The Federal Trade Commission (FTC) Act--which prohibits unfair, deceptive and fraudulent business practices--represents a common route that small business owners can use to involve the federal government in a lawsuit against another party, especially because the term "unfair and deceptive" business practices is so broadly interpreted by the courts. Each state has its own version of the FTC Act, which can similarly be used to involve the state government in the action.
Usually, these laws represent a significant risk factor for small business owners, as consumers most commonly use the acts to file suit. However, the protection offered by the acts also extends to business owners.
If the government takes action, then the small business owner will benefit significantly, because the government will bear the full cost of the claim and has immense resources that usually cannot be matched by the other party.
Because, the term "unfair and deceptive" trade practice is defined so broadly by the courts, small business owners who suffer losses in dealings with other commercial parties have a better chance of fitting the other party's conduct under the state acts.
Moreover, in contrast to the FTC act, the state acts also authorize a private party to file an action and make the loser pay attorney's fees and related costs, in addition to compensatory and, possibly, punitive damages.
The small business owner operating a franchise also can use the FTC Act to enlist the government's assistance. The FTC franchise regulations require that franchisors provide perspective franchisees with a pre-sale disclosure statement, known as "offering circular."
The disclosure statement contains very extensive and detailed financial and management information concerning the franchisor and its existing franchises. A franchisor who fails to provide the disclosure statement, or who provides a statement that contains errors or omissions, is deemed to have committed an unfair trade practice under the FTC Act.
Because the disclosures are so extensive and detailed, there are many instances where a franchiser can run afoul of the rules. These types of mistakes can represent effective ways for the small business owner to engage the government's assistance, when a dispute arises with a franchisor.
Of course, many actions of a franchisor may amount to unfair and deceptive trade practices under the FTC Act itself. Thus, the franchise regulations represent an additional way to engage the federal government in the action.
Several states also have franchise laws based on the FTC regulations. Of these 15 states, all except Michigan and Oregon require that the franchisor deliver to each perspective franchisee a pre-sale disclosure document, which is similar to the disclosure document required by FTC's franchise regulations. Michigan and Oregon do not require a filing of a pre-disclosure statement. In Oregon, no filing of any type is required. However, in Michigan, a notice of the sale must be filed with the state.
Importantly, all of these 15 states, including Michigan and Oregon, grant franchisees the right to file a complaint with the state, which may result in the state taking action against the franchisor. In addition, in contrast to the FTC franchise regulations, all these states grant franchisees the right to bring a private cause of action against franchisers. This statutory cause of action offers many advantages over a common law cause of action, because the franchisee can recover attorney's fees and related costs, as well as punitive damages, under these statutes. Thus, the statutory cause of action usually will result in a larger monetary damage award and is more likely to bring about a favorable settlement before trial.
Finally, where the other party has engaged in a pattern of illegal activity, the small business owner may be able to engage the assistance of the federal government through (and file an action under) the RICO Act, the federal anti-racketeering statute. RICO also authorizes the filing of private causes of action with recovery of attorney's fees and punitive damages.