Illinois is a significant franchise market, supported by its diverse economy, strategic location and large consumer base, accounting for approximately 4% of all US franchise establishments. Chicago’s economic strength includes an average household income of USD159,231 and total annual consumer expenditure of USD38.04 billion.

Key international and domestic franchise brands are active in Illinois. McDonald’s opened its first franchise restaurant in Des Plaines in 1955 and still maintains its global headquarters in Chicago. Starbucks has 164 Chicago-area locations, and Dunkin’ Donuts, 7-Eleven and Subway also maintain a strong presence.

The market is particularly attractive for food service, retail and business services, and senior healthcare franchises are gaining traction due to the state’s aging population. However, Illinois has experienced a slight decline in franchise establishment growth, with projections indicating a 2.4% decrease in 2025.

In summary, Illinois offers a substantial, diverse franchise market with strong economic fundamentals, though declining establishment growth may temper future opportunities.

Franchising in Illinois is regulated at both the federal and state level. At the federal level, the Federal Trade Commission (FTC)’s Franchise Rule (16 CFR Part 436) requires franchisors to provide prospective franchisees with a Franchise Disclosure Document (FDD) containing 23 specified categories of information before any binding agreement is signed or payment is made.

At the state level, Illinois is among the minority of states that impose franchise registration and disclosure requirements in addition to the federal statute. The principal sources of Illinois franchise regulation are:

• the Illinois Franchise Disclosure Act of 1987 (815 ILCS 705/1 et seq) (IFDA), administered by the Illinois Attorney General, which requires franchise registration and disclosure and provides substantive franchisee protections, including good-cause termination requirements, notice and compensation requirements for non-renewal, and a private right of action;
• the FTC Franchise Rule (16 CFR Part 436), which sets the baseline federal disclosure format that Illinois disclosure statements must follow;
• the Illinois Antitrust Act (740 ILCS 10/1 et seq), which applies general competition-law principles to vertical restraints in franchise agreements; and
• the Illinois Consumer Fraud and Deceptive Business Practices Act (815 ILCS 505/1 et seq), which may apply to misrepresentations in the franchise sales process independent of the franchise statute.

Franchise relationships may also be shaped by general Illinois contract and tort law, and by sector-specific statutes for regulated industries such as motor vehicle dealers and petroleum marketing, expressly carved out of the IFDA’s own definition of a franchise.

Under Section 3 of the IFDA, a “franchise” is defined as a contract or agreement, whether expressed or implied, oral or written, between two or more persons, that satisfies the following three criteria:

• marketing plan or system – the 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 the franchisor;
• trade mark association – the operation of the franchisee’s business pursuant to a marketing plan or system that is substantially associated with the franchisor’s trade mark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and
• franchise fee – the person granted the right to engage in such business is required to pay, directly or indirectly, a franchise fee of USD500 or more. 

The statutory definition emphasises objective criteria rather than the parties’ subjective intent. Courts have consistently held that an agreement meeting these three elements constitutes a franchise under the Act regardless of how the parties label their relationship. In Brenkman v Belmont Marketing, Inc, 87 Ill App 3d 1060, the court held that subjective intent is irrelevant and that classification depends solely on whether the statutory elements are met. Similarly, in Salkeld v VR Business Brokers, 192 Ill App 3d 663, the court reiterated that the Act applies when the three criteria are met and should be liberally interpreted to protect franchisees.

Disclosure Requirements

Illinois has a dedicated franchise disclosure statute that operates alongside the federal FTC Franchise Rule. Under Section 5(2) of the IFDA, a franchisor may not offer or sell a franchise required to be registered in Illinois without first delivering a disclosure statement and copies of all proposed agreements to the franchisee at least 14 calendar days before the earlier of signing a binding agreement or paying consideration.

Section 16 of the IFDA also requires the disclosure statement to follow the FTC Franchise Rule’s format, the guidelines of the North American Securities Administrators Association (NASAA) and any implementing rules issued by the Illinois Attorney General.

The FDD’s 23 items cover matters including:

• the franchisor’s business, litigation and bankruptcy history;
• initial fees, ongoing royalties and other required payments;
• the franchisee’s estimated initial investment;
• territory rights and any restrictions on the franchisor’s own competing activity;
• trade mark, patent and proprietary information;
• financing arrangements and any financial performance representation the franchisor chooses to make; and
• contact information for existing and recently departed franchisees.

Cooling-Off Period

There is no separate cooling-off period distinct from the 14-day pre-signing disclosure window; the Act does not impose an additional waiting period after signing.

No Explicit Translation Obligation

The IFDA does not explicitly require a franchisor to translate its FDD into other languages, though the disclosure must be clear, concise and understandable, avoiding technical language and unnecessary complexity.

Exemptions

Certain transactions and entities are exempt from the registration and disclosure requirements, such as institutional franchisees (eg, banks and insurance companies) and franchisors meeting specific financial thresholds. See 2.3 Franchise Disclosure Exemptions.

