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The GPMemorandum, Special Edition, Issue 96

January 01, 2007 | Alert

Craig P. Miller, Editor of The GPMemorandum

To view a pdf. version of this newsletter, please click here.

THE REVISED FRANCHISE RULE - IT'S HERE!

FTC STAFF ISSUES UPDATED FRANCHISE RULE . . . FINALLY!

Like many others in the franchise community, we have long wondered when the Federal Trade Commission would issue its much-anticipated, updated Franchise Rule.  For those of us who attended the first FTC workshop in Minnesota, back in 1995, little did we realize that the process of amending a rule regulating disclosures in franchise offering circulars would last more than 11 years.  As we reported in last week’s Special Issue of The GPMemorandum, the FTC Staff finally announced the release of the amended Franchise Rule (16 CFR Part 436) (the “Amended Rule”) last Tuesday (January 23).  You may obtain a copy of the nearly 400-page Report and related Federal Register notice at http://www.ftc.gov/enforcement/rules/rulemaking-regulatory-reform-proceedings/franchise-rule.

THE AMENDED RULE – WHAT DOES IT MEAN FOR FRANCHISORS?

The Amended Rule and accompanying Statement of Basis and Purpose (the “FTC Statement”) present an exhaustive summary and analysis of the FTC Staff’s 11-plus year Franchise Rule review, a review which included several public hearings, hundreds of public comments and extensive analysis by FTC Staff members.  For those familiar with the proposed revisions to the Franchise Rule published in 2004 (reported in Issue No.76 of our GPMemorandum dated September 1, 2004. The Amended Rule confirms much of what was proposed while adding several new twists.

To help you prepare for this significant change in franchise disclosure regulation, this Special Edition of The GPMemorandum highlights key provisions of the Amended Rule, the impact some of the more significant changes will have on franchisors and strategies to maximize the benefits and minimize the challenges presented by the Amended Rule.

NEW DISCLOSURE MODEL AND SCOPE

Following the UFOC Guidelines – with a Few New Twists

Consistent with the aim of the Franchise Rule to provide full disclosure to franchisees while minimizing franchisors’ compliance costs and burdens, the Amended Rule adopts in large part the UFOC Guidelines disclosure model, a model which the North American Security Administrators Association (“NASAA”) originally created.  The Amended Rule incorporates a substantial number of the current UFOC Guidelines with little or no variance, streamlines other UFOC Guidelines in an effort to eliminate unnecessary disclosure burdens and revises or adds a few other disclosure requirements to fix what the FTC Staff perceives as broken elements of the Franchise Rule.

Sending Business Opportunities Down a Separate Path

As predicted, the FTC formally removed business opportunities from the scope of the Amended Rule, and addresses these “distinct business arrangements” in a separate business opportunity rule (16 CFR Part 437).  This change recognizes that the principal concern with business opportunities is fraudulent activity, which should be addressed by imposing a few narrowly tailored disclosure requirements accompanied by appropriate restrictions on such activity.  For now, the FTC made only cosmetic changes to the rule on business opportunities, pending resolution of ongoing rulemaking proceedings.

Avoiding Regulation of the Ongoing Franchise Relationship

Consistent with the original Franchise Rule, the Amended Rule does not regulate the continuing relationship between a franchisor and franchisee.  The FTC Statement explains that the FTC lacks statutory authority to regulate relationship issues and has insufficient data to support such an expansion of the Franchise Rule to mandate any substantive terms of private franchise contracts.  The FTC Staff notes that a franchise purchase is entirely voluntary and further suggests that relationship issues can be addressed by expansion of select pre-sale disclosures.

