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57293

FridayOctober 22, 1999

Part IV

Federal TradeCommission16 CFR Part 436Franchise Rule; Proposed Rule

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57294 Federal Register / Vol. 64, No. 204 / Friday, October 22, 1999 / Proposed Rules

1 43 FR 59614 (December 21, 1978).2 Statement of Basis and Purpose (‘‘SBP’’), 43 FR

59621, 59625 (December 21, 1978).3 Id.

4 60 FR 17656 (April 7, 1995).5 References to the Rule Review comments are

cited as: the name of the commenter, RR,commenter number (e.g., NASAA, RR, Comment43). Commission staff also held two publicworkshop conferences on the Rule. References tothe two Rule Review public workshop transcriptsare cited as: name of commenter, Sept. 95 Tr orMarch 96 Tr, respectively (e.g., D’Imperio, Sept. 95Tr, and Ainsley, March 96 Tr).

FEDERAL TRADE COMMISSION

16 CFR Part 436

Franchise Rule

AGENCY: Federal Trade Commission.ACTION: Notice of proposed rulemaking.

SUMMARY: The Federal TradeCommission (the ‘‘Commission’’ or‘‘FTC’’) is commencing a rulemaking toamend its Trade Regulation Ruleentitled ‘‘Disclosure Requirements andProhibitions Concerning Franchisingand Business Opportunity Ventures’’(the ‘‘Franchise Rule’’ or ‘‘the Rule’’),based upon the comments received inresponse to its Advance Notice ofProposed Rulemaking (‘‘ANPR’’) andother information discussed in thisnotice. The Franchise Rule requires thepre-sale disclosure of materialinformation to prospective franchiseesabout the franchisor, the franchisedbusiness, and the terms and conditionsthat govern the franchise relationship.DATES: Comments must be submitted onor before December 21, 1999. Rebuttalcomments may be submitted on orbefore January 31, 2000.ADDRESSES: Written comments shouldbe identified as ‘‘16 CFR Part 436—Franchise Rule Comment’’ and sent toSecretary, Federal Trade Commission,Room 159, 600 Pennsylvania Avenue,NW., Washington, DC 20580. Toencourage prompt and efficient reviewand dissemination of the comments tothe public, all written comments shouldalso be submitted, if possible, inelectronic form, on either a 51⁄4 or a 31⁄2inch computer disk, with a label on thedisk stating the name of the commenterand the name and version of the wordprocessing program used to create thedocument. Programs based on DOS arepreferred. Files from other operatingsystems should be submitted in ASCIItext format to be accepted. TheCommission will also accept commentssubmitted to the following E-mailaddress: ‘‘[email protected]’’. Inaddition, commenters may leave a shortcomment on a telephone hotlinenumber designated for this purposeonly: (202) 325–3573.FOR FURTHER INFORMATION CONTACT:Steven Toporoff, (202) 326–3135, orMyra Howard (202) 326–2047, Divisionof Marketing Practices, Room 238,Bureau of Consumer Protection, FederalTrade Commission, 600 PennsylvaniaAvenue, NW., Washington, DC 20580.SUPPLEMENTARY INFORMATION:

The Commission invites interestedparties to submit data, views, andarguments on the proposed changes tothe Rule and to address specifically the

questions set forth in Section H of thisnotice. The comment period will remainopen for 60 days. All comments will beavailable on the public record and, tothe extent practicable, placed on theCommission’s Internet web site: < http://www.ftc.gov>. After the close of thecomment period, the record will remainopen for another 40 days for rebuttalcomments. If necessary, the Commissionwill also hold hearings with cross-examination and post-hearing rebuttalsubmissions, as specified in section18(c) of the Federal Trade CommissionAct, 15 U.S.C. 57a(c). Parties whorequest a hearing must file within the60-day period a comment in response tothis notice and a statement explainingwhy they believe a hearing is warrantedand how they would participate in ahearing. Parties interested in a hearingmust also designate specific facts indispute and submit a summary of theirexpected testimony within the commentperiod. In lieu of a hearing, theCommission will also consider requeststo hold additional informal publicworkshop conferences to discuss theissues raised in this notice and thecomments.

Section A. Background

The Commission is publishing thisnotice pursuant to section 18 of theFederal Trade Commission (‘‘FTC’’) Act,15 U.S.C. 57a et seq., and Part 1,Subpart B, of the Commission’s Rules ofPractice. 16 CFR 1.7, and 5 U.S.C. 551et seq. This authority permits theCommission to promulgate, modify, andrepeal trade regulation rules that definewith specificity acts or practices that areunfair or deceptive in or affectingcommerce within the meaning ofsection 5(a)(1) of the FTC Act. 15 U.S.C.45(a)(1).

1. The Franchise Rule

The Commission promulgated theFranchise Rule on December 21, 1978.1Based upon the original rulemakingrecord, the Commission found a seriousinformational imbalance betweenprospective franchisees and theirfranchisors, enabling franchisors todefraud prospective franchisees throughboth material misrepresentations andnondisclosures of material facts.2 TheCommission concluded that thesepractices led to serious economic harmto franchisees.3

To prevent fraudulent franchise salespractices, the Commission adopted apre-sale disclosure rule. The Franchise

Rule does not purport to regulate thesubstantive terms of the franchiserelationship. Rather, it requiresfranchisors to disclose materialinformation to prospective franchiseeson the theory that an informedconsumer can determine whether afranchise deal is in his or her bestinterest. The Franchise Rule providesprospective franchisees with four basictypes of material disclosures. First, thereare disclosures about the nature of thefranchisor and the franchise system. Forexample, the franchisor must disclosethe business background of thefranchisor and its officers, theirlitigation history—including suits filedby franchisees concerning the franchiserelationship—and statistics on thenumber of franchisees who have left thesystem. Second, there are disclosuresthat enable a prospective franchisee toassess the franchisor’s financial viabilityand, thus, ability to perform aspromised. These disclosures include thebankruptcy history of the franchisor andits officers, as well as the franchisor’saudited financial statements. Third,there are disclosures about the materialcosts of the franchise, as well as theterms and conditions that govern thefranchise relationship. Finally, there aredisclosures that enable prospectivefranchisees to conduct their own duediligence investigation of the franchiseoffering, including the names andaddresses of current franchisees.

2. Initial Franchise Rule Review andRequest for Comments

In April 1995, as part of its continuingreview of FTC trade regulation rules, theCommission published in the FederalRegister a request for comment on theRule (‘‘Rule Review Notice’’) 4 todetermine the Rule’s currenteffectiveness and impact. The RuleReview Notice sought comment on thestandard regulatory review questions,such as the costs and benefits of theRule, what changes in the Rule wouldincrease the Rule’s benefits toconsumers, how would those changesaffect compliance costs, and whatchanges in the marketplace and newtechnologies may affect the Rule.5


57295Federal Register / Vol. 64, No. 204 / Friday, October 22, 1999 / Proposed Rules

6 62 FR 9115 (February 28, 1997).7 The Commission received comments through

three means: (1) In writing (108 comments); (2) byE-mail (36 comments); and (3) by telephone (22comments). Of the 166 comments, 121 weresubmitted by franchisees or their representatives; 34were submitted by franchisors or theirrepresentatives, and the remainder did not specifyany affiliation. A list of commenters and the

abbreviations used to identify each is attached asAttachment A.

8 A list of public workshop participants and theabbreviatins used to identify each is attached asAttachment B.

9 References to the public workshop conferencesare cited as: the name of the commenter, date 97Tr at ll (e.g., Simon, 18 Sept 97 Tr at 146).

10 E.g., Baer, Comment 25, at 2; Hogan & Hartson,Comment 28, at 2; Kaufmann, Comment 33, at 2–3; SBA Advocacy, Comment 36, at 2–3;Kestenbaum, Comment 40, at 1; IL AG, Comment77, at 1. At the same time, several commenters urgethe Commission to streamline the Rule and to creategreater uniformity with state franchise regulations.E.g., Bruce, Comment 3, at 1; Baer, Comment 25, at2; Kaufmann, Comment 33, at 3; IL AG, Comment77, at 5; Cendant, Comment 140, at 2.

11 NASAA, Comment 120, at 1–4.12 IFA, Comment 82, at 1–2.13 NCL, Comment 35, at 2.14 E.g., Cendant, Comment 140, at 1–2. See also

Better Homes & Gardens Real Estate Service, Re/Max Corporation, and The Prudential Real EstateAffiliates, Inc., (RR Comment 24, at 1); Snap-On,Inc. (RR Comment 27, at 1); Little Caesars (RRComment 31, at 1); The Southland Corporation (7-Eleven) (RR Comment 47, at 1); MedicapPharmacies (RR Comment 48, at 1); Forte Hotels (RRComment 52, at 1).

15 E.g., Hogan & Hartson, Comment 28, at 2; SBAAdvocacy, Comment 36, at 2; Zarco & Pardo,Comment 134, at 1. The record reveals thatfranchisees may suffer loses of several hundedthousand dollars. E.g., Slimak, 22 Aug 97 Tr at 26($289,000 loss); Lundquist, 22 Aug 97 Tr at 48 (halfa million dollar loss). See also NCL, Comment 35,at 2.

16 But see Winslow, Comment 84, at 1.17 E.g., Brown, Comment 4, at 2–3; Purvin,

Comment 81, at 4.18 E.g., Rachide, Comment 32, at 3; AFA,

Comment 62, at 3; Slimak, Comment 130, at 1;Vidulich, 22 Aug 97 Tr at 21.

19 E.g., Brown, Comment 4, at 2; Manuszak,Comment 13, at 1; AFA, Comment 62, at 1; Buckley,Comment 97, at 3; Zarco & Pardo, Comment 134,at 2.

20 E.g., Colenda, Comment 71, at 1; Slimak, 22Aug 97 Tr at 26; Chiodo, 21 Nov 97 Tr at 293–94.

21 E.g., Brown, Comment 4, at 3; Bell, Comment30, at 1; White, Comment 54, at 1; AFA, Comment62, at 3; Johnson, Comment 67, at 1.

3. Advanced Notice of ProposedRulemaking

Based upon the comments receivedduring the Rule Review, theCommission tentatively determined toretain the Franchise Rule, but soughtadditional comment on possibleamendments to the Rule. To that end, inFebruary 1997, the Commissionpublished an ANPR, 6 seeking commenton specific issues, including: (1)Whether the Commission shouldseparate the disclosure requirements forbusiness opportunities from those forfranchises; (2) whether the Commissionshould revise the Rule’s pre-saledisclosures based on the UniformFranchise Offering Circular (‘‘UFOC’’)Guidelines promulgated by the NorthAmerican Securities AdministratorsAssociation (‘‘NASAA’’); (3) whetherthe Commission should modify the Ruleto clarify that the Rule does not reachthe sale of franchises to be located oroperated outside the United States, itsterritories, and possessions; and (4)whether the Commission should permitfranchisors to comply with theFranchise Rule’s disclosure obligationsby posting disclosure documents on theInternet? On the assumption that theCommission would revise the Rulebased upon the UFOC Guidelinesmodel, the Commission solicitedadditional comment on specificdisclosure items, including: (1) Whetherthe Commission should modify thelitigation disclosures (UFOC Item 3) torequire franchisors to disclose law suitsfiled by franchisors against franchisees;(2) whether the Commission shouldimprove the franchisee statisticsdisclosures (UFOC Item 20) and if so,how; (3) whether the Commissionshould modify the Rule to prohibitfranchisors from using ‘‘gag clauses’’that restrict former or existingfranchisees from speaking withprospective franchisees or other parties;and (4) whether the Commission shouldmodify the financial performancedisclosure requirements (UFOC Item 19)to require franchisors to include specificpreambles in their disclosuredocuments to provide prospectivefranchisees with more informationabout financial performance claims.

The ANPR elicited 166 writtencomments.7 In addition, Commission

staff held six public workshopconferences on the Rule in Washington,D.C. (2 workshops); Chicago, Illinois;New York, New York; Dallas, Texas; andSeattle, Washington. Sixty-sevenindividuals 8 participated in the publicworkshops, including franchisees,franchisors, business opportunitysellers, and their representatives, statefranchise and business opportunityregulators, and computer consultants.The workshop conferences generatedtranscripts totaling 1,548 pages.9 Basedupon the comments and the evidencediscussed herein, the Commissionproposes to amend the Rule in the formset forth infra at Section I.

Section B. The Continuing Need for theFranchise Rule

Based upon the record, theCommission believes that the FranchiseRule continues to serve a usefulpurpose. In response to the ANPR,commenters who address this issueoverwhelmingly urge the Commission toretain the Franchise Rule.10 Thesecommenters, including NASAA,11 theInternational Franchise Association(‘‘IFA’’),12 National Consumers League(‘‘NCL’’),13 and prominent franchisors,14

note that pre-sale disclosure is a cost-effective way to provide materialinformation to prospective franchisees,is necessary to prevent fraud, andenables franchising to flourish.Commenters also observe that pre-saledisclosure helps to reduce economicinjury to franchisees by enabling themto understand fully the nature of thefranchise relationship and the financial

and legal commitments they will beundertaking.15

While almost all franchisorsresponding to the ANPR support theRule,16 existing franchisees and theiradvocates continue to criticize the Rulebecause it does not address what theybelieve to be the greatest problem infranchising today: abusive franchiserelationships.17 They believe that theCommission should use its unfairnessauthority under section 5 of the FTC Actto prohibit, for example, post-termcovenants not to compete,18

encroachment of franchisees’ markets,19

and restrictions on the sources ofproducts or services.20 They also urgethe Commission to ban franchisors fromrequiring mandatory arbitration, waiverof jury trials, and choice of venue andchoice of law provisions, which theybelieve often impede a franchisee frombringing suit or favor franchisors inlitigation.21

Based upon the record and theCommission’s law enforcementexperience over the last twenty years,the Commission believes that pre-saledisclosure is necessary to protectprospective franchisees from fraudulentand deceptive franchise sales practices.Pre-sale disclosure provides prospectivefranchisees with material informationneeded to conduct their own duediligence investigation of the offering, aswell as information that prospectivefranchisees might not otherwise be ableto obtain on their own, such as thefranchisor’s litigation history, failurerates in the franchise system, andaudited financial information. Further,complaints from franchisees aboutvarious contractual issues are prevalentand strongly suggest that pre-saledisclosure is necessary to ensure thatprospective franchisees are betterinformed about the relationship theywill be entering, including issues such



22 For example, the Commission’s FuneralIndustry Practices Rule, 16 CFR 453, requiresfuneral homes to disclose pre-sale the costs of itsgoods and services, but does not regulate the termsand conditions of private funeral services contracts.Similarly, the Used Motor Vehicle Trade Regulati0nRule (‘‘Used Car Rule’’), 16 CFR 455, requires usedcar sellers to disclose pre-sale whether the carcomes with a warranty, but does not purport toregulate the terms and conditions of private usedcar sales.

23 See FTC v. Orkin Exterminating Co., 108 F.T.C.263 (1986), aff’d, Orkin Exterminating Co. v. FTC,849 F.2d 1354 (11th Cir. 1988), cert denied, 488U.S. 1041 (1989).

24 15 U.S.C. § 45(n) (added by The Federal TradeCommission Act Amdnements of 1994, Pub. L. No.103–312). In amendment the FTC Act, Congressalso made clear that the Commission may notdeclare an act or practice unfair based upon publicpolicy concerns alone. Id.

25 In Orkin, the seminal case in which theCommission exercised its unfairness jurisdiction inthe context of a commercial contract, theCommission neither dictated nor revised thesubstantive terms of the Orkin contract, butrequired Orkin to abide by the contractual termsand conditions that Orkin itself freely chose andoffered to the public. 849 F.2d at 1363.

26 E.g., Brown, Comment 4; Baer, Comment 25, at5; Hogan & Hartson, Comment 28; IFA, Comment82, at 2; NASAA, Comment 120, at 4; Selden,Comment 133, at 2. But see NCL, Comment 35.

27 See Muncie, Comment 15, at 2.28 E.g., AFA, Comment 62, at 2; IL AG, Comment

77, at 1; IFA, Comment 82, at 1; Bundy, Comment119, at 1; NASAA, Comment 120, at 2; Cendant,Comment 140, at 2.

29 E.g., Brown, Comment 4, at 1; Kaufmann,Comment 33, at 3; AFA, Comment 62, at 2; IL AG,Comment 77, at 1; WA Securities, Comment 117, at1; NASAA, Comment 120, at 2–3.

30 E.g., Baer, Comment 25, at 2; Hogan & Hartson,Comment 28, at 5–6; Kaufmann, Comment 33, at 3;Kestenbaum, Comment 40, at 1; WA Securities,Comment 117, at 1.

31 E.g., Brown, Comment 4, at 2; Baer, Comment25, at 2; AFA, Comment 62, at 2; WA Securities,Comment 117, at 1; NASAA, Comment 120, at 3.Cendant observes that interpretations of the UFOCoften vary from state to state and asserts that theCommission’s interpretation of the UFOC wouldbring greater uniformity to the field. Cendant,Comment 140, at 3.

32 Kaufmann, Comment 33, at 3.33 NASAA, Comment 120, at 2.34 E.g., Karp, 19 Sept 97 Tr at 90.

as rights to protected territories andproduct source restrictions.

At the same time, the Commissionrecognizes that pre-sale disclosureaddresses only some of the issuesfranchisees may face in the course ofoperating their franchises. From thesignificant number of complaints filedby existing franchisees, the Commissionhas no doubt that some franchisees aredissatisfied with their franchisepurchase, believe a serious imbalance ofpower exists between franchisors andfranchisees, or otherwise believe thatfranchise contracts are oppressive.Nonetheless, the record does notsupport the Commission’s ability tobroaden the Rule to address substantivefranchise relationship issues.

As an initial matter, franchiserelationships are matters of contract lawthat traditionally have been regulated atthe state level. Indeed, several states,even those without franchise disclosurelaws, have some type of franchiserelationship law. In contrast to thestates, the Commission traditionallydoes not regulate or set the terms ofprivate contracts in franchising or inany other economic sector.22

Further, the Commission believes thata widespread misconception existsabout the scope of its unfairnessjurisdiction. ‘‘Unfairness’’ is a term ofart that has a specific legal meaning thathas been developed by the Commissionover time 23 and adopted by Congress in1994. Section 5 states that theCommission does not have authority todeclare an act or practice unfair unlessit meets three specific criteria: (1) Theact or practice causes or is likely tocause substantial injury; (2) that is notoutweighed by countervailing benefitsto consumers or to competition; and (3)is not reasonably avoidable.24

Accordingly, before the Commissioncould consider a rulemaking prescribingthe substantive terms of private

contracts,25 the Commission would needevidence not only of substantial harm,but also specific data that would enablethe Commission to weigh the purportedharm against any countervailing benefitsto the public at large or to competition.In addition, the Commission wouldneed evidence showing that franchiseescannot reasonably avoid the allegedharm.

While the Commission finds thatfranchisees and their advocates suggesteconomic harm to individualfranchisees may result from somefranchise practices, they have notshown to date that such harm issubstantial and not outweighed bycountervailing benefits. Further, in atleast some instances, prospectivefranchisees could also avoid harm bycomparison shopping for a franchisesystem that offers more favorable termsand conditions and by consideringalternatives to franchising as a means ofbusiness ownership. Thus, theCommission continues to believe thatpre-sale disclosure is the best availablevehicle, within its statutory authority, toaddress franchise relationship issuesand, as discussed below, proposes toenhance the Rule’s disclosures to enableprospective franchisees to investigatethe franchise relationship fully beforethey commit to buying a franchise. Thisis totally consistent with theCommission’s long-held view that freeand informed consumer choice is thebest regulator of the market.

Section C. Discussion of ProposedRevisions to the Franchise Rule

1. The Proposed Rule Focuses on theSale of Franchises

The proposed Rule focusesexclusively on the sale of franchises.The Commission agrees with theoverwhelming view of the commenterswho address this issue that franchisesand business opportunities are distinctbusiness arrangements that requireseparate disclosure approaches.26 Forexample, many of the Rule’s pre-saledisclosures, in particular thosepertaining to the parties’ detailedrelationship, do not apply to the sale ofmost business opportunities, whichtypically involve fairly simple contracts

or purchase agreements. The Rule’sdetailed disclosure obligations may alsocreate barriers to entry for legitimatebusiness opportunity sellers.27

Accordingly, the Commission intends toconduct a separate rulemakingproceeding for business opportunitysales.

2. The Proposed Rule Is Based Upon theUFOC Guidelines

The proposed Rule is based upon theUFOC Guidelines’ disclosure model.Without exception, the commenterswho address this issue—includingfranchisors and franchisees alike—urgethe Commission to revise the Rule tomirror the UFOC.28 These commentersemphasize that the UFOC has improveddisclosures 29 and is already used by thevast majority of franchisors.30 Further,uniformity between federal and statefranchise disclosure laws will help toreduce compliance costs 31 and willfacilitate comparison shopping amongfranchise systems.32 Moreover, asNASAA notes, the UFOC Guidelineswere developed with significant inputfrom franchisors, franchisees, and otherfranchise administrators, and they weresubject to public hearings and noticeand comment.33 Indeed, the UFOCGuidelines have been well-received byall interests involved in franchising andhave become the national industrystandard.34

The proposed Rule, however, differsfrom the UFOC Guidelines in severalrespects. The Commission hasreorganized the UFOC disclosures toconform to the standard Code of FederalRegulations format, has edited theUFOC disclosures for clarity, and hasstreamlined the disclosures wherepossible. For example, the proposedRule does not include many of theUFOC Guidelines’ detailed instructions,nor its sample answers. In a few



35 16 CFR 436.2(f).36 16 CFR 436.2(g).37 16 CFR 436.2(o).38 16 CFR 436.2(l).39 UFOC Item 3, Definitions, ii.40 See Final Interpretive Guides, 44 FR at 49966,

49973 (August 24, 1979).

41 UFOC Item 1, Instructions, v. In several UFOCdisclosure items, the term ‘‘affiliate’’ has a morerestrictive meaning. In those instances, thedefinition of ‘‘affiliate’’ is modified, consistent withthe UFOC Guidelines.

42 UFOC Instruction 150.43 The Commission also proposes to use the term

‘‘financial performance representation,’’ instead ofthe widely used ‘‘earnings claim.’’ Some franchisorsdo not use ‘‘earnings’’ as a measure of performance.For example, performance in the hotel industry istypically measured by room occupancy rates.

44 See Final Interpretive Guides, 44 FR at 49968.45 See Advisory 97–1 Bus. Franchise Guide (CCH)

¶ 6,481, at 9,681–82 (1997); Advisory 96–2, Bus.Franchise Guide (CCH) ¶ 6,477, at 9,675 (1996).

instances, the Commission has madesubstantive changes, enhancing theUFOC disclosures by retaining broaderprovisions in the current Rule or byadding new disclosures based upon therecord and the Commission’s lawenforcement experience. Each of thesechanges is discussed in more detailbelow.

3. Title of the RuleThe Commission proposes to change

the title of the Rule to ‘‘DisclosureRequirements and ProhibitionsConcerning Franchising.’’ Thisproposed change is necessary toeliminate the current title’s reference tobusiness opportunity ventures, which,as discussed above, will be addressed ina separate rulemaking proceeding.

4. Proposed Section 436.1: DefinitionsThe proposed Rule begins with a

definitions section that sets forth eachdefinition in alphabetical order. Inmany instances, the proposeddefinitions are substantially similar tothose already contained in the Rule orin the UFOC Guidelines. In someinstances, the Commission proposes torevise a definition for clarity, or toupdate a definition to embrace long-standing Commission policies. TheCommission also proposes to add a fewnew definitions that are needed toclarify new Rule provisions orinstructions (e.g., Internet). At the sametime, the Commission proposes tostreamline the Rule by eliminating fourdefinitions that no longer serve a usefulpurpose: (1) ‘‘business day;’’ 35 (2) timefor making of disclosures; 36 (3) personalmeeting; 37 and (4) cooperativeassociation,38 as discussed below.

a. Proposed Section 436.1(a) (‘‘Action’’)Proposed section 436.1(a) adopts the

UFOC definition of the term ‘‘action.’’ 39

It makes clear that disclosures involvinglitigation include not only civil mattersbrought before a court, but mattersbefore administrative agencies andarbitrators. This definition is alsoconsistent with the Commission’scurrent interpretation of the term‘‘action.’’ 40

b. Proposed Section 436.1(b)(‘‘Affiliate’’)

In keeping with the Commission’sgoal of revising the Rule to mirror theUFOC Guidelines, proposed section

436.1(b) adopts the UFOC’s definition ofthe term ‘‘affiliate.’’ 41 This definition isgreatly streamlined from the currentRule definition, which defines‘‘affiliate’’ in three parts as follows:

The term affiliated person means a person* * * (1) Which directly or indirectlycontrols, is controlled by, or is undercommon control with, a franchisor; or (2)Which directly or indirectly owns, controls,or holds with power to vote, 10 percent ormore of the outstanding voting securities ofa franchisor; or (3) Which has, in commonwith a franchisor, one or more partners,officers, directors, trustees, branch managers,or other persons occupying similar status orperforming similar functions.

16 CFR § 436.2(i).

c. Proposed Section 436.1(c)(‘‘Disclose’’)

Proposed section 436.1(c) is basedupon the UFOC’s definition of the term‘‘disclose,’’ which incorporates a ‘‘plainEnglish’’ requirement.42 Currently, thereis no comparable Rule definition. TheCommission, however, proposes todefine the term ‘‘plain English’’ in aseparate definition, as discussed below.

d. Proposed Section 436.1(d)(‘‘Financial PerformanceRepresentation’’)

Proposed section 436.1(d) adds anexplicit definition of the term ‘‘financialperformance representation.’’ 43 Thecurrent Rule does not specifically definethe term. To the extent that a definitionappears, it is cast as a prohibition: It isa violation of section 5 to ‘‘make anyoral, written, or visual representation toa prospective franchisee which states aspecific level of potential sales, income,gross, or net profit for the prospectivefranchisee, or which states other figureswhich suggest such a specific level,unless * * *’’ 16 CFR § 436.1(b).

The Commission believes that theproposed definition of ‘‘financialperformance representation’’ combinesthe best features of both the current Ruleand UFOC definitions. Like the currentRule, proposed section 436.1(d) retainsthe phrase ‘‘or which states other figureswhich suggest such a specific level,’’which the Commission believes isnecessary to ensure that franchisorsunderstand fully that the Rule covers

the making of implied financialperformance representations. Followingthe UFOC approach, the definition alsospecifies that financial performanceinformation may include both historicalperformance representations andprojections and may be in the form ofcharts, tables, and mathematicalcalculations. The Commission alsoproposes to update the definition byclarifying that financial performancerepresentations include thosedisseminated through the Internet.

e. Proposed Section 436.1(e) (‘‘FiscalYear’’)

Proposed section 436.1(e) retains thecurrent definition of the term ‘‘fiscalyear’’ set out at 16 C.F.R. § 436.2(m)

f. Proposed Section 436.1(f) (‘‘FractionalFranchise’’)

Proposed section 436.1(f) slightlymodifies the fractional franchiseexemption currently found at 16 C.F.R.§ 436.2(h). It incorporates theCommission’s long-standing policy thatthe parties must anticipate that theadditional sales will not exceed 20percent of total sales within the firstyear of operation.44 The definition alsomakes explicit what previously has beenonly implied: that the parties must havea reasonable basis to assert theexemption.45

g. Proposed Section 436.1(g)(‘‘Franchise’’)

Proposed section 436.1(g) modifiesthe definition of the term ‘‘franchise’’ inthree ways. First, the current definitionof the term ‘‘franchise’’ was draftedbroadly to cover both the sale offranchises and business opportunities.In light of the Commission’s proposal toaddress business opportunity sales in aseparate trade regulation rule, theCommission believes the definition ofthe term ‘‘franchise’’ should now belimited to ensure that it no longercaptures ordinary business opportunitysales. To that end, the Commissionproposes to revise the seconddefinitional elements: significantcontrol or assistance. Specifically, theCommission proposes to revise the Ruleto cover franchisors that exert or havethe authority to exert significant‘‘continuing control’’ over thefranchisee’s method of operation. Whilefranchisors typically exert controlthroughout the franchise agreementterm, business opportunity sellers oftendo not exert control, or limit theircontrol to the initial stage of a



46 See Final Interpretive Guides, 44 FR at 49966.47 SBP, 43 FR at 59699.70.48 See Final Interpretive Guides, 44 FR at 49967.

49 See Final Interpretative Guides, 44 FR at 49969.50 In the ANPR, the Commission used the term

‘‘gag orders.’’ During the New York publicworkshop conference, several panelists wereconfused by the use of the word ‘‘order,’’ notingthat it implied a court mandate. E.g., Forseth, 18Sept. 97 Tr at 40; Zaslav, id., at 55. Accordingly,the Commission will use the term ‘‘gag clause,’’ toavoid any implication that the Rule will addressonly court imposed speech restrictions.

51 The proposed definition is modeled, in part,after the definition of ‘‘internet’’ set forth in theCommission’s recently published Request forComment on the Interpretation of Rules and Guidesfor Electronic Media, 63 FR 24996–97 and n.1 (May6, 1998) (‘‘Internet Notice’’).

purchaser’s business. In a similar vein,the Commission proposes to revise theRule to cover only franchisors that offersignificant assistance ‘‘extendingbeyond the start of the businessoperation,’’ recognizing that in manyfranchise systems the franchisor’sassistance extends beyond the initialphase of the business. For example, thefranchisor may offer ongoingadvertising, training, and businessdevelopment plans. In contrast, abusiness opportunity seller’s assistanceis often limited to the initial phase ofthe purchaser’s business, such aslocating vending machines or providingpurchasers with an initial list ofaccounts.

Second, consistent with its goal ofstreamlining the Rule whereverpossible, the Commission also proposesto eliminate from the current definitionof ‘‘franchise’’ the alternative that thefranchisee ‘‘indirectly or directly [is]required to meet the quality standardsprescribed by [the franchisor.]’’ 16 CFR§ 436.2(a)(1)(i)(a)(2). The Commissionbelieves that quality standards aresimply one form of control that afranchisor may impose on a franchisee.As long as the Rule retains the moreinclusive ‘‘control’’ element, the specific‘‘quality standards’’ element appears tobe unnecessary.

Finally, the Commission proposes tomodify the definition of the term‘‘franchise’’ to incorporate three long-standing Commission policies. Therevised definition makes clear that: (1)A relationship will be deemed afranchise if it meets the threedefinitional elements of a franchise,regardless of what it may be called; 46 (2)a business relationship will be deemeda franchise if it is offered or representedas having the characteristics of afranchise, regardless of any failure onthe franchisor’s part to perform aspromised; 47 and (3) the term ‘‘payment’’includes payments ‘‘by contract or bypractical necessity.’’ 48

h. Proposed Section 436.1(h)(‘‘Franchise Seller’’)

Proposed section 436.1(h) introducesa new term—‘‘franchise seller.’’ Thisdefinition combines the current terms‘‘franchisor’’ and ‘‘franchise broker’’into a single concept. The Commissionbelieves that this approach willstreamline the Rule considerably.Currently, whenever the Rule refers tothe obligation to furnish disclosuredocuments, it must specifically refer toboth franchisors and franchise brokers.

Not only is this reference longer thannecessary, it is incomplete because itdoes not specifically include thefranchisor’s employees, salesrepresentatives, and agents who alsomay sell franchises and have anobligation to furnish disclosures.Accordingly, the term ‘‘franchise seller’’refers to all parties having an obligationto provide disclosure documents. At thesame time, the definition adopts long-standing Commission policy that afranchisee seeking to sell its own outletis not covered by the Rule.49

i. Proposed Section 436.1(i)(‘‘Franchisee’’)

Proposed section 436.1(i) simplifiesthe current definition of the term‘‘franchisee.’’ The current Rule definesthe term ‘‘franchisee’’ in an awkwardand circular fashion: ‘‘any person (1)who participates in a franchiserelationship as a franchisee, as denotedin paragraph (a) of this section, or (2) towhom an interest in a franchise is sold.’’16 CFR § 432.(d). The revised definitiondeletes unnecessary references to otherRule sections and focuses on the grantof an interest in a franchise, which isthe core issue triggering a franchisor’sdisclosure obligations.

j. Proposed Section 436.1(j)(‘‘Franchisor’’)

Similarly, proposed section 436.1(j)streamlines the definition of the term‘‘franchisor.’’ The proposed definitiondeletes unnecessary references to otherRule sections and focuses on the grantof an interest in a franchise.

k. Proposed Section 436.1(k) (‘‘GagClause’’)

Proposed section 436.1(k) introducesa new term—‘‘gag clause.’’ 50 Asdiscussed in greater detail below atSection C.8.t., the Commission proposesto amend the Rule to require franchisorsto disclose information about gagclauses, namely contractual provisionsthat prohibit or restrict existing orformer franchisees from discussing withprospective franchisees theirexperiences as franchisees. Theproposed definition focuses exclusivelyon a franchisee’s ability to discuss hisor her personal experience as afranchisee within a franchisor’s system.It does not include a confidentiality

agreement between a franchisor and acompany officer who happens to be afranchisee, and it excludesconfidentiality agreements created toprotect a franchisor’s trade secrets andother proprietary information.

l. Proposed Section 436.1(l) (‘‘Internet’’)Proposed Section 436.1(l) is new. It

defines the term ‘‘Internet’’ broadly tocapture all communications betweencomputers and between computers andtelevision, telephone, facsimile, andsimilar communications devices. Thisdefinition is necessary because, asexplained in Section C.10. below, theCommission proposes to amend theRule to permit franchisors to complywith the Rule electronically, includingthe use of the World Wide Web and E-mail.51

m. Proposed Section 436.1(m) (‘‘LeasedDepartment’’

Proposed section 436.1(m) (‘‘LeasedDepartment’’). Proposed section436.1(m) greatly streamlines the Rule’sleased department exemption. Leaseddepartments are one of four expressRule exemptions. Currently, the Rulecontains no definition of the term‘‘leased department.’’ Rather, theconcept is explained in the exemptionssection of the Rule as follows:

The provisions of this part shall not applyto a franchise * * * [w]here pursuant to alease, license, or similar agreement, a personoffers, sells, or distributes goods,commodities, or services on or aboutpremises occupied by a retailer-grantorprimarily for the retailer-grantor’s ownmerchandising activities, which goods,commodities, or services are not purchasedfrom the retailer-grantor or persons whom thelessee is directly or indirectly (a) required todo business with by the retailer-grantor or (b)advised to do business with by the retailer-grantor where such person is affiliated withthe retailer-grantor.

