Kaufmann Gildin & Robbins LLP Kaufmann Gildin & Robbins LLP 2026-08-03T05:54:17Z https://www.kaufmanngildin.com/feed/atom/ WordPress /wp-content/uploads/sites/1404180/2023/10/cropped-Kaufman-Gildin-site-icon-32x32.png by Kaufmann Gildin & Robbins <![CDATA[The American Franchise Act: Potentially Bringing Clarity to the Joint Employer Standard for Franchisors and Franchisees]]> https://www.kaufmanngildin.com/?p=51271 2026-07-29T05:48:03Z 2026-07-29T05:48:03Z For more than a decade, franchisors and franchisees have operated amid an evolving and often uncertain legal landscape concerning one of the most significant issues in franchise law: when may a franchisor be deemed a “joint employer” of a franchisee's employees? The answer has substantial legal and business implications. A finding that a franchisor is a joint-employer may expose that franchisor to collective bargaining obligations, unfair labor practice claims, wage-and-hour liability, and other employment-related risks stemming from a franchisee’s workplace. A bill pending in the U.S. House of Representatives, the proposed American Franchise Act, seeks to provide greater clarity by establishing a clear, franchise-specific statutory standard for determining joint-employer liability. The American Franchise Act On September 10, 2025, a bipartisan group of members of the U.S. House of Representatives introduced legislation (H.R. 5267), known as the American Franchise Act (the “Act”), aimed at “preserving the franchise business model” by establishing a uniform federal standard for determining when a franchisor may be deemed a “joint employer” of a franchisee’s employees under federal labor law. On July 21, 2026, the bill made it out of committee in the House. The vote was 18-15 along party lines. The next step is for the bill to advance to the full House floor for consideration.  If enacted, the bill will address years of fluctuating interpretations by the National Labor Relations Board, the U.S. Department of Labor and the federal courts, where the joint-employer standard has expanded and contracted depending on the presidential administration in office. These shifting interpretations have created considerable uncertainty for franchise systems attempting to balance necessary brand oversight with the legal requirement to maintain a clear separation between franchisor and franchisee operations. Franchisors must exercise sufficient oversight to protect their trademarks and preserve brand standards, operational consistency, quality controls, marketing requirements, and customer experience expectations, while franchisees remain independent business owners responsible for recruiting, hiring, firing, training, supervising, scheduling, compensating, disciplining and terminating their own employees. The proposed legislation is intended to preserve that distinction by clarifying when a franchisor's brand oversight crosses the line into employment-related control.

What the Act Would Do

At its core, the American Franchise Act would establish that a franchisor and franchisee are separate and independent employers unless the franchisor both possesses and exercises substantial, direct, and immediate control over essential terms and conditions of employment. Those employment-related factors generally include decisions involving hiring, termination, discipline, supervision, direction, compensation, benefits, and work schedules. The proposed legislation is intended to draw a clear distinction between legitimate franchise system oversight and actual control over a franchisee’s employment decisions. That distinction is fundamental to the franchise business model. Franchisors rely on systemwide operational standards to protect their trademarks, preserve brand consistency, and ensure that customers receive a uniform experience across franchised locations. To achieve these objectives, franchisors routinely establish brand standards governing the use of trademarks, operating manuals, product specifications, technology platforms, training programs, marketing and advertising initiatives, customer service expectations, cleanliness requirements, and periodic brand-compliance audits, among other things. The Act is designed to recognize that these types of brand protection measures, standing alone, do not transform a franchisor into the employer of a franchisee’s employees. At the same time, if a franchisor regularly and meaningfully controls core employment matters—such as making hiring decisions, setting wage rates, approving terminations, directing day-to-day supervision, or controlling employee schedules—the franchisor could still be deemed a joint employer. In that sense, the proposed legislation does not immunize franchisors from joint-employment exposure. Instead, it attempts to define the line between protecting a franchise brand and controlling a franchisee’s employees.

