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Franchise law

Franchise law includes the various sources of state and federal law (statutes, rules, regulations, contracts) that govern the registration, offer, and sale of franchises, and the relationship between franchisors and franchisees—including any personal guarantee of the franchisee’s obligations.

At the federal level, the Federal Trade Commission (FTC) regulates franchising under the FTC Franchise Rule—which (1) requires certain disclosures to potential franchisees before signing a franchise agreement or contract and (2) prohibits unfair and deceptive trade practices. And at the state level, some states have passed franchise laws that impose state registration obligations, regulate the offer and sale of franchises, and prohibit certain franchise agreement provisions.

Under the FTC Franchise Rule, a business or licensing arrangement will be regulated as a franchise if it has three elements: (1) the franchisor grants the franchisee a right to use the franchisor's trademark; (2) the franchisor exerts or has the authority to exert a significant degree of control or assistance over the franchisee's method of operation; and (3) the franchisee pays the franchisor a fee of at least $570. Even if the parties to a contract call it a licensing agreement, a distribution agreement, or explicitly state that it is not a franchise arrangement, if these three elements are present, the FTC Franchise Rule and other federal laws, regulations, and FTC rules will apply.

The FTC Business Opportunity Rule and state statutes governing the marketing of business opportunities and the related sale or lease of products, equipment, supplies, or services may also apply to franchises and the relationship between franchisors and franchisees.

In Texas, franchise law is governed by both federal and state regulations. Federally, the Federal Trade Commission (FTC) oversees franchising through the FTC Franchise Rule, which mandates that franchisors provide potential franchisees with specific disclosures before a franchise agreement is signed and prohibits unfair and deceptive practices. This rule applies if the business arrangement includes the use of the franchisor's trademark, significant control or assistance over the franchisee's operation, and a fee paid by the franchisee to the franchisor. Additionally, the FTC Business Opportunity Rule may apply to franchises. Texas does not have a specific franchise registration law, but it does have business opportunity laws that could impact franchises. These laws require certain disclosures and regulate the sale of business opportunities. It's important for franchisors and franchisees to understand these regulations to ensure compliance with both federal and state laws when engaging in franchise agreements in Texas.

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