Illinois Franchise Law Explained

The purpose of this article is to provide a summary of Illinois franchise law and federal franchise law as applied in Illinois.   Because franchises are governed by both federal and state regulations, franchise law is complex, and an experienced business attorney should be an essential part of your team, whether you are a franchisor or franchisee. 

What is the definition of a Franchise in Illinois?

‍It is important to understand that regardless of the label that the parties to an agreement place on the agreement (e.g. joint venture, licensing agreement, consulting agreement), the relationship between two parties will be considered a franchise, and therefore will be subject to state and federal franchise laws, if the relationship possesses the legal elements of a franchisor/franchisee relationship.   The elements of a franchise vary slightly from state to state.  However, Illinois has adopted the federal definition of the term "franchise."

In Illinois (and federally), there are 3 elements that must all be present create a franchise:

• Association  with a trademark:  The franchisee must be substantially associated with the franchisor's trademark or symbol.  Courts interpret this broadly.  Courts have found that if the franchisees customers base any of their judgments on the reputation of the franchisor, this element is satisfied.
• Participation in a marketing plan:  The determination of whether a shared marketing plan exists is made by the court on a case-by-case basis based on individual circumstances.  Courts look at whether the franchisor provides promotional materials, whether the franchisor provides the franchisee with an operating manual, whether the franchisor provides required training to the franchisee.  The key to this analysis is the amount of control exerted by the franchisor over the operations of the franchisee. 
• Payment of a fee: Regardless of whether a fee is labeled as a "franchise fee," an ongoing payment will typically satisfy this requirement.  

For more information on franchise law in Illinois read our article, Recent Changes to Illinois Franchise Law

Franchise Disclosure Documents Explained

The Federal Trade Commission requires that Franchisors make certain disclosures when making offerings to potential franchisees.  The document in which these disclosures are made is called a Franchise Disclosure Document (FDD).  In Illinois the the equivalent of an FDD is a Unfiorm Franchise Offering Circular ("UFOC") , the franchisor must disclose information on the following topics:

• Corporate information regarding the franchisor and its affiliated companies; 
• The business experience of the franchisor's officers, directors, and managers; 
• Any litigation in which the franchisors have been or are currently involved; 
• Bankruptcies filed by the franchisor or its principals; 
• Initial fees to be paid by the franchisee to the franchisor; 
• Additional fees to be paid by the franchisee at a later date;
• An estimate of the franchisee's initial investment; 
• Restrictions imposed by the franchisor on products and services; 
• The franchisee's obligations during the course of the franchise relationship; 
• Any financing potentially available through the franchisor; 
• Franchisor's obligations with respect to advertising, systems, and training; 
• The franchisee's territorial rights; 
• Trademarks, patents, copyrights, and proprietary information; 
• The obligation of the franchisee to operate the franchise business; 
• Restrictions on the types of products the franchisee can sell;
• The rights of the franchisee regarding renewal, termination, transfer, and dispute resolution; 
• Public figures who endorse the franchise; and 
• The franchisor's financial statements.

‍In addition to these optional disclosures, franchisors have the option to disclose Financial Performance Representations ("FPR").  FPRs consist of information from which a franchisee may determine a range of expected profit or sales from the franchise.  Franchisors who do not make FPRs in their FDDs or UFOCs are prevented from then providing this information to franchisees prior to sale.  

Franchise Registration in Illinois

‍Federal law does not require franchisors to register their franchise.  However, Illinois law does require franchise registration.  Before offering or selling a franchise in Illinois, the franchisor must provide the franchisee with a current Franchise Disclosure Document that has been properly registered with the Franchise Bureau for the Illinois Attorney General's Office.   The registration must be updated annually. 

​In order to register an FDD with the Illinois Attorney General, the franchisor must submit the following to the Franchise Bureau of the Illinois Attorney General's Office, 500 South Second Street, Springfield, IL 62706:

• Uniform Franchise Registration Application Page, allowing with any Supplemental Information Pages;
• Sales Agent Disclosure Forms disclosing each sales agent employed by the franchisor; 
• Consent to Service of Process, which allows the Attorney General to receive service of process on behalf of the corporation. 
• A Certification Page; 
• Auditor's Consent Letter, which grants consent to use certain audited reports in the registration; 
• A current Uniform Franchise Offering Circular ("UFOC") submitted in duplicate.  This is essentially another term for the Franchise Disclosure Document. 
• A fee of $500.00.  

