Louisiana State Bar Association
Dazzling Disney CLE
February 15 – 18, 2015
Disney’s Grand Floridian Resort & Spa
Lake Buena Vista, Florida
Franchise Law
Kingdom—From
Royalties to (State
Law) Registration
William W. Sentell, III
Pugh, Accardo, Haas, Radecker & Carey, LLC
New Orleans, Louisiana
[email protected]
Table of Contents
Introduction ………………………………………………………………………………………………….
1
Part I—Overview of the FTC Franchise Rule and the FDD ….……………………………… 2
1. The FTC Franchise Rule’s definition of a franchise …………………………………..
3
2. The disclosure obligation ………………………………………………………………………. 5
3. The contents of the FDD ………………………………………………………………………..
Part II—Registering and Updating the FDD ……………………………………………………..
6
14
1. Understanding the 120-day rule …………………………………………………………….. 15
2. Start early …………………………………………………………………………………………….
15
3. Not all states are created equal ……………………………………………………….......... 16
4. Call the examiner ………………………………………………………………………………….
16
5. Use feedback to improve the FDD …………………………………………………………..
17
6. Don’t get stumped …………………………………………………………………………………
17
7. Always track changes and keep a master copy of the FDD …………………………
18
8. The FDD is not a marketing document ……………………………………………………
19
Conclusion ……………………………………………………………………………………………………. 19
Appendix 1—States that Require FDD Registration ………………………………………….
20
Introduction
This paper is intended to offer a very basic overview of franchise law and
regulation in the United States. Franchising is big business. According to the
International Franchise Association, the gross domestic product of the franchise sector
will be $521 billion in 2015, or roughly 3 percent of U.S. GDP.1 Franchising is more than
fast food and hotels. There are franchises offering educational, health care,
entertainment, and financial services.2
What is franchising? At its most basic level, franchising is a way to distribute
products and services under a legally-protected trade name. Franchising as a legal
concept dates back hundreds of years. As David Gurnick & Steve Vieux have explained:
At earliest common law the term “franchise” referred to a
grant of rights by the sovereign ruler who might delegate
powers or privileges on one who would provide money [i.e.,
royalties] or services in exchange. The monarch might grant
land rights, the right to collect taxes, or to build a road. The
grantee had to provide services, or a portion of collections, or
income in return. The variety of prerogatives held by the
ruler meant the kinds of franchises which could be granted
were almost infinite. 3
Today public franchises still exist (i.e., cable monopolies), but the term is most
often associated with private businesses.
From the franchisor’s perspective, franchising offers a less expensive alternative
to traditional business expansion. Why build multiple stores when you can shift that
cost (and risk) to a franchisee? For the franchisee, franchising is thought to be less risky
than simply “going it alone.” The franchisee is literally licensing the goodwill of the
IHS Economics, Franchise Business Economic Outlook for 2015, International Franchise Association
Education Foundation (January 2015), http://emarket.franchise.org/FranchiseBizOutlook2015.pdf.
2 Id.
3 David Gurnick & Steve Vieux, Case History of the American Business Franchise, 24 Okla. City U. L. Rev.
37, 38 (1999).
1
1
franchisor. For the consumer, a franchised business may offer products and services
that are more affordable, reliable and uniform than those offered by independent
businesses.
When does an attorney encounter franchise law, if ever? Typically the subject will
come up in two contexts. First, perhaps a client wants to invest in a franchise
opportunity and needs advice or help negotiating with a franchisor. Second, perhaps an
existing business owner desires to expand his or her existing business through
franchising.
The relationship between a franchisee and franchisor is contractual. But
franchise sales are heavily regulated, much like the sale of a security. The majority of
this paper is focused on the disclosure obligations of the franchisor. With few
exceptions, any person who desires to offer a franchise is required to prepare a
Franchise Disclosure Document (“FDD”). While the FDD is designed to be read and
understood by a layperson, it is far from intuitive, even for an attorney.
The first part of this paper is an attempt to break down the federal disclosure
requirements and highlight the FDD itself. The goal is to provide a baseline for an
attorney whose client is in interested in becoming a franchisee or a franchisor. The
second part of this paper deals with the process of updating and registering the FDD.
This section is especially helpful for an attorney who is asked to assist an existing or
“emerging” franchisor.
