What is the FTC’s Rule Franchise Rule and How Does It Affect Franchises?
The Franchise Rule is supposed to protect franchisees from overreaching by unscrupulous franchisors. It does this by requiring franchisors to make various disclosures in the Franchise Disclosure Document (FDD) about the rights and obligations between franchisors and franchisees. There was – and to some degree, still is – a tendency by franchisors to overpromise and underdeliver when selling franchise opportunities. The Franchise Rule is intended to prevent this overreaching.
The FTC publishes a summary of the Franchise Rule along with advisory opinions, press releases, and other helpful information, via its website.
The FTC also publishes a Franchise Rule Compliance Guide intended to help franchisors comply with the Franchise Rule. This guide is also helpful to franchisees, as it provides an overview of the information that is required to be disclosed by franchisors, in (mostly) plain English.
If you are already reviewing a FDD, you know that there are 23 categories of information franchisors are required to provide in it. These are: (1) The Franchisor and Any Parents, Predecessors, and Affiliates; (2) Business Experience; (3) Litigation; (4) Bankruptcy; (5) Initial Fees; (6) Other Fees; (7) Estimated Initial Investment; (8) Restrictions on Sources of Products and Services; (9) Franchisee’s Obligations; (10) Financing; (11) Franchisor’s Assistance, Advertising, Computer Systems, and Training; (12) Territory; (13) Trademarks; (14) Patents, Copyrights, and Proprietary Information; (15) Obligation to Participate in the Actual Operation of the Franchise Business; (16) Restrictions on What the Franchisee May Sell; (17) Renewal, Termination, Transfer, and Dispute Resolution; (18) Public Figures; (19) Financial Performance Representations; (20) Outlets and Franchisee Information; (21) Financial Statements; (22) Contracts; and (23) Receipts.
As you can see, there is a lot of information – and a lot of opportunity for franchisors to bury unhelpful facts. This is why it often pays off to have a qualified attorney review the FDD before agreeing to it. It can ever be helpful afterwards in the event of a dispute because franchisors are prohibited from making misrepresentations in the FDD.
If you are a franchisee who needs representation with a franchise issue, give us a call at 980-999-3557 to see how we can help you succeed.