American Bar Association
37 Annual Form on Franchising
____________________________________________________________
th
FRANCHISE DISCLOSURE CHALLENGES
FOR LARGE, SOPHISTICATED OR MULTI-BRAND
FRANCHISE COMPANIES
Alan R. Greenfield
Greenberg Traurig, LLP
Chicago, IL
Theresa Leets1
Department of Business Oversight
Los Angeles, CA
Karen B. Satterlee
Hilton Worldwide, Inc.
McLean, VA
October 15-17, 2014
Seattle, WA
©2014 American Bar Association
1
The opinions expressed by Theresa Leets in this paper and during the oral presentation are her own and do not necessarily represent the views of the California Department of Business Oversight, its Commissioner or NASAA. This paper is a combined work of the three authors. It does not, however, necessarily represent the personal views or opinions of any particular author or his or her employer. Table of Contents
I.
INTRODUCTION....................................................................................................................... 1
II.
THE PURPOSE OF DISCLOSURE .......................................................................................... 1
III.
EXEMPTIONS TYPICALLY APPLICABLE TO LARGE, SOPHISTICATED
OR MULTI-BRAND FRANCHISE COMPANIES ....................................................................... 2
A.
B.
Federal Exemptions ...................................................................................................... 2
1.
Fractional Franchises ........................................................................................... 2
2.
Large Investment Exemption ................................................................................ 3
3.
Large Franchisee Exemption................................................................................ 4
Registration State Exemptions ...................................................................................... 5
1.
Large Franchisor Exemptions............................................................................... 5
2.
Transactional Exemptions .................................................................................... 6
3.
IV.
a.
Fractional Franchise Exemption .................................................................. 6
b.
Large Investment Exemption ....................................................................... 6
c.
Large Franchisee Exemption ....................................................................... 7
d.
Renewal of Existing Franchise Agreement .................................................. 7
e.
Sales of Existing Franchisee ....................................................................... 8
f.
Franchisor Insider Exemption ...................................................................... 9
g.
Sales by Existing Franchisee....................................................................... 9
Discretionary Exemption.................................................................................... 10
EXEMPTION CHALLENGES FOR LARGE, SOPHISTICATED AND MULTI-BRAND
FRANCHISE COMPANIES ................................................................................................... 10
A.
Exemption Challenges for Large and Sophisticated Franchise Companies ............. 10
1.
Corporate Structure ........................................................................................... 11
2.
Financial Statements ......................................................................................... 11
3.
Sophisticated Corporate Actions and Financing Transactions .......................... 12
a.
Stock Repurchase Program...................................................................... 13
b.
4.
B.
V.
Securitization Financing............................................................................ 13
Acquisitions ....................................................................................................... 13
Exemption Challenges for Multi-Brand Franchise Companies ................................... 14
DISCLOSURE CHALLENGES FOR LARGE, SOPHISTICATED AND MULTI-BRAND
FRANCHISE COMPANIES .................................................................................................... 16
A.
B.
VI.
Disclosure Challenges for Large and Sophisticated Franchise Companies .............. 16
1.
Related Entity Disclosures: Parents, Predecessors, and Affiliates .................. 16
2.
Financial Statements ........................................................................................ 18
3.
Potential Acquisitions and Other Sophisticated Financing
Arrangements ................................................................................................... 19
4.
Franchise Owner-Initiated Disclosure Challenges ............................................ 20
5.
Routine Material Events ................................................................................... 21
Disclosure Challenges for Multi-Brand Franchise Companies .................................. 23
1.
Multiple Brands offered in a Single FDD .......................................................... 23
2.
Disclosure of Competitive Businesses ............................................................. 24
CONCLUSION ....................................................................................................................... 25
APPENDIX I .................................................................................................................................... 26
APPENDIX II .................................................................................................................................... 42
I.
INTRODUCTION
This paper explores the challenges that large, sophisticated and/or multi-brand franchise
companies experience in complying with federal and state pre-sale disclosure requirements.
These challenges take primarily four forms: 1) the requirement that a franchise disclosure
document (“FDD”) be created at all, given the nature of the transaction; 2) content restrictions
on the FDD that do not permit and exchange of information that would otherwise be an FPR;
3) timing issues relating to the 14-day waiting period; and 4) disclosure requirements that do not
appear to consider the business realities of complex business transactions, such as
sophisticated franchisors and franchisees engaging in transactions that are unconventional in
format or setting.
The first part of this paper will explore whether the franchisor has a disclosure obligation
at all or whether the transaction may be exempt from federal and state franchise disclosure
requirements due to the availability of exemptions. This paper is not intended to be a
comprehensive discussion on federal and state exemptions, but only a review of federal and
state exemptions that enable the franchisor to completely dispense with pre-sale disclosure.1
The second part of this paper will review disclosure issues that large, sophisticated or
multi-brand franchisors often encounter, including: (i) the corporate history of the franchisor and
its extended corporate family; (ii) having to include multiple sets of financial statements; (iii)
disclosure procedures and timing constraints to be assessed in connection with potential
acquisitions and other sophisticated financing arrangements; (iv) franchisee initiated disclosure
challenges; (v) the occurrence of material events; and (vi) whether a franchisor may use a
single FDD to offer multiple brands.
Finally, we will offer practical tips to manage these issues.
II.
THE PURPOSE OF DISCLOSURE
The original FTC Rule was issued on December 21, 1978.2 This rule was adopted in
response to the “widespread deception in the sales of franchises and business opportunities
through both material misrepresentations and non-disclosures of material facts.”3 The purpose
of the FTC Rule was not to regulate the substantive terms of the franchise relationship, but
rather, to ensure that franchisees were given specific information that the FTC Rule deemed
necessary to enable a prospective franchisee to make an informed investment decision prior to
purchasing a franchise.4
1
For a comprehensive discussion see Earsa R. Jackson & Karen B. Satterlee, Navigating the
Exemption/Exclusion Maze Under the Amended FTC Rule and State Laws, ABA 31ST ANNUAL FORUM ON FRANCHISING
(2008); Robin Day Glenn & Mary Beth Trice, A Scenic Tour of Exemptions and Exclusions to Franchise Registration
Laws, ABA 24TH ANNUAL FORUM ON FRANCHISING (2001).
2
43 Fed. Reg. 59,614 (December 21, 1978).
3
Disclosure Requirements and Prohibitions Concerning Franchising, 72 Fed. Reg. 15,445 (March 30, 2007).
4
Id.
1
As a general rule, experienced franchisors understand and support the underlying
purpose of pre-sale disclosure laws and agree that it is important that the investing public have
a complete understanding of the franchise offering prior to making an investment. However, not
all franchise concepts, and not all franchise candidates, are similarly situated. The prospective
franchisee that is purchasing a home cleaning franchise or other low capital investment
franchise is not the same type of institutional investor that is investing in building hotels and
restaurants. In these circumstances, one must consider whether a “one size fits all” disclosure
requirement is appropriate for all franchisors and all franchisee candidates, whether
sophisticated investors are the type of investor that the franchise laws are (or should be)
designed to protect, and whether a franchise disclosure document is needed at all to help a
sophisticated franchisee make an informed investment decision, in accordance with the purpose
of the FTC Rule.
Partially to address these concerns, the FTC amended the FTC Rule in 2007, the
“Amended FTC Rule.”5 The Amended FTC Rule exempts certain classes of franchisees that,
because of their size and sophistication, or the fractional nature of the franchised concept, do
not need additional regulatory protection. The federal exemptions we will consider for the
purposes of this paper are: the Large Franchisee Exemption, the Large Investment Exemption
and the Fractional Franchise Exemption. Even though a transaction may be exempt under the
FTC Rule, state franchise disclosure requirements must also be considered to determine if a
transaction is exempt. State disclosure requirements, and their interplay with the federal
exemptions, are discussed in section IV of this paper.
III.
EXEMPTIONS TYPICALLY APPLICABLE TO LARGE, SOPHISTICATED OR MULTIBRAND FRANCHISE COMPANIES
A.
Federal Exemptions
As we have stated, the focus of this paper is discussing and finding potential solutions to
disclosure challenges for franchisors. However, as precursor to solving disclosure problems,
the franchisor should first ensure that it actually has a disclosure obligation.
1.
Fractional Franchises
Fractional franchises are extensions of, or add-ons to, a product or service the
franchisee is already offering to the public.6 Fractional franchises are commonly found in hotels,
grocery stores, universities, airports or in facilities where the product or service offered is within
the confines of another business.7 A franchise is “fractional” under the FTC Rule if: (1) the
franchisee, any of the franchisee’s current directors or officers, or any current directors or
officers of a parent or affiliate, has more than two years of experience in the same type of
business; and (2) the parties have a reasonable basis to anticipate that the sales arising from
the relationship will not exceed 20% percent of the franchisee’s total dollar volume in sales
5
16 CFR § 436
6
Karen B. Satterlee & Leslie D. Curran, Exemption-Based Franchising: Are You Playing in a Minefield?, 28
FRANCHISE L.J. 191, 192 (2009).
7
Id.
2
during the first year of operation.8 Starbucks uses this model for its exemption based franchise
program.
It should be relatively easy for a franchisor to determine if a prospect meets the
experience element of the standard and for the franchisee candidate to project a dollar volume
of sales in the first year of operation. The greater challenge is determining if the franchised
concept is “in the same line of business” in which the franchisee is engaged. The FTC
Interpretive Guides state: “[t]he required experience may be in the same business selling
competitive goods, or in a business that would ordinarily be expected to sell the type of goods to
be distributed under the franchise.”9 For example, one would have to contemplate whether a
big box retailer adding a restaurant concept to the big box store or an airport operator adding a
newsstand would be engaging in the same line of business? This determination is clearly a
judgment call.
In addition, it remains an open question as to whether a franchisor is required to
calculate gross sales on a store-by-store basis or whether it may aggregate sales at the
corporate level. Aggregating sales at the corporate level arguably permits the franchisor
licensing stand-alone units to qualify for the fractional franchise exemption on the theory that the
gross sales of the individual unit is less than 20% percent of the franchisee enterprise. An FTC
informal staff opinion suggested that a fractional franchise located outside of the franchisee’s
primary place of business was not, in itself, disqualified, stating: “It is the nature of the
franchisees' business experience, not the location of its business per se, which may bring the
business relationship within the fractional franchise exemption. Nonetheless, location is one
factor we will consider in determining the similarities and differences between the established
business and the new franchised business.”10 Note that this opinion does not state that standalone units do qualify for use of the exemption, only that they are not inherently outside its
scope.11 Franchisors should consider the risk they are exposing themselves to if the fractional
franchise exemption was deemed by a court or state regulator not to apply in this circumstance
relative to the alternative of simply complying with the FTC Rule.
2.
Large Investment Exemption
The rationale underpinning the large investment exemption is that sophisticated
investors are capable of obtaining material information relating to the franchise investment
without the assistance of government mandated disclosures. In order to qualify for this
exemption, the franchise’s initial investment, excluding any financing received from the
franchisor or its affiliates, the cost of unimproved land, must exceed $1,084,900.12 The initial
investment is limited to those costs set forth in Item 7, not the investment required over the life
of the franchise agreement.13 If the sale is for the transfer of an existing unit, the investment of
8
16 C.F.R. § 436.8(a) (2) (2007).
9
44 Fed. Reg. 49,968 (Aug. 5, 1980).
10
Informal Staff Adv. Op. 99-5 (July 2, 1999).
11
Id.
12
16 C.F.R. § 436.8(a)(5)(i).
13
72 Fed. Reg. 15,526 (Mar. 30, 2007).
3
the selling franchisee may be considered in meeting the threshold.14 In addition, this investment
must come from a single investor, rather than a pool of investors, the idea being that a group of
small investors aggregating funds, do not evidence the sophistication of the large single
investor.15 Franchisor financing provided to the investor is excluded from the initial investments
because the FTC felt that it added “a measure of protection to the prospective franchisee
because traditional lenders are very likely to require a due diligence investigation of the offering,