International Applicability – The Amended Franchise Rule Stops At the Border(s)

The Amended Rule answers a long-standing question as to the international application of the Franchise Rule.  In its current form, the Franchise Rule does not specifically address whether it applies to international franchise sales activity.  The Amended Rule expressly addresses the matter by limiting application of the Rule to the sale of franchises to be located in the United States (including its territories and possessions).  In doing so, the Amended Rule does not apply to the sale of franchises to be located in other countries, regardless of the residency of the franchisee.  The FTC Staff did confirm, however, that the Amended Rule will apply to franchises to be located in American territories such as Puerto Rico.  Despite the FTC’s new (and reasonable) position respecting international applicability of the Amended Rule, international franchise sales activities will still fall within the scope of certain state franchise laws.  Serious doubt exists as to whether each of these states (e.g., California) will revise their disclosure laws to parallel the FTC’s approach under the Amended Rule.

MECHANICS OF DISCLOSURE – GETTING A LITTLE LESS MECHANICAL

Get Personal . . . Disclose Later

Recognizing that the first personal meeting disclosure trigger has become obsolete in this technology age, the FTC has eliminated this historic requirement from the Amended Rule (Section 436.2).  Further, in a departure from the traditional 10 business day rule, the Amended Rule now requires disclosure “at least 14 calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.”  In counting the 14 calendar-day period, the FTC requires franchisors to begin counting days on the day after actual document delivery, and to postpone the signing of any binding agreements or the making of any payments until the 15th day after delivery – thus ensuring a full 14-day review period.  In deference to concerns that franchisees may incur substantial investment obligations well before the start of the 14-day disclosure period, however, Section 436.9(e) of the Amended Rule requires franchise sellers to provide full disclosure earlier in the sales process, if reasonably requested.

Close that Deal Now – The Old Five Day Rule

As prospective franchisees often seek to negotiate contract terms up to the actual point of contract execution, the Amended Rule eliminates the traditional five-day rule that requires franchisors to deliver final, execution copies of agreements at least five business days before signing.  Under the  Amended Rule (Section 436.2), a franchisor may not make unilateral, material changes to the agreements without providing a prospect with at least seven calendar days to review the changes.  Importantly, however, the Amended Rule recognizes that “changes to an agreement that arise out of negotiations initiated by the prospective franchisee do not trigger [the] seven calendar-day period.”

Renewal Filings – All I Need is a Little More Time

Another welcome change for franchisors is the Amended Rule’s extension of the annual updating period from 90 to 120 days – now tracking the updating period of several franchise registration states (Section 436.7).  Publicly-held and larger privately-held companies (and their accounting firms) will appreciate the additional 30-day period to complete the audit process.  The Amended Rule also requires franchisors to update their UFOCs on a quarterly basis, as material changes occur.

Format of Disclosure – Any Way You Like It (Including Electronic Disclosure)

Stepping into the 21st Century, the Amended Rule (Section 436.6) provides welcome clarification, and flexibility, as to the method or media of disclosure.  The Amended Rule permits UFOC delivery in any manner that permits a prospect “to store, download, print, or otherwise maintain a copy for future reference.”  This means that disclosure can be completed by e-mail as well as through a franchisor’s website.  Before delivering the UFOC, the franchisor must simply advise a prospect of available disclosure formats, and any requirements for obtaining and reviewing disclosure in a particular format.  While the Amended Rule permits franchisors to include scroll bars, internal links and search features, these must be incorporated solely to enhance reader utility.  Further, to prevent a flood of non-material or confusing information within core disclosures, the Amended Rule expressly prohibits the inclusion of any material not specifically required under the Amended Rule (or by applicable state law) – including any multimedia tools such as audio, video, animation, pop-up screens, or links to extraneous information.  From a housekeeping standpoint, franchisors will now be required to retain a sample copy of each materially different UFOC, and all signed receipt pages, for a period of at least three years.

A FOND FAREWELL TO BROKER DISCLOSURE?

