FTC Franchise Rule to Take Effect July 1


WASHINGTON, DC -- Revisions to the federal Franchise Rule will take effect on July 1, but the changes won’t become mandatory until July 1, 2008, according to the Federal Trade Commission (FTC). The FTC’s Franchise Rule has been in place since 1978 to offer potential franchisees the information they need to weigh the risks and benefits of investment in a franchise.

The revisions were passed earlier this year to bring the federal rule into closer alignment with state franchise disclosure laws, which are based on the Uniform Franchise Offering Circular (UFOC) guidelines. The amendments also were made to adapt the original rule to changes in the marketing of franchises and new technologies, to reduce compliance costs where possible and to address franchisee complaints about their experiences with franchisors after they signed an agreement and entered into a franchise relationship.

Although the amended rule closely tracks the UFOC guidelines, in some instances it requires more extensive disclosures—mostly with respect to certain aspects of the franchisee-franchisor relationship. The amended rule requires more extensive disclosures on lawsuits the franchisor has filed against franchisees, the franchisor’s use of so-called “confidentiality clauses” in lawsuit settlements, a warning when there is no exclusive territory, an explanation of what the term “renewal” means for each franchise system, and trademark-specific franchisee associations. In a few instances, the amended rule requires less than the UFOC guidelines. It does not require disclosure of so-called “risk factors,” franchise broker information or extensive information about every component of any computer system that a franchisee must purchase.

The Franchise Rule already requires franchisors to provide potential franchises with a disclorure document containing 23 items of information about the offered franchise, its officers and other franchisees. Some required disclosure topics include litigation history, current and previous franchisees and their contact information, and any assistance the franchisor may provide to the franchisee.

The original rule spanned two distinct offerings: franchises and business opportunity ventures. The new rule separates the business opportunity venture requirements with the franchise requirements. Part 436 of the rule gives the details about franchises, whereas newly added Part 437 maintains the information regarding the business opportunity ventures, according to a release from the FTC.

For more information about the changes, go to the FTC Web site at www.ftc.gov. --Kelsey Garrison

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