Kaufmann Gildin & Robbins LLP

Why Every Franchisor Should Invest in Franchise Sales Compliance Training

2026-06-18T05:48:05Z

Franchising is one of the most heavily regulated methods of doing business in the United States. Federal law, administered by the Federal Trade Commission, and the laws of more than a dozen individual states impose a web of disclosure, registration, and sales conduct requirements on franchisors and their sales personnel. The consequences of getting it wrong — even inadvertently — can be severe. Yet many franchisors operate without ever (or only long ago) having provided their executives and franchise development teams with formal training on what the rules actually require. That is a risk no franchisor should take.

The Regulatory Landscape and the Cost of Non-Compliance

Under the FTC's Franchise Rule, franchisors are required to provide prospective franchisees with a Franchise Disclosure Document before any sale is made and before any money changes hands. Many states layer additional requirements on top of the federal baseline, including pre-sale registration of the FDD with state regulators, review and approval before offers can be made to residents of those states, and specific timing and delivery requirements. Failures to comply with these obligations carry real consequences. State franchise regulators have authority to investigate, issue cease-and-desist orders, impose fines, and refer matters for criminal prosecution in egregious cases. Perhaps more significantly for franchisors, a franchisee who was not properly disclosed can seek rescission of the franchise agreement — meaning the unwinding of the entire deal — and in some states may be entitled to recover damages, attorneys' fees, and other relief. Litigation stemming from disclosure failures is expensive, disruptive, and reputationally damaging, and it is largely preventable with the right training and protocols in place.

Understanding the FDD: More Than a Document to Hand Over

The Franchise Disclosure Document is a detailed, legally mandated disclosure containing 23 required items covering everything from the franchisor's litigation history and financial condition to the terms of the franchise agreement and the franchisee's estimated initial investment. Franchise executives and salespeople need to understand not just that the FDD exists, but what it contains, why it matters, and precisely how and when it must be furnished to a prospect. The timing rules alone require careful attention. Under the FTC Rule, a franchisor must give a prospective franchisee the FDD at least 14 calendar days before the franchisee signs any agreement or makes any payment. Some states impose additional or different timing requirements. Getting this wrong — even by a day, or by furnishing a superseded version of the FDD — can create significant legal exposure.

Pre-Sale Disclosure Obligations and the Importance of State Registration

Beyond the mechanics of FDD delivery, franchisors must understand the basic framework of pre-sale disclosure obligations. In states often referred to as "registration states" — including some of the most populous such as New York, California, Maryland, Illinois, Virginia, and others — a franchisor generally may not offer or sell a franchise to a state resident until its FDD has been registered and approved by that state's franchise regulatory authority. Making an offer before registration is complete can itself constitute a violation, regardless of whether a sale is ultimately consummated. Franchise sales personnel need to know which states have registration requirements, the current status of the franchisor's registration in each state, and what they may and may not say or do with a prospective franchisee whose home state has not yet cleared the franchisor's registration.

Exemptions: Proceed with Caution

Both federal and state franchise laws contain exemptions that, if applicable, may relieve a franchisor of some or all of the usual disclosure and registration obligations. Common exemptions include those for sophisticated franchisees, large investments, or sales to existing franchisees. While these exemptions can be valuable, they are also fact-specific and vary considerably from state to state. The critical point for franchise personnel to understand is this: the existence of a potential exemption does not mean the exemption applies. Before relying on any exemption, franchisors should consult with qualified franchise counsel to confirm that all conditions for the exemption are satisfied under the law of the applicable state. Assuming an exemption applies without that analysis is a common — and costly — mistake.

The Minefield of Financial Performance Representations

Perhaps no area of franchise sales compliance generates more litigation than financial performance representations, disclosed in Item 19 of the FDD. Under the FTC Rule, a financial performance representation is broadly defined as any representation — oral or written — made to a prospective franchisee regarding actual or potential sales, income, gross revenues, or profits. That definition is far broader than most people appreciate. A franchise salesperson who tells a prospect "our top franchisees are doing really well" or "in a market like yours, you could expect to do better than average" may have just made an FPR. So might a salesperson who shares a franchisee's tax return, passes along informal earnings estimates, or even makes offhand statements about the profitability of the business model. If a franchisor wants to make a financial performance representation, it must be made through a properly prepared Item 19 disclosure. Representations made outside that framework — or that go beyond what Item 19 discloses — expose the franchisor to claims of fraud, misrepresentation, rescission, and damages. Training franchise sales staff to understand the breadth of the FPR definition, and to exercise disciplined caution in every prospect conversation, is one of the most important steps a franchisor can take to reduce litigation risk.

Franchise Advertising and Recruitment Compliance

Franchise recruitment advertising — whether in print, online, through social media, or via third-party brokers and referral networks — is itself subject to legal requirements. The FTC Rule requires that franchise advertisements not be misleading and that certain disclosures accompany specific types of earnings claims made in advertising. Several states, including California and New York, impose additional requirements on franchise advertising materials, including in some cases pre-use filing obligations before certain advertising pieces may be used to solicit prospects in those states. Sales and marketing personnel need to understand what review and approval processes must occur before advertising is published, and the firm should have a clear protocol for submitting and tracking any required state filings.

