The purpose of this article is to provide a summary of Illinois franchise law and federal franchise law as applied in Illinois. Because franchises are governed by both federal and state regulations, franchise law is complex, and an experienced franchise attorney should be an essential part of your team, whether you are a franchisor or franchisee.
It is important to understand that regardless of the label that the parties to an agreement place on the agreement (e.g. joint venture, licensing agreement, consulting agreement), the relationship between two parties will be considered a franchise, and therefore will be subject to state and federal franchise laws, if the relationship possesses the legal elements of a franchisor/franchisee relationship. The elements of a franchise vary slightly from state to state. However, Illinois has adopted the federal definition of the term "franchise."
In Illinois (and federally), there are 3 elements that must all be present create a franchise:
The Federal Trade Commission requires that Franchisors make certain disclosures when making offerings to potential franchisees. The document in which these disclosures are made is called a Franchise Disclosure Document (FDD). In Illinois the the equivalent of an FDD is a Unfiorm Franchise Offering Circular ("UFOC") , the franchisor must disclose information on the following topics:
In addition to these optional disclosures, franchisors have the option to disclose Financial Performance Representations ("FPR"). FPRs consist of information from which a franchisee may determine a range of expected profit or sales from the franchise. Franchisors who do not make FPRs in their FDDs or UFOCs are prevented from then providing this information to franchisees prior to sale.
Federal law does not require franchisors to register their franchise. However, Illinois law does require franchise registration. Before offering or selling a franchise in Illinois, the franchisor must provide the franchisee with a current Franchise Disclosure Document that has been properly registered with the Franchise Bureau for the Illinois Attorney General's Office. The registration must be updated annually.
In order to register an FDD with the Illinois Attorney General, the franchisor must submit the following to the Franchise Bureau of the Illinois Attorney General's Office, 500 South Second Street, Springfield, IL 62706:
The phone number for the Franchise Bureau is (217)782-4465.
The UFOC must be updated and an amendment must be filed with the Franchise Bureau whenever there is a change in any of the "material information" contained therein. "Material information" means any information that a franchisee would consider important in making a decision about whether to invest in the franchise.
On the federal level, there is no private cause of action for violation of federal franchise laws, meaning that franchisees cannot sue franchisors for violation of federal franchise regulations. If a franchisor violates federal regulations, the FTC may bring suit for an injunction requiring franchisors to cease and desist a violation of franchise rules. The FTC is also empowered to bring suits against franchisors on behalf of franchisees seeking both civil damages and criminal penalties. Officers, directors, or other principals of the franchisor may be found personally liable for violations of federal franchise law.
The Illinois Franchise Disclosure Act of 1987 ("IFDA") creates a private cause of action in Illinois for violation of the IFDA. Section 705/26 of the IFDA provides that anyone who offers, sells, terminates, or fails to renew a franchise in violation of the IFDA is liable to the franchisee for any damages caused by the violation of the IFDA. The IFDA also provides for personal liability for principals, directors, and officers of the franchisor who had or should have had knowledge of the facts amounting to a violation of the IFDA. The IFDA awards attorneys fees and costs to franchisees who are successful in bringing an action under the IFDA.
Franchise relationship laws govern the interaction between the franchisor and the franchisee during the course of the agreement.
The most common types of violations of Illinois franchise laws include:
Below is a summary of some of the mot important Illinois franchise relationship laws:
Section 705/19 of the IFDA provides that a franchisor may not terminate a franchise prior to the expiration of its term unless there is "good cause," which includes, but is not limited to franchisee's failure to cure a breach of the franchise agreement after giving notice and an opportunity to cure. Certain types of "good cause" terminations do not require notice and an opportunity to cure:
Section 705/20 of the IFDA provides that a franchisor may not refuse to renew a franchise agreement without compensating the franchisee by repurchase or other means, when:
Section 705/18 of the IFDA prevents the franchisor from unreasonably and materially discriminating between franchisees located in Illinois by offering different terms to different franchisee, if the discrimination would cause competitive harm. The IFDA carves out certain exceptions to this rule, allowing the franchisor to make reasonable distinctions between different businesses and to offer different terms to franchisees who sign up at different times.
Section 705/17 of the IFDA prevents franchisors from interfering with franchisees participating in trade associations.
Below are several common issues that arise between franchisors and franchisees: