Statutes > Illinois Statutes > CHAPTER 815 BUSINESS TRANSACTIONS > 815 ILCS 705/ Franchise Disclosure Act of 1987.

815 ILCS 705/ Franchise Disclosure Act of 1987.

    (815 ILCS 705/1) (from Ch. 121 1/2, par. 1701)
    Sec. 1. Short title. This Act may be cited as the Franchise Disclosure Act of 1987.
(Source: P.A. 85‑551; 86‑1475.)

    (815 ILCS 705/2) (from Ch. 121 1/2, par. 1702)
    Sec. 2. Findings and purpose. (1) The General Assembly finds and declares that the sale of franchises is a widespread business activity. Illinois residents have suffered substantial losses where franchisors or their representatives have not provided full and complete information regarding the franchisor‑franchisee relationship, the details of the contract between the franchisor and franchisee, the prior business experience of the franchisor and other factors relevant to the franchise offered for sale.
    (2) It is the intent of this Act: (a) to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered for sale; and (b) to protect the franchisee and the franchisor by providing a better understanding of the business and the legal relationship between the franchisee and the franchisor.
(Source: P.A. 85‑551.)

    (815 ILCS 705/3)(from Ch. 121 1/2, par. 1703)
    Sec. 3. Definitions. As used in this Act:
    (1) "Franchise" means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:
        (a) a franchisee is granted the right to engage in
     the business of offering, selling, or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and
        (b) the operation of the franchisee's business
     pursuant to such plan or system is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and
        (c) the person granted the right to engage in such
     business is required to pay to the franchisor or an affiliate of the franchisor, directly or indirectly, a franchise fee of $500 or more;
    Provided that this Act shall not apply to any of the following persons, entities or relationships which may involve or acquire a franchise or any interest in a franchise:
        (i) any franchised business which is operated by the
     franchisee on the premises of the franchisor or subfranchisor as long as such franchised business is incidental to the business conducted by the franchisor or subfranchisor at such premises, including, without limitation, leased departments and concessions; or
        (ii) a fractional franchise. A "fractional
     franchise" means any relationship in which the person described therein as a franchisee, or any of the current directors or executive officers thereof, has been in the type of business represented by the franchise relationship for more than 2 years and the parties anticipated, or should have anticipated, at the time the agreement establishing the franchise relationship was reached, that the sales arising from the relationship would represent no more than 20% of the sales in dollar volume of the franchisee for a period of at least one year after the franchisee begins selling the goods or services involved in the franchise; or
        (iii) a franchise agreement for the use of a
     trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating a person who offers on a general basis, for a fee or otherwise, a bona fide service for the evaluation, testing, or certification of goods, commodities, or services; or
        (iv) a franchise relationship covered by the
     Petroleum Marketing Practices Act, 15 U.S.C. 2801.
    (2) "Franchisee" means a person to whom a franchise is granted and includes, unless stated otherwise in this Act: (a) a subfranchisor with regard to its relationship with a franchisor and (b) a subfranchisee with regard to its relationship with a subfranchisor.
    (3) "Franchisor" means a person who grants a franchise and includes a subfranchisor with regard to its relationship with a franchisee, unless stated otherwise in this Act.
    (4) "Subfranchise" means any contract or agreement between a franchisor and a subfranchisor whereby the subfranchisor is granted the right, in consideration of the payment of a franchise fee in whole or in part for such right, to sell or negotiate the sale of franchises. Where used in this Act, unless specifically stated otherwise, "franchise" includes "subfranchise."
    (5) "Subfranchisor" means a person to whom the right to sell or negotiate the sale of subfranchises is granted.
    (6) "Order" means a consent, authorization, approval, prohibition, or requirement applicable to a specific case issued by the Attorney General Administrator.
    (7) "Person" means an individual, a corporation, a partnership, a joint venture, an association, a joint stock company, a trust, or an unincorporated organization.
    (8) "Rule" means any published regulation or standard of general application issued by the Administrator.
    (9) "Sale" or "sell" includes every contract or agreement of sale of, contract to sell, or disposition of, a franchise or interest in a franchise for value.
    (10) "State" means the State of Illinois.
    (11) "Fraud" and "deceit" are not limited to common law fraud or deceit.
    (12) "Offer" or "offer to sell" includes every attempt to offer to dispose of, or solicitation of an offer to buy, a franchise, any interest in a franchise or an option to acquire a franchise for value.
    (13) "Publish" means publicly to issue or circulate by newspaper, mail, radio, or television, or otherwise to disseminate to the public.
