Penalties for Violating Franchise Laws

Article by: Lynne D. Shelton

The Federal Trade Commission (“FTC”) and the State agencies governing franchises take the hundreds of complaints they receive each year very seriously.

Using the FTC Rule, courts have penalized Franchisors through civil fines, rescission, monetary damages, and personal liability for the owners of the franchisor.

Civil fines have been levied for up to $11,000 per day, per violation. In one instance, a fine of $870,000 was levied against a franchisor.

Rescission is when the Franchisee can cancel their contract with the Franchisor. The Franchisee has this option when the Franchisor violates the FTC Rule or state statutes. This includes not only the original franchise fee, but all monies the Franchisee has spent in reliance on the franchise.

Monetary damages of over $4.89 million have been recorded. But the most terrifying aspect for most franchisors is that the owner may be held personally liable for not only the fines and monetary damages, but can also be sentenced to jail time under criminal felony statutes.

We cannot stress enough, how important it is for franchisors to seek advice from an experienced franchise attorney. Most business and commercial attorneys do not have an adequate understanding of the franchise laws to competently represent Franchisors. And many of the franchise relationship laws are counter intuitive to most attorneys. It is imperative to have an experienced franchise attorney prepare all of your franchise documents including, but not limited to, the Disclosure Document, the Franchise Agreement and the Operation Manuals.

At Shelton & Power, LLC, we have the knowledge to help make sure that your company is protected from these types of penalties by creating or reviewing your Disclosure Documents, Franchise Agreements, and Operations Manuals and setting your company on a path to a compliant timeline.