Part I—Overview of the FTC Franchise Rule and the FDD
The agency tasked with regulating franchises at the federal level is the Federal
Trade Commission (“FTC”). The primary document that contains franchise regulations
promulgated by the FTC is called “Disclosing Requirements and Prohibitions
2
Concerning Franchising and Business Opportunity Ventures.” Often this document is
simply referred to as the FTC Franchise Rule or the Rule.
The purpose of this paper is not to summarize the entire FTC Franchise Rule,
which is voluminous. At its most basic level, the FTC Franchise Rule regulates the lawful
sale of franchise opportunities in the United States.
1. The FTC Franchise Rule’s definition of a franchise
The FTC Franchise Rule’s definition of a franchise is a helpful starting point for any
discussion of franchise law and regulation. In order to meet the federal definition, the
person selling the franchise must promise that:

The person obtaining the franchise will obtain the right to operate a business that
is identified or associated with the franchisor’s trademark.4

The franchisor will exert or has authority to exert a significant degree of control
over the franchisee's method of operation, or provide significant assistance in
the franchisee's method of operation;5 and

As a condition of obtaining or commencing operation of the franchise, the
franchisee makes a required payment or commits to make a required payment
to the franchisor or its affiliate.6
From a layperson’s standpoint, the right to license the franchisor’s trademark is
the hallmark of any franchise relationship (think McDonald’s golden arches). Less
obvious are the second and third requirements. The element of control is typically laid
out in a franchise contract or detailed operations manual (which is essentially an
addendum to the contract itself). In a typical modern franchise relationship, the
16 CFR § 436.1(h).
Id.
6 Id.
4
5
3
franchisee is required to follow the franchisor’s proprietary “system.” If he fails to do
this, he risks termination or other sanctions under the contract. Most franchisors also
provide some form of assistance to the franchisee, especially at the beginning of the
relationship.
The third requirement refers generally to initial franchise fees. This is usually
money that is required to be paid “up front” or at the time the franchise contract is
signed. But it can also include fees that are paid over time. Typically franchisees also pay
a host of other royalties and fees as a condition of maintaining the right to operate under
the franchise contract.
Why is the definition relevant? Many times a business owner might inadvertently
trigger the rule without knowing it. Consider the following example: A owns a successful
po-boy shop in New Orleans. A decides he would like to open a second unit, but doesn’t
have the time to operate it. He enters into a contract with B. A knows that franchising is
a complicated process, and decides he would rather enter in a simple license agreement
with B. Under the license agreement, B is permitted to use A’s trademarks in exchange
for a monthly fee. A also agrees to stop by the store once a week and offer help and
advice.
Under this fact pattern, A has almost certainly offered a franchise without
following the FTC’s Franchise Rule. At the very least, A should have provided B with a
Franchise Disclosure Document and followed other rules related to the lawful sale of a
franchise. The failure to do so could subject A to legal action instituted by the FTC. 7 In
7
15 U.S.C. § 45(a); F.T.C. v. Transnet Wireless Corp., 506 F. Supp. 2d 1247, 1252 (S.D. Fla. 2007)
4
some states, B would have a private right of action to sue A for rescission and other
damages.8
While some parties can and do structure their relationship in such a way that the
FTC Franchise Rule may not apply, in the author’s view, this is a risky course. The better
practice is to follow the FTC Franchise Rule and related state law, where applicable.
2. The disclosure obligation
Aside from defining a franchise, the FTC Franchise Rule also sets forth very
detailed disclosure requirements. In basic terms, in order to lawfully sell a franchise
under federal law, a franchisor must furnish a prospective franchisee with a copy of the
franchisor’s current disclosure document at least 14 calendar days before the
prospective franchisee signs a binding agreement with the franchisor or makes any
payments to the franchisor.9
Why require an FDD? FTC Rule and related state law regulation is itself a
response to abuses within the franchise industry. This includes the FTC’s historical
finding over the years of “widespread deception in the sale of franchises and business
opportunities through both material misrepresentation and nondisclosures of material
facts.”10 In theory, the FDD contains all the information that a prospective franchisee
would want to know about the franchise he or she is about to purchase. The FDD also
provides clarity and predictability to the franchisor, who can better understand and
discharge its obligations (and perhaps minimize frivolous claims in the future).
In the author’s view, the FDD contains a wealth of material information that is
not otherwise available in the context of other unregulated business sales. On the other
See, e.g., Minn. Stat. 80C.01, et seq.
16 CFR § 436.2(a).
10 Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities, 72 Fed.
