USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
3.3 Consequences of a Failure to Register The failure of a franchisor to register its franchise offer - ing in any of the states where pre-sale registration is required can result in significant negative conse - quences. State franchise administrators are typically granted the power, through their state franchise laws, to: • conduct investigations; • halt a franchisor’s ability to legally offer or sell fran - chises in their state; • impose fines for unauthorised franchise sales activ - ities in their state; and • require a franchisor to takes steps to assure its dis - continuance of such unauthorised franchise sales activity, and to report to the franchise administrator periodically regarding this. Note that most state franchise registration statutes define “fraudulent” and “unlawful” practices quite broadly. Any violation of a franchise registration stat - ute, including any rules or regulations promulgated thereunder, and any attempt to compel a franchisee’s waiver of any given statute’s provisions are, under most state franchise registration statutes, declared fraudulent and unlawful practices. If state franchise administrators exercise their broad powers to inves - tigate franchise sales and uncover evidence of fraud, unlawful franchise sales practices or other violations of applicable franchise laws, the administrators can institute civil proceedings seeking (without limitation):
agreement, damages and recovery of their attorneys’ fees. Under limited circumstances, punitive damages, over and above the franchisee’s “actual” damages, are permitted by some state franchise statutes.
4. Other Requirements 4.1 Past-Profitability Requirements
While compliance with federal and state pre-sale dis - closure requirements is a foundational element of a franchisor’s regulatory compliance obligations, it rep - resents only one aspect of the broader legal frame - work that a franchisor must satisfy before offering or entering into franchise agreements. Before commencing franchising activities, a fran - chisor should confirm that it is properly organised, duly authorised to conduct business under the laws of its jurisdiction of formation and any other appli - cable jurisdictions, and legally empowered to grant franchise rights. This includes verifying that the fran - chisor entity has been validly formed, maintains the requisite organisational authority and IP rights to enter into franchise agreements, and has obtained any necessary governmental or quasi-governmental approvals, including applicable business licences or permits. Depending on the nature of the franchise sys - tem, there may be industry-specific regulatory require - ments that franchisors must satisfy before they can lawfully offer or sell franchises. A franchisor must ensure that it has adequately pro - tected the IP rights underlying its franchise system, including registering its principal trade marks with the United States Patent and Trademark Office, pro - tecting proprietary and confidential materials, and securing licences to use and sublicense such IP to its franchisees in connection with their operation of franchised outlets. Franchisors must also ensure that their FDD and all required exhibits – such as the franchise agreement and multi-unit development agreement – comply with applicable federal and state franchise laws, and that their franchise sales practices comply with all appli - cable laws prohibiting fraud, misrepresentation, and unfair or deceptive trade practices. This requires
• restitution; • damages; • injunctions; • fines and penalties; and • court-ordered receiverships.
Many state franchise administrators also possess “stop order” powers – the ability to suspend a fran - chisor’s ability to offer or sell franchises. Moreover, violation of state franchise registration requirements in many states gives rise to criminal liability which accrues on a per-violation basis. Furthermore, many state franchise registration stat - utes confer upon franchisees a limited private right of action for, respectively, rescission of the franchise
82 FRANCHISING 2026
C HAMBERS.COM
Powered by FlippingBook