whereas the franchisor or its affiliate likely would not.”16
In order to claim this exemption, a franchisor must obtain a written acknowledgment from
the franchisee verifying the grounds for the exemption. The FTC Rule requires the following
acknowledgement be used verbatim: “The franchise sale is for more than $1,084,900—
excluding the cost of unimproved land and any financing received from the franchisor or an
affiliate—and thus is exempted from the Federal Trade Commission’s FTC Rule disclosure
requirements, pursuant to 16 CFR § 436.8(a)(5)(i).”17 The challenge with this exemption is
finding a person, not an entity, which has made the requisite investment. The more complex the
entity is, such as in the case of REITS or investments funds, the more common this issue is.
Therefore, a franchisor may find that it is in a transaction with a public company that is unable to
satisfy this requirement. While the reader may suggest that the public company would likely
qualify for the large franchisee exemption (which is probably the case) the large franchisee
exemption does not exist in all registration states. Without an applicable state level exemption,
an exemption at the federal is meaningless.
3.
Large Franchisee Exemption
To qualify for this exemption, the franchisee, which may be an entity, its parent and
affiliates as well as an individual, must have been in business for at least five years and have a
net worth of at least $5,424,500.18 Business experience may be “tacked” on from individuals,
parents and affiliates to meet the five year business experience and net worth requirements.19
The franchisee’s business experience does not have to be in the area of the franchised
business.20 This is arguably the most useful of the exemptions discussed herein, given the
ability to tack on business experience of corporate affiliates and consolidate their collective net
worth.
Franchisors should take care to consider the definition of “affiliate” for this purpose,
especially since sophisticated and multi-brand franchisors may attract sophisticated franchisees.
Many of these franchisees will use joint ventures to enter into the franchise relationship. Are
joint venture partners “affiliates” for the purpose of the FTC Rule? A franchisor wanting to rely
on this exemption should consider how they want their own joint ventures to be construed for
tax and other legal reasons. The franchisor who exempts the franchisee candidate for this
14
Id. at 15,527.
15
Id. at 15,526.
16
Id. at 15,525.
17
16 C.F.R. § 436.8(a)(5)(i).
18
16 C.F.R. § 436.8(a)(6).
19
72 Fed. Reg. 15,528 (Mar. 30, 2007).
20
Id.
4
purpose may be hard pressed to distinguish why they are not affiliated with their joint venture
partners in other circumstances.
B.
Registration State Exemptions
Keep in mind that the burden of proving the exemption is on the person claiming it.21
Exemptions and/or exceptions from the state laws governing the offer and sale of franchises are
diverse. In Appendix 1, we provide is a state-by-state table that shows the available exemptions
and/or exceptions and whether the exemption and/or exception is from registration, disclosure,
or both, and whether the exemption or exception is self-executing or requires a filing. NASAA
Model Exemptions are not included in this discussion but it is noted they provide a compelling
uniform alternative to the existing patch work that a franchisor must navigate depending on
which state(s) have jurisdiction.
1.
Large Franchisor Exemptions
This state exemption is based upon the experience and net worth of the franchisor. The
rationale for this exemption is that the franchisor is well-capitalized with a proven track record.
The track record demonstrates the viability of the business and the franchisor’s ability to run it.
And the capitalization is important because it affords franchisees’ recourse should they pursue a
legal claim against the franchisor.
The states that recognize this exemption are California, Illinois, Indiana, Maryland, New
York, North Dakota, Rhode Island, Virginia, and Washington.22
Generally a franchisor is
required to have a minimum net worth of $5 million to $15 million, depending on the jurisdiction,
and a number of years of related experience (generally 5 years) administering a franchise
system with at least 25 franchisees continuously operating during that period or continuous
operations of the business itself.
If a franchisor is eligible for this exemption, it will still have pre-sale disclosure
requirements in California, Illinois, Indiana, Maryland, New York, North Dakota, Rhode Island,
Virginia and Washington. Also, the franchisor must make Notice filings in California, Illinois (if
up to $15 million), Maryland, New York (net worth less than $15 million), North Dakota, Rhode
Island, Virginia, and Washington.23 New York does not review a “large jumbo” (net worth of 15
million or more) exemption and only requires that the agent for service of process be provided.
While some states use the notice filings to verify that the franchisor is eligible for the claimed
exemption, the state does not undertake a full review, thus allowing the franchisor to avoid the
risk of unwanted deal delays that may occur if the registration state issues comments.
21
Dollar Systems, Inc. v. Avcar Leasing Systems, Inc., 890 F. 2d 165, 172 (9th Cir. 1989).
22
CAL. CORP. CODE § 31101(c); ILL. ADMIN. CODE tit. 14, § 200.202(e)(3); IND. CODE § 23-2-2.5-3(c); MD.
CODE REGS. § 02.02.08.10(D); N.Y. GEN. BUS. LAW § 684(2)(c); N.D. CENT. CODE § 51-19-04(1)(c); R.I. GEN. LAWS §
19-28.1-6(1)(iii); 21 VA. ADMIN. CODE § 5-110-75(4); WASH. REV. CODE § 19.100.030(4)(a); NASAA MODEL FRANCHISE
EXEMPTIONS § 2(b)(vi) (2012).
23
CAL. CORP. CODE § 31101(d), ILL. ADMIN. CODE tit. 14, § 200.202(e)(5); MD. CODE REGS. §
02.02.08.10(D)(2)(a), (d); N.Y. GEN. BUS. LAW § 684(2)(b), N.D. CENT. CODE § 51-19-04(1)(e), R.I. GEN. LAWS § 1928.1-6(1)(iv); 21 VA. ADMIN. CODE § 5-110-75(4)(b)(1); WASH. REV. CODE § 19.100.030(4)(b)(i)(D); NASAA MODEL
FRANCHISE EXEMPTIONS § 2(b)(i) (2012).
5
2.
Transactional Exemptions
a.
Fractional Franchise Exemption
As mentioned above, a fractional franchise is an extension of, or add-on to, a product or
service the franchisee is already offering the public. The exemption is predicated on the concept
that the franchisee has enough experience in its going concern to assess the risks and benefits
of entering into the fractional franchise, thus, diminishing the need for the protections provided
in the state franchise laws. Where available, this exemption offers the franchisor an exemption
from both registration and disclosure requirements at the state level. When available, the
exemption allows the franchisor to sell a franchise without creating a disclosure document. Note
that California and New York require notice filings.24 And New York is deal-by-deal and subject
to approval while California is a blanket annual filing.
The states that have adopted this exemption are California, Illinois, Indiana, Michigan,
Minnesota, New York, South Dakota, and Wisconsin.25 Illinois, Indiana, Minnesota, South
Dakota, and Wisconsin adopted the same standards as found under the FTC Amended Rule.
California, Michigan, and New York are more restrictive, as they require the fractional franchise
to be operated from the same location as the franchisee’s existing business.26 In addition,
California is unique in that it requires that the experienced officer must have been employed by
the franchisee for 24 month period before the sale and that the franchisee not be “controlled” by
the franchisor.27
b.
Large Investment Exemption
If the initial investment is substantial, some states have determined that the franchisee
does not need the protection of the state franchise laws. If the franchisee has the ability to make
a substantial investment, it is assumed the franchisee has the business experience to assess
the risk and benefits of the investment. While a single-unit franchise transaction may not meet
the investment threshold some parties are of the view that a multiple unit transaction (e.g., four
$300,000 investments) may be counted together when evaluating whether these thresholds are
met.
The states that provide this exemption are: Illinois (over $1,000,000); Maryland (over
$750,000); South Dakota ($1,000,000 or more); and Wisconsin (at least $100,000 and does not
exceed 20% of the franchisee’s net worth).28
24
CAL. CORP. CODE § 31108(f); N.Y. GEN. BUS. LAW § 200.10(2)(f); NASAA MODEL FRANCHISE EXEMPTIONS §
1 (2012).
25
CAL. CORP. CODE § 31108; 815 ILL. COMP. STAT. 705/3; IND. CODE § 23-3-2.5-1(a); MICH. COMP. LAWS §
445.1506(1)(h); MINN. STAT. §80C.03(f); N.Y. COMP. CODES R. & REGS. tit. 13, § 200.10(2); S.D. CODIFIED LAWS § 375B-12(3); WIS. STAT. § 553.22.
26
CAL. CORP. CODE § 31108(c); MICH. ADMIN. CODE § 445.1506(1)(h); N.Y. COMP. CODES R. & REGS. tit. 13, §
200.10(2)(c).
27
CAL. CORP. CODE § 31108(a), (e).
28
ILL. ADMIN. CODE tit.14, § 200.201(c); MD. CODE REGS. 02.02.08.10(E)(1); S.D. Franchise Investment Act §
13(1); WIS. STAT. § 553.235(1)(a); NASAA MODEL FRANCHISE EXEMPTIONS § 3(d) (2012).
6
c.
Large Franchisee Exemption
The large franchisee exemption is akin to the exemption under securities laws for an
accredited investor. The concept underlying this exemption is that the franchisee (or one of its
principals as an investor) is financially sophisticated and less likely to need the protection
provided by the state franchise laws. The basis for the exemption also assumes the franchisee
already has significant information about the business or can assess the risks of the investment
through due diligence or because of access to expert advisors.
This exemption is available in California, Illinois, Rhode Island, South Dakota,
Washington and Wisconsin.29 In California, this exemption requires that a notice be filed before
the offer is made; however, franchisors may file the notice once a year and rely on that same
notice for future deals (facts permitting) throughout the year. Unfortunately, if a franchisor waits
to file the exemption notice in California until after a deal negotiation is underway, the exemption
would be unavailable for that particular deal.30 Disclosure under this exemption is required by
Illinois and Rhode Island. Notice filings must be made in California and Rhode Island.
Illinois and South Dakota. The exemptions mirror the large franchisee exemption
under the FTC Rule, as described under III.A.3.
California. If the franchise owner is (i) an entity, then the entity must have a total assets
exceeding $5,000,000 and not be specifically formed for the purpose of acquiring the franchise,
or have all of its equity owners qualify under (ii) below, (ii) an individual, then the individual must
have either a net worth (single or joint) exceeding $1,000,000, a gross income exceeding
$300,000 per year in each of the two prior years, or an annual joint gross income with that
person’s spouse exceeding $500,000 in each of those years.
Rhode Island. The franchise owner must have a net worth of at least $1,000,000 or
income (single or joint) in excess of $200,000 per year in each of the two prior years.
Washington. The franchise owner must be an “accredited investor,” defined as (i) an
entity or trust with total assets in excess of $5,000,000 and not be specifically formed for the
purpose of acquiring the franchise, (ii) an individual whose net worth (single or joint) exceeds
$1,000,000, (iii) an individual whose annual gross income exceeds $200,000 per year in each of
the two prior years, or whose annual joint gross income with that person’s spouse exceeds
$300,000 in each of those years, or (iv) an entity in which all of the equity owners are accredited
investors.
d.
Renewal of Existing Franchise Agreement
In some form or another, all of the “registration states” have some form of an exception
from their state laws for the renewal of an existing franchise agreement subject to different
standards among the states, so that the renewal need not comply with the franchise registration
and/or disclosure requirements if certain conditions are met. All of the states that offer this
exception require that there be no interruption in the operation of the franchise business;
29
CAL. CORP. CODE § 31109; 815 ILL. COMP. STAT. 705/8(a)(2); R.I. GEN. LAWS § 19-28.1-6(4); S.D. CODIFIED
LAWS § 37-5B-13(2); WASH. REV. CODE § 19.100.030(5); WIS. STAT. § 553.235; NASAA MODEL FRANCHISE
EXEMPTIONS § 3(a) (2012).
30
CAL. CORP. CODE § 31109(e).
7
however, the states vary as to whether or not material modifications to the existing franchise
agreement are permitted.
California, Hawaii, Illinois, Michigan, Rhode Island, Virginia and Wisconsin follow the
more restrictive language under the FTC Rule and allow the exclusion only where there are no
material modifications to the existing franchise agreement.31 Meanwhile, New York has case law
that permits material modifications to be made to an existing franchise agreement,32 and Indiana
and Maryland statutes are silent as to material modifications. However, since the FTC Rule only
allows this exception when there are no material modifications, a prudent franchisor would not
rely on the state exception in New York, Indiana, or Maryland unless the franchisor can also
claim a different exemption or exception under the FTC Rule. The renewal of an existing
franchise agreement exception, allows the franchisor to avoid franchise registration (except
North Dakota33) and disclosure obligations under the state franchise laws, (except in Indiana
and Michigan, where disclosure is still required34). In addition, in order to qualify for this
exception, Rhode Island requires a notice filing.35
e.
Sales to Existing Franchisee
Existing franchisees may be deemed to already have the material information that they
need to make an informed investment decision. Consequently, California, Hawaii, Maryland,
Michigan, New York, Rhode Island, South Dakota, Virginia, Washington and Wisconsin
recognize this exemption.36 It is interesting to note that if an existing franchisee later claims
fraud as to its initial purchase but has bought a second franchise, after discovery of the alleged
fraud, this second purchase may act as a waiver to claim damages for fraudulent inducement.37
The FTC rule also offers this exemption and, as with the renewal of an existing
franchise, it applies only if there are no material changes to the terms and conditions of the
existing franchise agreement. Rhode Island, Virginia and Washington allow the exception if the
franchise is substantially the same and the franchisee has 2 years of experience. California,
Hawaii and Wisconsin allow the exception if the sale is to an existing franchisee. Michigan and
New York require the sale be to a franchisee that actively operated the franchise for the
immediately preceding 18 months (and the purchase is for investment and not for resale).
31
CAL. CORP. CODE § 31018(c); HAW. REV. STAT. § 482E-4(a)(5); 815 ILL. COMP. STAT. 705/7; MICH. COMP.
LAWS § 445.1506(1)(e); R.I. GEN. LAWS § 19-28.1-6(6); 21 VA. ADMIN. CODE 5-110-75(2); WIS. ADMIN. CODE
§ 32.05(1)(g).
32
Rich Food Services, Inc. v. Rich Plan Corp., 5:02-CV-1447, at 6 (N.D.N.Y. Sept. 17, 2004).
33
N.D. CENT.CODE § 51-19-03.
34
IND. CODE § 23-2-2.5-9; MICH. COMP. LAWS § 445.1506(1)(g).
35
R.I. GEN. LAWS § 19-28.1-6(1)(iv).
36