Why the Joint-Employer Standard Matters

Franchisor Or Joint Employer? The franchise relationship occupies a unique space in commercial law. Franchisees operate local businesses under a licensed brand, but they are not branch offices of the franchisor. They typically sign leases, employ staff, manage payroll, purchase supplies, and make day-to-day operational decisions. Franchisors, meanwhile, protect systemwide goodwill by setting the standards that customers associate with the brand. A broad or ambiguous joint-employer rule can pressure franchisors to reduce support to franchisees for fear that training, guidance, technology, compliance assistance, or operational recommendations could be characterized as evidence of employment control. That result can be counterproductive. Franchisees often choose franchising precisely because they want access to a proven system, brand resources, operational guidance, and ongoing support. If franchisors pull back from those functions, franchisees may lose tools that help them compete and grow. At the same time, employee protections remain a critical consideration. Workers should not lose rights simply because an employer operates within a franchised network or system. The legal question is who has actual authority over the employment terms at issue. The Act attempts to preserve that accountability by focusing on direct and immediate control over essential employment conditions rather than indirect influence or ordinary brand oversight.

Where the Act Stands Now

The American Franchise Act continues to advance through the legislative process. After several markup sessions, on July 21, 2026, the House Committee on Education and the Workforce voted 18-15 to report the amended bill favorably to the full House of Representatives, marking the first significant legislative advancement of the proposal. During those markup sessions, the committee revised the language of the Act to establish that a franchisor can only be deemed a joint employer if it possesses and directly exercises “substantial, direct, and immediate control” over essential employment terms, such as hiring, wages, or scheduling. The committee vote does not enact the legislation, but it signals meaningful momentum and places the Act in the next stage of congressional consideration. The bill will now proceed to the House floor for consideration, where it must be approved by the full House before advancing to the Senate. If the bill passes the full House, the Senate must take up and pass its companion measure (or the House bill) before it can move to the President's desk. Industry groups are targeting major lobbying pushes, such as the International Franchise Association Advocacy Summit in September, to drive further momentum.

Conclusion

Although the Act has not yet been enacted and may change as it advances through the legislative process, it represents an important effort to create a clear, uniform federal standard for joint-employer liability in the franchise context. Whether the Act ultimately becomes law, it provides a timely reminder that franchisors and franchisees should carefully define, document, and preserve their respective roles. Franchisors should, in most cases, periodically review their franchise agreements, operations manuals, training programs, technology platforms, and compliance practices to ensure they do not inadvertently exercise substantial, direct, and immediate control over franchisee employees. Franchisees, likewise, should in most cases maintain independent employment policies and practices consistent with their responsibilities as separate employers. By proactively evaluating these issues, both franchisors and franchisees can help reduce joint-employer risk while preserving the balance between brand protection and operational independence that is central to the franchise business model. This post is provided for general informational purposes and does not constitute legal advice. For more information about the American Franchise Act, please contact Kaufmann Gildin & Robbins LLP. If you would like us to assess whether your franchise operations may expose you to joint employer liability, contact us. We can help. Call Michelle Murray-Bertrand, Esq. at 212-705-0855 or email 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.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[Private Equity’s Pursuit of Franchisors: Strategy, Diligence, and the Unseen Third Party at the Table]]> https://www.kaufmanngildin.com/?p=51266 2026-07-24T19:06:13Z 2026-07-24T19:01:57Z Private equity's appetite for franchise systems has become one of the defining stories in franchising over the past decade. Hardly a month passes without a headline announcing that a well-known brand has changed hands — not to a strategic competitor, but to a financial sponsor with billions in "dry powder" and a well-worn playbook for extracting value. Roark Capital's acquisition of Subway for approximately $9.6 billion, and its subsequent purchase of a majority stake in Dave's Hot Chicken; Blackstone's roughly $8 billion (including debt) acquisition of Jersey Mike's Subs in late 2024; KKR's purchase of Nothing Bundt Cakes; Transom Capital's acquisition of WellBiz Brands; and Main Post Partners' acquisition of senior-care franchisor HomeWell are only a sampling. The trend extends beyond the franchisor level as well, with sponsors such as Eyas Capital and Franchise Equity Partners acquiring the largest franchisees of brands like Bojangles' and 7 Brew, respectively. Global private equity investment in restaurant franchising alone reportedly doubled in 2025, and industry observers have described deal volume in 2026 as accelerating sharply. For franchisors and large multi-unit franchisees, this wave of activity is not simply a business-page curiosity. It represents a distinct and increasingly important area of practice — one that intersects M&A, regulatory compliance, and the peculiar relational dynamics that only exist in franchising. This post examines why private equity firms are drawn to franchisors (as opposed to, or in addition to, large multi-unit franchisees), how they structure and price these acquisitions, and why competent franchise counsel is indispensable to getting the deal right.

