n our previous article in this Journal , 1 we provided a Top Ten list of the highlights of the Federal Trade Commission’s

revised Franchise Rule (16 C.F.R. Part 436—Disclosure Requirements and Prohibitions Concerning Franchising) (the New Rule), which replaces the original 1978 Franchise Rule (the Old Rule). This article is a more comprehensive overview of the New Rule and its implications for the franchise industry. It is assumed that the reader is generally familiar with the Old Rule and the Uniform Franchise Offering Circular (UFOC).

I

A Road Map to the New FTC Franchise Rule
GERALD C. WELLS AND DENNIS E. WIECZOREK
In addition, nothing in the New Rule prohibits state franchise regulators from prescribing additional disclosures for the FDD or mandating other requirements. The New Rule follows the preemption policies established by the FTC in the Old Rule: The FTC does not intend to preempt the franchise practice laws of any state or local government, except to the extent of any inconsistency with this Rule. A law is not inconsistent with this Rule if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.4 Accordingly, franchisors should expect to continue usage of state disclosure addenda and otherwise follow normal registration procedures. In addition, as will be discussed below, state disclosure document delivery rules may require disclosure earlier than the New Rule, and exemptions and exclusions under the New Rule may be unavailable under some state franchise laws. Coverage and Definitional Issues The New Rule retains most of the coverage and definitional elements of the Old Rule. The changes that have been made are largely fine-tuning in nature, but some of them are worthy of mention. As expected, the FTC confirmed that international transactions are not subject to the New Rule. Transactions relating to a franchised area or location outside the United States are not covered by the New Rule, even if the franchisees are U.S. domiciliaries or contacts are made within the United States.5 In another expected development, the FTC elected to regulate business opportunities under a separate rule. Although the FTC continues a rulemaking procedure to establish a separate regulation for business opportunities, it has created a temporary rule in 16 C.F.R. Part 437. This regulation is nearly identical to the Old Rule (which covered franchises and business opportunities) but with a global deletion of references to franchises. A major terminology change involves the recasting of earnings claims as financial performance representations.6 But a more important substantive change was made. Under the Old Rule, earnings claims were defined to include sales, revenues, costs, expenses, earnings, profits, or other monetary indicia of financial performance by a franchised unit. Under the New Rule, costs and expenses are excluded from the definition of financial performance representations.7 This means that a franchisor may make available to prospective franchisees any information, data, or representations about costs or expenses outside of the restrictions and requirements

Gerald C. Wells

Effective Date The New Rule was promulgated on January 23, 2007. In an effort to ease compliance burdens via a phase-in process and to coordiDennis E. Wieczorek nate implementation with state franchise administrators, the FTC delayed the effective date of the New Rule. Franchisors are allowed to begin compliance with the New Rule and initiate use of the mandated disclosure document (Franchise Disclosure Document or FDD) as early as July 1, 2007, but no later than July 1, 2008. A franchisor must adopt the FDD and the requirements of the New Rule in their entirety and cannot select portions of the New Rule (except for electronic data disclosure, as noted below) while retaining other provisions of the Old Rule or the UFOC. Efforts by the FTC and state franchise regulators to coordinate the implementation of the New Rule culminated in the adoption of an interim policy, entitled “Instructions for Filing a Uniform Franchise Registration Application Using the ‘New FTC Franchise Rule’ After July 1, 2007,” by the North American Securities Administrators Association, Inc. (NASAA) on June 22, 2007. 2 The NASAA policy essentially adopts the New Rule in its entirety, including the format of the FDD. The NASAA policy adds an additional FDD cover page, which basically includes several warning legends, possible risk factors, and other information.3
Gerald C. Wells and Dennis E. Wieczorek are partners with DLA Piper US LLP in the Atlanta and Chicago offices, respectively.

