If you think franchise compliance is just a box to check, think again. As part of my presentation on Annual Developments in Franchise Law at the most recent ABA Forum on Franchising Annual Meeting, I did a deep dive into analyzing the recent enforcement actions taken by state franchise regulators. In doing so, I noticed some key trends that franchisors, brokers, and attorneys should have on their radar.
- Washington Now Leads the Pack in Franchise Enforcement. Washington took the top spot in franchise enforcement actions, issuing approximately 20 reported orders during the 12 month period I reviewed last year —more than any other state. The majority of violations stemmed from the sale of unregistered franchises and disclosure defects—a reminder that proper registration and FDD compliance remain top priorities for regulators. Additionally, Washington is also one of only two states (along with New York) that require separate franchise broker registration, and that rule led to three enforcement actions: (i) one against a franchisor using an unregistered broker, which resulted in a consent order and fine; and (ii) two actions against brokers themselves, one of which led to Washington’s largest investigative cost assessment of the year—$7,500.
- California’s Holistic Approach: More Penalties, More Education. California followed Washington with approximately 14 enforcement actions, but the severity of violations led to higher administrative penalties and orders of rescission. California regulators aren’t just punishing offenders—they’re also requiring remedial education. In some cases, violators must: complete a minimum number of franchise compliance education hours with an approved franchise attorney; or (ii) hire a franchise attorney as an independent monitor for a set period; or (iii) both. This approach reflects California’s focus on both curative and preventive measures, reinforcing the importance of ongoing franchise compliance training.
- Other Key Enforcement Hotspots. Maryland came in third with approximately 7 enforcement actions while Indiana and Virginia each had 2 enforcement actions, and Wisconsin had a single action. Most of these cases involved unregistered franchise sales, often due to: (i) accidental misclassification as a “license”, (ii) failing to properly qualify for an exemption, or (iii) lapses in registration renewal. One particularly interesting case in Indiana involved a mischaracterized “business opportunity,” highlighting the importance of scrutinizing state-specific definitions and exemption
- International In-Bound Systems Pose Risk. A growing trend involves international franchise systems unknowingly violating U.S. state franchise laws when entering the market. Many assume area representative, area development, or single-unit sales avoid registration obligations—but state laws often say otherwise. A misstep in classification can mean the difference between legal compliance and an unexpected enforcement action.
To avoid state franchise examiner scrutiny, we recommend:
- Staying ahead of state-specific requirements. If you’re expanding into new states, double-check disclosure and broker registration rules.
- Ensuring international franchisors understand U.S. compliance. Many foreign brands entering the U.S. market are running into unexpected regulatory hurdles.
- Avoiding the costly mistake of misclassification. Licenses, business opportunities, and franchise exemptions must be carefully analyzed to avoid triggering unintended obligations.
With franchise regulators actively monitoring compliance, franchisors, brokers, and attorneys need to stay vigilant—or risk becoming the next enforcement headline.
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