    (14) "Franchise fee" means any fee or charge that a franchisee is required to pay directly or indirectly for the right to enter into a business or sell, resell, or distribute goods, services or franchises under an agreement, including, but not limited to, any such payment for goods or services, provided that the Administrator may by rule define what constitutes an indirect franchise fee, and provided further that the following shall not be considered the payment of a franchise fee: (a) the payment of a reasonable service charge to the issuer of a credit card by an establishment accepting or honoring such credit card; (b) amounts paid to a trading stamp company by a person issuing trading stamps in connection with the retail sale of merchandise or services; (c) the purchase or agreement to purchase goods for which there is an established market at a bona fide wholesale price; (d) the payment for fixtures necessary to operate the business; (e) the payment of rent which reflects payment for the economic value of the property; or (f) the purchase or agreement to purchase goods for which there is an established market at a bona fide retail price subject to a bona fide commission or compensation plan. The Administrator may by rule define what shall constitute an established market.
    (15) "Disclosure statement" means the document provided for in Section 16 of this Act and all amendments to such document.
    (16) "Write" or "written" shall include printed, lithographed or any other means of graphic communication.
    (17) (Blank).
    (18) "Marketing plan or system" means a plan or system relating to some aspect of the conduct of a party to a contract in conducting business, including but not limited to (a) specification of price, or special pricing systems or discount plans, (b) use of particular sales or display equipment or merchandising devices, (c) use of specific sales techniques, (d) use of advertising or promotional materials or cooperation in advertising efforts; provided that an agreement is not a marketing plan or system solely because a manufacturer or distributor of goods reserves the right to occasionally require sale at a special reduced price which is advertised on the container or packaging material in which the product is regularly sold, if the reduced price is absorbed by the manufacturer or distributor.
    (19) "Administrator" means the Illinois Attorney General.
    (20) (a) An offer to sell a franchise is made in this
     State when the offer either originates from this State or is directed by the offeror to this State and received at the place to which it is directed. An offer to sell is accepted in this State when acceptance is communicated to the offeror in this State; and acceptance is communicated to the offeror in this State when the offeree directs it to the offeror in this State reasonably believing the offeror to be in this State and it is received at the place to which it is directed.
        (b) An offer to sell a franchise is not made in this
     State merely because the franchisor circulates or there is circulated in this State an advertisement in (i) a bona fide newspaper or other publication of general, regular and paid circulation which has had more than 2/3 of its circulation outside this State during the past 12 months, or (ii) a radio or television program originating outside this State which is received in this State.
    (21) "Franchise broker" means any person engaged in the business of representing a franchisor in offering for sale or selling a franchise and is not a franchisor, an affiliate of a franchisor or an officer, director or employee of a franchisor or an affiliate of a franchisor with respect to such franchise. A franchisee shall not be a franchise broker merely because it receives a payment from the franchisor in consideration of the referral of a prospective franchisee to the franchisor, if the franchisee does not otherwise participate in the sale of a franchise to the prospective franchisee. A franchisee shall not be deemed to participate in a sale merely because he responds to an inquiry from a prospective franchisee.
    (22) "Salesperson" means any person employed by or representing a franchise broker, a franchisor or an affiliate of the franchisor in effecting or attempting to effect the offer or sale of a franchise.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/4) (from Ch. 121 1/2, par. 1704)
    Sec. 4. Jurisdiction and venue. Any provision in a franchise agreement that designates jurisdiction or venue in a forum outside of this State is void, provided that a franchise agreement may provide for arbitration in a forum outside of this State.
(Source: P.A. 88‑256.)

    (815 ILCS 705/5) (from Ch. 121 1/2, par. 1705)
    Sec. 5. Prohibited practices.
    (1) Sale of unregistered franchise unlawful. It is unlawful for any person to offer or sell any franchise required to be registered under this Act unless the franchise has been registered under this Act or is exempt under this Act.
    (2) Failure to deliver a disclosure statement unlawful. It is unlawful for any person to offer or sell any franchise which is required to be registered under this Act without first providing to the prospective franchisee at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt by such person of any consideration, whichever occurs first, a copy of a disclosure statement meeting the requirements of this Act and registered by the Administrator, together with a copy of all proposed agreements relating to the sale of the franchise. For the purposes of this Act, delivery of a disclosure statement to a general partner of a partnership shall constitute delivery to the partnership and its partners and delivery of a disclosure statement to a principal officer of a corporation shall constitute delivery to the corporation and its shareholders.
    (3) Sale of franchise by unregistered franchise broker unlawful. It is unlawful for any franchise required to be registered under this Act to be offered for sale or sold in this State by a franchise broker subject to this Act who is not first registered under this Act unless exempt from registration.
    (4) Filing of untrue report unlawful. It is unlawful for any person to make or cause to be made any untrue statement of a material fact in any application, notice, or report filed with the Administrator, or to omit to state in any application, notice, or report any material fact, or to fail to notify the Administrator of any material change in such application, notice, or report, as required by this Act.
(Source: P.A. 90‑642, eff. 7‑24‑98; 91‑916, eff. 7‑7‑00.)

