Due to globalization, business relations between nations have rapidly increased, resulting in a rise in international business.The global expansion and growth of businesses was accomplished through a variety of strategies, including franchising.
While franchising may appear a simple and convenient method for expanding a business, there are many obstacles they must overcome in order to run this endeavor. Undoubtedly, there are numerous advantages to this business model, but there are also disadvantages.
In this article, you learn problems and common legal issues that both parties face in general.
For a contract to be deemed legal in the US, it must not violate the elements outlined in the Federal Trade Commission (FTC) franchise law, which are as follows:
- A contract, consisting of an offer and an acceptance of the offer;
- Legal consideration for the contract;
- Legal intent and purpose of the contract;
- Free consent of the contracting parties;
- The parties’ ability to enter into a contract.
If this franchising agreement violates the fundamentals, the contract is deemed unenforceable.
It is clear that franchising involves the transfer of certain rights and obligations, the most significant of which is Intellectual Property. Becausethe majority of businesses grow as a result of their inventions or trademarks, it is the franchisor’s primary responsibility to ascertain that these intellectual property rights are not exploited.
Major international beverage brands, for instance, rely on the secrecy of their ingredients and drinks for their success. If this agreement is not reached with regard to the country’s intellectual property laws, there is a high likelihood that these intellectual property rights will be exploited.
In the majority of franchising agreements, the franchisee is the franchisor’s agent. The franchisor determines how the business is operated and standards that must be adhered to, and the franchisee must ultimately notify the franchisor concerning the business.
According to the US FTC franchise law, the principal is responsible for the business-related actions of the agent. Under certain conditions, a franchisee may violate some the consumer protection statute, and as a result, a lawsuit may be filed against that franchisee. When entering into such an agreement, as a franchisor, you must consult with a franchise litigation lawyer in the USA.
As is common knowledge, the majority of contracts contain a confidentiality clause that prohibits either party from keeping business information to themselves. In the event that any third party discloses contract-related information, the other party must be indemnified. Only indemnification can provide monetary relief to the victim, but each business has its own philosophy. If a competitor adopts the business’s core concept, the company as a whole may suffer losses. In the case of franchising, the parties must execute an agreement that prohibits them from sharing any information.
Competition Law and Unfair Business Conduct
Due to the increase in trade practices, prohibiting unfair trade practices is one of the government’s most important responsibilities. In the US, the FTC franchise law has been enacted to prevent restrictive business practices and monopolistic control. In some instances, the franchisor may require the franchisee to sell a specific product at a specific price, or the franchisee may make false representations or submit false reports to the franchisor. To avoid such situations, the agreement between the parties must be meticulously drafted.
Concerning Corporations and Securities
Companies in the US are governed by the Corporate Law, and if either the franchisor or the franchisee is a company, the Corporate Law regulations must be observed. There are no unregistered businesses in the US, and it is a requirement to submit a financial statement to the Ministry of Corporate Affairs.
In the event that the franchisee files a false report, the franchisor may be held liable, and if the franchisor commits any violations, the franchisee will also be affected. The same applies to securities regulations. If the company is listed on a stock exchange, it falls under the jurisdiction of the Securities and Exchange Commission and is subject to its regulations.
If the franchisor is an US brand and the franchisee is a foreign one, or vice versa, the U.S. Securities and Exchange Commission (U.S. SEC) regulations will apply. Before entering into an agreement, the parties must adhere to these rules.
In exchange for using the franchisor’s intellectual property, the franchisee pays a royalty fee. These fees are charged. In accordance with the US income tax law, interest and royalties are presumed to appear and acummulate under certain conditions. Profits from franchised businesses are taxed at a maximum rate of 20%. Therefore, before signing the final document, the parties should investigate the applicable tax laws.
Above are the common legal issues encountered in the franchising context. Franchising comes with an existing client base because the brand name is already well-known and the parties do not need to spend money on products advertising. However, all the franchising agreements must be made considering the international and the domestic laws.