By Tyler Johnson
Franchises are regulated on both the federal and state levels.
The Federal Trade Commission (“FTC”) controls the way franchisors may offer a franchise business for sale to a prospective franchisee. The FTC requires, among other things, that franchisors disclose to prospective franchisees material information such as information about the franchisor, initial costs of starting a franchise, and audited financial information through its disclosure rules. The franchisor’s required disclosures are contained in a Franchise Disclosure Document (FDD).
Individual states have certain franchise registration and disclosure obligations that must be met before a franchisor may offer for sale or sell a franchise business in that particular state.
Often overlooked are state specific relationship laws, which govern the ongoing franchisor/franchisee relationship.
For example, Nebraska’s Franchise Practices Act (the “Act”) defines the responsibilities of franchisors and franchisees in connection with renewing, terminating, or canceling a franchise business, as well as transferring, assigning or selling the franchise business to a third party. Importantly, under the Act, a franchisor is prohibited from terminating, canceling or failing to renew a franchise without good cause and is prohibited from imposing unreasonable standards of performance upon a franchisee.
Nebraska case law also recognizes the implied covenant of good faith and fair dealing in every contract; however some states do not. This covenant “requires that none of the parties to the contract do anything that will injure the right of another party to receive the benefit of the contract.” Thus, in the franchisor/franchisee relationship context, both the franchisor and franchisee must act in good faith in the performance of the franchise agreement.
Whether you are starting a franchise, purchasing a franchise or currently operating a franchise, you should consult an experienced franchise attorney to ensure you have a clear understanding of all of your obligations and rights under applicable federal and state laws.
Contact Tyler Johnson at [email protected] for more information.