    (815 ILCS 705/6) (from Ch. 121 1/2, par. 1706)
    Sec. 6. Fraudulent practices. In connection with the offer or sale of any franchise made in this State, it is unlawful for any person, directly or indirectly, to:
    (a) employ any device, scheme, or artifice to defraud;
    (b) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading; or
    (c) engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person.
    For the purposes of this Section 6, a sale of a franchise is made in this State when: (i) an offer to sell or buy a franchise is made in this State and accepted within or outside of this State, or (ii) an offer to sell or buy a franchise is made outside of this State and accepted in this State, or (iii) the offeree is domiciled in this State, or (iv) the franchised business is or will be located in this State.
(Source: P.A. 85‑551.)

    (815 ILCS 705/7)(from Ch. 121 1/2, par. 1707)
    Sec. 7. Sale by franchisee and extension or renewal of existing franchise. There shall be exempted from the provisions of Sections 5, 10, 11, 13 and 15 of this Act the offer or sale of a franchise by a franchisee for its own account if the sale is not effected by or through a franchisor. A sale is not effected by or through a franchisor merely because a franchisor has a right to approve or disapprove a different franchisee or requires payment of a reasonable transfer fee or requires the new franchisee to execute a franchise agreement on terms not materially different from the existing franchise agreement.
    There shall be exempted from the provisions of Sections 5, 10, 11, 13 and 15 of this Act the extension or renewal of an existing franchise or the exchange or substitution of a modified or amended franchise agreement where there is no interruption in the operation of the franchise business by the franchisee.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/8)(from Ch. 121 1/2, par. 1708)
    Sec. 8. Exemptions.
    (a) There shall be exempted, from the registration requirements of Section 10 of this Act, the offer and sale of a franchise if:
        (1) the franchisor has a net worth on a consolidated
     basis, according to its most recent audited financial statement, of not less than $15,000,000; or the franchisor has a net worth, according to its most recent unaudited financial statement, of not less than $1,000,000 and is at least 80% owned by a corporation which has a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than $15,000,000;
        (2) the franchisee (or its parent or any affiliates)
     is an entity that has been in business for at least 5 years and has a net worth of at least $5,000,000; or
        (3) one or more purchasers of at least 50% ownership
     interest in the franchise within 60 days of the sale, has been, for at least 2 years, an officer, director, general partner, individual with management responsibility for the offer and sale of the franchisor's franchises or the administrator of the franchised network; or within 60 days of the sale, has been, for at least 2 years, an owner of at least a 25% interest in the franchisor.
    Provided, unless exempted by order or rule of the Administrator, the franchisor shall deliver to the prospective franchisee a disclosure statement in accordance with the requirements of Section 5(2) of this Act in connection with any transaction exempted under this Section 8(a).
    (b) There shall be exempted from the provisions of Sections 5, 10, 11, and 15 of this Act the offer and sale of a franchise if the prospective franchisee qualifies as one of the following:
    any bank as defined in Section 3(a)(2) of the Securities Act of 1933 whether acting in its individual or fiduciary capacity or as an insurance company as defined in Section 2(13) of that Act.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/9) (from Ch. 121 1/2, par. 1709)
    Sec. 9. Exemptions from disclosure statement and registration requirements granted by Administrator. The Administrator may by rule or order provide that any information required by Section 16 of this Act to be included in the disclosure statement need not be included in respect of any class of franchises if he finds that the requirement of such information is inapplicable to such class and that disclosure fully adequate for the protection of prospective franchisees is otherwise required to be included within the disclosure statement. The Administrator may by rule or order, and subject to such terms and conditions as he may prescribe, exempt any franchise, franchisor, subfranchisor, or franchise broker from Sections 5, 10, 11 and 13 of this Act if he finds that the enforcement of this Act is not necessary (1) in the public interest, or (2) for the protection of any class of prospective franchisees, or (3) by reason of the investment involved, or (4) because of the limited character of the offering. The disclosure statement required by Section 16 need not be furnished to a franchisee who has already been furnished with a copy of such disclosure statement in connection with a prior purchase of a franchise by such franchisee, provided that no material amendments have been made to such disclosure statement since it was furnished to such franchisee.
(Source: P.A. 85‑551.)

