The FTC's amended Franchise
Rule helps fulfill the reasonable expectations of prospective franchisees by imposing
stringent disclosure and other requirements on franchisors. These requirements
help insure that franchisees make fully informed decisions but can be a trap
for the unwary franchisor. Among other "traps" is the prohibition on
any attempt to nullify FTC mandated disclosures by including broad merger
clauses in the franchise agreement.
The Federal Trade Commission's
amended Franchise Rule requires franchisors to make numerous disclosures to
franchisees before a franchise agreement may be entered into. The purpose of
the Rule is to ensure that prospective franchisees make fully informed
decisions about the purchase, given the enormous expense and expenditure of
other resources typically involved in purchasing and operating a franchise.
The disclosure requirements are both exacting, and, in many respects, a trap
for the unwary. Fortunately, the FTC has made the painstaking process easier by
providing explicit instructions regarding both the disclosures that must be
made and the manner of disclosing them. It is critical that counsel for both
the franchisor and the franchisee understand these requirements. Failure on the
part of the franchisor to abide by them could be construed as a deceptive trade
practice; failure on the part of the franchisee to understand them could
deprive the franchisee of important rights promulgated for his or her benefit.
This analysis will highlight some of the more prominent aspects of the amended
Franchise Rule that require special attention.
Background of the Amended Franchise Rule
The original FTC Franchise Rule was promulgated in 1978 as a result of findings
by the FTC of "widespread deception in the sale of franchises." The
overriding goal of the Franchise Rule was to "give prospective
purchasers of franchises the material information they need in order to weigh
the risks and benefits of such an investment." The Franchise Rule required
franchisors to make material disclosures regarding the nature of the franchise;
the franchisor's financial viability; the costs of opening and operating a
franchise; the contractual terms governing the franchise relationship; and the
identities of other franchisees who could provide useful information about
their franchise experiences. [footnotes omitted]
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