CAL. CORP. CODE § 31106; HAW. REV. STAT. § 482E-4(a)(6); MD. CODE ANN., BUS. REG. § 14-214(b)(2);
MICH. COMP. LAWS § 445.1505(1)(g); N.Y. GEN. BUS. LAW § 684(3)(d); R.I. GEN. LAWS § 19-28.1-6(5); S.D. CODIFIED
LAWS § 37-5B-14; 21 VA. ADMIN. CODE 5-110-75(3); WASH. REV. CODE § 19.100.030(6); WIS. ADMIN. CODE §
32.05(1)(e); NASAA MODEL FRANCHISE EXEMPTIONS § 3(a) (2012).
37
See, e.g., Burne v. Lee, 156 Cal. 221; 104 P. 438 (Cal 1909); and Oakland Raiders v. Oakland-Alameda
County Coliseum, Inc., 144 Cal. App. 4th 1175 (2006).
8
California, New York and Rhode Island require a notice filing38 and disclosure may be
required in Michigan if the franchisor has a disclosure statement in compliance with the laws of
any state or the Amended FTC Rule,39 but disclosure is required in Rhode Island and Virginia.40
f.
Franchisor Insider Exemption
Generally insiders are individuals who either own at least a 25% interest in the franchisor
for the last 2 years or have been an officer, director or own an interest in the franchisor and
have management responsibility within the franchise system. The insider exemption
acknowledges the franchisor is fully informed about the business and has actual experience
managing the franchise being offered so the protections offered by the state franchise laws are
not necessary or appropriate.
This exemption can be utilized in California, Illinois, Rhode Island, South Dakota and
Washington.41 Disclosure is only required in Illinois. Notice is required by California and Rhode
Island.
g.
Sales by Existing Franchisee
All states recognize the need of business owners to be able to sell their business.
Consequently, they all have an exemption that permits the franchisees to sell an existing
franchise business to a third party. It is important to note that while the franchisor may approve
the new franchisee under this exemption the sale cannot be “affected by or through” the
franchisor.
Case law provides guidance on when a sale has been “affected by or through” the
franchisor.42 Specifically, if the franchisor matched buyers and sellers, advised the parties on
the financial terms, facilitated or identified financing, or required the buyer to sign a new
franchise agreement, the franchisor may be deemed to have “effected” the sale and the
franchisor will no longer eligible for this exemption.
38
CAL. CORP. CODE § 31106(b); N.Y. GEN. BUS. LAW § 684(3)(d)(iii); R.I. GEN. LAWS § 19-28.1-6(1)(iv);
NASAA MODEL FRANCHISE EXEMPTIONS § 3(a)(ii)(1) (2012).
39
MICH. COMP. LAWS § 445.1506(2).
40
R.I. GEN. LAWS § 19-28.1-6(5); 21 VA. ADMIN. CODE 5-110-75(3); NASAA MODEL FRANCHISE EXEMPTIONS §
3(a)(ii)(5) (2012).
41
CAL. CORP. CODE § 31106; 815 ILL. COMP. STAT. 705/8(a)(3); R.I. GEN. LAWS § 19-28.1-6(3); S.D. CODIFIED
LAWS § 37-5B-13(4); WASH. REV. CODE § 19.100.030(5); Wash. Admin. Code § 460-44A-501(1)(d); NASAA MODEL
FRANCHISE EXEMPTIONS § 3(b) (2012).
42
See Little Caesar Enters., Inc. v. OPPCO, LLC, 219 F.3d 547 (6th Cir. 2000); Johnson v. Mail Boxes Etc.
USA, Inc., No. 44438–7–I, 2000 WL 264026, at *1 (Wash. Ct. App. Mar. 6, 2000).
9
3.
Discretionary Exemption
Upon a showing of appropriate cause, some state administrators (commissioners) have
the authority to grant exemptions from registration and/or disclosure on a case-by-case basis,
for example, where they determine that the franchise laws are not necessary or appropriate in
the public interest, or needed to protect prospective investors.
This option is available in Illinois, Indiana, Maryland, Minnesota, New York, North
Dakota, Rhode Island, South Dakota and Wisconsin.43 In California and Hawaii44, it appears that
the statute provides the commissioner authority to grant discretionary exemptions but as a
matter of policy these states only offer exemptions through their respective rule making
processes. So for the practical purposes of this paper California and Hawaii do not offer
discretionary exemptions from pre-sale disclosure. In addition, North Dakota has only granted
this exemption 3 times in the last decade.
As a practical matter, some large, sophisticated and multi-brand franchise companies
have a general policy of delivering an FDD to prospective franchise owners in connection with
all offers and sales – even those that are expected to qualify for an exemption – for
informational purposes and to maintain consistency and uniformity in its business development
process across all prospects, jurisdictions, and transactions. This policy would mean that even
where a proposed franchise transaction may qualify for an exemption to both registration and
disclosure requirements under the FTC Franchise Rule and state franchise laws, the franchisor
would disclose the prospective franchise owner with an FDD (assuming the franchisor has a
current FDD) as a belt and suspenders approach.45
IV.
EXEMPTION CHALLENGES FOR LARGE, SOPHISTICATED AND MULTI-BRAND
FRANCHISE COMPANIES
A.
Exemption Challenges for Large and Sophisticated Franchise Companies
Large and sophisticated franchise companies often rely on exemptions under the FTC
Rule and state law to exempt the franchisor or a particular transaction from franchise disclosure
and/or franchise registration requirements. The more common of such exemptions are the
fractional franchise and large franchisee exemptions under the FTC Rule and the fractional
franchise and large/seasoned franchisor exemptions under state law. As illustrated below, the
exemption qualifications under state law often do not translate well when applied to large and
sophisticated franchise companies. The following Section explores common challenges for
large and sophisticated franchisors attempting to rely on these exemptions.
43
815 ILL. COMP. STAT. 705/9; IND. CODE §§ 23-2-2.5-5, 23-2-2.5-8; MD.CODEREGS.02.02.08.10(G), MINN.
STAT. §80C.03(g); N.Y. GEN. BUS. LAW § 684(1), (4); N.D. Cent. Code §§ 51-19-04(3), 51-19-05; R.I. GEN. LAWS § 1928.1-6(10); S.D. CODIFIED LAWS § 37-5B-15; WIS. STAT. § 553.25; NASAA MODEL FRANCHISE EXEMPTIONS § 4 (2012).
44
See CAL. CORP. CODE § 31100; HAW. REV. STAT. § 482E-4(b).
45
Remember this approach will create a requirement to disclose in Michigan under MICH. COMP. LAWS §
445.1506(2).
10
1.
Corporate Structure
Sophisticated franchisors and franchise owners, alike, often have elaborate corporate
structures to account for operational complexities, in view of multiple operating entities (each
with their own history), and help take advantage of tax benefits and insulate liability. These
elaborate structures create challenges when trying to satisfy the “experience” or “net worth”
elements under the exemptions to federal and state franchise disclosure and registration
requirements frequently relied on by large and sophisticated companies, as discussed under
section III above.
While the federal exemptions appear to accommodate today’s complex corporate
structures by accounting for the possibility of a parent "or affiliate" satisfying one of the elements
of the exemptions in lieu of the franchise owner,46 most state franchise statutes still do not.
Federal and state exemptions still vary greatly and are yet to be reconciled. For example, the
large/seasoned franchisor exemption is available in certain states to franchisors that meet
minimum net worth and franchise experience requirements. Qualifying franchisors are generally
still subject to state disclosure requirements or annual filings and fees, but are permitted to
forego agency review of franchise registration and renewal applications (with the exception of
the “super large franchisor” exemption in Illinois and New York, under which there are no filing
requirements or fees payable).47
Although the net worth and experience requirements vary by state, none of the
large/seasoned franchisor exemptions permit a franchisor to rely on an affiliate’s net worth or
experience. All of the states with a large/seasoned franchisor exemption require that the
franchisor, or a parent or company that owns 80% or more of the franchisor, satisfy the net
worth element under the exemption.48 Likewise, while the experience element under the
large/seasoned franchisor exemption varies among the states (and in Illinois and New York the
exemption does not include an experience element), all of the exemptions with an experience
element require the franchisor, or a parent or company that owns at least 80% or more of the
franchisor, to satisfy the minimum experience requirements. The challenge in both instances is
that large or sophisticated companies may, for one reason or another, establish a sister
company (affiliate) or indirect subsidiary as the franchisor entity rather than a direct subsidiary;
in that case, a transaction that would otherwise qualify for the large/seasoned franchisor
exemption had the franchisor entity been a wholly-owned subsidiary of the parent entity will not
qualify for the exemption simply due to the franchise company’s corporate structure. As a
practical matter, in these instances, a franchise company may be able to request a discretionary
exemption on the grounds that complying with the registration requirements under state law has
little value to the interest of the public and that granting a discretionary exemption is consistent
with the purpose of the large/seasoned franchisor exemption.
2.
Financial Statements
When dealing with large and sophisticated franchise companies, often times a franchise
company’s financial statements (or lack of audited financial statements) present challenges
when trying to qualify for the large/seasoned franchisor exemption under state law. As noted
46
See 16 C.F.R. § 436.8.
47
815 ILL. COMP. STAT. 705/8(a)(1); N.Y. GEN. BUS. LAW § 684(3)(a).
48
Large Franchisor Exemptions, supra note 22.
11
under section III.B.1. above, in order to satisfy the minimum net worth element under the
large/seasoned franchisor exemption, the franchisor or a parent or company that owns 80% or
more of the franchisor must have a certain minimum net worth,49 and in most states, both the
parent and franchisor must have a certain minimum net worth according to audited financial
statements. One of the challenges resulting from the language of the statutes and regulations is
that many large and sophisticated franchise systems do not issue audited financial statements
at the franchisor entity level. Rather, the franchisor entity’s financials are typically consolidated
with a direct or indirect parent company with little or no specific mention of the franchisor entity’s
financials. A franchisor without its own audited financial statements may not be able to meet the
exemption requirements, even if the consolidated financial statements at the parent level show
a net worth for the franchisor entity considerably in excess of the minimum net worth required
for the parent to qualify for the exemption.
Another common challenge with respect to financial statements for large and
sophisticated franchise companies arises where the franchisor – on its own – may have a
sufficient net worth to satisfy the minimum net worth element under the large/seasoned
franchisor exemption, but when the franchisor’s financials are consolidated with its parent
company, the parent company may have a substantially lower net worth because of
underperformance by a separate business entity or a dividend issued to stockholders at the
parent company level. In that case, the franchisor’s net worth cannot be viewed in isolation
from the rest of the consolidated financial statements, and therefore the franchise company
would not qualify for the exemption.
Again, as a practical matter, in both of these instances, a franchise company may be
able to request a discretionary exemption on the grounds that complying with the registration
requirements under state law has little value to the interest of the public and that granting a
discretionary exemption is consistent with the purpose of the large/seasoned franchisor
exemption.
3.
Sophisticated Corporate Actions and Financing Transactions
It is not uncommon for large and sophisticated franchise companies to take certain
company actions or utilize non-traditional forms of financing that are not a consideration for
small or medium franchise companies. For example, a publicly-traded franchise company, such
as Marriott International, Inc., may decide to institute a stock repurchase program,50 or a large
franchise company, such as Sonic Corp., may decide to refinance existing debt or raise new
capital through securitization financing.51 Both of these company actions could affect the
franchise company’s net worth and the company’s ability to qualify for the large/seasoned
franchisor exemption under state law.
49
Large Franchisor Exemptions, supra note 22.
50
See Press Release, Marriott Int’l Inc., Marriott International Declares Cash Dividend; Announces Increase
in Stock Buyback Authorization (Feb. 14, 2014), http://news.marriott.com/2014/02/marriott-international-declarescash-dividend-announces-increase-in-stock-buyback-authorization.html.
51
See Press Release, Sonic Corp., Sonic Completes Issuance of Securitized Notes (July 18, 2013),
http://ir.sonicdrivein.com/releasedetail.cfm?ReleaseID=778638.
12
a.
Stock Repurchase Program
A stock repurchase program is when a company purchases its own outstanding shares
(repurchase) in order to reduce the number of outstanding shares. Companies will buy back
shares either to increase the value of shares still available (reducing supply), or to eliminate any
threats by shareholders who may be looking to acquire a controlling stake. Stock repurchase is
often seen as an indication that the company's management thinks the shares are undervalued.
The challenge for franchise companies in connection with a stock repurchase program is that
the program can result in the company taking on a significant liability on its books (and thereby
effecting the company’s net worth), which, alone, should have little bearing on whether the
company is financially sound. However, in such instances, the franchise company may not only
have difficulty satisfying the minimum net worth requirement under the large/sophisticated
franchisor exemption or sophisticated franchisee exemption, whichever is applicable, but the
franchise company may experience a difficult time obtaining registration in the states absent a
financial assurance condition (such as a fee deferral, escrow requirement or posting of a surety
bond). Accordingly, a franchise company that has a practice of relying on either of these
exemptions should be mindful of the amount of the company’s cash reserves allocated to a
stock repurchase program.
b.
Securitization Financing
Additional challenges exist for franchise companies considering securitization financing,
which is generally a financing option available to only large franchise companies with a
significant network size. The essence of a securitization is that a franchisor’s revenue stream
(e.g., royalty payments) is “securitized” by structurally isolating the revenue stream in a newly
created, bankruptcy-remote, special-purpose entity that issues debt instruments, preferred
stock, or certificates of beneficial interest secured by that revenue stream. The subject assets
(typically existing franchise agreements that serve as the basis for the royalty payments), once
properly isolated, become distinct from the company’s balance sheet. Under the securitization
model, the new special-purpose entity will serve as the “franchisor” after the completion of the