Recognizing the substantial compliance costs associated with preparing broker disclosures, and the “scant benefit” provided by such disclosures, the Amended Rule omits any requirement to include broker information in Item 2 (Section 436.5(b)).  Before throwing a party and deleting all broker disclosures, however, franchisors must keep in mind that states are not pre-empted from imposing disclosure obligations in addition to those included in the Amended Rule.  In fact, before issuance of the Amended Rule, state franchise authorities already had suggested that broker disclosures are not likely to fall off of the state disclosure radar.  Unfortunately, for franchisors filing in these states, the cumbersome and dreaded broker disclosure obligations may remain a part of the UFOC update process.

GREATER LITIGATION DISCLOSURE IMPOSED ON FRANCHISORS – WHEN IS ENOUGH ENOUGH?

The expansion of litigation disclosures under Section 436.5(c) of the Amended Rule is among the most significant changes for franchisors.  Specifically, the FTC Staff addresses three substantive disclosure issues under this Section – franchisor-initiated litigation, parent company/affiliate litigation and settlement agreements involving franchisees.

Franchisor-Initiated Litigation – If You Pursue It, Plan to Disclose

Most importantly, the Amended Rule requires a franchisor to disclose annually in Item 3 all franchisor-initiated litigation involving the franchise relationship during the previous fiscal year.  While franchisor-initiated litigation must be “material,” the FTC intends to view materiality from the reasonable prospective franchisee’s vantage point.  In other words, franchisors should be prepared to disclose most lawsuits brought against franchisees.  The new disclosure standard includes civil actions that a franchisor initiates against a franchisee to enforce contractual obligations directly relating to the operation of the franchised business (such as royalty payment and training obligations).  The obligation to disclose does not include actions involving third parties (such as suppliers), affiliates or other systems, or indemnification for tort liability.  To aid franchisors in disclosing franchisor-initiated litigation, the Amended Rule does allow franchisors to list similar individual lawsuits under common headings (e.g., royalty collection suits).  In doing so, the Amended Rule eliminates the need to disclose more than the case name, court, and file number for each similar suit.  Each franchisor-initiated action need only remain in the UFOC for one year unless otherwise subject to disclosure under another paragraph of Item 3 (Section 436.5(c)).

Parent and Affiliate Litigation Disclosure

Under the Amended Rule, franchisors also must disclose litigation regarding a “parent” (an entity that controls the franchisor directly, or indirectly, through one or more subsidiaries) or an “affiliate” (an entity controlled by, controlling, or under common control with, another entity), but only if that parent or affiliate guarantees the franchisor’s obligations.  In addition, the Item 3 litigation disclosure relating to governmental actions (i.e., injunctive or restrictive orders or decrees) will apply to “an affiliate who has offered or sold franchises in any line of business within the last 10 years,” instead of being limited to “an affiliate offering franchises under the franchisor’s principal trademark,” as is required under the UFOC Guidelines.

Can Settlement Agreements Remain Confidential?

The Amended Rule also addresses a franchisor’s obligation to disclose settlements with its franchisees.  While franchisors still are not required to disclose settled litigation where the settlement is favorable, the Amended Rule expands the franchisor’s requirements and mandates the disclosure of non-favorable settlements, even if the parties agreed to keep those settlements “confidential.”  This expansion brings the Amended Rule in line with the UFOC Guidelines.  Franchisors that have traditionally complied with the original Franchise Rule will need to disclose confidential settlements entered after the effective date of the Amended Rule.  The Amended Rule will have little impact, however, on franchisors that in the past have disclosed confidential settlements pursuant to the UFOC Guidelines format.

WHERE DOES THE MONEY GO? – INITIAL FEES, OTHER FEES AND ESTIMATED INITIAL INVESTMENT

The Amended Rule tracks Items 5, 6 and 7 of the UFOC Guidelines, with a few significant changes or additions:

Initial Fees – It’s All in the Definition

The Amended Rule defines “initial fees” to include not only cash payments made, but also “commitments to pay,” which may take the form of notes or other written commitments to make payments in the future.  Notably, the Amended Rule does not require franchisors to explicitly state whether initial fees are negotiable.  The Amended Rule instead follows the approach of the UFOC Guidelines by requiring disclosure of the range or formula for calculating initial fees (when fees are not uniform) and requiring disclosure of any installment payment terms.