Building a Compliance Culture: Records, Documentation, and Internal Protocols

Compliance is not a one-time event; it is an ongoing program. Franchisors should maintain detailed records of every franchise offer and sale, including documentation of FDD delivery, the dates on which FDDs were furnished, signed receipts from prospective franchisees acknowledging receipt of the FDD, and records of any state filings and registration approvals. These records serve a critical evidentiary function if the franchise is ever challenged on disclosure compliance. Equally important is the establishment of internal protocols that govern what franchise sales personnel may and may not say and do during the sales process. Without clear guidelines — and regular reinforcement through training — even well-intentioned employees can inadvertently create legal exposure for the franchisor.

Let Us Help You Train Your Team

At Kaufmann Gildin & Robbins LLP, we provide franchise legal sales compliance trainings specifically designed for franchisors and their franchise sales personnel. Our trainings are practical, tailored to your business, and designed to give your team the knowledge and protocols they need to sell franchises confidently and in compliance with applicable law. If you are interested in scheduling a compliance training for your franchise development team, we invite you to contact us. An investment in training today is far less costly than the litigation and regulatory exposure that comes from operating without one. If you have questions or would like franchise legal sales compliance training, contact us to see if we can assist you. Call David B. Ramsey, Esq. at 212-705-0816 or dramsey@kaufmanngildin.com. Attorney advertising. © 2026 KAUFMANN GILDIN & ROBBINS • ALL RIGHTS RESERVED. Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

Virginia’s New Franchise Law Eliminates Post-Termination Noncompete Clauses: What Franchisors Need to Know

2026-06-17T16:11:32Z

What Changed: Overview of the New Law

Virginia has enacted one of the most significant changes to its franchise laws in recent years. On April 13, 2026, Governor Abigail Spanberger signed House Bill 69 and Senate Bill 240 into law, substantially amending the Virginia Retail Franchising Act (the “Act”). Effective July 1, 2026, the amendments prohibit franchisors from including most post-termination noncompete provisions in franchise agreements offered or entered into in Virginia. Specifically, the amended Act makes it unlawful for a franchisor to offer or enter into a franchise agreement that restricts a franchisee, following the expiration or termination of the franchise relationship, from engaging in the retail sale, offering, or distribution of goods or services similar to those offered by the franchisor. As a result, franchisors generally may no longer require Virginia franchisees to refrain from operating a competing business after their franchise rights have ended. The amendments also impose new choice-of-law requirements, mandating that certain franchise agreements involving a franchise location in Virginia be governed by Virginia law. Together, these changes represent a significant shift in the legal framework governing franchise relationships in Virginia and may necessitate revisions to franchise agreements, state-specific addenda, and compliance protocols. Franchisors with existing or prospective Virginia franchisees should carefully assess the implications of these amendments and take appropriate steps to ensure compliance before offering, renewing, extending, or amending franchise agreements in the Commonwealth.

Why It Matters for Franchisors

For decades, post-term noncompete provisions have been a standard feature of franchise agreements and a key tool for protecting franchise system goodwill, proprietary business methods, confidential information, and customer relationships. Virginia’s amendment significantly alters that framework. Franchisors that have traditionally relied on post-term restrictive covenants to safeguard their brands and business interests must now reevaluate their contractual protections and compliance strategies. Going forward, franchisors operating in Virginia should expect that traditional post-term noncompete provisions in covered agreements will be unenforceable if included in franchise agreements offered or entered into on or after July 1, 2026.

Limited Exception for Franchise Sales

Virginia’s prohibition on post-termination noncompete provisions is not without exceptions. The amended statute permits a limited noncompete restriction when a franchisee voluntarily sells its franchise business at a mutually agreed-upon price, whether to a third party or back to the franchisor. In those circumstances, the parties may agree to a noncompete covenant lasting up to two years following the sale. Importantly, the amendments are forward-looking and do not invalidate existing franchise agreements. Franchise agreements entered into before July 1, 2026 generally remain subject to the law in effect when they were executed. However, franchisors should carefully evaluate renewals, amendments, transfers, extensions, and other franchise-related agreements entered into on or after July 1, 2026, as such transactions may trigger application of the amended Act. The statutory exception for franchise sales reflects the long-recognized legal distinction between restrictive covenants imposed on franchisees during or following a franchise relationship and those arising from the sale of a business. Courts have historically afforded greater protection to noncompete agreements associated with the sale of a business because the purchaser is acquiring valuable assets, including goodwill, customer relationships, and other proprietary business interests, and has a legitimate interest in protecting the value of that acquisition.

Virginia Law Must Govern Virginia Franchise Agreements

As previously noted, the amendments do more than prohibit post-termination noncompete provisions. They also require that any franchise agreement involving the establishment or operation of a franchised business in Virginia be governed by Virginia law. As a result, franchisors may no longer rely on governing-law provisions that designate the law of another state for covered Virginia franchise relationships. Because many franchisors utilize standardized franchise agreements that select the law of the franchisor’s home state, this change may require revisions to existing franchise documentation and state-specific addenda. Franchisors offering franchises in Virginia should carefully review their governing-law provisions and related disclosure documents to ensure compliance with the amended Act before July 1, 2026.

