What is Franchise and Distribution Law?

In order to explain what franchise and distribution law is, you first need to understand franchises and distributorship relationships.

At its simplest, franchising is a business format where the franchisee uses a trademark and business system developed and owned by a franchisor to operate a franchise outlet. The franchisee pays a fee to the franchisor for the right to use the trademark and business system. For example, the local owner of the local McDonald’s (franchisee) uses the McDonald’s trademark and the know-how and products developed by McDonald’s Corporation (franchisor) to operate the local McDonald’s restaurant (franchise) in exchange for the franchisee paying a fee to the franchisor.

At a basic level, a distributorship (or dealership) is similar to a franchise. The most significant difference is a distributorship involves the sale of a manufacturer’s products to the end user customer. In a distributorship, the manufacturer’s trademark is typically used by the distributor but the public often recognizes that the distributor’s business is separate from the manufacturer. The financial aspects are also slightly different in a distributorship. Rather than them directly paying a portion of its profits to the manufacturer, a distributor typically pays a wholesale price to the manufacturer while selling the product to the customer at a retail price. While many distributorships sell expensive products such as cars, tractors, and pleasure boats, there are also distributorships that sell much less expensive product such as repair parts or beauty products.

With a basic understanding of franchises and distributorships, we will turn to the laws that affect these business formats.

Common legal issues that can come up in franchise and distributorship relationships include intellectual property issues, contracting and business transaction issues, trade and competition regulation, and disputes relating to breach of contract, fraud, misrepresentation, and tortious interference. In addition to these legal issues that can affect almost any business, there are statutes which specifically relate to franchises and distributorships.

At the federal level, the Federal Trade Commission has established rules regulating the sale of a franchise to a prospective franchisee, requiring certain specific disclosures and waiting periods. Many states have statutes similar to the Federal Trade Commissions rule. These state statutes, in addition to or at times instead of, requiring disclosure of specific information to the prospective franchisee and waiting periods, may require the franchisor to register the franchise opportunity.

Many state franchise statutes also regulate the relationship between the franchisor and franchisee. Most commonly these statutes require a franchisor to have good cause to terminate a franchise relationship and require the franchisor provide notice to the franchisee and an opportunity for the franchisee to cure the alleged default. In addition, many statutes have requirements relating to the dispute resolution process between the franchisors and franchisees regulating the applicability of the statute, where any court case can occur, and whether the franchisor must pay the franchisee’s attorneys’ fees and costs if the franchisee is successful in litigation. However, there are also state franchise statutes which typically favor and provide protection to the franchisee, as they are the non-superior party in the relationship.

While some franchise statutes can apply to certain distributorships, there are also specific statutes that apply to distributorships in most states. These distributorship statutes are most often written to only apply to certain industries, such as tractor dealerships, marine dealerships, and car dealerships. There protections also differ from franchise statutes in that while they often regulate the termination of the distributorship by manufacturers, the damages available are typically limited to requiring repurchase of the products and any equipment that relates specifically to the distributorship, such as product specific tools.

All of these law, statutes, and regulations can make the rights and responsibilities of the parties to a franchise or distributorship relationship complex, resulting in many franchisor and manufacturers taking a misstep into an unknown pitfall and leaving franchisees and distributorships unaware of their legal rights.

If you are in a franchise or distributorship relationship and need assistance with understanding your rights and responsibilities, contact one of our experienced franchise and distribution law attorneys for assistance.