16 CFR 436.2(a)(3)(ii). The Commissionbelieves that the proposed reviseddefinition is shorter, clearer, and easierto understand.

n. Proposed Section 436.1(n)(‘‘Material’’)

Proposed section 436.1(n) alsostreamlines the current definition of‘‘material,’’ which is currently definedas:

The terms material, material fact, andmaterial change shall include any fact,circumstance, or set of conditions which hasa substantial likelihood of influencing a



52 See NASAA UFOC Guidelines Commentary(June 21, 1994) Bus. Franchise Guide (CCH) ¶5,800,at 8,466 (Item 4 bankruptcy disclosures).

53 See FTC v. P.M.C.S., Inc., No. 96–5426 (E.D.N.Y. 1996) (franchisor fails to disclose ‘‘silentpartner’’ with prior bankruptcy); FTC v. Why USA,Inc., No. 92–1227–PHX–SMM (D. Ariz. 1992)(franchisor fails to disclose officers and their priorlitigation). See also Lay, 22 Aug 97 Tr at 6(franchisee was not informed that franchisor’sdirector of franchising (who was not a corporateofficer) had been declared bankrupt).

54 Registration Form Used by Open-EndManagement Investment Companies, SEC ReleaseNo. 33–7512, 17 CFR 274.11A.

55 See UFOC Item 1.56 UFOC, Item 1C, Instructions, i.

57 See Final Interpretive Guides, 44 FR at 49967.58 63 FR 14528, 14531 (March 25, 1998).59 See Final Interpretive Guides, 44 FR at 49966.60 See Internet Notice, 63 FR at 24996.

reasonable franchisee or a reasonableprospective franchisee in the making of asignificant decision relating to a namedfranchise business or which has anysignificant financial impact on a franchiseeor prospective franchisee.

16 CFR § 436.2(n). The proposeddefinition eliminates the Rule’s currentreference to ‘‘significant financialimpact.’’ The Commission believes thatthis reference is redundant in that anycircumstance impacting upon a person’sfinances would also necessarilyinfluence his or her decision-makingprocess. Accordingly, the proposedrevision is not a substantive change, butsimply part of the Commission’s effortto streamline the Rule where possible.

o. Proposed Section 436.1(o) (‘‘Officer’’)

Proposed section 436.1(o) adds a newdefinition—‘‘officer.’’ 52 Althoughseveral Rule disclosures pertain to thefranchisor’s officers—such as thedisclosures for litigation andbankruptcies—the Rule currently doesnot specifically define the term‘‘officer.’’ Rather, in the litigationdisclosure, the Commission givesexamples of an officer, including ‘‘thechief executive and chief operatingofficer, financial, franchise marketing,training, and service officers.’’ 16 C.F.R§ 436.1(a)(2). The proposed definitionmakes clear that franchisors mustdisclose information about all officers,including de facto officers, withsignificant managerial responsibilitiesfor marketing and/or servicingfranchises. The Commission believesthat this proposed Rule amendment isnecessary to eliminate any doubt thatthe Rule is to be read broadly, capturingall individuals who function as officers,whether or not they are named in thefranchisor’s incorporation papers orcarry a particular corporate title.53

p. Proposed Section 436.1(p) (‘‘Person’’)

Proposed section 436.1(p) retains theRule’s current definition of the term‘‘person’’ set out at 16 CFR § 436.2(b).

q. Proposed Section 436.1(q) (‘‘PlainEnglish’’)

Proposed section 436.1(q), a newdefinition, defines the term ‘‘plainEnglish.’’ This definition is necessary

because, as discussed below at SectionC.9., the Commission proposes to adopta requirement that franchisors writetheir disclosure documents in plainEnglish, consistent with the UFOCGuidelines. The proposed definition of‘‘plain English’’ is modeled after theSecurities and Exchange Commission’s(‘‘SEC’’) plain English requirement, setforth in the recently promulgatedmutual fund regulations.54

r. Proposed Section 436.1(r)(‘‘Predecessor’’)

Proposed section 436.1(r) introduces anew term—‘‘predecessor.’’ Becauseseveral of the proposed Rule’sdisclosures pertain to a franchisor’spredecessors, the Commission hasincorporated the UFOC’s definition ofthat term.55 The Commission alsoproposes to enhance the UFOCdefinition to make clear that the term‘‘predecessor’’ includes any person fromwhom the franchisor has obtained theright to use the trademark or tradesecrets associated with the franchisesystem.

s. Proposed Section 436.1(s) (‘‘PrincipalBusiness Address’’

Proposed section 436.1(s) introduces anew term—‘‘principal businessaddress,’’ modeled after the UFOC’sdefinition of that term.56 The proposeddefinition makes clear that a franchisormust use its principal street address, nota post office box or private mail drop.The Commission believes the proposedamendment will reduce fraud infranchise sales by making it easier forprospective franchisees to find andinvestigate the franchisor and itsprincipals.

t. Proposed Section 436.1(t)(‘‘Prospective Franchisee’’

Proposed section 436.1(t) follows thecurrent Rule’s definition of the term‘‘prospective franchisee’’ set out at 16CFR § 436.2(e). However, where thedefinition refers to ‘‘franchisor orfranchise broker,’’ the Commission hasrevised the definition to substitute thenew term ‘‘franchise seller,’’ asdiscussed above.

u. Proposed Section 436.1(u) (‘‘RequiredPayment’’

Proposed section 436.1(u) is new. Thecurrent Rule does not specifically definethe term ‘‘required payment.’’ Proposedsection 436.1(u) defines that term inaccordance with long-standing

Commission policy that a payment canbe required by contract or by practicalnecessity.57

v. Proposed Section 436.1(v) (‘‘Sale of aFranchise’’

Except for some minor editing, thedefinition of ‘‘franchise sale’’ is thesame as that set out at 16 CFR § 436.2(k).

w. Proposed Section 436.1(w)(‘‘Signature’’)

Proposed section 436.1(w) introducesa new term—‘‘signature.’’ As discussedin Section C.10. below, the Commissionproposes to amend the Rule to permitfranchisors to use electronic media tofurnish disclosure documents undercertain conditions, provided prospectivefranchisees confirm their identity bysigning an acknowledgment of receipt.Modeled after the Federal ReserveSystem’s Interim Rule AmendingRegulation E, implementing theElectronic Fund Transfer Act(‘‘EFTA’’),58 the proposed definition isflexible, permitting franchisees toconfirm their identity by alternativemeans, such as the use of digitalsignatures and passwords.

x. Proposed Section 436.1(x)(‘‘Trademark’’)

Proposed section 436.1(x) adopts theCommission’s long-standing definitionof the term ‘‘trademark’’ to includeservice marks, logos, and othercommercial symbols.59

y. Proposed Section 436.1(y) (‘‘Written’’)

Proposed section 436.1(y) defines theterm ‘‘written’’ to include electronicmedia, such as computer disk and theInternet. This definition is necessarybecause, as discussed below at SectionC.10., the Commission proposes toamend the Rule to permit franchisors tofurnish disclosures electronically. Theproposed definition clarifies thatelectronic media fall within the ambit ofa ‘‘written’’ document.60

5. Proposed Section 436.2: Furnishingand Preparing Disclosure Documents

a. Scope of the Rule

Proposed section 436.2 begins with anew provision that limits the Rule’sscope to the sale of franchises in theUnited States, its possessions, orterritories. The overwhelming numberof ANPR commenters who address thisissue urge the Commission to limit theRule’s application to domestic franchise



61 E.g., SBA Advocacy, Comment 36, at 9; Loeb &Loeb, Comment 63, at 2; IFA, Comment 82, at 3–4; Jeffers, Comment 116, at 7; CA Bar, Comment124, at 2–3; Cendant, Comment 140, at 2 and 4–5.

62 Brown, Comment 4, at 4–5, and Comments 6,96, and 103; Stubbings, Comment 21, at 1; Embassyof Argentina, Comment 132, at 1; Selden, Comment133, at 2–3.

63 Brown, Comments 6, at 2; Embassy ofArgentina, Comment 132, at 1; Selden, Comment133, at 2.

64 Selden, Comment 133, at 2. See also Stubbings,Comment 21, at 1.

65 Brown, Comments 4, at 3; 6, at 2; 103, at 15–16.

66 Hogan & Hartson reviewed the Commission’sRule, as well as the UFOC Guidelines, and observedthat many of the provisions are limited todisclosures involving the domestic market. Forexample, UFOC Item 20 refers to the number offranchise sales ‘‘in this state.’’ Hogan & Hartson,Comment 28, at 3.

67 See Cendant, Comment 140, at 4.68 See Branch v. FTC, 141 F.2d 31 (7th Cir. 1944).

But see Nieman v. Dryclean U.S.A. FranchiseCompany, Inc., lll F.3d lll (11th Cir. June21, 1999).

69 Even some commenters favoring the ANPRproposal that the Commission limit the Rule’s scopeacknowledge that the Commission will retain itsauthority under section 5 to target Americancompanies that may fraudulently sell franchisesabroad. E.g., Hogan & Hartson, Comment 28, at 4.

70 See 16 CFR 436.2(g).

72 16 CFR 436.1(a); 436.2(o).72 16 CFR 436.1(a); 436.2(f)–(g).73 62 FR at 9122.74 For example, Kennedy Brook observes that

franchise sales can occur entirely electronically‘‘where the contact is made over the Web, where E-mail is exchanged, where telephone [calls] areexchanged, where documents are sent out byFederal Express, and where, in fact, there never isa face-to-face meeting.’’ Brooks, 18 Sept 97 Tr at160. See also NCL, Comment 35, at 4–5; SBAAdvocacy, Comment 36, at 9; Kestenbaum,Comment 40, at 2; IL AG, Comment 77, at 3–4;Winslow, Comment 85, at 1.

75 E.g., Duvall, Comment 19, at 3; Baer, Comment25, at 6; Loeb & Loeb, Comment 63, at 2; Tifford,Comment 78, at 7–8; IFA, Comment 82, at 4.

76 Hogan & Hartson, Comment 28, at 9. KennethCostello also observes that in the SBP and FinalInterpretive Guides the Commission drew adistinction between sales via mail or telephone andface-to-face meetings because the latter could beprone to high pressure sales. He notes that Internetsales require an affirmative action on the part of theprospective franchisee to investigate a franchisorvia modem, ‘‘a connection that is even more readilybroken than a telephone call.’’ Loeb & Loeb,Comment 63, at 2.

77 Baer, Comment 25, at 6.

sales.61 Only four commenters 62 urgethe Commission to enforce the Ruleinternationally, raising essentially threearguments: (1) It would be inconsistentfor a franchisor to subject a foreigner toAmerican law and American courtsthrough contractual choice of venue andchoice of law provisions withoutsimultaneously extending the benefit ofAmerican law, namely pre-saledisclosure; 63 (2) American citizens whopurchase a franchise abroad would notbe protected by American law; 64 and (3)the Commission has jurisdiction overforeign franchise sales and should notwillingly restrict its own jurisdiction.65

The Commission believes that therecord adequately supports its tentativefinding in the ANPR that mandated pre-sale disclosure in internationalfranchise sales is unnecessary, may bemisleading, and may impedecompetition. The Commissiondeveloped a pre-sale disclosure rule inresponse to problems occurring in thedomestic market.66 None of the fourANPR commenters noted above offerdata or other evidence tending to showthat fraud or deception by Americancompanies engaging in internationalfranchises sales is prevalent.

Further, the record strongly supportsthe view that franchises are soldinternationally to sophisticatedinvestors who are generally representedby counsel or who otherwise can protecttheir own interests. Moreover, there isno evidence in the record that adisclosure document addressing theAmerican market would be beneficial toa prospective foreign investor. Just theopposite appears to be true. Such adocument may be irrelevant andpotentially misleading when given to aforeign investor (or an Americaninvesting in a foreign market) because ofvast differences between American andforeign markets, cultures, and legalsystems. Risks to the investor would

arise primarily from economicconditions and cultural values in thosecountries, not in the United States. Fora disclosure document to be relevant, afranchisor would have to prepareindividual disclosure documentstailored to each specific foreign market.Such a requirement, however, wouldvery likely impose extraordinaryburdens and costs on franchisors andwould impede competition withcompanies from countries withoutsimilar disclosure obligations,67 despitethe lack of evidence in the record offraud or deception in foreign franchisesales.

Finally, by limiting the application ofthe Rule to domestic franchise sales, theCommission is not restricting its ownjurisdiction. Assuming that theCommission has jurisdiction overforeign franchise sales,68 it will continueto do so even if the Rule is amended asproposed in the ANPR. Accordingly, inappropriate circumstances, theCommission may address unfair ordeceptive franchise sales abroad,consistent with its authority undersection 5.69

b. Proposed Section 436.2(a): ObligationTo Furnish Documents

Proposed section 436.2(a) sets forththe Rule’s two principal disclosureobligations: It is a violation of section 5of the FTC Act for any franchise sellerto fail to furnish prospective franchiseeswith a copy of the franchisor’sdisclosure document and the completedfranchise agreement within the specifictime frames discussed below. Consistentwith current Commission policy, thissection also provides that the obligationto furnish documents can be satisfiedeither by the franchisor itself or byanother franchise seller.70 At the sametime, it makes clear that all franchisesellers—including the franchisor’s salesrepresentatives and third-partyfranchise sellers—can be heldindividually liable for their failure tofurnish prospective franchisees with therequired disclosure documents.

c. Proposed section 436.2(a)(1): 14-DayDisclosure Review Period

Proposed section 436.2(a)(1) requiresfranchisors to furnish prospective

franchisees with disclosure documents14 days before the franchisee signs abinding agreement or pays any fee inconnection with the franchise sale. Thisprovision modifies the current Ruleprovision that requires franchisors tofurnish disclosure document at theearlier of the first personal (face-to-face)meeting 71 or at least 10 business daysbefore the franchisee signs a bindingagreement or pays a fee.72

In the ANPR, the Commissionquestioned whether the Rule’s currentrequirement that franchisors provideprospective franchisees with adisclosure document at the firstpersonal meeting continues to serve auseful purpose. Recognizing that theterm ‘‘personal meeting’’ may beobsolete in light of the growing use ofthe telephone, facsimile machines, andthe Internet as vehicles of commerce,the Commission asked whether theCommission should replace the term‘‘personal meeting’’ with the term ‘‘firstsubstantive discussion.’’ 73

Several commenters agree that theterm ‘‘personal meeting’’ has becomeirrelevant in an era where even largeinvestments are made by telephone orvia the Internet.74 Many franchisors andtheir representatives, however, opposechanging the term ‘‘personal meeting’’to ‘‘substantive discussion.’’ Theybelieve that the term ‘‘substantivediscussion’’ is ambiguous,75 and wouldnot reach Internet sales, wherepresumably no actual discussion takesplace.76 Others fear that franchisors,who may receive countless telephonecalls in a day, may have to stop talkingwith callers, lest they trigger the Rule’sdisclosure obligations.77 Severalcommenters urge the Commission to



78 Duvall, Comment 19, at 3; Baer, Comment 25,at 6; Tifford, 18 Sept. 97 Tr at 158–59.

79 E.g., Wieczorek, 6 Nov 97 Tr at 25–26.

80 See FTC v. Amy Travel Serv., 875 F.2d 564, 573(7th Cir. 1989); FTC v. Minuteman Press, Bus.Franchise Guide (CCH) ¶ 11,516 at 31,253 (E.D.N.Y.1998); United States v. The Building Inspector ofAmerica, 894 F. Supp. 507, 518–20 (D. Mass. 1995);FTC v. Jordan Ashley, Bus. Franchise Guide (CCH)¶70,570 at 72,096 (S.D. Fla. 1994); FTC v. Kitco ofNevada, 612 F. Supp. 1282, 1292 (D. Minn. 1985);Under this standard, the Commission has broughtnumerous actions naming not only owners andcorporate officers, but others who are instrumentalin the fraud. E.g., FTC v. FutureNet, Inc. No. 98–1113 GHK (AIJx) (C.D. Cal. 1998); FTC v. InternetBus. Broad., Inc., No. WMN–98–495 (D.Md. 1998);United States v. Toys Unlimited Int’l, Inc., No. 97–08592 Highsmith (S.D. Fla. 1997); FTC v. Audiotex

Connections Inc., No. CV–97–726 (DRH) (VVP)(E.D.N.Y. 1997).

81 Heron, Comment 80, at 1. See also G. Gaither,Comment 69, at 1; Dady & Garner, Comment 127,at 3.

82 See Murphy, Comment 2 at 2; Maloney,Comment 38, at 1; Heron, Comment 80, at 1; Kezios,18 Sept 97 Tr at 10; Karp, 19 Sept 97 Tr at 89–90.

83 E.g., Simon, 18 Sept 97 Tr. at 9; Kestenbaum,id. at 9–10; Cantone, id. at 10.

84 Cendant, Comment 140, at 3; Forseth, 18 Sept97 Tr at 11–12; Simon, id., at 12–13, Kestenbaum,id., at 12.

85 For example, the choice of venue and choiceof law disclosures repeat what is already disclosedin the text of Item 17.

eliminate the personal meeting triggeraltogether and, as an alternative, requirefranchisors to furnish disclosures aminimum number of days prior to thefranchise sale.78

The Commission agrees that thepersonal meeting disclosure trigger hasbecome obsolete in the communicationsage where prospective sellers nowcommunicate with buyers through awide array of communications media,including facsimile machine, E-mail,and the Internet. Accordingly, proposedsection 436.2(a)(1) streamlines the Ruleby eliminating the first personal meetingtrigger. As long as the prospectivefranchisee has a minimum number ofdays in which to review the franchisor’sdisclosures, that should suffice tocombat deceptive franchise sales. A pre-sale review period can also function asa ‘‘cooling-off’’ period, enablingprospective franchisees to resist highpressure sales techniques. TheCommission also proposes to streamlinethe Rule further by creating a bright line14-day review period in lieu of theRule’s current ‘‘10 business days’’provision. The term ‘‘10 business days’’may be unnecessarily confusing becausefranchisors must remember to includeall federal holidays, some of which arenot observed in every state. In addition,in most instances, 10 business days asa practical matter amounts to 14 days.

d. Proposed Section 436.2(a)(2): Five-Day Contract Review Period

Proposed section 436.2(a)(2)streamlines the Rule further byrequiring franchisors to affordprospective franchisees at least five daysto review the completed franchiseagreement. This would modify thecurrent Rule provision found at 16 CFR436.1(g) that requires franchisors tofurnish prospective franchisees with acopy of the completed agreement ‘‘atleast 5 business days prior to the datethe agreements are to be executed.’’ TheCommission recognizes that fivebusiness days usually means sevendays. However, the Commissionbelieves that a seven-day contractreview requirement might beburdensome for both franchisors andfranchisees who often want to sign afranchise agreement quickly in order tocement their deal.79 The Commissionbelieves that a five-day review periodstrikes the right balance betweenaffording prospective franchisees timeto review the completed contract and

accommodating the parties’ desire tomove the deal forward.

e. Proposed Section 436.2(b): FurnishingDisclosures

Proposed section 436.2(b) providessome additional guidance on whatconstitutes ‘‘furnishing’’ disclosures. Itmakes clear that franchisors can complywith the Rule’s timing provisions bydelivering a paper copy, or transmittingan electronic copy of documents, beforethe required date. It also clarifies thatfranchisors who wish to maildocuments should do so by first classmail and by adding an additional threedays in order to ensure that theprospective franchisee receives thedocuments in the time frame requiredby the Rule. Otherwise, it is possiblethat a prospective franchisee mayreceive a copy of the completedfranchise agreement, for example, onlya day or two before he or she isscheduled to sign the agreement. TheCommission believes that thisclarification is essential if theCommission, as proposed above,shortens the timing provision forreviewing completed contacts from‘‘five business days’’ to a bright line‘‘five days.’’

f. Proposed Section 436.2(c): Form ofthe Disclosures

Proposed section 436.2(c) providesthat it is a violation of section 5 of theFTC Act for a franchisor to fail toinclude the information and follow theinstructions set forth in sections 436.3–436.8 of the Rule. It also clarifies thestandard of liability for Rule violations.Currently, franchise brokers are jointlyliable with the franchisor for the contentof a disclosure document. Proposedsection 436.2(c) makes clear thatfranchise sellers other than thefranchisor will be liable for the contentof a disclosure document only if theyknew or should have known of theviolation. This is consistent with thestandard of individual liability forsection 5 violations, as articulated bynumerous courts since the Rule waspromulgated in the 1970’s.80

6. Proposed Section 436.3: The CoverPage

Proposed section 436.3 requires allfranchisors to begin their disclosureswith an FTC cover page that informsprospective franchisees that they arereceiving important information aboutthe franchise offering. The Commissionproposes to modify the current coverpage requirement, however, to addressseveral suggestions raised in response tothe ANPR. For example, a fewfranchisees and their supporters urgethe Commission to require morebackground information on franchising,its risks, and applicable laws.81 Theyalso contend that phrases in the currentcover page such as ‘‘information * * *required by the Federal TradeCommission’’ and ‘‘to protect you’’ aremisleading because they imply greaterfederal oversight of franchise offeringsthan actually exists.82 Severalfranchisors also urge the Commission tocoordinate with the states to produce asingle, uniform cover page,83 and a fewquestion the value of risk factors andwhether the Commission could, as apractical matter, require the disclosureof risk factors on a national basis.84

The Commission agrees with thosecommenters who urge the Commissionto promote greater uniformity with statedisclosure laws. Accordingly, proposedsection 436.3 includes the UFOCrequirements that the cover pageinclude, for example, the franchisor’sname, logo, brief description of thefranchised business, total purchaseprice, and a notice that comparativeinformation is available. TheCommission, however, is not inclined toadopt the UFOC’s requirement thatfranchisors disclose specific risk factorson the cover page. First, theCommission notes that the two currentUFOC mandated risk factors (choice ofvenue and law) merely repeat what isalready required to be disclosed in thedisclosure document itself.85 Moreover,including these two risk factors in theFTC cover page might incorrectly signalprospective franchisees that these arethe most important risk factors for



86 See Tifford, 18 Sept 97 Tr at 15–16.87 See Heron, Comment 80, at 4.88 See Cordell, 6 Nov 97 Tr at 156.89 One commenter notes that only a minority of

prospective franchisees use competent counselbefore making an investment decision. He suggeststhat the Commission essentially require franchiseesto seek professional guidance before making aninvestment decision. Murphy, Comment 2, at 1. TheCommission believes such a regulation would beoverly intrusive. Nonetheless, in keeping with Mr.Murphy’s suggestion, the Commission proposesstrengthening the cover page’s consumer educationmessage by replacing the current Rule language (‘‘If

possible, show * * *’’), with the stronger ‘‘Showyour contract and this disclosure document to anadvisor, like a lawyer or an accountant.’’

90 In response to the ANPR, no commenters raisedany concerns about UFOC Item 1, upon whichproposed section 436.5(a) is based.

91 E.g., FTC v. Wolf, Bus. Franchise Guide (CCH)¶ 10,401 (S.D. Fla. 1994); FTC v. Inv. Dev., Inc., Bus.Franchise Guide (CCH) ¶ 9,326 (E.D. La 1989).

92 E.g., FTC v. Car Checkers of America, Inc., Bus.Franchise Guide (CCH) ¶ 10,163 (D.N.J. 1993); U.S.v. Lifecall Sys.,Inc., Bus. Franchise Guide (CCH)¶ 9,677 (D.N.J. 1990).

93 E.g., Packer, Comment 10, at 1; Manuszk,Comment 13, at 1; Gray, Comment 22, at 1; Lopez,Comment 123, at 1.

94 See Vidulich, 22 Aug 97 Tr at 16–17.

consumers to consider. Second, as apractical matter, the Commission cannotformulate a list of specific risk factorsthat would be relevant to all franchisesystems on a national basis, nor does theCommission have the ability to requirerisk disclosures on an individualfranchise system basis. Nonetheless, theCommission recognizes that statefranchise examiners may requirefranchisors to include various riskfactors on the cover page and that suchdisclosures may serve a useful purpose.In an effort to harmonize federal andstate disclosure laws, proposed section436.3 makes clear that franchisors arepermitted to include risk factors on thecover page, if they are required to do sounder state law.86

Proposed section 436.3(b) alsoupdates the current cover pageprovision to reflect the growing use ofthe Internet by franchisors. Accordingly,it requires franchisors to include their E-mail address and Internet home page, ifapplicable, on the cover page. Thisinformation should enable a prospectivefranchisee to communicate more readilywith the franchisor. Proposed section436.3(g)(2) also requires franchisors toinclude additional statements on thecover page if they wish to comply withthe Rule electronically, such as theInternet. These requirements areexplained more fully below at SectionB.10.

Based upon the comments received,the Commission also proposes toinclude references to additionalresources to enable prospectivefranchisees to conduct a due diligenceinvestigation of the franchise offering.To that end, proposed section436.3(g)(3) includes a reference to theCommission’s home page 87 whereconsumers can find resources onfranchising, and a reference to theCommission’s Guide to Buying aFranchise.88 In addition, proposedsection 436.3(g)(4) adds new language tothe cover page pointing out thedifference between a disclosuredocument and a franchise agreementand stresses the need for prospectivefranchisees to understand theircontract.89

Finally, proposed section 436.3eliminates arguably misleadinginformation from the current cover page,namely, the phrases ‘‘information * * *required by the Federal TradeCommission’’ and ‘‘to protect you.’’ Tothe extent that some prospectivefranchisees may misinterpret the phrase‘‘to protect you’’ as implying a greaterrole on the Commission’s part, thedisadvantages of including suchlanguage would appear to outweigh anyminimal benefit. Nonetheless, proposedsection 436.3 retains the statement thatthe Commission has not checked thedisclosures for accuracy. TheCommission believes this statement isessential to warn prospectivefranchisees not to rely on thefranchisor’s disclosures at face value.

7. Proposed section 436.4: Table ofContents

Proposed section 436.4 sets forth atable of contents, which tracks the orderof the required disclosures. For the mostpart, the proposed table of contentsfollows the text set forth in the UFOCGuidelines. The titles of four disclosureitems, however, have been changed. TheCommission believes that these changesbetter capture the essence of therespective disclosure provisions. First,Item 7 has been changed from ‘‘InitialInvestment’’ to ‘‘Estimated InitialInvestment.’’ Second, Item 11 has beenchanged from ‘‘Franchisor’sObligations’’ to ‘‘Franchisor’sAssistance, Advertising, ComputerSystems, and Training.’’ Third, Item 19has been changed from ‘‘EarningsClaims’’ to the more inclusive term‘‘Financial PerformanceRepresentations.’’ Finally, Item 20 hasbeen changed from ‘‘List of Outlets’’ to‘‘Outlets and Franchisee Information.’’

8. Proposed Section 436.5: The RequiredDisclosure Items

Proposed section 436.5 sets forth therequired disclosure items. For the mostpart, these proposed disclosures aresubstantially similar to the disclosurerequirements specified in the UFOCGuidelines. The Commission, however,believes it is important to retain a fewcurrent Rule disclosure provisions thatare broader than the comparable UFOCprovisions and to enhance the UFOCdisclosures in a few instances basedupon the record and the Commission’slaw enforcement experience.

a. Proposed Section 436.5(a): Item 1(The Franchisor, Its Parent,Predecessors, and Affiliates)

Proposed section 436.5(a) is modeledafter UFOC Item 1.90 It requires thedisclosure of background informationon the franchisor, as well as its parent,predecessors, and affiliates. Proposedsection 436.5(a) improves thecomparable Rule disclosures currentlyfound at 16 CFR 436.1(a)(1), (a)(3), and(a)(6) in three material respects. First,franchisors must disclose informationabout their predecessors. This provisionis necessary to prevent franchisors fromavoiding disclosure obligations bysimply assuming a new corporatename.91 Second, franchisors mustdisclose any regulations specific to theindustry in which the franchisebusiness operates, such as necessarylicenses or permits, that may affect thefranchisees’ ability to conduct businessas well as costs.92 An explanatoryfootnote accompanies the Rule’s text tohelp franchisors distinguish betweengeneral and industry-specificregulations. Third, franchisors mustdescribe the general competitionprospective franchisees are likely toface, which better ensures thatprospective franchisees will understandthe likely economic risks in purchasinga franchise. The Commission believesthat a disclosure about likelycompetition is warranted in light ofnumerous franchisee complaintsconcerning competition issues.93

At the same time, proposed section436.5(a) retains one feature of thecurrent Rule, namely the disclosure ofinformation about any parent of thefranchisor. The Commission believesthat information about a franchisor’sparent may be highly material to aprospective franchisee. For example, aparent corporation may directlycompete with the franchisees by offeringfranchises under a different trademarkor by operating or acquiring a competingfranchise system.94 For this reason, theCommission decided to require thedisclosure of information about a parentwhen it promulgated the Ruleoriginally, even though it recognized



95 SBP, 43 FR at 59639.96 SBP, 43 FR at 59640. See, e.g., FTC v. Car

Checkers, Bus. Franchise Guide (CCH) ¶ 10,163 at24,043; FTC versus Nat’l Consulting Group, Inc.,Bus. Franchise Guide (CCH) ¶ 11,335 (N.D. Ill1998); FTC v. Levinger, No. 94–0925–PHX RCB (D.Ariz. 1994). Cf. FTC v. Goddard Rarities, Inc., No.CV93–4602–JMI (C.D. Cal. 1993).

97 In response to the ANPR, no commenter raisedany concerns about UFOC Item 2, upon whichproposed section 436.5(b) is based.

98 Cf. 16 CFR 436.1(a)(3).99 Only one commenter, Gary Duvall, criticizes

the current UFOC Item 3 disclosure, upon whichproposed section 436.5(c) is based. Among otherthings, Mr. Duvall suggests that franchisors shouldalso be able to disclose cases that are resolved intheir favor, noting that it might be difficult todistinguish between a dismissal without anyliability from a settlement where both partiesreceived some benefit. Duvall, Comment 19, at 1–2. In addition, he opposes the disclosure ofconfidential settlements, asserting that it‘‘discourages settlement of disputes, and therebyencourages prolonging of litigation and arbitration.’’Duvall, Comment 83, at 1. The Commission,however, finds that a franchisor can always err onthe side of caution and disclose a suit if it is notsure whether or not it is covered by Item 3. Inaddition, nothing in the Rule would prohibit afranchisor from making any consistent, truthfulinformation known to prospective franchiseesoutside of the disclosure document. TheCommission further believes that confidentialsettlements provide prospective franchisees withmaterial information needed to assess the franchiseoffering. Mr. Duvall has submitted no statistics ordata to support his bald assertion that the requireddisclosure of confidential settlements causes harm.

Accordingly, the Commission has no basis toconclude that the benefits of such disclosure areoutweighed by any costs.

100 See, e.g., FTC v. Inc. Dev., Inc., No. 89–0642(E.D. La. 1989); FTC v. Hayes, No. 4:96CV06126SNL(E.D. Mo. 1996). See also Marks, 19 Sept 97 Tr at8.

101 This disclosure is entirely consistent withlong-standing Commission policy that a franchisor’scontinued financial viability and ability to performas promised is material to a potential investor. See,e.g., SBP, 43 FR at 59650–51, and 59682.

102 When NASAA revised the UFOC in 1993, itexplained that all settlements must be disclosed,regardless of any confidentiality clause they maycontain. Recognizing that franchisors may havecontractual restrictions on disclosing the existenceof confidential settlements, NASAA made thedisclosure requirement prospective—onlyconfidential settlements entered into after April 15,1993, (the date NASAA approved the revised UFOCGuidelines) must be disclosed. Proposed footnote 4makes clear that the Commission will follow theNASAA approach.

103 See 16 CFR 436.1(a)(4)(ii)(B); UFOC, Item 3, A.

104 62 FR at 9120–21.105 SBA, Comment 36, at 4–5; AFA, Comment 62,

at 2; IL AG, Comment 77, at 2; Lagarias, Comment125, at 3; Selden, Comment 133, Appendix B, at 2;Karp, 19 Sept 97 Tr at 98.

106 E.g., Kaufmann, Comment 33, at 4.107 E.g., Quizno’s, Comment 16, at 1; Kaufmann,

Comment 33, at 4; IFA, Comment 82, at 1–2;Cendant, Comment 140, at 3.

