The Federal Trade Commission (“FTC”) recently requested public comments on its proposed changes to what is known as the FTC’s “Disclosure Requirements and Prohibitions Concerning Franchising” (the “Disclosure Requirements”). Here in San Diego, franchising is regulated by both the federal government and by California law. The FTC is the governmental agency at the federal level that is tasked with regulating franchisor-franchisee relations under provisions of the Federal Trade Commission Act (“FTC Act”). In general, California law is much stricter than the FTC Act with respect to what disclosures must be made by a franchisor. That is, what a franchisor must disclose under California law is stricter than the FTC Disclosure Requirements. Even the proposed new rule only brings federal disclosure in line with California law. If you are thinking of buying a franchise or considering starting a franchise, retaining an experienced San Diego corporate attorney is essential. The list below is a good summary of the types of information a franchisor must provide and the information that you must consider when thinking about buying a franchise.

As currently written, the FTC’s Disclosure Requirements require a franchisor — the person owning the master franchising system — to provide information and various documents which collectively are called a “Franchise Disclosure Documents.” Under current FTC regulations, it is considered an unfair or deceptive act or business practice for franchisors to fail or refuse to give the Disclosure Documents to a potential franchisee. This is a strict requirement and government liability is strict for failure to tender the Disclosure Documents. Likewise, tendering the wrong Disclosure Documents will also bring governmental action.

In mid-February 2019, the FTC proposed a more stringent Disclosure Requirement. The FTC is proposing that the following information must be disclosed by a franchisor:

• Initial fees and estimated initial investment required;
• Litigation and bankruptcy history of the franchisor, its officers, and key executives;
• The financial performance of existing company-owned and franchised outlets;
• Contact information for current and former franchisees — allowing a potential franchisee to contact current franchisees to conduct an investigation;
• Financial statements reflecting the ability of the franchisor to provide promised services and support;
• Any restrictions on the sources of goods and services and any required purchases;
• Terms of any financing offered by the franchisor;
• The training and assistance provided by the franchisor;
• The extent to which the proposed franchisee’s outlet is/would be protected from competition by the franchisor and other franchisees — territoriality and exclusivity of territory issues;
• Any restrictions on what the franchisee may sell — goes to issues of selling goods or services unrelated to the franchise;
• Early termination circumstances;
• Any restrictions or rules related to franchisee’s sale of the franchise;
• Renewal rules for renewal of the franchise;
• Grounds for refusal of renewal;
• Dispute resolution mechanisms and limitations (such as arbitration only);
• Number of outlets created, sold, and closed during the past three years;
• Representations and projections (if any) with respect to financial performance;
• And more

For the full proposed new Disclosure Requirements, see here. Public comments can be provided to the FTC until April 21, 2019.

Contact San Diego Corporate Law

For more information, contact franchise law attorney Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has extensive experience helping San Diego residents buy and sell their franchises. Mr. Leonard can be reached via email or by calling (858) 483-9200. Like us on Facebook.

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