Field of law

Franchise & Distribution

The Franchise Rule and disclosure documents, financial performance claims, registration states, territory and encroachment, transfer and renewal, termination statutes, and dealer protection.

Personal Guaranties and Who Is Left Owing

A franchise guaranty is ordinarily a continuing, unconditional, joint and several undertaking by the owners to answer for every obligation of the franchisee entity, with the usual suretyship defenses waived. It does not expire when the outlet closes or when the franchise is sold; release requires an express written instrument. Where a spouse with no ownership interest must sign, federal credit law is implicated, though courts divide on whether a guarantor is protected.

6 min readFederal law

Franchise & Distribution

Territory Rights, Encroachment and Reserved Channels

A franchise territory is defined by the grant clause and narrowed by the reservations that follow it. Exclusivity is usually limited to the placement of another outlet of the same brand within a described area, while the franchisor reserves alternative channels, non-traditional venues, national accounts and the right to operate acquired systems. Encroachment claims therefore rest on the implied covenant, on state relationship statutes, or on statements contradicting the disclosure document.

6 min readState law

Franchise & Distribution

What Makes an Arrangement a Franchise

Under the federal trade regulation rule, an arrangement is a franchise where the operator receives the right to sell under the grantor's trademark, the grantor exerts or promises significant control over or assistance to the operator's method of operation, and the operator must pay the grantor or an affiliate a required sum before or within six months of opening. All three elements must be present, and the label the parties used is irrelevant.

7 min readFederal law

Franchise & Distribution

Dealer Protection Statutes for Vehicles and Equipment

Motor vehicle, farm equipment and construction equipment dealers are regulated by sector-specific statutes rather than by general franchise acts. These laws require good cause and notice before termination, let existing dealers protest a new or relocated outlet nearby, require warranty reimbursement at retail rates, protect family succession, and oblige a supplier to repurchase inventory on termination. Disputes often begin before a state board.

6 min readState law

Franchise & Distribution

Registration States and the Exemptions From Them

Registration states require a franchisor to file its disclosure document, audited financial statements and a consent to service of process, and to obtain an effective registration before offering or selling within the state. An examiner reviews the filing and issues comments; registrations lapse and must be renewed, and material changes require an amendment. Other states require only a notice filing, and both registration and disclosure obligations may be avoided by statutory exemption.

6 min readState law

Franchise & Distribution

Transferring or Renewing a Franchise

Transfer of a franchise requires the franchisor's consent, conditioned on cure of defaults, a transfer fee, qualification and training of the buyer, an upgrade of the premises, execution of the current form of agreement, and a general release. Renewal is a right to a successor agreement rather than an extension, exercisable within a notice window and subject to a similar condition list. Several states restrict releases and require notice before nonrenewal.

7 min readState law

Franchise & Distribution

Advertising Funds and How a Franchisor May Spend Them

System advertising funds take a percentage of gross sales and are administered by the franchisor, which reserves discretion over creative, media and geography. The federal rule requires disclosure of how the fund is administered, whether it is audited, whether franchisor-owned outlets contribute on the same basis, and how contributions were allocated between media, production and administration. The contract, not the rule, supplies the spending limits.

6 min readFederal law

Franchise & Distribution

Post-Term Covenants and Whether They Hold

Post-term covenants restrict a former franchisee from operating a competing business for a defined period within a defined area, and are paired with restrictions on soliciting customers and employees. Most states test them for reasonableness in duration, geography and scope against the franchisor's legitimate interest, applying a standard closer to the sale of a business than to employment. A few states void such restraints entirely.

6 min readState law

Franchise & Distribution

Termination and the State Relationship Statutes

Where a state franchise or dealership act applies, a franchisor may terminate only for good cause, generally defined as failure to comply with a lawful material requirement after written notice and a reasonable opportunity to cure. Notice periods run from ten days for nonpayment to ninety days for ordinary defaults, with shorter or no notice for insolvency, abandonment, conviction and health hazards. Contract terms inconsistent with the statute are void in the enacting state.

6 min readState law

Franchise & Distribution

Required Purchases, Approved Suppliers and Rebates

Franchise agreements restrict sourcing three ways: purchase from the franchisor or an affiliate, from a designated supplier, or from any supplier approved against stated specifications. The federal rule requires disclosure of the restrictions, of the revenue the franchisor derives from them, and of the approval procedure. Tying claims mostly fail where the restriction was disclosed before purchase, leaving contract and state unfair practice law as the real constraints.

6 min readFederal and state

Franchise & Distribution

System Standards, Mandatory Remodels and Who Pays

Franchise agreements incorporate an operations manual by reference and reserve the right to modify it during the term, which is how new equipment, technology, products and image standards become mandatory. Remodel obligations arise from a periodic upgrade clause, at renewal, or on transfer. Courts generally enforce express reservations, limiting review to the implied covenant, while a few state acts reach changes that substantially alter an outlet's competitive position.

7 min readFederal law

Fields of law

This journal

Franchise & Distribution

Personal Guaranties and Who Is Left Owing

Territory Rights, Encroachment and Reserved Channels

What Makes an Arrangement a Franchise

Dealer Protection Statutes for Vehicles and Equipment

Registration States and the Exemptions From Them

Transferring or Renewing a Franchise

Advertising Funds and How a Franchisor May Spend Them

Post-Term Covenants and Whether They Hold

Termination and the State Relationship Statutes

Required Purchases, Approved Suppliers and Rebates

System Standards, Mandatory Remodels and Who Pays