108 E.g., Kestenbaum, Comment 40, at 1; Tifford,Comment 78, at 3.

109 E.g, Kaufmann, Comment 33, at 4; Tifford,Comment 78, at 3; Cendant, Comment 140, at 3. Onthe other hand, Carl Jeffers, a franchise consultant,suggests that the disclosure of franchisor-initiatedsuits could be viewed as a ‘‘positive attribute,’’showing that the franchisor is willing to enforce itsstandards and trademark, and is willing toeliminate aggressively continuing violations of itsfranchise agreement. Jeffers, Comment 116, at 1–2.

110 E.g., Baer, Comment 25, at 3; Kaufmann,Comment 33, at 4. See also Forseth, 18 Sept 97 Trat 20.

111 Baer, Comment 25, at 3.

that the UFOC Guidelines had nocomparable disclosure requirement.95

b. Proposed Section 436.5(b): Item 2(Business Experience)

Proposed section 436.5(b), anotheranti-fraud provision, requires afranchisor to disclose the businessexperience of the company’s officers.The Commission has long recognizedthat the business experience of thefranchisor and its officers is materialbecause it provides the ‘‘prospectivefranchisee with an important indicationof the franchisor’s competence andfinancial soundness.’’ 96 Proposedsection 436.5(b) is substantially similarto UFOC Item 2.97 However, theCommission proposes to add aprovision requiring franchisors todisclose the business experience of anydirector, trustee, general partner, officer,and subfranchisor of any parent whowill have management responsibilityrelating to the offered franchises. TheCommission believes that informationabout all persons having managementresponsibility is material to prospectivefranchisees, regardless of whether theofficer is associated with the franchisoror the franchisor’s parent.98

c. Proposed Section 436.5(c): Item 3(Litigation)

Proposed section 436.5(c) is modeledafter UFOC Item 3.99 It is one of the

most important anti-fraud disclosures,requiring franchisors to disclose certainmaterial litigation involving thefranchisor, its parent, predecessors, andofficers.100 Proposed section 436.5(c)improves the comparable Ruledisclosures currently found at 16 CFR§ 436.1(a)(4) in several material respects.First, it would require franchisors todisclose litigation involvingpredecessors for the first time. Second,it would require a franchisor to disclosecivil actions, other than ordinaryroutine litigation, that may impact uponthe franchisor’s financial condition orability to operate the business.101

Following the UFOC approach,proposed section 436.5(c) also includesthree instructional footnotes, the mostimportant of which advises franchisorson how to disclose settlementagreements that may haveconfidentiality clauses (footnote 4).102

The other footnotes clarify whenfranchisors must disclose dismissedcivil actions (footnote 2) and theinclusion of summary opinions ofcounsel (footnote 3).

At the same time, the Commissionproposes to enhance UFOC Item 3 byretaining the current Rule provisionrequiring the disclosure of litigationinvolving the franchisor’s parent. Inaddition, the Commission would requirefranchisors to disclose pendingfranchisor-initiated law suits againstfranchisees on issues involving thefranchise relationship. Currently, theRule (and UFOC Guidelines) requirefranchisors to disclose only suits thatfranchisees have filed against thefranchisor. A franchisor must disclosesuits it has initiated only if thefranchisee were to file a subsequentcounterclaim.103

Based upon the record, theCommission finds that broader litigation

disclosures are warranted to alertprospective franchisees to potentialproblems in the franchise relationship.In the ANPR, the Commission solicitedcomment on whether it should amendthe Rule’s litigation disclosures torequire franchisors to disclosefranchisor-initiated litigation in allinstances.104 Several commenters favorthe ANPR proposal, asserting thatfranchisor-initiated litigation is materialto prospective franchisees because itsheds light on problems in the franchiserelationship, as well as the extent towhich the franchisor is inclined to uselitigation to resolve disputes.105 Othersoppose the ANPR proposal, maintainingthat franchisor-initiated litigation isimmaterial to prospective franchisees.106

To the extent a franchisee is aggrievedby a franchisor-initiated suit, thefranchisee, in their view, will surely filea counterclaim, which all agree must bedisclosed under current law.107 Theyalso contend that litigation should belimited to suits that imply wrongdoingon the franchisor’s part: franchisor-initiated suits simply demonstrate thatthe franchisor is enforcing its rightsunder the franchise agreement.108 Theyfear that disclosing such litigationwould have a negative connotation toprospective franchisees, implying somewrongdoing on the franchisor’s part.109

They also contend that an expandedItem 3 would ‘‘bulk up’’ disclosuredocuments, thereby increasingcompliance costs.110 One franchisorrepresentative suggests that if theCommission were to require such adisclosure that it consider setting fortha threshold: a franchisor would not haveto make the disclosure unless it hassued at least a certain percentage (i.e.,5%) of the franchisees in its system.111

After carefully considering the ANPRcomments, the Commission proposes toamend the UFOC Item 3 litigation



112 Peter Lagarias observes that ‘‘[f]ranchisors areoften able to wield the threat of litigation, especiallyby threatening to seek attorneys fees, to deterfranchisees from suing or maintaining lawsuitsagainst them. Thus, while loss of a single lawsuitis seldom significant to franchisors, loss of a lawsuitagainst their franchisor is often fatal forfranchisees.’’ Lagarias, Comment 125, at 3. See alsoMerret, Comment 126, at 1; Brandt, Comment 137,at 1; Doe, 7 Nov 97 Tr at 267.

113 See Quinzo’s, Comment 16, at 1.114 Cendant notes that in vicarious liability cases

(where a customer sues the franchisor for allegedwrongdoings by the individual franchisee), thefranchisor often must sue the franchisee to protectits interests and to obtain indemnification. Cendantbelieves that such suits are really between thecustomer and the franchisor and are not indicativeof franchise system performance. Cendant,Comment 140, at 3. The Commission agrees.Accordingly, the proposed Item 3 disclosure wouldrequire franchisors to disclose only those suits theyinitiate against franchisees involving the franchiserelationship. Most often, this would include suitsfor failure to pay royalties or to comply withoperations standards. It would not extend to allsuits filed by the franchisor against the franchisee,such as suits for indemnification for actions outsidethe franchise contract.

115 In response to the ANPR, no commenter raisedany concerns about UFOC Item 4, upon whichproposed section 436.5(d) is based.

116 See 16 CFR 436.1(a)(5).117 Pre-sale disclose of cost information is

prevalent in Commission trade regulation rules.E.g., Trade Regulation Rule Pursuant to theTelephone Disclosure and Dispute Act of 1992(‘‘900 Number Rule’’), 16 CFR 308 at 308.3(b);Telemarketing Sales Rule, 16 CFR 310 at § 310.3;Funeral Industry Practices Rule, 16 CFR 453 at453.2.

118 In response to the ANPR, no commenter raisedany concerns about UFOC Item 5, upon whichproposed section 436.5(e) based.

119 In response to the ANPR, no commenter raisedany concerns about UFOC Item 6, upon whichproposed section 436.5(f) is based.

disclosures by requiring franchisors todisclose material information aboutpending franchisor-initiated litigationinvolving the franchise relationship.There is no doubt that a franchisor mustdisclose a franchisor-initiated lawsuit ifa franchisee files a counterclaim. Inmany instances, however, franchiseesdo not have the financial resources tohire an attorney to initiate a suit or topursue a counterclaim.112 Therefore, thedisclosure of litigation involving thefranchise relationship should notdepend upon which party happens tohave the resources and the ability to filea law suit.

More important, the Commission ispersuaded that franchisor-initiated suitsmay reveal material information to aprospective franchisee. For example, afranchisor may routinely file suit tocollect royalties from franchisees. Suchsuits may show that franchisees areunwilling to pay royalties, or are havingdifficulty making their royaltypayments. The royalty payments may betoo high in light of franchisees’ actualearnings, or the franchisees may beunsuccessful and cannot afford to paythe royalty fee. A pattern of such suitsis highly material to a prospectivefranchisee because it is another sourceof information from which prospectivefranchisees can assess the quality of therelationship with the franchisor andlikelihood of their own success.Moreover, as noted above, theoverwhelming number of commenterswho responded to the ANPR are currentfranchisees voicing various complaintsabout their relationship with thefranchisor. These franchisees continueto argue for more substantive regulationof the franchise relationship. While therecord does not support such a drasticexpansion of the Franchise Rule by theCommission, it does support greaterdisclosure of suits initiated byfranchisors against franchiseespertaining to the franchise relationship.Such disclosure no doubt would shedgreater light on problems within afranchise system.

At the same time, the Commissionshares the commenters’ concerns thatrequiring additional disclosures mayincrease the costs and burdens ofpreparing a disclosure document.Therefore, the Commission proposes tolimit the disclosure of franchisor-

initiated litigation as follows. First, theproposed disclosure is limited to‘‘material’’ franchisor-initiated lawsuits. 113 Arguably, an isolated suitagainst an individual franchisee mightnot be deemed material given thenumber of franchisees in the system.Second, the proposed disclosure islimited to suits involving the franchiserelationship. Franchisors need notdisclose suits they initiated againstsuppliers, advertisers, or other thirdparties. 114 Third, the proposeddisclosure is limited to pendinglawsuits: there is no requirement thatfranchisor-initiated suits be disclosedfor a full 10 years, as franchisors mustdo for suits alleging, for example, fraud.The Commission believes thatrestricting the disclosure to pendinglawsuits is a good compromise thatwould likely be sufficient to show apattern of suits on the franchisor’s partwithout ‘‘bulking up’’ the disclosuredocument and imposing unduecompliance costs.

Finally, the Commission wishes toexplore further the suggestion that afranchisor should be required todisclose franchisor-initiated litigationonly if the franchisor has sued at leasta certain percentage of franchisees in itssystem. At this time, however, therecord is insufficient for theCommission to determine the merits ofthis suggestion. Accordingly, theCommission seeks comment on whethera franchisor-initiated litigationdisclosure should be tied to a thresholdand, if so, what threshold would besufficient.

d. Proposed Section 436.5(d): Item 4(Bankruptcy)

Proposed section 436.5(d) issubstantially similar to UFOC Item 4. 115

It requires franchisors to discloseinformation about any priorbankruptcies. Proposed section 436.5(d)enhances the comparable Rule

disclosures found at 16 C.F.R.§ 436.1(a)(5) in two respects: (1)Franchisors would disclose bankruptcyinformation about their predecessorsand affiliates; and (2) franchisors wouldmake the disclosures for 10 years,instead of the current seven years.Proposed section 436.5(d) also clarifiesthat franchisors must disclose foreignproceedings comparable to bankruptcy.Proposed section 436.5(d) differs fromthe UFOC Guidelines, however, byretaining the Rule’s current requirementthat franchisors include informationabout a parent’s prior bankruptcy. 116

e. Proposed Section 436.5(e): Item 5(Initial Franchise Fee)

Proposed section 436.5(e) begins aseries of three disclosures concerningthe total costs involved in purchasingand operating a franchise. 117 Modeledafter UFOC Item 5, it requiresfranchisors to disclose informationabout the initial franchise fee, includingwhether such fees are refundable. 118

Proposed section 436.5(e) enhances thecomparable Rule disclosures found at 16CFR 436.1(a)(7) by enabling franchisorsto provide a range of fees, instead of afixed fee. Arguably, a franchisor whooffers a franchise at a price that is notreflected in its disclosure documentmight violate the Rule because the sellerhas not provided the prospect withcomplete and accurate pre-saledisclosure of the price terms. In effect,proposed section 436.5(e) clarifies thatfranchisors can negotiate with aprospective franchisee over the initialfranchise fee, without potentiallyviolating the Rule.

f. Proposed Section 436.5(f): Item 6(Recurring or Occasional Fees)

Proposed section 436.5(f), the secondcost disclosure, is substantially similarto UFOC Item 6.119 It requiresfranchisors to disclose recurring feesassociated with operating a franchise(e.g., royalties, advertising fees, andtransfer fees). This disclosure recognizesthat a prospective franchisee’sinvestment is not limited to the initialfranchise fee alone. Rather, a franchisee



120 The failure to disclose all material ongoingcosts involved in using a product or service is aviolation of section 5. See, e.g., FTC v. MinutemanPress Int’l, No. C–93–2496–DRH (E.D.N.Y. 1993);FTC v. SureCheK Sys. No. 1–97–CV–2015 (JTC)(N.D. Ga. 1997); In the Matter of Jenny Craig, 1998FTC Lexis 13 (February 27, 1998); FTC v. DesignTravel, No. C–97–0833 MHP (N.D. Cal. 1993); In theMatter of General Motors, 102 F.T.C. 1741 (1983).Proposed section 436.5(f) is also consistent withmany Commission trade regulation rules thatrequire sellers to disclose post-sale costs andconditions that will impact upon the consumer’sultimate cost in using the product or service. E.g.,Appliance Labeling Rule, 16 CFR 305 at 305.11; 900Number Rule, 16 CFR 308 at 308.3; TelemarketingSales Rule, 16 CFR 310 at 310.3.

121 In response to the ANPR, no commenter raisedany concerns about UFOC Item 7, upon whichproposed section 436.5(g) is based.

122 In response to the ANPR, a few franchiseesreported that their franchisors failed to approvealternative suppliers or made it difficult forfranchisees to find alternative sources of supplies.E.g., Chiodo, 21 Nov 97 Tr at 308–09; Hockert-Lotz,id at 325–327.

123 E.g., Manuszak, Comment 13, at 1; Weaver,Comment 17, at 1; Mueller, Comment 29, at 2;Gagliati, Comment 72, at 1; Buckley, Comment 97,at 1; Rafizadeh, 7 Nov 97 Tr at 288–89; Slimak, 22Aug 97 Tr at 26. See also Kezios, Comment 64, at2–3.

124 Brickner, Comment 128. Brickner adds that healso must purchase specific equipment from onlyone manufacturer and the franchisor is the onlysupplier. Id. See also Buckley, Comment 97 at 3;Myklebust, Comment 101; Chiodo, 21 Nov 97 Tr at293–94.

125 Selden, Comment 133, Appendix B, at 1.126 Zarco, Comment 134, at 2. Harold Brown, a

franchisee advocate, also urges the Commission toprohibit direct and indirect ‘‘kick-backs’’ fromthird-party vendors to the franchisor. Brown,Comment 4 at 3. The Commission, however,believes that proposed section 436.5(h)(5), requiringthe disclosure of revenue to the franchisor fromfranchisee purchases, is sufficient to address thisissue.

127 Only one commenter, Gary Duvall, raises anyconcern about UFOC Item 9, upon which proposedsection 436.5(i) is based. Mr. Duvall suggests thatthe Commission permit a franchisor to opt out ofItem 9 if the franchisor provides prospectivefranchisees with a detailed table of contents orindex to their franchise agreement. Duvall,comment 19, at 2. In an effort to harmonize federaland state disclosure laws, however, the Commissionis inclined to adopt UFOC Item 9 in its entirety.

128 Proposed section 436.5(i) is consistent withother trade regulation rules where the Commissionhas recognized that information about legal risks toconsumers is material. E.g., 900 Number Rule, 16CFR 308 at 308.7 (obligations concerning billingdisputes); Negative Option Rule, 16 CFR 425 at425.1(a)(1)(ii) (minimum purchase obligations);Door-to-Door Sales Rule, 16 CFR 429 at 429.1(e)(obligations regarding cancellations); WarrantyDisclosures, 16 CFR 701 at 701.3(a)(5) (obligationsto obtain performance).

may incur considerable costs in theoperation of the business that willsignificantly impact upon his or herability to continue operations andultimately be successful.120

Consistent with the UFOC Guidelinesapproach, proposed section 436.5(f)enhances the comparable Ruledisclosure provisions found at 16 CFR436.1(a)(8) by adding a disclosure aboutadvertising and purchasing cooperativesfrom which franchisees are required topurchase goods or services. Thefranchisor must also disclose the votingpower of any company-owned outlets inthe cooperative and, if company storevoting power is controlling, the range ofrequired fees charged by the cooperativemust be disclosed. These additionaldisclosures better enable prospectivefranchisees to understand their totalcosts of conducting business.

g. Proposed Section 436.5(g): Item 7(Estimated Initial Investment)

Proposed section 436.5(g), the thirdcost disclosure, requires franchisors todisclose additional expenses necessaryto commence business (e.g., rent,equipment, inventory) in an easy-to-read tabular format. It is based uponUFOC Item 7, which addresses fees paidto third parties.121 Proposed section436.5(g) enhances the comparable Ruledisclosures found at 16 CFR 436.1(a)(7)by requiring franchisors to disclose‘‘additional funds’’ required beforeoperations begin and ‘‘during the initialphase of the franchise.’’ Thisinformation is essentially the same as aworking capital disclosure. The UFOCdefines the term ‘‘initial phase’’ to meanat least three months or a reasonableperiod for the industry. Franchisorsmust also identify the factors, basis, andexperience they have considered indetermining the level of additionalfunds. These disclosures assistprospective franchisees to understandnot only the costs of entering into thebusiness, but their likely operationalcosts until they can break even. These

enhanced disclosures are entirelyconsistent with the Rule’s general policyof requiring full cost and expensedisclosures.

h. Proposed Section 436.5(h): Item 8(Restrictions on Sources of Products andServices)

Proposed section 436.5(h) is one ofseveral Rule provisions that requirefranchisors to state with specificity thelegal obligations and restrictionsimposed on the franchisee. Modeledafter UFOC Item 8, it requires thefranchisor to disclose obligatorypurchases, restrictions on sources ofproducts and services, the conditionsunder which the franchisor will approvealternative supplies or products, and theamount of any rebates the franchisormay receive from required suppliers.Proposed section 436.5(h) enhances thecurrent Rule disclosures found at 16CFR 436.1(a)(9)–(11) by requiringgreater disclosure about thecircumstances under which thefranchisor will authorize substitutegoods 122 and whether, by contract orpractice, the franchisor providesmaterial benefits to franchisees who usedesignated or approved suppliers, suchas permitting renewals or providingadditional outlets. It also requires thedisclosure of purchasing or distributioncooperatives and whether the franchisornegotiates purchase arrangements withsuppliers for the benefit of franchisees.These additional disclosures enableprospective franchisees to assess bettertheir likely costs and benefits, as well astheir independence from the franchisor.

In response to the ANPR, severalcommenters voice concern about sourcerestrictions that prevent franchiseesfrom obtaining comparable supplies atcheaper rates.123 For example, onefranchisee states that franchisors ‘‘putyou in an uncompetitive situation withother people in the same businessbecause you are paying higher than fairmarket value for the price of the goodsthat you receive from them.’’ 124 Thesecommenters generally do not allege that

their franchisors failed to disclosesource restrictions, but complain aboutthe abusive nature of such restrictions.Other commenters, however, questionthe sufficiency of UFOC Item 8, urgingthe Commission to expand Item 8 torequire franchisors to disclose moreinformation about their practices andintentions with respect to the provisionof competitive alternative sources ofsupply,125 or to require franchisors toinclude a specific risk factor aboutsourcing restrictions in their Item 8disclosure.126

The Commission believes that theANPR comments clearly support theproposition that full disclosure aboutsource restrictions and purchasingobligations is warranted. Nonetheless,the Commission believes that proposedsection 436.5(h) strikes the right balancebetween pre-sale disclosure andcompliance costs and burdens, and issufficient to warn prospectivefranchisees about source restrictions,purchase obligations, and approval ofalternative suppliers.

i. Proposed Section 436.5(i): Item 9(Franchisee’s Obligations)

Except for some minor editing,proposed section 436.5(i) is identical toUFOC Item 9.127 There is no counterpartin the current Rule. Proposed section436.5(i) requires franchisors to providean easy-to-understand table that crossreferences the sections of the franchiseagreement and disclosure document thatexplain the franchisee’s legal obligationsin greater detail.128 The Commissionfinds that this proposed disclosureserves an important consumerprotection function, giving prospective



129 As with most of the other disclosures, nocommenters raised any objections to UFOC Item 10,upon which proposed section 436.5(j) is based.

130 Misrepresentations about promised supportand assistance are among the most commonallegations in franchise cases and continue to be asource of numerous franchisee complaints. E.G.,FTC v. Nat’l Consulting Group, Inc., No. 98 C 0144(N.D. III 1998); FTC v. Hayes, No. 4:96CV061126SNL (E.D. Mo. 1996); FTC v. Int’l ComputerConcepts, Inc., No. 1:94CV1678 (N.D. Ohio 1994);United States v. Megatrend Telecomm., Inc., No.3:93 CV 22220 AVC (D.Ct. 1993); FTC v. Intellipay,

Inc., Bus. Franchise Guide (CCH) ¶ 10,061 (S.C. Tx.1992); FTC v. Blanc, Bus. Franchise Guide (CCH)¶ 10,032 (N.D. Ga 1992). See also Lundquist 22 Aug97 Tr at 45; Gray, comment 22, at 1; Dady & Garner,Comment 127, at 4; Mousley, 29 July 97 Tr at 4–7.

131 In response to the ANPR, a few commentersvoiced concerns about maintenance obligationsregarding computer systems and related equipment.E.g. Fetzer, 19 Sept 97 Tr at 42; Rafizadeh, 7 Nov97 Tr at 292. See also NCA–7 Eleven Franchisees,Comment 113, at 2.

132 Brown, comment 4, at 5.

133 Kestenbaum, Comment 40, at 2.134 E.g., FTC v. Int’l Computer Concepts, Inc., No.

1:94CV1678 (N.D. Ohio 1994); FTC v. O’Rourke, No.93–6511 (S.D. Fla. 1993); FTC v. Nat’l Bus.Consultants, Inc., Bus. Franchise Guide (CCH)¶ 9,365 (E.D. La. 1989); FTC v. American SafeMktg., Inc., Bus. Franchise Guide (CCH) ¶ 9,350(N.D. Ga. 1989); FTC v. American Legal Distrib.,Inc., Bus. Franchise Guide (CCH) ¶ 9,090 (N.D. Ga.1988); United States v. C.D. Control Tech., Inc., Bus.Franchise Guide (CCH) ¶ 9,851 (E.D.N.Y. 1985).

franchisees an easy-to-understandroadmap to their franchise agreementand disclosure document, withoutimposing great compliance costs orburdens on franchisors. In addition, thesignificant number of commentsdetailing franchise relationshipproblems would tend to support theneed to provide prospective franchiseeswith more guidance in understandingand reviewing a franchise agreement.

j. Proposed Section 436.5(j): Item 10(Financing)

Proposed section 436.5(j) requires thefranchisor to disclose all the materialterms and conditions of any financingagreements, including the annualpercentage rate, the number ofpayments, penalties upon default, andany consideration received by thefranchisor for referring a prospectivefranchisee to a lender. For the most part,these disclosures are comparable to thedisclosures lenders must make underthe Federal Reserve’s Regulation M(Consumer Leasing), 12 CFR 213, andRegulation Z (Truth in Lending), 12 CFR226. Based upon UFOC Item 10,129

proposed section 436.5(j) enhances thecurrent Rule disclosures found at 16CFR 436.1(a)(12) by requiringfranchisors to disclose any interest onthe financing in terms of an AnnualPercentage Rate, consistent with otherconsumer credit transactions. It alsorequires more disclosure about what thefinancing covers, waiver of defenses,and the franchisor’s practice or intent tosell or assign the obligation to a thirdparty. Proposed section 436.5(j) alsomakes clear that the franchisor mayprovide this information in summarytable format, and Appendix A to theproposed Rule offers a sample table.

k. Proposed Section 436.5(k): Item 11(Franchisor’s Assistance, Advertising,Computer Systems, and Training)

Proposed section 436.5(k) requiresfranchisors to disclose their obligationsto franchisees with respect to pre-opening and ongoing assistance (such assite selection, training, and advertising)in tabular form, with cross references tothe corresponding provisions of thefranchise contract.130 It expands the

comparable Rule provisions found at 16CFR 436.1(a)(17)–(18) by requiringfranchisors to explain in greater detailtheir site selection criteria and thenature of their training program. It alsorequires additional disclosuresconcerning the extent of advertisingassistance and the operation of local,regional, and national advertising co-ops. Proposed section 436.5(k) alsoaddresses major technological changesin franchising since the Rule waspromulgated in the late 1970s.Specifically, it requires greaterdisclosure about the required use ofcomputers and electronic cashregisters.131 The Commission believesthat these disclosures are necessary toaddress frequent franchisee complaintsabout promised assistance and relatedobligations. Each of these expandeddisclosures sheds greater light on thelevel of services and assistancepromised to prospective franchisees, aswell as related franchisee obligations,and therefore are material. The pre-saledisclosure of this information toprospective franchisees is also likely toreduce misunderstandings and conflictduring the franchise relationship.

Two commenters, however, questionthe sufficiency of UFOC Item 11, uponwhich proposed section 436.5(k) isbased. One franchisee advocatecontends that the UFOC Item 11’s short-hand references to the franchise contract‘‘offend[s] the basic purpose of thedisclosure statement, namely, to providethe prospective franchisee with areliably complete description of what isbeing purchased.’’ 132 He urges theCommission to require a franchisor toprovide prospects with a more in-depthanalysis of each of the franchisor’sobligations. A franchisor representativeraises a concern about the disclosuresconcerning computer systems. UFOCItem 11, and by extension proposedsection 436.5(k), require franchisors todisclose information about the nature oftheir computer systems and anyassistance available to franchiseesconcerning such systems. Thiscommenter does not disagree with theneed for the disclosure, but notes thatmany start-up franchisors are ‘‘notcertain which computer system or

software they expect to have thefranchisees use. Provision should bemade for these new franchisors.’’ 133

In light of the overwhelming numberof comments urging the Commission toadopt the UFOC format, theCommission finds no compellingjustification to expand Item 11, assuggested above. Requiring franchisorsto repeat in the disclosure documentwhat they already disclose in theircontract would appear to impose costson franchisors without any clear benefitto prospective franchisees. Multipledisclosure might greatly increase thesize of a disclosure document, making itmore daunting to read. TheCommission, however, is concerned thatthe UFOC Item 11 disclosuresconcerning computer systems may notprovide adequate guidance to start-upfranchisors. Specifically, a start-upfranchisor may require franchisees touse computer systems in the future, butmay not have the specific computerrequirements available at the time of thefranchise sale. Based upon the record,the Commission cannot assess theextent to which proposed section436.5(k) may impose undue costs orburdens on, or otherwise disadvantage,start-up franchise systems. Accordingly,the Commission solicits additionalcomment on this issue.

l. Proposed Section 436.5(l): Item 12(Territory)

Proposed section 436.5(l) addressesexclusive territories, as well ascompetition from franchisors sellingsimilar goods or services under the sameor a different trade name. TheCommission believes this provision isone of the most important disclosureitems, preventing fraud and misleadingstatements concerning protectedterritories and competition. Indeed, theCommission has brought a number oflaw enforcement actions against false ormisleading exclusive territoryrepresentations.134 Proposed section436.5(l) enhances the current Rule’sdisclosures found at 16 CFR 436.1(a)(3)–(13) in several respects, includingrequiring franchisors to disclose theconditions, if any, under which theywill approve the relocation of thefranchisee’s business and thefranchisee’s establishment of additional



135 E.g., Brown, Comment 4, at 2; Manuszak,Comment 13, at 1; AFA, Comment 62, at 1; Orzano,Comment 73, at 1; Buckley, Comment 97, at 3;Marks, Comment 107, at 2; Zarco & Pardo,Comment 134, at 2.

136 E.g., Parker, Comment 10, at 1; L. Gaither,Comment 68, at 1; Vidulich, 22 Aug 97 Tr at 17;Christiano, 19 Sept 97 Tr. at 50; Bundy, 6 Nov 97Tr at 135.

137 For example, Andrew Selden suggests that‘‘Item 12 should be elaborated to require fulldisclosure of past practice, current intention orfuture possibility of franchisor-sponsoredcompetitive activities that have the prospect ofimpacting the franchisee’s business.’’ Seldon,Comment 133, Appendix B, at 1. See also, Dady &Garner, Comment 127, at 4.

138 Zarco & Pardo, Comment 134, at 2. See alsoG. Gaither, Comment 69, at 1; Orzano, Comment 73,at 1; Dady & Garner, Comment 127, at 3; Cordell,6 Nov 97 Tr at 136; Kezios, 6 Nov 97 Tr at 142.

139 The Commission believes that the issue ofencroachment is essentially a contractual matter.Absent an express grant of a protected territory, afranchisor is generally free to establish as manyoutlets (company-owned or franchised) in anyparticular market as it wishes. A few state courts(or federal courts applying state law), however,have held that encroachment violates state impliedcovenants of good faith and fair dealing. See, e.g.,In re Vylene Enter., Inc., 90 F.3d. 1472 (9th Cir.1996).

140 In response to the ANPR, no commenter raisedany concerns about UFOC Item 13, upon whichproposed section 436.5(m) is based.

141 If the mark is not registered, the franchisormust provide the following warning: ‘‘By nothaving a Principal Register federal registration for(name or description of symbol), (Name ofFranchisor) does not have certain presumptive legalrights granted by a registration.’’

142 In response to the ANPR, no commenter raisedany concerns about UFOC Item 14, upon whichproposed section 436.5(n) is based.

outlets. Franchisors must also discloseany present plans to operate acompeting franchise system offeringsimilar goods or services or to sellthrough alternative channels ofdistribution.

Unlike most disclosure items—whichgenerated little comment in response tothe ANPR—UFOC Item 12 generated asignificant number of comments. Inparticular, franchisees and theiradvocates complain about‘‘encroachment,’’ where a franchisoressentially competes with itsfranchisees by establishing company-owned or new franchised-outlets in thesame market, or sells the same goods asthe franchisee through alternativechannels of distribution.135 Thesecommenters contend that encroachmenthas a devastating effect upon anindividual franchisee who does nothave a contractual right to an exclusiveterritory,136 and they urge theCommission to ban encroachment as anabusive and unfair practice. Othercommenters urge the Commission at thevery least to expand the disclosuresabout territories to include moreinformation about the franchisor’s pastpractices and specific expansionplans.137 Finally, several franchiseessuggest that the Commission shouldstrengthen the UFOC’s ‘‘encroachment’’risk factor. For example, one commentersuggests that franchisors should berequired to state: ‘‘The companyreserves the right to increase the numberof franchised or company-owned unitsin an area. In the past, we have beenknown to put another outlet in closeproximity to an existing unit. Thisaction generally has a negative impacton the gross and/or net sales of the pre-existing unit.’’ 138

The Commission believes thatproposed section 436.5(l) strikes theappropriate balance, ensuring thatprospective franchisees will receivematerial information about the extent to

which they will receive a protectedterritory and/or are likely to facecompetition from the franchisor.Disclosure about a franchisor’s pastpractices and future policies, however,appears to be unwarranted. Afranchisor’s past policies and practicesregarding territories and means ofdistribution are arguably irrelevantbecause they do not necessarily shedany light on the franchisor’s practicesthat will govern a particular franchiserelationship.139 In the same vein, afranchisor’s expansion policies in onelocation may be irrelevant to aprospective franchisee who intends tooperate his or her outlet in another.Moreover, prospective franchisees maybe able to discover past practices ontheir own by speaking with current andformer franchisees.

The Commission also believes it isunreasonable to require franchisors todisclose hypothetical possibilities aboutfuture expansion. Indeed, by notgranting an exclusive territory, thefranchisor has effectively reserved toitself the unrestricted right to expandthe number of outlets or to sell itsproducts or services via alternativechannels of distribution. For thatreason, proposed section 436.5(l)provides that franchisors not offeringexclusive territories must state: ‘‘Youwill not receive an exclusive territory.[Franchisor] may establish otherfranchised or company owned outletsthat may compete with your location.’’Although the Commission generallydisfavors the use of risk factors thatmerely repeat what is expressly orimpliedly stated in the franchiseagreement, the Commission agrees thatthe disclosure of this specific risk factoris warranted in light of the considerablenumber of franchisee complaintsregarding encroachment. Armed withsuch information, prospectivefranchisees can shop for a competingfranchise system that does offerprotected territories, if they so choose.

m. Proposed Section 436.5(m): Item 13(Trademarks)

Proposed section 436.5(m) is intendedto be identical to UFOC Item 13. Itrequires franchisors to discloseinformation about the principaltrademarks that will be licensed to the

franchisee for use in operating theoutlet.140 This is an anti-fraud provision,ensuring that franchisors do notmisrepresent the value of the trademarkunderlying the franchise system.

The current Rule provision addressingtrademarks, section 436.1(a)(iii), merelyrequires the franchisor to identify itstrademarks. Following UFOC Item 13,proposed section 436.5(m) enhances thecurrent Rule requirements by requiringmore detailed disclosures, includingwhether the trademark is registered withthe U.S. Patent & Trademark Office,141

and the existence of any pendinglitigation, settlements, agreements, orsuperior rights that may limit thefranchisee’s use of the trademark.Proposed section 436.5(m) also explainsthe franchisor’s contractual obligationsto protect the franchisee’s right to usethe mark against claims of infringementor unfair competition. These additionaldisclosures are entirely consistent withthe Commission’s long-standing policyof requiring the disclosure of materialinformation about the costs and benefitsof entering into the franchiserelationship.

n. Proposed Section 436.5(n): Item 14(Patents, Copyrights, ProprietaryInformation)

Proposed section 436.5(n) is intendedto be identical to UFOC Item 14.142 It isanother anti-fraud provision, ensuringthat franchisors do not misrepresent thenature of their intellectual property,such as secret recipes or manufacturingprocesses, the existence of which oftenmakes the purchase of a franchise anattractive option, especially toconsumers without prior businessexperience. Like trademark limitations,restrictions on the use of thefranchisor’s intellectual property arematerial because they not only canseriously diminish the value of thefranchise, but could undermine thefranchisee’s ability to operate thebusiness. No comparable provision isfound in the current Rule. In keepingwith the goal of reducinginconsistencies between federal andstate disclosure law, the Commission



143 Proposed section 436.5(n) is substantiallysimilar to other required disclosures. Itcomplements Item 13, which requires thedisclosure of information about the franchisor’strademark, and it parallels Item 3, which requiresthe disclosure of certain litigation.

