For franchisors and franchisees looking to do business in a state that offers economic advantages and a friendly business climate, Tennessee can be an appealing option.

The state offers numerous government-sponsored programs, incentives and grants designed to support business growth alongside business-friendly taxes and strong industries like tourism, manufacturing, healthcare, and more. Combined with a low cost of living and undeniable natural beauty, entrepreneurs can find a myriad of reasons to set up shop in the Volunteer State.

Still, there are important legal considerations every franchisor and franchisee should take into account before doing business there– including understanding the franchise laws that set Tennessee apart from other states.

Franchise Relationship Laws in Tennessee

Although Tennessee is not one of the Franchise Registration States (states with laws that supplement federal franchise laws and require FDD registration with local state regulators prior to offering or selling a franchise), the state does have a unique set of laws that govern franchises operating there.

“Franchise Relationship Laws are state laws that supplement the rights of franchisees,” explains Charles N. Internicola, founder of The Internicola Law Firm, P.C., a national and internationally recognized franchise law firm whose practice focuses exclusively on franchises.

Historically, franchise relationship laws–also referred to as franchisee protection laws–have been enacted to make franchising fairer for both parties in a franchise relationship.

“In many instances, the franchisor-franchisee relationship can be legally one-sided,” Internicola says. “If a state franchise relationship law is well-thought-out and precise, it can provide valuable benefits for franchisees without providing undue burden on the rights of franchisors. To be effective, franchise relationship laws should be limited to select circumstances where there is an imbalance in the franchisor-franchisee relationship.”

Obligations and Restrictions for Tennessee Franchisors

In Tennessee, in addition to the Federal Franchise Rule requiring franchisors to issue their FDD to a prospective franchisee at least 14 days prior to signing a franchise agreement or accepting fees related to the sale of a franchise, the legal relationship between franchisors and franchisees is codified, placing important limitations on specific rights of franchisors.

Under the state Code, franchises are broadly defined and include any written or oral agreement that grants another party (a) the right and license to use a trademark exclusively within a territory, or (b) the right to sell or distribute services or goods within an exclusive territory.

Under those definitions, once a franchise relationship has been determined per Tennessee Code 47-25-15, et. seq., franchisors are limited in their ability to take certain actions related to the modification, non-renewal or termination of franchise rights in the state.

Under Tennessee’s franchise relationship laws, franchisors are also required to act in good faith toward franchisees and provide franchisees with cure opportunities, in addition to other specific requirements under the code.

“The biggest advantage for franchisees (in Tennessee) is that the Tennessee franchise relationship laws afford them additional rights. The Tennessee franchise relationship laws afford valuable benefits to franchisees. Compared to states that do not have relationship laws, franchisees in Tennessee are much better off,” Internicola says.

Restrictions on Franchise Agreement Terminations

In Tennessee, franchise relationship laws aim to address a few specific sets of circumstances where the rights of franchisors are limited regarding their interactions with franchisees in the state.

One of the circumstances under which franchisor rights are limited is terminating a franchise agreement.

“Before a franchisor can terminate a Tennessee franchise, the franchisor must demonstrate that they are acting in good faith, have good cause for termination, and provide the franchisee with notice and an opportunity to cure a franchise agreement default (of not less than 30 days),” Internicola says.

Under the state’s Code, “good cause” is determined 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.

While the regulations imposed on franchisors wishing to terminate a franchise agreement in Tennessee aren’t impossible to comply with, they could add more complexity for franchisors compared to operating in some other states.

“The disadvantage for franchisors (in Tennessee) is that, in addition to following the terms and conditions of their own franchise agreement, they must ensure that they comply with the termination and notice requirements required by the Tennessee laws,” Internicola says.

Restrictions on Denying the Renewal of a Franchise Agreement

Other restrictions on franchisors in the state include limiting the right to deny the renewal of a franchise agreement upon its expiration.

Before denying a Tennessee franchisee the right to renew the franchise agreement, a franchisor must first provide the franchisee with no less than 60 days written notice of their intent to not renew the agreement, as well as the facts and circumstances that the franchisor believes to be good cause for nonrenewal. The franchisor must also agree not to enforce post-termination or post-expiration restrictive covenants per the franchise agreement upon its expiration.

Should a franchisor decide not to sell or distribute products through a franchisee in Tennessee for two years or more, the act could also constitute grounds for a non-renewal so long as the franchisor agrees not to enforce any post-termination or post-expiration restrictive covenants per the franchise agreement when it expires.

Restrictions on Family and Non-Family Transfers

In Tennessee, the right of franchisors to limit or deny franchise transfers is also regulated by state laws under specific circumstances.

Under state law, a franchisor is restricted from limiting an individual franchisee’s right to transfer the franchised business to specific family members. Individual franchisees in Tennessee (including their estate, if deceased) are granted the right to transfer ownership interests of their franchised business to their spouse, child, grandchild, parent, brother, or sister upon giving written notice to the franchisor, even without franchisor approval.

Franchisees are also granted the right under Tennessee law to transfer ownership of their franchised business to non-family transferees under certain circumstances. Upon (a) providing a franchisor with a written notice of a proposed and requested transfer of the franchise, and (b) providing the franchisor with an opportunity to match the proposed offer, the franchisee has the right to transfer the franchised business without franchisor approval unless the franchisor can demonstrate that the transferee does not meet the franchisor’s “non-discriminatory, material, and consistently applied and reasonable qualifications and standards…”

In addition to certain other standards, and if the franchisor doesn’t choose to match the proposed offer to the franchisee, there may also be circumstances where a franchisee can transfer the franchised business to another qualified buyer instead.

It’s important to note that violations of Tennessee’s franchise relationship laws come with consequences such as the entitlement of franchisees to equitable and legal relief for damages, including attorney fees.

Joint Employer Liability and Franchises in Tennessee

While franchisees benefit from the additional rights afforded to them under Tennessee’s franchise relationship laws, the state also provides some important advantages for franchisors when it comes to legal claims.

In support of the franchise business model, Tennessee Code, Title 50, Chapter 1, Section 208 serves to counter earlier Joint Employer Liability determinations made by the National Labor Relations Board (NLRP).

Signed into law in 2015 by Gov. Bill Haslam, Tennessee’s joint employer liability shield disclaims employment relationships between franchisors and franchisees or employees of franchisees. This shield legally protects franchisors from being held responsible for the activities of franchisees in employment claims filed against the franchisee. The law 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

“The Tennessee Joint Employer Liability shield is smart pro-business legislation that helps shield franchisors from joint-employer claims. This law protects franchisors in Tennessee and helps to shield them from employment claims arising between a franchisee and its employees,” Internicola says.

To learn more about Tennessee’s franchise laws and regulations, visit the Tennessee State Government website. You can also check out our interactive franchise registration map to read about franchise laws and regulations in all 50 states.