Published in Franchise Law Journal, Volume 27, Number 2, Fall 2007. © 2007 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

and essentially encompasses the types of individuals that would be listed in FDD Item 2. the New Rule expands this exclusion to cover purchased inventory that is resold or leased to customers.9 • The New Rule clarifies its application to arrangements where the parties call a relationship a franchise.17 A large investment exemption is available if the initial investment exceeds $1 million. sells. which is a person who offers for sale. subfranchisors.12 The term encompasses anyone involved in franchise sales activities. First. In addition. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.23 Although the Statement of Basis and Purpose to the New Rule uses the foregoing language. franchise seller .15 Even though the $500 threshold was set almost thirty years ago. oral contracts. Reproduced with permission. It also formalizes an exemption for relationships governed by the Petroleum Marketing Practices Act.000 each would not qualify for the exemption. and to transfers meeting the same threshold. thus.10 • The definition of required payments continues to exclude the purchase at a bona fide wholesale price of reasonable amounts of inventory for resale. The FTC intends to memorialize those exclusions in forthcoming Compliance Guides. Instead. maintain controls. a new insider exemption applies to franchise sales to officers.11 • The New Rule creates a new term. existing franchisors may use this exemption in connection with sales to insiders. . Finally. including franchisor employees. or prospects are directed to them.13 which had been the subject of an exemption by petition of various petroleum marketers under the Old Rule. a group of ten investors investing $100. 8 News releases. Number 2. it will be covered by the New Rule even if the franchisor fails to perform its promises to provide services.14 Note that the FTC will adjust this minimum payment amount and the exemption threshold amounts (see below) every fourth year based on changes in the Consumer Price Index.22 Although experience is required. where a franchise sale is made to an entity (or an individual) with five years of experience and a net worth of $5 million. The Old Rule also mandated that the franchisor provide the ready-for-execution copy of the franchise agreement to the prospective franchisee at least five business days before signing. The exemption in the Old Rule required that the franchisee or its officers or directors have experience in the same line of business as that being franchised. Volume 27. where the original investment met the investment threshold. the net worth and experience requirements can be satisfied by parents or affiliates of the prospective franchisee. website information. and arrangements where required payments during the first six months of operation do not exceed $500. even if it does not have all of the legal elements. Fall 2007.of Item 19 of the FDD. taking the position that express exclusions are not necessary because those relationships are not franchises in any case. However. it mandates disclosure no later than fourteen calendar days before the payment of consideration or the execution of the franchise agreement. The New Rule specifies that if the putative franchisor represents that the arrangement is a franchise.21 The New Rule also includes a large franchisee exemption. Other definitional changes include the following: • The fractional franchise exemption of the Old Rule is retained but slightly expanded. Further.16 The sophisticated investor exemptions are completely new but are similar to exemptions under various state franchise laws. during the franchise sales process. or arranges the sale of a franchise. or license trademark rights. agents. if the franchisee is comprised of a group of investors. the New Rule eliminates the first personal meeting as an event requiring disclosure. Of course. a franchisor was required to make disclosure to a prospect at the earlier of the first personal meeting or ten business days before execution of a franchise agreement or payment of any consideration.18 To rely on the exemption. excluding the cost of unimproved land and funds obtained from the franchisor or its affiliates. The New Rule also maintains existing exemptions for fractional franchises. © 2007 by the American Bar Association. Exemptions The New Rule incorporates new exemptions for sophisticated investors. who are described further below. This term appears on the FDD receipt but otherwise is relevant to various prohibitions under the New Rule (see below). cooperative organizations. it can be in any line of business and need not be focused on the franchised business. a franchisor cannot make fraudulent representations about costs or expenses. The New Rule eliminates prior express exclusions for employer-employee and general partnership relationships. The exemption is available to individuals who have been with the company for at least two years and within sixty days of the sale. press articles. and brokers (but excludes franchisees unless they are engaged in repeated franchise sales). All rights reserved. the FTC clarified that franchisors are allowed to make financial performance representations in the media if such information is directed to the general public rather than to prospective franchisees. and the like are not financial performance representations unless they are supplied to prospects. and single trademark licenses. at least one of them must invest at the $1 million level.20 On the other hand. 24 Accordingly. or managers of a business before it becomes a franchisor. The New Rule expands this element to recognize experience by officers or directors of affiliates or parents of the prospective franchisee. The New Rule materially alters all of these requirements. leased departments. owners. testing or certification services.25 There is a twist: if the prospect makes a reasonable Published in Franchise Law Journal. the franchisor must obtain an acknowledgement from the prospective franchisee confirming that the initial investment satisfied the $1 million threshold. the terms of the New Rule itself do not restrict application of the exemption to businesses before they begin franchising. but the New Rule offers considerably more flexibility with respect to cost disclosures. the FTC has opined that the exemption may flexibly apply to conversion franchises. 19 However. it was not adjusted. Disclosure Deadlines Under the Old Rule.

