While US franchisors must navigate between multiple legislative and regulatory regimes (many of which are applicable simultaneously), annual (or more frequent) updating requirements, annual renewals of registrations in states with franchise registration requirements and other details, franchising in the US is robust and growing. Over 3,000 franchising entities, with home or parent offices within or outside the United States, are in operation, and the estimated number of franchised locations nears or exceeds 800,000. The number of international franchisors with US presence is too numerous to list. Franchising can be found in every category of business – varieties of food service, hotel and lodging, hotel business services, financial services, healthcare, fitness, education, technology, automotive services, retail and more.
The International Franchise Association (IFA), based in Washington, DC, was originally focused on franchisor members. It now extends to franchisees and franchise suppliers. There are various franchisee-oriented associations, including the American Association of Franchisees & Dealers. Others, such as the Coalition of Franchisee Associations, the International Association of Franchisees and Dealers and the American Franchisee Association, are typically composed of brand-based franchise associations.
Reports concerning franchising and franchise regulation, often issued by business organisations or consultancies, abound. The 2022 Franchising Economic Outlook, issued by IFA and FRANdata, is a good example. In addition, the US Government Accountability Office (GAO) issued the Federal Trade Commission: Enforcement of the Franchise Rule report on 31 August 2001 and the Existing Federal Trade Commission’s Oversight of Franchising report on 19 April 2023, which are also summarised in the GAO’s 18 April 2023 ‘WatchBlog’ post ‘Franchising is an Attractive Business Opportunity, But Not Without Challenges’.
The US is broadly open to foreign franchisors, subject to the same federal and state laws and regulations applicable to domestic franchisors (described hereafter). There are no restrictions on foreign franchisors owning equity in a local business or owning real property, unless the acquisition presents national security concerns, which would not be expected in franchising and has not been encountered to date. Foreign franchisors often offer forms of a master franchise agreement or development rights agreement subject to the same federal and state laws and regulations applicable to domestic franchisors (also described hereafter).
Foreign exchange and tax
Unless a foreign franchisor has no established US entity and receives payments directly from its US franchisee or is subject to US trade restrictions limiting trade with the franchisor’s country or the franchisor itself, foreign exchange and tax issues are not particularly relevant to US operations. Typically, the franchisor establishes a domestic subsidiary or wholly-owned limited liability company (LLC) to offer and sell with. US fees and royalties are paid to that entity, which pays US taxes on its income as any domestic franchisee. The payments are not subject to withholding tax. If net earnings are retained and spent in the US, foreign exchange controls do not come into play. In all cases, the existence and terms of any tax treaty between the US and the franchisor’s foreign domicile need to be reviewed before the US structure is finalised (tax issues are dealt with in greater detail in Section V).
Trademark and trade name searches in the US are relatively easy. The US Patent and Trademark Office (USPTO) trademark electronic search system (TESS) is a database of every US trademark that has been registered or applied for. Each record in TESS includes many important elements of the mark. Each element is a searchable piece of information. Searching TESS will allow one to find any marks that have common elements as well as a specific mark when one or more of its elements are known. Trade name searches for names that are not trademarked are less precise. Search engines are a standard starting point. Services capable of searching state (and other) databases listing trade names are available and avoid having to manually search each state website separately or search other government websites.
ii Brand protection
A trademark can protect the name of a business, goods and services at a national level, and prevent others in the same (or a similar) industry in the United States from using its trademarked names. While an unregistered mark can be enforced, most businesses (including franchisors) apply for USPTO registration and use the ™ symbol pending registration and the ® symbol once without registration; however, the US Copyright Office, part of the Library of Congress, maintains a catalogue of registered documents once a completed application form with a copy of the item has been submitted. When a party registers a claim on a copyright in a work with the US Copyright Office, it is making a public record. All the information provided on the copyright registration is available to the public and will be available on the internet.
The usual first step in enforcement is a cease and desist letter, sent with proof of receipt requested. In many cases this leads the infringer to end infringing conduct. Written confirmation from the infringer is highly desirable. In other instances, particularly where the issues are more complex and significant parties are involved, unresolved enforcement proceeds to litigation – typically in a United States district court – seek injunctive relief, damages and, in some cases, attorneys’ fees. Relief is not automatic, but depends on proof that the party seeking enforcement meets then-applicable standards, set by legislation and judicial precedent.
