Einbinder & Dunn, LLP has extensive experience in representing start up and existing franchisors in all aspects of their franchised systems. Recent changes to the Federal Trade Commission’s Disclosure Rule substantially affect the kinds of disclosures franchisors are required to make in their Uniform Franchise Offering Circular (“UFOC.”) The new document is now referred to as a Franchise Disclosure Document (“FDD.”) On January 23, 2007, the FTC released its Amended Franchise Disclosure Rule (the “Rule”). The Rule closely aligns the federal requirements with the UFOC Guidelines, which serve as the basis for state franchise registration disclosure requirements. The Rule went into effect on a voluntary basis on July 1, 2007 and must be used by all franchisors by July 1, 2008.

The Rule contains numerous modifications to the UFOC Guidelines and requires more extensive disclosures. For instance, the Rule requires franchisors to disclose the name and address of their parent companies in all instances. If a parent exerts control over the franchise system, further disclosure is then required relating to the litigation and bankruptcy history of the parent as well as a parent’s financial information. The Rule also requires franchisors to disclose lawsuits the franchisor has filed against its franchisees in the last fiscal year. Additionally, the Rule requires franchisors to provide an explanation of what the term “renewal” means within that franchise system, which in practice will typically require the franchisor disclose that the franchise relationship will continue under the terms of an entirely new and different franchise agreement. The Rule also requires franchisors to issue a specific warning when the franchisee is not granted an exclusive territory and provide another specific warning when the franchise system is to be operated under a trademark that the franchisor has not registered with the United States Patent and Trademark Office. Franchisors are also required to disclose any right of the franchisor or its affiliates to use other channels of distribution to make sales within the franchisee’s territory, the franchisor’s use of confidentiality clauses restricting franchisees from discussing their experience in the franchise system, and the existence of trademark specific franchisee associations (either franchisor sponsored or independent). (link to: Franchisee association articles)

However, many of the Rule’s modifications benefit franchisors. For instance, the Rule discontinues the requirement that franchisors disclose “Risk Factors” on the cover page, eliminates the confusing requirement that franchisor’s deliver the disclosure document on the first personal face-to-face meeting and gets rid of the five business day rule for delivery of execution ready agreements. The Rule permits franchisors to disseminate the disclosure document electronically and extends the period of time for franchisor’s to prepare their annual update to their disclosure document from 90 days to 120 days from the end of their fiscal year. The Rule also simplifies the required disclosures relating to computer systems, removes the requirement that franchisors disclose their franchise brokers, and provides that franchisors may give franchisees information outside of the disclosure document relating to the costs or expenses associated with the franchise system without making similar disclosures in the disclosure document. Additionally, the Rule completely overhauls Item 20 disclosures to make Item 20 more accurate and easier to analyze.

Einbinder & Dunn assists its franchisor clients in converting their existing UFOC disclosure documents to the new FDD required format and helps start-up franchisors prepare their disclosure documents. The firm also ensures that the FDD document complies with all applicable state regulations. Because the new requirements, many of which are highlighted above, are complex and evolving, preparation of a FDD requires the attention of a firm with E&D’s dynamic expertise. E&D can also revise the franchisor’s current agreements, to ensure, to the maximum extent possible, that the agreements insulate the franchisor from problems that often arise during the franchisor-franchisee relationship. For more information on how Einbinder & Dunn can provide efficient and cost effective legal service for your new or existing franchise, contact Einbinder & Dunn via telephone at (212) 391-9500 or email at info@ed-lawfirm.com.

Other Franchise Law sections:

• Einbinder & Dunn’s Franchise Practice
• Services for Franchisors
• FAQ’S for Franchisors
• Amended FTC Rule and FDD Conversion
• Is Your Business Franchisable?
• Comprehensive Franchise Review
• Services for Franchisees
• FAQ’S for Franchisees
• Representative Franchise Systems
• Franchise Articles and Media
• Franchise News/Case Notes
• Useful Links and Resources