Why Franchisors? The Strategic Calculus

Private equity firms evaluating whether to acquire a franchisor, a large multi-unit franchisee, or both, are driven by several overlapping motivations. Recurring, asset-light cash flow. Franchisors generate royalty and fee income — typically a percentage of franchisee gross sales — without bearing the capital costs of real estate, buildout, and staffing that franchisees absorb. This asset-light model, combined with the multi-year, non-cancelable nature of franchise agreements, produces the kind of predictable, contractually secured cash flow that private equity underwriting loves. Once the acquisition price has been recouped (whether through refinancing, dividend recapitalization, or simply the passage of time), continuing EBITDA becomes highly accretive to the sponsor's overall return, since the marginal cost of servicing an established franchise system is relatively low compared to the royalty stream it throws off. Elimination of competition and platform consolidation. Some acquisitions are motivated less by the isolated value of the target than by the value created by removing it as a competitor to a portfolio company the sponsor already owns, or by combining it with other brands to create a multi-brand platform with shared back-office infrastructure, purchasing power, and cross-marketing opportunities. Multi-brand consolidators — several of them themselves private equity-backed — have used this logic repeatedly to build diversified platforms out of what were once freestanding, single-brand franchisors. Adding a distribution network to an existing portfolio company. A sponsor that already owns a company — franchised or not — may acquire a franchisor to obtain an established distribution network through which to introduce a new product or service line, or to diversify into a secondary distribution channel that reduces the portfolio company's dependence on its original business. In this scenario, the franchisor acquisition is valued as much for the network of committed, capitalized local operators it delivers as for the franchisor's own standalone financials. Optimized, sometimes leveraged, use of investor capital. Ultimately, many of these acquisitions come down to a straightforward capital allocation decision: the sponsor believes it can deploy its investors' funds — often with meaningful leverage — into a franchise platform and generate a risk-adjusted return superior to other available uses of that capital. The franchise model's licensing structure, in which franchisees fund unit-level growth, allows a sponsor to accelerate expansion without matching capital contributions of its own, amplifying returns on the equity actually invested.

The Exit Is Always the Point

It is worth stating plainly what every experienced franchise practitioner already knows: private equity acquisitions of franchisors are almost never intended as permanent holds. The acquiror's underwriting, from day one, assumes an exit — whether an initial public offering, a sale to a strategic acquiror, or a sale to another financial sponsor — typically within a three-to-seven-year window. The intervening period is spent streamlining operations, expanding the franchised footprint, creating cost and marketing synergies (particularly where the brand is folded into a multi-brand platform), and introducing new products, services, technology, or capital that the prior ownership could not or did not provide. The hoped-for result is that the franchisor is sold or taken public at a materially higher multiple than the sponsor paid, yielding an outsized return on the equity actually committed. Everything the sponsor does post-closing — including its diligence-informed integration plan — is calibrated with that eventual exit in mind.