including those without formal titles. or website access. video.39 However.36 Other safeguards primarily relating to electronic disclosure include the following: The FDD cover page may indicate how a prospect can receive the FDD in other formats. its Predecessors. the franchisor must deliver the FDD. fax. and Affiliates to The Franchisor and any Parents. and (2) actions that are material in the context of the number of franchisees and the size. (4) Item 19 was changed from Earnings Claims to Financial Performance Representations. the franchisor must advise the prospective franchisee of the formats in which the FDD is available and any prerequisites or conditions for obtaining or reviewing the FDD in particular formats. These range from actual delivery (fax. the franchisor might disclose that specific software will be required to view the FDD (such as Adobe Acrobat). The FTC specifies that the signing of a confidentiality agreement by itself does not implicate disclosure obligations. Item Specific Changes to the FDD The FDD follows the UFOC but it changes it in numerous ways. The New Rule also details the exact length of time encompassed by the fouteen-day holding period. franchisors may have to cope with longer holding periods in specific states.46 Item 3. Item 2.request for disclosure at any time during the sales process. the New Rule allows internal links and search features. to facilitate review of and navigation within the FDD. review by professional advisors.35 The New Rule also specifies when the FDD will be deemed to have been delivered under these various methods.34 E-Disclosure and Related Issues Electronic disclosure is one of the major benefits of the New Rule and can be used immediately. (2) include the email and website for the franchisor.43 Item 1. (3) Item 7 was changed from Initial Investment to Estimated Initial Investment. e-mail. Number 2.27 Finally. Fall 2007. A franchisor now has to disclose a broad range of people. Electronic versions of the FDD cannot include audio. (2) Item 5 was changed from Initial Franchise Fees to Initial Fees . if the franchisor unilaterally makes material changes to the agreement. or provision of directions for accessing the FDD on the Internet) to at least three calendar days via first-class mail before the required date of disclosure.41 For example.32 The New Rule eliminates the requirement that the final agreement be provided five business days before execution. Volume 27. including traditional hard copy. or financial condition of the franchise system or the franchisor’s business operation. or any external links.31 retain the first personal meeting disclosure requirement in their franchise statutes. (5) Item 20 was changed from List of Outlets to Outlets and Franchisee Information. downloaded.44 The FTC felt this disclosure was necessary to alert prospective franchisees of competing company-owned outlets that may not fall within the requirement to disclose affiliates in Item 1. All rights reserved. Cover Page. even with a UFOC. This section of the article highlights the differences between the new FDD and the UFOC. © 2007 by the American Bar Association.26 The term reasonable request is not yet defined. (3) contain various warnings about document holding periods and other matters. The New Rule requires the disclosure of background information for not only directors and executives of a franchisor. the changes must be provided at least seven days before signing. However. the New Rule was expanded to require a franchisor to disclose (1) actions involving predecessors and certain affiliates.45 The intent of this new disclosure is to prevent the concealment of a manager’s experience or litigation and bankruptcy history by not giving the manager a title as a director or officer. the New Rule clarifies that only signing of a franchise agreement is relevant to the delivery rules. A franchisor will have the flexibility to use a variety of methods to deliver the FDD. or otherwise maintained for future use. and (6) Item 23 was changed from Receipt to Receipts.30 and Rhode Island. Other states use a ten-business-day period rather than fourteen calendar days in their franchise laws (which could be a longer holding period in certain circumstances). Like the UFOC. The New Rule now requires identification of the franchisor’s parent companies and their principal business addresses. but also for people who will have management responsibility related to the sale or operation of franchises offered in the FDD.37 The New Rule mandates that the FDD be in a form that can be stored.38 Thus. or both. a franchisor cannot merely show the FDD to the prospect unless a copy can be retained for the prospect’s use. and Affiliates. e-mail. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. CD-ROM. three states. Maryland. 47 The New Rule requirement to disclose litigation applies not only to affiliates that Published in Franchise Law Journal. but presumably the disclosure mandate does not apply until the franchisor qualifies the prospect and the parties enter into specific discussions about the purchase of a franchise.42 Table of Contents. and (4) disclose both the total investment to begin operation of the franchise and the total amount in Item 5 that must be paid to the franchisor and its affiliates. and other documents are not. hand delivery. Reproduced with permission. The New Rule adopted the UFOC requirement for the wording and order of the table of contents with the following revisions to reflect changes to the names of certain Items: (1) Item 1 was changed from The Franchisor. Predecessors.33 This rule is inapplicable when the franchisee initiates negotiations. even if some of the contract modifications favor the franchisor. printed. nature. the date of delivery and the date of signing or payment of consideration are not counted as part of the fourteen-day period. The New Rule includes new requirements that the cover page (1) reference sources of additional background information that prospective franchisees can use in investigating the franchise (including the FTC’s website and Consumer Guide to Buying a Franchise). .28 Despite these revisions.29 New York. pop-up screens. For example.40 Before providing the FDD. essentially. The New Rule eliminates the UFOC requirement that brokers be disclosed in the FDD. who have management responsibility over the sale or operations of franchises.

