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Franchise Law

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. By the year 2000, retail analysts predict that over fifty percent of all retail sales will be made from a franchised outlet. Franchising permeates every aspect of modern American life. Most people are familiar with fast food franchises. But consumers buy from franchised locations everyday. Car dealerships (John Elway Honda), airlines (United Express), hotels (Mariott), and even grocery stores (Cub Foods) represent franchise systems we deal with daily.

The franchise community is well entrenched in this State. Re/Max International, The Packaging Store, Big O Tires, Grease Monkey International, Village Inn Family Restaurants, Pak Mail Centers of America, Signal Graphics, and yes, even Boston Chicken, 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 CBA Business Law Subsection on Franchise Law was created earlier this year with the intention of providing a resource for attorneys practicing in the area of franchise law. The Subsection meets quarterly, and the members of the Subsection take turns hosting the group at their respective offices. The discussion topic for each meeting is selected by the Subsection members at the previous meeting. Non-attorneys with an interest in franchising are welcome and encouraged to attend. Anyone interested in learning more about the subsection, or wishing to be included on the Subsection mailing list, is invited to call me directly at the offices of Dorsey & Whitney, LLP at (303) 260-6359.

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, 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 a Uniform Franchise Offering Circular, or U.F.O.C., and must be presented to potential franchisees at the earlier of the first meeting in which the purchase of a franchise is discussed or ten days before the franchisor receives the first payment from the franchisee.

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 and outlines the various exceptions to the FTC Rule.

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. All of these state laws provide traps for the unwary franchise attorney.

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 meeting.

For a recent article on Chapter 11 bankruptcy and franchising, see Kevin P. Hein, "Chapter 11's Impact on the Franchise Relationship," Colorado Bar Association, Business Law Newsletter, April, 1997. The article may be viewed by clicking on the Chapter 11 Article button in the left margin frame.

Franchise Law Subsection 2014-2015 Chair: Daniel Graham