Reg. 15445 (March 30, 2007).
8
9
5
hand, the document itself is usually so voluminous (often 300 pages or more) that many
prospective franchisees fail to read it or simply skim its contents.
While the FDD is required to be written in “plain English,” often it is not. Even
when the language is “plain” the concepts discussed are often quite technical. Useful
information is also buried in the back of the document or presented in an obfuscatory
way. Too many times the FDD is viewed as legal “fine print.” For that reason, it is often
advisable for a prospective franchisee to ask an attorney or other professional with
franchise experience to review the FDD and discuss it with his or her client.
3. The contents of the FDD
The FTC Franchise Rule sets forth exactly what must be contained in the FDD. In
essence, the FTC provides a template and the franchisor must fill in the blanks. There is
very little room for creativity and the FDD is not a marketing document.11
There are 23 items required to be included in the FDD (in addition to a cover
page). Much like chapters in a textbook, each “item” corresponds with some discrete
topic related to the franchise relationship and the franchise contract that the franchisee
will ultimately sign. The following is a summary of each of the 23 items, including
general advice about “what to look for” when reviewing the FDD on behalf of a
prospective franchisee client.
Item 1. The Franchisor, and any Parents, Predecessors, and Affiliates. This item
includes very general information about the franchisor. Look for the length of time the
franchisor has been in business and other information about the general market for the
products or services that the franchisee will offer. There is also information about laws
16 CFR § 436.6(d). (“Do not include any materials or information other than those required or
permitted by [the FTC Franchise Rule] or state law.”).
11
6
and regulations that are specific to the industry in which the franchise business
operates.12
Item 2. Business Experience. This item includes information about the business
experience of the franchisor’s principals. Look for experience that is directly related to
franchising. Many otherwise skilled business people or entrepreneurs may have little or
no experience actually building and growing a thriving franchise “ecosystem.” 13
Item 3. Litigation. In the author’s view, this is one of the most important items in
the FDD. The FTC Franchise Rule requires that virtually all litigation be disclosed for
the past decade. This includes matters that are submitted to courts and arbitrators.
Remarkably, the franchisor is required to disclose all material terms of any settlement
agreement, even if the agreement is confidential. This would almost always include the
amount of the settlement. For these reasons, many franchisors go out of their way to
work with their franchisees to avoid litigation or arbitration in the first place (matters
that are settled prior to litigation or arbitration are not required to be disclosed). A
lengthy list of prior litigation could be an indication of a problem with the franchise
system. On the other hand, some litigation might indicate that the franchisor is serious
about protecting its brand and rooting out “weak links” in the franchise system.14
Item 4: Bankruptcy. The franchisor is required to disclose any bankruptcy by the
franchisor, any parent, predecessor, affiliate, officer, or general partner of the franchisor
or any other individual who will have management responsibility relating to the sale or
16 CFR § 436.5(a).
16 CFR § 436.5(b).
14 16 CFR § 436.5(c).
12
13
7
operation of franchise being offered for sale. While this item is rarely triggered, it is
clearly designed to root out dishonest or “fly-by-night” franchisors.15
Item 5: Initial Fees. The franchisor is required to disclose the initial fees required
to purchase the franchise, and whether that fee is refundable. The franchisor must also
disclose whether such fee is uniformly imposed. While most initial fees are uniformly
imposed—i.e., every new franchisee pays the same amount—it is worthwhile to verify
this information. If the franchisor imposes a range of initial fees it could signify a
willingness to negotiate this aspect of the transaction.16
Item 6. Other Fees. In addition to the initial fee, the franchisor must disclose any
other fee that it imposes. The most obvious fee is the royalty. But most franchisors
impose a host of other fees which are typically related to marketing, advertising, and
technology. Understanding these fees is critical from a “client expectations” standpoint.
While a franchisor may only charge a 6 percent base royalty, all fees in the aggregate
may top 10 percent. These fees are typically calculated as a percentage of a franchisee’s
“top line” revenues. Like the initial fee, the franchisor must also disclose whether the
fees are uniformly imposed.17
Item 7. Estimated Initial Investment. This item discloses how much a franchisee
can expect to invest prior to opening the franchise. Next to Item 19, this is probably the
most important “business item” from the standpoint of the prospective franchisee. It is
also the source of frequent litigation, as franchisees will sometimes claim that the
amount of the initial investment was deliberately understated. The total investment is
16 CFR § 436.5(d).
16 CFR § 436.5(e).
17 16 CFR § 436.5(f).
