Consumer » Franchisee


Protecting Franchisees from Fraud

Girard Gibbs’ franchisee lawyers protect investors from fraud, breach of contract, and other unlawful schemes related to their franchise business.

In the franchisee-franchisor relationship, the franchisor is typically a major company and often has the upper-hand. Some companies use this to take advantage of investors, misleading investors about profits, fees, and costs, or setting up schemes so that the franchise will fail and the franchisor company can resell the franchise outlet to another unsuspecting investor. Franchise companies that engage in this kind of conduct may be violating franchisees’ contractual rights and breaking franchise laws.

Common forms of franchise fraud

Franchise fraud is a broad term referring generally to fraud relating to the sale, operation, or termination of a franchise. Common ways franchisors take advantage of franchisees include:

Churning (setting up to fail)

The more times a franchise is sold, the more money the franchisor makes. Franchisors profit from the initial sale and on-going fees and royalties paid by franchisees, so by setting up a business to fail, the franchisor can reclaim the failed franchise and resell it to profit yet again. This practice is known as “churning” and is associated with pyramid schemes.

Misrepresenting profits

Franchisors often promise franchisees huge profits to lure them into purchasing a franchise. But all too frequently these profits never materialize, leaving franchisees to incur major financial losses. Federal law prohibits franchisors from predicting future earnings to prospective or actual franchisees.

Excessive fees & costs

Franchisors often downplay the costs of owning a franchise or royalties that a franchisee is required to pay. In other cases, franchisors force franchisees to purchase specific products from certain vendors at inflated prices or demand that franchisees pay for costly advertising or related expenses.

Breach of contract

A franchise agreement sets out the terms and conditions that will govern the ownership of the franchise and is usually drafted by the franchisor. If a franchisor does not fulfill its duties under the contract or breaches the terms of the agreement, then harmed franchisees may have a legal claim to hold the franchisor responsible.

Terminating a franchise agreement

Various states have franchise laws that protect against unfair terminations of franchise relationships by franchisors. Generally, a franchisee may not be terminated prior to the termination of the franchise agreement without “good cause,” as defined under these franchise laws.

Laws & regulations for the franchise industry

Various state and federal laws regulate the U.S. franchise industry and protect against franchise fraud.

Federal Franchise Law

The Federal Trade Commission’s “FTC Franchise Rule” defines practices that are unfair or deceptive in the U.S. franchise industry and specifies what disclosures must be made during the sale of a franchise.

State Franchise Law

Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, North Dakota, South Dakota, Virginia, Washington and Wisconsin all have laws regulating the franchisor-franchisee relationship. These laws typically regulate franchisors’ ability to terminate or refuse renewal of a franchise.

>> More about federal and state franchise laws

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