North Dakota Franchise Law

Interested in franchising your existing North Dakota business or purchasing a franchised business in North Dakota? Franchising is a popular growth strategy, impacted by federal and state laws. The state of North Dakota has enacted protections for franchisees and imposed certain restrictions on franchisors. It’s important to for franchisees to understand how laws protect their interest and for franchisors to understand the requirements and consequences of franchising in North Dakota.

Franchising in the United States

All franchises in the United States are subject to a set of franchise-specific regulations promulgated by the Federal Trade Commission (FTC). Essentially, under the federal law franchises can only be offered and sold by disclosure of a franchise disclosure document in substantial compliance with the enumerations provided in the Franchise Rule. States have the authority to supplement these rules, and many states have chose to do so to various degrees through franchise specific laws, rules, and regulations. These states are typically referred to as filing states, registration states, and business opportunity states. States without franchise specific laws are referred to as non-registration states.

Is North Dakota a Franchise Registration State?

Yes, North Dakota is one of the franchise registration states. This means that franchisors must obtain permission from the North Dakota Securities Department before offering or selling any franchises in the state. This includes an initial registration allowing with annual renewal and amendment requirements. The North Dakota Franchise Investment Law can be found at NDCC Chapter 15-9. We summarize the registration process below.

How do North Dakota Laws Protect Franchisees?

North Dakota law protects entrepreneurs looking to purchase a franchise in several ways. These protections come both from franchise specific laws and business laws that protect workers and businesses generally. There are a few main areas where North Dakota law helps level the playing field for franchisees. Naturally, these laws can create challenges for franchisors which must be taken into account.

Overall, North Dakota is a franchisee friendly state.

Registration and oversight

The first way franchisees are protected is through the registration process. The Securities Department processes and reviews applications, ensuring that addendums are included to educate prospects about certain areas of state law and to supersede or delete certain contract provisions. This process helps ensure North Dakota franchisees make informed decisions.

The Department is also charged with enforcement and has oversight authority. It is unlawful to offer or sell franchises in the state without approval or contrary to an order of the commission. Offering and selling franchises without permission can result in disclosure obligations, stop sell orders, fines, and other penalties. This includes civil and criminal penalty for wrongdoing.

North Dakota laws also provide franchisees with a private cause of action for franchise violations. The federal franchise laws do not provide this enforcement mechanism, leaving many franchisees outside of North Dakota to rely on general tort and contract claims if issues arise.

Private Cause of Action

There are a lot of rules when franchising, but enforcement of the rules can prove challenging to franchisees in most states. The private cause of action established by the North Dakota Franchise Investment Law is extensive in comparison to other states.

NDCC Section 51-19-12. Civil liability. 1. 2. 3. 4. 5.

Any person who violates any provision of this chapter or any rule or order issued by the commissioner thereunder is liable to the franchisee or subfranchisor who may bring an action for damages, for rescission, or for such other relief as the court may deem appropriate.
Every person who directly or indirectly controls a person liable under subsection 1, every partner in a firm so liable, every principal executive officer or director of a corporation so liable, every president or governor of a limited liability company so liable, every person occupying a similar status or performing similar functions, and every employee of a person so liable who materially aids in the act or transaction constituting the violation is also liable jointly and severally with and to the same extent as such person, unless the other person who is so liable had no knowledge of or reasonable grounds to believe in the existence of the facts by reason of which the liability is alleged to exist.
In any action under this section, the franchisee or subfranchisor, if successful, is also entitled to costs and disbursements plus reasonable attorney’s fees.
No franchisee or subfranchisor may file or maintain an action under this section if the person received a written offer before the action was commenced and at a time when the person owned the franchise to refund the consideration paid together with interest at the rate of seven percent per annum from the date of purchase, less the amount of income received on the franchise, conditioned only upon tender by the franchisee or subfranchisor of all items received by the person for the consideration and not sold, and failed to accept the offer within thirty days of its receipt or if the franchisee received the offer before the action was commenced and at a time when the person did not own the franchise, unless the person rejected the offer in writing within thirty days of its receipt; provided, that in either instance the offering documents and rescission prospectus must be submitted to the commissioner for approval at least fifteen days prior to submission to the franchisee or subfranchisor. The rescission offer must recite the provisions of this section. If the franchise involves a substantial building or substantial equipment and a significant period of time has elapsed since the sale of the franchise, the commissioner, in approving a rescission offer, may approve an equitable offer recognizing depreciation, amortization, and other factors which bear upon the value of the franchise being returned to the franchisor.
No action may be brought under this section after five years from the date that the aggrieved party knew or reasonably should have known about the facts that are the Page No. 106. basis for the alleged violation. This subsection does not apply to any action under sections 51-19-09 and 51-19-11.
Except as explicitly provided in this section, no civil liability in favor of any private party may arise against any person by implication from or as a result of the violation of any provision of this chapter or any rule or order issued by the commissioner thereunder. Nothing herein limits any liability which may exist by virtue of any other statute or under common law if this chapter were not in effect.

Financial Assurances

One way franchise examiners can protect prospective franchisees is through fee deferral requirements, escrow of initial funds, or other financial assurances. North Dakota law requires these assurances based on the financial status of the franchisor. This can help franchisees in the case of emerging franchisors.

prohibited unfair or inequitable trade practices

North Dakota has a number of laws designed to protect workers from unfair or inequitable restrictions. These protections may make certain restrictions unenforceable for North Dakota franchisees. One of the most helpful to franchisees and difficult to franchisors is that most post-term non-competes are unenforceable.

NDCC Section 9-08-06. In restraint of business void – Exceptions.

A contract by which anyone is restrained from exercising a lawful profession, trade, or business of any kind is to that extent void, except:

A person that sells the goodwill of a business and the person’s partners, members, or shareholders may agree with the buyer to refrain from carrying on a similar business within a reasonable geographic area and for a reasonable length of time, if the buyer or any person deriving title to the goodwill from the buyer carries on a like business in that area.
Partners, members, or shareholders, upon or in anticipation of a dissolution of a partnership, limited liability company, or corporation; upon or in anticipation of a dissociation of a partner or member; or as part of an agreement addressing the dissociation or sale of a partner, member, or shareholder’s ownership interest, may agree that all or any number of them will not carry on a similar business within a reasonable geographic area where the partnership, limited liability company, or corporation business has been transacted, or within a specified part of the area.

There are a number of other helpful provisions that effect how franchisors resolve disputes and attempt to limit their exposure. For example:

Franchisors cannot force franchisees to arbitrate or litigate disputes at a remote location outside of North Dakota.
Franchisors cannot force franchisees to pay liquidated damages in the event of a termination.
Franchise agreements must be governed by North Dakota law.
Franchisors cannot require franchisees to waive their right to a jury in a franchise agreement.
Franchisors cannot require franchisees to waive exemplary and punitive damage.
The renewal of a franchise agreement cannot be contingent on signing a general release.
Franchisors cannot limit the statute of limitations to bring claims.
North Dakota prohibits one-way attorney fee provisions and provides that the prevailing party be paid attorneys fees and costs.