15
16
8
also required to be disclosed in the cover page. Note that the initial franchise fee is
included in the calculation of the total initial investment.18
Item 8. Restrictions on Sources of Products and Service. This item deals with
aspects of the franchise that are less obvious to a layperson. Most franchisors require
franchisees to purchase products directly from the franchisor or from approved vendors.
The franchisor will almost always derive revenues from these purchases. In the instance
of required purchases from third parties, the franchisor will typically receive rebates or
other consideration. All of this is required to be disclosed in Item 8. Additionally, the
franchisor must also disclose how much of its total revenues were derived from required
purchases.19
Item 9. Franchisee’s Obligations. This item includes a table that summarizes the
franchise contract that the franchisee will be asked to sign. It should be reviewed in
conjunction with the actual contract (which is also required to be disclosed with the
FDD). In essence, Item 9 is a “user friendly” summary of an otherwise dense contract.
Key provisions include the term of the contract, renewal and termination, and dispute
resolution.20
Item 10. Financing. Some franchisors provide financing directly to franchisees.
Others work with approved vendors in exchange for payments or other consideration.
These details are required to be disclosed along with other material financing terms. 21
Item 11. Franchisor’s Assistance, Advertising, Computer Systems and Training.
This item summarizes the franchisor’s obligations to its franchisees. A discerning
attorney will note that a typical franchisor has comparatively few obligations to its
16 CFR § 436.5(g).
16 CFR § 436.5(h).
20 16 CFR § 436.5(i).
21 16 CFR § 436.5(j).
18
19
9
franchisees, especially after the franchise opens. Indeed, the entire relationship is onesided by design. The franchisor exists primarily to cultivate a brand (trademark and
other IP) in exchange for royalties. The franchisee is expected to be an independent and
sophisticated business operator. That being said, most franchisors can and do offer
ongoing advice, training and consultation to franchisees. This item also discloses
information about those services, in addition to computer and software requirements
(usually point-of-sale software) and regional and national advertising funds.22
Item 12. Territory. This item discloses whether a franchisee will receive an
“exclusive territory,” among other particulars. Often a franchisor will grant an
“exclusive” territory vis-à-vis other franchisees within a system, while the franchisor will
retain certain rights involving alternative distribution channels (i.e., Internet
marketing). The issue of territorial “encroachment” is a frequent source of disputes
between franchisees and franchisors. Careful study of this item is advisable if only to
manage the expectations of the franchisee. The FTC has been especially vigilant about
instructing franchisors to provide clearer disclosures about territorial exclusivity.23
Item 13. Trademarks. This item discloses information about the ownership of the
franchisor’s principal trademarks. A discerning attorney advisor may want to verify that
the franchisor has obtained all necessary trademark registrations, especially as it relates
to new or “emerging” franchisors.24
Item 14. Patents, Copyrights and Proprietary Information. Like the name
suggests, this item requires the franchisor to disclose information about patents and
16 CFR § 436.5(k).
16 CFR § 436.5(l).
24 16 CFR § 436.5(m).
22
23
10
copyrights that the franchisor owns and/or licenses. In the author’s experience, this
item rarely drives any negotiations with a franchisor, but it should not be overlooked.25
Item 15. Obligation to Participate in the Actual Operation of the Franchise
Business. Many prospective franchisees view a franchise as an investment opportunity
or side business. They envision little day-to-day involvement in the operation of the
franchise. While some franchises are set up for so-called “absentee owners,” many are
not. This item is largely an attempt to communicate to the franchisee how much
involvement he or she is expected to have in the operations of the franchise. 26
Item 16. Restrictions on What the Franchisee May Sell. Franchisees are not
mom-and-pop businesses. Franchisors take retail and product uniformity very seriously,
and require that franchisees only sell approved products and services. This item will also
disclose whether a franchisor has a right to make changes to the types of products and
services that are offered. Almost all franchisors do retain this right, and prospective
franchisees would do well to understand that aspect of the business.27
Item 17. Renewal, Termination, Transfer, and Dispute Resolution. This item is
very similar to Item 9, as it is an attempt to distill the various contractual provisions that
will bind the franchisee. This item is particularly concerned with issues of renewal,
termination, and dispute resolution. Pay particular attention to choice of law and choice
of forum provisions. Virtually all franchisors will require litigation (or arbitration) in