Fees to Third Parties Adequately Addressed

The  Amended Rule closely tracks the UFOC Guidelines respecting disclosure of “other fees.”  Significantly, the Commission rejected the FTC Staff’s recommendation to require disclosure of all fees that must be made directly to third parties.  The Commission found that such a requirement would be impractical and that franchisee payments to third parties were adequately addressed elsewhere (in Items 7 and 8).

Estimated Initial Investment/Additional Funds

The Amended Rule requires that the “Additional Funds” category in the Item 7 Initial Investment table disclose additional funds needed for an initial period of “at least three months or a reasonable period for the industry.”  The FTC Statement contemplates that the period of time may be less than three months, but that the franchisor has the burden to show that a period shorter than three months is reasonable.

GOODBYE “EARNINGS CLAIMS.”  HELLO “FINANCIAL PERFORMANCE REPRESENTATIONS”

The easiest change to spot in Item 19 of the Amended Rule is the title – it is now called “Financial Performance Representations” rather than “Earnings Claims.”  Noting that Item 19 is one of the most important sections of the Rule, particularly as it relates to anti-fraud disclosures, the FTC took several steps to allow franchisors to share material and reasonable financial performance representations with prospective franchisees.

Taking the Voluntary Approach

As expected, the Amended Rule provides that financial performance representations remain voluntary, favoring a free market approach over mandated disclosures.  This approach is consistent with the FTC’s observations throughout the rulemaking process that the record did not provide a sufficient basis to mandate a financial performance disclosure.

Redefining the Scope of Financial Performance Representations

As in the case of many other areas, the FTC adopted significant changes to the original Rule in order to bring financial performance representations under the Amended Rule into closer alignment with Item 19 of the UFOC Guidelines.  The Amended Rule differs, however, from the UFOC Guidelines in a few areas.  First and most remarkable is that the FTC intentionally eliminated references to “expense” information from the definition of a financial performance representation.  This change will allow franchisors to provide expense information to prospects without preparing a financial performance disclosure in their UFOC.  Second, under the Amended Rule, a representation made through the “general media” is expressly included in the definition of a financial performance representation.  As a result, general media claims, if directed at franchise prospects, are subject to the Item 19 requirements.  The FTC indicated in the FTC Statement that the FTC Staff will address the scope of general media financial performance representations in the supplementary FTC compliance guide to be published later this year.  Finally, unlike Item 19 under the UFOC Guidelines, the Amended Rule specifically permits financial performance disclosures pertaining only to “subgroups” and “subsets” of existing franchised or franchisor-owned units.  While several of these changes appear to benefit franchisors, the attractiveness of these changes will diminish if one or more states reject these modifications.

Procedurally, all franchisors must begin Item 19 with a prescribed preamble stating that the FTC’s Franchise Rule permits franchisors to make financial performance representations under certain circumstances.  If a franchisor does not include Item 19 financial performance representations, it must include a separate statement warning prospects not to rely on unauthorized representations and to report any unsubstantiated representations.

DOUBLE-COUNTING AND CHURNING – INFORMATION ON OUTLETS AND FRANCHISEES

Item 20 of the Amended Rule (Section 436.5(t)) contains several noteworthy changes:

No More Double Counting

The current UFOC Guidelines require franchisors to report changes in franchise ownership in five categories – transfers, cancellations or terminations, nonrenewals, reacquisitions by franchisor, and units reasonably known to have “ceased doing business.”  These categories sometimes overlap, resulting in double-counting of franchise ownership changes and corresponding confusion on the part of prospective franchisees.  To address this concern, in what is one of the more significant substantive revisions of the current UFOC Guidelines, the Amended Rule includes five separate reporting tables – current franchise system status, transfers, turnover rate among franchised units, turnover rate among company-owned units, and projected openings.  The Amended Rule also provides definitions of change in ownership events (such as “termination” and “reacquisition”) to avoid double counting.