144 In response to the ANPR, no commenter raisedany concerns about UFOC Item 15, upon whichproposed section 436.5(o) is based.

145 This requirement is consistent with theCommission’s long-standing view that prospectivefranchisees should be able to assess their legalobligations under the franchise agreement, as wellas the degree of independence they will be able toexercise in operating their business. SBP, 43 FR at59662–63. Personal participation requirementsmight also result in economic injury to franchiseeswho, under their franchise agreement, are restrictedfrom engaging in other businesses or who havesigned covenants not to compete in the samebusiness. Id.

146 In response to the ANPR, no commentersraised any concerns about UFOC Item 16, uponwhich proposed section 436.5(p) is based.

147 Sales restrictions can cause serious economicinjury to franchisees by limiting the scope of the

franchisee’s market and ultimately the franchisee’sprofitability. SBP, 43 FR at 59661. Comparabledisclosures about the terms, conditions, andrestrictions on the use of goods and services arefound in many Commission rules. E.g.,Telemarketing Sales Rule, 16 CFR 310 at 310.3;Negative Option Rule, 16 CFR 425 at 425.1(a)(1)(ii);Disclosure of Warranty Terms and Conditions, 16CFR 701 at 701.3(a)(8).

148 The Commission has recognized that the termsand conditions governing the franchise relationship‘‘may well be the most important provisions in afranchise agreement, since they limit what thefranchisee may do with his capital asset.’’ Given thelength and complexity of the typical franchiseagreement, such terms and conditions are oftenoverlooked or not fully appreciated. TheCommission has also recognized that there is oftenan informational imbalance between franchisorsand franchisees about the relationship. ‘‘Thisinformation imbalance makes the clear and concisedisclosure [about franchise relationship issues]essential, if a prospective franchisee is to make aninformed business judgment.’’ SBP, 43 FR at 59664.

149 Duvall, Comment 19, at 2.150 E.g., Bores, Comment 9, at 1; Rachide,

Comment 32, at 1; Chabot, Comment 37, at 1; Rich,Comment 65, at 1; Orzano, Comment 73, at 1;Geiderman, Comment 131, at 1; Vidulich, 22 Aug97 Tr at 19–20; D’Alessandro, 22 Aug 97 Tr at 41;Chiodo, 21 Nov 97 Tr at 303–04.

151 For example, the AFA states:‘‘Renewal’’ is a misnomer. ‘‘Re-license,’’

‘‘rewrite’’ or even ‘‘re-franchise’’ is a more accuratedescription of what actually happens at the end ofthe initial contract term. Most franchisees find thatwhen it is time to ‘‘renew,’’ they are not ‘‘renewing’’their existing franchise agreement, but are enteringinto a wholly new franchise agreement, often withmaterially different financial and operational terms.They are presented these ‘‘renewal’’ contracts on a‘‘take it or leave it’’ basis and are under enormouscoercion pressures to sign—especially if the oldagreement contains a post-termination covenant notto compete. This is truly ‘‘holding a gun to thehead’’ of the ‘‘renewing’’ franchisee.

AFA, Comment 62, at 2.152 See supra at Section B.

believes that adopting UFOC Item 14 iswarranted.143

o. Proposed Section 436.5(o): Item 15(Obligation To Participate in the ActualOperation of the Franchise Business)

Proposed section 436.5(o) is intendedto be identical to UFOC Item 15.144 Itrequires franchisors to disclose whetherfranchisees must participate personallyin the direct operation of thefranchise.145 Proposed section 436.5(o)enhances the current Rule disclosuresfound at 16 CFR 436.1(a)(14), however,in several respects. It requiresfranchisors to disclose not onlyobligations under the franchiseagreement, but obligations to participatedirectly arising from other agreementsor as a matter of practice. Franchisorsmust also state if direct participation isrecommended. Proposed section436.5(o) also requires franchisors todisclose any limitations on whom thefranchisee can hire as a supervisor andany restrictions that the franchisee mustplace on its manager. If the franchise isa business entity, the franchisor mustalso disclose the amount of equityinterest that the supervisor must have inthe franchise. Armed with suchdisclosures, prospective franchisees willhave a much better understanding of thepersonal commitment required tooperate the franchise.

p. Proposed Section 436.5(p): Item 16(Sales Restrictions)

Proposed section 436.5(p) is intendedto be identical to UFOC Item 16.146 Likeother Rule provisions governing afranchisee’s method of operation, itrequires a franchisor to disclose anyrestrictions limiting customers to whomthe franchisee is permitted to sell, or thegoods or services that the franchiseemay offer for sale.147 Proposed section

436.5(p) enhances the current Ruledisclosures found at 16 CFR 436.1(a)(13)by also requiring the franchisor todisclose whether the franchisor has theright to change the types of authorizedgoods and services and whether thereare limits on the franchisor’s right tomake such changes. These disclosureswill better enable a prospectivefranchisee to understand the scope ofthe franchisor’s contractual rightsregarding product sales.

q. Proposed Section 436.5(q): Item 17(Renewal, Termination, Transfer, andDispute Resolution)

Proposed section 436.5(q) is intendedto be identical to UFOC Item 17. Itrequires franchisors to summarize intabular form 23 enumerated terms andconditions of a typical franchiserelationship, such as the duration of thefranchise agreement, rights andobligations upon termination, post-termcovenants not to compete, andassignment and transfer rights.148

Proposed section 436.5(q) enhancesthe current Rule disclosures found at 16CFR 436.1(a)(15) by requiringdisclosures about arbitration ormediation of disputes, as well as forum-selection and choice of law provisions.At the same time, it greatly streamlinesthe Rule’s disclosures. The Rulecurrently requires franchisors to detailthe rights and obligations alreadyspelled out in the franchise agreement.Proposed section 436.5(q), in contrast,requires franchisors to cross referencethe applicable contractual provisions inan easy-to-read table with only a briefsummary of each provision. Thisstreamlined approach reducescompliance burdens, while providingprospective franchisees with a detailedroad map to the contract, where theycan read the various provisions ingreater detail.

In response to the ANPR, a fewcommenters offer specific suggestionsabout UFOC Item 17, upon whichproposed section 436.5(q) is based. Onecommenter questions whether the Item17 disclosure is necessary in the firstinstance, suggesting that a franchisor bepermitted to opt out of Item 17, if itprovides a detailed table of contents orindex to its franchise agreement.149 Inaddition, several franchisees and theirrepresentatives state that the term‘‘renewal’’ in Item 17 is misleading.They maintain that the word ‘‘renew’’implies that the franchisee is able tocontinue to operate the franchise undersubstantially similar terms andconditions as under the originalfranchise agreement. They assert,however, that in reality franchisees whowish to continue operating the franchiseupon expiration must often signradically new contracts that imposesubstantially different terms andconditions, such as higher royaltypayments or the elimination of anexclusive territory. Further, they assertthat, in many instances, franchiseeshave no choice but to sign even the mostabusive, one-sided contracts because thefranchisee has a substantial economicinvestment in the franchise and simplycannot walk away from it withoutincurring a significant economic loss.150

Franchisees also note that if they dowalk away from the franchise, they areoften bound by covenants not tocompete that restrict their ability tooperate a similar business for a numberof years.151

As noted previously, theoverwhelming number of ANPRcomments were submitted byfranchisees who voice various franchiserelationship concerns.152 The stream offranchisee complaints aboutrelationship issues demonstrates thatthere is a continuing need for complete



153 In response to the ANPR, no commenter raisedany concerns about UFOC Item 18, upon whichproposed section 436.5(r) is based.

154 See SBP, 43 FR at 59677–78.

155 Final Interpretive Guides, 43 FR at 59628.156 E.g., FTC v. GreenHorse Communications, Inc.,

No. 98–CV–245–M (D.N.H. 1998); FTC v. Nat’lConsulting Group, Inc., No. 98–C 0144 (N.D. Ill.1988); FTC v. Hart Mktg. Enter., Ltd., No. 98–22–CIV–T–23E (M.D. Fla. 1988); FTC v. Shelton, No.CV–N–97–00712–ECR (RAM)(D. Nev. 1997); FTC v.Hayes, No. 4:96CV06126 SNL (E.D. Mo. 1997); FTCv. Tower Cleaning Sys., Inc., No. 96 58 44 (M.D. Pa.1996).

157 62 FR at 9118.158 Id.

159 Id.160 Id.161 The ANPR proposed that all franchisors state

the following in their Item 19 disclosure:The FTC’s Franchise Rule permits a franchisor to

provide you with information about the actual orpotential sales, income, or profits of its outlets,provided that there is a reasonable basis for suchinformation and the franchisor offers to provide youwith written substantiation. You should not rely onany information on sales, income, or profitsprovided by a franchisor or its salespersons ifwritten substantiation is not offered.

Franchisors who do not make earningsdisclosures would add the following additionalstatement:

This franchisor does not make anyrepresentations about sales, income, or profits. Wealso do not authorize our salespersons to make anysuch representations either orally or in writing.

Id. at 9121–22.162 Id. at 9119.163 E.g., Brown, Comment 4, at 4; SBA Advocacy,

Comment 36, at 8; AFA, Comment 62 at 4; Purvin,Comment 79, at 2; Lagarias, Comment 125, at 1–2;Dady & Garner, Comment 127, at 1–2; and Selden,Comment 133, at 2 and Appendix C; Lundquist, 22Aug 97 Tr at 46–47.

164 E.g., Karp, 19 Sept 97 Tr at 100–01. Quotingseveral business texts, Mr. Karp asserts that

Continued

and clear disclosure about the basiccontractual terms and conditions thatwill govern the franchise relationship.In an effort to harmonize federal andstate disclosure laws, the Commission isinclined to adopt UFOC Item 17 as setforth in the UFOC Guidelines.Nonetheless, the Commission wishes toexplore further whether the use of theterm ‘‘renewal’’ is misleading. On theone hand, ‘‘renewal’’ appears to be aterm of art that is well understood infranchising to mean that the partiesenter into a new contract. Indeed, UFOCItem 17 specifically distinguishesbetween renewals and extensions.Although not defined in the Rule, theterm ‘‘extension’’ implies that afranchisee can continue to operateunder the same terms and conditions foran additional period. In contrast, itwould appear that a ‘‘renewal’’ meansthat the franchisee may continue inoperation, but under modifiedconditions. Given the number ofcomments on this issue, however, theCommission wishes to explore furtherwhether the term ‘‘renewal’’ ismisleading and possible alternativesthat would be more useful.

r. Proposed Section 436.5(r): Item 18(Public Figures)

Proposed section 436.5(r) is intendedto be identical to UFOC Item 18.153 Itrequires franchisors to disclose theinvolvement of a public figure in thefranchise system, including anymanagement responsibilities, the totalinvestment made in the franchisesystem, and any compensation received.A comparable disclosure provision iscurrently found at 16 CFR 436.1(a)(19).This information helps prospectivefranchisees understand the extent of anyfinancial and managerial commitmentsfrom the public figure, as well as anyobligations to the public figure.Prospective franchisees can then decidefor themselves whether an associationwith a public figure is valuable tothem.154

s. Proposed Section 436.5(s): Item 19(Financial Performance Representations)

Background. Proposed section436.5(s), perhaps the most importantanti-fraud provision, addresses financialperformance representations. In theoriginal rulemaking record developed inthe 1970s, the Commission found ‘‘thatfranchises have been marketed through* * * unsubstantiated claims regardingpotential sales, income, [and] gross or

net profit of franchises.’’ 155 TheCommission’s law enforcementexperience shows that the making offalse or unsubstantiated earningsrepresentations continues to beprevalent. Indeed, the making of false orunsubstantiated earningsrepresentations is the most frequentcount alleged in Commission FranchiseRule cases. Of the more than 150 Rulecases filed to date, all but three allegefalse or unsubstantiated earningsclaims.156

Although financial performancerepresentations are highly material toprospective franchisees, theCommission stated in the ANPR that itwas inclined not to mandate earningsdisclosures.157 After reviewing the RuleReview comments, the Commissionacknowledged that financialperformance information is material toprospective franchisees, but rejectedmandating such disclosures in favor ofa free market approach. TheCommission noted that approximately20 percent of franchisors choose tomake earnings disclosures and thatprospects, in theory, can find franchisesystems that voluntarily discloseearnings information. Moreover, theCommission observed that prospectivefranchisees can obtain earningsinformation from a variety of sources.‘‘For example, typical expenses, such aslabor and rent, may be available fromindustry trade associations and industrytrade press.’’ 62 FR 9118. Prospectivefranchisees are also free to discussearnings and other performance issueswith former and current franchisees.Perhaps most important, theCommission noted that the record doesnot provide a sufficient basis for theCommission to formulate an earningsdisclosure that would both be useful toand not mislead prospectivefranchisees. The Commission also notedthat mandating earnings disclosuresmight impose burdens and costs onexisting franchisees (who would have torelease their earnings information totheir franchisor) without any recordsupport showing that such increasedburdens and costs are outweighed bybenefits to prospective franchisees. 158

While rejecting mandated financialperformance disclosures, the ANPR

explored whether the Commissionshould nonetheless revise the Rule’sperformance disclosure requirements intwo respects. First, the Commissionobserved that some franchisors actuallymisrepresent that the Commission or theFranchise Rule prohibits franchisorsfrom making performance informationavailable.159 Second, the Commissionquestioned whether prospectivefranchisees should be cautioned not torely on unsubstantiated earningsrepresentations.160 Accordingly, theCommission solicited comment onwhether the Rule should be modified torequire all franchisors to providespecified preambles to their Item 19disclosure that would explain financialperformance representations in greaterdetail.161 The prescribed preamblewould make it clear that franchisors canmake earnings disclosures if they havea reasonable basis to do so. At the sametime, it would discourage prospectsfrom relying on unauthorized earningsinformation.162

In general, no new arguments wereraised in response to the ANPR eithersupporting or opposing mandatoryearnings disclosures. Franchisees andtheir allies continue to argue thatearnings information is material, thatmandating earnings disclosures willcurb deceptive or false earnings claimsalready being made, and that it is amaterial omission for franchisors to failto disclose earnings information theypossess.163 They also contend thatprospects need historical earningsinformation in order to conduct a duediligence investigation of the franchiseoffering.164 On the other hand,



historical earnings information is critical to anyevaluation of a business. for example, he citesInternal Revenue Service Ruling 59–60, Item D,which provides that: ‘‘detailed profit and lossstatements should be obtained and considered fora representative period immediately prior to therequired date of appraisal, preferably five or moreyears.’’ Mr. Karp believes that the failure offranchisors to disclose historical earningsinformation deprives prospects of materialinformation that is essential in evaluating thefranchise offering.

165 See, e.g., Duvall, Comment 19, at 2; Hogan &Hartson, Comment 28, at 7; Kaufmann, Comment33, at 7; Tifford, Comment 78, at 5; IFA, Comment82, at 3; Jeffers, Comment 116, at 5.

166 Tifford, Comment 78, at 6; AFA, Comment 62,at 4; IL AG, Comment 77, at 2; IFA, Comment 82,at 3.

167 Cendant, Comment 140, at 2.168 See also Duvall, Comment 19, at 2; Kaufmann,

Comment 33, at 7; Jeffers, Comment 116, at 5; Zarco& Pardo, Comment 134, at 6; CA BLS, Comment124, at 2.

169 SBA Advocacy, Comment 36, at 8; CA BLS,Comment 124, at 2; Lagarias, Comment 125, at 4–5.

170 Kaufmann, Comment 33, at 15.171 Wieczorek, 6 Nov 97 Tr at 183–84.172 IL Ag, Comment 77, at 2. See also AFA,

Comment 62, at 6.173 WA Securities, Comment 117, at 3; NASAA,

Comment 120, at 8; Zarco & Pardo, Comment 134,at 6; Kezios, 18 Sept 97 Tr at 91; Tifford, 18 Set97 Tr at 91–92.

174 See also Cordell, 6 Nov 97 Tr at 199–200.175 See Hogan & Hartson, Comment 28, at 7;

Kaufmann, Comment 33, at 7; Tifford, Comment 78,at 5; IFA, Comment 82, at 3. 176 See 16 CFR 436.1(b)(1); 436.1(c)(1).

franchisors and their allies continue tooppose mandatory earnings disclosures,maintaining that earnings informationobtained from franchisees is oftenunavailable or unreliable, thatmandating the disclosure of earningsinformation will increase litigation, andthat prospects can often obtain earningsinformation directly from current andformer franchisees.165 In addition, a fewcommenters urge the Commission tocoordinate its policy with NASAA topromote uniformity between federal andstate disclosure laws.166 One franchisorsuggests that the FTC prohibit statesfrom mandating earnings disclosures bypreempting the field.167

At the same time, several commenterssupport the ANPR proposed preamblesas an alternative to mandating earningsdisclosures, noting that this approachwould rely on market pressures, notgovernment mandates, to encouragefranchisors to disclose earningsinformation voluntarily. For example,one commenter states:

We believe that these required disclosuresnot only would correct misrepresentations byfranchisors that the Rule prevents them frommaking earnings claims, but also would bringmore market pressure to bear on franchisorsto make reliable earnings claims. Suchmarket pressures may result in a substantialincrease in the amount of financialinformation disclosed to franchisees withoutthe costs and other burdens attendant to agovernment mandate.

Hogan & Hartson, Comment 28, at 8.168

A few commenters, however, offerspecific suggestions to improve theproposed preambles. For example, somecommenters voice concern that phrasessuch as ‘‘do not rely on’’ unauthorizedearnings information may bemisinterpreted as a disclaimer ofliability where salespeople routinelymake false or unauthorized earnings

claims.169 Another commenter voicesconcern that the first preamble proposedin the ANPR could be misinterpreted asenabling franchisors to provide earningsinformation outside of the disclosuredocument, as long as the franchisorfollowed the Rule’s requirements.170

Several commenters also offer substitutelanguage. For example, one commenternotes that some industries—such as thehotel industry—do not use sales,income, or profits as measures ofperformance.171 He suggests that thepreamble include the more inclusiveterm ‘‘financial performance’’ to capturethose industries. Another commenterrecommends that the term ‘‘outlets’’ berevised to make it clear that a financialperformance claim can be based oneither company-owned or franchisedoutlets.172 A few commenters alsosuggest that the Commission add aprovision stating that prospectivefranchisees should report anyunauthorized financial performanceclaims to the franchisor and/or to theFederal Trade Commission and to stateauthorities.173 Finally, NASAA suggeststhat the Commission require franchisorswho choose not to make earningsdisclosures to make the followingstatement:

This information is very important to anyprospective franchisee, and our failure toprovide it makes it more difficult for you tomake an informed decision about purchasinga franchise, as well as increases yourfinancial risks in purchasing a franchise fromus. Unless you obtain this type ofinformation on your own, your risks may besubstantial.

NASAA, Comment 120 at 8.174

Revised Financial PerformanceDisclosures. Based upon the record, theCommission continues to believe thatfinancial performance disclosuresshould remain voluntary and thatordinary market forces are sufficient toprovide an incentive for franchisesystems to make performanceinformation available to prospectivefranchisees.175 At the same time, theCommission proposes to amend theRule by adopting the greatly streamlinedUFOC Item 19 approach toward

financial performance representations.First, following the UFOC Guidelines,proposed section 436.5(s) would permitfranchisors to make financialperformance claims in the text of theirdisclosure documents, without the needto create separate ‘‘earnings claim’’documents. Second, proposed section436.5(s) would permit franchisors todisclose truthful information about thefinancial performance of all or asubgroup of franchisor-owned orfranchised outlets, provided thefranchisor also describes thecharacteristics of the included outletsthat may differ materially from those ofthe outlet that is offered for sale. Incontrast, the current Rule permits suchdisclosures only if the data is directlyrelevant to the prospective franchisee’sgeographic market territory.176

Third, proposed section 436.5(s)incorporates two UFOC Item 19provisions that greatly facilitatefranchisors’ ability to provide prospectswith performance information. Afranchisor who provides a prospectivefranchisee with the actual operatingresults of a specific unit being offeredfor sale need not comply with thegeneral Item 19 disclosure requirementsprovided that the franchisor gives theinformation only to the potentialpurchaser of that unit and provides thepotential purchaser with the name andlast known address of each owner of theunit during the prior three years. Inaddition, a franchisor who make Item 19financial performance representationscan provide prospective franchiseeswith supplemental performancerepresentations directed at a particularlocation or circumstance, apart from thedisclosure document, provided that thefranchisor furnishes such supplementalperformance representations in writing,explains how it differs from the Item 19disclosure, follows the Item 19 format,and leaves the information with theprospective franchisee. Both of theseenhancements, which have no parallelin the current Rule, make it easier forfranchisors to provide prospects withmaterial performance informationnarrowly tailored to the particularoutlets in question.

At the same time, proposed section436.5(s)’s financial performancedisclosure provision differs from theUFOC approach in one significant way.UFOC Item 19—as well as the currentRule—requires franchisors who makefinancial performance disclosures tostate the number and percentage of thefranchised outlets that have actuallyattained or surpassed the statedperformance claim. The Commission



177 For example, a franchisor may state ahistorical performance representation as follows:

Franchised outlets in Seattle earned $100,000 in1998.

The Franchisor has sampled all of its franchisedoutlets in Seattle during the period 1998. Thesample included 10 outlets. Nine of the 10 outlets

responded. Of the nine responding franchisedoutlets, all attained or surpassed net profits of$100,000. We note, however, that each of thefranchised outlets in Seattle has been in businessfor over 10 years and is located in an urban center.

178 Several commenters state that suchmisrepresentations are prevalent and urge theCommission to clarify the Rule to address thisproblem. For example, Peter Lagarias states: ‘‘I ampersonally aware of franchisors (and sometimeseven their lawyers) stating that earnings claims areforbidden by the Commission’s Rule. TheCommission should clarify in the Rule that thefranchisor could elect to make earnings claims buthas elected not to make earnings claims.’’ Lagarias,Comment 125, at 4. See also Hogan & Hartson,Comment 28, at 8; SBA Advocacy, Comment 36, at8; AFA, Comment 62, at 5; Purvin, Comment 79, at2; Jeffers, Comment 116, at 5; CA Bar, Comment124, at 1.

179 SBA Advocacy, Comment 36, at 8; CA Bar,Comment 124, at 2; Lagarias, Comment 125, at 4–5.

180 WA Securities, Comment 117, at 3; NASAA,Comment 120, at 8; Zarco & Pardo, Comment 134,at 6; Kezios, 18 Sept 97 Tr at 91; Tifford, 18 Sept97 Tr at 91–92.

181 SBP, 43 FR at 59670–73.182 See Karp, 19 Sept 97 Tr at 95; Slimak, 22 Aug

97 Tr at 33.

believes that this disclosure may bemisleading and may actually discouragefranchisors from making financialperformance information available toprospective franchisees. For example, afranchisor may have statistics showingthat 9 out of 10 franchised stores in aparticular location (such as Seattle)average $100,000 net profit a year. Yet,the current UFOC and Rulerequirements would prevent thefranchisor from disclosing truthfulinformation about the universe thefranchisor has measured—the 10franchised outlets in Seattle. Rather, thefranchisor would be forced instead tostate 9 out of the entire number of allfranchises nationwide (e.g., 9 out of1,000) have earned the $100,000claimed.

This approach arguably wouldprevent a franchisor who does not havecomplete financial performanceinformation on each and every franchisein its system from making truthfulperformance representations about asubset of franchisees, such asfranchisees operating in a particulargeographic area or operating a particularkind of unit (e.g., kiosks in shoppingmalls). Moreover, in the example notedabove, a disclosure that 9 out of 1,000franchisees have earned the representedamount ($100,000) is misleadingbecause it implies that 991 franchiseeshave not earned the claimed amountwhen, in fact, the franchisor may nothave sampled or otherwise measuredthe remaining group of 991.

Accordingly, the Commissionproposes to amend the Rule to permit afranchisor to disclose historicalfinancial performance information in itsItem 19 disclosures if there is areasonable basis for such informationand the franchisor: (1) Discloses thenature of the universe of outletsmeasured; (2) the dates during whichthe reported level of financialperformance was achieved; (3) thenumber of outlets in the universemeasured during the relevant period; (4)the number of outlets from the universemeasured whose performance wereutilized in arriving at the representation;(5) of the number of outlets whose datawas utilized, the number and percentagethat actually attained or surpassed thestated results; and (6) characteristics ofthe included outlets that may differmaterially from those being offered tothe prospective franchisee.177

Based upon the record, theCommission also proposes to adopt theANPR proposal that franchisors includeprescribed preambles in Item 19 toclarify the law regarding financialperformance claims. Among otherthings, the first preamble corrects thecommon misrepresentation that theCommission or the Rule actuallyprohibits the making of financialperformance disclosures.178 In light ofthe Commission’s extensive lawenforcement history combating false andunsubstantiated performance claims, theCommission also believes that the firstpreamble is necessary to encourageprospective franchisees to considerfinancial performance representationsmade in an Item 19 disclosure only. Inaddition, the Commission believes thatthe second preamble, which is usedonly if the franchisor does not discloseperformance information, is warrantedto alert prospective franchisees that anysubsequent performance claims areunauthorized and, impliedly, shouldnot be relied upon.

The proposed revised preamblesincorporate many of the suggestionsoffered in response to the ANPR. Forexample, some commenters voiceconcern that phrases in the originalpreamble such as ‘‘do not rely on’’unauthorized performance informationmay be misinterpreted as a disclaimer ofliability in those instances wheresalespeople routinely make false orunauthorized performance claims.179

Accordingly, the revised preambledeletes the reference to ‘‘do not rely’’ infavor of a broader statement alertingprospective franchisees that a franchisorcan provide financial performance data‘‘only if the information is included inthe disclosure document.’’ Theproposed revised first preamble alsoclarifies the law regarding financialperformance disclosures by noting twoexceptions to the general rule that

performance claims must appear in Item19: (1) Actual records of an existingoutlet for sale; and (2) supplementalperformance information about aparticular location. The Commissionalso agrees with the commenters whosuggest that the second preambleinclude a provision encouragingprospective franchisees to report anyunauthorized earnings claims to thefranchisor, the Federal TradeCommission, and state authorities.180

t. Proposed Section 436.5(t): Item 20(Outlets and Franchisee Information)

Proposed section 436.5(t) is anotheranti-fraud disclosure provision. Basedupon UFOC Item 20, it requiresfranchisors to disclose in tabular formstatistical information on the number offranchises and franchisor-ownedoutlets, including the number offranchises that have failed or otherwiseceased operations. It also requiresfranchisors to provide prospectivefranchisees with the names andaddresses of current and formerfranchises, with which they can verifythe franchisors’ representations andlearn more about the franchiserelationship.181 For these reasons, theCommission agrees that Item 20 isamong the most material disclosureitems.182

Proposed section 436.5(t) enhancesthe less comprehensive disclosuresfound at 16 CFR 436.1(a)(16) byrequiring franchisors to disclose thenames and addresses of former as wellas current franchisees. It also increasesthe number of franchisees about whominformation is disclosed from 10 toeither all or at least 100. Thisinformation prevents fraud by armingprospective franchisees with a source ofinformation with which they canconduct their own due diligenceinvestigation of the franchise offering.At the same time, proposed section436.5(t) corrects a ‘‘double counting’’problem in UFOC Item 20 that wasidentified during the Rule Reviewproceeding. As explained below,proposed section 436.5(t) also improvesUFOC Item 20 by addressing the use ofgag clauses and trademark-specificfranchisee associations.

‘‘Double Counting’’ Issue. During theRule Review, commenters voicedconcern that UFOC Item 20 is flawed



183 E.g., Simon, RR Tr. at 223–24; Perry, RR Tr.at 263.

184 62 FR at 9121.185 E.g. Hogan & Hartson, Comment 28, at 6; AFA,

Comment 62, at 3; IL AG, Comment 77, at 2; Tifford,Comment 78, at 4; IFA, Comment 82, at 2; Cendant,Comment 140, at 3; Karp, 19 Sept 97 Tr at 91.

186 For example, Robert Zarco recommends thatthe Commission create 12 categories to capturevarious combinations of ownership changes.Transfers, for instance, would be divided into fourdistinct categories: (1) Transfers by the franchiseeto the franchisor; (2) transfers by the franchisee tothe franchisor, but ultimately re-franchised; (3)transfers by the franchisee directly to a newfranchisee; and (4) transfers by the franchiseedirectly to a new franchisee more than once. Zarco& Pardo, Comment 134, at 6–7. See also AFA,Comment 62, at 3; Karp, Comment 136, at 2–6.

187 Wieczorek, Comment 122, at 2.188 Id.189 Simon, 18 Sept 97 Tr at 23–24; Tifford, id. at

25–26. See also Bundy, 6 Nov 97 Tr at 229.

190 Several commenters urged the Commission todefine the terms ‘‘transfers’’ and ‘‘reacquisitions’’more precisely. IL AG, Comment 77, at 2; Tifford,Comment 78, at 4; Wieczorek, Comment 122, at 1–2.

191 See Kaufmann, 18 Sept 97 Tr at 27; Karp, 19Sept 97 Tr at 92.

192 See Wieczorek, Comment 122, at 2; 6 Nov 97Tr at 225–26.

193 62 FR at 9121.194 See FTC v. Orion Prod., Bus. Franchise Guide

(CCH) ¶ 10,970 (N.D. Cal. 1997), and FTC v. TutorTime Child Care Sys., Bus. Franchise Guide (CCH)¶ 10,971 (N.D. Cal. 1997). Cf. FTC v.Comprehensive Accounting Corp., Bus. FranchiseGuide (CCH) ¶ 8911 (N.D. Ill. 1987 (Defendantsprohibited from ‘‘wrongfully discouraging’’

and needs to be fixed.183 Specifically,commenters observed that franchisorsmay report a change in franchiseownership in multiple categories, whichmay inflate the overall number offranchise closings. Accordingly, in theANPR, the Commission acknowledgedthis concern and solicited comment onhow UFOC Item 20 could beimproved.184

In response to the ANPR, severalcommenters confirm the ‘‘doublecounting’’ problem.185 However, only afew commenters offer concretesolutions, as noted below, and noconsensus has emerged on how tocorrect the problem. Specifically, threecommenters suggest that theCommission solve the double countingproblem by adding additional categoriesto the Item 20 disclosure.186 Anothercommenter believes that most doublereporting problems are attributable tothe inclusion of transfers andreacquisitions in the UFOC Item 20table that summarizes franchisedoutlets. He suggests that transfersshould be reported in a separate columnlocated on the side of the franchiseestatistics table and that reacquisitions bemoved to the second UFOC Item 20table concerning company-ownedoutlets.187 At the same time, thiscommenter suggests that franchisorsreport multiple ownership changes onlyonce, according to which event was‘‘first-in time.’’ 188 Other commenterssuggest that the Commission requirefranchisors to report multiple eventsaccording to a predetermined order ofpriority.189 Specifically, the Commissioncould require franchisors to reportmultiple ownership changes only once,but eliminate ‘‘picking and choosing’’ ofcategories by assigning a specific orderof priority such as termination, non-renewal, reacquisition, and transfer. Forexample, a franchisor might report anownership change as a termination,

regardless of what other events mayhave occurred before (abandonment ofthe property) or after (reacquisition ortransfer).

The Commission believes thatproposed section 436.5(t) fixes thedouble counting problem within theframework of the UFOC Guidelines.Franchisors would start the disclosureby noting the states where they haveoutlets (column 1) and the number ofoutlets opened at the beginning of thefiscal year (column 2). Franchisors thennote the number of franchises with thesame ownership at the end of the year(column 3). Next, franchisors report onfranchisees who have left the systemduring the course of the term of thefranchise agreement because of one ofthree events—termination,reacquisition, and transfer (columns 4–6). Franchisors then report outlets thatwere not renewed at the end of thefranchise term (column 7). To ensurethat all outlets are accounted for, thereis a miscellaneous category ‘‘outlets thatceased operation or closed for otherreasons’’ (column 8). This categorywould capture information about eventssuch as an abandonment of an outlet. Toaid prospective franchisees inunderstanding the net effect of changesin ownership, franchisors also report thetotal number of outlets discontinuedduring the fiscal year (column 9).Finally, to account for franchisees thathave joined the system during the fiscalyear, franchisors report the total numberof outlets in operation at the end of theyear (column 10).