48 The New Rule also requires the disclothe FTC concluded that the FDD need not provide a fransure of litigation related to a parent that backs a franchisor chisor’s history of approving alternative suppliers.70 formal title. the franchisor.g.57 The general and any restrictions on the franchisee’s right to use alternative litigation disclosures required by the New Rule would channels to make sales outside the franchisee’s territory. Reproduced with permission. the New Rule does not require detailed the New Rule to omit concluded litigation and settlements information on every piece where the franchisor was of hardware and software. and its affiliates’ right to use alternative channels of distribuActions involving solely the franchise relationship can be tion. 58 Note. Patent and individuals that have management responsibility over the Trademark Office.63 Under the UFOC. The New Rule expands the disclosure obligations chisee directly relating to the operation of the franchised related to territories.60 government injunctions or restrictive orders has been Item 8. or may face competition from franchisees. 56 The FTC’s goal is to the franchisor’s other distribution channels. Item 13 are similar to the UFOC requirements.62 financially or otherwise guarantees its performance.S. tem requirements in the In a significant expanNew Rule focus on a genersion of the Old Rule and al description of the computer system. UFOC. (2) historically used only a disclosure document view the manual before purchasing the franchise. even in the absence of a franchisee counterallows flexibility in disclosing whether specifications or stanclaim. under the New Rule. . and required nated settlements as confidential. the New Rule specifies the use of a more sale or operations of franchises in spite of the lack of a extensive warning legend than that required by the UFOC. that must include a summary in tabular form of twenty-three conItem 4 does not extend to directors who serve solely in tract terms generally found in a franchise relationship. a franchisor is allowed under Unlike the UFOC. All rights reserved. Number 2. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. a franchisor computer systems.65 For concluded civil actions.59 Published in Franchise Law Journal.64 The FTC prepared under the Old Rule.52 A settlefunctionality of hardware ment need not be disThe FTC’s goal is to give and software.51 to the franchisor’s offices to review the manual. a franchisor must also disclose the bankruptcy Item 17. When a franchisor does not offer an business (such as royalty payment and training obligaexclusive territory. a prospect cannot be required to fly before the New Rule’s effective date. Consistent with the UFOC’s detailed disclosures. Like the UFOC. the New Rule requires the disclosure of actions iniupgrade requirements. not held liable. Item 17 history of all people listed in Item 2. but paid to third parties. The disclosure of affiliates with currently effective Item 6 closely tracks the UFOC. any of indemnification for tort liability.. An early draft of Item 6 required disclosure of fees offer franchises under a franchisor’s principal marks. or disclosed in summary form and are not subject to any quarother direct marketing sales. in addition to fees paid to the franchisor also to affiliates that guarantee the franchisor’s perforand affiliates.”53 within a franchise system. The New Rule expressly provides that confidential settlethe New Rule requires specific information about the assisments and the terms of such confidential settlements must tance provided by a franchisor to franchisees.69 cover any counterclaims filed by a franchisee in response to Item 13. within the franchisee’s territory terly updating requirements in the New Rule. The New Rule eliminated this requirement and mance.66 For start-up franchisors that have was a plaintiff in a material action involving the franchise not yet determined computer requirements. including adverbe disclosed. and a franchisor’s access to information tiated in a franchisor’s last fiscal year where the franchisor on the computer system.54 The New Rule defines franchise relationship as a dards exist in this regard. and any franchisor consideration nor is more information on the approval to use compatible bound by obligations that nature and level of disputes equivalent hardware and are materially adverse to software. compatible closed if “the Franchisor a prospective franchisee equivalent hardware and neither pays any material software. If the franchisor’s Item 4. however. or competitive give a prospective franchisee more information on the brands.61 Although the issue has offered or sold franchises in any line of