Due Diligence: Where Franchise Counsel Earns Their Keep

Every acquisition of scale involves rigorous due diligence, and franchisor acquisitions are no exception. But acquiring a franchisor requires diligence of a fundamentally different character than diligence on an ordinary operating company, and this is where the involvement of experienced franchise counsel — as distinct from generalist M&A counsel — becomes not merely helpful but essential. Said candidly, and without the slightest intention of disparaging our colleagues in the broader corporate / M&A bar, it is very often the case that the nation's most sophisticated M&A attorneys have little or no meaningful background in the structures, customs, and unwritten norms of franchising. They may be entirely capable of running a standard diligence process, negotiating representations and warranties, and structuring a purchase agreement — yet be unequipped to assess how the target's franchise network actually developed and evolved over time, how that history will bear on the network's future profitability, what franchisor-franchisee political dynamics are simmering beneath the surface, or how the transaction itself — simply by closing — may alter those dynamics and affect the network's forward performance. This is because a franchisor acquisition has a party at the table that does not exist in an ordinary corporate acquisition: the target's franchisee population. Franchisees are not merely customers, vendors, or employees who can be evaluated through financial statements and contracts. They are independent business owners bound to the franchisor through long-term agreements, often for a decade or more, whose cooperation, morale, and continued investment in their businesses are essential to the value the acquiror believes it is purchasing. A franchisee base that is disengaged, distrustful, or actively organizing against franchisor policies represents a very different acquisition than one with an engaged, well-capitalized, growth-oriented franchisee community — even where the franchisor's financial statements look identical on paper. Assessing that franchisee population is a genuinely strange diligence exercise. It requires, in effect, taking the temperature of a constituency that must never learn it is being examined. Premature knowledge that a sale is pending can trigger exactly the disruption the acquiror is trying to avoid — franchisee anxiety, accelerated departures, slowed development, or organized resistance through franchisee associations. Skilled franchise counsel must therefore assess franchisee sentiment, system health, and litigation or complaint history through indirect means: review of franchisee association communications and governance documents, analysis of default and termination histories, review of state registration and renewal filings and any related disclosures, assessment of encroachment and territorial disputes, review of item 20 and item 3 disclosures in the Franchise Disclosure Document across several years to spot turnover and litigation trends, and careful reading of the pattern (not merely the existence) of franchisee complaints. This is a fundamentally more amorphous and subjective undertaking than reviewing audited financials, and it is precisely the sort of analysis that generalist M&A counsel, however capable, is typically not equipped to perform.

Structuring and Pricing the Deal

Partial acquisition of equity. Private equity acquisitions of franchisors are frequently structured so that the sponsor does not pay the entire purchase price, or acquire the entire company, at closing. It is common for the sponsor to initially acquire roughly 70% to 80% of the franchisor's equity, with the remainder either purchased later (often pursuant to a put/call mechanism tied to future performance) or retained by the original owner or management team as a rollover equity stake. This structure aligns incentives during the transition period, keeps legacy management economically invested in the system's continued success, and can ease the tax and financing burden of the transaction. Pricing methodologies. There is no single accepted method for pricing a franchisor acquisition, and each of several recognized approaches has its own legitimacy depending on the target's industry and financial profile:
  • A multiple of gross revenues, more common for early-stage or high-growth systems where profitability is not yet stabilized.
  • A multiple of LTM (last twelve months) earnings per share, more typical where the target is a public or quasi-public company with an established earnings history.
  • RevPAR (revenue per available room), the standard barometer in the hotel and lodging segment, where per-room performance is a more reliable indicator of system health than aggregate revenue.
  • A multiple of LTM cash flow, used where cash generation, rather than reported earnings, best reflects the business's economics.
  • Book value, infrequently used given how poorly it captures the value of an asset-light franchise system, but occasionally relevant where the target holds substantial owned real estate or hard assets.
  • Comparable transactions, benchmarking the deal against recent sales of similarly situated systems.
  • Triangulation, in which several of the above methodologies are used together to test and validate a proposed price, rather than relying on any single metric in isolation.
By far the most commonly used metric, in franchise acquisitions as in M&A generally, is a multiple of the target's LTM EBITDA. What multiple a sponsor is willing to pay is a central subject of negotiation and fluctuates with the broader economic and financing environment — availability and cost of acquisition debt, prevailing interest rates, and the general appetite of the private equity market for the target's sector all bear directly on where that multiple lands. Purchase price adjustments. The headline multiple is rarely the final number. Buyers typically negotiate downward adjustments (or upward, in the seller's favor) for items such as net working capital variances from an agreed target, indebtedness and transaction expenses deducted from enterprise value to reach equity value, non-recurring or non-operating items excluded from adjusted EBITDA, and known contingent liabilities, including pending franchisee litigation or regulatory exposure uncovered in diligence. Holdbacks and escrows. It is standard for a meaningful portion of the purchase price to be held back or placed in escrow post-closing, typically for twelve to eighteen months. This serves two related purposes: first, it secures the seller's indemnification obligations for breaches of representations and warranties discovered after closing; and second, in many franchise deals, it is tied to the target's actual post-closing economic performance, protecting the buyer against the risk that pre-closing financial representations do not hold up once the sponsor is operating the system. Earnout provisions, tied to development milestones, royalty growth, or franchisee retention rates, serve a similar risk-allocation function. Currency considerations in cross-border deals. Where the target franchise system operates internationally, currency fluctuation adds a further layer of complexity to pricing. The letter of intent or pricing memorandum must specify precisely how currency movements between signing and closing will be handled — whether through a fixed exchange rate locked at signing, a collar mechanism that adjusts price only outside a specified band of currency movement, hedging arrangements procured by either party, or a true-up mechanism calculated at closing. Absent clear, carefully negotiated language on this point, currency volatility between letter of intent and closing can materially — and unexpectedly — shift the economics of the deal for either side.