Data protection, cybercrime, social media and e-commerce
Data protection, cybercrime, social media and e-commerce are topics of general concern without specific connection to franchising. That said, while there is no national data protection law as of this date, the legislative landscape requires constant attention, particularly for franchisors whose computer-driven ordering, loyalty programmes and other data collection activities, at the franchisor and franchisee level, generate significant amounts of personal data. The 1978 California Consumer Privacy Act was the first state law aimed at privacy issues and was amended in 2019. The number of state bills increases each year, as has the number enacted into law. At the time of writing, state laws of varying scope have been enacted in California, Connecticut, Colorado, Indiana, Iowa, Tennessee, Utah and Virginia. Cybercrime is ubiquitous and includes false gift cards. As demands for enforcement increase, the expense and complexity of enforcement at individual retail levels leads to efforts to make upstream entities, such as franchisors, responsible.
Social media and e-commerce issues often have an additional franchise-related aspect. Many US franchisors seek to control or limit a franchisee’s use of social media. Others reserve e-commerce or third-party websites to themselves, or limit franchisees to promotion of their local fixed location for in-person retail sales. It would not be prudent to assume that these topics will be exempt from future scrutiny.
At the federal level (applicable in all 50 states, Puerto Rico, the US Virgin Islands and US territories), the offer and sale of franchises is regulated by the Federal Trade Commission Franchise Disclosure Rule,2 adopted in 1978 (effective 1979) and amended in 2007. The FTC’s Statement of Basis and Purpose accompanies the Rule, and a detailed Franchise Rule Compliance Guide was issued in May 2008. The Federal Trade Commission Business Opportunity Rule3 would apply to some franchises meeting the very-specific definition of a ‘business opportunity’, were it not for a provision excluding franchises complying with the disclosure rule. Periodically, and particularly at present, there are suggestions that the provisions of Section 5 of the Federal Trade Commission Act enabling the Commission to take action against ‘unfair or deceptive acts or practices in or affecting commerce’ be used against franchisors. The Rules and the Act are enforced by the Commission; there is no private right of action. However, in many cases Commission decisions become evidence in state proceedings. The Rules and the Act do not pre-empt state laws or regulations that cover similar subjects.
Almost all states have their own legislation addressing unfair or deceptive acts or practices and usually can be enforced through individually filed administrative complaints or judicial action, or both. Fourteen states have some form of franchise disclosure statutes requiring the franchisor to follow their specific instructions before proceeding with registration, review and approval, all of which must occur before a franchise can be offered or sold. Many states incorporate franchise relationship provisions or proscribe specific franchisor behaviour. In addition, over 20 states have enacted separate franchise relationship laws. There are ongoing efforts to increase the number of states with franchise disclosure and franchise relationship regimes (or to add additional requirements), with mixed results. Eleven states also have business opportunity laws, some of which require franchisors to file annual or one-time exemptions and pay an exemption fee.
Under the federal Franchise Disclosure Rule a complete franchise disclosure document (FDD) must be delivered at least 14 days before a franchise is sold, unless the transaction qualifies for an exemption from disclosure.
The broadest basis for negating the FTC Disclosure Rule is on the ground that the rule does not apply to a bona fide trademark licence to a single licensee covering the whole US, or a series of one-on-one licences, each to a licensee manufacturing goods according to the licensor’s specifications. The challenge is to draft an agreement that is fundamentally a licence linked to preserving the value, reputation and essential characteristics of the trademark and other licensed intellectual property, while giving the licensor participation (but not control) that does not point a regulator toward franchising. However, the characteristics of this category are not fully specified and can be fact-intensive.4
Other common exemptions are more straightforward (amounts referenced are adjusted at four-year intervals):
- no payments of any kind to a franchisor or an affiliate for the first six months of operation exceeding US$615;
- investment by the franchisee in excess of US$1.233 million (not including unimproved real estate or money provided by the franchisor) at the start of the relationship;
- the franchisee (if a corporation, LLC or partnership) has at least one individual with net worth in excess of US$6.165 million and five years’ business experience; and
- a fractional franchise where estimated first year annual sales of items that constitute the franchised business are not in excess of 20 per cent of the overall business.5
The FDD required by the FTC Disclosure covers 23 items, with detailed instructions for each item. The compliance guide for the FDD is 143 pages long. This includes descriptions of:
- the franchisor’s history, corporate structure and the market in which a franchised location operates;
- its management business experience;
- its past and present litigation breakdown;
- any settlements;
- the bankruptcy history, if any, of the franchisor and its principals;
- initial fees and ongoing fees;
- a breakdown of the estimated initial franchise investment throughout three months of operation;
- restrictions on sources of products and services;
- a statement of franchisee’s obligations;
- financing offered;
- franchisor’s assistance, advertising, computer systems and training;
- territorial protections, if any;
- trademarks, patents, copyrights and proprietary information;
- franchisee’s obligation to participate in the actual operation of the franchised business;
- restrictions on what the franchisee may sell;
- renewal, termination, transfer and dispute resolution;
- use of public figures;
- financial performance representations, if any;
- outlets and franchisee information;
- financial statements; and
- copies of required contracts.