The Commission believes thatproposed section 436.5(t) solves thedouble counting problem in astreamlined and efficient mannerwithout increasing compliance burdens.First, proposed Item 20 addresses thecore source of double counting—imprecise reporting categories. To thatend, it defines with specificity the terms‘‘termination,’’ ‘‘reacquisition,’’‘‘transfer,’’ and ‘‘nonrenewal,’’ creatingmutually exclusive categories. A‘‘termination’’ occurs when a franchisorsends a franchisee an unconditionalnotice that it will terminate thefranchise agreement before the end ofthe agreement term. A ‘‘reacquisition’’ islimited to instances where thefranchisee sells his or her outlet back tothe franchisor. A ‘‘transfer,’’ in turn, islimited to instances where a franchiseesells his or her outlets directly to a newfranchise owner. Finally, a nonrenewaloccurs when a franchisor sends afranchisee an unconditional notice thatit will not renew the franchiseagreement at the end of the agreementterm. These proposed definitionseliminate a major source of double

count: overlapping categories.190 At thesame time, the proposed definitionshave the additional benefit of informinga prospective franchisee about theextent to which franchisees recoupsome of their investment when theyleave the system.191

Second, proposed section436.5(t)(1)(xi) reduces double countingby adopting a ‘‘first-in-time’’ approach:when an ownership change involvestwo or more events, the franchisorreports only the event that occursfirst.192 For example, a franchisor mayformally notify a franchisee that thefranchise will be terminated on aspecific date and the franchisee thentransfers the outlet to a new owner.Under the ‘‘first-in-time’’ instruction,the termination would be consideredthe first event.

While the Commission proposes achronological approach (‘‘first-in-time’’)to reporting ownership changes, itnonetheless wishes to explore furtherthe suggestion that the Commissionrequire franchisors to report ownershipchanges according to a precise order ofpriority. The record, however, is devoidof any information from which theCommission could prioritize changes inownership. Accordingly, theCommission seeks comment on whetherthe proposed first-in-time approach,coupled with precise categorydefinitions, is sufficient to address thedouble counting issue, or whether theCommission should establish a specificorder of priority. If an order of priorityis preferred, then the Commissionsolicits specific suggestions for creatingsuch a priority list.

Gag Clause Issue. In the ANPR, theCommission explored the use of gagclauses, contractual provisions thatprohibit or restrict former or existingfranchisees from discussing theirexperiences within the franchisesystem.193 Recognizing that gag clausesmay harm prospective franchisees bylimiting their ability to conduct a duediligence investigation of the franchiseoffering,194 the Commission asked for



franchisees from giving unfavorable references topotential investors.’’).

195 E.g., Manuszak, Comment 13, at 1; Sibent,Comment 41, at 1 (and 19 identical comments);AFA, Comment 62 at 3; IL AG, Comment 77, at 2;Buckley, Comment 97, at 1; Marks, Comment 107,at 2; WA Securities, Comment 117, at 2; NASAA,Comment 120, at 4; Dady & Garner, Comment 127,at 2. Opponents of gag clauses include severalfranchisor representatives. E.g., Kestenbaum,Comment 40, at 2. Cendant opposes the use of gagclauses outside of litigation, except to protect tradesecrets or other proprietary information. Cendant,Comment 140, at 3.

196 Lundquist, 22 Aug 97 Tr at 42–43. See alsoMaloney, Comment 38, at 2.

197 NCL, for example, states: ‘‘Because theexperience of others who have purchased afranchise or business opportunity is the bestindicator of potential earnings and other factors forprospective buyers, ‘gag orders’ that prohibit peoplefrom sharing their experience with others should beprohibited.’’ NCL, Comment 35, at 3. See also Baer,Comment 25, at 3; Karp, 19 Sept 97 Tr at 95–96.

198 From example, Roger Haines, a Scorecard Plusfranchisee, states:

I had spoken to some of the franchisees that hadleft the system. I now feel certain that they painteda picture that was not close to being the truth based

on the gag order that [the franchisor] imposed. HadI gotten the truth from these people, my decisioncertainly would have been different. Everyfranchisee leaving the system has had a gag orderplaced on them, making it impossible for currentand future franchisees to get the facts.

Haines, Comment 100, at 2.199 See NASAA, Comment 120, at 4.200 Selden, Comment 133, Appendix B, at 2.201 Kaufmann, Comment 33, at 5–6; See also

Tifford, Comment 78, at 3; IFA, Comment 82, at 2;Duvall, 6 Nov 97 Tr at 247; Gitterman, 6 Nov 97Tr at 250–51.

202 Baer, Comment 25, at 3. Even franchiseeadvocates recognize franchisor’s legitimate need fortrademark protection. E.g., AFA, Comment 62, at 3;Zarco & Pardo, Comment 134, at 4.

203 See Cordell, 6 Nov 97 Tr at 247–48; Kezios,id. at 256. See also NASAA, Comment 120, at 4.

204 Wieczorek, 6 Nov 97 Tr at 258–59.

205 Zarco & Pardo, Comment 134, at 4. SimilarlyHoward Bundy adds that ‘‘[i]n a perfect world Iwould have a list of those that are subject to [gagclauses], so I didn’t have to make all those extra 75calls. But I could live with or without that. It’s moreimportant to disclose the fact that they do exists.’’Bundy, 6 Nov 97 Tr at 249. See also Selden,Comment 133, Appendix B, at 2; Jeffers, 6 Nov 97Tr at 251–52. See also Wieczorek, 6 Nov 97 Tr at260.

206 The term ‘‘gag clause’’ is defined in proposedsection 436.3(k) as: ‘‘any contractual provisionentered into by a franchisor and a current or formerfranchisee that prohibits or restricts the franchiseefrom discussing his or her personal experience asa franchisee within the franchisor’s system. It doesnot include confidentiality agreements that protectthe franchisor’s trademarks or proprietaryinformation.

207 For example, one franchisee signed anagreement upon termination that contained thefollowing clause:

The Slimak parties shall not make any derogatoryor disparaging action or make any false, derogatory,or disparaging comment, publicly or privately,concerning the Jacadi parities, or any of thedirectors, officers, shareholders, affiliates,employees, agents, consultants, successors, orassigns or Jacadi products * * *. If questioned byany third party as to the circumstances surroundingthe termination of the franchise agreement. TheSlimak Parties shall state only that the partiesmutually agreed to terminate their commercialrelationship.

Slimak, Comment 130, at 1. See also Doe, 7 Nov97 Tr at 276.

comment on the extent to whichfranchisors use gag clauses to inhibitfranchisee speech, whether theCommission should modify the Rule toprohibit franchisors from using gagclause provisions, and alternatives thatwould ensure that prospectivefranchisees can freely obtaininformation from former and existingfranchisees about their experience withthe franchise system.

In response, a quarter of thecommenters (42 out of 166 commenters)address the gag clause issue, themajority opposing their use.195 Inaddition, several participants at theCommission staff’s six public workshopconferences on the ANPR identified gagclauses as a problem. The most poignantexample was a franchisee of anundisclosed franchise system whoattended the Chicago public workshopconference. She told Commission staffthat she had to speak quickly becauseshe was on her way to sign a finalagreement terminating her relationshipwith her franchisor. The terminationagreement she was to sign included agag clause.196

Commenters opposing the use of gagclauses, including state regulators andsome franchisors, assert that suchclauses inhibit prospective franchiseesfrom learning the truth about thefranchise system as they attempt toconduct their due diligenceinvestigation of the franchise offering.197

Attempts to restrict franchisee speechthrough gag clauses may deceiveprospects by effectively eliminating onesource of information, namely thosewho may have a dispute with thefranchisor or are otherwisedisgruntled.198 Indeed, a franchisor, if it

wished to do so, could use gag clausesto ensure that prospects speak with onlythose franchisees who are successful orotherwise inclined to give a positivereport.199 In addition, one commentercontends that the harm flowing from gagclauses goes beyond individualfranchise sales, noting that gag clausesintimidate franchisees against testifyingbefore legislative committees and publicagencies, such as the Commission.200

On the other hand, several franchisorsor their representatives oppose banningthe use of gag clauses. For example, onecommenter contends that gag clausesprevent disgruntled franchisees frominflaming others and enable franchisorsto end relationships with problemfranchisees without spendingconsiderable resources. He asserts thatbanning gag clauses would impedeinformal settlements betweenfranchisors and franchisees.201 Othercommenters note that franchisors musthave the ability to protect their tradesecrets from disclosure.202

Other commenters offer a variety ofsuggestions on how the Commissionmight address the use of gag clausesshort of an outright ban. For example, afew commenters suggest that franchisorsshould note in their Item 20 whichspecific franchisees are subject to a gagclause provision. Such a requirementwould accomplish two goalssimultaneously. It would alertprospective franchisees that thefranchisor may require its franchisees tosign gag clauses, and it would saveprospects the time and trouble of tryingto contact franchisees who, in fact, arenot free to speak.203 In response,however, one commenter contends thatsuch an approach would beunnecessarily burdensome, observingthat franchisors would have to updatetheir disclosures more frequently,especially in franchise registrationstates.204

As an alternative, several commentssuggest that franchisors disclose the

number and percentage of current andformer franchisees subject to gagclauses. Indeed, of the various proposalssuggested in response to the ANPR andduring the public workshopconferences, a general disclosure aboutthe use of gag clauses garnered the mostsupport.205 Finally, one commenter addsthat franchisors should disclose the useof gag clauses over a period of threeyears in order to highlight a pattern ortrend in their usage. He observes: ‘‘thefact that 1 out of 100 of 1996’s formerfranchisees had a gag order does notreally fairly present the picture if youhave 80 out of 100 in 1995.’’ Bundy, 6Nov 97 Tr at 257. Rather, franchisorsshould present information that wouldreveal a trend.

Based upon the record, theCommission proposes to modify UFOCItem 20 to require franchisors todisclose information about their use ofgag clauses, which bar franchisees fromspeaking with others about theirpersonal experiences as franchisees.206

The Commission finds that such clausesare widespread in terminationagreements and dispute settlements.207

Neither the current Rule or UFOCGuidelines addresses this issue.

Proposed section 436.5(t)(6) providesthat a franchisor must disclose theexistence of gag clauses if, within thelast three fiscal years, franchisees havesigned gag clause provisions in anyagreement, settlement, or other contract.In addition, the franchisor must state



208 Two commenters suggest that the Commissionrequire a disclosure about gag clauses only if thenumber of franchisees subject to such clausessurpasses some threshold. They imply that isolatedinstances of gag clause usage may be misleading toprospective franchisees or prejudicial to thefranchisor. See Bundy, 6 Nov 97 Tr at 249; Jeffers,id. at 251–52. The Commission believes that theflexibility offered by proposed section 436.5(t)(6), inparticular the franchisor’s ability to explain whenit uses gag clauses, appears sufficient to address thisconcern.

209 Not all independent franchisee associationsare well-received by the franshisor. Indeed, somecommenters have told us that in some instancesfranchisors have filed suit to stop the formation ofan independent group or have retaliated againstindividuals who have participated in such groups.E.g., Donafin, Comment 14, at 1. See also Mueller,Comment 29, at 1–2; Bell, Comment 30, at 1;Rachide, Comment 32, at 3.

210 Similarly, Martin Cordell, a franchiseexaminer for the State of Washington, observes thatdisclosing trade associations could ‘‘be a muchmore ready source of information as opposed toindividual franchisees who have to take time out ofthe businesses to share information with theprospective franchisee.’’ Cordell, 6 Nov 97 Tr at168–69. Similarly, Susan Kezios of the AFA told usthat associations, ‘‘have a collective memory ofwhat has been going on historically in the franchisesystem that one or another individual franchiseesmay or may not have.’’ Id. at 176. See alsoManuszak, Comment 13, at 1; Zarco & Pardo,Comment 134, at 3; Kezios, 6 Nov 97 Tr. at 168;Wieczorek, 6 Nov 97 Tr at 170; Bundy, id. at 173.

211 Shay, 18 Sept 97 Tr at 71; Wieczorek, 6 Nov97 Tr at 169–70; Duvall, id. at 171.

212 The Commission is not suggesting thatfranchisors disclose the existence of broad-basedassociations that represent franchisee interestsgenerally, such as the American FranchiseeAssociation or the American Association ofFranchisees & Dealers.

213 The record indicates that franchisees may bereluctant to share information about their systemwith prospective franchisees either because they donot have the time, or because they fear retaliationfrom their franchisor. For example, Howard Bundytold us that he often instructs his franchisee clientsto state only their ‘‘name, rank, and serial numberand refer [the prospect] back to the franchisor foreverything else.’’ Mr. Bundy explains thatfranchisees who make statements in connectionwith a franchise sale might be deemed franchisebrokers under state law and could be liable for anyclaims or damages resulting from the sale. He alsofears that franchisees who volunteer informationmight be subject to a defamation suit by thefranchisor. Bundy, 6 Nov 97 Tr at 236–37.

the consequences to the prospectivefranchisee, namely that current andformer franchisees may not be able tospeak freely about their experiences. Toadd flexibility, the Commissionproposes further that the franchisor bepermitted to disclose the number andpercentage of its current and formerfranchisees in each of the last threeyears that are subject to a gag clause.This optional disclosure would enable afranchisor to disclose how widespreadthe use of gag clauses is in its system.For example, a franchisor might wish todisclose such data to demonstrate thatits franchisees sign gag clauses inisolated instances only, or that the trendis away from using such clauses. At thesame time, proposed section 436.5(t)(6)would also permit a franchisor toexplain its use of gag clauses. TheCommission believes that a bald riskfactor or disclosure about the numberand percentage of franchisees under agag clause arguably may be misleadingand prejudicial to a franchisor.208 Forexample, a franchisor conceivably mayenter into an agreement containing a gagclause only at the request of thefranchisee during the course ofnegotiations. The Commission believesthat a franchisor should be able toclarify any disclosures about gag clauseswith additional, truthful informationthat puts the use of gag clauses into aproper context.

Franchisee Association Issue. Inresponse to the ANPR, a number offranchisees and their advocates urge theCommission to revise UFOC Item 20 torequire the disclosure of trademark-specific franchisee associations. In someinstances, these organizations arerecognized councils approved by thefranchisor, where franchisee-participants are selected by thefranchisor or are elected by the system’sfranchisees. In other instances, theorganizations are independent of thefranchisor.209 One commenter explains

the need for such a disclosure asfollows:

The UFOC Guidelines currently requiredisclosure of the existence of purchasingcooperatives known to the franchisor, butthis is not adequate disclosure of a fact ofgrowing importance to franchisees, which isthe existence, or non-existence, of anautonomous franchisee associationrepresenting franchisees in that particularfranchise organization. When an organizationrepresents a substantial plurality offranchisees in the system, perhaps over 30%,and its existence is known to the franchisor,that fact should be disclosed, possibly by anadditional category in the list of existingfranchisees required in item 20, as anadditional and critical source of informationabout the franchise opportunity.

Selden, Comment 133, Appendix B. at1.210

Franchisors generally do not oppose adisclosure for trademark franchiseeassociations, especially franchisor-sponsored franchisee advisory councilsand recognized independent franchiseeassociations. However, they voiceconcern about any mandate to discloseindependent franchisee associations.They assert that such organizations areoften small, informal groups that comeand go, or organizations formed on thelocal or regional level without theknowledge of the franchisor. 211 In short,they fear liability for failing to disclosethe existence of groups that they do notknow exist.

Based upon the record, theCommission agrees that franchisorsshould disclose the existence oftrademark-specific franchiseeassociations. 212 The Commission haslong recognized that the names andaddresses of current franchisees ismaterial information, enablingprospective franchisees to conduct theirown due diligence investigation of thefranchise system. Providing prospectivefranchisees with information about anorganized group of franchisees is a

logical extension, giving franchisees yetan additional source of materialinformation from which they can learnabout the system, especially franchisees’financial performance history. Thisdisclosure is particularly important ifindividual former and existingfranchisees of a system are subject to gagclauses or are otherwise reluctant to talkwith prospective franchisees. 213

The Commission believes proposedsection 436.5(t)(7) strikes the rightbalance between providing disclosure toprospective franchisees and eliminatingfranchisors’ potential liability for failingto disclose the existence of franchiseeorganizations that are unknown to them.It would require franchisors to discloseorganizations whose existence is knownto them either because the franchisorsponsors the organization or formallyrecognizes the organization. In addition,it would require the franchisor todisclose incorporated, independentfranchisee associations, but only to theextent that such organizations maketheir existence known to the franchisoron an annual basis. This wouldeliminate franchisors’ concerns abouthaving to disclose every small, informalgroup of franchisees by limiting thedisclosure to incorporatedorganizations, which are more likelythan unincorporated organizations tohave an ‘‘institutional history,’’ as wellas the time and inclination to speakwith prospective franchisees. It wouldalso shift the burden to the franchiseeassociation to ask specifically to beincluded in the franchisor’s disclosuredocument. The Commission believesthat this approach would relievefranchisors of the burden of, andpotential liability associated with,having to identify such organizations.To further reduce compliance costs andburdens, proposed section 436.5(t)(7)makes clear that a franchisor must listthe franchisee organization in itsdisclosure document to be used in thenext fiscal year only. This relievesfranchisors of the burden of having toverify the continued existence of theorganization in the future. In short, afranchisee organization would have the



214 16 CFR 436.1(a)(20(ii).215 62 FR at 9121.216 E.g., Duvall, Comment 19, at 1; Baer, Comment

25, at 4; Kaufmann, Comment 33, at 6; Kestenbaum,Comment 40, at 2; AFA, Comment 62, at 3; IL AG,Comment 77, at 3; Tifford, Comment 78, at 4; IFA,Comment 82, at 1; Jeffers, Comment 116, at 2.

217 In response to the ANPR, no commenter raisedany concerns about UFOC Item 22, upon whichproposed section 436.5(v) is based.

218 In the SBP, the Commission recognized thatthis requirement ‘‘will therefore have a remedialeffect in that it will encourage accurate discussionof the required information in the disclosurestatement.’’ 43 FR at 59696.

219 In response to the ANPR, no commentervoiced any concerns about UFOC Item 23, uponwhich proposed section 436.5(w) is based.

220 See infra Section C.10.b.

burden to renew its request forinclusion in the disclosure document onan annual basis.

u. Proposed section 436.5(u): Item 21(Financial Statements)

Based upon UFOC Item 21, proposedsection 436.5(u) requires the disclosureof audited financial information basedupon generally accepted accountingprinciples. It improves the comparableRule disclosures currently found at 16CFR 436.1(a)(20) by requiringfranchisors to present financialdisclosures in columns that compare atleast two fiscal years. This will enableprospective franchisees to analyze betterthe franchisor’s fiscal status by seeing ata glance a broad snap-shot of thecompany’s historical earningsperformance.

At the same time, the Commissionproposes to modify the Rule to clarifythe Commission’s three-year phase-in ofaudited financial statements.214 In theANPR, the Commission solicitedcomment on whether the Commissionshould retain the phase-in.215 Withoutexception, the commenters who addressthis ANPR issue continue to support athree-year phase-in,216 and nocommenter offers any refinements oralternatives to the Commission’s currentphase-in approach.

The proposed phase-in clarifies andstreamlines the Commission’s currentphase-in provision in several ways. Aswith the current phase-in, franchisorswill be allowed two fiscal years beforethey are required to provide full auditedfinancial statements. The proposedphase-in, however, eliminates thearguably confusing current distinctionbetween a franchisor’s first ‘‘partial’’ or‘‘full’’ fiscal year by collapsing ‘‘partial’’and ‘‘full’’ fiscal years into one category.Under this proposal, all franchisors willbe required to include audited financialstatements in their disclosuredocuments by their third year, whetheror not their first fiscal year was a partialor full year. The proposed phase-in alsoclarifies the Rule by setting forth thephase-in schedule in a clear and easy-to-understand table. This should enablefranchisors to understand quickly theRule’s phase-in requirements. TheCommission believes that the proposedphase-in of audited financial statementsnot only reduces compliance costs forstart-up franchise systems, but

effectively removes a potentiallysignificant barrier to entry.

v. Proposed Section 436.5(v): Item 22(Contracts)

Proposed section 436.5(v)incorporates UFOC Item 22.217 It is alsosubstantially similar to the current Ruleinstruction found at 16 CFR § 436.1(g).It prevents fraud by requiringfranchisors to attach copies of allagreements pertaining to the franchisesale, such as the franchise agreementand any leases, options, or purchaseagreements. This enables prospectivefranchisees to compare what thefranchisor represents in its disclosuresabout the franchisor’s and franchisee’slegal obligations with the actualagreements that will govern thefranchise relationship.218

w. Proposed Section 436.5(w): Item 23(Receipt)

Proposed section 436.5(w)incorporates the UFOC Guidelines’ Item23 receipt requirement.219 There iscurrently no comparable Rulerequirement. The Commission believesthat proposed section 436.5(w) willserve an important anti-fraud purpose.The Commission’s law enforcementexperience indicates that franchisees inmany instances claim that they neverreceived a copy of the franchisor’sdisclosure document. A requirementthat franchisees acknowledge receipt ofthe disclosure document will betterensure that franchisees actually receivethe disclosures with all requiredattachments. The receipt also serves animportant consumer education function,informing prospects that they have 14days to review the disclosures, thatfranchisees should receive certainattachments, and that franchisees canreport possible law violations. Further,as explained below, a receipt isnecessary to prove delivery in the eventthat a franchisor chooses to makedisclosures via the Internet.220

At the same time, the Commissionbelieves that the UFOC Item 23 receiptshould be modified to afford franchiseesgreater flexibility in acknowledgingreceipt of a disclosure document. Tothat end, proposed section 436.5(w)would allow prospective franchisees to

acknowledge receipt through a‘‘signature.’’ As explained supra atSection C.4.w., the Commissionproposes to define the term ‘‘signature’’to include not only written signatures,but digital signatures, passwords,security codes, and other devices thatwill enable a prospective franchisee toeasily acknowledge receipt, confirmtheir identity, and submit theinformation to the franchisor. Proposedsection 436.5(w) also provides thatfranchisors may include specificinstructions on how to submit thereceipt, such as via facsimile. Thiswould enable the parties to determinefor themselves the most efficient way forthe prospective franchisee toacknowledge receipt.

Proposed section 436.5(w) also addstwo new provisions. First, section436.5(w)(2) provides that franchisorsshall obtain a signed copy of the receiptat least five days before the prospectivefranchisee signs the franchise agreementor pays any fee in connection with thefranchise sale. In effect, franchisorsmust have the signed receipt at the timethey furnish prospective franchiseeswith the completed franchiseagreement. The Commission believesthis provision is necessary to ensurethat the prospective franchisee receivesthe disclosures in a timely fashion. Italso prevents fraud by effectivelyprohibiting franchisors from requiringfranchisees to backdate the disclosuredocument receipt after the sale has beencompleted. Finally, section 436.5(w)(3)adds a minor recordkeeping provision,requiring franchisors to retain a copy ofthe signed receipt for a period of at leastthree years. This provision is necessaryin order for franchisors to provecompliance with the rule’s disclosureand timing provisions. The Commissionbelieves that this requirement shouldnot impose any significant costs orburdens on franchisors, who generallywould retain a copy of the receipt as astandard business practice, especially tocomply with the laws of many franchiseregistration states that requirefranchisors to keep records of eachfranchise sale.

9. Proposed Section 436.6: Instructionsfor Preparing Disclosure Documents

The next section of the proposed Rulesets forth the basic instructions forpreparing a disclosure document. Forthe most part, the existing Ruleinstructions are unchanged.

a. Proposed Section 436.6(a): PlainEnglish

Proposed section 436.6(a) adopts theUFOC’s requirement that disclosuredocuments be written in plain English.



221 See <www-a.blm.gov/nhp/NPR/plaine.html>.Indeed, several agencies already have incorporatedplain English requirements in their rules andguides. See, e.g., <www.sec.gov/consumer/plaine.htm> (SEC plain English guides);<www.irs.ustreas.gov/basic/tax-regs/reglist.htm>

(Internal Revenue Service plain English guides).222 See, e.g., UFOC Cover Page Instructions; UFOC

Item 1C Instructions.223 See Final Interpretive Guides, 44 FR at 49969.224 See UFOC Guidelines, General Instructions

230 and 240.

225 62 FR at 9122.226 Su, Comment 24; PR One, Comment 105.227 To that end, the proposed Rule adds three new

definitions. See supra at Section C.4. First, the term‘‘written’’ has been revised to include all media thatare capable of being printed and read. Second, theCommission has added the ‘‘Internet,’’ which isdefined to include all communications betweencomputers and between computers and othercommunications devices. Finally, the term‘‘signature,’’ includes electronic signatures,passwords, and other devices as a substitute for thetraditional handprinted signature.

228 63 FR at 25001.

229 For example, the Commission expects afranchisor to disclose in advance the medium usedto furnish its disclosures (such as computer disk,CD–ROM, E-mail, or Internet) and any specificapplications necessary to view the disclosures (suchas Windows 95, or DOS, or a particular Internetbrowser).

230 This proposal is similar to the positionadopted by the SEC with respect to federalsecurities regulations. See Use of Electronic MediaFor Delivery Purposes, SEC Release No. 33–7233,60 FR 53458 (October 13, 1995) (‘‘SEC Release’’),formally adopted in SEC Release No. 33–7289, 61FR 24652 (May 15, 1996), which advises thesecurities industry how it may use electronic mediato deliver information (i.e., prospectuses and proxymaterials) required under various federal securitiesstatutes. A copy of the SEC release is found at<http://www/sec.gov/rules/proposed/33–7233.txt>.

The plain English requirement is alsoconsistent with the efforts of the federalgovernment’s National PerformanceReview to make all federal rules andregulations easier to understand.221 Thedefinition of the term ‘‘plain English’’ isdiscussed supra at Section C.4.q.

b. Proposed Section 436.6(b): ResponsesProposed section 436.6(b) directs

franchisors to respond to each requireddisclosure item, either positively ornegatively. Except for minor editing,proposed instruction 436.6(b) isidentical to the current Rule provisionfound at 16 CFR § 436.1(a)(24).

c. Proposed Section 436.6(c): NoAdditional Materials

The first part of proposed section436.6(c) specifies that franchisors maynot include additional information inthe disclosure document except forinformation required by non-preemptedstate law. This part is identical to thecurrent Rule provision found at 16 CFR436.1(a)(21). The remainder of theinstruction makes clear that franchisorspreparing multi-state disclosures mayinclude state-specific information in anattachment to their basic disclosuredocument. This instruction reducescompliance burdens and costs becausefranchisors need not generate disclosuredocuments tailored for each state. Thisapproach is consistent with severalinstructions found throughout theUFOC Guidelines.222

d. Proposed Section 436.6(d):Subfranchisors

Proposed section 436.6(d) addressesdisclosure obligations pertaining tosubfranchisors. Specifically, it requiressubfranchisors to disclose the requiredinformation about the franchisor and, tothe extent applicable, the sameinformation about the subfranchisor.This is consistent with currentCommission policy,223 as well as theUFOC Guidelines.224

10. Proposed Section 436.7: Instructionsfor Electronic Disclosure Documents

Proposed section 436.7 sets forthinstructions to enable franchisors tocomply with the Franchise Ruleelectronically. In the ANPR, the

Commission solicited comment on howfranchisors might comply with theFranchise Rule via the Internet.225 Inresponse, two commenters offersubstantially similar proposals,recommending that the Commissionpermit compliance via the Internet in atleast the following scenario: (1) Thefranchisor has a web site that providesgeneral information about its franchisesystem; (2) individuals interested inbeing considered for a franchise can fillout and transmit an online application;(3) applicants deemed by the franchisorto be serious prospects would be givena password to gain access to a sectionof the web site containing disclosuredocuments; and (4) the applicantreviews the appropriate disclosuredocument online.226

The Commission does not wish toimpede franchisors’ ability to maximizethe use of new technologies in theirefforts to comply with the Rule. TheCommission, therefore, proposes thatfranchisors be free to use electronicmedia to furnish their disclosures to thefullest extent possible.227 As theCommission recognized in its InternetNotice, electronic transmission ofdisclosures may be ‘‘easier, moreefficient, and less costly to industrymembers.’’ 228 Electronic disclosurewould also greatly reduce perhaps thechief costs imposed by the Rule:printing and distribution costs.

As explained below, the Commissionproposes no new sweepingrequirements in this area. Rather,proposed section 436.7, for the mostpart, elaborates upon concepts that arealready part of the Rule, in particularhow to ‘‘furnish’’ disclosureselectronically and how to prepare‘‘clear,’’ ‘‘concise,’’ and ‘‘legible’’disclosures in an electronicenvironment. Nonetheless, in order toprevent fraud and circumvention of theRule’s pre-sale disclosure requirements,the proposed Rule contains two new,modest requirements: (1) Thatfranchisors using electronic mediaprovide prospective franchisees with apaper summary document containing anexpanded cover page, table of contents,and acknowledgment of receipt, and (2)

that franchisors retain a specimen hardcopy of each materially different versionof their disclosures.

a. Proposed Section 436.7(a): Consent

Proposed section 436.7(a) makes clearthat a franchisor can furnish disclosureselectronically only if it obtains theprospective franchisee’s informedconsent.229 It also provides thatprospective franchisees retain the rightto revoke acceptance of an electronicdisclosure document for any reason andobtain a paper copy up until the time ofthe franchise sale.

The Commission believes that theobligation to furnish disclosures wouldbe a hollow one if franchisors couldforce prospective franchisees to receivedisclosures in an electronic format thatthey cannot actually receive or read.230

The Commission is also concerned thatfraudulent operators will gravitatetoward electronic media as a new wayto avoid pre-sale disclosure. Forexample, a scam artist could decide tofurnish its disclosures only in someobscure format that is essentiallyunaccessible to most prospectivefranchisees. In keeping with the Rule’svery purpose—to prevent fraud—theCommission believes that candidates fora franchise who are trying to conducttheir own due diligence investigationshould be able to review a hard copydisclosure document if that medium ismore convenient to them. Disclosuredocuments are often very lengthy andprospective franchisees may havedifficulty reading the document onscreen or downloading the documentonto a disk. Some prospectivefranchisees simply may not wish to paythe cost to print the disclosuredocument from their computer screen.Until such time as electronic media aremore widely used, and consumers aremore comfortable with such media, thetraditional paper copy should remainavailable as an option.

In the same vein, the Commissionbelieves that franchisees should have



231 See SEC Release, 60 FR at 53460–61. Similarly,the Federal Reserve agrees in principle thatconsumers should be able to get a paper copy ofelectronic transfer disclosures, stating that it‘‘expects that financial institutions willaccommodate a consumer’s request for a papercopy, or that they will redeliver disclosureselectronically, to the extent that it is feasible to doso.’’ See Interim Rule on Electronic Fund Transfers(‘‘EFT Rule’’), implementing the Electronic FundTransfer Act, 15 U.S.C. 1693 et seq. (1978), 63 FR14528, 14530 (March 25, 1998). See also Selden,Comment 133, at 3; Zarco & Pardo, Comment 134,at 5.

232 See Wieczorek, 6 Nov 97 Tr at 61; Duvall, id.,at 62–63.

233 The Federal Reserve has also expressedconcern about disclosures posted on the Internetwithout prior notice: ‘‘Simply posting informationon an Internet site without some appropriate noticeand instructions about how the consumer mayobtain the required information would not satisfythe [disclosure] requirement.’’ 63 FR at 14529.Similarly, the SEC has stated that stock issuers andothers providing electronic delivery of informationshould have ‘‘reason to believe that any electronicmeans so selected will result in the satisfaction ofthe delivery requirements.’’ SEC Release, 60 FR at53461–62.

the ability to revoke acceptance of anelectronic disclosure document in favorof a paper copy up until the time of thesale.231 Requiring franchisors to provideprospective franchisees with a papercopy should not impose any significantburdens or costs. If a prospectivefranchisee finds that he or she cannoteasily read a disclosure documentelectronically, it would be relativelyeasy, and cost little, for the franchisor toprint a copy of its electronic version andmail it to the prospect.232 This proposalis consistent with the Commission’sInternet Notice, where the Commissionrecognized that:

The requirement that certain informationshould be provided to another person impliesthat such information actually be received bythat person. Therefore, although it may beadvantageous to use new technology tocomply with affirmative [disclosure]requirements, industry members should bemindful of certain issues. For example, therequirement to give, mail, deliver, or furnishinformation would not be met if the intendedrecipient does not have the technologicalcapabilities of receiving or viewing theinformation. In certain circumstances,industry members may need to obtain therecipient’s consent to deliver information bya certain electronic method, inform therecipient of any particular mediumapplications needed to view the information,or deliver the information on paper.

63 FR at 25001.Finally, to ensure that prospective

franchisees are notified about their rightto receive a paper copy, proposedsection 436.3(g) requires any franchisorseeking to furnish disclosureselectronically to add the followingprovision to their cover page:

You may have elected to receive anelectronic version of your disclosuredocument. If so, you may wish to print ordownload the disclosure document for futurereference. You have the right to receive apaper copy of the disclosure document upuntil the time of the sale. To obtain a papercopy, contact [name] at [address] and[telephone number].

Thus, prospective franchisees who wishto revoke acceptance of an electronicdisclosure document for any reason willknow whom to contact to receive apaper copy.

b. Proposed Section 436.7(b): Notice andReceipt

Proposed section 436.7(b) requires afranchisor who furnishes disclosureselectronically to provide prospects witha paper summary document containingthe following three items from itsdisclosure document: (1) The coverpage, (2) the table of contents, and (3)the Item 23 receipt. Franchisors alreadyprepare these three items as part of theirdisclosure document and should be ableto produce the summary document at arelatively low cost. The Commissionbelieves the proposed summarydocument requirement serves two anti-fraud purposes: (1) Advance notice ofthe importance of the information beingdisclosed; and (2) proof of receipt.

