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Seller and Reseller Laws

Seller Reseller Laws

Seller and Reseller laws are complex and involves both federal and state laws.

Laws are not uniform and vary from state to state and from country to country. To further complicate matters, there are state and federal laws that govern "business opportunities" and "seller-assisted marketing plans" which can also apply to reselling. The following overview explains only the basics.

For a detailed understanding, an interested seller should always consult with an experienced seller lawyer.

The FTC seller Rule

The U.S. Federal Trade Commission (FTC) and various state agencies regulate reselling. The FTC seller Rule applies everywhere in the United States. A state's seller law usually applies only if the offer or sale of a seller is made in the state, if the sellerd business will be located in the state, or if the Reseller is a resident of the state.

Under federal law, the FTC seller Rule states that there are three elements of a seller:

1. Trademark. The Reseller is given the right to distribute goods and services that bear the seller's trademark, service mark, trade name, logo, or other commercial symbol.

2. Significant Control or Assistance. The seller has significant control of, or provides significant assistance to, the Reseller’s method of operation. Examples of significant control or assistance include:

  • approval of the site.
  • requirements for site design or appearance.
  • designated hours of operation.
  • specified production techniques.
  • required accounting practices.
  • required participation in promotional campaigns.
  • training programs.
  • providing an operations manual.

3. Required Payment. The Reseller is required to pay the seller (or an affiliate of the seller) at least $500 either before or within six months after opening for business. Required payments include any payments the Reseller makes to the seller for the right to be a Reseller. These include seller fees, royalties, training fees, payments for services, and payments from the sale of products unless reasonable amounts are sold at bona fide wholesale prices. If all three elements are present, then the relationship will be a "seller" for purposes of the FTC seller Rule.

State Law

State law definitions of sellers vary, but there are several common themes. In twelve states, the three elements of the legal definition of a "seller" are:

  • Marketing Plan. The Reseller is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system substantially prescribed by the seller.
  • Association with Trademark. The operation of the Reseller’s business is substantially associated with the seller’s trademark, trade name, service mark, etc.
  • Required Fee. The Reseller is required to pay a fee, directly or indirectly.

In five other states, the three elements of the legal definition of a seller are:

  • Trademark License. The Reseller is granted the right to engage in the business of offering, selling or distributing goods or services using the seller’s trademark, trade name, service mark, etc.
  • Community of Interest. The seller and Reseller have a community of interest in the marketing of goods or services.
  • Required Fee. The Reseller is required to pay a fee, directly or indirectly.

These requirements are unique to the states which have passed them, and not to others. You should always do research on the laws governing seller relationships in your jurisdiction before beginning a seller project.

Categories of seller Law

There are three general categories of laws regulating sellers: disclosure laws, registration laws and relationship laws. Disclosure laws regulate things like required pre-sale disclosures, prohibited seller sales practices, and a mandatory cooling-off period before seller sales. Registration laws require things like registration of the seller, seller salespersons and seller advertising. Relationship laws govern certain aspects of the relationship between seller and Reseller, such as grounds for terminating a seller, notice and cure periods before termination, grounds for not renewing a seller, and equal treatment of Resellers.

Disclosure Laws

The FTC seller Rule requires that Sellers provide each prospective Reseller with a disclosure document, which is sometimes called an offering circular, at a certain point early in the process of offering and selling a seller.

Laws in more than a dozen states also require Sellers to provide a similar disclosure document. Because the FTC format for disclosure does not satisfy the law requirements in these states, most Sellers choose to use the UFOC (Uniform seller Offering Circular) format which is acceptable in all of the registration states. The UFOC Guidelines are lengthy and there are detailed requirements for the preparation of a UFOC. See UFOC Outline for a discussion of these requirements.

The seller must give the UFOC to the prospect:

  • during the first face-to-face meeting with the prospect involving a discussion about the sale of a seller
  • at least ten business days before the prospect signs any agreement with the seller
  • at least ten business days before the prospect pays any money to the seller

The seller also must provide the prospect with a complete version of the seller agreement (with all blanks filled in) at least five business days before the prospect signs any agreement or pays any money.

State Registration Laws

-seller Registration

The FTC seller Rule does not provide for any registration of a seller with the Federal Trade Commission, so there is no federal registration of sellers. However, various states require that sellers, business opportunities and seller-assisted marketing plans must be registered with the state and filing fees provided before they can be sold in the state.

In most of these states, registration involves a review of the UFOC by a seller regulator who checks to make sure the UFOC meets the state requirements. But in a few states, the UFOC is simply filed.

State registrations are generally valid for one year. In some states, the effective period of registration is a full calendar year from the first registration date, but in other states the registration expires a certain number of days (typically 90 to 120 days) after the end of the seller’s fiscal year. To renew registration, a seller must file a renewal application or annual report each year, which includes certain forms, an updated UFOC, and a filing fee. Maryland also requires Sellers to file quarterly reports.

The UFOC also needs to be updated every time there is a change to any of the material information regarding the seller or the seller opportunity. "Material information" means information that a potential Reseller could consider important in making a decision whether to invest in a seller. If there are any of these changes, then the seller must update its UFOC and file an amendment in the relevant registration states.

-Business Opportunity Registration or Exemption

A number of states require registration of business opportunities and seller-assisted market plans. The statutory definitions of these types of business relationships are often broad enough to include sellers, but most of these states provide some type of exemption for sellers that comply with the FTC seller Rule. The exemption is automatic in some states. Others require a one-time or an annual filing. The seller exemption in some states is available only for Sellers that have obtained registration of the trademarks or service marks involved in the seller. Sellers that do not have these mark registrations will need to register their seller under the business opportunity laws if they will offer sellers in these states.

