USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
and furnish it to each prospective franchisee prior to offering or selling a franchise. At the federal level, franchise sales are regulated by the FTC through the FTC Franchise Rule, codified at 16 CFR Part 436. The Rule establishes uniform nation - wide pre-sale disclosure requirements to ensure that prospective franchisees receive material information about the franchise offering sufficiently in advance of the sale to make an informed investment decision. It requires that franchisors furnish their FDDs to pro - spective franchisees at least 14 calendar days before the prospective franchisee signs a binding agree - ment with, or pays consideration to, the franchisor or one of its affiliates. The 14-day disclosure period commences the day after the FDD is furnished. If the franchisor unilaterally and materially modifies the form of franchise agreement in the FDD, it must provide the revised agreement at least seven calendar days before the agreement is executed. The 23 required disclosure items in an FDD are the following (with various sub-items under each “Item” heading as detailed in the FTC Franchise Rule): • the franchisor, and any parents, predecessors and affiliates; • business experience; • litigation; • bankruptcy; • initial fees; • other fees; • estimated initial investment; • restrictions on sources of products and services; • the franchisee’s obligations; • financing; • the franchisor’s assistance, advertising, computer systems and training; • territory; • trade marks; • patents, copyrights and proprietary information; • the obligation to participate in the actual operation of the franchise business; • restrictions on what the franchisee may sell; • renewal, termination, transfer and dispute resolu - tion; • public figures; • financial performance representations;
• outlets and franchisee information; • financial statements; • contracts; and • receipts.
The FTC Franchise Rule, however, does not require pre-sale disclosure for every franchise transaction. In fact, the Rule expressly exempts certain categories of franchise transactions, including fractional fran - chises, large investment franchises, sales to fran - chisor insiders, leased department arrangements, oral agreements, and certain franchise renewals or exten - sions. Whether an exemption under the Rule applies depends on the specific facts and circumstances of the franchise transaction. While the FTC Franchise Rule establishes a federal pre-sale disclosure requirement, many states sup - plement those requirements in their own respective franchise laws. Each state franchise law varies by jurisdiction. However, these laws generally fall within one of the following three categories: • franchise registration and disclosure laws; • non-registration franchise disclosure laws; and • business opportunity laws. Currently, the 14 Registration States – California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minne - sota, New York, North Dakota, Rhode Island, South Dakota, Virginia, Washington and Wisconsin – have enacted franchise registration and disclosure laws. Generally, these laws require that franchisors pre - pare an FTC-compliant FDD and register or file it with the appropriate state regulatory agency and (in certain cases) obtain the state’s approval before the franchisor can offer or sell a franchise in that state. Although commonly grouped with the Registration States, Michigan only requires franchisors to file a notice of intent with the appropriate regulatory agen - cy to offer and sell franchises in Michigan. Once the required registration, filing or notice has been submit - ted (and, where necessary, approved), the franchisor must comply with the FTC Franchise Rule’s 14-day disclosure requirement before offering or selling a franchise.
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