The FTC FDD was intended to provide full and accurate disclosure of the franchise offering without dictating contract terms. However, in many sections, the FDD specifies certain disclosure language that impacts on contract terms, which may be treated as establishing contractual obligations, or precluding franchisor claims that do not comply with the rule’s requirements. The rule also includes few direct prohibitions, such as unilateral changes in the disclosed franchise agreement without giving a prospect reasonable notice before signing and using third parties who appear unrelated to provide false information. Recently, attention is being paid to proposals for modifying or adding behavioural requirements to the rule in future amendments.
In contrast to jurisdictions with a civil law system that recognise the doctrine of culpa in contrahendo, the ‘implied duty of good faith contract performance’ applied in the US (unless modified by legislation) is a principle of contract performance, which does not create pre-contractual obligations for the franchisor. But franchise disclosure obligations (both federal and state) must be truthful and accurate. Failing to meet that standard can lead to significant financial and other penalties. Parties to franchise contracts induced by fraud may have judicial remedies (although subject to potential barriers, as discussed below). Fraud may also lead to criminal prosecution. In addition, as noted above, many states have unfair practice or unfair competition laws that may be applicable.
Thirteen states have their own franchise disclosure laws that have substantive requirements that go beyond simply complying with the FTC Disclosure Rule: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin.6 The required disclosures generally parallel the FTC Rule, with states adding required state-specific addenda and additional forms.7 Common, but not universal, state addenda reference:
- releases that waive rights under or compliance with state law or regulations;
- mandatory litigation at a venue in a different state;
- designation of governing law other than that of the registration state;
- liquidated damages;
- post-term covenants not to compete;
- state termination and non-renewal provisions; and
- trial jury waivers.
There are continuous efforts to revise and enlarge this list.
The North American Securities Administrators Association (NASAA) has actively worked to harmonise state and federal disclosure laws and regulations and maintains a Franchise and Business Opportunity Project Group with advisers from all segments of franchising as part of its long-standing mission to shield and protect ‘investors’, especially those who they believe lack the expertise and experience to protect their own interests. Its reports and statements of policy have significant influence on those federal and state regulators who share the view that protection of prospective franchisees needs to be enhanced. Recent activity has focused on financial performance representations made by franchisors, and a re-evaluation of FDDs and the questionnaires franchisees are asked to answer at the end of the franchise sale process. Some of these initiatives have already led to changes or proposed changes in disclosure rules. (See Section VII.)
The FTC Franchise Disclosure Rule does not include any registration process. There are no federal registration requirements that are specific to franchising. Franchisors with US-based employees, or with a US entity, register with the Internal Revenue Service to obtain a tax identification number or employer identification number as needed. In states with their own franchise disclosure regime, registration results from completing the process.
Disclosure compliance guides, instructions and state-specific addenda are the principal sources of mandatory clauses in franchise agreements or disclosure documents.
Guarantees and protection
Franchisees regularly use forms of guarantee from individuals and companies, which may go beyond a guarantee of franchisee financial performance and operational performance, but also bind the guarantor to specific in-term obligations, such as confidentiality and non-competition.
Franchisor tax liabilities
Franchisors that have established a US entity for franchising (the almost universal approach) have the same tax liabilities as a US franchisor, principally federal and (if applicable) state and local income tax, tax on trademark royalties if imposed in the jurisdiction and obligations arising from employment (such as amounts to be withheld from employee pay cheques and submitted to taxing authorities, the employer’s share of social security payments, workers’ compensation, etc.). Franchisors that have not established a US entity for franchising but have US employees have obligations arising from that employment, typically handled for them by a payroll service. Franchisors that have no established US entity for franchising but receive royalties from a US franchisee are subject to withholding from the franchisee’s payment, with its ultimate net obligations determined by any tax treaty between the US and the franchisor’s domicile. Generally, a foreign person is subject to US tax of 30 per cent, but a reduced rate, including exemption, may apply if an Internal Revenue Code section provides for a lower rate, or there is a tax treaty between the foreign person’s country of residence and the United States that sets a lower (or a zero) rate. The tax is withheld by the payor from the payment made to the foreign person.