securitization, not only in administering the existing franchise network, but in selling new
franchises as well.
Accordingly, although the franchisor may have been able to rely on the large/seasoned
franchisor exemption prior to the securitization transaction, the new special-purpose “franchisor”
entity may not be able to meet the experience element under the exemption. Depending on
whether the new franchisor entity executed an inter-company guarantee as part of the
securitization (which typically occurs), the franchisor entity may not have a net worth sufficient to
satisfy the minimum net worth requirements under the state exemptions. It has become a
common practice for franchise companies undertaking securitization financing to work with state
examiners to obtain discretionary exemptions in order for the franchisor to be able to continue to
seek on the large/seasoned franchisor exemption post-securitization.
4.
Acquisitions
There continue to be a high number of acquisitions involving franchise companies, as
franchise companies are attractive investment targets for both strategic and private equity
purchasers. However, being the target of an acquisition can result in a number of challenges for
the franchise company post-acquisition when trying to satisfy the “experience” and “net worth”
elements under the large/seasoned franchisor exemption.
13
If an acquisition of a franchise company is structured as an asset purchase -- the
purchase of the franchise company’s assets -- it is important to consider whether the assets are
being purchased by a special purpose entity formed specifically for the acquisition or whether
the assets are being purchased by an existing franchise company. The former is common
where a purchaser is trying to limit its liability post-acquisition for claims that may have occurred
pre-acquisition, and the latter is common where an existing franchise company is looking to
make a strategic acquisition. If a franchise company’s assets are purchased by a special
purpose entity, the new franchisor entity (post-acquisition) will have difficulty satisfying the
experience requirement under the large/seasoned franchisor exemption because the new
franchisor entity will not have been in existence for five years, as required under all of the states
with a large/seasoned franchisor exemption (except for New York, which has no experience
requirement). Two states,52 Illinois and Virginia, do permit a franchisor to rely on the prior
experience of the franchisor’s predecessor, which could be helpful to a franchisor postacquisition in its attempt to satisfy the experience element under the large/seasoned franchisor
exemption.53
It is not uncommon for franchise companies purchased by private equity firms to be
saddled with a significant amount of debt post-acquisition and be forced to pay significant
dividends to the private equity firm periodically during that firm’s ownership of the franchise
company. In these instances, it is often difficult for a franchisor to satisfy the net worth element
under the large/seasoned franchisor exemption post-acquisition. It is also not uncommon for a
purchaser to assign a significant percentage of the purchase price to the goodwill of the
franchise company. Franchisors should be mindful that an attempt to rely solely on intangible
assets to satisfy the net worth element under the large/seasoned franchisor exemption will likely
be met with resistance from some state examiners, unless the franchisor can also demonstrate
tangible assets in excess of the minimum net worth requirements.
B.
Exemption Challenges for Multi-Brand Franchise Companies
Multi-brand franchising is where several different franchise brands are held by one
conglomerate. Diversification is a driving factor in the growth of multiple-brand franchising. As
multi-unit franchise owners seek new avenues for growth, increasing numbers of them are
adding multiple brands to their franchise brand portfolios. The increase in multi-brand
franchising has been accompanied by a growth in the number of franchisors offering multiple
brands from under the same corporate roof. Usually, the family of brands is limited to a single
industry segment (hotel or retail fast food, for example), but not always. Since not all of the
brands held by one conglomerate may be in the same industry segment, and brands within the
same industry segment typically vary from one another, franchisors often face challenges in
trying to satisfy the “experience” element under exemptions from federal and state franchise
disclosure and registration requirements frequently relied on by multi-brand franchise
companies.
As noted under section III.A.1., in order for a franchisor to rely on the fractional franchise
exemption under the FTC Rule54 for a particular transaction, the franchise owner must satisfy
52
ILL. ADMIN. CODE tit. 14, § 200.201(e)(2); 21 VA. ADMIN. CODE § 5-110-75(4)(a)(3).
53
See also, Cal. Comm'r of Corp., Comm. File No. OP 6420F, Bus. Franchise Guide (CCH) ¶ 10,476 (June
22, 1994).
54
16 C.F.R. § 436.1(g)(1).
14
the “experience” element of the exemption. One would think that it is relatively easy for a
franchisor to determine whether the franchise owner satisfies the "experience" element under
the exemption; however, such is not necessarily the case when dealing with multi-brand
franchise owners.
Under the FTC Rule, the franchise owner must have more than two years of experience
in the “same type of business” as the franchise being offered by the franchisor. The challenge
when attempting to rely on the fractional franchise exemption for a particular transaction is
determining whether the existing brand owned by the franchise owner is “the same type of
business.” For example, is a Hilton Garden Inn hotel the same type of business as a Conrad
hotel? Is a Popeye’s franchise the same type of business as a Checkers franchise? According
to the FTC Rule Statement of Basis and Purpose ("SBP"), the “Commission has never required
experience in the identical type of business. Rather, the sale of similar goods may qualify for the
exemption … [and] a broad reading of the fractional franchise exemption is warranted when
determining which individuals may qualify as having the requisite prior experience.”55 However,
according to the FTC Compliance Guide, the “same line of business” means “selling competitive
goods, or being in a business that would ordinarily be expected to sell the type of goods to be
distributed under the franchise.”56 Using this reasoning, a franchisor could take the position that
the Hilton Garden Inn is in the same line of business as a Conrad hotel; however, it may be
more difficult to argue that Popeye’s and Checkers franchises are in the same line of business.
As noted earlier in this paper, this determination is clearly a judgment call.
The fractional franchise exemption is also available in certain states57 for transactions
that meet its requirements, which are similar to those under the federal exemption. The primary
benefit of qualifying for the fractional franchise exemption is that the transaction is exempt from
both state franchise disclosure and registration requirements.
The “experience” element under the fractional franchise exemption varies among the
states. Certain states, such as California and New York, require the multi-brand franchise
owner to have more than two years of experience in a “substantially similar” business as the
franchise being offered by the franchisor, while other states require the two years of experience
to be in the “same type” of business as the franchise being offered by the franchisor. As with
the fractional franchise exemption under the FTC Rule, the challenge for a franchisor is
determining whether the existing brand owned by the franchise owner is “substantially similar”
or the “same type” of business. Like with the federal exemption, this determination is a
judgment call.
When dealing with multi-brand franchise companies, the launch of a new brand by a
franchisor often times presents challenges when trying to qualify for the large/seasoned
franchisor exemption under state law. The challenge for a multi-brand franchisor is determining
whether an existing brand can be used by a franchisor to satisfy (or help satisfy) the experience
element under the large/seasoned franchisor exemption.
55
72 Fed. Reg. 15,458-59 (Mar. 30, 2007).
56
FEDERAL TRADE COMMISSION, FRANCHISE RULE COMPLIANCE GUIDE 8 (2008).
57
CAL. CORP. CODE § 31108; 815 ILL. COMP. STAT. 705/3; IND. CODE § 23-3-2.5-1(a); MICH. COMP. LAWS §
445.1506(1)(h); MINN. STAT. §80C.03(f); N.Y. COMP. CODES R. & REGS. tit. 13, § 200.10(2); S.D. CODIFIED LAWS § 375B-12(3); WIS. STAT. § 553.22.
15
As noted earlier in this paper, the experience element under the large/seasoned
franchisor exemption (for the states that include an experience requirement) varies among the
states. In order to satisfy the experience element under the large/seasoned franchisor
exemption (for the states that include an experience requirement), the franchisor or a parent or
company that owns 80% or more of the franchisor must have had at least twenty-five
franchisees “conducting business” at all times during the five year period immediately preceding
the offer or sale. California and Illinois require that the business conducted by the twenty-five
franchisees be “the subject of the franchise,” 58 while Maryland and Virginia require that the
business conducted by the twenty-five franchisees be “the same franchised business”59 as the
franchised business being offered by the franchisor. Rhode Island, on the other hand, requires
that the business conducted by the twenty-five franchisees be “substantially the same
franchised business”60 as the franchised business being offered by the franchisor. While the
determination depends, in part, on how similar the existing brand is to the franchisor’s new
brand, the franchisor likely will not be able to rely on an existing brand to satisfy the experience
element under the large/seasoned franchisor exemption in most states.
V.
DISCLOSURE CHALLENGES FOR LARGE, SOPHISTICATED AND MULTIBRAND FRANCHISE COMPANIES
A.
Disclosure Challenges for Large and Sophisticated Franchise Companies
As explained above, even the most ubiquitous and well-established franchise companies
may be unable to satisfy applicable criteria for an exemption from the disclosure obligations of
the FTC Rule and/or state franchise laws. Moreover, even if a franchise company satisfies the
criteria for an exemption under the FTC Rule and state franchise laws, qualifying franchisors are
generally still subject to state disclosure requirements or annual filings and fees, but are
permitted to forego agency review of franchise registration and renewal applications. This
section explores significant disclosure issues facing large and sophisticated franchise
companies, including: (i) information relating to the franchisor’s history and extended corporate
family that must be shared with prospective franchise owners; (ii) the possibility of having to
include multiple sets of financial statements in the franchisor's FDD; (iii) disclosure procedures
and timing constraints to be assessed in connection with potential acquisitions and other
sophisticated financing arrangements; (iv) franchisee initiated disclosure challenges; and (v) the
occurrence of routine material events.
1.
Related Entity Disclosures: Parents, Predecessors, and Affiliates
Experienced franchisors and counsel likely are familiar with required FDD disclosures
concerning parent, predecessor, and affiliate-related information as minimally required under
FDD Item 1 (describing the company’s 10-year chain of ownership and certain currently-related
entities and brands), and as otherwise possibly implicated by Item 3 (certain actions involving
certain related entities and persons), Item 4 (10-year bankruptcy history involving related
entities and persons), Item 10 (affiliate-sponsored financing available to franchise owners), Item
12 (territorial concerns with respect to related brands), and Item 21 (financial statements of
58
CAL. CORP. CODE § 31101(b)(1); ILL. ADMIN. CODE tit. 14, § 200.202(e)(2).
59
MD. CODE REGS. § 02.02.08.10(D)(1)(b); 21 VA. ADMIN. CODE § 5-110-75(4)(a)(3).
60
R.I. GEN. LAWS § 19-28.1-6(1)(ii).
16
certain related entities).61 Still, as a franchisor’s extended corporate family grows larger and
more intricate through changed ownership and management of the franchisor itself, as well as
the development and acquisitions of new brands by its affiliates and parent companies, a
sophisticated franchisor must assess the full organizational chart and related portfolio of its
entire corporate family to properly address the nuanced disclosure obligations concerning
predecessors and affiliates.
The FTC Rule defines an “affiliate” as “an entity controlled by, controlling, or under
common control with, another entity.”62 This broad definition includes, but is not limited to, any
of the franchisor’s “parents,” which means “any entity that controls another entity directly or
indirectly through one or more subsidiaries.”63 But not all of a franchisor’s parents, or all of its
non-parent affiliates, are reached by the FTC Rule disclosure instructions employing these
terms. Rather, the scope of a franchisor’s discloseable parents and affiliates, and their related
information, is restricted to information that must be disclosed only in certain Items, and may
vary in breadth from Item to Item. A “predecessor” for disclosure purposes is any “person from
whom the franchisor acquired, directly or indirectly, the major portion of the franchisor’s assets,”
where such former owner of the assets “itself operated or franchised the same or a similar
business.”64 Like parent and affiliate-related disclosures, predecessor information is only
selectively required under certain disclosure Items, as applicable.65
A franchisor must disclose under Item 1, among other things, the names and addresses
of any parent in the chain of ownership that exercises control over the policies and direction of
the franchise system (rather than merely own the franchisor),66 any of franchisor’s predecessors
during the ten-year period immediately before the close of the franchisor’s most recent fiscal
year, and any of franchisor’s affiliates that offer franchises in any line of business or that
otherwise provide products or services to the franchise owners of the franchisor.67 In addition,
for any predecessors during the past ten years, and any affiliates offering other franchises or
that service the franchisor’s franchisees, the franchisor must disclose each entity’s relevant
operating experience in the type of business being offered and that entity’s franchising
experience and franchise sales history across any line of business.68 Large and sophisticated
franchise companies may find these disclosures particularly tedious, if not challenging to
capture accurately, when faced with a complex organizational chart of affiliates as well as direct
and indirect parent entities. For instance, typical hotel companies must track and disclose
numerous affiliated companies and brands across various hotel chains, as do restaurant holding
61
16 C.F.R. § 436.5.
62
72 Fed. Reg. 15,454 (Mar. 30, 2007) (regarding Section 436.1(b): Affiliate).
63
Id. at 15,463 (regarding Section 436.1(m): Parent).
64
FEDERAL TRADE COMMISSION, FRANCHISE RULE COMPLIANCE GUIDE 30 (2008).
65
