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Legal Considerations For Franchisors

Legal Considerations For Franchisors

Legal Considerations For Franchisors

You’ve got a great business that’s very successful. You want to grow to maximize your earnings to get a great return on all the sacrifices you’ve made. There are several ways to do this, each with its own costs, benefits, and risks. One is to franchise your business so it can grow with the help of others according to a corporate disputes lawyer.

What Is A Franchise?

A franchise is a contractual arrangement where you (the franchisor) allow another party (the franchisee) to use your trademarks, other intellectual property, business processes, and systems to create a copy of your business in exchange for meeting contractual obligations, including upfront costs and ongoing fees.

What Types Of Franchises Are There?

No matter what type of business you’re in, others may be willing to pay you to replicate your success elsewhere. Franchises cover home maintenance, cleaning services, vehicle repair shops, dog walking, restaurants, vending machines, auto parts, and funeral homes.

What Legal Issues Do Franchisors Face?

Franchisors face a complex legal landscape. Here are some common legal challenges franchisors encounter as told by Focus Law LA:

  • Franchise Disclosure Document (FDD): The Federal Trade Commission (FTC) Franchise Rule requires franchisors to provide a detailed FDD to prospective franchisees. This document outlines the business, risks, and financials. Failing to comply with FTC disclosure rules can have serious consequences
  • Franchise agreement: This legally binding contract outlines both parties’ rights and responsibilities. A poorly drafted agreement can lead to disputes over territory rights, fees, support obligations, and termination clauses
  • Contractual disputes: Disagreements between franchisors and franchisees over the terms of their franchise agreements are common. They can involve royalty fees, territory encroachment, renewal terms, or termination procedures
  • Intellectual property (IP) infringement: Franchisees rely heavily on a franchisor’s trademarks, copyrights, and trade secrets. The franchisor must allow their use while ensuring franchisees don’t abuse and infringe on their IP
  • Support disputes: Failing to provide the promised level of training and ongoing support to franchisees can lead to financial losses and legal disputes
  • Fair franchising: Competition laws and regulations seek to prevent unfair business practices. A franchisor can’t engage in illegal anti-competitive practices
  • Franchisee failure: If a franchisee fails to uphold brand standards or goes out of business, the franchisor may face reputational damage and potential litigation. A failed franchisee may lose a substantial investment, so they may be willing to try legal action to get at least part of it back
  • Employment issues: You may want a franchisee’s employees to look and act a certain way to protect your brand. But if you have too much potential or actual control over them, you may be considered a co-employer and be potentially liable in employment-related lawsuits and complaints to government agencies

By proactively addressing these legal issues with an attorney through careful planning, strong contracts, and adherence to regulations, franchisors can minimize risks and build a successful franchise network. If legal issues arise, they may spread among your network, so it’ll be in your interests to address them as quickly and effectively as possible — contact a lawyer near you for help.