Based upon the Commission’s lawenforcement experience, it appears thatmany prospective franchisees areunaware of the Franchise Rule or thatthey should receive pre-sale disclosures.The Rule currently addresses thisproblem by requiring a cover page thatconspicuously states, among otherthings, the name of the franchisor, thatthe document contains importantinformation, and certain cautionarymessages. In addition, the table ofcontents provides a summary of thetypes of disclosures contained in thedocument. The Commission believesthat a prospective franchisee is morelikely to read the disclosures if he or sheknows that it contains information suchas the franchisor’s litigation history(Item 3), financial performanceinformation (Item 19) and statistics onfranchisees in the system (Item 20).

The proposed paper summarydocument would serve the sameconsumer education function, alertingthe prospective franchisee to theimportance of the electronic disclosures.Unlike a paper disclosure document—which clearly announces its contents onthe cover page—an electronic disclosuredocument does not impart anyinformation unless and until theprospective franchisee actually assessesit by opening a file or otherwise callingit up on a computer screen. TheCommission is concerned that thismight provide scam artists with a newfertile ground to commit fraud. Forexample, a franchise seller may seek tofurnish disclosures under the Rule bysimply handing a prospect an unmarkedcomputer disk, without any furtherexplanation. In such an instance, theprospect may fail to read the disclosurescontained on the disk, or, worse, mightdiscard the disk, because nothing drawshis or her attention to the importance ofthe information contained on the disk.Similarly, a franchisor, in theory, might

seek to comply with the Rule byverbally telling a prospective franchiseeto visit the franchisor’s web site to viewthe franchisor’s disclosure document, orby scrolling through a copy of itsdisclosure document online during apresentation in a hotel room.233

To combat such potential fraud,proposed section 436.7(b) requiresfranchisors offering electronic versionsof their disclosure documents to provideprospective franchisee with a papersummary document. Armed with thepaper summary, the prospectivefranchisee would realize that: (1) Theyshould receive disclosures; (2) thefranchisor’s Internet addresses (i.e., E-mail and web site); (3) they have at least14 days to review the disclosures; and(4) information on how to get a papercopy. For additional protection, section436.7(b)(2) requires that the franchisor’sreceipt be incorporated into thesummary document. This wouldprevent a franchisor from having aprospect sign only the receipt, withoutthe benefit of reviewing the importantconsumer educational messagescontained in the cover page, as well asin the table of contents.

In addition to serving a consumereducation function, the summarydocument is necessary to prove deliveryand receipt of the disclosures. Unlikepaper disclosure documents, there is nocertainty that prospective franchiseeswill actually receive disclosures that aresent via E-mail or made available overthe Internet. As the Commissionrecognized in its Internet Notice:

Because there may be technologicaldifficulties that could impede the electronicdelivery of information, it may be necessaryfor industry members to confirm that therecipient in fact received the information.Most facsimile machines routinely confirmwhen the facsimile has been successfullytransmitted. Senders, for example, mightrequire recipients to confirm receipt byreturn e-mail or verify in some manner therecipients’ access to information posted onthe Web site.

63 FR at 25001.The proposed Rule would provide

prospective franchisees with severaloptions for acknowledging receipt of thedisclosure document. Prospectivefranchisees of course could sign the



234 See 63 FR at 14531.235 For a description of electronic verification, see

Gerdes, 6 Nov 97 Tr at 79–82; Jeffers, id. at 86–87.236 The Federal Reserve has come to a similar

conclusion. See 63 FR at 14530. See also Bundy, 6Nov 97 Tr at 129.

237 This recommendation is consistent with thecurrent Rule’s prohibition on adding any materialto the disclosure document beyond what isspecifically required by the Rule. 16 CFR 436.1(f).

receipt in either the paper summarydocument or Item 23 of the disclosuredocument. Proposed section436.7(b)(1)(iii) would also enableprospective franchisees to ‘‘sign’’ thereceipt in the disclosure documentelectronically. As discussed above, theterm ‘‘signature’’ is defined broadly toinclude not only the traditional writtensignature, but digital signatures andother identity verification devices, suchas passwords or security codes.234 Thisdiffers from the UFOC Guidelines,which permits a written signature only.

While the Commission believes thatfranchisors and prospective franchiseesshould be able to take advantage of newtechnologies, it nonetheless rejects thesuggestion that a franchisor bepermitted to demonstrate receiptthrough ‘‘electronic verification,’’ suchas embedding a code in a disclosuredocument that would send a signal tothe franchisor once an electronicdisclosure documents has beenopened.235 The Commission believesthat prospective franchisees should takesome affirmative step to acknowledgereceipt and confirm their identify. Theacknowledgment of receipt serves notonly as proof of delivery, but, asdiscussed above, a consumer educationvehicle. For example, theacknowledgment form reminds theprospect that he or she is to receivesupplemental documents along with thebasic disclosure document, such ascontracts or lease agreements. It alsoinforms the prospect to report anyinaccuracies in the disclosure documentto the Commission and state authorities.These potential benefits to prospectivefranchisees might be lost if thefranchisor could prove delivery solelythrough electronic verification.Requiring a prospect to sign theacknowledgment would better ensurethat the prospect has actually read theacknowledgment page.

c. Proposed Section 436.7(c):Preservation of Disclosures

Proposed section 436.7(c) requiresfranchisors to ensure that an electronicversion of a disclosure document mustbe capable of being printed,downloaded, or otherwise preserved asone single document. The Commissionbelieves that the concept of‘‘furnishing’’ disclosures implies thatprospective franchisees will receive adocument that can be preserved forfuture reference.236 This requirement is

particularly important with respect todisclosures disseminated via the Web(which are often transitory), especially ifthe franchisor does not maintain anonline archive of its disclosuredocuments.

d. Proposed Section 436.7(d): SingleDocument

Proposed section 436.7(d) makes clearthat electronic disclosures, like hardcopies, must be capable of beingreviewed as a single, self-containeddocument. This proposal is analogous tothe Internet Notice’s discussion ofunavoidability, where the Commissionstated:to ensure effectiveness, disclosures ordinarilyshould be unavoidable by consumers actingreasonably. On the Internet or otherelectronic media, this means that consumersviewing an advertisement should necessarilybe exposed to the disclosure in the course ofa communication without having to takeaffirmative action, such as scrolling down apage, clicking on a link to other pages,activating a ‘‘pop up,’’ or entering a searchterm to view the disclosure.

63 FR at 25003.The Commission recognizes that a

franchisor, in theory, could divide itsdisclosures into separate documentsthat are hyperlinked together oraccessed through a pop-up screen orother device. However, the Commissionbelieves that prospective franchiseesreviewing electronic disclosures shouldnot have to surf the franchisor’s web siteor take affirmative action to access therequired disclosures. In addition, if aprospective franchisee sought todownload or print the disclosuredocument for future reference,disclosures contained in a separate, butlinked text, would most likely beexcluded. In short, any impediment tothe prospect’s ability to review allportions of a disclosure documentonline or to preserve the text as a singledocument would render the documentan ineffective communication.

e. Proposed Section 436.7(e): Features

Proposed section 436.7(e) addressesthe use of special features available inelectronic media. Many special featuresexist in an electronic environment, suchas audio, video, graphics, pop-upscreens, and scrolling messages.Proposed section 436.7(e) limits the useof special features to those that willassist a prospective franchisee tonavigate through a disclosure document,such as internal hyperlinks, scroll bars,and search functions. Such features arethe functional equivalent of leafingthrough a hard-copy document. In otherrespects, however, an electronicdisclosure document must be

unadorned. The Commission isconcerned that, if permitted, franchisorscould use graphics, animation, audio,video, and other features to callattention to favorable portions of theirdisclosure document or to distractprospects from damaging disclosures—such as litigation (Item 3) and franchiseefailure rates (Item 20).237

f. Proposed section 436.7(f):Accessibility

Proposed section 436.7(f) requires thatelectronic disclosures remain accessibleat least until the time of the sale. Theconcept of ‘‘furnishing’’ disclosuresimplies that prospective franchisees willreceive a document that can bereviewed at will. The Commission isconcerned that a scam artist, forexample, may embed a code or a virusin a computer disk that will effectivelydestroys its contents. Similarly, as notedabove, disclosure documents posted onthe Internet are often transient: Adisclosure document used one day maybe updated the next. It is also possiblethat a franchisor, for some reason, maysimply decide to suspend disseminatingits disclosures online, leavingprospective franchisees who haveagreed to accept disclosures via the Webwithout any ability to access thedisclosures.

At the same time, the Commissionrecognizes that any obligation on thefranchisor’s part to ensure thatelectronic documents remain accessibleshould be limited. For example, adocument posted on the Internet maybecome inaccessible not because of anyaction taken by the franchisor, butbecause of the consumer’s computerproblems or because of system failures.Accordingly, proposed section 436.7(f)makes clear that technical failuresbeyond the franchisor’s reasonablecontrol (such as system crashes) will notrender a document inaccessible.Further, the Commission recognizes thatfranchisors are under obligations toupdate their disclosure documentsperiodically. A requirement thatdisclosures remain accessibleindefinitely arguably may result infranchisors having to post multipleversions of its disclosures on theInternet to ensure that each prospectivefranchisee has continued access to hisor her particular version. TheCommission doubts that the costs andburdens of such a requirement would beoutweighed by any benefits.Accordingly, proposed section 436.7(f)



238 Bundy, 6 Nov 97 Tr. at 58.239 Id.240 See Houston-Aldridge, 6 Nov 97 Tr at 130–31. 241 See 16 CFR 436.1(e)(6).

242 The Rule currently excludes four non-franchise relationships: (1) Employer-employee andgeneral partnership relationships; (2) relationshipscreated by membership in a cooperative association;(3) relationships in a testing or certification service;and (4) ‘‘single’’ license relationships.

243 SBP, 43 FR at 59708.

also makes clear that updatingdisclosure documents on the Internetwill not render a previously posteddisclosure document inaccessible. Aslong as a prospective franchisee hasaccess to the franchisor’s currentdisclosure document, that shouldsuffice.

g. Proposed Section 436.7(g): RecordRetention

Proposed section 436.7(g) requiresfranchisors who furnish electronicdisclosures under the Rule to complywith a modest recordkeepingrequirement. Specifically, franchisorsmust maintain a specimen copy of eachmaterially different version of theirdisclosures for three years. TheCommission believes that a limitedrecord retention requirement isnecessary for effective law enforcement.For example, one commenter observesthat ‘‘only about 24 to 25 percent of[franchise systems] are likely to be herefive years from now.’’ 238 Franchisorsmerge, go into bankruptcy, sell theirassets, and maintenance of old recordsbecomes very difficult, ‘‘particularly ifthey are available only in electronicform.’’ He further observes that‘‘[e]lectronic form of documents isevolving at such a rapid clip thatsomething that is available in MicrosoftWord 97 today may not be readable inMicrosoft Word 99 tomorrow.’’ 239 Inshort, he advocates a recordkeepingrequirement in order to enable afranchisee to be able to show (andultimately prove) what form ofdocument he or she relied upon.

The Commission agrees. While theRule currently does not require afranchisor to keep copies of itsdisclosure documents, it does require afranchisor to make copies of itsdisclosures (and financial performanceclaims substantiation) available to theCommission upon request. Franchisorsalso routinely keep copies of theirdisclosure documents, without federaloversight, for their own businessrecords 240 and to comply with staterecord retention requirements. It is notunreasonable to expect franchisors toretain copies of their disclosures inorder to mount a defense to aCommission, state, or private action.Moreover, any minimal recordkeepingcosts associated with electronicdisclosures would be substantiallyoutweighed by the vast savings inreduced, or eliminated, printing anddistribution costs associated with

disseminating paper disclosuredocuments.

11. Proposed Section 436.8: Instructionsfor Updating Disclosure Documents

The last of the instructions sections—proposed section 436.8—concernsdisclosure updating requirements. Withone exception, as discussed below, theupdating requirements are identical tothe instructions already contained in thecurrent Rule.

a. Proposed Section 436.8(a): AnnualUpdates

Proposed section 436.8(a) sets forththe basic updating requirement thatfranchisors must revise their disclosures90 days after the close of the fiscal year.This instruction is identical to thecurrent Rule updating requirement setforth at 16 CFR 436.1(a)(22).

b. Proposed Section 436.8(b) QuarterlyUpdates. Proposed section 436.8(b)provides that franchisors must updatetheir disclosure documents to reflectany material changes on at least aquarterly basis. This instruction is alsoidentical to the current Rule updatingrequirement set forth at 16 CFR436.1(a)(22).

c. Proposed Section 436.8(c): MaterialChange Disclosures

Proposed section 436.8(c), a newprovision, would enhance the currentRule’s updating provisions to requirefranchise sellers to notify prospectivefranchisees about any material changesthat may have occurred since theprospective franchisees received theirdisclosure documents. For example, it ispossible that a franchisor may file forbankruptcy, lose a class action suit thatmight affect its ability to continue inbusiness, or undergo some othermaterial change since the last quarterlyupdate. Currently, franchisors mustnotify prospective franchisees onlyabout material changes underlying afinancial performance representation.241

To prevent fraud, proposed section436.8(c) makes clear that it is anomission of material information inviolation of section 5 of the FTC Act fora franchisor to fail to alert prospectivefranchisees about material changeswhen it knows that prospectivefranchisees are relying on theincomplete information contained in adisclosure document. Franchise sellers,therefore, must alert prospectivefranchisees about any material changessince the last quarterly update whenthey furnish the disclosure document.Franchise sellers must also alertprospective franchisees to any

additional material changes when theydeliver a copy of the completedfranchise agreement at least five daysbefore the franchise agreement isexecuted. This proposed revision of theRule’s updating requirements does notrequire franchisors actually to amendtheir disclosure documents, whichmight impose unwarranted costs.Rather, a franchisor must simply notifythe prospective franchisee about anysuch material changes. An oralstatement or faxed letter, for example,would be sufficient.

d. Proposed Section 436.8(d): UpdatedAudited Information

Proposed section 436.8(d) retains theCommission’s current policy thataudited information in a disclosuredocument need not be re-audited on aquarterly basis. Rather, a franchisor canupdate its audited disclosures byincluding unaudited information,provided the franchisor discloses thatthe information is unaudited. Thisinstruction is identical to the currentRule updating requirement set forth at16 CFR 436.1(a)(22).

12. Proposed Section 436.9: ExemptionsThe Commission proposes to retain

all of the existing Rule exemptions andto add several additional exemptions. Atthe same time, the Commissionproposes to eliminate the exclusionscurrently found at 16 CFR 436.2(a)(4)(i)–(iv).242 In the SBP, the Commissionrecognized that these four relationshipsare not franchises, but might beperceived as falling within thedefinition of a franchise.243 To avoidany confusion, the Commissionexpressly excluded these fourrelationships from Rule coverage. TheCommission believes that theseexclusions no longer serve a usefulpurpose. While there may have beensome confusion about the extent of Rulecoverage at the time the Commissionpromulgated the Franchise Rule nearlytwenty years ago, the Commission doesnot believe that such confusion existstoday. Since the Rule went into effect inthe 1970s, the franchise community hasbecome very familiar with the Rule’srequirements, including the definitionof the term franchise. In eliminating thefour exemptions, however, theCommission is not signaling asubstantive change in Commissionpolicy. Rather, the elimination of the



244 SBP, 43 FR at 59704.245 Final Interpretive Guides, 44 FR at 49967.246 Id.

247 See 45 FR 51765 (August 5, 1980).248 Id. at 51766.249 At the time the Commission granted the

petition, it recognized that circumstances maychange in the industry which would warrant a freshreview:

[I]f circumstances change in the future andevidence of renewed misrepresentations in the aleof petroleum franchises reappears on a significantscale, a new rulemaking proceeding may beundertaken that is tailored to the specific needs ofthe industry. In the interim, if isolated abusesoccur, they will be subject to the adjudicativeprocedures and remedies provided by section 5 ofthe FTC Act.

250 See Tifford, Comment 78, at 2; Duvall &Mandel, Comment 114, at 2–3; Cendant, Comment140, at 2; Kaufmann, 18 Sept 97 Tr at 190;Wieczorek, id. at 192; Forseth, id. at 194–95. Seealso Caruso, Comment 118, at 1. Some commentersdid not advance a sophisticated investor exemption,but did not oppose it. See Bundy, 6 Nov 97 Tr at19–20.

251 See Kaufmann, 18 Sept 97 Tr at 165, 170–71;Wieczorek, id. at 187–88 and 6 Nov 97 Tr at 26. OneCommenter notes that while franchisors can fileindividual petitions for exemptions to the Ruleunder section 18(g), the process is costly and thedelay involved often renders this approach anunviable option. Duvll & Mandel, Comment 114, at16.

252 See Zarco & Pardo, Comment 134, at 4–5;Kezios, 6 Nov 97 Tr at 47–48; Bundy, id, at 48–49.

exclusions is simply part of theCommission’s general effort tostreamline the Rule.

a. Proposed Section 436.9(a): MinimumPayment Exemption

Proposed section 436.9(a) issubstantially similar to theCommission’s current $500 minimuminvestment exemption found at 16 CFR436.2(a)(3)(iii). This exemption ensuresthat the Rule ‘‘focuses upon thosefranchisees who have made a personallysignificant monetary investment andwho cannot extricate themselves fromthe unsatisfactory relationship withoutsuffering a financial setback.’’ 244

Proposed section 436.9(a) also enhancesthe current minimum paymentexemption by incorporating theCommission’s long-standing policyexemption for inventory purchases intoan express Rule exemption. In the FinalInterpretive Guides, the Commissionstated that, as a matter of policy, itwould exempt from the Rule’s ‘‘requiredpayment’’ definitional elementreasonable amounts of inventorypurchased at bona fide wholesale pricesfor resale.245 In adopting this policy, theCommission recognized that it is oftendifficult to distinguish betweeninventory purchases that are required bycontract or by practical necessity andthose that are merely discretionary. TheCommission noted, however, thatfranchisors could disguise up-frontfranchisee fees by inflating the level ofinventory franchisees must purchaseand/or inflating the purchase price. Toreduce this fear, the Commissionlimited the policy exemption toreasonable amounts of inventory (asdetermined by standard industrypractices) and purchases at bona fidewholesale prices.246 The proposedexemption, therefore, does not changeCommission policy, but makes it clearthat traditionally non-franchisedbusinesses can sell inventory withoutthe fear of triggering the Rule’sminimum payment requirement.

b. Proposed Section 436.9(b): FractionalFranchise Exemption

Proposed section 436.9(b) retains thefractional franchise exemption currentlyfound at 16 CFR 436.2(a)(3)(i). However,the definition of the term ‘‘fractionalfranchise’’ has been modified slightly,as discussed above at Section C.4.f.

c. Proposed Section 436.9(c): LeasedDepartment Exemption

Proposed section 436.9(c) retains theleased department exemption currentlyfound at 16 CFR 436.2(a)(3)(ii).However, the Commission hasstreamlined the exemption by creating aclearer and shorter definition of theterm ‘‘leased department,’’ as discussedabove at Section C.4.m.

d. Proposed Section 436.9(d): PetroleumMarketers and Resellers Exemption

Proposed section 436.9(d) adds a newexemption for petroleum marketers andresellers covered by the PetroleumMarketing Practices Act (‘‘PMPA’’). 15U.S.C. 2801. In 1980, the Commissiongranted a petition for an exemption fromthe Rule filed by several oil companiesand oil jobbers, pursuant to section18(g) of the FTC Act.247 Specifically, theCommission stated that the Rule ‘‘shallnot apply to the advertising, sale orother promotion of a ‘franchise,’ as theterm ‘franchise’ is defined by the[PMPA].’’ 248 In considering the petition,the Commission noted that the mostfrequently cited complaint voiced in therecord about the petroleum franchiseindustry concerned termination andrenewal practices. After the close of theCommission’s franchise rulemakingrecord, Congress passed the PMPA,which specifically addressed thatcomplaint, requiring, among otherthings, pre-sale disclosure offranchisees’ termination and renewalrights. Accordingly, the Commissionconcluded that the Franchise Rule waslargely duplicative of the PMPA andrelated federal regulations.

Since 1980, Commission staff hasreceived only isolated complaintsregarding abuses in the relationshipbetween petroleum franchisors and theirfranchisees, and the Commission has noreason to believe that a pattern of abuseis likely to develop in the near future.Moreover, even if such abuses didoccur, the Commission has alreadycommitted itself to handling the matterthrough an industry-specificrulemaking.249 For these reasons, theCommission proposes to incorporate the

1980 policy exemption into the Rule asan express Rule exemption.

e. Proposed Section 436.9(e):Sophisticated Investor Exemptions

Proposed section 436.9(e) sets forthtwo new exemptions, which collectivelycan be referred to as ‘‘sophisticatedinvestor’’ exemptions: (1) the largeinvestment exemption; and (2) the largecorporate franchisee exemption. Inresponse to the ANPR, severalcommenters urge the Commission toadopt a sophisticated investorexemption to the Rule.250 Thesecommenters note that franchising todaymay involve heavily-negotiated, multi-million dollar deals between franchisorsand highly sophisticated individual andcorporate franchisees who arerepresented by counsel. In the course ofsuch deals, the franchisees oftendemand and receive information fromthe franchisor that equals or exceeds thedisclosures required by the Rule. Theycontend that these are not the kinds offranchise sales that the Rule wasintended to cover. Commenters furtherassert that the Rule’s mandatory waitingrequirements (currently 10 businessdays to review disclosures and fivebusiness days to review completedcontracts) impose unnecessary costs andadd unwarranted delay in the high-paced negotiation process, where partiesoften are anxious to cement their dealsquickly to beat out the competition.251

At the same time, some commentersvoice concern about the breath of anysuch exemption. They fear thatinvestors may appear to be sophisticatedonly because of a certain net worth orprior business experience, but may havelimited knowledge of the risks inherentin operating the specific franchise beingoffered. In short, they contend that theCommission should protect the wealthy,but inexperienced.252

Based upon the record, theCommission agrees that appropriateexemptions for sophisticated investorsare warranted. The Commission haslong recognized that the Rule’s



253 45 FR 51763 (August 5, 1980).254 See Wieczorek, 6 Nov 97 Tr at 43.

255 Lenders are also likely to require theprospective investor to have sufficient equitycapital in order to qualify for a loan. Indeed, withan investment of $1.5 million, a lending institutionmay require equity of several hundred-thousanddollars before considering a loan. This lending-industry requirement further ensures that, as apractical matter, the proposed exemption would belimited to sophisticated investors only.

256 No state has a comparable exemption. Severalstates—including California, Indiana, Maryland,New York, North Dakota, Rhode Island, SouthDakota, and Washington—have an exemption fromregistration for ‘‘experienced franchisors,’’ focusingon the franchisor, rather than on the prospectiveinvestor. To qualify for the exemption, a franchisormust typically have a net worth of at least $5million and have had 25 franchise locations inoperation during the previous five years. Seegenerally Duvall & Mandel, Comment 114, at 3–4.

257 See Kaufmann, 18 Sept 97, Tr at 190. Theproposed large corporate-franchisee exemption isalso a logical extension of the rule’s fractionalfranchise exemption. The fractional franchiseeexemption focuses narrowly on purchasers whowish to expand their product lines, have experiencein the field, and face a minimal financial risk. Forexample, a small grocery store owner probablywould be a fractional franchisee if he or she becamea snack food distributor. Under the current rule,however, a hospital purchasing the same snack fooddistributorship probably would not be deemed afractional franchisee because of a lack of priorexperience in food sales. This is an illogical result,given the hospital’s greater financial resources andbargaining power. Hospitals and other largeinstitutions such as airports and universities arehardly the type of ‘‘consumers’’ that theCommission needs to protect. See Kirsch, 18 Sept97 Tr at 198–99. But see Kezios, id. at 191–92.

258 This inflation adjustment proposal is modeledafter the Appliance Labeling Rule, 16 CFR 305,which sets forth ranges of estimated annual energycosts and consumption for various appliances.Because energy cost and appliance efficienciesfluctuate, the Commission adjusts the labelrequirements periodically by publishing in theFederal Register new costs and ranges, which thenbecome part of the rule’s labeling requirements. Tothat end, section 305.9(b) of the Appliance LabelingRule provides: ‘‘Table 1, above, will be revised onthe basis of future information provided by theSecretary of the Department of Energy, but not moreoften than annually.’’ The proposal is alsoconsistent with the Commission’s procedures foradjusting thresholds or other information inCommission-enforced statutes. For example, theCommission publishes in the Federal Registerannual adjustments for determining illegalinterlocking directorates in connection with section19(a)(5) of the Clayton Act, as well as adjustmentsto civil penalties at least once every four yearsunder the Debt Collection Improvement Act of1966. See 61 FR 54549 (October 21, 1996).

protections may be unnecessary wherethe likelihood of abuse does not exist.Proposed section 436.9(e)(1) wouldexempt franchise sales where theinvestment totals at least $1.5 million.The Commission believes that onemeasure of ‘‘sophistication’’ is the sizeof the investment. In granting petitionsfor exemption from the Franchise Ruleunder section 18(g) of the FTC Act, theCommission has noted several factorsthat, when present, suggest thatapplication of the Rule may beunwarranted, including the size of theinvestment. For example, in granting thePetition submitted by the AutomobileImporters of America, Inc.,253 theCommission observed:Prospective motor vehicle dealers makeextraordinarily large investments. As apractical matter, investments of this size andscope involve relatively knowledgeableinvestors or the use of independent businessadvisors, and an extended period ofnegotiation. The record is consistent with theconclusion that the transactions negotiatedby such knowledgeable investors over timeand with the aid of business advisorsproduce the pre-sale information disclosurenecessary to ensure that investment decisionsare the product of an informed assessment ofthe potential risks and benefits of theproposed investment.

Id. at 51,764.The Commission believes that a $1.5

million threshold is sufficient to exemptsophisticated investors, yet protectordinary consumers who seek topurchase a franchise. Consumers whohave $1.5 million available to invest ina franchise are likely to be experiencedbusiness persons.254 Further, aninvestment of $1.5 million most likelywould involve the purchase of a singlelarge investment—such as a hotel or themost expensive restaurant location—orthe purchase of multiple, less costlyunits. Purchasers of multiple units aremore likely to be persons withsignificant business experience in lightof the management demands such ashiring staff and ensuring efficientoperation of the outlets. In addition,purchasers of multiple units are likelyto include existing franchisees withsignificant prior experience with thefranchisor. These experienced investorsare not likely to purchase a franchise onimpulse, are more likely to negotiateover the terms of any contract, and aremore resistant to high pressure salesrepresentations.

Proposed section 436.9(e)(1) hasadditional safeguards beyond the $1.5million threshold to ensure that averageconsumers will be protected. First, theproposed exemption makes clear that

funds obtained from the franchisor (oran affiliate) cannot be counted towardthe $1.5 million threshold. Mostpurchasers of a franchise, or group offranchises, that require a $1.5 millionlevel of investment will have to turn tobanks or other sources of financing.Lenders most likely will ensure that theinvestor has conducted a due diligenceinvestigation of the offering beforeapproving any loan.255 This assurance,however, is absent if the source of anyfunds is the franchisor or an affiliate.Indeed, a prospective franchisee who isinclined to purchase without a thoroughexamination of the proposed franchisedeal may also be lulled into making alarge investment when offered attractivefinancing by the franchisor.

Second, the proposed largeinvestment exemption requires theprospective franchisee to sign anacknowledgment that the franchise saleis exempt from the Franchise Rulebecause the prospective franchisee willbe investing more than $1.5 million.This requirement will reduce theprobability that the franchisor maymisrepresent the cost of the franchise. Itwill also provide a paper trail in theevent an enforcement action becomesnecessary.

While the Commission believes thatthe proposed large investmentexemption is proper, it nonethelesssolicits additional comment on thisissue. Specifically, the Commissionseeks comment on whether theproposed $1.5 million threshold is toohigh or low and, if so, what would bean alternative threshold, including anyspecific facts or data that would supportsuch an alternative.

Proposed section 436.9(e)(2) wouldexempt from the Rule the sale offranchises to large corporations, namelythose that have been in business for atleast five years that have a net worth ofat least $ 5 million.256 There appears tobe little risk for abuse where afranchisor sells a single or multiple

franchises to a large corporatefranchisee. Such transactions often areheavily negotiated by sophisticatedcounsel who have significant experiencein the franchise industry. Even if a largecorporation does not have priorexperience in franchising specifically, itis reasonable to assume that it canprotect its own interests whennegotiating for the purchase of afranchise.257 Nonetheless, theCommission solicits additionalcomment on the proposed largecorporation exemption. Specifically, theCommission seeks comment on whetherthe proposed 5 years and $5 millionthresholds are sufficient and solicits anyalternatives.

Finally, proposed section 436.9(e)states that the Commission may publishrevised thresholds for the sophisticatedinvestor exemption once every fouryears to adjust for inflation. While theCommission believes that the proposedthresholds are sufficient today, it isquite possible that in a few years thesethresholds will be too low because ofinflation. Accordingly, the Commissionproposes to publish revised thresholdsin the Federal Register once every fouryears.258 A four-year adjustment periodappears to strike the right balance



259 The proposed exemption is modeled afternearly identical language in California’s franchisestatute. Washington and Rhode Island have similarexemptions. See Duvall & Mandel, Comment 114,at 21.

260 SBP, 43 FR at 59708.

261 One commenter, Dady & Garner, suggests thatfranchisees should always receive a refund (minusactual costs) if they never actually open or operatean outlet. Dady & Garner, Comment 127, at 4. TheCommission believes that the substantive terms andconditions of refunds are a matter of contractbetween the parties. As long as the terms andconditions of any refund policy are spelled out inthe disclosure document or franchise agreement,that appears to be sufficient.

262 62 FR at 9122.263 See also Winslow, Comment 92, 1–2.264 For example, the Commission’s 1995 Project

Telesweep, in which the FTC and state law andlocal enforcement authorities filed nearly 100 lawenforcement actions, was based upon the findingthat many franchise and business opportunitysellers seek to attract consumers throughadvertisements, in particular advertisements withoutrageous earnings representations.

265 Indeed, the Commission has testified beforethe Senate Commerce, Science and TransportationCommittee that ‘‘the proliferation of deceptive,

between ensuring that the thresholdskeep up with inflation and relieving theCommission of the expense and burdenof more frequent adjustments.Nonetheless, the Commission solicitscomment on whether a periodicinflation adjustment is warranted, thecosts and benefits of a four-yearadjustment period, as well as anyalternatives.

f. Proposed Section 436.9(f): Officersand Owners Exemption

Proposed section 436.9(f) wouldexempt sales to franchisees who are (orrecently have been) officers or owners ofthe franchisor.259 There does not appearto be any need for disclosure in suchcircumstances because we canreasonably assume that the prospectivefranchisee already is familiar with everyaspect of the franchise system and theassociated risks. Further, in someinstances, a company may wish to offerunits to its owners or directors only. Ifnot exempt, these companies wouldhave to go through the burden andexpense of creating a disclosuredocument for isolated sales to companyinsiders. To ensure that individualsqualifying for the exemption have recentand sufficient experience with thefranchisor, the proposed exemption islimited to individuals who have beenassociated with the franchisor within 60days of the sale and who have beenwithin the franchise system for at leasttwo years.

g. Proposed Section 436.9(g): OralContracts

The final exemption, proposedsection 436.9(g), retains the currentexemption for oral contracts found at 16CFR 436.2(a)(3)(iv). In the SBP, theCommission recognized that problemsof proof make it difficult to regulatepurely oral agreements. In addition, therecord indicated that oral arrangementsare usually informal and require onlynominal investments. 260

13. Proposed Section 436.10: AdditionalProhibitions

The next section of the ProposedRule—proposed section 436.10—setsforth additional prohibitions. Proposedsection 436.10 differs from the currentRule prohibitions in several respects.First, it updates the Rule’s provisionsregarding financial performancerepresentations made in the generalmedia to include representations on the

Internet and other advertising vehicles.Second, it prohibits franchisors fromincluding integration clauses in theircontracts that would effectively absolvethem from liability for statements madein their disclosure documents. Finally,it makes clear that the use of paidreferences (shills) is an unfair anddeceptive act or practice in violation ofsection 5 of the FTC Act.

a. Proposed Section 436.10(a): NoContradictory Statements

Proposed section 436.10(a) prohibitsfranchisors from making any statementsthat are contradictory to those set forthin their disclosure documents. Exceptfor minor editing, this is identical to thecurrent Rule prohibition set out at 16CFR 436.1(f).

b. Proposed Section 436.10(b): RefundsProposed section 436.10(b) prohibits

franchisors from failing to honor theirrefund guarantees. This is similar to thecomparable Rule provision found at 16CFR § 436.1(h). However, theCommission proposes to modify theprohibition slightly. The current section436.1(h) prohibits franchisors fromfailing ‘‘to return any funds or depositsin accordance with any conditionsdisclosed pursuant to paragraph (a)(7) ofthis section.’’ Thus, the provision islimited to instances where thefranchisor makes an express refundpromise in the disclosure documentitself. The Commission’s lawenforcement experience indicates,however, that in some instancesfranchisors do not make any specificpromise in the disclosure document, butdo so either in the franchise agreementor in a separate contract or letter ofunderstanding. Proposed section436.10(b) makes clear that the failure tohonor any written refund promise inconnection with a franchise sale willconstitute a Rule violation. 261

c. Proposed Section 436.10(c): WrittenSubstantiation

Proposed section 436.10(c) prohibitsfranchisors from failing to makeavailable to prospective franchisees andto the Commission upon reasonablerequest written substantiation for anyfinancial performance representationsmade in an Item 19 disclosure. Exceptfor minor editing, this provision is

identical to the current Rule provisionfound at 16 CFR 436.1(b) and 436.(1)(c).

d. Proposed Section 436.10(d): FinancialPerformance Statements

Proposed section 436.10(d) addressesthe dissemination of financialperformance representations outside ofa disclosure document, including thegeneral media, Internet advertising, andunsolicited commercial E-Mail. In theANPR, the Commission questioned thecontinuing need for the general mediaclaims provision currently set out at 16CFR 436.1(e). 262 In response, nocommenter raised any concerns aboutthe Rule’s existing approach towardgeneral media financial performanceclaims. On the other hand, a fewcommenters note the proliferation offinancial performance claims in thegeneral media. For example, the AFAstates:

You have to look no further than lastThursday’s edition of the Wall Street Journalto see examples of misleading advertisementswith regard to earnings potential. Forexample, one franchisor consistentlyadvertises by saying ‘‘60% to 80% grossprofit margins.’’ An advertisement for amaster franchisee states ‘‘a proven method ofmaking a fortune.’’ * * * Consumers see theadvertisement first, the franchise agreementsecond and then the franchisor’s salespersonsays something like ‘‘we are prohibited bylaw from making any earnings claims.’’ Butthe damage has already been done—theconsumer has seen the ad.

