Does auctioning off new franchises online raise any legal issues?
Kaufmann: You bet it does. Both the federal government and several states have enacted Web-specific regulations that franchisors must adhere to when offering franchises over the Internet.
A franchisor's Web-based franchise marketing campaign is considered to be franchise advertising, which is regulated and, in certain states, must be filed with franchise administrators unless the franchisor makes it clear on its Web site that it's not offering franchises in a particular state and does not take any application from that state.
Moreover, the antifraud provisions of federal and state franchise laws apply to all Internet franchise sales activity. While franchisors are now free to post their franchise disclosure documents on their Web sites, no jurisdiction, either federal or state, has yet permitted franchisors to fulfill their disclosure obligations through electronic means. Paper disclosure documents must still be disseminated and paper receipts must still be collected.
Purvin: Current law requires lengthy disclosure of franchise opportunities, plus a [10-day] period following disclosure before a franchise agreement can be signed and any money can exchange hands. Under the current law, legal sales of franchises over the Internet are quite questionable.
How could auctioning franchises online affect a company's franchise system?
Kaufmann: Auctioning franchises on eBay is not only suspect from an econometric perspective, but it may violate federal and state laws governing franchise sales activity. Those laws require franchisors to set forth in their disclosure documents just what initial fees they charge-and, if the initial fee varies, the circumstances under which such variation takes place. "We will sell to the highest bidder" is not the type of justifiable circumstance that any franchise-regulating authority has ever accepted as lawful. I would suggest to any franchisor considering auctioning its franchises to first consult with competent franchise counsel to determine if such conduct could lead to the collapse of that company's franchise sales program in the wake of federal and state enforcement actions.
Purvin: Quite simply, this would be a certain path for disaster. A franchise relationship should be built upon careful planning and screening. We are not selling computers or commodities here, but rather a very high stakes Internet dating, one with dire consequences if the relationship doesn't work.
American Association of Franchisees & Dealers
(800) 733-9858, http://www.aafd.org
Kaufmann, Feiner, Yamin, Gildin & Robbins LLP
(212) 755-3100, firstname.lastname@example.org