Franchisee Lists – Addressing Privacy Concerns

The Amended Rule, like the current UFOC Guidelines, requires franchisors to include a list of current franchisees and those franchisees who have left the franchise system.  The Amended Rule is different from the UFOC Guidelines in that the Amended Rule requires the franchisors to disclose only the name, city and state, and current business telephone number (or if unknown, the last known home telephone number) of those franchisees that have left the system to address privacy concerns.  In addition, franchisors must include a notice to prospective franchisees that states, “If you buy this franchise, your contact information may be disclosed to other buyers when you leave the franchise system.”

Tell Me, How Did the Former Franchisee Do at This Location?

The Amended Rule expands the disclosure requirements of the current UFOC Guidelines to give prospective franchisees more information about turnover rates at specific locations.  When the franchisor sells a franchise outlet that was previously owned by a franchisee, the franchisor must disclose certain information about the franchise outlet for the past five fiscal years, including the contact information of the previous franchise owner(s) and the reason for each change in ownership.  This information may be provided as an addendum to the disclosure document, or as a supplemental disclosure if the franchisor previously disclosed the prospective franchisee.

A Secret is a Secret – Striking a Balance with Confidentiality Clauses

The Amended Rule requires a franchisor to disclose if, during the last three fiscal years, franchisees signed any confidentiality clause in a franchise agreement, settlement or any other contract with the franchisor.  Under the Amended Rule, the franchisor’s Item 20 disclosure must include the following statement:  “In some instances, current and former franchisees sign provisions restricting their ability to speak openly about their experience with [name of franchise system].  You may wish to speak with current and former franchisees, but be aware that not all such franchisees will be able to communicate with you.”  Franchisors have the option of disclosing the number and percentage of current and former franchisees who signed confidentiality agreements.  The term “confidentiality clause” does not include clauses that protect a franchisor’s trademark or other proprietary information (Section 436.1(c)).

Recognition of Franchisee Associations

The Amended Rule requires a new Item 20 disclosure of trademark-specific franchisee associations.  Franchisors must disclose the name, address, phone, email address and web address, to the extent known, of each trademark-specific franchisee organization associated with the franchise system being offered, if the organization:  (1) has been created, sponsored or endorsed by the franchisor; or (2) is incorporated or otherwise organized under state law and asks the franchisor to be included in the UFOC during the next fiscal year.  These organizations must renew their request on an annual basis by submitting a request no later than 60 days after the close of the franchisor’s fiscal year.

FINANCIAL STATEMENTS – MOSTLY STYLE

The Amended Rule (Section 436.5(u)) incorporates much of Item 21 of the UFOC Guidelines while including several modest changes.

Most importantly, the Amended Rule resolves a recent controversy involving accounting procedures for financial statements of a foreign franchisor.  In particular, Item 21 of the Amended Rule will now permit foreign franchisors to prepare financial statements according to U.S. generally accepted accounting principles (“GAAP”) or, under limited circumstances, according to a comprehensive body of accounting principles acknowledged by the Securities and Exchange Commission.  Under the latter scenario, a foreign franchisor must identify the alternative body of accounting principles and reconcile its statements with U.S. GAAP.

As for the disclosure of parent financial statements, the Amended Rule departs from the FTC Staff’s position in earlier drafts of the Amended Rule.  Earlier proposals would have required such disclosure in all situations.  Under the Amended Rule, a franchisor must disclose a parent corporation’s financial statements only under two situations: (1) if the parent commits to perform post-sale obligations for the franchisor; or (2) if the parent guarantees obligations of the franchisor.  The Amended Rule also requires franchisors to attach a copy of the guarantee in the disclosure document, a requirement that is not addressed clearly within Item 21 of the UFOC Guidelines.