Franchisee tax liabilities
The franchisee has the same tax obligations as any US business or business person but in addition, if its franchisor has no established US entity for franchising but receives royalties from its US franchisee, the franchisee is responsible for the withholding and its submission to the relevant taxing authority or authorities with accompanying forms.
As noted above, franchisors almost universally establish a US entity for franchising that has its own US tax obligations calculated based on its net income and allows it to use the dollars received for its ongoing needs, eliminating most, if not all, issues of foreign exchange and repatriation.
Impact of general law
As noted above, the implied duty of good faith contract performance applied in the US (unless modified by legislation) is a principle of contract performance rather than an independent source of obligation. It cannot be used to contradict or override a contract provision that permits or prohibits particular conduct. In reaction to a body of precedent applying that principle to franchise agreements, some state legislatures have adopted provisions limiting franchisors’ rights, particularly in matters of new location development, or have included broadly defined good faith standards in general contract law, permitting breach of contract lawsuits to be grounded on failure to act in good faith and allowing evidence of alleged loss of the ‘benefit of the bargain’ or ‘reasonable expectations’ to be considered notwithstanding contract terms, with the potential award of damages. A more sophisticated analysis, applicable when there is no specific contract term in play, looks at good faith as a ‘gap filler’ that adds matters that would have been addressed in the contract had they been identified, or a barrier to opportunistic acts that are viewed as unconscionable.
Agency distributor model
In general, in true agency agreements, in which an agent has limited (or no) independence to act for its own account and is compensated by commission after performance and does not meet the definitional requirements for a franchise, no required ‘fee’ is being paid to the principal for the right to enter into or engage in the business. Distributor and dealer agreements can be structured as franchises subject to registration and regulation, but are typically no-fee relationships avoiding that effect. Precise drafting and ongoing review of communications and operations are required to avoid indirect or hidden fees. Fees that lead to franchise classification go beyond initial payments. They may include:
- purchases at prices inflated above a bona fide wholesale price to create an indirect fee;
- required purchase of inventory beyond reasonable minimum amounts;
- required expenses where the ‘investment’ cannot be recovered as a function of the selling price; and
- requirements to incur costs solely for the benefit of the alleged franchisor.
There have been repeated efforts to classify franchisees as employees of the franchisor or to classify the franchisor and franchisee as joint employers of persons employed in a franchised business. On the federal level the rules gyrate based on the party appointing the chair of the National Labor Relations Board (NLRB), impacting enforcement of some federal employment laws, particularly the Fair Labor Standards Act and the National Labor Relations Act. A 2015 NLRB decision states that a franchisor could be deemed a joint employer based on control, indirect control or even an expressed right to exercise indirect control – a formulation that reflects a lack of understanding of franchising. In early 2020, regulations based on the 2015 decision were removed, only to be resuscitated by the current administration. Uncertainty has led some franchisors to restrict or reformulate their involvement in franchisee operational subjects. Most states have their own employment laws and regulations, often with differing scope and application. Many employment regulators tend to ignore or minimise franchise agreement provisions.8
Some state unfair practice laws (and potentially Section 5 of the Federal Trade Commission Act) may afford remedies to franchisees as consumers of franchises or as residents in the
jurisdiction. However, the starting point is usually with state franchise-specific law and regulation of the franchise relationship, where remedies may have a more significant impact on the franchisor. Where consumer protection or general laws are applicable, reference to them is often included in complaining documents. The possible forms of relief depend on statutory language and precedent.