AFA, Comment 62, at 6. 263

Based upon the record, theCommission believes that disclosurerequirements for financial performancerepresentations made in the generalmedia continue to serve a usefulpurpose. The Commission’s lawenforcement experience alsodemonstrates that such claims areprevalent and continue to attract anumber of consumers.264 Indeed, thecommunications age has ushered in newadvertising media such as the Internetand unsolicited commercial E-mail. Forexample, many companies have homepages that contain express financialperformance representations andthousands of consumers receive ‘‘spam’’E-mail messages encouraging them toinvest in various opportunities.265



unsolicited commercial E-mail * * * couldundermine consumer confidence and slow thegrowth of Internet commerce,’’ noting that the FTChas collected over 100,000 pieces of unsolicitedcommercial E-mail and receives up to 1,500 newpieces daily. See FTC News, Growth of Deceptive‘‘Spam’’ Could Undermine Consumer Confidence inInternet (June 17, 1998).

266 See also Manuszak, Comment 13, at 1; Bell,Comment 30, at 1; Sibent, Comment 41, at 1 (and19 identical comments); AFA, Comment 62, at 3;Bundy, Comment 119, at 2; Selden, Comment 133,Appendix B, at 2; Zarco & Pardo, Comment 134, at3.

267 Selden, Comment 133, Appendix B, at 2.

268 Integration clauses effectively requrefranchisees to waive reliance on statements made inthe disclosure document. The Commission has longdisfavored the waiver of rights afforded byCommission trade regulation rules. See Used CareRule, 16 CFR 455 at § 455.3(b), Credit PracticesRule, 16 CFR 444 at § 444.2; Cooling-Off PeriodRule, 16 CFR 429 at § 429.1(d); and OphthalmicPractices Rule, 16 CFR 456 at § 456.2(d).

269 E.g., FTC v. Hart Mktg. Enter., Inc., No. 98–222–CIV–T–23 (M.D. Fla. 1988); FTC v. Stillwater

Continued

Accordingly, guidance concerningfinancial performance representations intraditional and new advertising media isclearly warranted.

Proposed section 436.10(d) prohibitsany franchise seller from making afinancial performance representationoutside of a disclosure document unlessthe seller: (1) has a reasonable basis forthe claim; (2) has written substantiationfor the claim at the time it is made; (3)includes the representation in Item 19 ofits disclosure document; (4) includesthe number and percentage of themeasured outlets that support the claimfrom its Item 19 disclosure; and (5)includes a conspicuous admonition thata new franchisee’s individual financialresults may differ from those stated inthe representation. In short, a franchisormay make a financial performance claimin advertising materials only if the claimis consistent with, and includes thelimited required information takenfrom, its Item 19 disclosures made toprospective franchisees.

The Commission finds that theproposed section 436.10(d) approach tofinancial performance claims greatlystreamlines the current Rule provisionand should make it easier forfranchisors to disseminate truthfulfinancial performance information. Forexample, under the current Ruleapproach, franchisors making generalmedia performance representations arerequired to give a prospective franchiseea separate earnings claim document thatsets forth the claim in detail and,depending upon the nature of the claim,specific cautionary language. Proposedsection 436.10(d) would eliminate theserequirements. The Commission believesthat the Item 19 disclosurerequirements, in the format describedabove, are sufficient to providemeaningful performance information toprospective franchisees without theneed for a separate disclosuredocument.

e. Proposed Section 436.10(e):Disclaimers

Proposed section 436.10(e), a newprohibition, addresses the issue ofcontract integration clauses. It wouldprohibit franchisors from disclaimingliability for, or causing franchisees towaive reliance on, statements made intheir disclosure documents. In responseto the ANPR, a number of franchisees

and their representatives commentedthat franchisors routinely seek todisclaim liability for their pre-saledisclosures through the use of contractintegration clauses. These clauseseffectively force franchisees to waiveany rights they have to rely on pre-saledisclosures made to them during thesales process. For example, onecommenter states:

In virtually every lawsuit I have filed forfranchisees alleging fraud, franchisedisclosure, or unfair or deceptive practices(under California law since the FTC rule doesnot provide a private right of action), counselfor the franchisor defendants have defendedthe action on lack of justified reliance.Franchisors and their counsel havesystemically written the agreements to stripfranchisees of all fraud claims and rights theminute the agreement is signed bysophisticated integration, no representationand no reliance clauses * * *. TheCommission should provide that reliance onthe disclosure document and otherrepresentations made in the sale of afranchise is per se justified. 266

Lagarias, Comment 125, at 4.Another commenter adds that

integration clauses are not wellunderstood and their impact is notappreciated at all until long after thefranchise purchasing commitment ismade. 267

Based upon the record, theCommission does not recommendbanning the use of integration clauses asa deceptive or unfair act or practice.Integration clauses can serve a usefulpurpose, ensuring that prospectivefranchisees rely only on informationauthorized by the franchisor or withinthe franchisor’s control. For example, afranchisor reasonably may seek todisclaim liability for unauthorizedclaims made by rogue salespersons,statements made by former or currentfranchisees, or even unattributedstatements found in the trade press.

The Commission, however, believes itis a violation of section 5 for franchisorsto use integration clauses essentially toshield themselves from liability for falseor deceptive statements made in theirdisclosure documents. The Commissionhas long recognized that the integrity ofa franchisor’s disclosure document iscritical to prospective franchisees. Forthat reason, disclosures must becomplete, accurate, legible, and current.The Rule also prohibits franchisors frommaking any statements that contradictthose in a disclosure document. The use

of integration clauses to disclaimliability for required disclosuresundermines the very purpose of theRule, which is to prevent fraud andabuse by ensuring that prospectivefranchisees have complete, truthful,material information with which tomake a sound investment decision. 268

Accordingly, proposed section 436.10(e)will better ensure that prospectivefranchisees will receive complete andtruthful pre-sale disclosures.

At the same time, the Commissionrecognizes that a prohibition ondisclaimers or waivers may have theunintended effect of chilling the parties’willingness to negotiate freely franchisecontract terms. A franchisor mayinterpret an anti-disclaimer prohibitionto mean that it is bound by the termsand conditions set forth in a disclosuredocument only and that anymodification will constitute a Ruleviolation. To rectify this potentialmisinterpretation, proposed section436.10(e) specifically provides that aprospective franchisee can agree toterms and conditions that differ fromthose specified in a disclosuredocument if: (1) the franchise selleridentifies the changes; (2) theprospective franchisee initials thechanges in the franchise agreement; and(3) the prospective franchisee has fivedays to review the completed revisedcontract before the sale is consummated,consistent with proposed section436.2(a)(2) described above.

f. Proposed Section 436.10(f): ShillsProposed section 436.10(f) adds aprohibition against franchisors’ use ofphony references or ‘‘shills.’’ Proposedsection 436.10(f) would make it a Ruleviolation for a franchisor tomisrepresent that any person hasactually purchased or operated one ofthe franchisor’s franchises. It also wouldmake it a Rule violation for a franchisorto misrepresent that any person can givean independent and reliable reportabout the experience of any current orformer franchisee. The Commission’slaw enforcement experiencedemonstrates that, in many instances,scam artists use shill references in orderto bolster their earnings and successclaims. 269 Indeed, shills are often the



Vending, Ltd., No. 97–386–JD (D.N.H. 1997); FTC v.Unitel Sys., Inc., No. 3–97CV1878–D (N.D. Tex.1997); FTC v. Southeast Necessities Co., Inc., No.6848–CIV–Hurley (S.D. Fla. 1994); Car Checkers ofAmerica, Bus. Franchise Guide (CCH) ¶ 10,163, at24,042. Indeed, in two actions, the Commissionnamed a shill in its complaint, charging each withviolating section 5 of the FTC Act. See FTC v.Vendors Fin. Serv., Inc., No. 98–N–1832 (D. Colo.1998); FTC v. Urso, Bus. Franchise Guide (CCH)¶ 11,410 (S.D. Fla. 1997). Cf. O’Rourke, Bus.Franchise Guide (CCH) ¶ 10,243 (evidence of shillsadmitted at contested Preliminary Injunctionhearing).

270 NCL reports that complaints about fakereferences are among the most common franchiseeand business opportunity complaints its receives.NCL, Comment 35, at 2.

271 SBP, 43 FR at 59719.272 See, e.g., FTC v. Hart Mktg. Enter. Ltd., Inc.,

No. 98–222-CIV-T–23 E (M.D. Fla. 1998); FTC v.Inetintl.com, No. 98–2140 (C.D. Cal. 1998); FTC v.Maher, No. WMN–98–495 (D.Md. 1998); FTC v.Nat’l Consulting Group, Inc., No. 98 C 0144 (N.D.Ill. 1998).

273 See 16 CFR 436, note 2. This approach isconsistent with other Commission trade regulationrules. See, e.g., Appliance Labeling Rule, 16 CFR305 at § 305.17; Cooling-Off Rule, 16 CFR 429 at§ 429.2; Mail Order Rule, 16 C.F.R. 435 at§ 435.3(b)(2); R-Value Rule, 16 CFR 460 at § 460.23.

274 This provision is comparable to theseverability provisions in other Commission traderegulation rules. See, e.g., 900-Number Rule, 16CFR 308.8; Telemarketing Sales Rule, 16 CFR 310.8. 275 15 U.S.C. 57a(c).

glue that holds the scam together byallaying consumers’ concerns about theinvestment. 270

14. Proposed Section 436.11: OtherLaws, Rules, and Orders

Proposed section 436.11 addresses theeffect the revised Rule may have onother Commission laws and outstandingCommission orders. It also discussespreemption of state franchise laws thatmay be inconsistent with this Rule.

a. Proposed Section 436.11(a): Effect onOther Commission Laws

Proposed section 436.11(a) makesclear that the Commission does notexpress any opinion about the legality ofany practices that might be disclosed ina franchisor’s disclosure document. Thecurrent Rule contains a comparableprovision at note 1 at the end of theRule. In the SBP, the Commissionrecognized that some of the Rule’sprovisions may require franchisors todisclose practices that may raiseantitrust issues. 271 The provision makesclear that the Commission reserves theright to pursue violations of antitrustlaws even if a franchisor discloses theviolation in complying with the Rule’sdisclosure requirements. In short,disclosure does not create a safe harborfor franchisors engaging in otherwiseunlawful conduct. At the same time,proposed section 436.11(a) clarifies thatcompliance with the Rule’s specificdisclosure requirements will not shielda franchisor from the broader anti-deception provision of section 5 of theFTC Act. 272 The Commission finds thatthis clarification is critical especially inan age of quickly developingtechnologies. The Commission cannotnow predict what information about thefranchise relationship will be materialin the future, in particular franchisors’

and franchisees’ rights and obligationsconcerning issues such as the use ofInternet home-pages, electronicadvertising, and electronic commerce.Franchisors’ disclosure obligationsunder section 5 must remain somewhatflexible to ensure that franchisorscontinue to provide prospectivefranchisees with all materialinformation as new technologies andmarketing practices emerge.

b. Proposed Section 436.11(b): Effect onPrior Commission Orders

Since the Rule went into effect in the1970s, the Commission has brought over150 franchise and business opportunitycases. The Commission recognizes thatit is possible that the revised Rule mayimpose disclosure or other obligationsthat are inconsistent with the terms ofexisting Commission orders. To reduceany potential conflicts between existingorders and provisions of the revisedRule, proposed section 436.11(b) wouldpermit firms under order to petition theCommission for relief consistent withthe provisions of the revised Rule.

c. Proposed Section 436.11(c):Preemption

Proposed section 436.11(c) retains thepreemption provision currently found atnote 2 at the end of the Rule. 273 Itprovides that the Commission does notintend to preempt state or localfranchise practices laws, except to theextent of any inconsistency with theRule. It provides further that a law is notinconsistent if it affords prospectivefranchisees equal or greater protection,such as registration of disclosuredocuments or more extensivedisclosures.

d. Proposed Section 436.12: Severability

Proposed section 436.12 retains theseverability provision currently found at16 CFR 436.3. This provision makesclear that, if any part of the rule is heldinvalid by a court, the remainder willstill be in effect. 274

Section D—Rulemaking Procedures

Pursuant to 16 CFR 1.20, theCommission has determined to use thefollowing rulemaking procedures. Theseprocedures are a modified version of therulemaking procedures specified in

section 1.13 of the Commission’s Rulesof Practice.

First, the Commission intends topublish a single Notice of ProposedRulemaking. The comment period willbe open for 60 days, followed by a 40-day rebuttal period. Second, pursuant tosection 18(c) of the Federal TradeCommission Act, 275 the Commissionwill hold hearings with cross-examination and rebuttal submissionsonly if an interested party requests ahearing by the close of the commentperiod. Parties interested in a hearingmust also submit within the commentperiod the following: (1) a comment onthe NPR; (2) questions of fact in dispute;and (3) a summary of the expectedtestimony. Parties wishing to cross-examine witnesses must also file arequest by the close of the commentperiod. If requested to do so, theCommission may also consider holdingone or more informal public workshopconferences in lieu of hearings. After theclose of the comment period, theCommission will publish a notice in theFederal Register stating whetherhearings (or a public workshopconference in lieu of hearings) will beheld and, if so, the time and place of thehearings and instructions for thosewishing to present testimony or engagein cross-examination of witnesses.

Finally, after the conclusion of therebuttal period, and any hearings oradditional public workshopconferences, Commission staff will issuea Report on the Franchise Rule (‘‘StaffReport’’). The Commission willannounce in the Federal Register theavailability of the Staff Report and willaccept comment on the Staff Report fora period of 60 days.

Section E—Communications toCommissioners and CommissionerAdvisors by Outside Parties

Pursuant to Commission Rule1.18(c)(1), the Commission hasdetermined that communications withrespect to the merits of this proceedingfrom any outside party to anyCommissioner or Commissioner advisorshall be subject to the followingtreatment. Written communications andsummaries or transcripts of oralcommunications shall be placed on therulemaking record if the communicationis received before the end of thecomment period on the staff report.They shall be placed on the publicrecord if the communication is receivedlater. Unless the outside party makingan oral communication is a member ofCongress, such communications arepermitted only if advance notice is



276 See 15 U.S.C. 57a(i)(2)(A); 45 FR 50814 (1980);45 FR 78626 (1980).

277 The RFA addresses the impact of rules on‘‘small entities,’’ defined at ‘‘small business,’’‘‘small governmental entities,’’ and ‘‘small [not-for-profit] organizations.’’ 5 U.S.C. 601. The FranchiseRule applies only to the first type of entity.

278 See supra at Section C.2.279 The franchisors who do not currently use the

UFOC format would, of course, have greatercompliance costs associated with adapting to a newformat. However, the number of small entitieswithin this subset does not appear to be substantial.

published in the Weekly Calendar andNotice of ‘‘Sunshine’’ Meetings. 276

Section F—Regulatory Analysis andRegulatory Flexibility ActRequirements

Section 22 of the FTC Act, 15 U.S.C.57b, requires the Commission to issue apreliminary regulatory analysis for arule amendment proceeding if it: (1)estimates that the amendment will havean annual effect on the nationaleconomy of $100,000,000 or more; (2)estimates that the amendment willcause a substantial change in the cost orprice of certain categories of goods orservices; or (3) otherwise determinesthat the amendment will have asignificant effect upon covered entitiesor upon consumers. Based upon therecord, the Commission haspreliminarily determined that theproposed amendments to the Rule willnot have such an effect on the nationaleconomy, on the cost or prices offranchised goods or services, or oncovered businesses or consumers. Toensure that the Commission hasconsidered all relevant facts, however, itrequests additional comment on thisissue.

The Regulatory Flexibility Act(‘‘RFA’’), 5 U.S.C. 601 et seq., requiresan agency to conduct an analysis of theanticipated economic impact ofproposed rule amendments on smallbusinesses. 277 The purpose of aregulatory flexibility analysis is toensure that the agency considers theimpact on small entities and examinesregulatory alternatives that couldachieve the regulatory goals whileminimizing burdens on small entities.The RFA does not apply if the agencyhead certifies that the regulatory actionwill not have a significant economicimpact on a substantial number of smallentities. As discussed below, theCommission believes that the proposedRule amendments will not have asignificant economic impact upon smallbusinesses subject to the Rule.Accordingly, the Commission certifiesthat the RFA does not apply to theproposed Franchise Rule amendments.

The proposed Rule amendments affectpre-sale disclosure for the sale offranchises, and thus are likely to havean impact on all franchisors, some ofwhich are small entities. Determiningthe precise number of small entitiesaffected by these proposed amendments,

however, is difficult due to the widerange of industries involved infranchising. The Commission estimatesthat there are approximately 5,000franchisors selling franchises in theUnited States, including 2,500 businessformat and product franchisors and2,500 business opportunity sellers. Mostbusiness opportunities and someestablished and start-up franchisesystems would likely be consideredsmall businesses according to theapplicable SBA size standards. As aresult, the Commission estimates that asmany as 70% of franchisors, as definedby the Rule, are small entities.

Nonetheless, the proposedamendments do not appear to have asignificant economic impact upon suchentities. For the most part, theCommission’s proposed amendments, asdetailed throughout this notice,streamline and reorganize the Rule’sdisclosures based upon the UFOCGuidelines model. The Rule’s reviseddisclosure requirements, therefore,would be more closely aligned with theUFOC format, which is considered bymany to be the national franchisedisclosure standard. 278 Other proposalsseek to clarify and refine the Rule, forinstance, by providing new or reviseddefinitions. Accordingly, we wouldexpect the vast majority of franchisors toincur only minor costs in adapting tothe proposed revised Rule. 279

Further, in a few instances, theproposed amendments will reducefranchisors’ compliance costs. Forexample:

(1) Proposed Section 436.2

This provision limits the scope of theRule to franchise sales in the UnitedStates, potentially relieving franchisorsof substantial costs associated withpreparing disclosure documents forinternational sales. Because franchisorsselling internationally are generallylarge franchisors, we do not expect thisproposal to have a significant effect onsmall entities.

(2) Proposed Section 436.9(e)

This provision sets forth newexemptions for sophisticated investors.These proposals similarly will reducecosts to those franchisors that are notlikely to engage in fraudulent franchisesales. Since the proposed exemptions,by their terms, apply only to largeinvestments, or investments made by

very large companies, we would expectlittle if any impact on small entities.

(3) Proposed Section 436.7

This provision expressly permitsfranchisors to utilize the Internet andother electronic media to furnishdisclosure documents. Allowing thisdistribution method could greatlyreduce franchisors’ compliance costsover the long run, especially costsassociated with printing anddistributing disclosure documents. As aresult of this proposal, we expectfranchisors’ compliance costs willdecrease over time, but do not expectthe immediate impact to be substantialfor most franchisors, in particularsmaller franchise systems.

A few proposed Rule amendments,however, may increase franchisors’compliance costs. Nonetheless, theCommission expects these costs to be deminimis and to decline after thefranchisors’ initial fiscal year ofcomplying with the proposed amendedRule. These proposals requirefranchisors to disclose additionalmaterial information that will shed lighton the state of the franchise relationshipor increase prospective franchisees’ability to conduct their own duediligence investigation of franchiseofferings. While these proposals couldpotentially impact both large and smallfranchisors, we would expect anyimpact to be greatest with largerfranchise systems. For example,

(1) Proposed Section 436.3.

This would require franchisors toinclude in the disclosure document’scover page references to severalfranchise resources, such as theCommission’s Internet web site and its‘‘Consumer Guide to Purchasing aFranchise.’’ These references assistprospective franchisees by notifyingthem of valuable information that isavailable on franchising. The provisionapplies to all franchisors, but at minimalcost.

(2) Proposed Section 436.5(c)

This provision would requirefranchisors to disclose pendinglitigation brought by franchisors againsttheir franchisees involving the franchiserelationship. Providing this additionalinformation gives prospectivefranchisees further insight into therelationship between the franchisor andcurrent and former franchisees. Whilethis proposed change would apply to allfranchisors, the impact is likely to begreatest on large systems, which bydefinition, have a significant number offranchisees, and therefore, a greater



280 See 64 FR 1206 (January 8, 1999), announcinga request for a three year extension of the FranchiseRule’s current information collection requirements.In that notice, the burden hour estimate wasreduced from 36,200 to 33,500.

likelihood of pending litigation againstfranchisees.

(3) Proposed Section 436.5(t)(6)This would require franchisors to

make a prescribed statement about theuse of ‘‘gag clauses,’’ if applicable. Thisproposed section also includes twoadditional optional disclosures,whereby franchisors are permitted todisclose the number and percentage offranchisees who have signed gagclauses, and the circumstances underwhich the gag clauses were signed. Theeconomic impact of including theprescribed statement alone is negligible.Any additional costs will arise fromfranchisors’ voluntarily complying withthe Rule’s optional provisions. Further,we can expect that larger systems aremore likely than small entities to havea significant number of franchisees whohave signed gag clause provisions.

(4) Proposed Section 436.5(t)(7)This provision would require

franchisors to disclose the names andaddresses of trademark-specificfranchisee associations that request tobe included in the franchisors’disclosure document. This informationwould further assist prospectivefranchisees in investigating thefranchise system, with virtually nochange in the cost of preparing adisclosure document. The number oftrademark-specific franchiseeassociations in any single franchisesystem is likely to be limited, especiallyin small franchise systems. Further,those associations that wish to beincluded in the disclosure documentmust provide the franchisor with all ofthe relevant information. Thus,including this information in adisclosure document should have verylittle impact on franchisors’ documentpreparation costs.

For the reasons outlined above, theCommission believes that the proposedRule amendments, taken as a whole,will likely have a negligible economicimpact on franchisors’ compliancecosts, particularly for small franchisors.Presumably, compliance costs will varywith the size of the franchise system,with smaller franchisors incurring lowercosts. The Commission estimates thatfranchisors will be required to spendbetween 1 and 5 hours to complyinitially with the proposed reviseddisclosure requirements. At an averagehourly billing rate of $250, theestimated cost to each system will bebetween $250 and $1,250. Theseamounts are not significant, especiallyin the context of franchisors’ total yearlyincome and expenses. Further, anyinitial compliance costs will

presumably decrease after the franchisorhas revised its disclosures into the newformat, and may well be offset by theRule amendments’ streamlineddisclosure provisions.

Therefore, based on the availableinformation, the Commission certifiesthat amending the Franchise Rule willnot have a significant economic impacton a substantial number of smallbusinesses. To ensure that no significanteconomic impact is being overlooked,however, the Commission requestscomments on this issue. TheCommission also seeks comments onpossible alternatives to the proposedamendments to accomplish the statedobjectives. After reviewing anycomments received, the Commissionwill determine whether a finalregulatory flexibility analysis isappropriate.

Section G—Paperwork Reduction ActIn this notice, the Commission

proposes to alter some informationcollections contained in the FranchiseRule. As required by the PaperworkReduction Act of 1995 (‘‘PRA’’), 44U.S.C. 3507(d), the Commission hassubmitted a copy of the informationcollections to the Office of Managementand Budget (‘‘OMB’’) for its review. Thecurrent public disclosure andrecordkeeping burden for collections ofinformation contained in the Rule is36,200 hours, approved under OMBControl No. 3084–0107, expiration dateMarch 31, 1999. In that clearancesubmission, we estimated there were3,613 franchisors. For the followingcalculations, we estimate that there arecurrently 5,000 franchise systems,consisting of 2,500 business format andproduct franchisors and 2,500 businessopportunity sellers. The 1999 estimateof the cost to comply with thecollections of information contained inthe Rule, which includes both businessformat and product franchisors andbusiness opportunities, is $19,925,000,and the total burden hours associatedwith these collections is currentlyprojected to be 33,500.280 As discussedbelow, we expect that the proposedFranchise Rule amendments will resultin a large information collectionsavings, resulting primarily fromeliminating business opportunities fromRule coverage.

The proposed amendments aredesigned to improve the Rule’sorganization and language, while alsoadding and changing some of the

disclosure items. The proposals willimpact franchisors differently, and,depending on the particular franchisor,may eliminate completely, reduce, orslightly increase, franchisors’compliance costs and burdens. Some ofthe more significant proposedamendments address the scope of theFranchise Rule, such as the proposalthat separates the disclosurerequirements for franchises from thoseof business opportunities. Otherproposals offer new disclosurealternatives or requirements, and mayimpact franchisors’ informationcollection. These include, for example,giving franchisors the option to use theInternet to furnish disclosuredocuments, and requiring franchisors todisclose information about knowntrademark-specific franchiseeassociations. Still other proposedamendments simply clarify certainexisting disclosure requirements andshould also provide an overall benefit toaffected respondents without increasingcosts. These clarifications, however, arenot changes to the regulation andaccordingly, they do not affect thecollections of information contained inthe regulation. Where proposals dochange an information collectionrequirement, we discuss them below.Following is a summary of the moreimportant proposed amendments to theRule:

(1) Eliminating the Rule’s Coverage ofBusiness Opportunities

The proposed Rule will no longerapply to business opportunity sellers,who will be covered by a separate Rule.Thus, compliance costs for businessopportunity sellers will drop to zero. Inthe past, we have estimated thatapproximately five hours are needed forbusiness opportunities to comply withthe information collection requirementscontained in the Rule, and 15 hours areneeded by franchisors. Eliminatingbusiness opportunities from the Rulewould therefore result in a total savingsof 12,500 labor hours (2,500 businessopportunity sellers × 5 hours) and$3.125 million (12,500 hours × $250 perhour), as well as a savings of $3.75million in printing costs (2,500 businessopportunity sellers × $1,500 printingcosts per company).

(2) Adopting Three SophisticatedInvestor Exemptions

Proposed section 436.9(e) will exemptcertain franchise offerings from theRule’s disclosure obligations. Thisproposal acknowledges that in verylarge transactions, and in transactionsthat involve certain owners andmanagers of the franchise system, the



individuals involved have theexperience and resources necessary toobtain important information about thefranchise system independently. Forthose companies that qualify, theseexemptions could eliminate alldisclosure burdens. Assuming that 5percent of franchise systems, or 125firms, will be exempted, this will resultin a reduction of 1,875 hours and$468,750 (1,875 × $250).

(3) Revising the Rule’s DisclosureRequirements Based Upon the UFOCGuidelines Model

Revising the Rule based on the UFOCGuidelines model will benefit affectedentities by bringing greater uniformity tofranchise disclosure documents. Inpractice, the UFOC is the nationalstandard. Because the proposed revisedRule format is patterned after the UFOCformat, we estimate that franchisors’time and costs needed to comply withthe Franchise Rule will be reduced by1 hour, for a net savings of 2,375 hoursand $593,750 (1 hour × $250 per 2,375companies).

(4) Improving the Rule’s Organizationand Language

Deleting provisions that no longerserve a useful purpose and streamliningthe Rule by adopting, for instance, aclear, bright line disclosure trigger, willmake the Rule easier to understand andthus, foster easier compliance. Althoughthe net savings under this proposalattributable to better organization andlanguage are difficult to quantify, webelieve that franchisors may save anaverage of 1 hour in compliance time at$250 per hour, for a net savings of 2,375hours and $593,750

(5) Permitting Compliance Through theInternet and Other Electronic Media

Proposed section 436.7 couldpotentially reduce franchisors’compliance costs significantly,especially the costs and hoursassociated with printing anddistributing disclosure documents,which at 6 hours per year, is the bulkof the current hourly burden estimate.Distributing documents electronicallywould eliminate the 6 hours per year forthose franchisors no longer printing andmailing any of their disclosuredocuments. We approximate that 20percent of franchisors, or 475franchisors, will initially make use ofthis proposal, and each will distribute50 of their 100 documentselectronically, saving three hours peryear. This will result in a reduction of1,425 hours. This provision, however,will also require franchisors to adaptand distribute their electronic and

summary documents. We estimate thatthose 475 franchisors will spend 1 hourto adapt and distribute their electronicand summary documents for anadditional burden of 475 hours.Accordingly, franchisors’ use of theelectronic disclosure option will resultin a net reduction of 950 hours.

Further, we have previously estimatedthat printing and mailing one disclosuredocument averages approximately$25.00 ($35 for franchisors and $15 forbusiness opportunity sellers) and that5,000 franchisors and businessopportunity sellers print and distribute100 copies annually, for a total cost of$12.5 million. We believe that theproposed amendment permittingelectronic disclosure would reduce thedistribution cost per electronicdisclosure document to $5.00, for a totalnet savings of $712,500 (475 franchisorsfurnishing 50 electronic disclosuredocuments each at a saving of $30 perelectronic disclosure document). Weanticipate that time and costs willfurther decline in the future as morefranchisors make greater use ofelectronic media.

(6) Disclosing Additional Resources andInformation for Franchisees

Proposed section 436.3 requires thedisclosure document’s cover page toreference the Commission’s Internetweb site, where consumers can findresources on franchising and relatedtopics. This information will providesignificant benefit to consumers, as willrequiring the cover page to note theavailability of the Commission’sConsumer Guide To Purchasing aFranchise. Another proposedamendment, proposed section 436.5(a),would require franchisors to discloseinformation about their predecessors,industry-specific regulations, and thegeneral competition prospectivefranchisees are likely to face. Finally,proposed 436.5(t)(7) would require afranchisor to disclose the names andaddresses of trademark-specificfranchisee associations that ask to belisted in the franchisor’s disclosuredocument. These associations can oftenprovide prospects with additionalinformation on the franchise system.

The proposed cover sheet changeswould not constitute ‘‘collections ofinformation’’ as that term is defined inthe PRA, because the text is beingprovided by the Government and thePRA exempts any ‘‘information that isoriginally supplied by the Federalgovernment to the recipient for thepurpose of disclosure to the public.’’ 5C.F.R. § 1320.3(c)(2). Requiringdisclosure of predecessor information,regulations and competition, while not

exempt, would only impose a deminimis burden, since presumably,franchisors would already possess thisinformation. Likewise, disclosinginformation about trademark-specificfranchisee associations would alsoimpose only a de minimis burden on theaffected entities, since franchisorswould only be responsible for disclosinginformation about those associationsthat request to be included in thedisclosure document. We estimate thatonly one hour per year per franchisorwould be needed to comply with thesedisclosure requirements for a totalincrease of 2,375 hours and a cost of$593,750.

(7) Disclosing Additional InformationAbout the Franchise Relationship

Proposed section 436.5(c), whichrequires franchisors to disclose pendinglawsuits brought against franchisees,would give potential franchiseesinformation about the types of problemsin the franchise system, and the extentto which a franchisor uses litigation toresolve disputes. The Rule currentlyrequires the disclosure of litigationbrought by franchisees againstfranchisors and this has not proven tobe overly burdensome. Disclosingadditional lawsuits would also generallybe de minimis, since this information iswell-known by the franchisor, is usuallyalready compiled during the ordinarycourse of business, and can easily beupdated at the beginning and end of alawsuit. Accordingly, we have assigned1 hour to this task for a total of 2,375hours and a cost of $593,750.

(8) Requiring Disclosure About GagClauses

Proposed section 436.5(t)(6) includesa new provision that requiresfranchisors to disclose their use of gagclauses. The proposed amendmentrequires that, if applicable, franchisorsmake a prescribed statement thatinforms prospective franchisees thatsometimes, current or formerfranchisees sign provisions restrictingtheir ability to discuss their franchiseexperience. The proposal also offersfranchisors two additional options: (1) afranchisor may disclose the number andpercentage of current and formerfranchisees who have signed agreementswith gag clauses within the last threeyears; and (2) a franchisor may explainthe circumstances surrounding the gagclauses. However, because thisproposal’s only actual requirement is toinclude specific text provided by theCommission, it is exempt from the PRA.Therefore, no additional burden hoursare associated with this proposal.



(9) Requiring Prescribed StatementsAbout Financial PerformanceRepresentations

Proposed sections 436.5(s)(1) and (2)require franchisors to include in theirdisclosure documents two prescribedstatements that clarify the law regardingfinancial performance representations.The first statement is mandatory for allfranchisors, and makes clear thatfinancial performance representationsare allowed under certaincircumstances. This statement combatsa common misrepresentation—that theFTC’s Franchise Rule does not permitfranchisors to make earningsrepresentations. If franchisors do notprovide financial representations, theymust also include a second prescribedstatement that includes anacknowledgment that they do notprovide any type of financialperformance representations, either oralor written. The proposed Rule providesthe specific text that franchisors mustuse for both statements, and is thereforeexempt from the PRA. Accordingly, noburden hours are associated with thisproposed amendment.

