The legal requirements for selling franchises vary from state to state, even though some obligations are established by federal law. North Dakota is one of several states that mandates franchisors to register their franchise before selling or even offering to sell a franchise to a potential franchisee within the state.
Many franchisors choose to work with franchise attorneys to ensure they comply with North Dakota franchise law and registration rules including the North Dakota Franchise Investment Law and administrative regulations adopted by the Securities Commissioner. Franchise filings must also meet the requirements set forth by the Federal Trade Commission.
In North Dakota, franchise operation is governed by the Franchise Examiner in the Securities Department. Franchise filings and other correspondence may be sent to the North Dakota Securities Department, 600 East Boulevard Avenue, State Capitol, 5th Floor, Bismarck, ND 58505-0510.
The Securities Department requires franchisors to include the following documents when registering a franchise, in addition to a cover letter and filing fee:
The registration filing fee is $250. Checks should be made payable to the North Dakota Securities Department. Registration of a franchise offering is deemed valid for one year unless the Commissioner of the Securities Department specifies a different registration period. Franchisors who submit unaudited opening balance statements will be required to submit one form of financial assurance.
The franchise registration will expire one year after the date the registration went into effect. It costs $100 to renew the registration and if a franchisor fails to complete the renewal process according to the state guidelines within the allotted time frame, they may be forced to reregister their franchise from scratch. This would also mean paying the higher registration fee. For renewal, franchisors must also submit:
North Dakota franchise law restricts the use of a few provisions in documents affecting franchise relationships for being either unjust, unfair, or inequitable to franchisees.
Under N.D. Cent. Code §9-08-06, contracts that restrict individuals from participating in business are considered void unless they meet strict requirements. Restrictive covenants in franchise documents are similarly void unless they specifically state that they are subject to the terms of this statute.
Several potential restrictions involving disputes between franchisees and franchisors are either not allowed under North Dakota law or must be handled with care in order to avoid a compliance problem. These include requiring arbitration at remote locations, requiring consent to jurisdiction outside of the state, requiring consent to liquidated damages and termination penalties, waivers of jury trial, and waivers of exemplary and punitive damages.
Franchisors cannot require franchisees to consent to a limitation of claims that is at odds with the statute of limitations set forth in North Dakota laws. Moreover, franchisors are also prohibited from requiring the franchisee to pay costs associated with enforcing the agreement. Rather, in an enforcement action, the prevailing party may recover attorney’s fees and other costs and expenses from the other party.
Franchisors must exercise care in preparing franchise registration documents so that all required information is included, and improper terms are avoided. In particular, it is important to ensure that the FDD contains appropriate provisions to enable potential franchisees to make an informed decision before investing in a franchise. A copy of this document must be given to franchisees at least 14 days before signing a franchise agreement.
An experienced franchise attorney could assist in preparing documents for registration and maintaining compliance with other North Dakota franchise law and registration obligations. These requirements are designed to protect franchisees, so franchisors must take steps to protect their own interests. Call today to schedule a consultation and to start expanding your business today.