    (815 ILCS 705/10)(from Ch. 121 1/2, par. 1710)
    Sec. 10. Registration and Annual Report. No franchisor may sell or offer to sell a franchise in this State if (1) the franchisee is domiciled in this State or (2) the offer of the franchise is made or accepted in this State and the franchise business is or will be located in this State, unless the franchisor has registered the franchise with the Administrator by filing such form of notification and disclosure statement as required under Section 16.
    The registration of a franchise shall become effective on the 21st day after the date of the filing of the required materials, unless the Administrator has denied registration under subdivision (a)(3) of Section 22.
    The registration of a franchise shall expire 120 days after the franchisor's fiscal year end. Annually, but not later than one business day before the registration expires, the franchisor shall file the disclosure statement updated as of the date of the franchisor's prior fiscal year end.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/11)(from Ch. 121 1/2, par. 1711)
    Sec. 11. Amendments. Within 30 days after the close of each quarter of its fiscal year, the franchisor shall prepare revisions to its disclosure statement to reflect any material changes to disclosures included, or required to be included, in the disclosure statement. The franchisor shall deliver the amended disclosure statement in accordance with the requirements of subsection (2) of Section 5 and Section 16 of this Act to any prospective franchisee, including prospective franchisees to whom a disclosure statement was previously delivered if the material change relates to or affects the franchise offered to such prospective franchisees. The amended disclosure statement shall be filed with the Administrator. An amendment shall not be required if the terms of the franchise agreement merely reflect changes from the franchisor's registered franchise made pursuant to negotiations between the franchisee and the franchisor.
    The fact that the franchise is considered to be registered is not a finding that the amended disclosure statement complies with the standard of disclosure required by this Act.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/12) (from Ch. 121 1/2, par. 1712)
    Sec. 12. Period of effectiveness. The registration of a franchise and the disclosure statement used in connection therewith shall continue to be effective unless the Administrator issues an order suspending, terminating, prohibiting or denying the sale or registration of the franchise under this Act.
(Source: P.A. 85‑551.)

    (815 ILCS 705/13)
    Sec. 13. (Repealed).
(Source: P.A. 85‑551. Repealed by P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/14) (from Ch. 121 1/2, par. 1714)
    Sec. 14. Effect of registration. The fact that a franchise has been registered by the Administrator is not a finding by the Administrator that the disclosure statement filed with the Administrator in connection with that registration is in any way true, accurate or complete in substance or on its face, or to be held to mean that the Administrator has in any way passed upon the merits or given approval to such franchise. It is unlawful to make, or cause to be made, to any prospective franchisee any express or implied representation contrary to the foregoing or to advertise or represent that the Administrator approves of or recommends any franchise.
(Source: P.A. 85‑551.)

    (815 ILCS 705/15)(from Ch. 121 1/2, par. 1715)
    Sec. 15. Escrow of franchise fees; surety bonds; franchise fee deferrals. If the Administrator finds that a franchisor has failed to demonstrate that adequate financial arrangements have been made to fulfill obligations to provide real estate, improvements, equipment, inventory, training, or other items to be included in the establishment and opening of the franchise business being offered, the Administrator may by rule or order require the escrow or impoundment of franchise fees and other funds paid by the franchisee until such obligations have been fulfilled, or, at the option of the franchisor, the furnishing of a surety bond as provided by rule of the Administrator, if he finds that such requirement is necessary and appropriate to protect prospective franchisees, or, at the option of the franchisor, the deferral of payment of the initial fee until the opening of the franchise business.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/16)(from Ch. 121 1/2, par. 1716)
    Sec. 16. Form and contents of disclosure statements. The disclosure statement required under this Act shall be prepared in accordance with the Federal Trade Commission rule entitled Disclosure Requirements and Prohibitions Concerning Franchising, 16 C.F.R. Part 436, as it may be amended, the Guidelines promulgated by the North American Securities Administrators Association, Inc., as they may be amended, and the rules adopted by the Administrator pursuant to Section 32 of this Act.
    All statements in the disclosure statement shall be free from any false or misleading statement of a material fact, shall not omit to state any material fact required to be stated or necessary to make the statements not misleading, and shall be accurate and complete as of the effective date thereof.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/17) (from Ch. 121 1/2, par. 1717)
    Sec. 17. Participation in trade associations. It shall be an unfair franchise practice and a violation of this Act for a franchisor to in any way restrict any franchisee from joining or participating in any trade association.
(Source: P.A. 85‑551.)

