 to 13-11-23 and Business Opportunity Disclosure Act, Utah Code 1953, 1989 Cum. Supp., Title 13, Chap. 15, 13-15-1 to 13-15-6), Virginia (Retail Franchising Act, Va. Code of 1950, Title 13.1, Chap. 8, 13.1-557 to 13.1-574 and "Little FTC Act," Code of 1950, 1987 Replacement Vol., Title 59.1, Chap. 17, 59.1-196 to 59.1-207 and Business Opportunity Sales Act, Code of 1950, Title 59.1, Chap. 21, 59.1-262 to 59.1-269), Washington (Franchise Investment Protection Act, 1989 Rev. Code of Wash., Title 19, Chap 19.100, 19.100.010 to 19.100.940 and Business Opportunity Fraud Act, 1989 Rev. Code of Wash., Title 19, Chap 19.110, 19.110.010 to 19.110.930), Wisconsin (Franchise Investment Law, Wisc. Stat., 1993-94, Chap 553, 553.01 to 553.78 and Wisc. Organized Crime Control Act, Wisc. Stat., 1993-94, Chap 946, 946.82) and Washington, D.C. ("Little FTC Act," D.C. Code, 1981, Title 28, Chap 39, 28-3901 to 28-3908).

    Regulations- California Administrative Code, Title 10, Chapter 3, Subchapter 2.6, 310.000 to 310.505; Hawaii Department of Commerce and Consumer Affairs, Title III, Business Registration, Title 16, Chapter 37, 16 to 37-1- 16-37-8; Illinois Administrative Code, Title 14, Subtitle A, Chapter II, Part 200, 200.100 to 200.901; Iowa Administrative Code, Insurance Division (191), Chapter 55, 55.1 (523B) to 55.9 (523B); Maryland Code of Regulations, State Law Department, Division of Securities, Title 02, Subtitle 02, Chapter 8, to; Minnesota Rules, 1995, Department of Commerce, Chapter 2860, 2860.0100 to 2860.9930; New York Department of Law, Bureau of Investor Protection and Securities-Codes, Rules and Regulations of the State of New York, Title 13, Chapter VII, 200.1 to 201.16; Oklahoma Business Opportunity Regulations, Rules 660:25-1-1 to 660:25-1-3, 660:25-3-1, 660:25-3-2, 660:25-5-1 and 660:25-7-1; Oregon Administrative Rules, Department of Consumer and Business Services, Division of Finance and Securities, Chapter 441, Division 325, 441-325-010 to 441-325-055 and Division 13, 441-13-040; Texas Administrative Code, Title I, Part IV, Chapter 97, 97.1 to 97.42; Virginia Administrative Code, Title 21, Chapter 110, 5-110-10 to 5-110-90; Washington Administrative Code, Department of Financial Institutions, Securities Division, Chapter 460-80, 460-80-100 to 460-80-910 and Chapter 460-82, 460-82-200 and Wisconsin Administrative Code, Chapters SEC 31 to SEC 36, SEC 31.01 to SEC 36.01.

  7. ^ California (Real Estate Licenses, Business and Professions Code, Div. 4, Part 1, Chap 3, Art. 3, 10177(m)), Maryland (Gasohol and Gasoline Marketing, Code of Md., Article- Commercial Law Title 11, 11-303), New York (Motor Fuels, General Business Law, Art. 11-B, 199-b and Cigarettes, Tax Law, Art. 20-A, 485 to 489), Tennessee (Motor Fuel Franchise, Tenn. Code, Title 47, Chap. 25, 47-25-601 to 47-25-607), Vermont (Service Station Operators and oil companies, Vt. Stat., Title 9, Chap. 109, 4103), Virginia (Motor Vehicles, Va. Code of 1950, Title 46.2, Chap. 15, Art. 7, 46.2-1566 and 46.2-1567) and Washington, D.C. (Retail Service Stations, D.C. Code, 1981, Title 10, Chap 2, 10-222).
  8. ^ 44 Federal Register 49966 (August 24, 1979).
  9. ^ Australia, Brazil, Canada (Alberta, Ontario and Quebec provinces), China, France, Indonesia, Italy, Korea, Malaysia, Mexico, Romania, Russia, Spain and the European Union.
  10. ^ Federal Trade Commission Interpretive Guides to Franchising and Business Opportunity Ventures Trade Regulation Rule, 44 Federal Register 49966 (August 24, 1979).
  11. ^ e.g. New York- 13 N.Y.C.R.R. 200.4(i)(f).
  12. ^ e.g. N.Y. General Business Law, Art. 33, 685; 13 N.Y.C.R.R. 200.6(a).
  13. ^ e.g. N.Y. General Business Law, Art. 33, 685; 13 N.Y.C.R.R 200.6(i).
  14. ^ e.g. Minnesota and North Dakota.

Mitchell J. Kassoff Mitchell J. Kassoff, Esq. is a tenured professor of law and taxation at Pace University in New York City, a lecturer for Continuing Legal Education (for attorneys) on the topic "How to Franchise a Business" and for business owners on the topic "How to Franchise Your Business." He is admitted to the Bars of New York and New Jersey, a past chairman of the American Bar Association Committee on the Use of Computer Produced Data and a consultant to the National Conference of State Tax Judges. He received a bachelor's degree in public accounting magma cum laude from the State University of New York at Albany and a J.D. from the University of Virginia School of Law.

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