Current franchise laws and regulations do not go far enough to protect the interests of franchisees against often times overreaching franchisors according to an article published in Franchise Law Journal, Volume 29, Number 3, Winter 2010.
Lagarias & Boulter replied to a franchisor lawyer’s call to arms to rein in regulations because modern franchisees are sophisticated and powerful enough to fend for themselves vis a vis franchisors.
Several key points emphasize the continuing need for franchise regulations.
Here is an excerpt from the Lagarias & Boulter Legal Blog:
Several key points emphasize the continuing need for franchise regulations. First, franchise agreements are drafted by a franchisor’s lawyers to benefit the franchisor in every possible way and are usually presented to franchisees on a take-it-or-leave-it basis. Regrettably, franchisees usually fail to hire an experienced franchise lawyer in advance of the purchase despite the fact that hundreds of thousands of dollars may be at stake. Second, franchisees have no idea where the “bones are buried” in franchise systems whereas the franchisors have all the critical information and often conceal it. Third, many franchisors “sell” franchises via commissioned sales representatives or brokers whose livelihoods depend on making sales. They will often embellish the likelihood of success and downplay the risks. Fourth, once in a system, the franchisee may often become stuck because of his sunk costs and continuing obligations like leases. This franchisee may end up working for free just to pay the bills.
Franchise laws help to diffuse some of the risks noted above. But franchise disclosure statutes exist in only thirteen states and even in those states, the documents are not generally reviewed for truthfulness. The federal FTC rule requires franchise disclosure in all states, but no generally recognized private right of action exists under the rule meaning, in most cases, no lawsuit can be filed under it by a franchisee. Reliance on overtaxed federal or state agencies to bring actions is not realistic. Further, franchisors have convinced some courts that fine print in their agreements can serve to insulate them from misrepresentation or other similar claims. For these reasons, the limited state statutes providing protection for franchisees should be expanded and consideration given to a more effective federal scheme that offers a private right of action.