Good Faith and Pre-Contractual Disclosure Obligations

While Illinois law does not explicitly recognise culpa in contrahendo, the IFDA and Illinois common law impose a duty of good faith and fair dealing in all franchise agreements and disclosures, including as follows:

• the IFDA prohibits false or misleading statements in disclosure documents and requires the disclosure of all material facts necessary to avoid misleading prospective franchisees;
• courts have held that failure to provide proper disclosure documents constitutes an unlawful sale, giving franchisees the right to rescind the agreement and seek damages; and
• the IFDA provides a private right of action for franchisees to sue for rescission or damages if the franchisor violates disclosure requirements. 

Under Illinois law, a franchisor’s failure to provide an FDD can result in significant civil and criminal consequences, discussed below.

Rescission and Damages

Section 26 provides a private right of action for violations of the IFDA, including violations of Sections 5, 6, 10, 11 or 15, allowing a franchisee to recover damages and, in some cases, seek rescission. See 815 ILCS 705/26. Thus, a franchisor’s failure to provide the Section 5 disclosure statement may give the franchisee a right to rescind. In Jensen v Quik Int’l, the Illinois Supreme Court confirmed that rescission is available under Section 26 but not mandatory – a franchisee may instead retain the agreement. See 213 Ill 2d 119 (2004). A prevailing franchisee may also recover damages, including amounts paid for the franchise, less net income received, plus interest, attorney’s fees and costs, subject to the limitations period in Section 27. 815 ILCS 705/27.

Termination

The IFDA does not separately provide a general right to terminate the franchise agreement merely because the franchisor failed to provide an FDD. Rather, the principal statutory remedy is rescission under Section 26. The franchisee may have a separate right to terminate if the franchisor’s failure to disclose constitutes a material breach of the agreement, depending on the agreement’s terms, applicable law and other case-specific facts. 

Civil and Criminal Penalties

In addition to private remedies, the IFDA authorises enforcement by the state. Under Section 24, the Illinois Attorney General may seek a civil penalty of up to USD50,000 per violation. See 815 ILCS 705/24. Separately, Section 25 makes wilful violations – including selling a franchise without complying with specified disclosure and registration requirements or making materially false or misleading statements in a disclosure document – a Class 2 felony. See 815 ILCS 705/26. 

Illinois provides several exemptions to the IFDA’s disclosure requirements, but these generally apply to specific transactions or parties rather than exempting franchisees based solely on financial sophistication.

Section 7 of the IFDA exempts certain transactions, including the sale of an existing franchise by a franchisee for its own account not effected by or through the franchisor, and certain extensions, renewals and amendments of existing franchise relationships. See 815 ILCS 705/7. Section 8(b) provides additional exemptions for sales to banks and insurance companies. See 815 ILCS 705/8(b).

Illinois also provides exemptions based on the characteristics of the franchisor or franchisee. Section 8(a) exempts transactions involving franchisors with a net worth of at least USD15 million, and entities operating at least five years with a net worth of at least USD5 million, from the Act’s registration requirements. These exemptions generally do not eliminate the obligation to provide the Section 5 disclosure statement. See 815 ILCS 705/8(a). Accordingly, a franchisee’s financial sophistication alone does not generally relieve an Illinois franchisor of its FDD obligation.

Even where a registration exemption applies, Section 8(a) generally still requires delivery of a disclosure statement meeting Section 5(2)’s requirements, unless the Attorney General separately grants relief by rule or order. The Attorney General also retains broad discretionary authority under Section 9 to exempt particular classes of franchises from disclosure and registration where enforcement is unnecessary in the public interest, given the offering’s limited scope or the franchisees’ sophistication.

The Attorney General, as the Act’s statutorily designated “Administrator”, may also exempt particular classes of persons, franchises or transactions from specified requirements where application would be unnecessary or inappropriate. See 815 ILCS 705/9.

Illinois does not impose a statutory requirement that the franchise disclosure document be translated into any language other than English. However, English is the language of Illinois’ courts, statutes and administrative filings, and the disclosure statement filed with the Attorney General is expected to be in English.

Illinois is one of a relatively small number of states that requires registration of franchise offerings under the IFDA. A franchisor generally must register its offering before offering or selling franchises in Illinois if:

• the prospective franchisee is domiciled in Illinois; or
• the offer is made or accepted in Illinois and the franchised business is or will be located in Illinois.

The IFDA requires registration of the franchise offering through a notification and disclosure statement filing, not registration of each individual franchise agreement – the franchisor itself is not separately registered as an entity.

When Registration Is Required

Section 10 requires registration before offering or selling a franchise in Illinois if the franchisee is domiciled in Illinois, or if the offer is made or accepted in Illinois and the business is or will be located there.