Finally, consistent with Item 21 of the UFOC Guidelines, the Amended Rule requires franchisors to disclose three years of audited financial statements, of which two fiscal years must be compared in a tabular format.  For start-up franchisors, however, the Amended Rule permits (as does the current Franchise Rule) a three-year phase-in of audited financial statements.  Franchisors must be careful in assessing whether the three year phase-in of audited financial statements is available, however, because qualifying start-up franchisors must be new to franchising and otherwise not have had reason to have prepared audited financial statements to date.

EXEMPTIONS/EXCLUSIONS – FTC INJECTS COMMON SENSE IN DETERMINING WHO NEEDS PROTECTION

In addition to retaining four exemptions from the original FTC Rule (i.e., exemptions for payment of less than $500, fractional franchise, leased department, and oral agreement), Section 436.8 of the Amended Rule adds a new exemption for relationships covered by the Petroleum Marketing Practices Act, and more significantly, three new “sophisticated investor exemptions” that may offer franchisors added flexibility in closing certain qualifying deals.  Generally speaking, the new sophisticated investor exemptions are as follows:

  • Large Investment.  The “large investment” exemption exempts from disclosure those arrangements where a franchisee makes an “initial investment” of  $1 million or more, excluding (1) the cost of unimproved land, and (2) any investments in which the franchisor (or an affiliate) provides financing.  To qualify for the exemption, a franchisor must obtain a signed acknowledgment from the prospective franchisee verifying that the exemption is met.  Interestingly, in determining whether the sale of a franchise to a conversion franchisee meets this exemption, the FTC concludes that it is reasonable to consider the conversion franchisee’s prior investment in the unit.
  • Large Franchisee.  The “large franchisee” exemption exempts from disclosure franchise sales to a franchisee who is (or who has a parent or an affiliate who is) an entity that has been in business for at least five years and has a net worth of at least $5 million.
  • Owner, Officer, and Manager.  The “owner, officer, and manager” exemption exempts from disclosure certain franchise sales where within 60 days of the sale, one or more of the purchasers (of at least a 50% interest in the franchise): (1) has been, for at least two years, an owner of the franchisor entity (at least a 25% interest); or (2) an officer, director, general partner, or individual with management responsibility for the offer and sale of the franchisor’s franchises, or the franchisor’s administrator of the franchised network.

The FTC has indicated that, by publication every four years, it will update the monetary thresholds for the various exemptions under the Amended Rule, in accordance with any changes in the Consumer Price Index (all urban consumers).

In an effort to streamline the Amended Rule, the FTC eliminated as unnecessary the exclusions under the original FTC Rule for the following four relationships that fall outside the definition of a franchise:  (1) employer-employee and general partners; (2) cooperative associations, (3) certification and testing services; and (4) single trademark licenses.  The FTC explicitly retained these exclusions as a matter of policy, however, and incorporated them by reference into the FTC Statement.

OTHER (MISCELLANEOUS) ITEMS WORTH MENTIONING

Items 1 and 8 -  Suggestions for More Significant Changes Ignored

The Amended Rule made significant changes to the disclosures covered typically under Items 1 and 8, compared to the original Rule, but those changes were done, in the FTC Staff’s own words, “to maximize consistency with the UFOC Guidelines.”   As a result, the resulting changes will have little or no significant effects on current practices since most franchisors already follow the UFOC Guidelines (not the original FTC rule) in preparing their disclosure documents.  Of more interest are suggestions that were not adopted.  For example, the Commission declined to adopt the FTC Staff’s recommendation that the required disclosure of competition in Item 1 include “competition from any entity in which a company officer owns an interest” (i.e., the conflict of interest issue).  The Commission believed that ordinary corporate fiduciary and conflicts of interest law principles are sufficient to remedy any potential harm if an officer of a franchisor owns an interest in a competitor.  For the same reasons, the Commission chose not to require a comparable “conflict of interest” disclosure in Item 8 when an officer of the franchisor owns an interest in a supplier.