72 Fed. Reg. 15,463 (Mar. 30, 2007) (regarding Section 436.1(m): Parent).
66
FEDERAL TRADE COMMISSION, AMENDED FRANCHISE RULE FAQ’S 16 (2007) (The definition of a “parent” for
FTC Rule purposes focuses on control such that a parent that merely owns, but does not control, a franchise system
is not a “parent” for purposes of any disclosure Item).
67
16 C.F.R. § 436.5(a).
68
Id.
17
companies that offer many dining concepts.69 Hilton Worldwide, for example, has an Item 1
disclosure in its FDD relating to its affiliates and their corporate history that is four pages long
and details information relating to every separate franchise company Hilton Worldwide has in
the United States (there are currently 9) and in international markets (more than 9). In addition,
to the extent a franchisor has changed hands many times over (which are not uncommon for
private equity-owned franchise companies), the franchisor must document all predecessors in
the chain of ownership during the prior ten years to properly comply with Item 1 disclosure
requirements under the FTC Rule. Finally, the more diverse and sizable the organization, the
more likely that ongoing transactions are being consummated involving discloseable entities,
which may trigger materiality analyses and possible franchise sales interruptions, FDD
supplemental disclosure or amendment, and re-disclosure (discussed further below in this
paper).
2.
Financial Statements
Often the biggest issue a sophisticated franchise company faces with respect to
disclosure concerns which financial statements to produce and include in the FDD.
Sophisticated franchise companies should remain mindful that certain commitments a parent
undertakes for, or on behalf of, its subsidiary franchisor can have far-reaching implications. Any
parent that performs post-sale, direct-to-franchisee obligations on the franchisor’s behalf must
include its own financial statements (audited in accordance with US GAAP) under Item 21 of the
franchisor's FDD in addition to the franchisor's financial statements. Such disclosure could be
challenging for a parent company should the parent not already have its own audited financial
statements. In addition, a parent or affiliate that agrees to guarantee the franchisor’s financial
performance must disclose its own audited financial statements under Item 21 of the
franchisor’s FDD (and include the executed guarantee in the FDD).70 In such cases, the parent
or affiliate has possibly made its own financial stability material to the franchise owner’s
investment decision by affirmatively committing to satisfy obligations for the prospective
franchise owner’s benefit.71
While some sophisticated franchisors are willing to disclose a parent's or affiliates
financial statements and/or to have a parent entity guarantee the franchisor’s performance,
others understandably would rather avoid doing so. This potential obstacle can arise for
complex franchise companies that want to centralize and perform post-sale obligations of the
franchisor through a parent operating company that undertakes the franchisor’s obligations.
This issue often arises in the hotel industry where a parent entity provides centralized hotel
services (marketing, F&B services, etc.) directly to all hotels operating under each of the brands
owned by the parent company. What if the organization is unwilling to release its financial
statements in the franchisor’s FDD, guarantee the subsidiary franchisor’s performance or to
otherwise disclose? One possible solution to address this challenge is to reposition the
franchisor entity within the larger corporate structure as a same-line affiliate – rather than a
subsidiary – of the former parent entity that was performing post-sale obligations. While Item 21
69
See W. Michael Garner, Richard Greenstein, and Mary McMonagle, When Competitive Franchise
Systems Merge: Opportunities & Pitfalls, IFA 43RD ANNUAL LEGAL SYMPOSIUM 1 (2014). A recent count reflected
Starwood operating at least 9 brands, Marriott at least 17 brands, Hilton Worldwide at least 9 brands, Wyndham at
least 14 brands, Choice Hotels at least 11 brands, and restaurant companies such as Darden (Olive Garden, Red
Lobster, etc.) and Bloomin’ Brands (Outback, Fleming’s, Roy’s, etc.) that offer a wide array of dining concepts.
70
FEDERAL TRADE COMMISSION, FRANCHISE RULE COMPLIANCE GUIDE 114 (2008).
71
Id.
18
requires that parents providing a guarantee or commitment to perform post-sale obligations
must disclose its financial statements, the same is not true of non-parent affiliates that may
similarly commit to perform post-sale obligations for the franchisor.
Publicly-traded franchise companies face another set of challenges if attempting to
register or renew their franchise offer in certain registration states more than 120 days after the
close of the franchise company’s fiscal year. States such as Hawaii, Maryland, Minnesota, and
Virginia require unaudited financial statements (i.e., balance sheet and statement of cash flows)
current within 90 to 120 days from the filing date (depending on the state) to be included in the
franchisor's FDD. While providing unaudited financial statements is generally a non-issue for
most small or medium franchise companies, publicly-traded franchise companies are unable to
issue unaudited statements. Publicly-traded companies must wait until the next quarterly SEC
filing (e.g., 10-Q) if the most recent 10-Q filing is not current with the ninety to one hundred
twenty day period. Such delay can result in the franchise company going "dark," which can be
extremely problematic for the company because no offer or sales activities can be conducted in
the state until the franchise offer is registered. Accordingly, publicly-traded franchise companies
need to make sure to plan ahead in order ensure that their franchise system avoids any
prolonged dark periods as a result of having to wait for financial statements to be issued.
3.
Potential Acquisitions and Other Sophisticated Financing
Arrangements
As discussed earlier in this section, a franchisor’s required disclosures concerning its
affiliates, parent entities and brands can be particularly broad and nuanced throughout the
disclosures required to be included in its FDD. New or changed circumstances independent of
a franchisor’s day-to-day franchising operations and policies can nevertheless impact the
information that may need to be disclosed in a franchisor’s FDD. This is particularly true of
potential acquisitions, divestments, and sophisticated financing activities that are common
occurrences with large and sophisticated franchise companies, the facts of any or all of which
may be "material" to prospective franchise owners and/or to current franchise owners,
depending on the circumstances.
The timing for disclosing a potential transaction in the FDD is often a challenging
assessment for franchise companies. Should a potential acquisition or sale be disclosed at the
time the franchisor, parent or affiliate signs a preliminary agreement, such as an NDA, term
sheet or LOI, or should the franchisor postpone disclosing the potential transaction until after a
definitive agreement is signed? Perhaps both of those timings are premature and the franchisor
should wait to disclose the potential transaction until after the closing of the transaction occurs?
Franchise companies often face such questions without much guidance from the FTC Rule or
state franchise laws.
Though “materiality” is not defined in the FTC Rule,72 the SBP alludes to the FTC’s longstanding interpretation of Section 5 of the FTC Act (on deceptive practices) to suggest that a
representation or omission is “material” if such information would be likely to affect a reasonable
prospective franchise owner’s decision to purchase the franchise.73 This commentary echoes
the predecessor federal law’s definition of “materiality”, and some state franchise laws include
72
For the definition of “materiality” in the predecessor franchise rule see 16 C.F.R. § 436.2(n) (2006).
73
72 Fed. Reg. 15,455 (Mar. 30, 2007).
19
similar definitions or references. However, the definition of “materiality” is anything but uniform.
The circumstantial nature and timing of events relating to a franchisor and the franchise system
force all franchisors to readily assess what information is “material” for purposes of disclosure.
By way of example, an affiliate’s potential acquisition of a small regional franchisor that offers
franchises in a wholly different line of business may not be viewed as “material” by the
franchisor when soliciting prospective franchise owners in a different region of the country, but
the potential acquisition of a large and directly competitive brand very likely would be.
Many franchise companies have adopted a practice of not disclosing a potential
acquisition, sale or sophisticated financing transaction, such as a securitization, until a definitive
agreement is signed. The rationale is that before the signing of a definitive agreement,
negotiations between the parties are not indicative that the parties will consummate an
agreement. Moreover, the transaction may be confidential, which is a particularly sensitive
issue for publicly-traded franchise companies. Upon signing a definitive agreement, however,
the level of expected certainty that the transaction will actually be consummated is such that a
franchisor must consider whether the information could be “material” to prospective franchise
owners.
While the FTC Rule does not mention anticipated transactions as a required disclosure,
the omission of such information could nevertheless be deemed a fraudulent or deceptive act if
such information is deemed to be “material” to a reasonable prospective franchise owner.74 At
the point a franchisor believes a proposed transaction is material (and in any case no later than
the transaction’s closing), then the franchisor should consider stopping sales activities under its
existing FDD, and begin steps to amend or issue a supplemental disclosure to its FDD for
prospective franchise owners in non-registration states and to amend its franchise registration in
the registration states where it has a then-effective registration. Further, some franchisors have
adopted a practice of distributing information (such as press releases, or an informal
“supplement”) disclosing the signing of a definitive agreement and the anticipated
consummation of the transaction to prospective and existing franchise owners as a riskmanagement mechanism to avoid potential state law claims for fraud or misrepresentation; the
rationale for doing so being that even if the franchisor is not certain that the transaction at its
current stage is "material," the benefit of disclosing the potential transaction to prospective and
existing franchise owners outweighs the burden of having to fend off fraud and/or
misrepresentation claims by franchise owners for not disclosing the transaction. Although the
practice of distributing a "supplement" to the FDD is not contemplated by existing state
franchise laws, the FTC Rule does contemplate supplemental disclosure by permitting
franchisors to disclose any material changes within a reasonable period of time after the close
of each quarter of the fiscal year in the form of an addendum or supplement to the FDD.75
4.
Franchise Owner-Initiated Disclosure Challenges
When it comes to large and sophisticated franchisors, large and multi-unit franchises are
becoming more the rule than the exception. This reality is beneficial in many ways to
sophisticated franchise companies, by allowing them to engage a growing pool of highly
qualified, experienced, and well-capitalized prospective franchise owners, and in turn more
readily take advantage of transaction-based exemptions from state franchise laws (as discussed
74
See Century Pac., Inc. v. Hilton Hotels Corp., 528 F. Supp. 2d 206, 236 (S.D.N.Y. 2007) (granting
summary judgment for defendants on fraud claim involving sale of Red Lion brand after hotel franchisor told
franchisee pre-sale that it was not planning to sell the chain), aff’d, 354 F. App’x 496, 499 (2d. Cir. 2009).
75
72 Fed. Reg. 15,566 (Mar. 30, 2007).
20
above). Nonetheless, having a large multi-unit franchise owner base is not without challenges
for a franchisor.
Multi-jurisdictional transfers are a challenge large and sophisticated franchisors often
face as a result of having multi-unit franchise owners. These transfers can be challenging for
franchisors who may not be registered in all of the registration states or who have a practice of
relying on transaction-based state exemptions. If the franchisor is not currently registered in a
state in which one of the franchised outlets is located or if the franchisor is unable to rely on a
federal and state exemption in connection with the transfer, the franchisor may need to navigate
the complexities of transferring the franchised outlets in piecemeal or delay its consent to the
transaction pending registration approval.
Another challenge franchisors often face as a result of attracting a greater number of
prospective multi-unit franchise owners is an expectation for negotiating the development and
franchise agreements. While a franchisor may be willing to accommodate certain requested
changes, franchisors should keep in mind the possible implications a negotiated change may
have on disclosure in the franchisor's FDD. Further, if the negotiated changes occur in
connection with a sale of a franchise in California (and the franchisor is not exempt from the
franchise registration laws in California), the franchisor may be required to disclose the
negotiated changes to future prospective franchise owners.76 While not necessarily within the
focus of this paper, Appendix II includes a brief summary on how to comply with the negotiated
changes and material modifications requirements under the California Franchise Investment
Law.
Even after the parties enter into the franchise agreement, franchisors often continue to
face greater transaction costs when dealing with a multi-unit franchise owner base in connection
with activities that are normally straightforward and routine when dealing with single-unit
franchise owners. Franchisors with a large number of multi-unit franchise owners regularly field
requests to consent to complex refinancings and ownership interest transfers, which can
become time consuming. These requests typically involve having to negotiate subordination
agreements, amendments to franchise agreements, in addition to the consent agreement, itself.
In addition, franchisors that own and lease, or rent and sublease, real property or significant
equipment and other assets to franchise owners may have to prepare, review or revise
numerous other documents (and consult with landlords, vendors and legal counsel) each time
one of these activities occurs. Franchisors should be cognizant of the likelihood for higher
transaction costs that usually accompany large multi-unit franchise deals, and include
reimbursement rights and sufficient transfer amounts in the franchise agreements with multi-unit
franchise owners to help offset the increase in expenses.
5.
Routine Material Events
As discussed above, franchisors must constantly assess new or changed information in
their ongoing business activities to determine whether such information would be reasonably
likely to affect a prospective franchise owner’s investment decision. If the franchisor decides