Initial Registration Filing

To register, a franchisor must file a notification and disclosure statement with the Illinois Attorney General, along with any required forms, including:

• a Uniform Franchise Registration Application Page;
• a Supplemental Information Page;
• a Sales Agent Disclosure Form for each sales agent;
• a Uniform Consent to Service of Process naming the Illinois Attorney General as the agent for service of process;
• a Certification Page;
• an auditor’s consent letter for the use of audited financial reports; and
• the franchisor’s current FDD.

(See Ill Admin Code tit 14, Section 200.600.)

Illinois also requires a USD500 fee for the initial registration. See 815 ILCS 705/40(b).

Effectiveness and Regulatory Review

A franchise registration generally becomes effective on the 21st day after the required materials are filed, unless the Attorney General denies registration under Section 22 – for example, for non-compliance with the IFDA, a material misrepresentation or omission, or fraudulent or deceptive practices. See 815 ILCS 705/22.

Registration does not constitute approval or endorsement of the franchise by the Attorney General, nor does it mean that the Attorney General has determined the FDD to be accurate, complete or otherwise compliant with the IFDA. Registration merely authorises the franchisor to offer or sell the registered franchise in Illinois.

Annual Renewal and Amendments

Illinois registration is not a one-time filing; a franchisor must maintain it through periodic filings. Under Section 10, registration expires 120 days after the franchisor’s fiscal year-end, and the franchisor must file an updated disclosure document no later than one business day before expiry. See 815 ILCS 705/10.

Section 11 also requires a franchisor to revise its disclosure statement within 30 days after each fiscal quarter to reflect material changes, and to file and deliver the amended statement to the Attorney General and prospective franchisees similar to the initial registration. See 815 ILCS 705/11.

The filing fee for an amended disclosure statement is USD100 when the amendment concerns a material change and USD25 for other amendments. See 815 ILCS 705/40(c).

A franchisor may not offer or sell a franchise required to be registered unless it has been registered or an exemption applies. See 815 ILCS 705/10. Failure to register may result in administrative enforcement, including denial, suspension or termination of the registration and other relief under the Act, as well as civil penalties of up to USD50,000 per violation. See 815 ILCS 705/22, 24.

Failure to register also exposes the franchisor to private liability: a franchisee may bring an action for damages and, for a Section 10 violation, seek rescission under Section 26, which may require the franchisor to return amounts paid, less net income received, plus interest, reasonable attorney’s fees and costs. See 815 ILCS 705/26. A wilful violation may also constitute a Class 2 felony.

Illinois does not require a franchisor to demonstrate a minimum period of profitable operation, a minimum number of company-owned or franchised locations, or any other operating-history threshold before offering franchises in the state. Unlike jurisdictions that require an established track record, Illinois generally allows new and emerging franchise systems to offer franchises so long as they comply with the IFDA’s registration and disclosure requirements.

The FTC Franchise Rule and Illinois’ disclosure requirements instead address these concerns through disclosure rather than a profitability or operating-history requirement: a franchisor with little or no operating history must still disclose that fact, its litigation and bankruptcy history, and (if it chooses to make one) any financial performance representation, letting prospective franchisees evaluate its track record themselves rather than being screened out by a regulatory threshold. In practice, franchisors with very limited operating histories – sometimes called “emerging” systems – can and do register and sell franchises in Illinois, provided their disclosure is complete and accurate.

Illinois law does not impose a statutory minimum or maximum term for a franchise agreement; duration is a matter of contract between the parties, subject to the IFDA’s termination and renewal protections described below. Franchise terms in Illinois commonly range from five to 20 years depending on the industry, required capital investment and the franchisor’s system-wide practice, but these are business norms, not legal mandates.

Regardless of the term selected, the Act’s termination and non-renewal protections apply for the agreement’s full duration and cannot be contracted around; a short initial term does not reduce a franchisor’s obligations if it does not intend to renew.

A franchisee’s statutory renewal rights and entitlement to compensation upon non-renewal depend heavily on the type of franchise; this guide addresses only general franchises, not motor vehicle franchises (governed by the Illinois Motor Vehicle Franchise Act, 815 ILCS 710/1 et seq).

The IFDA does not grant general franchisees a statutory right to renewal; instead, it regulates the financial consequences of non-renewal. Under Section 20, a franchisor that declines to renew may be required to compensate the franchisee for the “diminution in the value of the franchised business” caused by the franchise’s expiry.

However, this statutory right to compensation only applies in certain circumstances, specifically when:

• the franchise agreement, or the franchisor’s refusal to waive a restrictive covenant at least six months before expiry, prevents the franchisee from continuing substantially the same business under another trade mark, service mark, trade name or commercial symbol in the same geographic area following expiry; or
• the franchisor fails to provide written notice of its intent not to renew at least six months before the franchise expires or any extension thereof.

Notably, the IFDA does not establish a right to “goodwill” compensation derived from commercial agency laws upon non-renewal.