‍The phone number for the Franchise Bureau is (217)782-4465.  

‍​The UFOC must be updated and an amendment must be filed with the Franchise Bureau whenever there is a change in any of the "material information" contained therein.  "Material information" means any information that a franchisee would consider important in making a decision about whether to invest in the franchise. 

‍Consequences of Violating State and Federal Franchise Laws

‍On the federal level, there is no private cause of action for violation of federal franchise laws, meaning that franchisees cannot sue franchisors for violation of federal franchise regulations.  If a franchisor violates federal regulations, the FTC may bring suit for an injunction requiring franchisors to cease and desist a violation of franchise rules.  The FTC is also empowered to bring suits against franchisors on behalf of franchisees seeking both civil damages and criminal penalties.  Officers, directors, or other principals of the franchisor may be found personally liable for violations of federal franchise law. 

‍The Illinois Franchise Disclosure Act of 1987 ("IFDA") creates a private cause of action in Illinois for violation of the IFDA.  Section 705/26 of the IFDA provides that anyone who offers, sells, terminates, or fails to renew a franchise in violation of the IFDA is liable to the franchisee for any damages caused by the violation of the IFDA.  The IFDA also provides for personal liability for principals, directors, and officers of the franchisor who had or should have had knowledge of the facts amounting to a violation of the IFDA.  The IFDA awards attorneys fees and costs to franchisees who are successful in bringing an action under the IFDA. 

‍Franchise relationship laws govern the interaction between the franchisor and the franchisee during the course of the agreement.  

The most common types of violations of Illinois franchise laws include:

• offering an unregistered franchise,
• failure to timely provide a UFOC,
• providing an incomplete UFOC with missing disclosures,
• making misrepresentations to potential franchisees,
• improperly terminating the franchise, and
• improperly failing to renew the franchise.  

Below is a summary of some of the mot important Illinois franchise relationship laws:

Franchise Terminations:  

Section 705/19 of the IFDA provides that a franchisor may not terminate a franchise prior to the expiration of its term unless there is "good cause," which includes, but is not limited to franchisee's failure to cure a breach of the franchise agreement after giving notice and an opportunity to cure.  Certain types of "good cause" terminations do not require notice and an opportunity to cure:

• Making an assignment for the benefit of creditors; 
• Voluntarily abandoning the business; 
• Being convicted of a felony or other crime that impairs the franchise's good will; or
• Repeatedly failing to comply with the franchise agreement. 

Franchise Non-Renewals: 

Section 705/20 of the IFDA provides that a franchisor may not refuse to renew a franchise agreement without compensating the franchisee by repurchase or other means, when:

• the franchisee has signed a non-compete clause barring him or her from continuing in substantially the same business under a different trademark or name; or
• The fanchisee has not been sent 6 months notice of the franchisor's intent not to renew. 

Discrimination Between Franchisees:  

Section 705/18 of the IFDA prevents the franchisor from unreasonably and materially discriminating between franchisees located in Illinois by offering different terms to different franchisee, if the discrimination would cause competitive harm.   The IFDA carves out certain exceptions to this rule, allowing the franchisor to make reasonable distinctions between different businesses and to offer different terms to franchisees who sign up at different times. 

Trade Associations: 

Section 705/17 of the IFDA prevents franchisors from interfering with franchisees participating in trade associations. 

Below are several common issues that arise between franchisors and franchisees:

• Encroachment:  Franchisors typically retain the right to deliver goods and services through channels other than the franchisee. Case law has provided inconsistent results when franchisees challenge the franchisor's use of alternative distribution channels (such as the internet or catalog sales) for products provided by the franchisee.  
• Change of Franchise Systems:  Franchisors usually retain the right to change their franchise-wide systems by updating their operations manual.  Although this issue is frequently litigated by franchisees, the rights of franchisors to make these changes has been upheld by the courts unless the change directly benefits the franchisor at the expense of the franchisee. 
• Fiduciary Relationship:  Courts have consistently held that the franchisor/franchisee relationship is not a fiducairy relationship, and therefore does not impose a higher fiduciary duty upon the franchisor above and beyond the franchisor's contractual duties.  
• Violation of Brand Standards:  Franchisors have the right to terminate a franchise where franchisees fail to uphold minimum brand standards.  However this right is limited by the IFDA's requirements of notice and intent to cure.