Practical Implications for Franchisors

The loss of post-termination noncompete protections does not mean franchisors are without remedies. Instead, franchisors should consider strengthening alternative contractual protections that remain enforceable. Areas that deserve particular attention include:

Confidentiality and trade secret protections.
Non-disclosure obligations regarding proprietary operating systems and manuals.
Customer and vendor non-solicitation provisions, where permitted.
Robust trademark de-identification requirements upon termination.
Technology access restrictions and data security measures.
Strong post-termination transition obligations.
Rights to purchase assets or leasehold interests under appropriate circumstances.

Franchisors should also evaluate operational controls that help protect system goodwill and confidential information during the franchise relationship, rather than relying primarily on post-term restrictive covenants.

What Franchisors Should Do Now

With the July 1, 2026 effective date approaching, the immediate practical response is clear. Franchisors should proactively review their franchise disclosure documents, franchise agreements, state-specific addenda, and related agreements. Franchise systems that sell or plan to sell franchises in Virginia after July 1 should ensure that their documents comply with the new statutory requirements before making any offers or sales in the Commonwealth. Franchisors should also consult franchise counsel regarding the treatment of renewals, transfers, amendments, and other transactions that may trigger application of the amended statute. If you have questions or would like counsel on how to comply with Virginia’s recent changes in its franchise law, contact us to see if we can assist you. Call Michelle Murray-Bertrand, Esq. at 212-705-0855 or mmbertrand@kaufmanngildin.com. Attorney advertising. © 2026 KAUFMANN GILDIN & ROBBINS • ALL RIGHTS RESERVED. Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

How to Legally Franchise Your Business Format to Expand Outlets of Your Business

2026-06-04T08:37:59Z

David B. Ramsey, Esq., a franchise lawyer with Kaufmann Gildin & Robbins LLP, presented to the Greater NY Chamber of Commerce about “How to Legally Franchise Your Business Format to Expand Outlets of Your Business.” David explained what is franchising; gave examples of successful franchises started in the greater New York region; provided a broad overview of the law of franchising; and described federal and state franchise registration and disclosure laws. He summarized legal requirements about creating, registering, and using a Franchise Disclosure Document; basic rules about making financial performance representations to prospective franchisees who may want to purchase a franchise; gave a recent example of franchise law as applied in New York; and, answered various questions from the audience.

Think Before You Chat: What United States v. Heppner Means for Franchisors Who Use AI to Prepare for Legal Discussions

2026-06-01T15:39:07Z

Artificial intelligence ("AI") tools like ChatGPT, Claude, and Gemini have become go-to resources for busy executives trying to organize their thoughts, research legal concepts, and prepare talking points before meeting with their attorneys. It feels productive — even smart. But a landmark federal court decision handed down in February 2026 should give every franchisor pause before typing sensitive business information into a publicly available AI platform.

The Case: United States v. Heppner

In United States v. Heppner, 820 F.Supp.3d 292 (S.D.N.Y. 2026), Judge Jed Rakoff of the Southern District of New York addressed what he described as a question of first impression nationwide: are a user's communications with a publicly available generative AI platform protected from government inspection by the attorney-client privilege or the work product doctrine? The defendant, Bradley Heppner, was indicted on charges including securities fraud, wire fraud, and falsifying corporate records. Following his arrest, FBI agents seized approximately 31 documents reflecting his communications with the AI platform Claude. Heppner's counsel argued those documents should be privileged because: (1) Heppner had inputted information he learned from his attorneys into Claude; (2) he created the documents in order to facilitate discussions with counsel; and (3) he subsequently shared the documents with his lawyers. Judge Rakoff was unpersuaded. The court ruled that the AI documents were protected by neither the attorney-client privilege nor the work product doctrine — and the reasoning carries direct implications far beyond criminal defense.

Why the Privilege Claims Failed

Attorney-Client Privilege: The privilege requires a confidential communication between a client and an attorney, made for the purpose of obtaining legal advice. The Heppner court found that AI documents fail on multiple grounds:

Claude is not an attorney. No attorney-client relationship can exist between a user and an AI platform, regardless of how legal the subject matter feels.
There is no confidentiality. Anthropic, the operator of the Claude AI platform, published its privacy policy — which users agree to — that expressly permits the company to collect user inputs, use them to train its models, and disclose them to third parties, including governmental regulatory authorities. By clicking "agree," users effectively waive any reasonable expectation of confidentiality.
The purpose was not to obtain legal advice from counsel. Because Heppner used Claude on his own initiative — without any direction from his attorneys — the court evaluated whether he intended to obtain legal advice from the AI. Claude itself disclaimed that ability, telling the government when asked that it "can't provide formal legal advice."

Work Product Doctrine: This doctrine protects materials prepared by or at the direction of counsel in anticipation of litigation. Here again, the court found the AI documents unprotected because Heppner created them entirely on his own initiative, without instruction from his lawyers. The documents reflected his own thinking, not his counsel's legal strategy — and sharing them with his attorneys afterward did not retroactively create privilege.

The court's memorable formulation: non-privileged communications are not "alchemically changed into privileged ones upon being shared with counsel."