Illinois imposes meaningful statutory constraints on a franchisor’s ability to terminate a franchise. Under Section 19 of the IFDA, a franchisor generally may not terminate a franchisee before the end of its term except for “good cause”. The statute distinguishes defaults requiring advance written notice and a cure opportunity from those permitting termination without notice; under Section 19(b), a franchisee generally must receive 30 days’ written notice and an opportunity to cure a failure to comply with a lawful provision of the franchise or other agreement.

In contrast, Section 19(c) permits termination without notice or an opportunity to cure in specified circumstances, including when the franchisee:

• makes an assignment for the benefit of creditors or similar disposition of the franchise business’s assets;
• voluntarily abandons the franchise business;
• is convicted of a felony, or other crime, that substantially impairs the goodwill associated with the franchisor’s mark; and
• repeatedly fails to comply with lawful provisions of the franchise or other agreement.

Franchise agreements in the United States are primarily governed by federal antitrust law, including Section 1 of the Sherman Act. Illinois courts generally look to federal antitrust precedent when interpreting the Illinois Antitrust Act, which expressly directs Illinois courts to use federal judicial interpretations as a guide where its language is identical or similar to federal law. See 740 ILCS 10/11; Laughlin v Evanston Hosp, 133 Ill 2d 374, 384 (1990).

Most vertical restrictions commonly found in franchise agreements – exclusive territories, non-compete covenants, and requirements to purchase from approved suppliers – are generally evaluated under the rule of reason: a restriction is not unlawful merely because it limits competition, and courts weigh its actual or likely anti-competitive effects against legitimate pro-competitive justifications. See Leegin Creative Leather Prods, Inc v PSKS, Inc, 551 US 877, 885–91 (2007).

This approach recognises that restrictions within a franchise system can promote rather than hinder competition: territorial protections may encourage franchisees to invest by protecting them from intra-brand competition, while purchasing requirements may promote consistency, quality and efficiency system-wide. See Continental TV, Inc v GTE Sylvania Inc, 433 US 36, 54–59 (1977).

The principal antitrust risks often arise from horizontal agreements among franchisees or other market participants rather than ordinary vertical restrictions imposed by the franchisor. Agreements among competitors to fix prices or allocate markets are generally treated as per se unlawful. See United States v Topco Assocs, Inc, 405 US 596, 608 (1972). Accordingly, franchisors should take particular care not to facilitate agreements among franchisees that restrain competition, even though ordinary vertical restraints remain subject to rule-of-reason analysis.

Exclusive territories are generally permissible in franchise agreements, but the scope of any territorial protection depends on the agreement’s terms. Illinois courts will not ordinarily infer an exclusive territory where the agreement expressly reserves the franchisor’s right to operate or establish additional locations. In Patel v Dunkin’ Donuts of America, Inc, the court declined to recognise an exclusive territory where the agreement did not expressly grant one and instead reserved that right. See 146 Ill App 3d 233, 236–37, 496 NE2d 1159, 1161 (1986). Similarly, in Libby-Broadway Drive-In, Inc v McDonald’s System, Inc, the court refused to enforce an alleged oral promise of territorial exclusivity where the written agreement granted no exclusive territory. See 72 Ill App 3d 806, 808–10, 391 NE2d 1, 2–3 (1979).

In-term non-compete provisions are generally enforceable when they reasonably protect the franchisor’s legitimate interests. In McDonald’s System, Inc v Sandy’s Inc, the court enforced a restriction on the franchisee operating a competing business during the franchise term, reasoning that it was valid for the duration of the contractual relationship. See 45 Ill App 2d 57, 64–65, 194 NE2d 1, 5–6 (1963). Because the restriction applied only during the term, the court distinguished it from a post-term restraint and did not require the territorial limitations applicable to restrictions extending beyond the franchise relationship.

A franchisor may generally require a franchisee to purchase products, ingredients, equipment or services from the franchisor or its designated or approved suppliers. Such requirements are common in US franchising and are generally lawful when reasonably related to legitimate business objectives, such as product quality, protecting trade marks and goodwill, and system-standard compliance.

Mandatory purchasing requirements must be properly disclosed. Item 8 of the FDD requires disclosure of the extent to which franchisees must purchase or lease goods, services, supplies, fixtures, equipment, inventory, computer hardware or software, real estate or other items from the franchisor, its affiliates or designated suppliers, and any rebates, commissions or other financial benefits the franchisor or its affiliates receive.

Mandatory purchasing requirements, however, may raise antitrust concerns when they function as tying or exclusive-dealing arrangements – ie, when a seller conditions the sale of one product on the buyer’s agreement to purchase another from the seller, or to refrain from purchasing the tied product elsewhere. See Northern Pac Ry Co v United States, 356 US 1 (1958). Not every mandatory purchasing requirement is an unlawful tying arrangement, however; legality generally depends on the restriction’s competitive effects, the franchisor’s market position, the extent to which competing suppliers are foreclosed, and the restriction’s legitimate business justifications. See Tampa Elec Co v Nashville Coal Co, 365 US 320 (1961); People ex rel Scott v Convenient Food Mart, Inc, 21 Ill App 3d 97, 104, 315 NE2d 124, 131 (1974).

