March 2007

New Disclosure Rule Impacts
Franchisees & Franchisors

On January 22, 2007, the Federal Trade Commission approved amendments to its Trade Regulation Rule entitled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures” (the “Franchise Rule”), which it originally enacted in 1978.   The amendments go into effect on  July 1, 2007 and all people offering franchises must comply with the changes by July 1, 2008.

According to the FTC’s January 23, 2007 press release, the primary purpose of the amendments is to more closely align the disclosures required by the Franchise Rule with those required under state franchise disclosure laws under the “Uniform Franchise Offering Circular” guidelines.

In general, the revised Rule requires franchisors to provide much more information to potential franchisees so they can make more accurate comparisons of opportunities they are considering and more informed decisions about the purchase of a particular franchise.  Basically, the Rule is an effort to minimize the occurrence of post-purchase dissonance for franchisees, reduce compliance costs, and reduce the occurrence of misrepresentation-related litigation between franchisees and franchisors.

The Rule requires all people offering franchise rights in the United States to disclose information in 23 specific categories, including information about company officers, other franchises offered by the company, the cost of purchasing and starting a franchise, assistance available from the franchisor, as well as franchisee contact information for past and current owners.

In addition, the FTC’s release says,  “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.”  For those companies that choose to provide information about the sales or profits of their company-owned stores or franchisees, the amendments clarify the types of supporting information the franchisor must have to substantiate the claims.

Finally, in conjunction with making the amendments to the Franchise Rule, the FTC is in the process of creating a substantially revised and expanded trade regulation rule concerning the sales of business opportunities, which are relationships in which the licenses do not include the right to operate under the seller’s trademark.

Whether you are a potential franchisee or you are considering growing your business by offering franchises or business opportunities, it is important to be aware of the effects of the amended Franchise Rule on sellers of franchises and business opportunities.

As always, the attorneys at Franchise & Business Law Group are a phone call away to discuss your opportunity, answer your questions, and guide you through the complicated world of franchising.