Business and Regulatory Confusion
In the overregulated and hyperlitigated society in which businesses now exist, businesses of all sizes are now struggling with new statutes and regulations, sometimes hastily written and poorly thought-out, and coming from different legislative bodies. As a result, well-meaning businesspeople cannot always abide by the law--despite their best efforts--because they're no longer sure what the law even is anymore.
In the first instance this week, a client of mine hired me to help him legally set up a franchise he was trying to create. He had a brilliant idea, he had a business plan, and he even had his first interested franchisee. All he needed to know was what laws to follow, for which reason he needed my advice.
Unfortunately for my client, however, the answer was not so simple. Starting at the state level, he learned he was subject to the North Carolina business opportunity laws, made to protect (legislators believe) potential franchisees who need to be protected from themselves. The business opportunity statutes outlined about four pages of information that needed to be contained in a franchise offering circular, which had to be provided to the potential franchise purchaser at least 48 hours prior to the person signing a contract.
The state laws, however, were the easy ones. We then researched the applicable federal rules, promulgated by not legislators but the Federal Trade Commission. Those regulations outlined more than 40 pages of information that needed to be contained in the franchise offering circular, which had to be provided to a potential buyer at least 14 days ahead of time.
Which rules apply? Well, all of them, and my job is to come up with something that assimilates all of the rules together. My client is a professional and a businessman, as are his potential purchasers, and all intelligent enough to make their own business decisions about whether to enter into a franchise agreement. Both our state and federal governments, however, have driven up transaction costs by dozens of pages of requirements for a franchisor before he even enters into a contract. He has to provide, in essence, potential purchasers a background history of himself, his criminal past, his civil litigation past, company financials and even personal bankruptcies. The state, in addition, requires the franchisor to register and, in certain cases, to be bonded.
In a second instance this week, an institutional client needed help in determining what rules needed to be followed in response to new state and federal regulations that had been hastily promulgated to resolve a perceived crisis. Sitting around the table were various board members of this client company, the vice president and president of the company, and the company's compliance officer. The federal regulations contained certain requirements, the state statutes required others. Some at our table argued that the state statutes ruled; some that the federal regulations preempted state law. Finally, after much research and talking to both state and federal regulators, we finally received the satisfactory answer we needed, but not without the employment of numerous man-hours and the stress of all involved who, despite their differing interpretations, were all working their hardest to have their company simply abide by the law.
It's a truism that we, as citizens, are presumed to know the law and that "ignorance of the law" is not a defense to a violation thereof. In this time of heightened government regulation, however, businesses (small ones especially, I fear) run the risk of violating laws because those laws have become so (1) conflicting; (2) multitudinous and (3) poorly written and hard to understand.
What can a business do to keep itself safe in these hyperregulatory times? Here are a few ideas:
1. Stay informed. If your business is part of an industry or trade association, stay abreast of all current developments. Read your industry association periodicals, attend "recent development" seminars sponsored by your industry, and, if necessary, call your industry association's attorney (every association should have one) to be updated on new laws and regulations that may affect your business.
2. If in doubt about the law, take the more conservative interpretation. Many businesses have, in the past, ventured into gray areas of law, especially when dealing with taxation issues. In the present environment, however, with a federal government full of anti-capitalist goons who are already suspicious of business, you have to be on the defensive. If you're not sure about the interpretation of a law, take the more conservative interpretation. At their worst, politicians are looking for scapegoats to punish, and "corporate America" is a current target. At their more innocent, politicians are looking for more sources of revenue. When it comes to taxes, you'd better believe they're going to take the more government-friendly interpretation of rules. When looking at violations, expect the government to be less friendly and to assault alleged violators with heavier fines, penalties and punishments--regardless of whether the violators even knew they were violating a law.
3. Have your attorneys more closely involved with regulatory review. It sounds self serving, but believe it or not, it gives me no pleasure to say that. I hate the idea that small businesses should keep a lawyer on retainer simply as part of their daily business in order to weave through an increasingly complicated morass of regulation. But in the current climate, stakes are too high not to understand laws affecting your industry. Have an attorney readily at hand who understands your business, one whom you can call if you have any questions. It's not cheap, but it's less expensive than hiring a lawyer to defend you when the government comes after your business for violating its laws.
Times are not easy. The economy is still struggling, and legislators are doing their misguided best to regulate the economy into health. In these times, businesses need to be at their most vigilant in following and understanding laws that affect them.
In the first instance this week, a client of mine hired me to help him legally set up a franchise he was trying to create. He had a brilliant idea, he had a business plan, and he even had his first interested franchisee. All he needed to know was what laws to follow, for which reason he needed my advice.
Unfortunately for my client, however, the answer was not so simple. Starting at the state level, he learned he was subject to the North Carolina business opportunity laws, made to protect (legislators believe) potential franchisees who need to be protected from themselves. The business opportunity statutes outlined about four pages of information that needed to be contained in a franchise offering circular, which had to be provided to the potential franchise purchaser at least 48 hours prior to the person signing a contract.
