There are a variety of key points to emphasize the continuing need for franchise regulations:
Franchise agreements are drafted by a franchisor’s lawyers to help benefit the franchisor in every possible way with protected barriers of the law usually leaving franchisees on a take-it-or-leave-it basis. Unfortunately, franchisees most of the time fail to hire an experienced franchise lawyer in advance of the purchase even though hundreds of thousands of dollars may be at stake.
Franchisees have no idea where the “bones are buried” in franchise systems whereas the franchisors have all the critical information and often conceal it.
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.
Once in a system, the franchisee may often become stuck because of his down payment 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 these 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.
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