(10) Recordkeeping Requirements

The proposed amended Rule wouldset forth two recordkeepingrequirements. As an initial matter,proposed section 436.5(w) adds arequirement that franchisors include intheir disclosure document a receipt thatprospective franchisees must sign andreturn at least five days before afranchise agreement is signed or thefranchisee pays any franchise fee. Theproposal also requires franchisors tokeep signed receipts for each completedfranchise sale for at least three years.This proposed item contains therequired language and format for thereceipt, and the franchisor must onlyfill-in its franchise-specific information.Franchisors are also required to includea receipt under the current UFOCGuidelines. Thus, there is very littleburden associated with producing thereceipt.

Further, proposed section 436.5(w)would require franchisors to retain acopy of the signed receipts for at leastthree years. In addition, proposedsection 436.7(g) would requirefranchisors who elect to furnishdisclosures electronically to retain aspecimen copy of each materiallydifferent version of their disclosuredocument for a period of three years.These recordkeeping provisions shouldimpose a de minimis additional burdenon franchisors. Many franchisorsalready retain sales receipt in order tocomply with state regulations. In

addition, we can assume that a largenumber of franchisors would retainreceipts as well as copies of theirdisclosures in the ordinary course ofbusiness. Thus, the few franchisors whodo not already retain these records inthe ordinary course of business willexperience an increased paperworkburden. We therefore estimate thatfranchisors, on average, will require 30minutes per year to maintain theserecords for a total increase of 1,188hours and $297,000.Total cost to comply with the Franchise

Rule = $12,165,750 ($19,925,000–$7,759,250)

Revised total annual burden hours =19,363 (33,500–14,137)Organizations and individuals

desiring to submit comments on theinformation collection requirementsshould direct comments to the Office ofInformation and Regulatory Affairs,OMB, Room 10235, New ExecutiveOffice Building, Washington, DC 20503;Attention: Desk Officer for the FederalTrade Commission.

The FTC considers comments by thepublic on these collections ofinformation in:

• Evaluating whether the proposedcollection of information is necessaryfor the proper performance of thefunctions of the agency, includingwhether the information will have apractical use;

• Evaluating the accuracy of theagency’s estimate of the burden of thecollection of information, including thevalidity of the methodology andassumptions used;

• Enhancing the quality, usefulness,and clarity of the information to becollected; and

• Minimizing the burden of collectionof information on those who are torespond, including through the use ofappropriate automated electronic,mechanical, or other technologicalcollection techniques or other forms ofinformation technology; e.g., permittingelectronic submission of responses.

• OMB is required to make a decisionconcerning the collection of informationcontained in these proposed regulationsbetween 30 and 60 days afterpublication of this document in theFederal Register. Therefore, a commentto OMB is best assured of having its fulleffect if OMB receives the commentwithin 30 days of publication. This doesnot affect the deadline for the public tocomment to the agency on the proposedregulations.

Section H—Request for Comments

The Commission invites members ofthe public to comment on any issues or

concerns they believe are relevant orappropriate to the Commission’sconsideration of the proposed FranchiseRule amendments. The Commissionrequests that factual data upon whichthe comments are based be submittedwith the comments. In addition to theissues raised above, the Commissionsolicits public comment on the specificquestions identified below. Thesequestions are designed to assist thepublic and should not be construed asa limitation on the issues on whichpublic comment may be submitted.

1. General Questions

Please provide comment, includingrelevant data, statistics, consumercomplaint information, or any otherevidence, on each different proposedchange to the Rule. Regarding eachproposed revision commented on,please include answers to the followingquestions:

(a) What is the impact (including anybenefits and costs), if any, on:

1. Prospective franchisees;2. Existing franchisees; and3. Franchisors (including small

franchisors and start-up franchisors)?(b) What alternative proposals should

the Commission consider? How wouldthese proposed alternatives affect thecosts and benefits of the proposed Rule?

2. Questions on Specific ProposedChanges

In response to each of the followingquestions, please provide: (1) detailedcomment, including data, statistics,consumer complaint information, andother evidence, regarding the issuesaddressed in the question; (2) commentas to whether the proposed changes door do not provide an adequate solutionto the problems they were intended toaddress; and (3) suggestions foradditional changes that might bettermaximize consumer protections orminimize the burden on franchisors.

Definitions

1. The proposed definition of‘‘financial performancerepresentation’’—section 436.1(d)—includes any representation that ‘‘statesor suggests’’ a value or range of potentialor actual financial performance. Thisdefinition seeks to make clear thatimplied earnings representations areconsidered financial performancerepresentations. Does this definitionclarify what the Commission considersto be financial performancerepresentations? If not, what alternativedefinition should the Commissionconsider?

2. Based upon the UFOC model, theproposed Rule requires franchisors to



disclose various expenses, including theinitial franchise fee (proposed 436.5(e)),recurring or occasional fees (proposed436.5(f)), and estimated initialinvestment (proposed 436.5(g)). Whilethe Commission does not consider thedisclosure of such expense informationalone to constitute the making of afinancial performance claim, othersarguably may interpret some expenseinformation as implying a financialperformance representation, such as abreak-even point. To avoid anyconfusion, the proposed definition of‘‘financial performancerepresentation’’—section 436.l(d)—specifically omits expense information.Is the omission of expense informationfrom the proposed definition sufficientto make clear that compliance with theRule’s expense disclosure obligationsdoes not trigger the Rule’s Item 19financial performance substantiationrequirements? At the same time, couldthe proposed definition inadvertently beinterpreted as permitting franchisors todisclose additional, non-requiredexpense data without complying withthe Rule’s Item 19 requirements? If so,could franchisors make ‘‘back-door’’earnings representations in the guise ofadditional expense information? Whatalternative definition should theCommission consider?

3. The proposed definition of the term‘‘franchise’’—section 436.1(g)—isdesigned to include franchises thattraditionally have been covered by theRule, while eliminating ordinarybusiness opportunities that will becovered by a separate businessopportunity rule. Does the proposedrevised definition capture theappropriate universe of franchises? Doesthe definition inadvertently eliminatebusinesses that should be consideredfranchises?

4. The proposed definition of‘‘franchise seller’’—section 436.1(h)—combines into a single concept thecurrent terms ‘‘franchisor’’ and‘‘franchise broker.’’ This alleviates thenecessity for using both terms whendiscussing obligations to furnishdocuments. It also seeks to clarify whois considered to be a franchise seller.Does the proposed definition includethe appropriate persons? Are there otherpersons that should be included in thedefinition?

5. Proposed section 436.1(k) providesa definition of the term ‘‘gag clause,’’which refers to contractual provisionsthat prohibit or restrict franchisees’ability to discuss their own personalexperiences within the franchisesystem. Does this proposed definitionclearly identify the types of provisionsthat are considered gag clauses? Does

the use of the term ‘‘gag clause’’accurately describe these types ofcontractual provisions? Is there anotherterm that would be preferable?

6. Proposed section 436.1(l) providesa broad definition of the term‘‘Internet,’’ which refers to all computer-to-computer communications, includingthe World Wide Web, andcommunications between computersand television, telephone, facsimile, andsimilar communications devices. Giventhe rapidly evolving computerenvironment, does this definition allowenough room—or too much room—fornew types of computer communication?Is the definition consistent with otheragencies’ definitions of Internet?

7. The proposed definition of officer—section 436.1(o)—includes ‘‘a de factoofficer,’’ an individual with significantmanagement responsibility whose titledoes not adequately reflect the nature ofthe position. This revised definition,based upon the UFOC Guidelines,clarifies that the actual functions aperson performs within a company,whether or not the person possesses atitle, will be considered whendetermining if the individual is subjectto the disclosure provisions in proposedsections 436.3–436.5. Is the proposeddefinition sufficient to enablefranchisors to determine who is deemedto be an officer for purposes of the Rule?What alternative definition might beappropriate?

8. The proposed definition of‘‘signature’’—section 436.1(w)— refersto a person’s affirmative steps toauthenticate his or her identity. Thisincludes both written and electronicsignatures. In light of the growing use ofelectronic communications, is theexpansion of the Rule to includeelectronic signatures desirable? Arethere sufficient safeguards in place todiscourage unlawful uses of electronicsignatures?

Liability9. The proposed Rule sets forth a new

standard of liability. Proposed section436.2(c) would hold franchisors liablefor any failure to comply with thedisclosure requirements andinstructions set forth in sections 436.3–436.8. In contrast, proposed section436.2(c) would hold other sellers (suchas the franchisor’s employees and salesrepresentatives) liable for violations ofsections 436.3–436.8 only if they ‘‘knewor should have known of the violation.’’What are the costs and benefits ofholding other franchise sellers liable forRule violations? If other franchisesellers are to be held liable, is a ‘‘knewor should have known’’ standardappropriate? What alternative standards

of liability should the Commissionconsider?

Timing Provisions10. Proposed section 436.2(a)(1)

would require franchisors to providedisclosure documents at least 14 daysbefore a prospective franchisee eithersigns a binding agreement or pays a feein connection with the franchise sale.This proposal would eliminate thecurrent ‘‘10 business day’’ period infavor of a bright line ‘‘14 days.’’ Is thismodification desirable? Whatalternatives should the Commissionconsider?

11. Proposed section 436.2(a)(2)would require the franchisor to providea copy of its completed contract at leastfive days before the prospectivefranchisee signs the contract. Thisproposal would eliminate the current‘‘five business day’’ period in favor of abright line ‘‘five days.’’ Does thisproposal afford prospective franchiseessufficient time to conduct a duediligence review of a franchise offering?If five days does not provide a sufficientreview period, what would be anappropriate review period?

Disclosures12. Proposed section 436.5 retains the

current Rule requirement thatfranchisors disclose informationconcerning their predecessors. What arethe costs and benefits of this disclosurerequirement? In particular, isinformation about predecessors usefulto prospective franchisees in decidingwhether to purchase a franchise fromthe current franchisor? Further, theproposed Rule would requirefranchisors to disclose informationabout predecessors during the past 10years. Is this information readilyavailable to franchisors? Should thedisclosure be limited to informationabout the franchisor’s immediatepredecessor?

13. Proposed section 436.5(c)(ii)would require franchisors to disclose allpending material civil actions involvingthe franchise relationship. Would theseadditional disclosures provideprospective franchisees with usefulinformation? Would it be advisable tolimit the scope of the disclosure, byproviding, for example, that a franchisorwould not have to make the disclosureunless it had sued a certain thresholdpercentage of its franchisees? If so,would a 5% threshold be appropriate?What other alternatives should theCommission consider?

14. Proposed section 436.5(k) requiresfranchisors to disclose informationabout whether they require theirfranchisees to purchase or use electronic



cash registers and computer systems.Franchisors must also disclose detailedinformation about any required systems.Does this proposal sufficiently specifywhat information is required to bedisclosed? Does this proposal undulyburden franchisors, in particular start-up franchisors, who may not possessspecific computer requirements at thetime the disclosure document isprepared? What alternatives should theCommission consider?

15. Proposed section 436.5(1)(2)(ii)would require franchisors that do notoffer exclusive territories to make thestatement: ‘‘You will not receive anexclusive territory. [Franchisor] mayestablish other franchised or franchisor-owned outlets that may compete withyour location.’’ Does this statementsufficiently alert prospective franchiseesabout potential competition from withinthe franchise system? What alternativestatement would be appropriate?

16. Proposed section 436.5(1) requiresfranchisors to disclose whether theyoffer protected territories. Shouldproposed section 436.5(l) also requirefranchisors to disclose their currentdevelopment plans? Is such informationproprietary? What costs and benefitswould be involved in disclosing currentdevelopment plans?

17. Proposed section 436.5(q), amongother things, requires franchisors todisclose information about ‘‘renewals.’’Is the term ‘‘renewal’’ misleading? Doesit imply that prospective franchiseeswill be able to extend their contracts foran additional period under the sameterms and conditions as their currentcontract? Is there a distinction betweenan ‘‘extension’’ and a ‘‘renewal’’ of acontract? If the term ‘‘renewal’’ ismisleading, what alternatives would bemore accurate?

18. Proposed section 436.5(s),consistent with the UFOC Guidelines,would eliminate the requirement thatfinancial performance representationsmust be geographically relevant to thefranchise being offered. Would thisproposal have an impact on the numberof franchisors making financialperformance representations or on thequality of such representations?

19. Proposed sections 436.5(s)(3)(i)-(ii) detail the information franchisorsmust provide if they elect to makehistorical performance representations.Do these required disclosures provideprospective franchisees with sufficientinformation to assess therepresentation? How can thesedisclosures be improved?

20. Proposed sections436.5(s)(3)(ii)(A) and (F) requirefranchisors that make financialperformance representations to: (1)

describe the characteristics of theoutlets underlying the representation;and (2) describe how thosecharacteristics may differ materiallyfrom those of the outlet that may beoffered to a prospective franchisee. Dothese sections provide franchisors withsufficient guidance about whatcharacteristics they must disclose? Howcan these sections be improved? Arethese characteristics sufficient to enableprospective franchisees to assess therelevance of the financial performancerepresentation to the franchise offeringbeing considered? If not, whatadditional disclosures are desirable toprovide prospective franchisees withthe necessary information?

21. Proposed section 436.5(s)(3)(iv)retains the current requirement thatfranchisors making financialperformance representations toprospective franchisees must include aconspicuous admonition that a newfranchisee’s individual financial resultsmay differ from the results stated in thefinancial performance representation.Should this admonitions be required forall financial performancerepresentations? If not, when is itunnecessary?

22. Commenters have noted that Item20 may cause franchisors to ‘‘doublecount’’ franchise closures. How oftenand under what circumstances does thisoccur? Does the proposed section436.5(t) approach solve the doublecounting problem? Do the instructionsand sample tables provide sufficientguidance on how to present the requiredinformation?

23. If multiple events occur in theprocess of a change in the ownership orclosure of a unit, proposed section436.5(t)(1) directs franchisors to reportthat change under the heading for theevent that occurred first (a ‘‘first-in-time’’ approach). For example, if afranchisor formally notifies a franchiseethat the franchise agreement for aparticular unit will be terminated, andthe franchisee subsequently sells hisrights back to the franchisor or to athird-party, the franchisor would recordthis series of events as a ‘‘termination,’’since that event occurred first. In manyinstances, this approach would captureterminations by the franchisor ratherthan any subsequent transfers orreacquisitions. Does this approachcapture the right information? Is thereany evidence that suggests thatinformation about terminations by afranchisor is more meaningful toprospective franchisees than subsequenttransfers or reacquisitions?

24. Instead of a first-in-time approach,should the Commission considerprioritizing the various events that may

occur, so that franchisors would reportunit closures and ownership changesthat involve multiple events accordingto the highest assigned applicablecategory (an ‘‘order-of-priority’’approach)?

A. Should the Commission adopt theorder of priority set forth in columns (4)through (8) of the proposed Item 20table? Like the first-in-time approach,this approach would tend to stressterminations and cancellations overreacquisitions and transfers. Under thisapproach, a franchisor would reportevents according to the following order:(1) termination or cancellation by thefranchisor; (2) reacquisition by thefranchisor for consideration (whether bypayment or forgiveness or assumption ofdebt); (3) transfer by the franchisee to anew owner; (4) post-term non-renewals;and (5) events other than termination/cancellation, reacquisition, transfer, orpost-term non-renewal.

B. Should the order of priority focuson reacquisitions and transfers overterminations and cancellations? Underthis approach, a franchisor would reportevents according to the following order:(1) reacquisitions by the franchisor forconsideration (whether by payment orforgiveness or assumption of debt); (2)transfer by the franchisee to a newowner; (3) termination or cancellationby the franchisor; (4) post-term non-renewal; and (5) events other thanreacquisition, transfer, termination/cancellation, or post-term non-renewal.

C. Are either of these approachespreferable to the first-in-time approach?Should the Commission consider otherorders of priority? How might theapplication of a specific order of prioritylead to different results than the first-in-time approach? What kinds ofinformation would a specific order-of-priority approach tend to provide that isnot available from the first-in-timeapproach? What evidence is there thatprospective franchisees would find thisadditional information valuable tothem?

25. Consistent with the UFOCguidelines, proposed section 436.5(t)(4)requires that franchisors disclose thenames, addresses, and telephonenumbers of either all of their franchiseesor at least 100 of their franchisees. Thecurrent Rule requires that franchisorsdisclose the names, addresses, andtelephone numbers of only 10franchisees. What are the costs andbenefits of disclosing the names,addresses, and telephone numbers ofadditional franchisees?

26. Proposed Item 20—section436.5(t)(6)—also includes a newprovision that requires disclosure ofinformation about the use of gag clauses.



Would this proposal provideprospective franchisees with usefulinformation? Will this proposal affectthe ability of franchisors and franchiseesto reach future settlements? Is the three-year reporting period appropriate? Ifnot, should it be longer or shorter?

27. Proposed Item 20—section436.5(t)(7)—also would requirefranchisors to disclose informationabout trademark-specific franchiseeassociations. Would this provisionprovide prospective franchisees withuseful information? Does the proposalstrike the correct balance between costsimposed on franchisors and the benefitsto prospective franchisees?

28. Proposed section 436(u)(2) setsforth the phase-in of audited financialstatements for new franchisors. Do theinstructions and table provide sufficientguidance on how to phase-in auditedfinancial statements? Should theCommission consider alternative phase-in approaches?

29. Proposed section 436.5(w)(2)would require franchisors to prove thatprospective franchisees actuallyreceived a disclosure document. Doesthis proposal serve a useful purpose? Dofranchisors already retain similarrecords in the ordinary course ofbusiness? What alternative methodsshould the Commission consider?

30. The proposed Rule disclosures arebased upon the UFOC Guidelines. Asexplained in this notice, however, thereare several instances where theCommission intends the proposed Ruleto differ from the UFOC Guidelines.Aside from those instances alreadynoted, are there other instances where aproposed Rule provision appears to beinconsistent with the comparable UFOCprovision in a material way?

Electronic Disclosures31. Proposed section 436.7(b) would

permit franchisors to furnish disclosuredocuments electronically, and sets forththe conditions under which franchisorsmay do so. What approaches are otherfederal and state agencies takingregarding electronic disclosure? Is theCommission’s proposal consistent withother federal and state agencies’approaches? Are there other approachesthe Commission should consider?

32. Proposed section 436.7(b) wouldrequire franchisors who furnishdisclosures electronically to provideprospective franchisees with a writtensummary document. One purpose of thesummary document is to help ensurethat prospective franchisees understandthe importance of receiving a disclosuredocument and their rights if they cannotread an electronic version. Will thisprovision achieve that goal? Will the

summary document add significantly tothe costs associated in providingelectronic disclosure documents?

Exemptions33. Proposed section 436.9 provides

that certain franchise relationships areexempt from the Rule’s disclosurerequirements. Does this provisionadequately inform franchisors that theynonetheless are subject to the applicableRule prohibitions set forth at 436.10(i.e., failure to return refunds)?

34. Assuming business opportunitieswill be addressed in a separate rule,does proposed section 436.9(a), whichretains the current $500 threshold forfranchise sales, continue to serve auseful purpose? What threshold wouldensure that the Franchise Rulecontinues to apply to transactionsinvolving a ‘‘personally significantmonetary investment?’’

35. Proposed section 436.9(e)(1)would create a disclosure exemption forlarge investments. Is the proposed $1.5million threshold appropriate? Whatalternative threshold would bepreferable? Are the other protectionsincluded in this proposed exemptionsufficient to limit it to onlysophisticated investors? Specifically, isit appropriate to exclude funds receivedfrom the franchisor or affiliate towardsthe $1.5 million? Does the requiredfranchisee acknowledgment add anyadditional protection to prospectivefranchisees?

36. Proposed section 436.9(e)(2) alsocreates a disclosure exemption for largecorporate investors. Do the proposedfive years in business and $5 million networth requirements accuratelycharacterize the type of corporateinvestors that should be excluded fromRule coverage? Should the limits beraised or lowered? What otheralternatives should the Commissionconsider in determining the proper classof exempted corporate-investors?

37. Does proposed section 436.9(e)adequately address the impact ofinflation on the proposed sophisticatedinvestor thresholds? Are there moreeffective ways of adjusting for inflation?Does the inherent uncertainty in aninflation adjustment present problemsto franchisors or prospectivefranchisees? If the Commissionpublishes its inflation-adjustedthresholds several months before theireffective dates, would that providesufficient notice to franchisors orprospective franchisees?

Miscellaneous38. Proposed section 436.10(e) would

prohibit franchisors from disclaiming(or requiring a franchisee from waiving

reliance on) any statement made in adisclosure document. Would thisproposal serve a useful purpose? Whatare the potential costs and benefitsassociated with the proposal? Whatalternatives should the Commissionconsider to ensure that prospectivefranchisees can rely on the accuracy ofstatements made in a disclosuredocument?

39. Proposed section 436.11(b) statesthat franchisors can petition theCommission to amend any outstandingFTC order that applies to any franchisorthat may be inconsistent with anyprovision of the revised Rule. Is thisexpress reference to the opportunity fororder modification by the Commissionneeded?

40. Should the Commission revise theFranchise Rule to add a requirementthat franchisors state in their disclosuredocuments the name, business address,and telephone number of the primaryindividuals who were responsible forpreparing the disclosure document?This proposal would be similar tofranchisors including information aboutthe accounting firm that prepared theiraudited financial statements. Wouldsuch a requirement improve the qualityof advice that prospective franchisorsare given by their advisors? Could thisrequirement help reduce fraud in thesale of franchises, by giving advisors anincentive to be more cautious aboutadvising clients who may be ill-prepared financially or otherwise toenter into franchising or to support afranchise system?

Section I—Proposed Rule

List of Subjects in 16 CFR Part 436

Advertising, Business and industry,Franchising, Trade practices.

Accordingly, it is proposed that part436 of title 16 of the Code of FederalRegulations, be revised to read asfollows:

PART 436—DISCLOSUREREQUIREMENTS AND PROHIBITIONSCONCERNING FRANCHISING

Subpart A—Definitions

Sec.436.1 Definitions.

Subpart B—Obligations of Franchisors andOther Franchise Sellers

436.2 The obligation to furnish documents.

Subpart C—The Contents of a DisclosureDocument

436.3 Cover page.436.4 Table of contents.436.5 Disclosure items.



Subpart D—Instructions

436.6 Instructions for preparing disclosuredocuments.

436.7 Instructions for electronic disclosuredocuments.

436.8 Instructions for updating disclosures.

Subpart E—Other Provisions

436.9 Exemptions.436.10 Additional prohibitions.436.11 Other laws, rules, orders.436.12 Severability.

Appendix A: Sample Item 10 Table—Summary of Financing Offered

Appendix B: Sample Item 20(1) Table—Franchised Outlet Summary for Fiscal Years1995–1997

Appendix C: Sample Item 20(2) Table—Franchisor—Owned Outlets Summary for1995–1997

Appendix D: Sample Item 20(3) Table—Projected Openings as of December 31, 1997

Authority: 15 U.S.C. 41–58.

Definitions

§ 436.1 Definitions.Unless stated otherwise, the following

definitions shall apply throughout thisrule:

(a) Action includes complaints, crossclaims, counterclaims, and third-partycomplaints in a judicial proceeding, andtheir equivalents in an administrativeaction or arbitration proceeding.

(b) Affiliate means an entitycontrolled by, controlling, or undercommon control with the franchisor.

(c) Disclose means to state all materialfacts accurately, clearly, concisely, andlegibly in plain English.

(d) Financial performancerepresentation means any oral, written,or visual representation to a prospectivefranchisee, including a representationdisseminated in the general media andInternet, that states or suggests a specificlevel or range of potential or actualsales, income, gross profits, or netprofits. A chart, table, or mathematicalcalculation that demonstrates possibleresults based upon a combination ofvariables is a financial performancerepresentation.

(e) Fiscal year refers to thefranchisor’s fiscal year.

(f) Fractional franchise means afranchise relationship, which when therelationship is created:

(1) The franchisee or any of thefranchisee’s current directors or officershas more than two years of experiencein the same type of business; and

(2) The parties reasonably anticipatethat the sales arising from therelationship will not exceed more than20 percent of the franchisee’s totaldollar volume in sales during the firstyear of operation.

(g) Franchise means any continuingcommercial relationship orarrangement, whatever it may be called,in which the terms of the offer orcontract specify, or the franchise sellerrepresents, orally or in writing, that:

(1) The franchisee obtains the right tooperate a business or offer, sell, ordistribute goods, commodities, orservices that are identified or associatedwith the franchisor’s trademark;

(2) The franchisor:(i) Exerts or has authority to exert a

significant degree of continuing controlover the franchisee’s method ofoperation, including but not limited to,the franchisee’s business organization,promotional activities, management, ormarketing plan; or

(ii) Provides significant assistance inthe franchisee’s method of operation(e.g., the franchisee’s businessorganization, promotional activities,management, or marketing plan),extending beyond the start of thebusiness operation. Promotionalassistance alone, however, will notconstitute ‘‘significant’’ assistance in theabsence of other forms of assistance; and

(3) As a condition of obtaining orcommencing operation of the business,the franchisee is required by contract orby practical necessity to make apayment, or a commitment to pay, to thefranchisor or a person affiliated with thefranchisor.

(h) Franchise seller means a personthat offers for sale, sells, or arranges forthe sale of an interest in a franchise. Itincludes the franchisor and itsemployees, representatives, agents, andthird-party brokers. It does not includefranchisees who sell only their ownoutlets.

(i) Franchisee means any person whois granted an interest in a franchise.

(j) Franchisor means any person whogrants an interest in a franchise andparticipates in the franchiserelationship.

(k) Gag clause means any contractualprovision entered into by a franchisorand a current or former franchisee thatprohibits or restricts that franchiseefrom discussing his or her personalexperience as a franchisee within thefranchisor’s system. It does not includeconfidentiality agreements that protectfranchisors’ trademarks or otherproprietary information.

(l) Internet means all communicationsbetween computers and betweencomputers and television, telephone,facsimile, and similar communicationsdevices. It includes the World WideWeb, proprietary online services, E-mail, newsgroups, and electronicbulletin boards.

(m) Leased department means anarrangement whereby a retailer licensesor otherwise permits an independentseller to conduct business from theretailer’s premises.

(n) Material, material fact, andmaterial change includes any fact,circumstance, or set of conditions thathas a substantial likelihood ofinfluencing a reasonable franchisee orprospective franchisee in making asignificant decision.

(o) Officer means any individual withsignificant management responsibilityfor the marketing and/or servicing offranchises, such as the chief executiveand chief operating officers, and thefinancial, franchise marketing, training,and service officers. It also includes a defacto officer, namely an individual withsignificant management responsibilityfor the marketing and/or servicing offranchises whose title does not reflectthe nature of the position.

(p) Person means any individual,group, association, limited or generalpartnership, corporation, or any otherbusiness entity.

(q) Plain English means theorganization of information andlanguage usage understandable by aperson unfamiliar with the franchisebusiness. It incorporates the followingsix principles of clear writing: Shortsentences; definite, concrete, everydaylanguage; active voice; tabularpresentation of information; no legaljargon or highly technical businessterms; and no multiple negatives.

(r) Predecessor means a person fromwhom the franchisor acquired, directlyor indirectly, the major portion of thefranchisor’s assets or from whom thefranchisor obtained a license to use thetrademark or trade secrets in thefranchise operation.

(s) Principal business address meansthe address of the franchisor’s homeoffice in the United States. A principalbusiness address cannot be a post officebox or private mail drop.

(t) Prospective franchisee means anyperson (including any agent,representative, or employee) whoapproaches or is approached by afranchise seller to discuss the possibleestablishment of a franchiserelationship.

(u) Required payment means allconsideration that the franchisee mustpay to the franchisor or its affiliate,either by contract or by practicalnecessity, as a condition of obtaining orcommencing operation of the franchise.

(v) Sale of a franchise includes anagreement whereby a person obtains afranchise or interest in a franchise forvalue by purchase, license, or otherwise.It does not include extending or



renewing an existing franchiseagreement where there is nointerruption in the franchisee’soperation of the business, unless thenew agreement contains terms andconditions that differ materially fromthe original agreement.

(w) Signature means a person’saffirmative steps to authenticate his orher identity. It includes a person’swritten signature, as well as a person’suse of security codes, passwords, digitalsignatures, and similar devices.

(x) Trademark includes trademarks,service marks, names, logos, and othercommercial symbols.

(y) Written means any information inprinted form or in any form capable ofbeing preserved in tangible form andread. It includes: type-set, wordprocessed, or handwritten documents;documents on computer disk or CD-Rom; documents sent via E-mail; ordocuments posted on the Internet. Itdoes not include mere oral statements.

Obligations of Franchisors and OtherFranchise Sellers

§ 436.2 The obligation to furnishdocuments.

In connection with the offer or sale ofa franchise to be located in the UnitedStates of America, its territories, orpossessions, unless the transaction isexempted under the provisions ofsection 436.9, it is an unfair ordeceptive act or practice in violation ofsection 5 of the Federal TradeCommission Act:

(a) For any franchise seller to fail tofurnish a prospective franchisee withthe following documents within thefollowing time frames. The obligationsset forth in this subsection are satisfiedif either the franchisor or other franchiseseller furnishes the required documentsto the prospective franchisee:

(1) A current disclosure document. Acopy of the franchisor’s currentdisclosure document, as described insections 436.3–436.8, at least 14 daysbefore the prospective franchisee signs abinding agreement or pays any fee inconnection with the proposed franchisesale; and

(2) Completed franchise agreement. Acopy of the completed franchiseagreement, and any related agreements,at least five days before the prospectivefranchisee signs the franchiseagreement.

(b) For purposes of this section, afranchise seller will be considered tohave furnished the documents by therequired date if a copy of thedocument—either a paper copy or, withthe consent of the prospectivefranchisee, an electronic copy—has

been delivered to the prospectivefranchisee by that date, or if a copy hasbeen sent to the address specified by theprospective franchisee by first-classmail at least three days prior to thespecified date. Documents shall also beconsidered to have been furnished bythe required date if a copy has been sentby electronic mail or if directions foraccessing the document on the Internethave been provided to the prospectivefranchise by that date.

(c) For any franchisor to fail toinclude the information and follow theinstructions required by sections 436.3–436.8 in preparing the disclosuredocument to be furnished to prospectivefranchisees. Any other franchise sellershall be liable for violations of thesesections if they knew or should haveknown of the violation.

The Contents of a Disclosure Document

§ 436.3 Cover page.Begin the disclosure document with a

cover page that consists of thefollowing:

(a) The title ‘‘FRANCHISEDISCLOSURE DOCUMENT’’ in boldfacetype.

(b) The franchisor’s name, type ofbusiness organization, principalbusiness address, telephone number,and, if applicable, E-mail address andprimary Internet home page address.

(c) A sample of the primary businesstrademark under which the franchiseewill conduct its business.

(d) A brief description of thefranchised business.

(e) The total amounts in Item 5 (InitialFranchisee Fee) and Item 7 (EstimatedInitial Investment) of the disclosuredocument.

(f) The issuance date.(g) The following statements in the

order and form shown below:(1) This disclosure document

summarizes certain provisions of thefranchise agreement and otherinformation in plain English. Read thisdisclosure document and all agreementscarefully. You must receive thisdisclosure document at least 14 daysbefore you sign a binding agreement orpay any fee. You must also receivecompleted copies of all contracts at leastfive days before you sign them.

(2) If the franchisor furnishes anelectronic version of its disclosuredocument, also insert the following:

You may have elected to receive anelectronic version of your disclosuredocument. If so, you may wish to printor download the disclosure documentfor future reference. You have the rightto receive a paper copy of the disclosuredocument up until the time of sale. To

obtain a paper copy, contact [name] at[address] and [telephone number].

(3) Buying a franchise is acomplicated investment. Theinformation contained in this disclosuredocument can help you make up yourmind. Note, however, that the FederalTrade Commission (FTC) has notchecked the information and does notknow if it is correct. Informationcomparing franchisors is available. Callyour State agency or your public libraryfor sources of information. Additionalinformation on franchising, such as ‘‘AConsumer’s Guide to Buying aFranchise,’’ is available from the FTC.You can contact the FTC in Washington,D.C., or visit the FTC’s home page at<www.ftc.gov> for further information.In addition, there may be laws onfranchising in your State. Ask your Stateagencies about them.

(4) You should also know that theterms and conditions of your contractwill govern your franchise relationship.While the disclosure document includessome information about your contract,don’t rely on it alone to understand yourcontract. Read all of your contractcarefully. Show your contract and thisdisclosure document to an advisor, likea lawyer or an accountant.

(5) Federal Trade Commission,Washington, DC 20580.

(h) Franchisors may includeadditional disclosures on the coverpage, or on a separate cover page, tocomply with any applicable State pre-sale disclosure laws.

§ 436.4 Table of contents.

Include the following table ofcontents. State the page where eachdisclosure Item begins. List all exhibitsby letter, following the example shownbelow.

Table of Contents

1. The Franchisor, its Parent, Predecessors,and Affiliates

2. Business Experience3. Litigation4. Bankruptcy5. Initial Franchise Fee6. Other Fees7. Estimated Initial Investment8. Restrictions on Sources of Products and

Services9. Franchisee’s Obligations10. Financing11. Franchisor’s Assistance, Advertising,

Computer Systems, and Training12. Territory13. Trademarks14. Patents, