Franchise Regulation: A Little History
The starting point for modern franchising and modern franchise regulations in the United States has to be 1946 when Congress passed the Federal (Lanham) Trademark Act. The Lanham Act granted licensors the ability to license their intellectual property and established the rules they need to follow.
Under the Lanham Act, a licensor (franchisor) can license its federally registered trademarks and service marks to others without risking the possible loss of its intellectual property. The ability of independently owned businesses to offer products and services licensed to them by franchisors is the essential cornerstone of every franchise system. Over the next 20 years, brands like Dunkin’ Donuts, Kentucky Fried Chicken (now KFC), Burger King, McDonald’s, Midas, Holiday Inn, H&R Block, International House of Pancakes, and 7-Eleven begin to dot the landscape of America.
Still, how franchisors offered their franchise opportunities to prospective franchisees was substantially unregulated, and with rapid growth, problems arose. By the late 1960s, the bloom had left the rose. Some franchisors began to focus more on selling as many franchises as they could rather than on their obligations to their franchisees and customers. In the process, their existing franchisees often received diminished support from the franchisor.
Some franchisors misrepresented the resources and success that their franchise offerings had achieved in an attempt to attract more franchisees. In some cases, some franchisors sold franchises for business concepts that didn’t even exist, and others used the names and endorsements of celebrities to attract buyers. There were even franchise opportunities that guaranteed you would get rich if you invested in their chinchilla farm opportunity.
As a result litigation followed, and soon there were federal and state hearings. Several states including Delaware, California, New Jersey, and Washington enacted laws governing the pre-sale disclosure of information to potential franchisees. Other states soon followed.
It wasn’t until 1979 that the Federal Trade Commission (FTC) implemented the FTC Rule throughout the United States and its territories, including American Samoa, Guam, Puerto Rico, and the Virgin Islands. The format and content of the FDD has undergone changes over the years meant to strengthen presale disclosure to prospective franchisees. The last major change took place in 2007, but the FTC is expected to begin a lengthy review of the existing disclosure format in 2017.