Franchising is a common form of business enterprise in the United States. Typically, a franchisor will license its trademark and business system to the franchisee for an upfront fee and ongoing royalty fees. Franchisees are willing to pay such fees presumably for brand recognition and a system of doing business that is tested and proven successful. However, franchises can be risky investments in terms of time, money, and opportunity costs. Franchisors, eager to secure franchisees and expand their systems, often make intentional and/or negligent misrepresentations (or conceal material information) about the prospects of success and other aspects of their franchises. Franchise agreements are written in legal language that is difficult for even trained lawyers to understand. In most cases, franchise agreements are written in such a way as to put the franchisor’s interests first and insulate the franchisor’s potential liability.
Once in a franchise relationship, franchisees suffer from a significant power imbalance. Franchisees, having invested significant resources into purchasing the franchise and making long-term commitments like leases, can be subjected to opportunistic behavior where the franchisor can try to impose new or different obligations or interpret the contracts in a way that was not originally intended. For these reasons and the historical abuse that has characterized the sale of various business opportunities including franchises (as well as other investments), the federal government and some state governments have passed laws and/or administrative regulations that require franchisors to make certain written disclosures and/or behave in certain ways vis-à-vis their franchisees so as to somewhat level the playing field. Because franchisors know more about the business opportunity they are offering than do the franchisees who are investing in the opportunity, written disclosures, assuming they are accurate, provide franchisees with some but not all of the information needed to assess the viability of the economic opportunity that is being offered. And although franchisees might justifiably rely upon the representations a franchisor is making, they should also conduct their own due diligence prior to purchasing a franchise. Hiring an experienced franchise law attorney can help prospective franchisees minimize their risk.