Item 4 – When Your Parents Went Bankrupt . . .

The Amended Rule expands the requirement to disclose bankruptcy proceedings (Item 4 of the UFOC Guidelines) to include bankruptcies of “any parent” of the franchisor.  This change expands the current requirement of the UFOC Guidelines, which encompasses bankruptcies of the franchisor, its affiliates, predecessors, officers and general partners.  “Parent” is defined by the Amended Rule as “an entity that controls another entity directly, or indirectly through one or more subsidiaries.”

Item 11 – For the Most Part, Business as Usual

Franchisors who have grown accustomed to the disclosures required under Item 11 of the UFOC Guidelines will be happy to discover that Section 436.5(k) (Item 11) of the Amended Rule retains almost all of these disclosures.  There are, however, a few new wrinkles worth noting.

In addition to providing a new title (i.e., “Franchisor’s Assistance, Advertising, Computer Systems and Training”), revised Item 11 reduces the disclosure requirements as to electronic cash registers and computer systems, simply requiring a franchisor to provide certain general information, without having to identify each and every piece of hardware and software by brand, type and principal function, or to identify compatible equivalents and whether they have been approved by the franchisor.  This should come as good news to franchisors, in light of the ever-evolving nature of technological requirements.

Item 12 – Familiar Territory

While the FTC received a number of comments relating to the issue of encroachment and a franchisor’s past and future expansion plans, Section 436.5(1) of the Amended Rule generally reflects Item 12 (with only a few changes) and the FTC specifically elected not to regulate contractual terms regarding territories.  First, franchisors who do not grant an exclusive territory must now include a warning in Item 12.  In addition, the FTC has defined “other channels of distribution” to include the Internet, catalog sales, telemarketing and other direct marketing in an effort to keep Item 12 current with changes in technology and the market place.  As a result, a franchisor must specifically disclose the rights the franchisor and franchisee each have relative to the use of these other channels of distribution.

SETTING THE FLOOR BUT NOT CLEARING IT – OTHER LAWS, RULES, ORDERS

Once effective, the Amended Rule will not preempt state franchise laws, except to the extent these laws are inconsistent with the Amended Rule.  The FTC will not consider a law to be inconsistent with the Amended Rule “if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.”  In other words, the Amended Rule will set a minimum compliance level with which all franchisors must comply in all U.S. jurisdictions.  A number of states with separate franchise laws will need to take affirmative measures to modify those laws should they desire to fully adopt the disclosure format described in the Amended Rule.  While a number of states may adopt measures to ensure consistency between state franchise laws and the Amended Rule, we expect at least a handful of states to reject aspects of the Amended Rule and retain more detailed disclosure requirements.  As a result, franchisors may get caught in the middle – facing additional burdens the FTC imposed under the Amended Rule while remaining subject to tougher state laws in areas where the FTC has relaxed its disclosure requirements.

CONCLUSION – WHAT YOU CAN DO TO PREPARE FOR THE AMENDED RULE

Despite many warnings and years of review, the Amended Rule will still catch some franchisors by surprise.  To avoid or limit such surprises, franchisors should take the following measures:

  1. Review the Amended Rule and consult with legal counsel to determine the impact on the company’s franchise offering circular.
  2. Determine strategy and timeline to comply with Amended Rule in light of voluntary (July 1, 2007) and mandatory (July 1, 2008) compliance deadlines, and potential delays in state review processes.
  3. Among other items, review past and pending litigation matters to determine disclosure obligations and analyze possible future franchisor-initiated litigation in light of new disclosure requirements.
  4. Obtain and review Amended Rule compliance guide expected to be published this summer.
  5. With the aid of counsel, closely monitor corresponding developments in the state law landscape.