An approved-supplier requirement thus presents less antitrust risk when it serves legitimate business purposes, such as product quality, protecting trade marks and goodwill, ensuring system-wide consistency, or satisfying operational standards. See Continental TV, Inc v GTE Sylvania Inc, 433 US 36, 54–59 (1977).

Illinois law also imposes a separate contractual constraint through the implied covenant of good faith and fair dealing. See Dayan v McDonald’s Corp, 466 NE2d 958, 971 (Ill App Ct 1984). The covenant limits a party’s exercise of contractual discretion exercised arbitrarily, capriciously or inconsistently with the parties’ reasonable expectations. Thus, even where a franchise agreement expressly permits the franchisor to designate suppliers, exercising that authority may raise a good-faith issue if used primarily to generate revenue for the franchisor or its affiliates without a legitimate connection to the franchise system or franchisees’ interests.

A franchisor can generally reserve certain sales channels, including internet and e-commerce sales, to itself or affiliates, subject to the same disclosure and antitrust principles applicable to other purchase and territorial restrictions. Illinois has no statute specifically addressing internet channel reservation; the question is instead resolved through the franchise agreement’s territorial and channel-of-trade provisions, informed by general antitrust rule-of-reason analysis and accurate disclosure of the scope of territorial protection actually granted.

Because Illinois is outside the EU, the Vertical Agreement Block Exemption Regulation (VBER) does not apply; Illinois franchise agreements are instead generally evaluated under US antitrust law and the rule of reason described in 6.1 Treatment of Competition Restrictions in Franchise Agreements. Unlike the VBER, US law provides no comparable block exemption, and courts instead generally consider whether a particular restraint promotes or harms competition.

This approach is generally favourable to single-brand franchise systems: courts recognise that vertical, non-price restraints can promote competition by protecting brand investment, maintaining consistent quality and preventing free-riding, and such restraints are generally lawful unless they have actual or likely anti-competitive effects. See, for example, Continental TV, Inc v GTE Sylvania Inc, 433 US 36, 54–56 (1977); Leegin Creative Leather Prods, Inc v PSKS, Inc, 551 US 877, 889–92 (2007).

Resale price maintenance is treated somewhat differently: the US Supreme Court in Leegin held that minimum resale price maintenance is subject to the rule of reason rather than per se illegality. See 551 US at 881, 885–92. State antitrust laws may impose stricter requirements, however, so minimum resale price restrictions should be evaluated under both federal and applicable state law.

Illinois courts generally do not treat a franchisor as the employee of its franchisee’s workers merely because it owns the franchise system, sets brand standards or monitors compliance with the franchise agreement; the key enquiry is the extent of the franchisor’s control over the franchisee’s day-to-day operations or the specific employment conditions at issue. In Coty v US Slicing Machine, the court affirmed a directed verdict for the franchisor because it could not hire, fire, supervise or issue orders to the franchisee’s employees, notwithstanding extensive operating requirements to protect the brand. See 58 Ill App 3d 237 (1978). The general right to make suggestions, inspect the premises, or terminate the agreement did not, by itself, make the franchisor a joint employer. See id at 243; see also Wise v Ky Fried Chicken Corp, 555 F Supp 991, 995 (DNH 1983).

Illinois courts have nevertheless imposed, or permitted claims seeking, liability where a franchisor affirmatively undertook responsibility for employee safety. In Decker v Domino’s Pizza, Inc, 268 Ill App 3d 521 (1994), the court upheld a verdict for a franchisee employee injured during a robbery because the franchisor had developed mandatory security procedures and taken affirmative steps to ensure compliance. Similarly, Lawson v Schmitt Boulder Hill, Inc, 398 Ill App 3d 127 (2009) allowed a franchisee employee’s negligence claim to proceed past the pleading stage based on allegations that McDonald’s mandated and monitored compliance with workplace-security procedures, though Lawson did not determine that McDonald’s owed or breached a duty.

Illinois has also upheld franchisor liability outside the employee-claim context. In Bruntjen v Bethalto Pizza, LLC, 2014 IL App (5th) 120245, the court affirmed a verdict holding a franchisor directly and vicariously liable for injuries caused by a franchisee’s delivery driver, based on delivery and driver-safety requirements that extended beyond general brand protection. Because the plaintiff was a third-party motorist rather than a franchisee employee, however, Bruntjen is instructive on control and assumed duties but is not itself a joint-employer decision.