business within of alternative suppliers was the subject of several comments. the last ten years. the FDD is required to include a warning tions). Similar to the requirement in Item 2 to disclose principal trademark is not registered with the U. The computer sysits interests. The FDD must disclose any supplier in which an expanded under the New Rule to include any affiliate that officer of a franchisor owns an interest. regardless of whether the parties have desigtising assistance. telemarketing. or (3) is new to franchising is adds that such a viewing must be a “reasonable opportunity to not required to disclose confidential settlements entered into review the Manual.55 Actions involving the franchise relationship do not that the franchisee will not receive an exclusive territory and include actions involving suppliers or other third parties. the table of contents to that (1) entered into confidential settlements before selling any operating manual must be included or the prospect must franchises. catalog sales.Item 6.68 Item 12 also must specifically address a franchisor’s nature and level of disputes within a franchise system. Volume 27. the New Rule relationship. The disclosure requirements in the New Rule for an action filed by a franchisor.50 However.67 contractual obligation between the franchisor and franItem 12.49 Item 11. Each that capacity. including the Internet.” e. operations manuals. © 2007 by the American Bar Association. training. maintenance costs. Fall 2007.

In addition to the UFOC requirements. Audited financial statements disclosed in the FDD must be prepared according to GAAP. their contact information may be disclosed in future FDDs. or as permitted by the Securities and Exchange Commission (SEC). and the periods when the franchisor retained control of the outlet in the last five years. Reproduced with permission. sponsored. © 2007 by the American Bar Association.78 • How many outlets were terminated. Volume 27. Number 2. address. the phase in is not allowed if the franchisor has been engaged in franchising or has previously prepared audited financial statements. the FDD must contain a warning to prospective franchisees that. market.79 • Summary of franchisor-owned outlets. 95 The UFOC requires franchisees to acknowledge receipt of the disclosure document with a handwritten signature while the New Rule allows a franchisor to use an electronic acknowledgment of receipt. email address.75 As discussed earlier. the reason for each previous ownership change during the last five years. the franchisor is required under the New Rule to disclose contact information for each previous owner of the outlet in the last five years. the FDD must list former franchisees.85 In disclosing confidentiality clauses.77 • Summary of the number of transfers within the franchised system. and website for each trademark specific franchisee association is required under the New Rule.90 The use of audited financial statements as permitted by SEC was included in recognition that the market today is global and that solely requiring GAAP could impede foreign franchisors from entering the U.96 The New Rule also specifies that the acknowledgment of receipt must appear at the end of the FDD. The New Rule completely revises the charts that are required in Item 20. As expected.93 However. Transfers are listed separately because they do not affect the total number of outlets but may show a pattern of churning in a franchise system.g. phone number.94 States are likely to continue to require audited statements so the phase-in may be of little benefit to start-up franchisors. the UFOC required the disclosure of all existing outlets known to have attained the performance level.91 The FTC is expected to provide additional details in the Compliance Guides on when a parent will be deemed to have committed to perform postsale obligations. Fall 2007.86 The disclosure of the name.S. nonrenewal of a franchise followed by a repurchase by a franchisor). Independent franchisee associations must be disclosed only if the association (1) is incorporated or otherwise organized under state law and (2) asks a franchisor to be included in the FDD during the next fiscal year.83 Also.72 The New Rule disposes of requirements that there be a separate financial performance document. if they do join the franchise system.82 In addition. and that historical financial information be prepared in accordance with generally accepted accounting principles. or endorsed by a franchisor must be disclosed in Item 20. Item 23. like the UFOC. The New Rule also requires the disclosure of financial statements of any subfranchisor.97 The Published in Franchise Law Journal. in which case the actual