Chair: Tamara Schulte
Why a Franchise Subsection?
by Kevin P. Hein
They say that the product distribution system known as franchising is the "wave of the future." Well, the future is here. Franchising permeates every aspect of modern American life. Most people are familiar with fast food franchises. But consumers buy from franchised locations every day. Car dealerships, airlines, hotels, and even grocery stores represent franchise systems we deal with daily.
The franchise community is well entrenched in this State. Re/Max International, The Packaging Store, Grease Monkey International, Village Inn Family Restaurants, Pak Mail Centers of America, and yes, even Boston Market, all make their home in Colorado. As a result, a number of attorneys have had to become familiar with the intricacies of federal and state franchise law.
The Franchise Law subsection was created with the intention of providing a resource for attorneys practicing in the area of franchise law. We host CLE and networking events during the year as well as provide updates regarding franchise law. Non-attorneys with an interest in franchising are welcome and encouraged to attend our events. Anyone interested in learning more about the subsection, or wishing to be included on the subsection mailing list, is invited to call Daniel Graham at (303) 607-3500.
What's a Franchise?
To better familiarize the legal community with the practice of franchise law, I thought it would be helpful to begin with a basic background lesson in what constitutes a "franchise" in Colorado. This state is blessed (or cursed, depending upon your perspective) with the absence of any state law regulating the franchise relationship. However, franchisors operating in Colorado must comply with federal law regarding franchise disclosure.
Since 1979, the Federal Trade Commission has relied upon a set of regulations entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," 16 C.F.R. § 436 (amended in 2007), also known as the "FTC Rule," to administer Federal franchise law. These regulations require franchisors selling in Colorado to prepare and provide a disclosure document to all potential franchisees which is similar to the breadth of disclosure required in private placement securities documents. This disclosure document is most commonly called an FDD.
The FTC Rule has established three elements which must be present in a business relationship before the relationship can be considered a "franchise" under federal law. In order to create a franchise relationship, the franchisor must (1) allow the franchisee to distribute goods or services in association with the franchisor's trademark; (2) exert significant control of, or provide significant assistance to, the franchisee's business or method comprising the franchise relationship; (3) require payment of a fee by the franchisee.
Attorneys representing franchisors and franchisees operating in states other than Colorado must also become familiar with franchise laws of those states. Many states have passed their own laws regarding disclosure requirements, and a number of states require that franchisors register their disclosure documents with a state regulatory agency. In addition, certain states have passed franchise "relationship laws," which have imposed additional restrictions on termination and other substantive aspects of the business relationship.
The subsection looks forward to discussing disclosure issues and a wide variety of other topics. We welcome your participation and hope to see you at our next event.