Franchise Law Explained: FDD, Rights, and Risks

A $860 Billion Industry Built on Disclosure

Franchising accounts for roughly $860 billion in economic output and 8.7 million jobs in the United States, according to the International Franchise Association's 2024 report. Behind those numbers lies a legal framework designed to close the information gap between franchisors who know their system intimately and franchisees who are committing substantial capital — often their life savings — based on representations made during sales presentations. That framework is the Franchise Disclosure Document.

The 23-Item FDD

The FTC Franchise Rule (16 C.F.R. Part 436), revised in 2007, requires franchisors to deliver a Franchise Disclosure Document containing exactly 23 mandatory items at least 14 calendar days before a franchisee signs any agreement or pays any money. The 14-day waiting period is a cooling-off mechanism. No negotiation or payment can shorten it.

Item 19: The Earnings Disclosure Gap

Item 19 is the only place in the FDD where a franchisor may make financial performance representations — projections, averages, or ranges of franchisee revenue and profit. The FTC does not require franchisors to provide Item 19 data at all. Only roughly 50% of franchisors include any financial performance information. Those that do vary widely in scope: some provide system-wide averages that mask wide variance, while others provide median, top-quartile, and bottom-quartile breakdowns by unit age, size, or geography.

Prospective franchisees should request the actual financial statements of existing franchisees — Item 20 provides contact information for current and former franchisees — rather than relying solely on what the franchisor volunteers in Item 19. Talking to 20 or more franchisees is standard due diligence.

Territorial Encroachment

Many franchise agreements grant exclusive territories — a defined geographic area within which the franchisor agrees not to open competing units or sell through alternative channels. The scope of that exclusivity has become a major source of litigation as franchisors developed e-commerce, ghost kitchens, grocery channels, and alternative delivery formats that compete with franchisee territories.

• Strict territorial exclusivity: Prohibits the franchisor from operating or licensing any competing outlet within the territory through any channel
• Limited exclusivity: Covers only traditional brick-and-mortar locations, leaving alternative channels unrestricted
• No exclusivity: The franchisor makes no territorial promises at all — common in service franchises
• Right of first refusal: Franchisee gets the first opportunity to open additional units within an adjacent territory before the franchisor may offer them to others

Courts have generally enforced territorial clauses as written, meaning franchisees who sign agreements with no e-commerce restrictions typically have no legal recourse when online sales cannibalize their territory.

Termination and Renewal Rights

Franchise agreements are typically for fixed terms of 5, 10, or 20 years with renewal options. Termination clauses define the franchisor's grounds for ending the agreement before expiration. Many agreements permit termination for "cause" — defined narrowly as material breaches — while others include "convenience" termination provisions that courts in some states will not enforce.

Sixteen states, including California, Hawaii, Illinois, and Michigan, have franchise relationship laws that impose additional restrictions on termination and non-renewal beyond what the contract requires. These state laws typically:

• Require "good cause" for termination regardless of contract language
• Mandate notice and cure periods (commonly 30–90 days)
• Prohibit non-renewal without good cause after a specified operating period
• Require compensation for goodwill upon non-renewal in some jurisdictions

The FDD must disclose all applicable state law requirements in Exhibit H (state-specific addenda), but prospective franchisees should independently verify whether their state's franchise relationship law applies.

Registration vs. Non-Registration States

Fourteen states — including California, New York, Maryland, and Washington — require franchisors to register their FDD with a state regulator before offering or selling franchises in that state. Registration states often require additional disclosures beyond the federal FTC Rule minimum. Non-registration states require only federal compliance. A franchisor that has not registered in a registration state cannot legally offer or sell franchises there, even if the franchise agreement is otherwise valid.

This article is for informational purposes only and does not constitute legal advice.