Franchise Rule

Last updated November 01, 2021

The Franchise Rule defines acts or practices that are unfair or deceptive in the franchise industry in the United States. The Franchise Rule is published by the Federal Trade Commission. The Franchise Rule seeks to facilitate informed decisions and to prevent deception in the sale of franchises by requiring franchisors to provide prospective franchisees with essential information prior to the sale. It does not, however, regulate the substance of the terms that control the relationship between franchisors and franchisees. Also, while the Franchise Rule removed the regulation of the sale of franchises from the purview of state law, placing it under the authority of the FTC to regulate interstate commerce, the FTC Franchise Rule does not require franchisors to disclose the unit performance statistics of the franchised system to new buyers of franchises (as would be necessary under state and federal Securities and Exchange law).^{[ citation needed ]} The FTC Franchise Rule was originally adopted in 1978. This followed a lengthy FTC rulemaking proceeding that began in 1971. A substantial revision of the FTC Franchise Rule was adopted by the FTC in 2007.

Franchise law

In the United States, the Federal Trade Commission has oversight of franchising, rather than the US Securities and Exchange Commission.^{[ citation needed ]}^{[ clarification needed ]}

The FTC administrates oversight via the FTC Franchise Rule.^[1] The FTC announced an update to the franchise Rule on January 23, 2007, becoming effective July 1, 2007.^[2]

The most recent version of the FTC Franchise Rule was in 2007, is printed in FR 2007a , pp. 15544–15575.

After July 2008, all franchisors in the United States are to use the Franchise Disclosure Document with potential franchisees.

Franchise law background

The Federal Trade Commission began examining practices in franchising in 1970. In 1971 the FTC began a formal rule making proceeding, to possibly develop a regulation requiring disclosure and prohibiting unfair practices in offering and selling franchises. These developments resulted in promulgation of the FTC Franchise Rule in 1979. The FTC enforces the Federal Trade Commission Act ("FTC Act"), which prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting commerce.

The FTC Act also empowers the Commission to prescribe rules that define with specificity acts or practices that are unfair or deceptive. One such rule is the Commission's Franchise Rule.^[3]

In 2006 the Franchise Rule was amended, with voluntary adoption of the changes permitted as of July 1, 2007 and mandatory adoption and compliance required as of July 1, 2008^[4]

The Commission focuses much of its Franchise Rule enforcement and consumer educational resources on combating business opportunity fraud.

The Franchise Rule requires franchisors to make material disclosures in five categories:

(1) the nature of the franchisor and the franchise system;
(2) the franchisor's financial viability;
(3) the costs involved in purchasing and operating a franchised outlet;
(4) the terms and conditions that govern the franchise relationship; and
(5) the names and addresses of current franchisees who can share their experiences within the franchise system, thus helping the prospective franchisee to verify independently the franchisor's claims.

In addition, franchisors must have a reasonable basis and substantiation for any Financial Performance Representations (FPRs) made to prospective franchisees, as well as disclose the basis and assumptions underlying any such FPRs in Item 19 of the FDD. Though FPRs are not required to be provided to prospective franchisees under the FTC Rule, the majority of franchisors do provide some level of FPR disclosure^[5].

The Franchise Rule generally covers two different types of business arrangements: franchises and business opportunity ventures.

Franchise agreements

Franchise agreements typically involve retail outlets that bear the franchisor's trademark and follow the franchisor's business operations model, such as fast-food restaurants, hotels, and automotive repair shops. These are commonly known as "business-format" franchises.

Non- Franchise Business Opportunities

Some business opportunities operate similar to franchises, and may even purport to be franchises, but often without the robust support model expected in franchising.^[6] Though business opportunities are not by definition fraudulent, they may be more likely to result in consumer fraud. In 2012 the Federal Trade Commission enacted legislation specifically to address the issue of fraudulent non-franchised business opportunities.^[7]

Franchise Disclosure Document laws

In addition to the FTC, fifteen states require pre-sale disclosure in franchise sales. Prior to the adoption of the Amended Rule, disclosure was required in the form of a Uniform Franchise Offering Circular, which was renamed to a Franchise Disclosure Document ("FDD") when the Amended Rule was adopted. The FDD format is generally accepted by states that have franchise-specific disclosure requirements, though they may require certain changes specific to the state's law attached as an addendum^[8].

Franchise rule enforcement

The Franchise Rule has the force and effect of law, and it may be enforced through civil penalty actions in federal courts.(10) The FTC Act authorizes courts to impose civil penalties of not more than $11,000 per compliance violation.

Franchise disclosure document

The Franchise Rule requires franchisors to provide all potential franchisees with a disclosure document containing 23 specific items of information about the offered franchise, its officers, and other franchisees.

Required Franchise Disclosure Document topics include: the franchise's litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance the franchisor provides franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, this topic also must be covered, as well as the material basis backing up those representations." ^[2]^[9]

Franchise termination

Franchise termination is covered in the franchise agreement between the franchiser and franchisee. In the 2007 Franchise Rule, comments from former franchisees were listed concerning confidentiality agreements and Franchise fraud.

Related Research Articles

Franchising is based on a marketing concept which can be adopted by an organization as a strategy for business expansion. Where implemented, a franchisor licenses some or all of its know-how, procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to a franchisee. In return the franchisee pays certain fees and agrees to comply with certain obligations, typically set out in a franchise agreement.

The Federal Trade Commission Act of 1914 was a United States federal law which established the Federal Trade Commission. The Act was signed into law by US President Woodrow Wilson in 1914 and outlaws unfair methods of competition and unfair acts or practices that affect commerce.

The Federal Trade Commission (FTC) is an independent agency of the United States government whose principal mission is the enforcement of civil (non-criminal) U.S. antitrust law and the promotion of consumer protection. The FTC shares jurisdiction over federal civil antitrust enforcement with the Department of Justice Antitrust Division. The agency is headquartered in the Federal Trade Commission Building in Washington, DC.

The Securities Act of 1933, also known as the 1933 Act, the Securities Act, the Truth in Securities Act, the Federal Securities Act, and the '33 Act, was enacted by the United States Congress on May 27, 1933, during the Great Depression and after the stock market crash of 1929. It is an integral part of United States securities regulation. It is legislated pursuant to the Interstate Commerce Clause of the Constitution.

A franchise agreement is a legal, binding contract between a franchisor and franchisee. In the United States franchise agreements are enforced at the State level.

False advertising is described as the crime or misconduct of publishing, transmitting, or otherwise publicly circulating an advertisement containing a false, misleading, or deceptive statement, made intentionally or recklessly to promote the sale of property, goods, or services to the public. One form of false advertising is to claim that a product has a health benefit or contains vitamins or minerals that it in fact does not. Many governments use regulations to control false advertising. A false advertisement can further be classified as deceptive if the advertiser deliberately misleads the consumer, as opposed to making an honest mistake.

A privacy policy is a statement or legal document that discloses some or all of the ways a party gathers, uses, discloses, and manages a customer or client's data. Personal information can be anything that can be used to identify an individual, not limited to the person's name, address, date of birth, marital status, contact information, ID issue, and expiry date, financial records, credit information, medical history, where one travels, and intentions to acquire goods and services. In the case of a business, it is often a statement that declares a party's policy on how it collects, stores, and releases personal information it collects. It informs the client what specific information is collected, and whether it is kept confidential, shared with partners, or sold to other firms or enterprises. Privacy policies typically represent a broader, more generalized treatment, as opposed to data use statements, which tend to be more detailed and specific.

The Fair and Accurate Credit Transactions Act of 2003 is a United States federal law, passed by the United States Congress on November 22, 2003, and signed by President George W. Bush on December 4, 2003, as an amendment to the Fair Credit Reporting Act. The act allows consumers to request and obtain a free credit report once every 12 months from each of the three nationwide consumer credit reporting companies. In cooperation with the Federal Trade Commission, the three major credit reporting agencies set up the web site AnnualCreditReport.com to provide free access to annual credit reports.

In re Amway Corp. is a 1979 ruling by the United States Federal Trade Commission concerning the business practices of Amway, a multi-level marketing (MLM) company. The FTC ruled that Amway was not an illegal pyramid scheme according strictly to the statutory definition of a pyramid scheme, but ordered Amway to cease price fixing and cease misrepresenting to its distributors (participants) the average participant's likelihood of financial security and material success.

A franchise disclosure document (FDD) is a legal document which is presented to prospective buyers of franchises in the pre-sale disclosure process in the United States. It was originally known as the Uniform Franchise Offering Circular (UFOC), prior to revisions made by the Federal Trade Commission in July 2007. Franchisors were given until July 1, 2008 to comply with the changes.

Movieland, also known as Movieland.com, Moviepass.tv and Popcorn.net, was a subscription-based movie download service that has been the subject of thousands of complaints to the Federal Trade Commission, the Washington State Attorney General's Office, the Better Business Bureau, and other agencies by consumers who said they were held hostage by its repeated pop-up windows and demands for payment, triggered after a free 3-day trial period. Many said they had never even heard of Movieland until they saw their first pop-up. Movieland advertised that the service had "no spyware", and that no personal information would need to be filled out to begin the free trial.

