Franchise relationship laws impose significant obligations on franchisors beyond federal disclosure requirements. These state-specific statutes typically govern when a franchisor must (or need not) renew a franchise and may (or may not) terminate a franchise, along with other franchisee protective elements. Understanding which states have such laws and what they require is essential for a franchisor seeking to avoid costly litigation.
States with Franchise Relationship Laws
Approximately 20 states have enacted franchise relationship laws that regulate the substantive relationship between franchisors and franchisees. These jurisdictions include Arkansas, California, Connecticut, Delaware, Hawaii, Illinois, Indiana, Iowa, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, Rhode Island, South Dakota, Utah (though not expressly about franchises), Virginia, Washington, and Wisconsin, plus certain U.S. territories and possessions such as Puerto Rico and the U.S. Virgin Islands.
Several states also have industry-specific statutes, such as automobile dealer laws and petroleum marketing laws. Florida, for example, has enacted robust protections for motor vehicle dealers under its Motor Vehicle Dealer Licensing Law. Ernie Haire Ford, Inc. v. Ford Motor Co., 260 F.3d 1285 (11th Cir. 2001) In this blog post, however, we do not focus on the industry-specific laws.
What Franchise Relationship Laws Typically Cover
State franchise relationship laws generally regulate five core areas:
- Termination and Non-Renewal Restrictions
Most of these state relationship statutes prohibit franchisors from terminating or failing to renew a franchise without “good cause.” Good cause is typically defined as the franchisee’s failure to substantially comply with material requirements of the franchise agreement.
- Transfer and Assignment Rights
Several states restrict a franchisor’s ability to unreasonably withhold consent to the transfer or assignment of a franchise.
- Notice Requirements
Franchise relationship laws impose specific notice requirements before termination or non-renewal becomes effective. These notice periods typically range from 60 to 180 days, depending on the circumstances and jurisdiction.
- Encroachment and Territorial Protections
Some states, particularly those that regulate dealer relationships, regulate a franchisor’s ability to establish or relocate dealerships within a franchisee’s relevant market area. Minnesota’s Motor Vehicle Sales and Distribution Act, for example, requires manufacturers to provide 90 days’ notice of proposed changes to a dealer’s area of sales effectiveness and prohibits arbitrary changes made without due regard to the present pattern of sales and registrations.
- Modification of Franchise Agreements
Certain statutes, including Michigan’s Franchise Investment Law, prohibit franchisors from requiring franchisees to sign updated agreements with materially different terms as a condition of transfer or renewal unless there is good cause and the requirement is commercially reasonable. However, courts have interpreted these protections to allow franchisors to enforce updated, modernized agreements during a transfer or renewal if systemwide uniformity and commercial reasonableness are maintained.
Other Features of Franchise Relationship Laws
Certain franchise relationship laws (for instance, those of Illinois and Washington) prohibit discrimination in the charges a franchisor can assess franchisees of a similar class for franchise fees, royalties, goods, services, equipment, rentals or advertising services.
Note also that the California Civil Rights Act prohibits discrimination in the granting of franchises solely on the basis of the race, color, religion, sex, national origin or disability of the prospective franchisee or the racial, ethnic, religious, national origin or disability composition of a neighborhood or geographic area in which the franchise is to be located.
Many franchise relationship statutes restrict a franchisor’s ability to prohibit the “right of free association” among franchisees, typically through franchisee associations. A number of relationship statutes impose a general duty of good faith on the franchisor and franchisee. Some restrict a franchisor from placing competitive units too close in proximity to existing units.
Penalties/Remedies for Noncompliance
As is the case with federal and state franchise registration/disclosure statutes, most state franchise relationship laws vest in government officials broad powers to investigate any violative conduct and, if same is uncovered, to commence legal actions against the franchisor seeking damages; rescission; restitution; and, fines and/or penalties.
In addition, a few state franchise relationship laws impose criminal liability upon franchisors committing violative conduct.
As is also the case with state franchise registration/disclosure statutes, many state franchise relationship laws confer upon franchisees injured by violative conduct the right to commence legal proceedings against their franchisor seeking injunctions; damages; rescission; court costs; and attorney fees.