For franchisors, the practical distinction is straightforward: control the brand, not the employee. Agreements and operating manuals should preserve the franchisee’s responsibility for hiring, compensation, scheduling, discipline, supervision and termination, since unnecessary involvement in day-to-day employment decisions can create evidence of the control needed to support joint-employer or vicarious liability.

A franchisor may be vicariously liable for loss or damage caused by a franchisee acting as its actual or apparent agent. Whether an agency relationship exists is ordinarily a question of fact, though it may be resolved as a matter of law where the facts are undisputed.

Actual Agency

Actual agency depends on whether the franchisor has the right to control the “operative details” or day-to-day operations of the franchisee’s business that caused the injury; characterising the franchisee as an independent contractor is relevant but not dispositive, and courts examine the parties’ actual relationship and the franchisor’s retained authority.

Controls intended to protect trade marks, goodwill and system-wide quality generally do not establish an agency relationship. In Coty v US Slicing Machine Co, 58 Ill App 3d 237, the franchisor imposed numerous operating requirements but did not retain day-to-day supervisory control and could not hire, fire or direct the franchisee’s employees, so its authority to demand compliance and terminate the agreement was insufficient to establish liability. Similarly, in Oliveira-Brooks v Re/Max Int’l, Inc, 372 Ill App 3d 127, 128, 865 NE2d 252, 253 (2007), the court found no vicarious liability because the franchisor’s control was limited to brand protection, not the franchisee’s daily real-estate activities or the vehicle causing the plaintiff’s injury.

In contrast, in Bruntjen v Bethalto Pizza, LLC, 2014 IL App (5th) 120245, the court upheld a verdict finding a pizza franchisor vicariously liable under an actual-agency theory, based on evidence of the franchisor’s operational controls – including requirements governing the franchisee’s menu, suppliers, hours, delivery area, advertising, uniforms, insurance and delivery drivers – despite the agreement’s independent-contractor label. An independent-contractor designation thus will not prevent vicarious liability where the franchisor’s actual authority extends beyond brand protection to the franchisee’s manner of operation. Id.

Apparent Agency

A franchisor may also be held liable under an apparent agency theory where:

• the franchisor held the franchisee out as its agent or knowingly permitted the franchisee to do so;
• the plaintiff reasonably believed that an agency relationship existed; and
• the plaintiff relied on that appearance to the plaintiff’s detriment.

See Oliveira-Brooks, 372 Ill App 3d at 137.

Common branding or the public display of the franchisor’s trade marks does not, without more, establish apparent agency. In O’Banner v McDonald’s Corp, 173 Ill 2d 208, 670 NE2d 632 (1996), the Illinois Supreme Court considered whether McDonald’s could be liable under apparent agency for its franchisee’s negligence, and although it rejected the claim it acknowledged that apparent agency could arise if the franchisor’s actions led a third party to reasonably believe that an agency relationship existed.

A franchise agreement subject to the IFDA must designate Illinois law as its governing law. Although parties may ordinarily select the law governing their contractual relationship, a franchise agreement may not select the law of a state other than Illinois. See 14 Ill Admin Code Section 200.608. The same regulation prohibits an agreement from requiring litigation under the agreement or the Act to occur outside Illinois, though the agreement may provide for arbitration outside the state. See also 815 ILCS 705/4.

The IFDA’s anti-waiver provision provides additional protection: under Section 41, any provision purporting to require a franchisee to waive compliance with the Act or another Illinois law is void. See 815 ILCS 705/41. A franchisor thus may not use a choice-of-law clause or other provision to avoid otherwise applicable Illinois franchise protections.

Franchisors typically address the IFDA’s requirements through a state-specific addendum, allowing them to retain a uniform franchise agreement system-wide while modifying the governing law, forum-selection, termination, non-renewal and other provisions as necessary to comply with Illinois law.

Illinois Administrative Code Section 200.608 requires franchise agreements subject to the IFDA to designate Illinois law as their governing law. Although neither the IFDA nor the Administrative Code addresses intellectual-property provisions separately, neither authorises applying different states’ laws to the intellectual-property and service components of the same agreement. Illinois courts may also decline to enforce a foreign choice-of-law provision that would contravene fundamental Illinois public policy. See Donaldson v Fluor Engineers, Inc, 169 Ill App 3d 759, 762–63 (1988) (refusing to enforce a California choice-of-law clause conflicting with Illinois’ fundamental policy against indemnity for one’s own negligence). Accordingly, Illinois law generally governs the parties’ contractual rights and obligations under both components of the agreement.

For intellectual-property provisions specifically, federal law continues to govern claims arising under federal statutes, including trade mark, copyright or patent infringement, while Illinois contract law ordinarily governs the interpretation and enforcement of intellectual-property licence agreements. See Baldwin Piano, Inc v Deutsche Wurlitzer GmbH, 392 F3d 881, 883–86 (7th Cir 2004) (applying Illinois law to determine the duration and termination of a trade mark licence); Automation by Design, Inc v Raybestos Products Co, 463 F3d 749, 753–60 and n5 (7th Cir 2006) (“Trademark licence contract disputes, just like copyright licence disputes, are governed by the general rules of contract interpretation”); Walthal v Rusk, 172 F3d 481, 482 (7th Cir 1999) (stating that, when a licence is silent as to length, it is implied to be indefinite and terminable by either side).

