Chicago, IL Franchise Attorneys
What is a Franchise Agreement?
A franchise is an agreement between two companies. An existing business, known as the franchisor, allows a new business, known as the franchisee, to use the company’s identity in exchange for a fee. Franchise in Illinois are governed by both federal law and Illinois law.
Federal Franchise Law
The Federal Trade Commission (FTC) is an independent agency charged with protecting consumers from fraud and anticompetitive practices. The FTC has the responsibility of overseeing franchise regulations.
Elements of a Franchise
Per the FTC, the basic elements of a franchise are:
- Use of a Trademark – The franchisee has the right to use the franchisor’s trademark.
- Mandatory Payment – The franchisee must pay a fee to the franchisor for licensing and training.
- Control Over Operations – The franchisor decides procedures, marketing, training, and location.
Franchisees give up authority over their businesses but benefit from proven strategies. Franchisors profit by collecting recurring franchise fees. Contracts known as franchise agreements secure the interests of both parties.
Franchise Disclosure Documents
The FTC requires all franchisors in the United States to issue Franchise Disclosure Documents (FDD) to potential franchisees two weeks before signing contracts. The franchisor must disclose 23 crucial pieces of information such as earning potential, other franchisees, and litigation history.
Illinois Franchise Disclosure Act
The FTC may bring a suit to federal court on behalf of franchisees in cases of fraud, but state courts handle most disputes. The State of Illinois passed the Illinois Franchise Disclosure Act (IFDA) in 1987 to clarify expectations.
FDDs and UFOC Filings
This law requires franchisors in Illinois to file current FDDs with the State Attorney General’s office and update them annually. Franchisors must also create a Uniform Franchise Offering Circular (UFOC). UFOC documents are also complex, and they receive updates whenever there is a material change to the business.
Elements of a Franchise
Regardless of any contract, Illinois recognizes the existence of a franchise if the following three conditions exist concurrently:
- Association with Brand – Another business uses the trademark of another.
- Required Fee – One company pays another for training, support, and licensing.
- Marketing Plan – A firm dictates another’s supplies, location, and marketing.
Franchisors must register with the Illinois State Attorney General’s office and pay filing fees. Those business who fail to do so face significant fines and penalties.
Types of Franchise Laws
Most franchise disputes are contract issues. The laws governing the actual franchise relationship itself fall primarily into three categories:
- Disclosure Laws – Information contained in the FDD or UFOC documents. A disclosure dispute might occur if a franchisee feels misled by claims made by the Franchisor. A poorly written UFOC is confusing, but deliberate omissions are criminal.
- Registration Laws – A business functioning as a franchisor must register with a state agency. The FTC does not require registration, but the State of Illinois does. A franchisor might operate in another state with less restrictive laws, but an unregistered business cannot sell licenses in Illinois.
- Relationship Laws – These laws define the existence of a franchise. Some companies attempt to avoid regulations by manipulating their client businesses. Relationship laws stop this abuse by giving state courts the power to determine when a franchise exists.
Legal Services for Franchisors
As the franchisor, you must follow the federal and state regulations to avoid penalties or voided contracts:
- Franchise Plan – It is important to understand a business’ plan, and to insure that the plan is one that may scale appropriately to be a successful franchise business. Franchising is a relatively costly undertaking, and you need to have a solid business plan in place to attract and maintain franchisees.
- Registration – A franchise lawyer reviews and helps draft your application documents and oversees the process to completion.
- Drafting the FDD and UFOC – These crucial documents are lengthy and complicated.
- Compliance – Franchisors lawyers keep vital records up to date and advise when material changes require modifications to declarations.
A good lawyer also helps you develop a legally sound franchise plan attractive to investors.
Legal Services for Franchisees
Before starting a franchise, you should consult with a knowledgeable franchise attorney. A knowledgeable franchise lawyer can assist with the following:
- Review of FDD and UFOC – A franchise lawyer identifies areas of concern and helps entrepreneurs evaluate the implications of their decisions.
- Review of Franchise Agreement – These contracts are binding. A legal analysis identifies potential conflicts.
- Sale/Transfer – The franchise agreement describes the process to transfer the rights to another. A franchise lawyer negotiates when conflicts with property rights arise.
An attorney may also advise you on your business structure and alternative financial strategies.
Franchise Litigation Attorneys in Chicago
Despite the best efforts of responsible professionals, these common conflicts still arise:
- Encroachment – A franchise agreement defines a territory. Encroachment happens when a peer franchisee works in the same space.
- Payment Disputes – This occurs when a franchisee either fails to meet its obligation or argues that fees are unfair. A court judgment settles the issue.
- Agreement Breaches and Defaults – Violating the contract may void some or all of the agreement. Sometimes a court must decide when a breach occurs.
- Trademark Infringement – This happens when a franchisee remains in business after the expiration of the contract. It is illegal to continue marketing with the franchisor’s branding and resources.
- Antitrust – Antitrust suits arise when franchisees believe the requirement to purchase specific supplies violates their right to seek competitive alternatives.
- Disclosure Violations – When a franchisor fails to disclose information, courts may award damages to franchisees.
- Discriminatory Actions – A franchisor may not favor one franchisee over another. Offering lower prices for the same services is discriminatory.
- Franchisor Fraud – If a franchisor deceives investors, the FTC may seek damages in federal court on behalf of the franchisees.
- Wrongful Termination – Except in exceptional circumstances, franchisors may not end a franchise without offering an opportunity to cure the relationship.
Hire a Chicago Franchise Lawyer
If you are considering opening a franchise business or if you want to establish your business model in the State of Illinois, consult with a qualified franchise attorney for advice. The law firm of Roth Fioretti represents franchisors and franchisees. Whether your company needs assistance filing the appropriate registration documents with the state of Illinois, you need someone to review the franchise agreement before signing, or you need representation during litigation, we’re the Chicago law firm to call.