    (815 ILCS 705/18) (from Ch. 121 1/2, par. 1718)
    Sec. 18. Discrimination. It shall be an unfair franchise practice and a violation of this Act for any franchisor to unreasonably and materially discriminate between franchisees operating a franchised business located in this State in the charges offered or made for franchise fees, royalties, goods, services, equipment, rentals or advertising services, if such discrimination will cause competitive harm to a franchisee who competes with a franchisee that received the benefit of the discrimination, unless and to the extent that any classification of or discrimination between franchisees is:
    (a) based on franchises granted at different times, and such discrimination is reasonably related to such differences in time;
    (b) related to one or more programs for making franchises available to persons with insufficient capital, training, business experience or education, or lacking other qualifications;
    (c) related to local or regional experimentation with or variations in product or service lines or business formats or designs;
    (d) related to efforts by one or more franchisees to cure deficiencies in the operation of franchise businesses or defaults in franchise agreements; or
    (e) based on other reasonable distinctions considering the purposes of this Act and is not arbitrary.
(Source: P.A. 85‑551.)

    (815 ILCS 705/19) (from Ch. 121 1/2, par. 1719)
    Sec. 19. Termination of a Franchise. (a) It shall be a violation of this Act for a franchisor to terminate a franchise of a franchised business located in this State prior to the expiration of its term except for "good cause" as provided in subsection (b) or (c) of this Section.
    (b) "Good cause" shall include, but not be limited to, the failure of the franchisee to comply with any lawful provisions of the franchise or other agreement and to cure such default after being given notice thereof and a reasonable opportunity to cure such default, which in no event need be more than 30 days.
    (c) "Good cause" shall include, but without the requirement of notice and an opportunity to cure, situations in which the franchisee:
    (1) makes an assignment for the benefit of creditors or a similar disposition of the assets of the franchise business;
    (2) voluntarily abandons the franchise business;
    (3) is convicted of a felony or other crime which substantially impairs the good will associated with the franchisor's trademark, service mark, trade name or commercial symbol; or
    (4) repeatedly fails to comply with the lawful provisions of the franchise or other agreement.
(Source: P.A. 85‑551.)

    (815 ILCS 705/20) (from Ch. 121 1/2, par. 1720)
    Sec. 20. Nonrenewal of a franchise. It shall be a violation of this Act for a franchisor to refuse to renew a franchise of a franchised business located in this State without compensating the franchisee either by repurchase or by other means for the diminution in the value of the franchised business caused by the expiration of the franchise where:
    (a) the franchisee is barred by the franchise agreement (or by the refusal of the franchisor at least 6 months prior to the expiration date of the franchise to waive any portion of the franchise agreement which prohibits the franchisee) from continuing to conduct substantially the same business under another trademark, service mark, trade name or commercial symbol in the same area subsequent to the expiration of the franchise; or
    (b) the franchisee has not been sent notice of the franchisor's intent not to renew the franchise at least 6 months prior to the expiration date or any extension thereof of the franchise.
(Source: P.A. 85‑551.)

    (815 ILCS 705/21)(from Ch. 121 1/2, par. 1721)
    Sec. 21. Franchise Advisory Board. There is created in the Office of the Administrator a Franchise Advisory Board. The Franchise Advisory Board shall consist of such members as the Administrator deems appropriate to advise him on franchising and franchise related matters. The members shall be persons who have knowledge and experience in franchising. The members of the Franchise Advisory Board shall serve at the pleasure of the Administrator. The Franchise Advisory Board from time to time shall make recommendations concerning the administration and enforcement of this Act. Members of the Franchise Advisory Board shall serve without compensation. The Board shall select its own chairman, establish rules and procedures, and keep a record of matters transpiring at all meetings.
(Source: P.A. 96‑648, eff. 10‑1‑09.)

    (815 ILCS 705/22)(from Ch. 121 1/2, par. 1722)
    Sec. 22. Enforcement.
    (a) The Administrator may suspend, terminate, prohibit or deny the sale of any franchise or registration of any franchise or salesperson if it appears to him that: (1) there has been a failure to comply w