Tennessee Franchise Law and FDD Registration

Tennessee Franchise Law

Tennessee is not a franchise registration state but has enacted franchise laws that govern the relationship between franchisor and franchisee. Franchisors are not required to register or file a FDD in the state of Tennessee but must comply with Tennessee's franchise relationship laws and the Federal Franchise Rule requiring FDD issuance and disclosure 14 days prior to the signing of a franchise agreement or acceptance of any fees.

What qualifies as a franchise under Tennessee law is broadly defined to include all oral or written agreements that grant another party, either (a) the license and right to use a trademark within an exclusive territory, or (b) the right to sell or distribute goods or services within an exclusive territory. Once a franchise relationship is established Tennessee Code 47-25-15, et. seq., prohibits franchisors from undertaking certain actions related to the termination, non-renewal, or modification of franchise rights within the state. Franchisors must undertake their franchisee relationship actions in good faith, afford franchisees cure opportunities and other rights set forth in the code.

To learn more about Tennessee franchise law and how we can help, contact us at (800) 976-4904 or by email.

Tennessee Franchise Relationship Laws

Tennessee franchise law imposes franchisee relationship obligations on franchisors. These relationship laws provide franchisees with supplemental rights that condition when and how a franchise agreement may be terminated and rights that allow family and third-party transfers without approval of the franchisor. Below is a summary of some of Tennessee's franchise relationship obligations and prohibitions:

• Restrictions on a Franchisors Right to Terminate a Franchise Agreement - To legally terminate a Tennessee franchise relationship, franchisors must (a) act in "good faith", (b) have "good cause" for termination, (c) provide the franchisee with a detailed notice of default, and (d) provide the franchisee with a reasonable opportunity to cure of not less than 30 days. The Tennessee Code itself defines those permissible instances of default that constitute good cause for termination, including the franchisee's substantial non-compliance of the its franchise obligations. Good cause is defined under the Code, as follows:

...Good Cause means...failure by a franchisee to comply substantially with the requirements imposed or sought to be imposed upon the franchisee by the franchisor, which requirements are not discriminatory as compared with the requirements imposed on other similarly situated franchisees, either by their terms or in the manner of their enforcement, and which requirements are not in violation of any law or regulation...

Withholding products, services, or support without prior and proper termination after notice, constitutes an act of termination in violation of Tennessee law.

Instances of default where a franchisor may potentially terminate a franchise without providing an opportunity to cure are listed in 47-25-1504, and include franchisee circumstances involving: bankruptcy, judicial insolvency, abandonment, material misrepresentations made by the franchisee at the time of entering into the franchise agreement, foreclosure and/or loss of franchisee leasehold interests in the business premises, criminal conduct or felony conviction relevant to the operation of the franchised business, and failure on two or more occasions to pass minimum health inspections.

• Restriction on a Franchisors Right to Deny Renewal of a Franchise Agreement - A Franchisor may not deny a Tennessee franchisee the right to renew a franchise agreement unless: (a) the franchisor provides the franchisee with not less than 60 days prior written notice of franchisors intent to not renew the franchise agreement and with notice of the facts and circumstances that the franchisor alleges to be good cause for its decision to not renew; (b) the franchisor possesses good cause for denying renewal; and (c) the franchisor agrees to not enforce post-termination / post-expiration restrictive covenants set forth in the franchise agreement upon expiration of the franchise agreement. If the franchisor elects to not sell or distribute products through franchisees in the State of Tennessee for not less than 2 years, such instance may constitute legitimate grounds for non-renewal provided franchisor agrees to not enforce post-termination / post-expiration restrictive covenants set forth in the franchise agreement upon expiration of the franchise agreement.

• Restriction on a Franchisors Right to Limit Family Transfers - Under Tennessee law a franchisor cannot limit an individual franchisee's right to transfer the franchised business to certain family members. Upon giving written notice of the franchisees intent to transfer ownership interests, an individual franchisee owner (including the estate of a deceased owner) may transfer ownership of the franchised business to his/her spouse, child, grandchild, parent, brother, or sister if such owner. In such instance franchisor approval is not required, only notice.

• Restriction on Franchisor's Right to Disapprove Non-Family Transfers - Under Tennessee law, if a franchisee provides the franchisor with written notice (a) of the proposed and requested transfer of the franchise, and (b) an opportunity for the franchisor to match the proposed offer, then the franchisee is granted an affirmative right to transfer the franchised business without franchisor approval unless, the franchisor demonstrates that the transferee does not meet the franchisor's "non-discriminatory, material, and consistently applied and reasonable qualifications and standards..." There are other standards and requirements that apply and, if the franchisor does not elect to match the proposed offer to the franchisee, there are instances where the franchisee may transfer the franchised business to other qualified buyers.

Violations of Tennessee's franchise relationship laws entitle franchisees equitable and legal relief for damages, including attorney fees.

Joint Employer Liability and Franchising in Tennessee

In support of the franchise business model and as a counter to Joint Employer Liability determinations previously made by the NLRP, Tennessee Code, Title 50, Chapter 1, Section 208 provides franchisors with a joint employer liability shield. That is, Tennessee specifically disclaims any employment relationship between franchisors with, either, franchisees or, employees of their franchisees. Tennessee law specifically states:

(a) Notwithstanding any voluntary agreement entered into between the United States department of labor and a franchisee, neither a franchisee nor a franchisee's employee shall be deemed to be an employee of the franchisor for any purpose.

(b) For purposes of this section "franchisee" and "franchisor" have the same definitions as set out in 16 CFR 436.1