their home state. This is rarely negotiable.28
16 CFR § 436.5(n).
16 CFR § 436.5(o)
27 16 CFR § 436.5(p)
28 16 CFR § 436.5(q)
25
26
11
Item 18. Public Figures. The franchisor is required to disclose whether any
“public figures” are paid to promote the franchise brand.29
Item 19. Financial Performance Representations. This item contains the most
widely sought after information provided in the FDD. Item 19 is an attempt to answer
the question: “How much can I expect to make as a franchisee?” Note that a franchisor
is not required to make any financial performance representations. But if it does, that
representation must be reasonable. The FTC Franchise Rule provides very detailed and
somewhat convoluted requirements for any financial representation that is made. In a
nutshell, the rules are designed to avoid so-called “cherry picking” or data manipulation.
For example, a franchisor cannot simply disclose the average revenue of its 10 best
performing units in a system consisting of, say, 50 or 100 units.
In the author’s view, some franchisors can and do push the spirit of the Item 19
requirements in order to drive sales discussions with prospective franchisees. Attorneys
should advise clients to view all Item 19 disclosures with a certain skepticism. In the
author’s view, Item 19 disclosures should be compared with the experiences of existing
franchisees—a process called validation (discussed below). Franchisors are also required
to provide supporting documentation for all financial performance representations,
although prospective franchisees rarely take advantage of this right.30
Item 20. Outlets and Franchisee Information. In the author’s view, Item 20
contains the most usable information for the prospective franchisee. Item 20 is a series
of tables that relate to the size of the franchised system. The first table in Item 20
discloses how many franchised units were open at the beginning of the year as opposed
29
30
16 CFR § 436.5(r)
16 CFR § 436.5(s)
12
to the end of the year. This information is required to be disclosed for the past three
years. A person reading Item 20 can very quickly determine the health of the franchised
system based on this table. Is the franchised system growing? Stable? Shrinking? Note
well, though, that accelerating growth is not always a positive sign. Many franchises
grow too fast and lack the ability to support new units. Most critically, franchisors are
required in Item 20 to disclose the contact information for every franchise in their
system. Franchisors must also disclose information about “exiting” franchisees for the
past year. The informal term “exiting franchisees” may refer to franchisees who were
terminated or who voluntarily sold their locations. Prospective franchisees are well
advised to take advantage of this wealth of information. While some current and
former franchisees may choose not to discuss their business with strangers, many can
and do.31
Item 21. Financial Statements. Franchisors are required to provide audited
financial statements for the last three years. Ideally, these financial statements should
be reviewed by a business-savvy attorney or CPA. Pay particular attention to the
auditor’s notes, which may telegraph looming financial problems that could ultimately
affect the franchisor’s ability to grow and support the franchise system.32
Item 22. Contracts. The franchisor is required to include copies of all proposed
agreements, including the franchise agreement itself and any ancillary agreements.
These agreements should be reviewed and compared against the FDD tables
summarizing key contractual provisions. Sometimes information provided in the FDD is
31
32
16 CFR § 436.5(t)
16 CFR § 436.5(u)
13
inconsistent with actual contractual terms (i.e., information about territorial
exclusivity).33
Item 23. Receipt. This item is simply an acknowledgement by the franchisee that
he received a complete copy of the FDD. It is required to be maintained by the
franchisor.34
Part II—Registering and Updating the FDD
While federal law imposes a myriad of disclosure requirements, there is no
requirement that the resulting FDD be registered with the FTC or any federal
government agency. In many states, including Louisiana, the FTC Franchise Rule is
essentially the default regulatory framework. These states do not require registration of
the FDD and generally do not regulate the franchise relationship per se.35
Other states do require that the FDD be registered or “on file” with the
appropriate state agency prior to commencing franchise sales in that state. These states
will generally review the FDD and can and often do insist on changes in order to bring
the disclosure documents into compliance with federal and state regulations. These
states may also require franchisors to escrow initial franchise fees based on the financial
condition of the franchisor. In theory, these so-called registration states provide an
additional layer of protection to consumers in those states.36
16 CFR § 436.5(v)
16 CFR 436.5(w)
35 All states have some type of consumer protection statute, such as the Louisiana Unfair Trade Practices
Act.