Conclusion

Private equity's continued and accelerating interest in franchise systems shows no sign of abating. For franchisors considering a sale, and for the private equity firms pursuing them, the transaction's success depends not only on getting the price and structure right, but on truly understanding what is being bought: a network of independent business relationships, built and maintained over years, that cannot be fully captured in a balance sheet. That is precisely the diligence that experienced franchise counsel is uniquely positioned to provide.
This post is provided for general informational purposes and does not constitute legal advice. For guidance on a specific transaction, please contact Kaufmann Gildin & Robbins LLP. If you would like counsel any franchise legal issues or situations, including acquisitions or sales, contact us to see if we can help. Call David B. Ramsey, Esq. at 212-705-0816 or email dramsey@kaufmanngildin.com. *Attorney advertising. © 2026 KAUFMANN GILDIN & ROBBINS • ALL RIGHTS RESERVED. Disclaimer: 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.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[From Concept to Compliance: A Legal Roadmap for Launching a Franchise System]]> https://www.kaufmanngildin.com/?p=51257 2026-07-17T19:18:30Z 2026-07-17T19:18:30Z So you have built a successful business and you are ready to franchise it. Franchising can be a powerful engine for growth -- but it is also one of the most heavily regulated industries in the United States. Before you award your first franchise, there is substantial legal, financial, and operational groundwork to complete. The following is an overview of the key steps a prospective franchisor should take to launch a franchise system and begin making lawful franchise offers and sales nationwide.

Retain Experienced Franchise Counsel - - First

Before anything else, retain a franchise attorney. Launching a franchise program requires the preparation of a Franchise Disclosure Document ("FDD") that complies with federal and applicable state franchise laws, and a suite of related agreements - - including the unit franchise agreement, and potentially an area development agreement for multi-unit developers. The FDD is a complex, heavily regulated document, and an improperly prepared one can expose a franchisor to significant legal liability. This is not the place to cut corners.

Form a New Franchisor Entity

Most franchise attorneys recommend that a client form a brand-new entity to serve as the franchisor company. A primary reason is practical: a newly formed entity generally avoids the requirement to provide three years of audited financial statements in the FDD - - a costly and time-consuming undertaking. Your accountant can help determine the most appropriate entity structure.

Protect Your Intellectual Property

Your trademarks, trade names, and service marks are among your franchise system's most valuable assets. The franchisor should apply for federal trademark registration with the United States Patent and Trademark Office before launching. Federal registration is important not only for brand protection, but also because it triggers certain exemptions from business opportunity laws in some states, reducing the number of state-level filings required. For systems with significant proprietary content - - copyrighted materials, patentable processes, or trade secrets - - additional IP protections should also be considered. Many franchisors also choose to house their intellectual property in a separate legal entity to shield it from any future judgments or liabilities that may arise against the operating franchisor entity.

Engage a Qualified Accounting Firm

The FDD must include audited financial statements. For a newly formed franchisor entity, this means an audited opening balance sheet. Thereafter, the franchisor must arrange for updated audited financials annually within 120 days (a bit shorter in certain states) of the close of its fiscal year if it wishes to continue offering and selling franchises. Not just any CPA will do. The accountant must be familiar with franchise-specific accounting standards - - including, for example, FASB's Accounting Standards Update No. 2014-09 (Topic 606), which governs how franchisors recognize revenue from initial franchise fees, area development fees, and renewal fees. In New York, only a registered CPA firm (not merely an individual CPA) that has completed the required peer review process may perform these audits.

Capitalize Adequately

Prospective franchisors should carefully assess whether they have sufficient capital not only to launch the franchise program, but to sustain it. Initial franchise fees alone are unlikely to cover the costs of supporting a growing system. If state franchise regulators determine that the franchisor entity lacks sufficient assets on its financial statements, they may require additional financial assurances as a condition of registration. Sound capitalization from the outset is essential.