that the answer is “yes,” then the information should be considered material and will have to be
disclosed in accordance with applicable franchise laws. However, even information that the
franchisor might not think would be reasonably likely to affect a prospective franchise owner’s
investment decision, may still qualify as “material” if its subject matter is covered by the FTC
Rule’s disclosure instructions. In fact, a prospective franchise owner is entitled to regard as
76
See CAL. CORP. CODE §§ 31109.1(a)(4), 31123; CAL. CODE REGS. tit. 10, §§ 310.100.2, 310.100.4 (2010).
21
material each and every statement in a FDD. According to the FTC Rule FAQ’s issued by the
FTC staff to assist franchisors in their review of the FTC Rule requirements, the text of the FTC
Rule, as well as the Compliance Guide, “make it clear that Section 436.9(h) reflects a
Commission finding that each disclosure required by the [FTC] Rule is material to a prospective
franchise owner’s investment decision.”77 As such, any change to existing disclosure in the
franchisor’s existing FDD would be considered material, and the franchisor must determine the
appropriate time and method by which to disclose the new material information.
With respect to the timing of any amendment to the franchisor’s existing FDD, the FTC
Rule requires a franchisor to issue quarterly updates to its FDD within a “reasonable time after
the close of each quarter in its fiscal year,” 78 while state franchise laws vary on specified timing
for amending a registration. For example, California and Maryland require that the FDD be
amended “promptly” in the event any material change occurs while Virginia requires that the
FDD be amended “within 30 days after a material change.”79 Thus, there is no clear rule across
all jurisdictions as to when to amend an FDD to account for a material change. Further,
although all information falling within the purview of the FTC Rule’s disclosure Items is
considered material, under the FTC Rule, not all material changes require in a quarterly update.
“Material changes include such events as the recent filing of a bankruptcy petition or the filing
against the franchisor of a legal action that may have a negative effect on its financial condition,”
but “several of the disclosure requirements. . . require only annual updating,” such as Item 3
franchisor-initiated litigation, and Item 20 outlet statistics and trademark-specific association
information.80
Without a unified timing metric for amending an FDD under the FTC Rule and state
franchise laws, a common practice is for the franchisor to implement material changes to its
existing FDD no later than 30 days following the end of the franchisor’s fiscal quarter. However,
if the information underlying the material change is of such significance – for example, a sale of
the franchisor entity – that the franchisor’s failure to convey such information to a prospective
franchise owner would represent a damaging omission or fraudulent misrepresentation by the
franchisor, then the franchisor should not wait until the end of its fiscal quarter to amend the
FDD. Rather, in such instances the franchisor should immediately amend the FDD upon the
occurrence of the material event and cease franchise sales activities until the FDD is amended
and registered in any applicable franchise registration states, if required.
The challenge for large and sophisticated franchise companies is that companies of
significant size are often confronted with new events or information that have an impact on its
existing FDD disclosures, but may not be material as a practical matter in the context of
prospective franchise owners considering the franchise investment. For example, while a
change in the chief executive officer or VP of Franchise Development of the franchisor could be
material to a prospective franchisee, changes to a director seat on the franchisor’s board or an
officer of the franchisor’s publicly-traded parent company likely carry no bearing on a
prospective franchise owner’s investment decision. Similarly, the filing of a new lawsuit against
the franchisor or its parent company that is discloseable under Item 3 of the FTC Rule may not
77
FEDERAL TRADE COMMISSION, AMENDED FRANCHISE RULE FAQ’S 21 (answering that a franchisor may not
require a prospective franchisee to identify what statements within the FDD it deems material).
78
72 Fed. Reg. 15,566 (Mar. 30, 2007).
79
CAL. CORP. CODE § 31123; ) MD. CODE REGS. § 02.02.08.06(A)(1); 21 VA. ADMIN. CODE § 5-110-40(A).
80
FEDERAL TRADE COMMISSION, FRANCHISE RULE COMPLIANCE GUIDE 126 (2008).
22
impact a franchise owner’s decision to purchase a franchise if the FDD already discloses fifteen
similar lawsuits. Also, although the signing of a purchase agreement by the franchisor’s private
equity parent company to acquire another franchise company may be discloseable under the
Item 1 of the FTC Rule, the franchise company’s operation in an unrelated line of business may
not be relevant to the franchisor’s pending prospective franchise owners who are on the verge
of signing franchise agreements. In all of these cases, a franchisor might choose for business
reasons to absorb the calculated risk of waiting to disclose the information until the franchisor’s
next planned quarterly amendment to its existing FDD. Alternatively, as mentioned in section 3
above, the franchisor might elect to distribute the relevant information (such as press releases,
or an informal supplement) to prospective franchise owners as a risk-management mechanism
to preclude potential state law claims for fraud or misrepresentation.
B.
Disclosure Challenges for Multi-Brand Franchise Companies
1.
Multiple Brands Offered in a Single FDD
The aggregation of different commercially-related franchise brands under a single FDD
has become a common practice for franchise conglomerates.81 Preparing one FDD across
multiple brands might appeal to a multi-brand franchise company for many reasons, including
uniformity of common disclosure information and corresponding agreements (e.g., one
document containing all agreements) and to assist with soliciting prospective franchise owners.
Combining multiple brands into a single FDD may also help facilitate franchise registration and
tracking state registration, as well as result in lower registration fees and legal and accounting
expenses. Nonetheless, the practice is not devoid of potential pitfalls that large and
sophisticated franchise companies with multiple brands should weigh when considering
adopting a single FDD for multiple brands.
The most fundamental challenge to producing a multi-branded FDD arguably lies in the
level of potential disparity between each brand’s business terms. While much of Item 1
organizational information or Item 17 boilerplate provisions (such as dispute resolution
procedures, etc.) may align between brands, the substantive business terms and infrastructures
of the brands may be vastly different. The brands might have different personnel, fees, start-up
costs, required purchases, training programs, territory restrictions, financial performance
representations and operational policies, which may be problematic when trying to organize
disclosure under Item 2 (officers, directors and management), Item 5 (initial fees), Item 6 (other
costs), Item 7 (estimated initial investment), Item 8 (supply chain), Item 9 (contract info), Item 10
(financing), Item 11 (training programs), Item 12 (territory), and Item 19 (financial performance
representations). The less standardized the programs, the more work required to combine the
franchise offers into one FDD, and the more potentially confusing and problematic the FDD may
become for state examiners and prospective franchisees. If the changes in the FDD are
confusing for state examiner to assess, combining the multiple brands into a single FDD could
result in delays in registration or even a requirement by the state examiner to file separate FDDs
for each brand as a condition to registration.
Besides the complexity - and possible misunderstanding of the document - a multi-brand
FDD may also be an impediment to a franchise company's franchise sales efforts. While
examiners may have reservations as to whether such an FDD is too cumbersome and
confusing, potential franchise owners may also find the documents overwhelming. In a multi81
By way of example, Midas and SpeeDee, and Tasti D-Lite and Planet Smoothie are franchise companies
with common ownership that offer multiple brands in a single FDD.
23
brand FDD, the volume of information and the appearance of different information for each of
the brands must be carefully handled. Further, if Brand A’s policies on certain issues are more
favorable to a franchisee than those of Brand B, such as lower fees or a larger territory
protection, then a Brand B prospect may more readily notice these differences and request
negotiated concessions than he might not have otherwise.
The most practical guidance for franchise companies considering combining multiple
brands into one FDD is to analyze the similarities and differences between programs to
determine whether one offering be advisable. As discussed above, a franchise company whose
program details differ significantly may create more obstacles for itself, particularly in the near
term, if it proceeds with combining multiple brands into a single FDD. In addition, if the
programs differ significantly, the state examiners may require the filing of separate FDDs for
each brand. Further, it may help facilitate registration if a franchise company that desires to
combine brands into one FDD first obtain renewal registrations on the existing, separate FDDs,
and later follow up with amendment filings to state agencies with the combined FDD when state
administrators have emerged from the backlog of renewal registrations from the months of
March and April.
2.
Disclosure of Competitive Businesses
Regardless of whether a multi-brand franchise company offers various franchises
through a combined FDD or in separate documents, each of the affiliated franchise companies
will have to include certain territorial disclosures in Item 12 of the FDD regarding the other
affiliated brands. The FTC Rule requires disclosure under Item 12 regarding other trademarked
businesses operated, franchised, or planned to be operated or franchised, by the franchisor or
any affiliate and that sells or will sell similar goods as the franchise owner will offer.82 The
franchisor also has to disclose how it will resolve conflicts between franchise owners of each
system regarding territory, customers, and franchise support, plus whether the othertrademarked outlets will be franchisor-owned or operated, and whether the other system will
occupy its own physical offices and training facility rather than sharing the franchisor’s
resources. In addition, the franchisor must also describe any of franchisor’s affiliates that have
the ability, within the franchise owner’s territory, to use other channels of distribution to make
sales under the franchisor’s principal trademark or to sell products or services under trademarks
other than the franchise owner will use under the franchise agreement. 83 This last disclosure is
not restricted to similar goods as those offered by the franchisor, but instead reaches to any
types of goods or services. Thus, a multi-brand franchise company must address these
questions of inter-brand competition among all of its affiliates with respect to all products and
services offered by the franchisor and each of its affiliates. Such disclosure can be extremely
cumbersome for multi-brand franchise companies with a number of brands under common
control.
Unfortunately these potential cumbersome Item 12 disclosures cannot be avoided where
the franchisor is unable to qualify for a disclosure exemption. That said, one commonly-used
approach for addressing such disclosure in Item 12 the FDD is for a highly diversified, multibrand franchise company to think about these disclosures in the context of the particular
category or subcategory of the franchise owner’s business line. For example, a multi-brand
franchisor that operates and franchises many different restaurant chains may distinguish its
82
16 C.F.R. § 436.5(l)(6).
83
Id.
24
offerings between quick-service restaurants, fast casual restaurants, and fine dining restaurants
as a way of indicating the franchisor’s reasonable belief that the brands’ target consumers are
different and the locations will not cannibalize one another’s market share, regardless of the
proximity.
A multi-brand franchise company might want to consider creating and adopting
confidential impact policies for use internally by each brand. The impact policy can serve as a
method to set forth a process for franchise owners to raise, and the franchisor to evaluate by
applying pre-established evaluation criteria, concerns about possible encroachment of other
proposed outlets on the territories of existing franchise owners or a franchise owner’s customer
base. Such a policy would allow a franchisor to proactively set forth a relatively uniform
approach for its various brand personnel to field and respond to franchise owner concerns.
V.
CONCLUSION
Federal and state franchise disclosure regulations, in large part, target start-up and
middle market franchisors. While it may be common for large, sophisticated and multi-brand
franchise companies to have elaborate corporate structures to account for operational
complexities, to take certain company actions, such as stock repurchases, or to utilize nontraditional forms of financing that are not a consideration for small or medium franchise
companies, federal and state franchise disclosure regulations often do not translate well when
applied to larger and more sophisticated companies. Fortunately, there are certain federal and
state-level exemptions available to large, sophisticated and multi-brand franchise companies to
help relieve the franchisor of the additional obligations associated with franchise registration and
disclosure requirements. However, as illustrated above, navigating these exemptions can be
tricky and the exemption qualifications often do not translate well when applied to large and
sophisticated franchise companies. Large, sophisticated and multi-brand franchise companies
must remain aware of the disclosure obligations associated with particular transactions unique
to franchisors of their size and sophistication, as well as possible available exemptions from the
disclosure obligations of the FTC Rule and/or state franchise laws.
25
Appendix I
Federal, State & NASAA Model Exemptions1
The following tables were created as a quick reference guide only. Please remember
the burden of proving eligibility for any exemption or exception is on the entity claiming it. So it
is strongly recommended that you read and then re-read the specific language of each statute
before relying on an exemption or exception.
FTC
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Institutional Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee2
Out of State Sales
Renewal of Existing
Agreement3
Sale of Single Franchise
Sales by Existing
Franchisees3
Sales to Existing
Franchisees4
Cite
Disclosure
Required
16 C.F.R. §
436.8(a)(2)
16 C.F.R. §
436.8(a)(6)
16 C.F.R. §
436.8(a)(5)(ii)
16 C.F.R. §
436.1(t)
16 C.F.R. §
436.1 (j),(t)
Compliance
Guide, p. 19
1
Notice
Filing
SelfExecuting