36 Several states have also enacted so-called Franchise Relationship Laws. These statutes typically create
private rights of action against franchisors for, inter alia, failure to register or failure to lawfully sell a
franchise opportunity. For a good discussion of these statutes, see Robert W. Emerson & Uri Benoliel, Are
Franchisees Well-Informed? Revisiting the Debate over Franchise Relationship Laws, 76 Alb. L. Rev.
193, 216 (2013).
33
34
14
Appendix 1 at the end of this paper lists each registration state and includes a link
to additional information about that state’s registration requirements. Preparing,
updating and registering an FDD is no easy task. Every registration state has slightly
different rules and guidelines, and there are also registration exemptions (especially for
larger franchisors). The purpose of this paper is not to catalogue those rules, but rather
to provide a few helpful pointers for managing the FDD over time and understanding
the registration process.
1. Understand the 120-day rule
The FDD is a living document. Once it is created, a franchisor will generally
revise the same document for many years. All information contained in the FDD must
be current as of 120 days of the close of the franchisor’s fiscal year. 37 There are also
requirements to update the FDD throughout the year in the event of certain material
changes.38 Assuming a franchisor’s fiscal year ends on December 31, the updated FDD
would be “due” on April 30.
Some states introduce slight variations on the 120-day rule. In California, for
example, the FDD registration must be renewed within 110 days after the fiscal year
ends.39 This is another good example of why it is important to constantly check state
registration requirements.
2. Start early
Updating an FDD is a cumbersome process that usually requires dealing with
more than one client representative (CFO, sales department, etc.). Often the attorney is
the last person to “own” the document, and is therefore a kind of de facto project
16 CFR § 436.7(a).
16 CFR § 436.7(b).
39 Cal. Code Regs., tit.10 § 310.120
37
38
15
manager. Remember that, without an updated FDD, the franchisor cannot sell
franchises. For that reason, there is usually enormous pressure as the 120-day deadline
approaches to finalize the revised FDD. The best advice is to start early. Remind the
client to begin updating the Item 20 tables and other basic information that must be
verified every year. Ask if there have been other changes in the business that would
necessitate new or revised disclosures. This is also a good time to consider changes to
the franchise contract and addenda. Seasoned litigators appreciate the frustration of
dealing with a contractual provision that is ambiguous or poorly drafted. Use the
opportunity to make the contract clearer and check to see if there are any major
reported judicial decisions that would necessitate other changes.
3. Not all states are created equal
Some states are simply more aggressive than others about reviewing the FDD and
finding real or perceived errors. In the author’s experience, Illinois and Maryland fit into
this category. Other states simply keep the FDD on file and make no effort to review its
contents. Generally speaking, the hardest part of any registration is the initial round.
Once the FDD is on file, every registration state offers some type of simplified renewal
process. In theory, the examiner is only looking at any changes to the document since
the last version was submitted. But be aware when the registration expires. If the
registration lapses, a franchisor may have to start anew and risk additional delays.
4. Call the examiner
FDDs are typically reviewed by “examiners” who are not attorneys. The
examiners are generally extremely familiar with the FTC Franchise Rule and related
16
guidelines from the North American Securities Administration Association (NASAA).40
Typically an examiner will review the FDD and provide detailed written feedback related
to the content of the FDD. Some of these required changes border on the hypertechnical (font size, paragraph spacing, etc.) but most are grounded in actual federal and
state rules and related FTC guidelines. It is always advisable to call the examiner if there
are any questions about required changes. In some circumstances, a simple
conversation or explanation will lead the examiner to “back off” whatever sticking point
is delaying the registration process. Note: it helps to be polite and deferential.41 Once the
FDD is resubmitted with the required changes, the examiner will typically issue a formal
order indicating that the FDD is registered. This order will provide further instructions
about renewal procedures and related deadlines.
5. Use feedback to improve the FDD
While the initial registration process can be cumbersome in some states, the
resulting feedback is a helpful means to improve the FDD. Keep in mind that if an
examiner in state A identifies a material deficiency in the document, it may be necessary
to amend in State B assuming State B missed the same deficiency. Also remember that
even minor errors or inconsistencies in the FDD are often grist for skillful attorneys
representing franchisees in litigation or arbitration.
6. Don’t get stumped
There are a wealth of free resources to help the guide the practitioner who is
preparing or updating the FDD. Of course the best starting place is the FTC Franchise
The NASAA provides a few additional requirements and forms that supplement the FTC Franchise Rule
in registration states. http://www.illinoisattorneygeneral.gov/consumers/2008_NASAA_Guide.pdf.
