USA Law and Practice Contributed by: David B. Ramsey and Michelle Murray-Bertrand, Kaufmann Gildin & Robbins LLP
Freedom Act (HR 10311), none has been enacted as of this writing. Franchisors that fail to comply with their pre-sale dis - closure obligations may also face liability under state laws. As discussed in 1.2 Franchise Regulation , sev- eral states have franchise disclosure and registration statutes that impose pre-sale disclosure requirements similar to those contained in the Rule, while others enforce those obligations through their consumer pro - tection statutes, commonly referred to as “Little FTC Acts”. States with franchise laws generally grant state regu - lators broad investigative and enforcement authority to enforce compliance with these laws. Although the scope of that authority varies by jurisdiction, regula - tors are typically empowered to: • investigate suspected violations; • compel document production and witness testi - mony; • issue deficiency notices; • require corrective FDD amendments; and • initiate administrative proceedings. Where a violation has been found, regulators may: • deny, suspend or revoke a franchisor’s registration; • issue stop orders or cease-and-desist orders; • impose civil penalties; and • seek temporary and permanent injunctive relief, restitution, rescission and other equitable relief. Certain of the registration states also permit criminal penalties if it is determined that the franchisor’s con - duct was wilful or fraudulent. In addition to governmental enforcement, many state franchise laws grant franchisees a private right of action against franchisors, and in some jurisdictions against any officer, director, employee, franchise sell - er or other individual who materially participates in or is responsible for the violation. Depending on the applicable statute, franchisees may seek damages, rescission, attorneys’ fees, costs and other legal or equitable relief. For example, under California law, a franchisee may recover damages resulting from a
franchisor’s violation of the state’s pre-sale disclo - sure requirements and, if the violation was wilful, may also seek rescission of the franchise. Similarly, New York law provides franchisees with a private right of action to recover damages for violations of its pre- sale disclosure requirements; where the violation is wilful and material, a New York franchisee may also seek rescission, together with 6% annual interest from the date of purchase, reasonable attorneys’ fees, and court costs. 2.3 Franchise Disclosure Exemptions The FTC Franchise Rule provides several exemptions from its pre-sale disclosure requirements under 16 CFR Section 436.8. These exemptions fall into two broad categories and reflect the FTC’s determination that certain franchise transactions either do not war - rant the protections available under the Rule or involve prospective franchisees who possess sufficient busi - ness experience, financial sophistication, bargaining power or prior knowledge of the franchise to pro - tect their own interests. These exemptions apply to transactions involving minimum payments, fractional franchises, leased departments, oral contracts, large investments, large franchisees, certain franchisor insiders, and petroleum marketers and resellers. Many state franchise laws exempt certain franchise transactions from their registration and/or pre-sale disclosure requirements. While these exemptions vary by jurisdiction, they generally apply to transactions involving sophisticated, insider or institutional inves - tors, large franchise investments, franchise renewals or extensions, existing franchisee transfers, fractional franchises, and isolated franchise sales. Unlike the Rule, some Registration States require that a fran - chisor file an application or notice of exemption (and in some cases, obtain the state regulator’s acceptance of such filing) before offering or selling a franchise in reliance on that exemption. Because federal and state exemptions differ sig - nificantly in scope and application, franchisors must evaluate the laws of each state in which they intend to offer and sell franchises. Franchisors should not assume that an exemption available under the Rule is automatically available under state law, or vice versa, and should determine whether any notices, filings,
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