Craig Tractenberg of Fox Rothschild.

The Federal Trade Commission (FTC) is requesting public comment on its trade regulation rule titled “Disclosure Requirements and Prohibitions Concerning Franchising” (the rule). The rule makes it an unfair or deceptive act or practice for franchisors to fail to give prospective franchisees a franchise disclosure document providing specified information about the franchisor, the franchise business and the terms of the franchise agreement. The rule also prohibits related misrepresentations by franchise sellers. The FTC is soliciting comments about the efficiency, costs, benefits and regulatory impact of the rule as part of its systematic review of all current commission regulations and guides. Interested persons have the opportunity to submit written data, views and arguments concerning the rule to the FTC. This is a summary of the FTC's request for comment.

• The franchise rule was first enacted in 1979.

The FTC issued the original franchise rule pursuant to its authority under Section 5 of the Federal Trade Commission Act to proscribe unfair or deceptive acts or practices. The primary purpose of the rule is to provide prospective purchasers of franchises the material information they need in order to weigh the risks and benefits of such an investment by providing disclosure requirements in a uniform format that facilitates comparison shopping.

• Periodic review by the FTC of the rule leads to amendments.

In 1995 the FTC decided to review the rule. The review concluded that the rule was still needed but could be improved, led to amendments to the rule issued in 2007 (the amended rule), which took effect on July 1, 2008. The amended rule sought, among other changes, to reduce inconsistencies between federal and state pre-sale disclosure requirements and established a set of uniform disclosure requirements in a franchise disclosure document (FDD).

The amended rule requires franchisors to provide prospective franchisees with their FDD at least 14 calendar days before they make any payment or sign a binding agreement in connection with a proposed franchise sale. The FDD provides prospective franchise purchasers with 23 items of information material to their investment decision, including the initial fees and estimated initial investment required; the litigation and bankruptcy history of the franchisor, its officers and key executives; the financial performance of existing company-owned and franchised outlets; contact information for current and former franchisees and financial statements reflecting the ability of the franchisor to provide promised services and support.

The FDD also requires disclosure of any restrictions on the sources of goods and services and any required purchases; a franchisee's contractual obligations in the establishment and operation of the franchise; the terms of any financing offered by the franchisor; the training and assistance provided by the franchisor; the extent to which the franchisee's outlet is protected from competition by the franchisor and other franchisees; any restrictions on what the franchisee may sell; the circumstances in which the franchise may be prematurely terminated or in which the franchisee's sale or renewal of the franchise may be refused by the franchisor; how and where any disputes will be resolved; any restrictions on the franchisee's ability to engage in the same or similar business during and after the termination of the franchise; and the number of outlets created, sold, and closed during the past three years. In addition, if the franchisor makes a financial performance representation, the representation must be disclosed in the FDD.

New Review by the FTC

The FTC is now seeking comment on a number of issues, as outlined in the questions below, including the continuing need for the amended rule, its economic impact, the effect of the rule on the unfair and deceptive practices it was designed to prevent, and the interaction of the rule with other regulations:

• Is there a continuing need for the rule? Why or why not?
•  What benefits, if any, has the rule provided to prospective franchisees, including small businesses? What evidence supports the asserted benefits?
• What modifications, if any, should be made to the rule to increase its benefits to prospective franchisees, including small businesses?
• What evidence supports the proposed modifications?
• How would these modifications affect the costs the rule imposes on franchisors and franchise sellers, including small businesses?
• How would these modifications affect the benefits to prospective franchisees?
• What impact has the rule had on the flow of truthful information and on the flow of deceptive information to prospective franchisees?
• What significant costs, if any, has the rule imposed on prospective franchisees, including small businesses? What evidence supports the asserted costs?
• What modifications, if any, should be made to the rule to reduce any costs on prospective franchisees, including small businesses?
• What evidence supports the proposed modifications?
• How would these modifications affect the benefits provided by the rule?
• What benefits, if any, has the rule provided to franchisors and franchise sellers, including small businesses? What evidence supports the asserted benefits?
• What modifications, if any, should be made to the rule to increase its benefits to franchisors and franchise sellers, including small businesses?
• What evidence supports the proposed modifications?
• How would these modifications affect the costs the rule imposes on franchisors and franchise sellers?
• How would these modifications affect the benefits to prospective franchisees?
• What significant costs, if any, including costs of compliance, has the rule imposed on franchisors and franchise sellers, including small businesses? What evidence supports the asserted costs?
• What modifications, if any, should be made to the rule to reduce the costs imposed on franchisors and franchise sellers, including small businesses?
• What evidence supports the proposed modifications?
• How would these modifications affect the costs the rule imposes on franchisors and franchise sellers?
• How would these modifications affect the benefits to prospective franchisees?
• What evidence is available concerning the degree of industry compliance with the rule?
• What modifications, if any, should be made to the rule to account for changes in relevant technology or economic conditions? What evidence supports the proposed modifications?
• Provide comment on any overlap or conflict with other federal, state, or local laws, or regulations.
• What evidence supports any asserted conflicts?
• With reference to asserted conflicts, should the rule be modified? If so, why or why not?

Members of the public may provide public comment on these or other questions regarding the rule. The window for public comment is open until April 21, and details are available on the FTC website, www.FTC.gov.

Craig R. Tractenberg, a partner at Fox Rothschild, handles complex business disputes involving intellectual property, licenses, business torts and insolvency issues. He focuses on franchise companies' development and expansion. Contact him at [email protected].