Brand Standards - - Build the Operational Infrastructure

A franchise system is, at its core, a system - - and that system must be documented and teachable. Franchisors need to develop and be prepared to disclose a structured franchisee training program, covering the subject matter, duration, and format (classroom versus on-site) of each training module. Equally important is a comprehensive, confidential operations manual that gives franchisees a detailed how-to guide for running their franchised outlet consistently with the franchisor's brand standards. In fact, the sum total of these materials, and any new brand / system guidance materials that a franchisor issues in the future, are often defined in the franchise agreement as the “Brand Standards” (formerly what was typically called the “Operations Manual,” but there is a general awareness now that such a term is too narrow). Both documents (the training program and the operations manual) must be in place before the FDD is finalized. The Brand Standards should be treated as a living set of documents, updated on a continuous basis. Note that certain states require the table of contents of the franchisor’s training program to be submitted with the Franchise Disclosure Document when seeking franchise registration. Franchisors should also establish clear site selection criteria for brick-and-mortar concepts, and have qualified personnel capable of evaluating proposed locations.

Navigate State Registration Requirements

Fourteen states require a franchisor to register its FDD with a state regulator before making any franchise offer or sale in that state - - unless a specific exemption applies. Several additional states have business opportunity laws that may impose independent filing obligations. The registration process requires executed (and in some cases notarized) state-specific forms and filing fees, and in some states, a review period during which examiners may issue comment letters requesting FDD modifications. This process can take weeks, and the timing must be carefully managed to ensure the franchisor does not make any premature offers.

Develop a Compliant Sales Strategy and Marketing Program

Franchisors must also think carefully about how they will market and sell franchises. Franchise sales advertising is regulated - - certain states require specific disclosure language in ads or advance filing of advertising materials. Franchise sellers must be trained on legally permissible sales tactics, including the strict prohibition on making any earnings claims not properly disclosed in the FDD. A well-constructed franchise sales program will also include a robust digital presence: a franchise development website, a prospective franchisee inquiry form, and a structured process for "Discovery Days" or other interactions with candidates.

Implement a Franchise Compliance System

Perhaps the most underappreciated step for new franchisors is putting a formal compliance system in place before the first sale. Franchising's regulatory scheme exists to protect prospective franchisees from deceptive sales practices, and regulators take violations seriously. A compliance system should track, among other things, what representations were made during sales discussions, whether and when the prospective franchisee executed the FDD receipt, and whether the required waiting period between receipt and signing was honored. A documented compliance process is not just good practice - - it is a critical risk management tool.

Additional Considerations

Beyond the steps outlined above, franchisors should also consider applying to have their brand listed on the U.S. Small Business Administration's Franchise Directory, which can facilitate franchisee access to SBA-backed financing. Establishing supply-chain relationships with vendors, POS providers, and distributors will also be important to the system's long-term success. And once the FDD is registered, franchisors must remember to renew their registrations annually and amend the FDD whenever material changes occur - - a process that requires year-round attention. --- Launching a franchise system is a significant legal and business undertaking. The steps outlined here are interconnected, and the sequence matters. With experienced franchise counsel and the right team of professionals in place, a well-prepared franchisor can bring its brand to market with confidence - - and the legal foundation needed to grow. ATTORNEY ADVERTISING. The attorneys at Kaufmann Gildin & Robbins LLP regularly counsel emerging and established franchisors on all aspects of franchise system development and compliance. Contact us to learn how we can help you build your franchise program the right way. Call David B. Ramsey at 212-705-0816 or email dramsey@kaufmanngildin.com.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[How Businesses Can Avoid Becoming an Unwitting Franchisor]]> https://www.kaufmanngildin.com/?p=51239 2026-07-13T06:32:26Z 2026-07-08T21:57:35Z However, businesses pursuing these expansion strategies often overlook a significant legal risk - - that risk being that they may inadvertently create a franchise relationship under applicable federal or state franchise laws, even though neither party intended to enter into a franchise arrangement. Calling an agreement a “license,” “dealer agreement,” or “strategic partnership” does not determine how the law will treat it. If the relationship has the legal characteristics of a franchise, the business granting the rights may unknowingly become an “unwitting franchisor.” This risk, commonly referred to an “accidental franchise”, typically arises when a company allows another party to operate under or in association with its brand, receives required payments, and exercises enough control or provides enough assistance over the operator’s business. Once a relationship is treated as a franchise, the brand owner may face disclosure obligations, registration requirements in certain states, limits on termination or nonrenewal, potential rescission claims, regulatory scrutiny, and other consequences that can be costly and disruptive.

The Franchise Test: Three Elements to Watch

Although the details vary under federal and state law, whether a business arrangement qualifies as a franchise focuses on the presence of three core elements: (i) trademark association, (ii) a required payment and (iii) significant control or assistance.
  • Brand Association. A company may satisfy this element by allowing another party to use its trademark, trade name, logo, commercial symbol, or other brand identity. The operator does not necessarily need to present itself as a formal branch or office of the brand owner. If customers are likely to understand that the operator’s goods or services are associated with the brand, the element may be present.
  • Required Payment. Businesses often make the mistake of focusing solely on whether they charge a payment labeled as a "franchise fee." In reality, the definition is much broader. A franchise fee may include initial fees, royalties, training charges, advertising contributions, technology or software fees, renewal fees, mandatory purchases, or other required payments made as a condition of entering into or continuing the business relationship. Indirect payments can also matter, particularly where the brand owner receives an economic benefit from required purchases or approved suppliers.
  • Significant Control or Assistance. A company may satisfy this element if it exercises significant control over, or provides significant assistance regarding, the operator’s method of doing business. While reasonable quality control measures designed to protect a company's trademarks generally do not create a franchise, more extensive operational involvement may. This can include requirements relating to operating procedures, marketing, training, site selection, business systems, pricing guidance, software, quality standards, or ongoing operational support.

Why the Label Does Not Control

If all three elements are present, a business that thought it was creating a mere license or distribution arrangement may instead have created a regulated franchise relationship. One of the most common mistakes is relying on contract labels. Simply labeling an agreement as a “license,” “distributorship,” “affiliate program,” or “dealership” does not determine its legal status. A provision stating that the relationship is “not a franchise” is helpful only if the actual structure supports that conclusion. Regulators and courts look to the substance of the relationship. If the parties operate like a franchise system, the agreement’s title will not prevent franchise laws from applying.   Licensing

Practical Steps to Reduce the Risk of Becoming an Unwitting Franchisor

Businesses can substantially reduce the risk of becoming an unwitting franchisor by carefully structuring their expansion strategy before entering into agreements with independent operators.
  • Evaluate the Business Model Early. Before launching a licensing, dealer, distributor, or affiliate program, businesses should have the proposed arrangement reviewed by experienced franchise counsel. An attorney can evaluate the relationship under applicable federal and state franchise laws, identify potential risks, and recommend changes before agreements are signed. The analysis should focus on the rights being granted, required payments, and the degree of operational control or assistance that will be provided.
  • Choose the Right Expansion Model. Avoiding franchise status is not always the best option. If the business intends to maintain a highly standardized system through recurring fees, extensive training, ongoing operational support, and significant brand control, a franchise model may be the more appropriate and legally compliant approach.
  • Limit Operational Control Where Appropriate. When a true licensing relationship is intended, businesses should exercise only the level of quality control necessary to protect their trademarks and brand reputation. Excessive involvement in an operator's day-to-day business may satisfy one of the key elements of a franchise.
  • Review All Required Payments. Businesses should evaluate every direct and indirect payment associated with the relationship. Initial fees, mandatory purchases, technology fees, training charges, or other required payments may qualify as franchise fees, even if they are not labeled as such.
  • Monitor the Relationship Over Time. Franchise risk can evolve over time. A licensing or distribution arrangement that initially falls outside franchise laws may later become a franchise if the business adds mandatory systems, new fees, operating manuals, or expanded operational support. Periodic reviews by franchise counsel can help identify and address potential issues before they become costly compliance problems.

If You May Already Be an Unwitting Franchisor

If a business believes it may have unintentionally created a franchise relationship, it should promptly consult experienced franchise counsel before offering additional agreements. An experienced franchise attorney can evaluate the relationship, assess potential exposure under applicable federal and state franchise laws, and recommend the most appropriate course of action. Depending on the circumstances, the relationship may be restructured to eliminate a franchise element or transitioned into a compliant franchise system.

