When compiling the Franchise Disclosure Document (FDD), franchisors must consider closely the laws that shall apply to the franchise agreement. You want to be honest and transparent with prospective franchisees in the agreement, yet mindful and even somewhat strategic in drafting the FDD under state and federal laws. Here are a few things to keep in mind.
If you’re a franchisor in a registration state such as California seeking to franchise nationally or even regionally, it’s best to have your franchise agreements written to define that the law of the state in which the franchisee resides shall be the law that applies to the agreement. This is because California law is more favorable to franchisees, granting them more protection than in other states. For example, a franchisor under California law is not able to enforce a non-compete clause, whereas Texas allows non-competes, as do many other states.
Franchisors also need to consider where a legal action would be heard. Most franchisors want to have any legal action near their company headquarters. You can apply the law where the franchisee is located, but still require them to come to your headquarters to seek relief.
Arbitration vs. Litigation
Rather than let your business be subject to civil litigation, which can take significantly longer and allows the public to review the litigation file, consider including an arbitration clause in your agreements. Arbitration is private, while a lawsuit is public record. Arbitration is also typically faster and less expensive than a trial that may take years to resolve. Lastly, franchisors find that the binding decision from arbitration brings them closure and certainty, particularly if the award is in their favor. With arbitration, there are no appeals.
Franchisors in California should keep in mind that the state has an interest that actions are heard in California. For this reason, consider requiring that the arbitration abide by the Federal Arbitration Act in order to remove the process from state jurisdiction.
Minimizing Your Exposure
As a franchisor, you always want to have an eye toward potential claims and make a concerted effort to minimize your exposure accordingly. That’s exactly what we can do for you at Soden & Steinberger, APLC. As franchise attorneys who have experienced the entrepreneur and franchisor journey ourselves, we are able to assist in every aspect of franchising your business. Call us at 619-239-3200 for a free consultation.