Illinois law does not prescribe a detailed list of clauses that must appear verbatim in a franchise agreement. Instead, the IFDA overrides or supplements the contract on a defined set of topics:

• a franchisee’s right not to be terminated except for good cause;
• a right to compensation on non-renewal in the circumstances described in 5.2 Franchise Renewal;
• a prohibition on unreasonable and material discrimination between similarly situated franchisees; and
• a guaranteed right to participate in trade associations without franchisor interference.

Because these protections apply as a matter of law regardless of whether the franchise agreement expressly recites them, franchisors are better served drafting agreements or preparing addendum consistent with the Act’s requirements rather than attempting to draft around them, since any attempted waiver of these statutory rights is void.

Illinois law has no single list of clauses prohibited in franchise agreements; instead, the restrictions are found in several provisions of the IFDA and other applicable Illinois laws. Void or unenforceable provisions include:

• out-of-state forum clauses – a franchise agreement may not require disputes to be litigated outside Illinois, though it may require arbitration outside Illinois, since the restriction does not apply to arbitration;
• waivers of statutory rights – a franchise agreement may not require a franchisee to waive rights or protections under the IFDA, though this does not prohibit settling or releasing claims relating to an actual or potential lawsuit;
• termination without good cause – a franchisor may not rely on a contractual right to terminate an Illinois franchise before the end of its term without good cause, as defined by the IFDA; and
• terms that conflict with rescission rights – a liquidated-damages provision may be unenforceable to the extent that it conflicts with a franchisee’s statutory right to rescind the agreement or recover relief under the IFDA.

Franchise agreements are also subject to the same general rules that apply to other Illinois contracts. For example, a court may refuse to enforce a provision that is unconscionable or violates Illinois public policy.

Enforcement of Judgments From Other US States

Judgments from other US states are generally straightforward to enforce in Illinois. Under the Uniform Enforcement of Foreign Judgments Act, a judgment creditor may file an authenticated copy of a qualifying judgment and an affidavit stating the parties’ names and last-known addresses with the circuit clerk in any Illinois county; notice is then mailed to the debtor, and the judgment thereafter has the same effect and enforcement procedures as an Illinois judgment. See 735 ILCS 5/12-650-653.

A debtor may seek to stay or challenge enforcement only on limited grounds, such as that the rendering court lacked jurisdiction or that the judgment is not entitled to full faith and credit; the debtor generally may not relitigate the merits or raise defences that could have been asserted in the original proceeding.

Enforcement of Foreign Country Judgments

Judgments from foreign countries are governed by the Uniform Foreign-Country Money Judgments Recognition Act (UFCMJRA), 735 ILCS 5/12-661 et seq, which applies to foreign-country judgments that are final, conclusive and enforceable under the rendering country’s laws and that grant or deny recovery of money. See 735 ILCS 5/12-661, 735 ILCS 5/12-663. The UFCMJRA does not apply to judgments for taxes, fines, divorce, support, maintenance or other domestic-relations matters. See 735 ILCS 5/12-661-663.

Unlike a judgment from another US state, a foreign-country judgment must first be recognised by an Illinois court, after which it is enforceable in the same manner and to the same extent as an Illinois judgment. See 735 ILCS 5/12-666-667.

An Illinois court must refuse recognition if the foreign judicial system lacks impartial tribunals or due-process-compatible procedures, or if the foreign court lacked personal or subject-matter jurisdiction, and has discretion to refuse recognition on other specified grounds, including inadequate notice, certain fraud, conflict with another final judgment, serious concerns about the foreign court’s integrity, or incompatibility with Illinois or US public policy. See 735 ILCS 5/12-664.

Enforcement of International Arbitration Awards in Illinois

Foreign arbitration awards are enforceable under the Federal Arbitration Act (FAA) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. The FAA allows a party to apply for confirmation of an arbitral award within three years of the award, and the court must confirm it unless grounds for refusal under the New York Convention are established. See 9 USCS Section 207.

To enforce a foreign arbitration award:

• the party seeking enforcement must provide the court with the original arbitration agreement and award, as required by Article IV of the New York Convention;
• Illinois courts, like federal courts, are generally pro-enforcement of arbitration awards but may refuse recognition if the award violates public policy, was procured by fraud or followed a process that lacked due process; and
• under Illinois law, arbitration awards may also be enforced through the Illinois Uniform Arbitration Act (710 ILCS 5/1 et seq), which provides state courts with jurisdiction to confirm awards unless a different forum is contractually specified – see Anderson v Golf Mill Ford, Inc, 383 Ill App 3d 474, 475, 890 NE2d 1023, 1026 (2008).