16 C.F.R. §
436.8(a)(5)(i)
16 C.F.R. §
436.8(a)(1)
Exempt
from
Disclosure












A special thanks to those who assisted in reviewing the tables for accuracy: Craig Tregillus (FTC); Theresa
Leets (CA); Henry Tanji (HI); Cassandra Karimi (IL); Patrick Sanders (IN); Dale Cantone (MD); Suzanne
Hassan (MI); Dan Sexton (MN); Alicia Brown (NY); Diane Lillis (ND); William Hawkins (RI); Jay Addison
(SD); Timothy O’Brien (VA); Martin Cordell (WA); Lindsay Fedler (WI); Susan Grueneberg, Advisory
Committee Chair for the NASAA Franchise Project Group (NASAA Model Exemptions).
2
Nominal fee is less than $540
3
No material changes to terms and conditions of franchise agreement
4
Franchisor must not play significant role in the sale (permissible for franchisor to approve transfer)
26
CALIFORNIA Type of Exemption
Cite
(CA Corp Code)
Disclosure
Required
Exempt
from
Disclosure
Notice
Filing
SelfExecuting
Discretionary1
Fractional Franchise
Insiders
Institutional Franchisee
§ 31108
§ 31106
Large Franchisee2
Large Franchisor
Large Investment
§31109
§ 31101
Nominal Fee3
Rule 310.011


§ 31105


§ 31018


§ 31102


§ 31106

4
Out of State Sales
Renewal of Existing
Agreement5
Sale of Single Franchise
Sales by Existing
Franchisees6
Sales to Existing
Franchisees









1: See Commissioner's Release 61-C: How to request an Interpretive Opinion
2: § 31109(e) The notice must be filed before the offer is made.
3: Nominal fee cannot exceed $500 annually
4: No CA residents purchasing and all business located outside of CA
5: Exempt only if there is no interruption in the operation of the business and no material modification of
the existing franchise.
6: Sale cannot be effected by or through franchisor but franchisor may approve new franchisee
CAVEAT: §31153 places burden of proving an exemption the person claiming it
27
HAWAII
Type of Exemption
Discretionary1
Fractional Franchise
Insiders
Institutional Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement2
Sale of Single
Franchise
Sales by Existing
Franchisees3
Sales to Existing
Franchisees
Cite
Disclosure
Required
Exempt
from
Disclosure
Notice
Filing
SelfExecuting
§ 482E-4(b)
§ 482E4(a)(2)

§ 482E4(a)(4)
§ 482E4(a)(5)



§ 482E-4(7)
§ 482E4(a)(6)

1: Policy is to refuse to grant exemptions despite authority to do so.
2: No interruption in operation of the franchise and no material change in franchise relationship
3: Must be an isolated sale by Franchisee for its own benefit
28

Illinois
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor ($5 $15 mil)
Large Franchisor
(over $15 mil)
Large Investment
6
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement7
Sale of Single
Franchise
Sales by Existing
Franchisees8
Sales to Existing
Franchisees
Cite (Admin.
Code tit. 14)
§ 705/9
§ 705/3
§ 705/8(a)(3)
Registration
Required

§ 705/8(a)(1)
§200.201(c)
Exempt
from
Disclosure
 
Notice
Filing
SelfExecuting

§ 705/8(b)
§ 705/8(a)(2)
§200.202(e)
Disclosure
Required
* 











705/3(1)(c)

§ 705/7

§200.201(b)(1)


§ 705/7

5
Depends on the offering. Disclosure is required, unless the Commissioner orders otherwise.
Fee cannot exceed $500.
7
Exempt only if there is no interruption in the operation of the business and no material modification of the
existing franchise agreement
8
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee/
6
29

Indiana
Type of Exemption
Discretionary9
Fractional Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement
Sale of Single
Franchise10
Sales by Existing
Franchisees11
Sales to Existing
Franchisees
Cite
Disclosure
Required
IC 23-2-2.5-5 &
IC 23-2-2.5-8
IC 23-3-2.5-1(a)


IC 23-2-2.5-3(a)

IC 23-2-2.5-1(g)

IC 23-2-2.5-3

IC 23-2-2.5-4
Exempt
from
Disclosure
Notice
Filing

SelfExecuting





9
It is self-executing but there is an option that any interested party may ask the Commissioner make a
determination that the exemption is valid by filing a verified statement as to the facts regarding the proposed
offer/sale. The filing fee is $50.
10
Only 1 sale within a 24-month period.
11
Offer or sale must not be affected by or through a franchisor.
30
Maryland
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee12
Out of State Sales
Renewal of Existing
Agreement
Sale of Single
Franchise
Sales by Existing
Franchisees
Sales to Existing
Franchisees
Cite
§ 02.02.08.10(G)
See
Discretionary
Disclosure
Required
* Exempt from
Disclosure
* * * Notice
Filing

§ 02.02.08.10(F)


§ 02.02.08.10(D)
§ 02.02.08.10(E)




§ 02.02.08.10(C)
§ 02.02.08.10(B)


§ 14-203(c)



§ 14-214(c)


§ 14-214(b)(2)


*Depends on the offering. Disclosure is required, unless the Commissioner orders otherwise.
12
SelfExecuting
Fee cannot exceed $100.
31
Michigan
Type of Exemption
Discretionary
Fractional Franchise
Insiders14
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee15
Out of State Sales
Renewal of Existing
Agreement16
Sale of Single
Franchise
Sales by Existing
Franchisees
Sales to Existing
Franchisees17
Cite
Disclosure
Required1
Exempt from
Disclosure131

Notice
Filing
SelfExecuting
§ 445.1506 (1)(h)

§ 445.1506 (1)(b)



§ 445.1506 (1)(c)
§ 445.1506 (1)(d)






§ 445.1506 (1)(e)



§ 445.1506 (1)(f)



§ 445.1505 (1)(g)



13
§445.1506 (2) - If the franchisor has a disclosure statement in compliance with the laws of any state or
rule of the federal trade commission then disclosure is required/
14
See reference to Sales to Existing Franchisees.
15
Nominal Fee cannot exceed $500.
16
No interruption in the operation of the franchise business and no material change in the franchise
relationship.
17
Must be an isolated sale by Franchisee for its own benefit
32

Minnesota
Type of Exemption
Discretionary
Fractional
Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large
Investment18
19
Nominal Fee
Out of State Sales
Renewal of
Existing
Agreement
Sale of Single
Franchise20
Sales by Existing
Franchisees21
Sales to Existing
Franchisees
Cite
§80C.03(g)
Registration
Required
Disclosure
Required
Exempt
from
Disclosure
Notice
Filing
SelfExecuting
§80C.03(f)


§80C.03(c)


§§ 2860.81008300


Not subject to franchise statute
§80C.03(h)


§80C.03(e)


§80C.03(a)

18

Investment exceeds $200,00, Must file financial statements
Annual payment is less than $100.
20
One sale per 12 months, no general solicitation and franchise fee must be deposited into an escrow.
21
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee.
19
33
New York
Type of Exemption
Discretionary22
Fractional Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement23
Sale of Single
Franchise24
Sales by Existing
Franchisees25
Sales to Existing
Franchisees
26
Trade Show
Cite
Disclosure
Required
Exempt
from
Disclosure
§ 684(1), (4)
Title 13, §
200.10(2) or
Admin R. §
441-325-0030
(1)

§ 684(3)(b)

§ 684(2)
&(3)(a)

SelfExecuting




Rich Food
Services, Inc.
v. Rich Plan
Corp.
Notice
Filing

§ 684(3)(c)

§ 684(5)


§ 684(3)(d)


§ 684(1)


22
Generally NY grants discretionary exemptions to NY franchisor selling a unit outside USA.
Requests take approximately 2 weeks to process.
23
Franchisor has no obligation to engage in disclosure at renewal.
24
May not offer to more than 2 people; no commission paid and franchisor is domiciled in NY or filed
consent to service of process with the Department.
25
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee. Must be an
isolated sale.
26
Exemption allows franchisor to show at the trade show for 3-days. No offers or sales.
34
North Dakota
Type of
Exemption
27
Discretionary
Fractional Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement
Sale of Single
Franchise
Sales by Existing
Franchisees28
Sales to Existing
Franchisees
Cite
Registration
Required
Disclosure
Required
Exempt
from
Disclosure
Notice
Filing
SelfExecuting
§ 51-19-04(3) &
§ 51-19-05
§ 51-19-04(1)

§ 51-1902(14)(a)(2)


§ 51-19-04.2


27

For more information about this exemption, contact Diane Lillis (701) 328-4712. The Commissioner has
allowed 3 discretionary exemptions in the last 10 years.
28
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee.
35
Rhode Island
Type of Exemption
Discretionary
Fractional
Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement30
Sale of Single
Franchise
Sales by Existing
Franchisees31
Sales to Existing
Franchisees
Cite
§ 19-28.1-6 (10)
Disclosure
Required

§ 19-28.1 -6(3)
Exempt
from
Disclosure

§ 19-28.1 -6(4)
§ 19-28.1 -6(1)


Notice
Filing29




§ 19-28.1 -7


§ 19-28.1 -6(6)


§ 19-28.1 -6(2)