What This Means for Franchisors

The Heppner decision arose in a criminal context, but its reasoning applies equally to the civil and transactional settings where franchisors routinely operate. Consider these common scenarios: Preparing for a franchise disclosure or registration matter. A franchisor's in-house team might, for example, use an AI platform to draft talking points, research FDD (Franchise Disclosure Document) disclosure obligations, or summarize regulatory requirements before a call with outside franchise counsel. If those AI conversations contain sensitive business information — deal terms, compliance concerns, strategy — they may be discoverable in future litigation or regulatory proceedings. Evaluating a franchisee dispute. Before engaging counsel, a franchisor's operations team might run scenarios through an AI chatbot to assess litigation risk, termination options, or settlement strategy. That analysis, however preliminary, likely carries no privilege protection and could be obtained by the franchisee in discovery. Guiding a franchise transaction, system structuring decisions, or other significant changes. Executives might use AI to model outcomes, draft internal memos, or articulate negotiating positions ahead of attorney consultations. Those outputs typically belong to the AI platform's operator — and its privacy policy may permit their disclosure.

Practical Guidance for Franchisor Clients

The Heppner decision does not mean franchisors should stop using AI tools. It means they should use them strategically and carefully:

Involve counsel before using AI for legally sensitive matters. The court left open the possibility that materials prepared at the direction of counsel could receive greater protection. If your attorney asks you to use an AI tool to organize information or draft a summary, that instruction matters legally.
Treat AI conversations as if they were public. Assume everything you type into a public AI platform could be read by a regulator, opposing counsel, or a jury. Do not input privileged communications, sensitive strategy, or confidential business information that you would not want disclosed.
Consider enterprise-grade or private AI deployments. Some AI tools offer configurations with stronger data privacy protections that may not share inputs with third parties or train on user data. Your franchise counsel can help evaluate whether such tools offer meaningfully better protection.
Consult counsel before you prepare, not just after. The most effective attorney-client relationships are proactive. Reach out to your franchise attorney early — before you start researching, drafting, or strategizing — so that your preparations unfold within the protected space that privilege provides.

The Bottom Line

AI is a rapidly developing technology with new implications for how legal matters are approached. United States v. Heppner is a timely reminder that AI tools, however powerful, are not lawyers — and they are not confidential. Franchisors who use publicly available AI platforms to prepare for legal discussions may inadvertently strip away the very protections they are trying to preserve. In franchise law, where regulatory compliance, franchise agreement negotiations, franchisee disputes, and system-wide transactions are never far from potential litigation, that is a risk worth taking seriously. Have a franchise litigation matter you would like to discuss with an attorney? Call Kevin Shelley at 212-705-0814 or any of the attorneys in our nationally-renowned franchise law practice at Kaufmann Gildin & Robbins LLP. This blog post is for informational purposes only and does not constitute legal advice. If you have questions about how AI tools may affect your privileged communications, please contact our office. Attorney advertising. © 2026 KAUFMANN GILDIN & ROBBINS • ALL RIGHTS RESERVED. Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

Government Actions, Prosecutions And Remedies

2026-05-28T13:54:16Z

Franchisors and their management teams which elect to ignore the mandates of federal and state franchise registration/disclosure laws - - by failing to register when necessary, effecting disclosure as required or by engaging in fraudulent conduct - - can expect to confront a litany of woe. To begin with, almost all such laws enumerate and define “fraudulent” and “unlawful” practices in the broadest of terms, as elucidated below. Further, franchise administrators possess broad powers under federal and state franchise registration/disclosure statutes to investigate franchise sales fraud and illegality. If they uncover fraud, these administrators can institute civil proceedings seeking broad remedies and, under many state franchise laws, can institute criminal proceedings as well - - in both instances targeting not just the franchisor itself, but also the franchisor’s officers, directors and managers. Finally, many state franchise administrators also have the power to unilaterally suspend a franchisor’s registration - - meaning that, until the franchise administrator is satisfied that no wrongdoing has occurred, or until that administrator’s lawsuit against the franchisor has been heard and determined, absolutely no franchise sales activity can take place in that state. In this blog post, we briefly review how federal and state franchise laws define what conduct is prohibited; the broad investigative powers possessed by federal and state franchise administrators; the criminal and civil proceedings they can institute; and, who may be held liable for statutory violations.

Prohibited Practices - - FTC Franchise Rule

The Federal Trade Commission Franchise Rule specifically identifies the following as unfair and deceptive acts or practices and thereby authorizes the FTC to proceed against the violator:

To fail to furnish to any prospective franchisee, within the timeframes required by the Rule, a disclosure document which accurately, clearly and concisely sets forth all of the information required to be disclosed under the Rule.
To fail to keep the disclosure document current as of the close of the franchisor’s most recent fiscal year (franchisors have 120 days, under the revised FTC Franchise Rule, following the close of their fiscal years, to revise their disclosure documents so that they are current in all respects).
To make any representation to a prospective franchisee regarding “financial performance information” (representations about actual or potential sales, income or profits of existing or prospective franchised or company-owned units) unless conveyed and substantiated as required by the Rule.
To make any claim or representation, whether in franchise advertising material or in oral statements made by salespersons, which is inconsistent with or contrary to the information disclosed in the franchisor’s disclosure document.
To fail to return any funds or deposits collected from prospective franchisees (such as down payments) which the franchisor’s disclosure document declares are, in fact, refundable.
To fail to furnish a copy of the franchisor’s disclosure document upon the reasonable request of a prospective franchisee earlier in the sales process then the FTC Franchise Rule otherwise requires.
To present for signing a franchise agreement whose terms materially differ from the specimen franchise agreement featured in the franchisor’s disclosure document unless the franchisor informs the prospective franchisee of such material differences at least seven days before contract execution.
To disclaim or require a prospective franchisee to waive reliance on any representation made in the franchisor’s disclosure document (note, however, that under the FTC Franchise Rule, franchisees may voluntarily waive specific contract terms in the course of negotiations).

As just one illustrative example: in March 2026, the FTC secured a settlement against Xponential Fitness for Franchise Rule violations and related deceptive practices, including $17 million that will be returned to franchisees, which (according to the FTC) is the largest amount ever to go back to consumers in a franchise case. The FTC alleged that Xponential Fitness (which sells franchises for popular fitness studios brands such as Club Pilates, Pure Barre, YogaSix, StretchLab, and BFT) misrepresented key information about the costs, risks, time to open and operate studios, and essential details about the company’s operations, leaving many franchisees and prospective franchisees in the dark about their investment.

Prohibited Practices - - State Franchise Registration/Disclosure Statutes

Though each state franchise registration/disclosure statute varies from the others, sometimes in material ways, virtually all of them have in common the following delineation of prohibited, illegal, fraudulent and/or unlawful practices:

Making any untrue statement of a material fact in connection with the offer or sale of any franchise, whether in the franchisor’s disclosure document; franchise advertising; or, in statements by the franchisor’s salespersons or other personnel.
Omitting from any franchise disclosure document any material fact which is required to be stated therein.
Omitting to state a material fact necessary to make disclosures actually made not misleading (that is, telling a “half-truth” in the disclosure document, franchise advertising or in person).
Engaging in any act, practice or course of business which may or would operate as a fraud or deceit upon any person.
Failing to register the franchise disclosure document (unless an exemption from registration is available).
Failing to immediately amend or revise a franchise disclosure document upon the occurrence of a material change to the facts set forth therein.
Making any offers or sales of franchises at a time when a current franchise registration is not in effect (unless an exemption from registration is available).
Requiring a franchisee to waive the rights and protections afforded by state franchise registration/disclosure laws.
Making any untrue statement of fact, or omitting material facts, in any application or report submitted to any franchise administrator.
Failing to disseminate the registered (when necessary) franchise disclosure document to prospective franchisees within the timeframes required by law.
Failing to disseminate to prospective franchisees all franchise and franchise-related agreements, in form ready for execution, within those timeframes specified by law.
Making any representation to a prospective franchisee which is inconsistent with the franchisor’s disclosure document.
Failing to file franchise advertising (in those seven states requiring such filings).
Failing to maintain books and records (financial statements, records of franchise sales, disclosure document receipts and similar records) for a statutorily required period of time.
Violating any order issued by a franchise administrator.

Government Investigations

The powers granted to federal and state franchise administrators to investigate franchise fraud are extremely broad. Typically, federal and state administrators are authorized to conduct such investigations as they deem necessary to determine whether any person has violated any provision of the subject franchise statute. They may subpoena witnesses, compel their attendance, examine them under oath and require the production of books or papers which the administrator deems relevant or material to the inquiry. While the target of an investigation may refuse to respond to questions or to produce documents on the ground that it may tend to incriminate him or her, many states confer upon their franchise administrators the power to confer immunity upon such investigative targets - - following which the target must then testify. Alternatively, some state statutes provide that no investigative target is excused from responding to questions or producing documents, even if it subjects that target to self-incrimination, provided that if the target gives such testimony or furnishes such documents after validly claiming his or her privilege against self-incrimination, he or she may not thereafter be prosecuted concerning any transaction regarding which the compulsory testimony or evidence concerned (it being specifically provided, however, that the individual testifying is not otherwise exempt from prosecution and punishment for perjury committed while testifying). Government investigations of possible franchisor violations may be opened for any of a variety of reasons. It may simply be that one or more state franchise administrators see franchise advertising that they consider suspect. Or it may be that one or more prospective or actual franchisees of a network have filed complaints against the franchisor alleging fraud, misrepresentation or some other violation of state law. As well, the franchise-regulating states routinely communicate among themselves, such that if one state detects what it considers to be fraudulent activity engaged in by a franchisor, the other state administrators will quickly be advised and may open investigations of their own. And it should certainly be noted that federal and state franchise officials are almost always present at significant franchise trade shows - - indeed, those routinely attending such shows may get to know them over the course of time. They are on the lookout for new franchisors who have not registered and who do not know or follow the rules of the industry. Regardless of how or why a government investigation of possible franchise fraud is opened, the franchisor and/or its personnel who are being targeted should be prepared to respond to all subpoenas and other requests for information in a timely and complete fashion, but only after having first consulted counsel.

Civil Proceedings

If, in the course of their investigations, federal or state franchise administrators uncover franchise fraud, they are statutorily empowered to institute civil proceedings seeking various forms of relief, including:

Preliminary and permanent injunctions to enjoin the illegal acts or practices or to enforce compliance with the applicable franchise law.
The appointment of a court-ordered receiver to seize and maintain any and all monies or property, obtained by a franchisor through statutorily violative conduct.
Restitution on behalf of those victimized by statutorily proscribed conduct.
Damages on behalf of persons injured as a result of illegal acts or practices.
Disgorgement of monies derived by a franchisor through illegal acts or practices.
Imposition of fines and penalties.
Rescission of all franchise agreements unlawfully entered into (designed to put the negatively affected franchisee back in the economic position it would had been in had it not entered into an agreement with the franchisor).

Who May Be Held Liable For State Franchise Law Violations?

Under many state franchise registration/disclosure laws, it is not just the franchisor itself which may be held liable for any violations thereof. Instead, the range of persons who may be liable beyond the franchisor may be very broad and include, under limited circumstances, the franchisor’s officers, directors, employees, salespersons, and sales brokers. It is almost always a precondition to the imposition of liability upon such individuals and corporations other than the franchisor itself that they either participated in the statutory wrongdoing or knew about it and did nothing to stop it. But under laws which extend liability to such individuals and entities beyond the franchisor, their liability is, in the legal jargon, “joint and several,” meaning that a federal and state franchise administrator may seek to hold liable for the entire amount of damages both a franchisor itself and/or some or all of the other individuals or entities recited above.

Stop Orders

Many states grant their franchise administrators the power to issue “ex parte” stop orders (an order granted without prior notice to the franchisor) prohibiting any franchise sales activity by franchisors or their personnel alleged to be violating the franchise statute in question. Other states - - and the Federal Trade Commission - - do not feature such “stop order” powers, but confer upon their administrators the functional equivalent: the ability to seek temporary restraining orders and preliminary injunctions against allegedly errant franchisors. Stop orders, temporary restraining orders and preliminary injunctions are a franchisor’s nightmare. The issuance of one of these decrees prohibits the franchisor from engaging in any franchise sales activity whatsoever in the subject jurisdiction. And as noted earlier, many state franchise administrators can issue such “stop orders” without even giving the franchisor any prior notice or opportunity to be heard.

Fines and Penalties

Under both the FTC Franchise Rule and state franchise registration/disclosure statutes, the government is empowered to seek and obtain fines and penalties from franchisors and their personnel who engage in violative activity. The amounts of possible fines and penalties varies from jurisdiction to jurisdiction. Under the FTC Franchise Rule, the Federal Trade Commission is authorized to seek up to $53,088 per violation (current figure as of May 2026; the original statutory amount was $10,000 but it is adjusted annually for inflation). In various states, there are set amounts per violation as well. It is critical to recall that the foregoing fines and penalties are applicable to each violation of law committed by the franchisor. It is also critical to recall that federal and state franchise laws govern not just the sale of franchises but the mere offer of franchises. Which means that if a franchisor in a state featuring a franchise registration/disclosure statute meets with fifty prospective franchisees at a trade show and offers each of those prospects a franchise - - at a time when the franchisor is not registered - - then that state’s administrator is authorized to seek the statutorily specified fine multiplied times fifty. Depending on the state, that could add up to not only tens or hundreds of thousands of dollars, but even millions of dollars. Making matters worse when franchise sales are, in fact, effected illegally is that the aforementioned civil penalties are payable over and above the other measures of financial relief sought by federal and state franchise administrators (such as restitution, rescission and damages, as detailed above). Finally, compounding the grief an errant franchisor may find itself confronted with is the fact that both the Federal Trade Commission and one or more of the franchise-regulating states may concurrently move against illegal franchise sales activity, meaning that the subject franchisor may confront multiple sets of government fines and penalties.

Criminal Liability

Under the FTC Franchise Rule, the Federal Trade Commission may not itself institute criminal proceedings for Rule violations. The Commission may, however, refer to the United States Department of Justice for criminal prosecution any instances of criminal wrongdoing uncovered in the course of an FTC investigation. By contrast, virtually all of the states featuring franchise registration/disclosure statutes provide for stiff criminal liability for certain violations thereof. As was the case with civil penalties (see above), criminal liability under these laws extends to each violation of law - - that is, each illegal franchise offer (an offer made without required registration or disclosure) and each illegal sale (a sale accomplished without required registration, or without giving a franchise disclosure document to the prospective franchisee, or otherwise tainted by law). The extent of criminal liability under state franchise registration/disclosure laws varies from jurisdiction to jurisdiction. Some states deem violative conduct under their statutes to be a misdemeanor (punishable by no more than one year in jail) while in other states such conduct is classified as a felony punishable by years of imprisonment. As is the case with civil actions, federal and state franchise administrators must adhere to their legislative “statutes of limitation” - - the time in which a criminal proceeding must be instituted or else forever abandoned. If you are facing a situation that may involve government actions, prosecutions and/or remedies involving franchise laws, rules and regulations, please feel free to contact us at any time to discuss if we can help you. Call David B. Ramsey at 212-705-0816 or dramsey@kaufmanngildin.com. Thank you! *Attorney advertising. © 2026 KAUFMANN GILDIN & ROBBINS • ALL RIGHTS RESERVED. Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.

Representing A Franchisor At Trial

2026-05-20T18:24:39Z

Franchise networks are not immune from disputes. Typically, actions commenced by a franchisor against a franchisee involve one or more of the following areas: unpaid royalties, advertising contributions, or other fees; in-term or post-term non-compete provisions; use and disclosure of confidential information; failure to report revenue in order to artificially reduce royalties; compliance with applicable law and system standards, including standards relating to quality, cleanliness, health, safety, and welfare of customers; and post-termination de-identification and closure of the franchised unit. Typical claims asserted by franchisees against their franchisor concern failure to provide support, territorial encroachment, violation of applicable state registration and disclosure statutes, violation of applicable franchise relationship laws, wrongful termination or nonrenewal, and the ever-popular breach of the implied covenant of good faith and fair dealing. With this background, based on our experience as a law firm focused on franchising for over 40 years, we present here some thoughts on how best to represent a franchisor at trial. 1. Educate the judge about franchising. Although franchising is ubiquitous in the modern economy, the legal aspects of the relationship are not well known by most people -- including attorneys and judges. Popular misunderstandings in the news media abounded, for example, in the early days of the COVID-19 pandemic, when new organizations drew no distinction between large franchisors of brands and the small business franchisees who benefited from PPP loans. Indeed, even judges presiding over commercial cases are rarely presented with sophisticated franchise-specific cases for trial, and in virtually no court in the country is there a judge who routinely hears franchise cases. As a result, while a judge may be competent and even sophisticated in his or her understanding of general commercial law, it is unlikely that the judge has a sophisticated understanding of the legal and business underpinnings of a franchise relationship. Because these legal and business issues will be central to nearly every trial between a franchisor and its franchisee, counsel must take every opportunity to educate the judge in advance of and during trial. Counsel must communicate to the judge the applicable statutory framework in which the parties’ franchise agreement arose; the existence of and content of the franchisor’s legally required pre-sale disclosure document and the parties’ franchise agreement; the nature of the “control” exerted over the franchisee by the franchisor to protect its trademarks and system; the franchisor’s responsibility to maintain and enforce its uniform standards throughout the system for the benefit of the franchisor and all other franchisees; the impact that noncompliance with the system by a franchisee has on the entire system and all of the franchisees within it; and, the impact that an adverse determination of the issues presented at trial will have on the franchisor, its system, and its remaining franchisees. The tricky part is doing so quickly, effectively, and early on in the trial and the process leading up to it. Franchisor counsel should seek to educate the court on these principles, as applicable, from the very beginning of the action through trial, including, as appropriate, through pleadings, motions to dismiss or for summary judgment (or both), motions in limine, pretrial memoranda, opening statements, testimonial evidence, closing statements, and post-trial memoranda. 2. Educate the jury about franchising. Although one has a much shorter time period in which to accomplish this goal, it is likewise crucial to educate the jury, if there is one, about the fundamental legal and business underpinnings of the franchise relationship. To the extent counsel participate (either directly or indirectly through the submission of voire dire questions to the court), jury selection is a good opportunity to begin to educate potential jurors about the nature of the parties’ franchise relationship. Certainly, in opening argument, franchisor counsel should explain the nature of the franchise relationship, generally, and the nature of the relationship between the parties. Counsel should emphasize, when applicable, that the franchisee was duly disclosed well in advance of the franchise sale with a Franchise Disclosure Document (FDD) (which imparts virtually all information a prospective franchisee would find material to its investment decision) and a sample franchise agreement, and that the franchisee then reviewed and signed the franchise agreement, which established the entirety of the parties’ rights and obligations with respect to each other (to the extent not superseded by statute). Counsel’s description of the parties’ franchise relationship in the opening statement is the prism through which all of the testimony and evidence received at trial will be viewed by the jury. In addition, it is important for franchisor counsel to inform the jury at the outset that this case affects not only the franchisor and the franchisee in the courtroom but also the entire franchise system, specifically the entirety of all other franchisees that have made substantial investments in, and earn their living from, the franchised system. In the field of franchising, our firm mainly represents franchisors, including at court. In doing so, we have seen time and again the importance of moving away from the “David versus Goliath” stereotype and getting the jury to understand that an adverse verdict will affect not merely the impersonal franchisor entity but also numerous other franchisees who support and indeed constitute the franchise system. In other words, franchisor counsel should make very clear to the jury that its verdict will affect the entire franchised system and not merely the (perhaps sympathetic) individual franchisee sitting in the courtroom. 3. Use experts at trial. We believe it is essential to provide expert testimony at trial concerning the unique nature of the franchise business relationship. Independent experts can provide compelling information about the structure of the franchise relationship and the effect of the dispute on the entire franchise system. Further, jurors view such experts as independent from, and not beholden to, the franchisor offering the testimony at trial. 4. Present evidence of the applicable franchise agreement provisions forcefully. Typically, particular terms and conditions set forth in the parties’ franchise agreement will be compelling, if not controlling, evidence in a franchisor-franchisee dispute. Also typically, because these agreements are drafted by the franchisor, they quite often favor the franchisor’s position. However, handing a 50-page, single-spaced franchise agreement to a juror is not compelling. For that reason, we would suggest that counsel use whatever presentation methods are available to bring attention to the specific franchise agreement provisions applicable to the issues presented at trial. There are several ways to bring attention to the provisions at issue: having a physical enlargement of the provision on an easel in the courtroom; presenting the provision on a large screen, with the ability to highlight, blow up, and otherwise manipulate the controlling language; and providing a hard copy of the agreement with applicable provisions highlighted. Remember, the average attention span of most jurors—indeed, most citizens—is decreasing, and their familiarity with viewing information on screens in increasing. We strongly encourage the use of visual presentations, even when presenting the otherwise dry evidence of the terms and conditions of the franchise agreement. 5. Cross-examine the franchisee’s principal and operators. Obviously, the nature of the cross-examination of the franchisee’s principal and operators is somewhat dependent on the issues presented in the case. Franchisor counsel need to elicit appropriate testimony concerning the breach of the parties’ franchise agreement or other wrongful act or omission from which the action arose. However, in nearly all cases, it is critical to establish in the mind of the judge and jury that the franchisee is not a poor, defenseless individual in battle with a huge franchisor entity of unlimited resources such that the franchisee should not be held responsible for all of the terms and conditions contained in the lengthy franchise agreement prepared by the franchisor and imposed on the poor franchisee on a “take it or leave it” basis. One way to do that is to demonstrate, through cross-examination testimony, the nature of the offer and sale of a franchise. As noted above, federal and state law requires a franchisor to prepare and deliver an FDD to the prospective franchisee in advance of the execution of the franchise agreement. The FDD contains a detailed description of the franchise system and the parties’ respective rights and obligations under the offered franchise agreement. The FDD also attaches a copy of the proposed franchise agreement and any other agreements to be entered into by the prospective franchisee. Thus, at trial, a franchisor counsel should ask the franchisee whether:

The franchisee received the FDD;
Whether the franchisee read the FDD;
Whether the FDD disclosed facts relevant to the dispute (identifying such relevant disclosures for the jury);
Whether it attached the prospective franchise agreement;
Whether the franchisee actually read the attached specimen franchise agreement;
Whether the franchisee thereafter received the actual franchise agreement from the franchisor;
Whether the franchisee read and reviewed the franchise agreement and whether he or she reviewed it with an advisor or attorney; and
Whether the franchisee signed the franchise agreement.

While written, signed acknowledgments about these sorts of facts were previously quite common in franchise agreements, they have now become much less common in the wake of the North American Securities Administrators Association (NASAA) commentary on franchise acknowledgments and questionnaires, as laid out in its Sept. 18, 2022 Statement of Policy Regarding the Use of Franchise Questionnaires and Acknowledgments. However, such acknowledgments may still be elicited in the context of a trial. In any event, the FDD and the parties’ franchise agreement should be extensively reviewed during cross-examination of the franchisee, both to educate the judge and jury on their contents and to establish that the franchisee has a certain level of sophistication and awareness of the terms and conditions they contain. 6. Introduce graphic evidence of noncompliance in standards cases. One of the most important things a franchisor can accomplish at trial is to enforce system-wide standards of operation, because uniformity of operation under the franchisor’s trademark is the foundation of a successful franchise system (and a lack of uniformity is the beginning of the end of an unsuccessful system). The system-wide standards are often comprehensive and extremely detailed, and when a franchisee materially disregards the proffered standards of operation, a franchisor must be prepared to take any and all steps necessary to obtain compliance, including termination (which often results in litigation and ultimately a trial concerning the franchisee’s noncompliance). At the trial, the franchisor must be prepared to present graphic evidence of the franchisee’s noncompliance to justify termination. When the noncompliance materially affects the franchisee’s ability to comply with its obligations under the franchise agreement and, even more compellingly, when it adversely affects the consuming public’s perception of the franchised location (and therefore all locations within the franchise system), termination is justified. In such circumstances, it is trial counsel’s responsibility to present evidence at trial to persuade the judge and jury that the noncompliance not only constitutes a material breach of the parties’ franchise agreement but, left unchecked, will materially and adversely affect the entire franchised system. As a result, if a franchisee has failed the franchisor’s routine inspections or has failed a department of health or other governmental agency inspection, the franchisor must gather vivid evidence of such noncompliance. Testimony and reports by independent inspectors, health department officials, and the franchisor’s managers must be presented, together with photographic or video evidence of noncompliance. In such cases, pictures are indeed worth a thousand words, and video even more so. Also, the franchisor should present detailed operational standards, usually set forth in its operations manual and other materials delivered to the franchisee, and tie those obligations directly to provisions in the franchise agreement. Finally, franchisor counsel should present the testimony of other, nearby franchisees that the adverse publicity and customer experience in the noncompliant franchisee’s location has directly and adversely affected their businesses. If you would like to discuss litigation regarding franchise matters from the franchisor’s perspective, please reach out to us.* Call Kevin M. Shelley at 212-705-0814 or email kshelley@kaufmanngildin.com. *Attorney advertising. © 2026 KAUFMANN GILDIN & ROBBINS • ALL RIGHTS RESERVED. Disclaimer: The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls, letters and electronic mail. Contacting us does not create an attorney-client relationship. Please do not send any confidential information to us until such time as an attorney-client relationship has been established.