guaranty must be included in the FDD. The New Rule requires use of a preamble describing a franchisor’s options related to providing financial performance information in the FDD. The New Rule adopted the UFOC requirement for an acknowledgment of receipt. or closed for other reasons. as well as a separate preamble if the franchisor professes not to make financial performance representations.87 The request for inclusion in the FDD must be annually renewed by an independent franchisee association no later than sixty days after the close of a franchisor’s fiscal year. the New Rule also requires a franchisor to explain what the term renewal means in the franchisor’s franchise system and to disclose if franchisees could be required to sign a renewal contract with materially different terms and conditions than their original contract.contract term is summarized in the table. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. the New Rule also does not treat mere expense disclosures as financial performance information. the FTC rejected arguments that financial performance information should be included in every franchisor’s FDD. if multiple events affect a given outlet (e.89 This disclosure was added to give additional information to prospective franchisees involved in the resale of an outlet and to identify churning of outlets. .74 The New Rule requires a franchisor to disclose only the number and percentage of existing outlets that attained the performance level in the area that formed the basis for the performance representation.. the ownership period for each previous owner required to be disclosed. not renewed. All rights reserved. reacquired by the franchisor. and a cross-reference is provided to the relevant contract provision.76 Item 20. The charts (showing state and nationwide information) are as follows: • Systemwide summary that shows the number of outlets at the beginning and end of the last three years. but personal information about the individuals is somewhat limited.88 When a franchisor sells a specific outlet. Confidentiality clauses are not prohibited but a franchisor may disclose the number and percentage of franchisees that have agreed to such clauses. the last-in-time event will be reported in Item 20.81 Under the New Rule. Item 21 .84 A franchisor must also disclose the existence of confidentiality clauses that prevent existing franchisees from talking to prospective franchisees about their franchise relationship. The New Rule requires the financial statements of a franchisor’s parent to be included in the FDD when the parent commits to perform post-sale obligations for the franchisor or guarantees obligations of the franchisor. as revised. again in contrast to the UFOC and the Old Rule.92 It retains the Old Rule’s provision that permits a start-up franchisor to phase-in audited financial statements within three years. All franchisee associations that are created.80 • Projection of how many franchised and franchisor-owned outlets will be opened in the coming year (comparable to the UFOC requirement). thus avoiding the double-counting problems that can arise under the UFOC. that the Item 19 information be geographically relevant to the franchise offered. a franchisor may describe the situations in which such provisions are signed.73 The New Rule permits the disclosure of financial information about a subset of the franchise system if a franchisor discloses specific information related to the subset.71 Item 19.

Franchise Guide (CCH) § 5710–5743. Because there is no private right of action under the New Rule. the New Rule establishes a three-year record retention policy that applies to sample copies of each FDD used by the franchisor111 and a copy of each receipt signed by a prospective franchisee.100 If there are material changes at any time in a franchisor’s Item 19.” was published in a 398-page report on January 23.103 The New Rule also prohibits the use of shills or other fictitious references. 2. and provide a current version of the franchise agreement to a prospect at least seven days before signing if it has been unilaterally modified by the franchisor. the FTC indicated that it has the right to seek injunctive relief against persons who have the authority to control conduct and who are involved in the preparation of the FDD. 7.g. most of which are consistent with other requirements under the New Rule.” The report is available at http://www. Whether this policy will be enforced is an open question.pdf. 26 FRANCHISE L. and the terms of the relationship between the parties. 