Why do I need a Franchise Attorney?

Article written by Lynne Shelton
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Why do I need a Franchise Attorney? If I had a dollar for every time I answered this question, I could fund all of you to franchise your businesses or fund you in buying your desired franchise unit.

After the zillionth time of being asked that question, the first response in my brain is usually “my Mommy voice saying, Because, I said so!” Luckily, for all of us, that statement doesn’t come out of the brain, instead the true franchise consultant and attorney-friend emerges utilizing the tongue and brain.

The first and most important thing to realize is that the area of franchise law is a specialty area. In fact in many cases, the legal answer to a question is 180 degrees opposite from the same question in a regular contract law setting. The legal arena around franchising is built upon “relationship laws” both federal and state laws. Every business owner, and probably every citizen is only a degree or two from a family member who is an attorney, or who a person who knows an attorney. Many people tell us that they will have a friend or family member do their legal work, or draft a small agreement for them so they can sell or buy a franchise. Folks, it really is not that simple. In fact, that is a really BAD idea! The area of law is so specialized that Franchising holds 1 of 6 special legal forums in the American Bar Association (“ABA”), along with fellow legal black holes like Air & Space Law and Entertainment and Sports Industries law. Out of approximately 400,000 ABA attorneys, there are only around 400 active full time franchise attorneys in the United States. And we have 2 of them in our office, along with franchise specialty legal support staff under them.

What do franchise attorneys do? We help individuals and companies do business in the franchise industry. This encompasses different items whether the client is an individual wanting to buy a franchise unit, or a company wanting to Expand Your Brand® through the franchising growth strategy. We work extensively within the confines of federal statutes, governed by the Federal Trade Commission (“FTC”) authors of the FTC Rule regarding consumer protection, as well as, various state franchise investment and financial acts. In fact, the FTC recognizes the difficulties in the franchising industry and has included in the FTC Rule a requirement that the following disclaimer be placed on the first page of every Federal Disclosure Document (“FDD”) in the United States.

“Buying a franchise is a complex investment. The information in this Disclosure Document can help you make up your mind. More information on franchising, such as “A Consumer’s Guide to Buying a Franchise,” which can help you understand how to use this Disclosure Document, is available from the Federal Trade Commission.”

In addition to the federal statute, certain states require Franchisors to make additional disclosures related to the information contained in the disclosure document. The additional state disclosures more times than not contradict the federal rule. The following states require that the FDD be registered or filed with the state, or be exempt from registration: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. A main portion of our daily workload is ensuring that all agreements for our clients are in compliance with the government and state’s comprehensive, often-complicated, always-evolving requirements.

For individuals, wanting to enter the franchise industry, our work also encompasses establishing a small business, business exit strategy planning, reviewing of the FDD, the 200+ page contract required under federal law, and negotiations with the franchisor if warranted, among other services.

For companies wanting to Expand Your Brand®, this encompasses legal and consultant services. At Shelton & Power they offer a planning stage included in the low fixed fees costs of the Franchise Fee with Shelton & Power, the clients receive 2-3 days of one-on-one consultations at their location. The focus is on getting to know the business inside and out, and planning best practice system around their already successful business. Afterwards the client begins an online consultation with a third-party representative for the new franchise systems’ online brand portal for lead and marketing tracking and best practices awareness training paid for by Shelton & Power.

Knowing when to obtain advice from an attorney specializing in franchise contracts is a great way to add value to your business decision. In fact, it can also be quite critical, as violations of the various franchise rules and laws can result in criminal penalties, significant fines and damages (including treble damages) , and $11,000 per day, per violation, civil fines, and even suspension or rescission of all funds paid to the franchisor and third parties for violations of the franchise and relationship laws. This can be very expensive and could even prevent a client from doing business altogether. In addition to the franchise law area, below are a few examples of how franchise law also interacts with various other areas of law.

Real Estate Law

Franchisors and Franchisees both work with real estate and leases on a fairly common basis. If the franchise unit to be operated is a non-home based business, the client may need to make it a priority to know which franchise regulations apply to their real estate transactions. Franchisees may be left holding an empty bag if the franchise system goes kaput, or a Franchisor may be left to sit idly by while a once thriving location sits empty because something unfortunate happened to the franchisee and there is no one to step in and run the franchised business. Nothing hurts a Brand’s reputation more that enduring these types of missteps from Real Estate transactions that were culminated without the sound advice and earned forethought of an ex-franchisor franchise attorney.

Litigation

Although no one in the franchise industry wants to acknowledge the ultimate litigation case down the road, except for the franchise litigators of course, the industry is fraught with law suits. A franchise in its very essence is a “system”, which means that the franchisor has a duty under federal law to protect the “system’s” uniformity for the good will of the “system” and all its franchisee members. From a public view point, if a consumer gets hurt by, or in a franchise “system” location then they will always sue both the franchisee business owner as well as the franchisor, who is perceived as having ‘deeper pockets’. It is important to understand the context and the requirements of the FTC Rule and federal case results to know which litigation issues can ‘flow down’ to the franchisee owner or ‘flow up’ to the franchisor.

All of the reasons why you should hire a franchise attorney ultimately assist you in your growth strategy and contracting. Before entering into a franchise deal consider seeking expert advice to make sound business decisions to Expand Your Brand® based upon best practices in the industry and to avoid or mitigate liability.

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Lynne Shelton is an attorney uniquely suited to assist with all of your franchise and business law needs.