At the ABA Forum, Dale Cantone of the Maryland Office of the Attorney General, and Craig Tregillus of the Federal Trade Commission, served as part of a panel discussion entitled "Advanced Disclosure Issues Under the Amended FTC Rule." The panel focused on identifying problematic disclosure and compliance issues that remain unclear under the Amended FTC Rule, and discussed the NASAA, state and FTC responses to such issues. The following is a sample of some of the issues touched upon by the panel that franchisors should keep in mind during the disclosure process:
- 7 Day Delivery Requirement. The panel pointed
out an important issue that arises after a franchisor initially
provides disclosure to a potential franchisee. If the franchisor
subsequently unilaterally and materially alters the terms or
conditions of its form franchise agreement or related agreements,
the franchisor is required to redisclose to the potential
franchisee seven calendar days prior to execution of the franchise
agreement. This does not apply to changes made to the agreements as
a result of negotiations that the franchisee initiates and as such,
many franchisors assume that this rule does not apply in most
However, the Amended FTC Rule Statement of Basis and Purpose (available here: http://www.ftc.gov/os/2007/01/r511003FranchiseRuleFRNotice.pdf ) and FTC Frequently Asked Question #10 (available here: http://www.ftc.gov/bcp/franchise/amended-rule-faqss.shtml ) provide that "substantive contractual details" that are written into the agreement and that are not disclosed in the disclosure document, must be included in the franchise agreement and provided to the franchisee in compliance with the seven day requirement. As we have been advising our clients for the last two years, this rule applies to the protected territory, fees or interest rates that are many times handwritten into the form franchise agreement. For example, many form franchise agreements do not include the specific protected territory applicable to the franchisee, and instead leave a blank to be filled in before execution of the document. In such circumstances, the franchisor must write the protected territory into the franchise agreement, and provide the completed agreement to the prospective franchisee seven days prior to execution.
- Disclosure Requests From Prospective
Franchisees. Under the Amended FTC Rule, franchisors must
provide a copy of its disclosure document if the prospective
franchisee "reasonably requests" it. The panel made it
clear that the franchisor does not have to provide a disclosure
document to every person who asks for a copy, and suggested that
the follow rules of thumb apply:
o The franchisor need only provide the disclosure document after the franchisee has completed a franchise application and the franchisor has determined that the prospective franchisee is qualified to move forward in the sales process, or otherwise provides a positive response to the application. In an additional note, the franchisor may not charge any fee in connection with the franchisee's request to receive the disclosure document.
o If a franchisee requests a copy of the disclosure document when the franchisor's registration is current, but it is in the process of updating the disclosure document (for example, if the franchisor is in the middle of the 120 day period after the close of its fiscal year), the franchisor should provide the franchisee with its current disclosure document, and advise the prospective franchisee that a revised disclosure document is being prepared, which will be available to the prospect when it is issued or registered.
o If a franchisee requests a copy of the disclosure document, and the franchisor is not registered under the applicable state franchise registration law, the franchisor may not disclose to the franchisee. If a franchisee requests a copy of the disclosure document, and the franchisor does not have an effective registration under the applicable state franchise registration law as it has a material change amendment application pending, the FTC states that it will not recommend an enforcement action against a franchisor in this situation if (1) the franchisor demonstrates that it advised the prospective franchisee the disclosure document was being revised to reflect a material change; and (2) the franchisor delivers the revised disclosure document as soon as it is effective, and in compliance with the 14 day disclosure rule.
- E-Disclosure. The Amended FTC Rule permits
franchisors to furnish disclosures electronically, through CD-ROM,
Internet websites, and email. Franchisors wishing to provide
electronic disclosure must give the prospective franchisee a
pre-disclosure notification, advising the franchisee of the formats
in which the disclosure document is available and the conditions
necessary to review it. The panel confirmed that franchisors may
keep electronic receipts to satisfy the recordkeeping requirement.
As such, franchisors may either: (i) include an external link from
the Item 23 page in the disclosure document that links to a receipt
webpage, which contains the required receipt language with
pull-down boxes and blanks so that the franchisee can fill in its
information; or (ii) include a "hot icon" which allows
the receipt to be printed on the franchisee's own
Importantly, the panel confirmed that a receipt page included in the envelope with the CD-ROM containing the disclosure document would not satisfy the record-keeping requirement, as it would be possible for the prospective franchisee to sign the receipt without opening the disclosure document.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.