The Federal Trade Commission has issued a newly updated version of its Franchise Rule, which sets forth requirements that businesses must follow when offering franchises or business opportunities. This amendment has been in the works for several years and represents a major overhaul of the Franchise Rule, which was originally adopted in 1978. The new Franchise Rule went into effect July 1, 2007, although businesses have the option of complying with the previous version of the Rule through July 1, 2008.
Disclosure Requirements and Prohibitions Concerning Franchising
The Franchise Rule defines a “franchise” as “any continuing commercial relationship or arrangement, whatever it may be called, in which the terms of the offer or contract specify, or the franchise seller promises or represents, orally or in writing, that:
(1) The franchisee will obtain the right to operate a business that is identified or associated with the franchisor's trademark, or to offer, sell, or distribute goods, services, or commodities that are identified or associated with the franchisor's trademark;
(2) The franchisor will exert or has authority to exert a significant degree of control over the franchisee's method of operation, or provide significant assistance in the franchisee's method of operation; and
(3) As a condition of obtaining or commencing operation of the franchise, the franchisee makes a required payment or commits to make a required payment to the franchisor or its affiliate.”
When a franchisor, which is a person who grants a franchise and participates in the franchise relationship, offers to enter into a franchise relationship with a prospective franchisee, the franchisor is obliged to provide a disclosure document to the prospective franchisee at least 14 calendar days before the prospective franchisee signs a binding agreement with or makes payment to the franchisor. Failure to do so is considered an unfair or deceptive act or practice in violation of the Federal Trade Commission Act, which the FTC enforces through injunctions, orders, and civil penalties of up to $10,000 per violation. Other acts which are considered unfair or deceptive acts or practices under the Franchise Rule include making representations contrary to the contents of the disclosure document, making representations concerning financial performance without meeting certain requirements, failing to provide a disclosure document to a prospective franchisee upon request, and offering for signing a franchise agreement in which terms have been altered without providing seven days notice before execution, among others.
The Franchise Rule sets forth very specific requirements for the contents of the disclosure document. This document is designed to give a prospective franchisee all of the information that he or she needs in order to make an informed decision about whether to enter into the franchise relationship. The former version of the Rule allowed a franchisor to satisfy the disclosure requirements of the Rule by offering a Uniform Franchise Offering Circular, which is a form of disclosure document required by several states. However, the new version of the Rule does not provide this option. Franchisors must comply with the requirements of the Franchise Rule regarding the contents of a disclosure document, which are not satisfied by a Uniform Franchise Offering Circular. The new Rule adopts much of the Uniform Franchise Offering Circular, but omits certain requirements and goes beyond the requirements of the Circular in certain areas. Therefore, franchisors currently using a Uniform Franchise Offering Circular must reevaluate and update their disclosure document, not only in content but also in form, in light of the new Franchise Rule by no later than July 1, 2008.
Disclosure Requirements and Prohibitions Concerning Business Opportunities
The former version of the Franchise Rule concerned both franchises and business opportunities. The new version offers separate rules for these two categories, with a Business Opportunities Rule separate from the Franchise Rule. opportunity seller.
Under the new Business Opportunities Rule, it is an unfair or deceptive act or practice under the Federal Trade Commission Act for a business opportunity seller or business opportunity broker to fail to furnish a prospective business opportunity purchaser with certain information, set forth in the Rule. This new Business Opportunities Rule utilizes the text of the former Franchise Rule, so far as it covered business opportunities. However, that is expected to change as the Federal Trade Commission is currently working on amending the Business Opportunities Rule.