-Advertising Filing

Some states require that all advertising for the sale of sellers must be filed with the state before they are published. These states also generally have laws that restrict what Sellers can say in advertisements. These restrictions usually prohibit characterizing the seller as a safe investment, or implying that state registration of the seller means that the state has approved of the seller. A few other states have similar content restrictions but do not require the ads to be filed.

-Salesperson Registration

Most of the seller registration states require the seller to file certain information about each person who will sell sellers in the state. This information includes the salesperson’s home address and phone number, business addresses and phone number, social security number, date of birth, employment history, and information about certain civil and criminal proceedings involving the person. If the salesperson is not an employee of the seller, some states require that additional detailed information be filed.

State Relationship Laws

There is no federal law governing seller relationships, despite many attempts by Congress. There are nineteen states that regulate some aspect of the seller relationship.

-Restrictions on Termination

In some states, it is illegal for a seller to terminate a seller agreement without good cause. "Good cause" usually includes things like:

  • the Reseller becomes insolvent or bankrupt
  • the Reseller voluntarily abandons its operations
  • the Reseller is convicted of a crime relating to the seller operations
  • the Reseller fails to substantially comply with its material obligations under the seller agreement

These laws typically require the seller to give the Reseller written notice of the proposed termination a certain number of days before the termination. This advance notice period ranges from 30 to 120 days. These laws also usually provide the Reseller with an opportunity to cure the default, although there are often exceptions for defaults that cannot be cured such as voluntary abandonment, bankruptcy, and criminal conviction.

-Non-Renewal Restrictions

State laws do not require seller agreements to include a provision for renewal of the seller after the end of the initial term. But if a seller agreement does have a renewal provision, then the seller relationship laws in twelve states restrict the seller's ability to not renew the seller.

Most of these states treat non-renewal just like termination. This means that a seller must renew the seller unless there is good cause not to, and the Reseller has been given the required advance written notice and opportunity to cure.

The relevant laws in several states require the seller to give the Reseller advance written notice of non-renewal (typically at least six months), and they impose certain restrictions or requirements on the seller in some circumstances, such as repurchase of the Reseller's assets or waiver of any non-competition restrictions.

-Repurchase Obligations

In ten states, the seller must repurchase some or all of the Reseller's furnishings, equipment, inventory, supplies and other assets following the end of the seller relationship. Most of these states allow the seller to offset any money the Reseller owes to the seller. In Arkansas and California, the repurchase obligation is only imposed in certain situation where the termination or non-renewal by the seller violates state law. In Connecticut, the law requires the seller to repurchase certain Reseller’s assets following any termination of the seller. In Hawaii and Washington, the repurchase obligation applies to terminations and non-renewals. The repurchase requirement is more limited in other states.

-Transfer Restrictions

In ten states, it is illegal for a seller to refuse to allow a transfer of the seller without good cause. Many of these states permit a seller to have a right of first refusal to purchase the seller prior to a transfer. The California and Indiana statutes limit the circumstances in which transfer must be allowed. In California, the spouse, heirs and estate of a deceased Reseller/dealer can operate the business if they qualify, or they can transfer the business to a qualified third party. Indiana simply grants the spouse, heirs and estate of a deceased Reseller/dealer the right to operate the business for a reasonable period of time.

-Other Restrictions

There are various other restrictions or requirements imposed on seller relationships by state law. Some of these include:

  • Encroachment. The seller’s ability to open a new unit in the vicinity of a seller’s existing unit is regulated in some states.
  • Free Association. It is illegal for a seller to prohibit free association among Resellers or to prohibit them from participating in a trade association in some states.
  • Good Faith/Reasonableness. A seller must deal with its Resellers in a commercially reasonable manner and/or in good faith in some states.
  • Management. It is illegal for a seller to require or prohibit any change in the management of the Reseller without good cause in some states.
  • Marketing Fees. It is illegal to collect marketing fees from Resellers and not spend them on marketing in Arkansas.
  • Non-Compete Agreements. The scope of a Reseller’s non-competition agreement is limited in Indiana and Louisiana.
  • Non-Discrimination. It illegal for a seller to discriminate among similarly situated Resellers in some states..
  • Non-Waiver. A Reseller’s waiver of any of the protections provided to it under state law is illegal or unenforceable in every state.
  • Required Purchases. There are limits on a seller’s ability to require Resellers to purchase supplies, inventory, goods and services from the seller or designated sources in some states.

-Common Violations

The most common types of seller law violations are:

  • Offering or selling an unregistered seller.
  • Failing to provide a UFOC on time.
  • Failing to provide all required disclosures in the UFOC.
  • Making misrepresentations to Reseller prospects.
  • Improperly terminating or not renewing a seller.

Governmental penalties for violating seller laws can include fines, permanent bans on engaging in reselling, freezing of assets, money damages for victims, and even jail sentences. These penalties can be applied to the seller and to its officers, directors, and managers who formulate, direct or control the seller's activities. The violation of state seller laws is typically treated under the statutes as either a fraudulent and deceptive trade practice, misdemeanor or felony. In some states, a Reseller who has been harmed by the seller’s conduct can be awarded money damages, including punitive damages and attorneys fees, or cancellation of the seller agreement and reimbursement of all fees paid to the seller.

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