The franchise sector grew faster than the overall economy in 2017 and is projected to do so again this year, due in part to an improved momentum in GDP, a boost from recent tax reform and an increased favorable regulatory environment, according to the International Franchise Association's Franchise Business Economic Outlook for 2018.

According to the study, states in the west and south, such as Florida, will continue to lead the nation in franchise employment and output growth in 2018. Florida's 2018 franchise forecasts include a 4.7 percent increase in franchise employment to 543,800 jobs; a 7.5 percent increase in output of franchise businesses in nominal dollars to $48.9 billion; a 2.9 percent increase in the number of franchised establishments to 48,900; and an 8.2 percent increase in the GDP of the franchise sector to $20 billion.

The fact that Florida continues to experience franchise growth is not surprising. Apart from the sunny weather, Florida has no state income tax, corporate franchise tax on capital stock, or property tax on business inventories. From a franchisor's perspective, Florida also offers a favorable regulatory landscape with respect to the registration of franchises prior to sale and does not regulate franchisor/franchisee relationships, apart from specialized industries, including motor vehicles, farm equipment and beer distributors.

While franchising is federally regulated by the Federal Trade Commission Franchise Rule (FTC Rule), which mainly governs the disclosure of prescribed information to prospective franchisees, there are 24 states that have their own franchise registration, sales, and relationship laws that impose obligations beyond the scope of federal law. Since franchisors must comply with both federal and state law, the laws of a given state can be an important consideration for startup and emerging franchisors in deciding where to expand.

The question of whether a given arrangement is a “franchise” is critical since it will determine whether compliance with federal and state franchise law is required. The FTC defines a franchise as a commercial relationship, regardless of what it is called, where the following three elements are met: the franchisee will obtain the right to operate a business, or sell goods or services, that is identified or associated with the franchisor's trademark; as a condition of obtaining the franchise or commencing operation, the franchisee makes a required payment during the first six months of operation; and the franchisor exerts significant control over, or provides significant assistance in, the franchisee's method of operation. States that have their own definition generally follow the FTC rule but may require a “marketing plan or system” prescribed by the franchisor or a “community of interest” in place of the significant control or assistance element, or reduce or eliminate the monetary threshold.

The following 14 states require registration of the franchise offering prior to the offer or sale: California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. Oftentimes, there may be requests or required changes to the offering documents before approval. Additionally, approximately 21 states have franchise relationship laws that govern aspects such as termination, renewal, transfers and franchisee treatment. The intent of these laws is to address perceived unequal bargaining power, resulting in situations where laws may override inconsistent provisions of contract.

While Florida is not a “registration” state and does not regulate the franchise relationship, franchising is nevertheless regulated in multiple provisions of state law. First, in order to sell franchises in the state, franchisors must file an exemption under the business opportunity laws stating that it is in compliance with the FTC rule. Once the exemption is submitted, there is no waiting period for a franchise offering to become effective before a franchisor may begin selling a franchise in the state.

In addition, the Florida Franchise Act (FFA), Fla. Stat. Section 817.416 imposes civil and criminal liability for intentionally: misrepresenting the prospects for success of a proposed or existing franchise or distributorship; misrepresenting, or failing to disclose, the total required investment; misrepresenting, or failing to disclose, efforts to sell or establish more franchises than is reasonable to expect the market or area to sustain. An aggrieved plaintiff may be entitled a judgment for all monies invested in the franchise, as well as attorney fees and costs. The FFA contains a definition of a “franchise” that is far less restrictive than the FTC rule, and uses the term “distributorship” synonymously.

Furthermore, since only the FTC can initiate enforcement actions under the FTC rule, franchisees can rely on Florida's Deceptive and Unfair Trade Practices Act, which creates a private right of action for unfair or deceptive trade acts or practices, including a violation of the FTC rule. There are a number of other states that have enacted similar statutes, which are known as “Little FTC Acts.”

Since Florida generally lacks franchise relationship laws, regular principles of contract law will govern, including the implied covenant of good faith and fair dealing. However, the current legal authority in the state is to limit application of the doctrine so that it does not contradict express contractual terms or impose liability for an independent claim, absent an express breach of contract.

Despite attempts to pass new franchise legislation last year, the Florida Senate rejected the proposed Protect Florida Small Business Act. The act received significant criticism from the franchise industry who argued the legislation would inhibit franchising in Florida. Time will tell whether Florida will eventually follow additional states' increased efforts to pass new franchise legislation to provide guidance and increase protections afforded to franchisees. One thing for certain is that Florida will continue to be a leader in franchise sector growth.

Morgan Ben-David is a partner with the Miami law firm of AXS Law Group.