2007. Report.7. it must show that the individual knew of the misrepresentations.F. Page references are to the 398-page report. The FTC will likely provide guidance in Compliance Guides about this topic as well. furnish updated disclosures to a prospect upon reasonable request (e. if necessary. but it is apparent that many franchisors will have to take steps to delete extraneous information from the FDD.ftc. Wells & Dennis E. 163 (2007). which includes the Statement of Basis and Purpose. unless required or permitted by the New Rule or by nonpreempted state laws. Volume 27. at 33 n. Reproduced with permission. even by e-mail or telephone call. Although acknowledging that integration clauses serve a useful purpose. 3. an FDD will provide a comprehensive portrait of the franchisor. Miscellaneous Provisions The New Rule clarifies the ground rules of liability for violations of the Rule. 6. Id. Gerald C. in a situation where the FDD has been updated or modified since the franchisee was originally disclosed)102.105 This language was criticized as negating standard integration clauses in franchise agreements. including proscribing representations that contradict the FDD and financial performance representations without a reasonable basis. the franchise opportunity.R. The New Rule also contains an immediate updating requirement with respect to financial performance representations.109 However. and a new part. 4. Id.98 Because the key element of the annual update is the franchisor’s audited financial statements. either by proof of actual knowledge or “an awareness of a high probability of fraud along with an intentional avoidance of the truth. only the FTC can assert claims for violations (although private claims may be viable under certain state Little FTC Acts).112 Conclusion The New Rule materially advances the cause of full disclosure to prospective franchisees.gov/os/2007/01/R511003FranchiseRuleFRNoti ce.2. 108 The FTC is expected provide additional detail on the scope of this prohibition in Compliance Guides. The New Rule and Your Practice—The Top Ten Things You Need to Know. damages) from an individual.acknowledgment of receipt in the FDD must also disclose the contact information for the specific people. The New Rule. thereby resulting in confusion as to the boundaries of the parties’ final agreement. Number 2. “Disclosure Requirements and Prohibitions Concerning Franchising. Wieczorek. 107 nor does it affect changes that are negotiated by the parties.. It can do so in any form. supra note 4. The New Rule also facilitates the disclosure and communication process between the parties by recognizing new technologies and processes.e. Quarterly updates are required only if material changes occur and may be effected via an addendum to the FDD. must be implemented within a reasonable time after the end of each calendar quarter (presumably during the month following the end of each quarter). the New Rule. hereafter called the “Report. But the New Rule includes additional prohibitions. known as franchise sellers. Prohibitions The New Rule incorporates a number of prohibitions from the Old Rule. Published in Franchise Law Journal.99 These updates.”110 The New Rule also prohibits the inclusion of additional materials in the FDD. the additional time period allows for some breathing room in completion of the franchisor’s audit. § 436. First. The franchise industry awaits the FTC’s promulgation of Compliance Guides to fill in the details of the New Rule and anticipates an ongoing dialogue with the FTC and the states to refine and update the disclosure process and the content of the disclosure document. “Disclosure Requirements and Prohibitions Concerning Business Opportunities. a franchisor is prohibited from failing to: provide the FDD to a prospect upon reasonable request101. 16 C. this prohibition does not apply to documents or advertisements outside the FDD. 106 the FTC stood fast on prohibiting waivers or integration clauses that have the effect of insulating franchisors from liability for misrepresentations in an FDD.. © 2007 by the American Bar Association. Updating Requirements The New Rule extends the time period for annual updates from ninety days to 120 days after a franchisor’s fiscal year end. 436. § 5743. at 34–36. Bus. if the FTC seeks consumer redress (i. Finally. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. However. as long as it can prove that it provided the update. For example. All rights reserved.104 Another prohibition in the New Rule has been the source of some controversy. dealing with the prospective franchisee in connection with the sale.97. Fall 2007. it must immediately notify prospective franchisees of those changes.” 5.J. Franchisors are prohibited from disclaiming or requiring a franchisee to waive reliance on the FDD. Endnotes 1. . More so than before.