The Amended Rule will require franchisors to make substantial changes to their disclosure documents.  Behind the obvious drafting work, however, franchisors must re-examine various policies (such as litigation disclosure practices) to best protect themselves.  GPM will carefully monitor ensuing rulemaking developments and keep you informed so that you are not swept away by regulatory whirlwinds.  For starters, we will host a breakfast seminar on February 15 in Minneapolis to discuss the Amended Rule and its likely impact on franchisors. Please feel free to contact any member of GPM’s Franchise and Product Distribution Practice Group as you encounter questions related to the Amended Rule.


GPMemorandum Special Edition Contributors:

Gaylen Knack (Editor), Liz Dillon, John Fitzgerald, Kevin Moran, Cheryl Myers, Max Schott, Stephen Vaughan, and Quentin Wittrock.

MINNEAPOLIS, MN OFFICE

John F. Fitzgerald, Co-Chair (john.fitzgerald@gpmlaw.com) 
Kirk W. Reilly, Co-Chair (kirk.reilly@gpmlaw.com)
Phillip W. Bohl (phillip.bohl@gpmlaw.com)
John W. Mooty (john.mooty@gpmlaw.com)
Jennifer C. Debrow (jennifer.debrow@gpmlaw.com)
Kevin J. Moran (kevin.moran@gpmlaw.com)
Elizabeth S. Dillon  (elizabeth.dillon@gpmlaw.com)
Cheryl L. Johnson (formerly Myers) (cheryl.johnson@gpmlaw.com)
Max J. Schott II (max.schott@gpmlaw.com)
Michael R. Gray (mike.gray@gpmlaw.com)
Jason J. Stover (jason.stover@gpmlaw.com)
Laura J. Hein (laura.hein@gpmlaw.com)
Michael P. Sullivan, Sr. (mike.sullivan@gpmlaw.com)
Kelly W. Hoversten (kelly.hoversten@gpmlaw.com) 
Franklin C. Jesse, Jr. (frank.jesse@gpmlaw.com)
Henry T. Wang (henry.wang@gpmlaw.com)
Gaylen L. Knack (gaylen.knack@gpmlaw.com)
Lori L. Wiese-Parks (lori.parks@gpmlaw.com)
Craig P. Miller (craig.miller@gpmlaw.com)
Quentin R. Wittrock (quentin.wittrock@gpmlaw.com)
Bruce W. Mooty (bruce.mooty@gpmlaw.com) 

WASHINGTON, D.C. OFFICE

Robert Zisk, Co-Chair (robert.zisk@gpmlaw.com)
Jeffrey L. Karlin (jeffrey.karlin@gpmlaw.com)
Stephen J. Vaughan (stephen.vaughan@gpmlaw.com)
Iris F. Rosario (iris.rosario@gpmlaw.com)
David E. Worthen (david.worthen@gpmlaw.com)
Eric L. Yaffe (eric.yaffe@gpmlaw.com) 
  
For more information on our Franchise and Product Distribution Practice and for recent back issues of this publication, visit the Franchise and Product Distribution group page.

GRAY, PLANT, MOOTY, MOOTY & BENNETT, P.A.

500 IDS Center
80 South Eighth Street
Minneapolis, Minnesota  55402-3796
Phone:  612-632-3000
Fax:  612-632-4444

2600 Virginia Avenue, N.W.
Suite 1111 - The Watergate
Washington, DC 20037-1905
Phone: 202-295-2200
Fax: 202-295-2250

franchise@gpmlaw.com

The GPMemorandum is a periodic publication of Gray, Plant, Mooty, Mooty & Bennett, P.A., and should not be construed as legal advice or legal opinion on any specific facts or circumstances.  The contents are intended for general information purposes only, and you are urged to consult your own franchise lawyer concerning your own situation and any specific legal questions you may have.

 

This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.

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