Legal Considerations When Starting a Franchise Business
The business law attorneys of Sayer, Regan & Thayer often advise clients on the intricacies of purchasing franchise businesses. This process can be complex, especially when considering the specific legal landscapes of states like Rhode Island and Massachusetts.
State Regulations on Top of Federal Laws
First and foremost, it’s crucial to understand that both Rhode Island and Massachusetts have specific franchise laws that supplement federal regulations. In Rhode Island, the Franchise Investment Act (R.I. Gen. Laws § 19-28.1-1 et seq.) provides additional protections for franchisees. Similarly, Massachusetts has the Regulation of Business Practices Between Motor Vehicle Manufacturers, Distributors and Dealers (Mass. Gen. Laws Ch. 93B), which, while primarily focused on auto dealerships, can have broader implications for franchise relationships.
Franchise Disclosure Document
One of the most critical documents in any franchise purchase is the Franchise Disclosure Document (FDD). Under federal law, specifically the Federal Trade Commission’s Franchise Rule, franchisors must provide potential franchisees with an FDD at least 14 calendar days before any agreement is signed or any payment is made. This document contains crucial information about the franchisor, the franchise system, and the terms of the franchise agreement.
In both Rhode Island and Massachusetts, it’s essential to carefully review the FDD with a qualified attorney. Pay particular attention to items such as the franchisor’s litigation history, financial performance representations, and any state-specific addenda. Rhode Island, for instance, requires additional disclosures related to the franchisor’s financial condition and the names of other franchisees in the state.
Franchise Agreement
The franchise agreement itself is another critical legal document that requires thorough examination. This contract will govern your relationship with the franchisor for the duration of the franchise term. In Massachusetts, under the Common Law, courts have recognized an implied covenant of good faith and fair dealing in franchise agreements (Uno Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 2004). This means that both parties must act in good faith and deal fairly with each other throughout the franchise relationship.
Territory rights are another crucial consideration. The franchise agreement should clearly define your exclusive territory, if any. In densely populated areas like Boston or Providence, territory rights can significantly impact your business’s potential for success. Ensure that the agreement provides adequate protection against encroachment by the franchisor or other franchisees.
Both Rhode Island and Massachusetts have robust consumer protection laws that can impact franchise relationships. The Rhode Island Deceptive Trade Practices Act (R.I. Gen. Laws § 6-13.1-1 et seq.) and the Massachusetts Consumer Protection Act (Mass. Gen. Laws Ch. 93A) prohibit unfair or deceptive acts or practices in business. These laws can provide additional recourse for franchisees if a franchisor engages in misleading or unfair conduct.
Dispute Resolution
When it comes to dispute resolution, many franchise agreements include mandatory arbitration clauses. While generally enforceable, it’s important to note that in Massachusetts, the Supreme Judicial Court has held that class action waivers in arbitration agreements may be unenforceable if they effectively deny consumers a remedy (Feeney v. Dell Inc., 454 Mass. 192, 2009). Although this case dealt with consumer contracts, it could have implications for franchise agreements as well.
Additional Considerations
Financing is often a significant concern when purchasing a franchise. Both Rhode Island and Massachusetts have usury laws that cap interest rates on loans. In Rhode Island, the maximum rate for business loans is 21% (R.I. Gen. Laws § 6-26-2), while in Massachusetts, it’s 20% (Mass. Gen. Laws Ch. 271, § 49). Be sure any financing arrangements comply with these limits.
Employment laws are another crucial area to consider. Massachusetts has some of the most employee-friendly laws in the country, including the Massachusetts Equal Pay Act and the Paid Family and Medical Leave law. Rhode Island also has its own paid family leave program. As a franchisee, you’ll need to ensure compliance with these state-specific employment laws in addition to federal regulations.
Lastly, don’t overlook the importance of local zoning laws and regulations. In historic areas of Rhode Island or Massachusetts, there may be strict regulations on signage or building modifications. Ensure that your chosen location is zoned appropriately for your franchise business and that you can comply with all local ordinances.
Own Your Own Business – Cautiously
Purchasing a franchise business in Rhode Island or Massachusetts requires careful legal consideration. From reviewing the FDD and negotiating the franchise agreement to ensuring compliance with state-specific laws on consumer protection, employment, and zoning, there are numerous legal aspects to navigate. Always consult with a qualified business attorney familiar with franchise law in your state to guide you through this complex process and help protect your interests as you embark on your franchising journey.
Contact Sayer, Regan & Thayer for more information on this topic.