The Federal Trade Commission has approved amendments to the Franchise Rule, which was originally promulgated in 1978. The amended Rule has a phased-in effective date: as of July 1, 2007, franchisors may follow the amended Rule, or they may continue their current practice of complying with the original Rule or individual state franchise disclosure laws that require an Uniform Franchise Offering Circular (“UFOC”); but by July 1, 2008, they will be required to follow the amended Rule only.
The Franchise Rule gives prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment. The Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees. Required disclosure topics include, for example: the franchise’s litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations.
A primary goal in amending the Rule was to harmonize the federal Rule with state franchise disclosure laws. The Commission’s amendments also serve the purposes of updating the original rule to adapt to changes in the marketing of franchises and new technologies, reducing compliance costs where possible, and addressing complaints voiced by many franchisees during the amendment proceeding about the franchisees’ experience with franchisors after they have signed an agreement and entered into a franchise relationship.
The Rule amendments bring the FTC’s Rule into much closer alignment with state franchise disclosure laws, which are based upon the UFOC Guidelines, developed and administered by the North American Securities Administrators Association (“NASAA”). Although the amended Rule closely tracks the UFOC Guidelines, in some instances it requires more extensive disclosures – mostly with respect to certain aspects of the franchisee-franchisor relationship. For example, the amended Rule requires more extensive disclosures on: lawsuits the franchisor has filed against franchisees; the franchisor’s use of so-called “confidentiality clauses” in lawsuit settlements; a warning when there is no exclusive territory; an explanation of what the term “renewal” means for each franchise system; and trademark-specific franchisee associations. In a few instances, the amended Rule requires less than the UFOC guidelines – for example, it does not require disclosure of so-called “risk factors,” franchise broker information, or extensive information about every component of any computer system that a franchisee must purchase.
The original Rule covered, in a single Code of Federal Regulations Part, two distinct types of offerings: franchises and business opportunity ventures. Many of the very familiar national fast-food restaurants and hotels, for example, are franchises; business opportunity ventures include vending machine routes, rack display operations, and medical billing schemes ventures. These ventures, unlike franchises, typically do not involve the right to use a trademark or other commercial symbol. Nevertheless, they do call for the opportunity seller to provide purchasers with locations for machines or equipment or with clients. The amended Rule separates the requirements applicable to franchises from those applicable to business opportunity ventures. Part 436 of the amended rule covers only franchises, while a newly-numbered Part 437 preserves the text of the original rule in so far as it covers business opportunity ventures. The Commission is conducting a separate proceeding to consider amendments to what is now designated Part 437, the Business Opportunity Rule.