Illinois law imposes no statutory cap on an initial franchise fee, ongoing royalty or other franchise-related fee, and no maximum royalty percentage or annual payment – in foreign currency or otherwise – under the IFDA or any other Illinois statute of general application. Fee and royalty levels are instead set by ordinary commercial negotiation and system-wide franchisor policy, unlike jurisdictions that impose statutory or central-bank-administered payment ceilings.

The relevant Illinois-law constraint is disclosure rather than a cap: the disclosure document must accurately state all initial and recurring fees and the basis for calculating them. See 815 ILCS 705/16; 16 CFR Section 436.5(e)–(f). Certain indirect payments – including required payments for goods, equipment or services above a bona fide market price – may also constitute a disclosable franchise fee. See 815 ILCS 705/3(14). Section 18 also prohibits a franchisor from unreasonably and materially discriminating between Illinois franchisees in the fees, royalties or charges it imposes where the discrimination causes competitive harm, though the IFDA permits distinctions – not discrimination – based on enumerated grounds, including franchises granted at different times and regional pricing variation. 

Illinois does not require a franchisee to withhold state income tax from ordinary franchise fees, royalties or service fees paid to a US franchisor; those payments are generally included in the franchisor’s taxable income rather than collected through withholding.

Payments to a foreign franchisor, however, may be subject to US federal withholding tax. Under Internal Revenue Code (IRC) Sections 861(a)(4), 881(a) and 1442, royalties for the use of trade marks, franchise rights or other intellectual property in the United States generally constitute US-source income, and the franchisee would withhold 30% of the gross royalty payment unless an exemption applies.

Technical and other service fees are treated differently from royalties: the source of compensation depends on where the services are performed. Compare IRC Sections 861(a)(3) and 862(a)(3). Fees for services performed entirely outside the United States generally constitute foreign-source income and are not subject to withholding under Treasury Regulation Sections 1441 and 1442.

Fees for services performed in the United States may be subject to withholding at the statutory 30% rate when paid to a foreign recipient, unless a treaty, associated income rules or another exemption applies. See IRC Sections 871(a)(1)(A), 881(a)(1), 1441(a), 1442(a); Treas Reg Section 1.1441-4(a)(1). If services are performed partly within and partly outside the United States, compensation must be apportioned under the method that most accurately reflects the income’s source. See Treas Reg Section 1.861-4(b).

The United States does not maintain foreign-exchange or capital controls of the kind found in some other jurisdictions, and Illinois franchisees may pay franchise fees, royalties and service fees to a domestic or foreign franchisor without prior authorisation from a central bank or other governmental authority. Cross-border payments remain subject to ordinary US anti-money-laundering, sanctions and currency-transaction-reporting requirements applicable to the processing banks, but these are compliance and reporting obligations rather than substantive restrictions on the franchisee’s ability to pay.

Illinois does not require a franchise agreement to be notarised, witnessed or otherwise specially authenticated to be valid and enforceable between the parties; ordinary contract-execution formalities apply, and the agreement is enforceable once signed by parties with authority to bind their respective entities. Because franchise agreements typically run longer than one year, however, the Illinois Statute of Frauds generally requires the agreement to be in writing and signed by the party against whom enforcement is sought. See 740 ILCS 80/1. Electronic signatures may satisfy this requirement.

There is no Illinois franchise-specific registration of the executed agreement itself with the Attorney General. Registration under the IFDA attaches to the franchise offering and disclosure statement, not to each individual signed agreement.

Electronic signatures are valid and enforceable for Illinois franchise agreements. Under the Illinois Uniform Electronic Transactions Act, a signature, contract or record may not be denied legal effect solely because it is electronic, and an electronic signature satisfies any legal requirement that a document be signed. See 815 ILCS 333/7.

The federal E-SIGN Act provides similar protections for transactions involving interstate or foreign commerce. See 15 USC Section 7001(a). Accordingly, an Illinois franchise agreement executed through an electronic-signature platform generally has the same legal effect as one signed by hand, provided the parties agreed to conduct the transaction electronically and the signature can be attributed to the signer. The agreement remains subject to the same questions of authority, authenticity, fraud and enforceability as a paper agreement.

Illinois does not impose a stamp duty, document tax or similar transfer tax on the execution of a franchise agreement, and has no general stamp-duty regime comparable to those found in many other countries.

Separate taxes may apply, however, if the transaction involves transferring an interest in Illinois real estate – for example, the Illinois Real Estate Transfer Tax may apply to the sale of real property, the transfer of certain long-term ground-lease interests, or the transfer of a controlling interest in an entity formed or acting substantially to hold Illinois real estate. See 35 ILCS 200/31-5, 31-10. A franchise agreement, by itself, does not trigger an Illinois stamp or document tax.