Contact Us

If you are considering expanding your business through licensing, distribution, or similar arrangements, or if you would like to evaluate whether your existing expansion model may be deemed a franchise under applicable law, we would be pleased to assist. Call Michelle Murray-Bertrand 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.  ]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[Navigating State Franchise Relationship Laws: Some Tips for Franchisors]]> https://www.kaufmanngildin.com/?p=51208 2026-06-26T07:53:20Z 2026-06-26T06:07:51Z

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:
  1. 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.
  1. Transfer and Assignment Rights
Several states restrict a franchisor's ability to unreasonably withhold consent to the transfer or assignment of a franchise.
  1. 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.
  1. 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.
  1. 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 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.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[Why Every Franchisor Should Invest in Franchise Sales Compliance Training]]> https://www.kaufmanngildin.com/?p=51180 2026-06-18T05:48:05Z 2026-06-18T05:37:55Z

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

Decorative Image 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

Compliancce 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.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[Virginia’s New Franchise Law Eliminates Post-Termination Noncompete Clauses: What Franchisors Need to Know]]> https://www.kaufmanngildin.com/?p=51169 2026-06-17T16:11:32Z 2026-06-17T14:17:07Z What Changed: Overview of the New Law Franchisee signing a franchise agreement contract 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

Franchisor and franchisee signing a Virginia franchise agreement 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.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[How to Legally Franchise Your Business Format to Expand Outlets of Your Business]]> https://www.kaufmanngildin.com/?p=51154 2026-06-04T08:37:59Z 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.]]> On Behalf of Kaufmann Gildin & Robbins <![CDATA[Think Before You Chat: What United States v. Heppner Means for Franchisors Who Use AI to Prepare for Legal Discussions]]> https://www.kaufmanngildin.com/?p=51146 2026-06-01T15:39:07Z 2026-06-01T09:24:26Z 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? Hands typing on laptop with glowing AI 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: Hand holding a smartphone displaying a holographic interface with scales of justice and AI icons, representing the intersection of artificial intelligence and legal technology
  1. 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.
  2. 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.
  3. 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.
  4. 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.]]> by Kaufmann Gildin & Robbins <![CDATA[Government Actions, Prosecutions And Remedies]]> https://www.kaufmanngildin.com/?p=51139 2026-05-28T13:54:16Z 2026-05-28T04:42:40Z 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. Judge reading court papers during a courtroom hearing.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:
  1. 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.
  2. 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).
  3. 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.
  4. 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.
  5. 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.
  6. 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.
  7. 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.
  8. 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).
Gavel with cash symbolizing legal fines or settlements.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:
  1. 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.
  2. Omitting from any franchise disclosure document any material fact which is required to be stated therein.
  3. 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).
  4. Engaging in any act, practice or course of business which may or would operate as a fraud or deceit upon any person.
  5. Failing to register the franchise disclosure document (unless an exemption from registration is available).
  6. Failing to immediately amend or revise a franchise disclosure document upon the occurrence of a material change to the facts set forth therein.
  7. 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).  
  8. Requiring a franchisee to waive the rights and protections afforded by state franchise registration/disclosure laws.
  9. Making any untrue statement of fact, or omitting material facts, in any application or report submitted to any franchise administrator.
  10. Failing to disseminate the registered (when necessary) franchise disclosure document to prospective franchisees within the timeframes required by law.
  11. Failing to disseminate to prospective franchisees all franchise and franchise-related agreements, in form ready for execution, within those timeframes specified by law.
  12. Making any representation to a prospective franchisee which is inconsistent with the franchisor’s disclosure document.  
  13. Failing to file franchise advertising (in those seven states requiring such filings).
  14. 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.
  15. 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:
  1. Preliminary and permanent injunctions to enjoin the illegal acts or practices or to enforce compliance with the applicable franchise law.
  2. 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.
  3. Restitution on behalf of those victimized by statutorily proscribed conduct.
  4. Damages on behalf of persons injured as a result of illegal acts or practices.
  5. Disgorgement of monies derived by a franchisor through illegal acts or practices.
  6. Imposition of fines and penalties.
  7. 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.]]>