Federal and state antitrust laws apply to US franchisors and their US franchisees. Agreements in restraint of trade, made between competing franchisors, or between competing franchisees, or between franchisees through promotion by or participation with the franchisor (a ‘hub and spokes’ agreement), are likely to receive scrutiny and lead to serious consequences. Vertical agreements between a franchisor and its individual franchisees (and not between franchisees) are analysed differently under federal and state antitrust laws, with some exceptions and qualifications, particularly in vertical price agreements.9 Some, such as territorial, customer or marketing restrictions (including reservation of customer classes or sales methods), or exclusivity during the franchise term, are practically per se legal, unless there is proof that they tend to create monopoly power excluding competition in a broad product or geographic market. Others, such as tying agreements or requirements to carry and promote a full line, are to be analysed under the rule of reason but rarely result in decisions adverse to the franchisor. However, activity that does not raise antitrust concerns may be addressed or even proscribed by state franchise laws, and an increase in regulatory activity by one agency can lead to ‘regulatory creep’ to multiple franchise and antitrust regulators.10
Violations of ‘in-term’ covenants, more akin to a full-time best efforts clause or limited exclusive dealing obligations in the subject of the franchised business, are breaches of contract enforceable under the franchise agreement terms and dispute resolution provisions. They can lead to injunctive relief, damages and, potentially, termination. A court or arbitrator may consider claims that a covenant is overbroad or unconscionable. Use of the franchisor’s proprietary information, usually prohibited by a separate contract provision, will support an additional cause of action.
Subject to provisions in state franchise or franchise relationship laws, termination is a matter of general contract law and the franchise agreement. A franchise agreement typically includes multiple provisions relating to termination:
- a list of grounds for termination effective on notice without opportunity to cure;
- a general term for breach provisions requiring notice and a detailed description of the grounds asserted;
- a provision setting time limits and standards for ‘cure’;
- post-termination provisions listing rights and obligations of franchisors and franchisees;11 and
- specifics for dispute resolution involving termination.
However, all of these are affected by general contract law and state franchise or franchise relationship law precedents, particularly relating to notice, materiality, cure and enforceability of post-term restrictive covenants (which vary from state to state).12 Franchise-specific laws are detailed and often enlarged by amendment. Common provisions establish good cause requirements, control time and content of notice and cure, and establish prohibitions against selective enforcement (which may also impair claims of materiality) and buyback obligations. The precise language used varies widely, and many incorporate exceptions for defined situations. Precedent often introduces nuanced interpretation and must also be reviewed.
Anti-corruption and anti-terrorism regulation
A franchisor operating in the US is subject to all laws and regulations relating to anti-terrorism, anti-corruption, money laundering and reporting of banking transactions in excess of US$10,000 that help law enforcement combat money laundering, tax evasion, drug dealing, terrorist financing and other criminal activities. None of these are specific to franchising. As a general rule, franchise agreements obligate franchisees:
- to maintain the franchised business and conduct operations in accordance with all applicable laws, regulations, codes and ordinances, including (without limitation) laws and regulations relating to age and gender discrimination, civil rights, employee and customer relations, the Americans with Disabilities Act and the Family and Medical Leave Act; and any law, regulation or executive order relating to terrorism or support of terrorist organisations; and
- to possess all permits, licences and other forms of government approvals.
ix Dispute resolution
Dispute resolution provisions in franchise agreements are varied and often reflect the experiences and biases of franchisor management and its advisers. Except for state prohibitions (typically, ones requiring a venue in a different state, precluding advance jury waiver or a choice of law that defeats applicable state franchise law), dispute resolution provisions are enforceable.
Use of mediation and arbitration is increasing. Typically, the steps result in speedier resolution and involve arbitrators and mediators who are franchise-literate. In many cases, franchise agreements call for a phased approach:
- high-level direct communication;
- prompt early pre-dispute mediation (generally not FDD-reportable);
- the possibility of preliminary injunctive relief if essential to protect the franchisor’s intellectual property and reputation; and
The US policy favouring arbitration is expressed in the Federal Arbitration Act.13 If the franchise agreement is carefully drafted – defining the scope of arbitration, the venue, adopting the rules of the selected arbitral body, providing that disputes regarding arbitrability are determined by the arbitrator and ensuring that related parties are included – any effort to bar arbitration will fail. See Henry Schein, Inc v. Archer & White Sales, Inc14 (where the parties have delegated questions of arbitrability to the arbitrator, the court may not decide any issue of arbitrability even if it finds the argument that the arbitration agreement applies to a particular dispute to be ‘wholly groundless’). There are a number of organisations and individuals offering franchise mediation and arbitration services.
Disputes under agreements without arbitration provisions end up in local federal or state courts. Where a franchisor is sued in a state court the usual first step is to determine whether the case can be removed to the federal trial court serving that area. Court procedures involve detailed pretrial steps, initial motions, pretrial conferences and orders, interrogatories and depositions, motions for summary judgment and, in many courts, referral to mediation. If a dispute is not otherwise resolved, it may take two to three years to come to trial. Where a dispute involves a significant risk of immediate and irreparable damage, permanent injunctive relief may be granted after trial. Reasonable attorneys’ fees may be awarded to the prevailing party, if authorised by statute or franchise agreement, as determined by the court. Other costs of litigation are not recoverable unless a statute or franchise agreement provides otherwise.