§ 19-28.1-6(5)

29
SelfExecuting

The filing fee for exemption Notice is $360. See § 19-28.1 -29(c)
No interruption in the operation of the business and no material change in the franchise relationship.
31
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee.
30
36
South Dakota
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Institutional
Franchisee
Large Franchisee
Large Franchisor
Large Investment
Cite
§ 37-5B-15
§ 37-5B-12(3)
§ 37-5B-13(4)
Disclosure
Required
Exempt
from
Disclosure
Notice
Filing
SelfExecuting







§ 37-5B-13(1)


Nominal Fee
Out of State Sales
§ 37-5B-12(5)
§ 37-5B-3




Renewal of Existing
Agreement33
Sale of Single
Franchise
Sales by Existing
Franchisees34
Sales to Existing
Franchisees
§ 37-5B-1(16),
(28)


§ 37-5B-1(16)


32
§ 37-5B-14(2)
§ 37-5B-13(2)
§ 37-5B-14(1)


32
Fee is less than $500.
No interruption in the franchisee's operation of the business and no terms and conditions that differ
materially from the original agreement.
34
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee.
33
37

Virginia
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Institutional Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement35
Sale of Single
Franchise
Sales by Existing
Franchisees36
Sales to Existing
Franchisees
Disclosure
Required
Cite
Title 13.1, ch.
8, § 13.1-559B
21 VAC 5-11075(5)
21 VAC 5-11075(5)
21 VAC 5-11075(2)
21 VAC 5-11075(1)
21 VAC 5-11075(3)
Exempt
from
Disclosure
Notice
Filing
SelfExecuting
Not subject to franchise statute










35
No interruption in the operation of the franchised business, and there is no material change in the
franchise relationship.
36
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee.
38
Washington
Type of
Exemption
Discretionary
Fractional
Franchise
Cite
Registratio
n Required
Disclosure
Required
RCW 19.100.030(5)
WAC 480-80-108
Accredited
Investors
Insiders
Institutional
Franchisee37
Large
Franchisee
Large
Franchisor
Large
Investment
Nominal Fee38
Out of State
Sales
Renewal of
Existing
Agreement
Sale of Single
Franchise or
Isolated
Sales39
Sales by
Existing
Franchisees40
Sales to
Existing
Franchisees41
RCW 19.100.030(5)
WAC 480-80-108(4)
RCW 19.100.030(3)
RCW 19.100.030(5)
WAC 480-80-108
RCW 19.100.030(5)
WAC 480-80-108(2)
& (3)
RCW
19.100.030(4)(b)

RCW
19.100.030(4)(b)(iii)

Exempt
from
Disclosure
Notice
Filing
SelfExecuting











RCW
19.100.030(4)(ii)



RCW 19.100.030(1)





RCW 19.100.030(6)

37
See WAC 480-80-108(1)-(3) and (7).
Fee cannot exceed $500.
39
Available only to WA based franchises and franchisor grants 3 or fewer franchises.
40
Franchisee may not be a franchisor affiliate, must sell their entire franchise and the sale cannot be made
by or through the franchisor.
41
Franchisee must have operated similar franchise for 2 years and the prior sale of the franchise must have
been registered in the state of Washington.
38
39
Wisconsin
Registration
Required
Disclosure
Required
Exempt
from
Disclosure


Notice
Filing42
* SelfExecuting43
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Cite
§ 553.25
§ 553.22
Institutional
Franchisee
Large Franchisee
Large Franchisor
§ 32.05
(1)(c)(2)

Large Investment
§ 553.235
(1)(a)

Nominal Fee44
§32.05
(1)(b)

* §32.05(1)(d)

* § 553.03
(8r) & (11)


Sales by Existing
Franchisees47
§ 553.23


Sales to Existing
Franchisees
§ 32.05
(1)(e)

Out of State Sales
45
Renewal of Existing
Agreement46
Sale of Single
Franchise

* 
* 42
See §32.03: Franchisors whose franchises are exempted under s. 553.25, Stats., shall be required, as a
condition of maintenance of the exemption, to notify the division in writing within 30 days after the happening
of any material event or material change within the meaning of s. DFI-Sec 31.01 (2), affecting the exempted
franchises or the franchisor
43
See §553.24 (6) the division may require that additional information be filed if the division determines that
the information is reasonably necessary to establish an exemption
44
Annual payment less than $1,000 for bona fide wholesale price for products or services.
45
Must comply with state's franchise laws where the sale takes place.
46
No interruption in the operation of the franchise business.
47
Sale cannot be effected by or through franchisor but franchisor may approve new franchisee/
40
NASAA Model Exemptions48
Type of Exemption
Discretionary
Fractional Franchise
Insiders
Institutional Franchisee
Large Franchisee
Large Franchisor
Large Investment
Nominal Fee
Out of State Sales
Renewal of Existing
Agreement
Sale of Single Franchise
Sales by Existing
Franchisees
Sales to Existing
Franchisees
Disclosure
Required
Exempt from
Disclosure
Notice Filing











SelfExecuting



48
North American Securities Administrators Association (NASAA) adopted a proposed set of model
exemption on September 9, 2012
41
Appendix II
California Negotiated Sales and Material Modifications
Under the California Franchise Investment Law a franchisor is prohibited from offering to
prospective franchise owners any franchise terms different from the terms of the offer registered
under Sections 31111 (initial registration), 31121 (renewal) or 31123 (post-effective
Amendment). There are 3 options for addressing negotiates sales in California.
Note that Negotiated Sales are different than Material Modifications made to existing
franchise agreements. If the franchisor proposes to change any terms of an existing franchise
agreement for a California franchise then an application must be sent into the Department under
Section 31125 before the change is made (unless an exception applies).
Negotiated Sales:
I.
II.
Section 31109.1 and Rule 310.100.4132 of the California law require the franchisor to
take the following actions:
1.
The initial offer must be registered under Section 31111, 31121, or 31123;
2.
In an appendix to the FDD, the franchisor must provide a prospective franchise
owner with a summary description of all of the material negotiated terms during
the prior 12 month period in the form prescribed under California Rule 310.100.4,
along with a statement that copies of the negotiated terms are available upon
written request and the contact information of the franchisor's representative from
whom negotiated terms can be obtained;
3.
The franchisor must certify or declare in an appendix to its application for renewal
that it has complied with all of the requirements under Section 31109.1 (in the
event this exemption is claimed);
4.
The negotiated terms, on the whole, must confer additional benefits on the
prospective franchise owner;
5.
The franchisor must provide a copy of all negotiated terms to the prospective
franchise owner within five business days following the request of the prospective
franchise owner; and
6.
The franchisor must keep copies of all material negotiated terms for a period of
five years from the date of the first agreement containing the relevant negotiated
term. Upon the request of the commissioner, the franchisor must make the
copies available to the commissioner for review.
Rule 310.100.2 of the California law exempts the offer or sale of a franchise on terms
different from the terms of the offer registered if all of the following conditions are met:
1.
132
The initial offer must be registered under Section 31111, 31121, or 31123;
The rules referred to herein are in Title 10, California Code of Regulations (CCR).
42
III.
2.
When the prospective franchise owner receives the FDD, he or she must also
receive copies of all Notices of Negotiated Sale of Franchise filed with the state
within the last 12 months, if any;
3.
Before selling another franchise, the franchisor must amend its registered offer
with prescribed language indicating that Items have been negotiated with other
franchise owners and copies of filed notices of negotiated sales are attached to
document (which can also be done by amendment that is auto-effective upon
filing);
4.
A Notice of Negotiated Sale of Franchise in prescribed form must be filed with
the state within fifteen business days after the negotiated sale is consummated;
and
5.
The franchisor certifies or declares in an appendix to its application for renewal
that all notices have been filed with the state as required under Regulation
310.100.2.
Section 31123 requires a franchisor shall promptly notify the commissioner in writing, by
an application to amend the registration, of any material change in the information
contained in the application as originally submitted, amended or renewed. The
negotiated changes under this option must be sent to the Department as a post-effective
amendment. The prospective franchisee is re-disclosed after the Department issues an
order and the sale is not consummated until after the 14-day waiting period.
Material Modification:
I.
Section 31125(c) and (d) of the California law excepts modifications of an existing
franchise or of existing franchises if all of the following conditions are met:
1.
The franchise owner must receive the complete written modification at least five
business days prior to the execution of a binding agreement, or provide that the
franchise owner may, by written notice mailed or delivered to the franchisor or a
specified agent of the franchisor within not less than five business days following
the execution of the agreement, rescind the agreement to the material
modification;
2.
The modification agreement must not be signed within twelve months after the
date of the franchise agreement;
3.
The modification must not waive any right of the franchise owner under the
California Franchise Relations Act, but the modification may include a general
release of all known and unknown claims by a party to the modification; and
4.
(i) The proposed modification must be in connection with the resolution of a bona
fide dispute between the franchisor and the franchise owner, and the modification
must not be applied on a franchise system wide basis (meaning offered on a
voluntary basis to fewer than twenty-five percent of the franchisor's California
franchises within any twelve month period); or (ii) The proposed modification
must be offered on a voluntary basis to fewer than twenty-five percent of the
franchisor's California franchises within any twelve month period, provided each
43
franchise owner must be given a right to rescind the modification agreement if
the modification is not made in compliance with paragraph (i); or
5.
The modification must be offered on a voluntary basis and must not substantially
or adversely impact the franchise owner's rights, benefits, privileges, duties,
obligations, or responsibilities under the franchise agreement.
44
THERESA LEETS
Theresa Leets is a Senior Corporations Counsel for the California Department of Business
Oversight’s Securities Regulation Division. She is 1 of 6 lawyers that regulate the offer and sale
of franchises and securities in California. She is a member of the NASAA Corporation Finance
Franchise and Business Opportunities Project Group and an IFA Certified Franchise Executive
(CFE). In addition, she is licensed as a Real Estate Broker with an inactive MLO (mortgage
loan originator) endorsement in California. Ms. Leets received her BA at the University of
California at Santa Barbara and her JD at the University of California at Davis.
ALAN R. GREENFIELD
Alan Greenfield is a Shareholder in the Chicago and Miami offices of Greenberg Traurig, LLP.
Mr. Greenfield concentrates his practice on international and domestic franchising, licensing and
distribution matters. Mr. Greenfield works with both experienced and start-up franchise
companies in structuring franchise programs and drafting franchise-related documents. He
counsels franchisors and manufacturers on everyday compliance and other franchise or
distributor-related issues, such as registration and disclosure matters, negotiating agreements,
relationship termination laws, maintaining good franchisee/distributor relations and resolving
disputes with franchisees/distributors. Mr. Greenfield also works extensively on international
franchising, licensing and distribution transactions. He counsels a broad range of clients in
expanding their brands around the globe through various means, such as master franchising,
multi-unit licensing and area development.
Mr. Greenfield also handles mergers and
acquisitions and sophisticated financing transactions involving franchise, license or distribution
networks. Mr. Greenfield earned his J.D., cum laude, from the University of Miami School Law
and his B.A., cum laude, from the University of Central Florida.
KAREN BORING SATTERLEE
Karen Satterlee is Vice President and Senior Counsel for Hilton Worldwide, Inc. Ms. Satterlee
is responsible for the legal affairs of Hilton’s Americas development team function, which
includes legal supports for the negotiation, drafting, interpretation and enforcement of hotel
management and franchise agreements, real estate acquisitions, dispositions and asset
management. She also manages the global franchise regulatory process.
Prior to Hilton Worldwide, Ms. Satterlee was Director and Senior Counsel for Franchise
Licensing for Starbucks Corporation in Seattle, Washington, where she served as a member of
the Starbucks Licensed Store leadership team. Prior to working at Starbucks, Ms. Satterlee
worked in a variety of capacities for Cendant Corporation in Parsippany, New Jersey and Exxon
Corporation in Houston, Texas.
Ms. Satterlee is the Publications Officer for the American Bar Association Forum on
Franchising’s Governing Committee and was the co-chair of the 34th Forum on Franchising in
October of 2011. She is also a member of the Board of Trustees for the International Franchise
Association’s Educational Foundation and a former member of the Board of Governors for the
Institute of Certified Franchise Executives. Ms. Satterlee has authored a number of articles for
the Franchise Law Journal and is a frequent speaker at legal and industry conferences.
Ms. Satterlee received her JD and BA at the University of Tennessee in Knoxville and lives in
Ashburn, Virginia.