Federal Franchise Rule Changes Incoming

Wednesday, December 9, 2020

On November 10, the Federal Commerce Fee held a digital public workshop addressing the continued utility of its Commerce Regulation Rule entitled “Disclosure Necessities and Prohibitions Regarding Franchising,” 16 CFR Half 436 (the “FTC Rule”). The workshop was a part of a scientific evaluate of all FTC rules and portends potential revisions to the Rule.

The workshop targeted on three points: (1) monetary efficiency representations, (2) using disclaimers and (3) the format of the FDD. Among the many contributors on the workshop have been state franchise directors, franchisor and franchisee counsel and at the very least one franchisee.

Monetary Efficiency Representations

Commentators consisting of state franchise regulators, franchise attorneys and franchisees argued for and towards revising the FTC Rule to mandate that franchisors present a monetary efficiency illustration. A state regulator famous that such info is most vital to potential franchisees and that the price to franchisors of offering monetary efficiency representations is offset by the profit to franchisees. Others argued towards necessary monetary efficiency representations, claiming, amongst different causes, that eligible franchisee info might not be accessible, franchisees are both not reporting their earnings or different info to the franchisor or are reporting figures which can be suspect or the franchise system is younger and doesn’t have a efficiency historical past.

Disclaimers, Waivers and Questionnaires

On this workshop, commentators highlighted the excellence between explaining the content material of the FDD and disclaiming it, noting that the prohibition on disclaimers has resulted within the rejection by state directors of explanatory language. Consequently, franchisees usually tend to misread the FDD.

With respect to using questionnaires and acknowledgements within the franchise gross sales course of, some commentators have been important of questionnaires, claiming that they discourage franchisee transparency about having acquired impermissible info within the disclosure course of. These commentators additionally famous franchisors’ use of questionnaires and acknowledgements as an improper technique of avoiding legal responsibility for gross sales legislation violations and different claims, equivalent to fraud. Different commentators defended use of questionnaires and acknowledgements, citing their position in clarifying that solely info supplied by the franchisor—and never from different sources or events—must be relied upon by the franchisee.

The Present FDD Format

A lot dialogue was had as as to if a abstract doc must be added to the FDD. Some commentators raised concern {that a} abstract would discourage prospects from studying the complete FDD, and that the summarized points might not deal with all these which can be materials to the prospect. One other spoke in favor of a abstract, claiming that it might convey entrance and middle the important FDD Gadgets. There was additionally a distinction of opinion as as to if the size of the FDD deters prospects from studying them. All commentators appeared to favor offering FDDs electronically with hyperlinks and search features.

Anticipated Adjustments to the FTC Rule

Whereas the FTC has in a roundabout way said what, if any, adjustments can be made to the FTC Rule, it’s doubtless that modest revisions can be proposed. This could be per previous apply. Following the FTC’s 1995 regulatory evaluate, the FTC felt compelled to make adjustments; nonetheless, comparatively restricted. Maybe this was a mirrored image of the truth that the FTC Rule had been in impact for a substantial time period with out large public criticism, and as a result of complexity in imposing a single rule that’s relevant and related throughout a variety of industries and circumstances.

Among the many probably adjustments that we anticipate are the next:

Incorporation of the current NASAA monetary efficiency illustration commentary into the FTC Rule. This alteration is a comparatively straightforward one for the FTC. The commentary has been vetted by the franchise directors of the roughly fifteen states that regulate the supply and sale of franchises and addresses the Merchandise 19 necessities of the FTC Rule. Furthermore, as a result of the NASAA commentary has, for all sensible functions, been adopted by the state franchise directors, franchisors which can be lawfully providing and promoting franchises in a number of of those fifteen states are already complying with the NASAA commentary. Consequently, the FTC’s adoption of the NASAA commentary would have little actual impact upon most franchisors;

Readability relating to prohibited disclaimers. The FTC might, and sure ought to, fill this void. There has existed appreciable uncertainty as to what constitutes a prohibited disclaimer. A uniform definition or set of pointers would cut back the uncertainty, and thus cut back the pointless authorized danger that has resulted from it; and

Extra regulation to advertise digital disclosure. The FTC Rule presently permits franchisors to ship their FDDs by way of digital means, and a major quantity and proportion of franchisors achieve this. Nevertheless, the FTC Rule prohibits the inclusion of any content material and hyperlinks past the FDD itself, apart from primary navigational instruments. The FTC might loosen this restriction, allowing hyperlinks to, amongst different issues, the FTC and state web sites. It could additionally encourage franchisors to put up their FDDs on their web sites.

We don’t anticipate that the FTC will mandate monetary efficiency representations or the addition of a abstract doc to the FDD. These adjustments could be way more substantive and vital than the adjustments that we anticipate, and would doubtless trigger confusion and uncertainty (in addition to heightened authorized danger and disputes ensuing from that confusion and uncertainty).

The FTC is accepting public feedback on the FTC Rule till December 17. It stays to be seen whether or not the FTC will undertake any adjustments to the FTC Rule and, if that’s the case, the character of the adjustments. Nevertheless, primarily based upon the workshop, the FTC’s focus seems fastened on monetary efficiency representations, disclaimers/waivers and abstract paperwork.