R.R.5(t)(8). Id. 87.6(d).7(d). 83.g.5(c)(1)(iii)(B).5(u)(1).5(t)(5). LAWS § 19-28. Report. 16 C. 42.F. 103. 16 C. e. supra note 4. 108.F. § 436.6(g). § 436.Y. Id. 80.F. 78. supra note 4. Id. at 232.5(u)(2). supra note 4. § 436. 75. § 436. R. 16 C.8. Old Rule § 436. § 436. . 35. 66. § 436.R. § 436.5(q). 16 C. 16 C. Id. § 436.9(h).2(b).R. Id. 86. 16 C. 19.F. 88. 30.F. 16 C.R.F.5(k)(6). 71. 98. § 436. § 436. at 237. 21. 36. supra note 4. 77. at 90–91.F.F. 65. Reproduced with permission. § 436. 59.R. 72. § 436. at 198. 16 C. § 436.F. 16 C.R.F. 95.R. 16 C. at 73. 16 C. 16 C. § 436. 70.F.1-8. 92. Id.F. at 256.R. 104.I. 62. Id.R.5(t)(2)(i). 90.F. Volume 27.5(t)(3).R.F. 16 C. 109.F. 16 C.R.F. 16 C. 23. Id. 16 C. 93.R.6(i). 16 C. (d) and (e). at 215.F.R. © 2007 by the American Bar Association. (2). 14. 16 C. supra note 4. 81.8(b).R.F.F. 41.5(t)(1).R. §553.5(w). 25.F. at 123.F. Report. 49. 48. 61.R.R.R.g.7(b). at 99. Id.5(c)(1). 38. 85. STAT.. 16 C. Number 2. § 436.R. Report.9(b). supra note 4. 16 C.R. Published in Franchise Law Journal.F. Report. 16 C.F.R. § 436. 100.R. 9. § 436.R. 16 C.F.5(l)(6)(i).R.F.F. 58. 50.6(h).8(a)(6). § 436. 91. 16 C.F. Id. Report.F.5(c)(1)(ii). § 436.F.R. 16 C.R. GEN. 26. supra note 4.4. 37.F. 16 C. § 436. 44. 102. Id. 112. 101. 68. 60.5(m)(4). 16 C. § 436.R.R. 16 C.8(a)(5)(i).F. supra note 4. 10.F. 55. § 436. 28.F.5(l)(5)(i).R. § 436. 56. 16 C.3(b). Item 19 (B)(ii). 18.F. at 199.F. 67. 74. § 436.R.5(t)(2)(iii).R.R. 43. 29. at 253. 33.R. 97. 64.5(u)(1)(v). Report. Report. WIS. 16 C. § 436. § 436. BUS.F. 94. 46. 105. § 436. 100.5(a)(1).R. 16 C.F. 24.R. 16 C. § 436. 34.R.F. § 436. § 436.R. supra note 4.F. 16 C.R. 84. 16 C.1(j).030(4). Report. Id.F. supra note 4. 16 C. e. 16 C. § 436. Id.R. 16 C. See. 47. 45.F. 16 C.R. Report. 16 C. Report.R. 16 C. § 436.3.F. 16. Id.F. supra note 4. 69. 16 C. 16 C. 57.R. 16 C.R. § 436. GEN. 16 C.F. § 436. at 72. § 436. Id. 16 C.1(e).R. § 436. § 436.F.R. § 436.F.1(c).7(a) 99.F. § 436.F. 27. MD. § 436. § 436.1(a)(4).R. § 436.F. 16 C. 16 C. 52.1(s).F. 11.R.5(c)(2).3(b).R. Report. § 436. § 436. 12. 16 C.5(s)(3)(ii)(C). § 436. Id. § 436. 107. Id. supra note 4. § 436 n.9(e).F.5(t)(7).5(k)(5). All rights reserved. Report. § 436. Id. 16 C. CODE § 31109. Report.27(4).F. 15. 89.9(h). 16 C.9(g). supra note 4.5(b).R. 63. Old Rule § 436.R. 40.F.8(a).F. REV.2(a). LAW § 683. 16 C. at 45.F.F.R.F.F.F. 73. § 436. supra note 4. 16 C. 16 C. 16 C. Id.R.F. 16 C.5(d).R. 39. 110. 16 C. § 436. § 436.R. CALIF. 79. 16 C. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. 32.5(w).(c)(i)(B). § 436.5(k).5(s)(3)(ii)(A). 16 C.5(t)(2)(ii). 106.5(f).R. § 436.9(f). 16 C. § 436. 16 C. 13. Report.R.R.F. Fall 2007.5(h)(3).F. See. UFOC.2(c). 16 C. 16 C. 96. WASH. CODE § 19. § 436. § 436. at 192.1(d). 54.R.R.R. § 436. § 436.. 111. supra note 4.R. at 231.5(s)(1).R.2.9(e).F. § 436. 16 C. § 436. § 436. 82. 53. § 436. 16 C. 16 C. 31. 17. § 436. at 132. 22. 51. N.F.1(g)(1). at 131.R.8. §14-223. 76. CORP. 20. CODE ANN. § 436.R. § 436. Report.8(a)(5)(ii). (f). 16 C.F.5(t)(2).

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