IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In
December 19, 2013
“Prospective franchisees can feel safe investing in a franchise,” many a franchise salesman has stated, “Because franchising is highly regulated, and there are severe penalties for non-compliance.” The International Franchise Association and other opponents of franchisee-protection legislation also argue that franchising is already a “highly regulated industry.”
This contention seems highly suspect considering the many blatant stories on UnhappyFranchisee.Com of shady companies that violate franchise disclosure laws with impunity, and established franchisors who seem to hold all the cards in the franchise relationship. So we are asking the nation’s top franchisee attorneys: “Is Franchising Highly Regulated?”
JERRY MARKS – MARKS & KLEIN, LLP
Is franchising truly a “highly regulated industry”? No, because the FTC Rule does not grant individuals a “private right of action,” which is the right to bring legal action in their own name if the provisions of the FTC act were violated in connection with the sale or operation of a franchise. The FTC Rule only gives the vastly under-staffed members of the FTC the right to bring an action, which is statistically insignificant compared to all the franchise litigation that exists.
Moreover, the FTC does not, unlike the states of New York, or California or Maryland review FDDs (franchise disclosure documents) prepared in accordance with Rule 436. The FTC merely requires a franchisor to prepare an FDD in accordance with its rules but it never checks if the FDD is accurate. Finally, the FTC has many other matters besides franchise cases that it attends to and consequently the FTC Rule is like a “toothless tiger” when it comes to franchise regulation.
Having said that however, there are state franchise statutes that provide protection to some degree but generally not a sweeping as the FTC Rule.
Do my franchisee clients believe there is more protection in place than there actually is? Yes, because the FTC gives prospective franchisees the logical idea that since the FDD is prepared in accordance with FTC guidelines, it must have been reviewed and accepted by the FTC
If strict government oversight is just a franchise myth, how damaging a myth is it? It is very damaging, because prospective franchisees mistakenly believe – with good cause – that the government has in some way approved the franchise they are considering…