The US is a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitration Awards (New York Convention) with regard to commercial disputes, and courts readily recognise such foreign arbitral awards from another Convention country, subject to the restrictions in the New York Convention.
Legislative, regulatory and judicial activity in matters relating to franchising appears to be increasing, with mixed results and uncertain outcomes.
The development receiving most attention stems from the September 2022 NASAA statement of policy nominally aimed at the use of written franchise questionnaires and acknowledgement in the franchise sale process, which became ‘effective’ (confirmed as NASAA guidance) on 1 January 2023. The focus of the statement is on contractual disclaimers
that release or waive rights under state laws that lead to franchisee claims being summarily dismissed, but it actually prohibits statements signed or agreed to in forming a franchise relationship that have the effect of disclaiming reliance on any ‘statement’ by or on behalf of a franchisor (presumably including terms of a written franchise agreement) and requiring the franchisor to state in the FDD that all such statements are ‘superseded’. At the same time, a footnote states that a fact-finding interview is permitted so long as the responses do not rise to the status of a waiver of statutory rights. The apparent goal is to ensure that almost anything can be litigated to verdict without the franchisor’s ability to rely on agreed franchise terms or avoid later litigation in which the franchisee asserts that it is not bound by them.
Whether the NASAA policy will be referenced or adopted as a result of the FTC’s 10 March 2023 request for information seeking responses about the means by which franchisors exert control over franchisees (discussed below) has yet to be seen. States have begun to enact statutes or issue regulations based on the NASAA policy. California’s Corporations Code (Section 31512.1) applies explicitly to franchisee agreement or FDD provisions referencing non-reliance on representations or making them ineffective, unenforceable, void and contrary to public policy, even when the franchise is exempt from registration. Maryland has issued its own interpretive opinion/no action position adopting NASAA’s policy, and the Washington Securities Division has issued a notice of proposed rulemaking to adopt the questionnaire policy. More are likely to follow. Arguably more troubling is the uncritical acceptance of NASAA’s premises:
- that all franchisees, as a group, lack the ability to likely understand the significance of a business transaction or to take account of notices when they consult an attorney or other advisers;
- that franchisees are so bedazzled by franchise opportunities that they have no ability to exercise judgment and need special protection;
- that franchisors regularly engage in misrepresentation knowing that they are able to bar complaints; and
- that franchisors should not be able to use contract provisions, common to most business transactions (such as integration provisions and mutual confirmation that – subject to settled exceptions – signed writings, including the FDD, define the parties’ rights and obligations) to obtain confirmation that relevant information is not being withheld.
At present, the possibility of less draconian alternatives does not appear to have been explored.
Whether a similar approach informs future regulatory decisions also remains to be seen. Responses to an FTC request for information encompassing over 75 substantive questions spanning every aspect of the franchise relationship and franchise agreement provisions were due by 8 June 2023 and will come under review. The Franchise Disclosure Rule also remains subject to FTC review and possible modification.15
New franchise legislation has been proposed in:
- Arkansas (authorising intra-family transfers without franchisor approval, eliminating the out-of-state venue requirement, and codifying good faith and fair dealing) with retroactive effect;
- Arizona (with a franchise relationship law similar to California but with a private right of action); and
- New Jersey, limited to hospitality franchises but addressing, inter alia:
- restricting required capital investments in the franchised business;
- prohibiting any vendor rebate, commission, kickback, services or other consideration not fully disclosed and promptly turned over to the franchisee;
- voiding designated supplier provisions where comparable quality items are available from another source; and
- modifying territory provisions to bar a ‘substantially identical business’ even if operated under different brands.
In many states, there are ongoing efforts aimed at increasing franchisor liability in labour and employment issues, based on conflating franchisor rights of control with employer–employee control.16 Of course, many initiatives are not enacted when first introduced. Nonetheless, they often foreshadow future developments.
With some exceptions, final judicial decisions still tend to apply traditional contract law and precedent unless a statute or rule mandates a different result. However, in light of the attention being paid to franchisor–franchisee issues, judges appear more willing to let cases proceed beyond motions to dismiss or to deny early summary judgment, with attendant cost and risk implications.