Franchise Regulation
| Publication year | 1986 |
| Pages | 395 |
| Citation | Vol. 15 No. 3 Pg. 395 |
1986, March, Pg. 395. Franchise Regulation
The marketing of a franchise in Colorado is subject to a variety of federal and state laws and regulations, although there is no Colorado statute specifically regulating such activity. The primary regulation is the Federal Trade Commission's ("FTC") trade regulation rule regarding disclosures to be made by franchisors and sellers of business opportunities prior to the sale. Such disclosures and the subsequent franchisor/franchisee relationship are also subject to Colorado's common and statutory law regarding trademarks, fraud, unfair competition, contracts and other matters.
In addition, if the franchisor intends to expand its franchise market to include other states, the franchise laws of those states should be considered at the formative stage in order to comply with those laws. This will avoid substantive changes in the structure of and documentation relating to the franchise.
In the late 1970s, the FTC conducted an extensive six-year investigation of the franchise industry and concluded that abuses existed which required federal control.(fn1) As a result, in 1979 the FTC issued its trade regulation rule, entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" ("FTC Rule").(fn2) The FTC Rule applies to the advertising, offering, licensing, contracting, sale or other promotion in or affecting interstate commerce of any franchise, as defined by the FTC Rule.(fn3)
In addition to the FTC's desire to prevent abuses, the difficulty in defining the peculiar nature of the franchise arrangement(fn4) hastened the FTC to act. Two types of continuing commercial relationships are defined as a "franchise" by the FTC Rule: "package and product franchises" and "business opportunity ventures."(fn5)
The three elements common to package and product franchises covered by the FTC Rule are (1) distribution of goods or services associated with the franchisor's trademark; (2) significant control of or significant assistance to the franchisee in the method of operation of the business; and (3) a required payment of $500 or more by the franchisee to the franchisor or a person affiliated with the franchisor at any time before or within six months after the business opens.
Business opportunity ventures are covered by the FTC Rule if each of the following three elements is present: (1) the franchisee sells goods or services supplied by the franchisor or its affiliate, or by suppliers with which it is required by the franchisor to do business; (2) the franchisor secures retail outlets or accounts for the goods or services, secures locations for vending devices or racks, or provides the services of a person to do either; and (3) the franchisee is required to pay $500 or more to the franchisor or a person affiliated with the franchisor at any time before or within six months after the business opens.
Relationships covered by the FTC Rule include those which are represented by the franchisor as being within the definition of franchise or business opportunity venture when the relationship is entered into, regardless of whether, in fact, they are within the definition.(fn6)
The Rule exempts fractional franchises, leased department arrangements and purely verbal agreements.(fn7) It excludes relationships between employer/employees and among general business partners, membership-and retail-owned cooperatives, certification and testing services and single trademark licenses.(fn8)
The FTC Rule does not regulate the substantive terms of the franchisor-franchisee relationship nor does it require registration, approval or filing of any documents with the FTC in connection with the sale of franchises.(fn9)...
To continue reading
Request your trial