In this weekly blog we will talk a lot about the Inside
Baseball of franchising. I was the
General Counsel of the International Franchise Association many moons ago, and have
been representing franchisors and the occasional franchisee in my private law
practice for about 30 years, so I have wrestled with most of what franchising
can throw at you.
I have written a couple of books, one about franchising, the
other about using various techniques to stay out of court with disputes in your
business and your life.
My intention is to cover ground that is valuable to everyone
in franchising: prospective investors in a franchised business, franchise
owners, multiple unit franchise developers, franchisors and their managers,
lawyers and paralegals involved in franchise regulation. So stay with me; let me have your
comments; send me your thoughts; and let me know if I hit a nerve.
This blog is starting in the summer of 2009 at a time of
delicious change in franchising, and particularly in the regulation of
franchising. As most people who
follow franchising know, a new set of federal and state franchise laws went
into effect last year, and the community is just starting to live with the new
rules. I want to talk about the
experience that franchisors are having with the new disclosure rules, and I
want to make sure we are all on the same page in understanding the rules of the
Franchising is a very political arena. Voices are delivering their views at
uncomfortable decibel levels, and how American is that? For years the community had a distinct
imbalance: franchisors had the gold and made the rules. I can tell you that the rather random surge
of state regulation in the 1970’s happened before the community of franchisors
could get organized to push back. When
the FTC announced its trade regulation rule in 1979 the game in the states was
largely over. By that time there
were about 13 states regulating franchise sales, and only one state – New York
– adopted a franchise investment law after the FTC Rule went into effect. By the end of the 1970s, the IFA was a
lobbying force, and was vigorously responding to new legislative proposals at
both the federal and state levels.
It took a while for franchisee interests to find their voice; that would
come with the invention of dynamic franchisee associations, and eventually the
IFA itself announced categories of membership for franchisees.
Franchising and its voices have come a long way in the 30
years I have been in franchising, and for the most part franchising itself has
matured to the benefit of the principal players. More on this topic as we go along.
Now to our practical tip for the week.
FDD Delivery Rules: Requesting and Receiving an FDD. “You’d Like to See the FDD? Why Didn’t You Ask?”
You have met with company representatives, attended a
discovery day and submitted a full application, but you have not yet received a
disclosure document. Maybe that’s
because you haven’t asked for one.
One of the most practical changes in the new FDD is the
revamping of delivery requirements for disclosures. Under the old FTC Rule franchisors were required to give out
a disclosure document at least 10 business days before payment is made or a
binding contract signed. If it
occurred first, disclosure would be required at the “first personal meeting”,
which was defined to mean the first face-to-face meeting where the franchisor
talks seriously about a franchise sale.
Under the Amended FTC Rule there are a few changes. The minimum is now 14 calendar days,
not counting the day of delivery or the day of contract execution. There is no more “first personal
meeting” disclosure requirement; it has been replaced by a prospect’s right to
request a franchise disclosure document, and a franchisor’s obligation to
deliver one “upon a reasonable request.”
What is considered “reasonable” is not sharply defined. Timing is important; the franchisor has
an obligation to deliver only after there has been a positive qualification and
substantial discussion about a franchise opportunity.
The Amended FTC Rule delivery requirement is an improvement
on the old rules, but there is a caveat in some of the franchise registration
states: they don’t move quickly, and have not been able to alter the delivery
rules on their books. So in
Maryland, New York and Rhode Island the “first personal meeting” rules are
still in effect. In Michigan, Oregon,
and Washington they still measure disclosure delivery requirements as 10
business days instead of 14 calendar days. It’s going to take a while for all the states to get in step
with the Amended FTC Rule.
Small price to pay for federalism.