The state laws, however, were the easy ones. We then researched the applicable federal rules, promulgated by not legislators but the Federal Trade Commission. Those regulations outlined more than 40 pages of information that needed to be contained in the franchise offering circular, which had to be provided to a potential buyer at least 14 days ahead of time.
Which rules apply? Well, all of them, and my job is to come up with something that assimilates all of the rules together. My client is a professional and a businessman, as are his potential purchasers, and all intelligent enough to make their own business decisions about whether to enter into a franchise agreement. Both our state and federal governments, however, have driven up transaction costs by dozens of pages of requirements for a franchisor before he even enters into a contract. He has to provide, in essence, potential purchasers a background history of himself, his criminal past, his civil litigation past, company financials and even personal bankruptcies. The state, in addition, requires the franchisor to register and, in certain cases, to be bonded.
In a second instance this week, an institutional client needed help in determining what rules needed to be followed in response to new state and federal regulations that had been hastily promulgated to resolve a perceived crisis. Sitting around the table were various board members of this client company, the vice president and president of the company, and the company's compliance officer. The federal regulations contained certain requirements, the state statutes required others. Some at our table argued that the state statutes ruled; some that the federal regulations preempted state law. Finally, after much research and talking to both state and federal regulators, we finally received the satisfactory answer we needed, but not without the employment of numerous man-hours and the stress of all involved who, despite their differing interpretations, were all working their hardest to have their company simply abide by the law.
It's a truism that we, as citizens, are presumed to know the law and that "ignorance of the law" is not a defense to a violation thereof. In this time of heightened government regulation, however, businesses (small ones especially, I fear) run the risk of violating laws because those laws have become so (1) conflicting; (2) multitudinous and (3) poorly written and hard to understand.
What can a business do to keep itself safe in these hyperregulatory times? Here are a few ideas:
1. Stay informed. If your business is part of an industry or trade association, stay abreast of all current developments. Read your industry association periodicals, attend "recent development" seminars sponsored by your industry, and, if necessary, call your industry association's attorney (every association should have one) to be updated on new laws and regulations that may affect your business.
2. If in doubt about the law, take the more conservative interpretation. Many businesses have, in the past, ventured into gray areas of law, especially when dealing with taxation issues. In the present environment, however, with a federal government full of anti-capitalist goons who are already suspicious of business, you have to be on the defensive. If you're not sure about the interpretation of a law, take the more conservative interpretation. At their worst, politicians are looking for scapegoats to punish, and "corporate America" is a current target. At their more innocent, politicians are looking for more sources of revenue. When it comes to taxes, you'd better believe they're going to take the more government-friendly interpretation of rules. When looking at violations, expect the government to be less friendly and to assault alleged violators with heavier fines, penalties and punishments--regardless of whether the violators even knew they were violating a law.
3. Have your attorneys more closely involved with regulatory review. It sounds self serving, but believe it or not, it gives me no pleasure to say that. I hate the idea that small businesses should keep a lawyer on retainer simply as part of their daily business in order to weave through an increasingly complicated morass of regulation. But in the current climate, stakes are too high not to understand laws affecting your industry. Have an attorney readily at hand who understands your business, one whom you can call if you have any questions. It's not cheap, but it's less expensive than hiring a lawyer to defend you when the government comes after your business for violating its laws.
Times are not easy. The economy is still struggling, and legislators are doing their misguided best to regulate the economy into health. In these times, businesses need to be at their most vigilant in following and understanding laws that affect them.
Labels: franchisees, franchises, franchisors, regulation, statutes
posted by Wesley Deaton at 6:10 PM
7 Comments:
I just finished my first year of lawschool and in my research and writing class we went over the CFR and state regulatory rules. I was shocked at how massive it was as a body of law. And what is even more shocking to me is that on the state level (in KS) the legislature can't even review what the regulators pass because it violates bicameralism and presentment. Do you have any structural solutions to suggest? Obviously we can't undo the regulatory system but just being able to hold them a little more accountable could be helpfull. Thoughts?
-Mike
TOPEKA KANSAS LAWYER
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Mike:
Take Administrative Law your second or third year, and it'll help you get a good grip on (Federal) regulatory structure. As dry as it sounds, I actually enjoyed the class. As for a structural solution, I don't have one to suggest. The bigger problem in my mind is the creation of agencies with quasi-legislative power. These agencies' sole reason for being is to control and regulate. To justify their existence, they continue to regulate more and more. The regulations are rarely deleted or reduced, just added to. Also, these regulations have the power of law, and can't be overturned unless they either violate the (applicable) constitution, or are found to be outside the administrative agency's statutory authority.
A system is created that creates administrative bodies that are layers removed from the democratic process, filled not with politically answerable individuals, but instead regulators whose power comes from regulating more, and there is the potential for (and are examples of) abusive power.
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