Multi-level marketing (MLM), also called network marketing or pyramid selling, is a controversial marketing strategy for the sale of products or services where the revenue of the MLM company is derived from a non-salaried workforce selling the company's products or services, while the earnings of the participants are derived from a pyramid-shaped or binary compensation commission system. An MLM strategy may be an illegal pyramid scheme.

'Franchise consulting' traditionally meant the same consultant-to-client relationship as any other industry wherein the consultant charges a 'fee for services'. But, as of the late 1990s the term 'consultant' has been adopted by many franchise salesmen and brokers who represent themselves as 'free' consultants to prospective franchise buyers. These franchise brokers provide introduction services for franchise sellers with whom they have worked out a pay-for-sale agreement.

A franchise fee is a fee or charge that one party, known as the franchisee, pays another party, known as the franchisor, for the right to enter in a franchise agreement. Generally by paying the franchise fee a franchisee receives the rights to sell goods or services, under the franchisor's trademarks, as well as access to the franchisor's business processes. Often, the franchisee fee includes some assistance from the franchisor in opening the franchised business.

Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent businesses from engaging in fraud or specified unfair practices in order to gain an advantage over competitors or to mislead consumers. They may also provide additional protection for the general public which may be impacted by a product even when they are not the direct purchaser or consumer of that product. For example, government regulations may require businesses to disclose detailed information about their products—particularly in areas where public health or safety is an issue, such as with food or automobiles.

In the middle of 2009 the Federal Trade Commission filed a complaint against Sears Holdings Management Corporation (SHMC) for unfair or deceptive acts or practices affecting commerce. SHMC operates the sears.com and kmart.com retail websites for Sears Holdings Corporation. As part of a marketing effort, some users of sears.com and kmart.com were invited to download an application developed for SHMC that ran in the background on users' computers collecting information on nearly all internet activity. The tracking aspects of the program were only disclosed in legalese in the middle of the End User License Agreement. The FTC found this was insufficient disclosure given consumers expectations and the detailed information being collected. On September 9, 2009 the FTC approved a consent decree with SHMC requiring full disclosure of its activities and destruction of previously obtained information.

The Telemarketing and Consumer Fraud and Abuse Prevention Act is a federal law in the United States aimed at protecting consumers from telemarketing deception and abuse. The act is enforced by the Federal Trade Commission. The act expanded controls over telemarketing and gave more control to prescribe rules to the Federal Trade Commission. After the passage of the act, the Federal Trade Commission is required to (1) define and prohibit deceptive telemarketing practices; (2) keep telemarketers from practices a reasonable consumer would see as being coercive or invasions of privacy; (3) set restrictions on the time of day and night that unsolicited calls can be made to consumers; (4) to require the nature of the call to be disclosed at the start of any unsolicited call that is made with the purpose of trying to sell something.

Franchise fraud is defined by the United States Federal Bureau of Investigation as a pyramid scheme.

Franchise termination is termination of a franchise business license by a franchisor or a franchisee.

The American Association of Franchisees and Dealers (AAFD) acts as a consumer protection organization that exposes the unethical practices that exist in the franchising community, and to educate the public regarding fair franchise rules, and quality franchise opportunities.

References

↑ "Disclosure Requirements and Prohibitions Concerning Franchising & Disclosure Requirements Concerning Business Opportunities - 16 CFR Parts 436 and 437" (PDF). 5 July 2013.
1 2 "FTC Issues Updated Franchise Rule". 23 January 2007.
↑ "Archived copy". Archived from the original on 2011-10-20. Retrieved 2011-03-27.CS1 maint: archived copy as title (link)
↑ "Amended Franchise Rule FAQ's". Federal Trade Commission. 2013-12-11. Retrieved 2021-10-31.
↑ "Making a Financial Performance Representation (Item 19 Disclosure) in 2021". JD Supra. Retrieved 2021-10-31.
↑ Chaney, Paul (4 September 2020). "Staff Writer". Small Business Trends. Retrieved 29 September 2021.
↑ "BUSINESS OPPORTUNITY RULE". Code of Federal Regulations. The Federal Trade Commission. Retrieved 29 September 2021.
↑ "Franchise Registration and Renewal". Securities Department, North Dakota. Retrieved 2021-10-31.
↑ "Archived copy". Archived from the original on 2013-10-06. Retrieved 2012-08-29.CS1 maint: archived copy as title (link)