Some Best Practices for Compliance
Document Good Cause Thoroughly
When terminating or not renewing a franchise, meticulously document the franchisee’s failures to comply with material franchise requirements. In 2024, in Mall Chevrolet, Inc. v. GM LLC, General Motors successfully defended a termination under New Jersey law by presenting substantial evidence of fraudulent warranty claims, including audit findings and employee admissions. The U.S. District Court in New Jersey held that submission of false warranty claims constituted a material breach and therefore was good cause for termination. Mall Chevrolet, Inc. v. GM LLC, 99 F.4th 622 (3d Cir. 2024)
Provide Complete Written Notice
Ensure termination notices include all grounds for the action. In some cases that go to litigation, franchisors may later be limited to the grounds for termination they set forth in the written notice. Failing to identify all reasons in the initial notice may prevent the franchisor from relying on those grounds later.
Evaluate Commercial Reasonableness
In many cases, requiring the franchisee to sign a new franchise agreement upon renewal, which may be materially different from the original franchise agreement, has been upheld as permissible. For a recent example, in Oakland Family Restaurants, Inc. v. American Dairy Queen Corp., the Sixth Circuit upheld Dairy Queen’s requirement that transferees sign updated franchise agreements, finding this condition commercially reasonable and constituting good cause under Michigan’s Franchise Investment Law. Oakland Family Rests., Inc. v. Am. Dairy Queen Corp., No. 24-1331, 2025 U.S. App. LEXIS 5980 (6th Cir. Mar. 12, 2025) In that decision, the U.S. Court of Appeals for the Sixth Circuit emphasized that a 1965 franchise agreement could not adequately address modern technological, legal, and competitive requirements, including internet ordering, electronic payments, data security and brand standardization.
Respect Contractual Territorial Rights
A franchisor must be quite careful about expanding territorial restrictions applicable to a franchisee beyond what the franchise agreement expressly provides. A franchisor must bear in mind the need to comply with the implied covenants of good faith and fair dealing. That being said, courts have held that franchisors may service areas outside a franchisee’s exclusive territory if the agreement does not prohibit such activity. The subject of territorial encroachment can get quite nuanced and complex, and will be the subject of another of our blog posts.
Some Things for Franchisors to Avoid
Avoid Arbitrary or Discriminatory Actions
A franchisor should generally avoid terminating, refusing to renew, or withholding consent to transfers based on subjective preferences or to favor other franchisees. A franchisor should seek to ensure that all standards applied are objective, reasonable, and consistently enforced to the extent possible, at least with respect to similarly situated franchisees.
Beware “Unclean Hands”
Courts may deny franchisors equitable relief when they have acted inequitably. For a recent example of this, see Fetch! Pet Care, Inc. v. Atomic Pawz Inc., where the U.S. Court of Appeals for the Sixth Circuit affirmed denial of a preliminary injunction where the franchisor had cut off legacy franchisees from its system while they were current on payments and before they breached non-compete obligations. Fetch! Pet Care, Inc. v. Atomic Pawz Inc., 170 F.4th 546 (6th Cir. 2026) In that case, the federal district court had applied the “unclean hands” doctrine to deny a preliminary injunction against former franchisees operating competing businesses. The Court of Appeals upheld that decision.
Never Require Unlawful Waivers
The “no waiver” (or anti-waiver) principle in franchise relationship laws (as well as virtually all franchise registration/disclosure laws) can render a contractual clause void in some cases if it requires a franchisee to waive their statutory rights, protections, or remedies. It operates as a legislative safety net to protect franchisees from unequal bargaining power and what may be perceived as overreaching terms dictated by franchisors. In some states, a waiver of compliance with the relationship laws is ineffective, and such principle has been upheld in court. See, for example, Cal. Bus. & Prof. Code §§ 20010 and 20015, which specifically states that the California Franchise Relations Act applies when a franchisee resides in California or when the franchised business operated in California and voids any attempt to waive that provision. At the same time, depending on the jurisdiction, a state’s countervailing policy in favor of enforcing contractual provisions, such as choice-of-law provisions, may prevail over the anti-waiver principle, particularly where there is no great disparity in the bargaining positions of the parties.
Complexities Require Experienced Counsel
The above are just a few tips and a few of the complexities involved. Compliance with state franchise relationship laws requires franchisors to act transparently, document good cause comprehensively, and apply objective standards consistently. Recent case law demonstrates that courts will enforce these protections vigorously while also recognizing legitimate business needs when franchisors act reasonably and in good faith. By understanding the substantive requirements and procedural safeguards in each applicable jurisdiction, franchisors can maintain productive franchise relationships while minimizing legal risk. If you would like counsel on complying with franchise relationship laws, contact us to see if we can help. Call David B. Ramsey, Esq. at 212-705-0816 or email [email protected].
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