41 State examiners can and do contact other state examiners to discuss issues with applicants. This is
another good reason to facilitate good working relationships with every examiner.
40
17
Rule itself.42 The FTC also publishes a very useful Compliance Guide that includes
examples and lengthy explanations.43 The NASAA’s own guidelines (which essentially
mirror the FTC Franchise Rule), are helpful in most registration states and describe
additional registration forms.44 The NASAA also provides commentary.45 The FTC
maintains a “Frequently Asked Questions” page for issues that often arise in the context
of state registration filings.46
Some states actually keep a repository of FDDs online. This can be helpful if you
are stumped about a particular disclosure provision and want to see how other
franchisors have dealt with the same issue (much like reviewing a form).47 These
websites are also a helpful place to verify that your own client is properly registered.
7. Always track changes and keep a master copy of the FDD
Most registration states require that the franchisor submit a “blackline” or
“redline” copy of the FDD from year to year, along with a clean copy. For that reason, it
is advisable to control who has access to the actual FDD native file. Often having a single
“owner,” who solicits changes, will make this process easier. The FTC Franchise Rule
provides that a franchisor can only have one FDD at any time.48 This means that, once
the revised FDD is “live,” the old FDD must be retired.49
42
http://www.ftc.gov/sites/default/files/070330franchiserulefrnotice.pdf
43http://www.ftc.gov/system/files/documents/plain-language/bus70-franchise-rule-compliance-
guide.pdf
44 http://www.nasaa.org/wp-content/uploads/2011/08/6-2008UFOC.pdf
45 http://www.nasaa.org/wp-content/uploads/2011/08/FranchiseCommentary_final.pdf
46 http://www.ftc.gov/tips-advice/business-center/amended-franchise-rule-faqs
47 California and Minnesota both offer searchable databases at the following URLs: California:
https://docqnet.dbo.ca.gov/search/ (California) and https://www.cards.commerce.state.mn.us/CARDS/
(Minnesota).
48 16 CFR § 436.7(a).
49 But note that former versions of the FDD must be maintained. “Franchisors shall retain, and make
available to the commission upon request, a sample copy of each materially different version of their
disclosure documents for three years after the close of the fiscal year when it was last used.” 16 CFR
436.6(h).
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8. The FDD is not a marketing document
The FDD is not a marketing document, although some franchisors think that it is.
Be sure not to include extraneous information. A good example of this is Item 2, which
includes “bios” of the franchisor’s principals. This is not a place to list every award or
accolade of the franchisor’s CEO. The FTC Franchise Rule is very clear about what
information must be provided: The person’s principal positions and employers during
the past five years, including each person’s starting date, ending date, and location.50
CONCLUSION
There is nothing inherently complex about franchise law and regulation, but
understanding the inner workings of the FDD and the state registration process takes
time and patience. The hallmark of franchise law is disclosure. Prospective franchisees,
and their counsel, would do well to take advantage of the wealth of information that is
available to them by virtue of state and federal law. By the same token, franchisors
should always err on the side of disclosing too much, if only to create a robust record in
the event of any future dispute or disagreement with the franchisee.
50
16 CFR 436.5(b).
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Appendix 1—States that Require FDD Registration
State
Website
California
http://www.dbo.ca.gov/Licensees/franchise_investment_law/Default.asp
Hawaii
http://cca.hawaii.gov/sec/registration_forms/franchise_filings/
Illinois
http://www.illinoisattorneygeneral.gov/consumers/franchise.html
Indiana
http://www.in.gov/sos/securities/2806.htm
Maryland
http://www.oag.state.md.us/Securities/info_for_franchisors5.pdf
Michigan
http://www.michigan.gov/ag/0,4534,7-164-48127-198444--F,00.html
Minnesota
http://mn.gov/commerce/licensees/Register-a-Franchise/
New York
http://www.ag.ny.gov/investor-protection/franchisors-franchisees
North Dakota http://www.nd.gov/securities/franchise-registration
Rhode Island http://www.dbr.state.ri.us/divisions/securities/franchising.php
South Dakota http://www.sdjobs.org/securities/franchise_registration.aspx
Virginia
https://www.scc.virginia.gov/srf/bus/franch_regis.aspx
Washington
http://www.dfi.wa.gov/franchises
Wisconsin
https://www.wdfi.org/fi/securities/franchise/
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