Navigating the legal landscape when it comes to buying, selling, or operating a franchise can be complex, and the rules vary from state to state. Understanding the Ohio-specific legal requirements is crucial for any Ohio resident involved in franchising, and this puts a premium on the use of experienced franchise agreement attorneys and franchise dispute attorneys.
Franchising in Ohio is regulated by a combination of federal and state laws and regulations. Federal regulation takes the form of a Federal Trade Commission Trade Regulation, commonly referred to as “the Franchise Rule”, which requires that franchisors provide potential franchisees with a Franchise Disclosure Document (FDD). The FDD must contain essential information about the franchise and a summary of the legal obligations the franchisee will have. In Ohio, the FTC’s Franchise Rule is supplemented by the Ohio Business Opportunity Law, which provides additional rules aimed at protecting franchisees.
The Importance of Franchise Legal Documents
When entering into a franchise agreement, the franchisee must understand what he is being asked to agree to. The Franchise Agreement contains the terms and conditions governing the franchise relationship, such as fee structures, territorial rights, operational guidelines, and termination clauses. It is vital for prospective franchisees to review this agreement thoroughly before signing, as it will dictate the terms of their business operation. These agreements are generally slanted in favor of the franchisor, but occasionally they contain unusual or even outrageous terms that no sane franchisee should be willing to agree to,
The FDD complements the Franchise Agreement by providing potential franchisees with necessary disclosures about the franchisor and the franchise system, in the form of 22 mandatory disclosure items dictated by the FTC Franchise Rule. By requiring these standard pre-sale disclosures, the FDD helps franchisees make informed decisions regarding their investment. In fourteen states, but not in Ohio, the law requires franchisors to register their FDD with the state if they intend to offer franchises within its jurisdiction. Those “registration states” are sometimes described as having Franchise Disclosure Laws. Eighteen other states do not have any laws called “Franchise Laws” and instead have laws that may be similar, but are called “Business Opportunity Laws”. In most cases, these Business Opportunity Laws inexplicably exempt franchises!” Only four of these state laws actually apply to sale of franchises, and only one of these laws — the Ohio Law — allows the franchisee to file suit to terminate the transaction and get his money back in case of pre-sale franchise disclosure obligations. Because of the unique provisions of the Ohio Law, one federal district court judge recently described Ohio as “the franchisee protection state on steroids”.
Navigating the Franchise Agreement.
The Franchise Agreement is the most critical legal document affecting a franchisee’s investment. Because of this, it is strongly recommended that franchisees hire a franchise agreement attorney who specializes in franchise law. An attorney can help the franchisee understand the complex language of the agreement, identify potential pitfalls, and perhaps negotiate more favorable terms. Important provisions of every Franchise Agreement include:
1. Initial Franchise Fees: The upfront fees paid to the franchisor to participate in the franchise system.
2. Royalty Fees: Ongoing payments usually based on a percentage of sales.
3. Territorial Rights: The geographical area in which the franchisee is allowed to operate, which is crucial for preventing competition with other franchisees from the same brand.
4. Termination and Renewal Terms: The conditions under which the agreement can be terminated and the procedures for renewing the agreement.
Ohio’s Franchise Disclosure Requirements
Ohio law requires that franchisors provide specific disclosures to potential franchisees that are somewhat different than the FDD requirements. Additionally, Ohio law requires a 5-day cancellation period after signing the agreement. However, the Ohio Law has an exemption for transactions that comply with the FTC Rule, and most franchisors ignore the Ohio-specific disclosure requirements, believing they will comply with the FTC Rule and thereby satisfy the Ohio Law’s exemption.
Sometimes franchisors fail to comply with the FTC Rule, and sometimes they even fail to provide any FDD, either through ignorance or because they mistakenly think their transaction falls outside the FTC Rule requirements. The FTC largely ignores these individual FTC Rule violations and in most states franchisees have no legal recourse to enforce the disclosure rules in such transactions. But in Ohio, franchisees can file their own lawsuits in such cases and potentially get their money back, plus attorney fees, and get released from the transaction.
Franchise Disputes in Ohio
Despite the advantages of franchising, disputes can arise between franchisors and franchisees in connection with operating the franchise. Common areas of conflict include failures to meet operational standards, misrepresentation of financial performance, and disagreements over termination rights. In such cases, it is essential to seek the expertise of a franchise dispute attorney. A knowledgeable frasnchise attorney can provide guidance on resolving the dispute, whether through negotiation, mediation, or litigation. In most cases, however, no special laws provide protections to franchisees in connection with such disputes.
Conclusion
Purchasing, selling, or operating a franchise in Ohio involves navigating a complex legal landscape. Potential franchisees must be diligent in reviewing the Franchise Disclosure Document and Franchise Agreement, seeking the assistance of franchise agreement attorneys to safeguard their interests. Understanding Ohio’s franchise laws, including the provisions designed to protect franchisees, is crucial for successful business operations within the state.
Once the franchise is operating, serious disputes necessitate hiring a franchise dispute attorney who can provide valuable guidance in resolving conflicts. By comprehensively understanding the legal aspects of franchising, the attorney can help ensure that franchisees achieve the best outcome to their dispute that is possible undr the circumstances.
