New disclosure requirements under the amended FTC franchise rule
The disclosure provisions under the new FTC rule are generally the same or similar to the current UFOC provisions with the particular additions, and has been referred to as "UFOC plus." Some highlights include (Items 1-23 not referenced generally remain the same or similar to the current UFOC):
Item 2, Business Experience.
Brokers who do not have ongoing obligations to franchisees no longer have to be disclosed (unless added back by a state). Brokers continue to be liable under Section 5 of the Federal Trade Commission Act for acts of fraud or misrepresentations.
Officers, directors and other individuals having "management responsibility" of any of franchisor and its parent or affiliates must be disclosed, regardless of formal title. Presumably management responsibility requires direct involvement in the franchisor sales and/or operational activities, but the revised rule does not explicitly state this, so it may pose a problem.
Item 3, Litigation
Franchisor initiated litigation
Disclosure is expanded to include all "material" litigation commenced by franchisors against a franchisee involving the franchise relationship during the prior fiscal year. These disclosures can be grouped under headings without the need to provide additional explanation or elaboration.
"Materiality" s determined from the viewpoint of a "reasonable perspective franchisee").
If a franchisor initiated action or proceedings is followed by a franchisee counterclaim, summary disclosure does not apply and the counterclaim must be fully disclosed in the same manner as all other franchisee litigation commenced against the franchisor.
Item 8, Restrictions on Sources of Products and Services
Disclosure is expanded by requiring identification of any supplier in which an officer of the franchisor has an interest.
Item 9, Franchisee Obligations
Franchisee obligations under any ancillary agreements as well as the core franchise agreement must be disclosed.
Item 11, Franchisor Assistance
The new rule only requires description of the computer system, any required purchase and maintenance costs and obligations, and whether franchisor will have access to the information contained in the computer systems, rather than identifying each individual computer component and software program required.
Item 12, Territory
The new rule expands disclosure about the competition which a franchisor can expect to experience from just company owned and franchised outlets, to also include from activities over the internet, through catalog sales, telemarketing or any alternative channel or distribution engaged in by the franchisor or other franchisees.
Franchisor must also disclose any restrictions placed on the franchisee precluding franchisees from conducting business outside their respective territories.
A new disclosure and specific required language is required if there is no territorial protection.
Item 17, Renewal
The precise meaning of "Renewal" must be disclosed. The FTC is seeking to highlight that renewal that may require a continuation of the franchise under potentially vastly different terms.
Item 19, Financial Performance or Earnings Claims
A change is that providing franchisee's prospective costs or expenses, standing alone, does not constitute an earnings claim.
There are 2 additional mandatory disclosures that:
- the FTC rule does not prevent franchisors from making earnings claims (franchisors had previously represented to franchisees the FTC did not permit franchisors to make earnings claims), and
- warning prospective franchisees not to rely on any authorized earnings claims they may receive otherwise than the disclosure document.
Item 20, Franchised Outlets
The table required showing franchisee information is entirely reworked
The double counting problem
Under the UFOC table prior franchisees were often counted more than 1 time in different categories (e.g., as both a "transfer" and "not renewed").
A franchisor selling a previously franchised unit now under its control must provide information for all franchisees of that unit within the prior five physical years to highlight any issue of "churning". Franchisors are required to disclose "confidentiality clauses," which restrict current franchisees from discussing their experience with prospective franchisees, and also disclose any independent trademark-specific franchisee association which has requested to be identified.
Item 21, Financial Statements
Parents who commit to perform post-sale obligations or guarantee any of the franchisor's obligations to franchisees financial information must be disclosed.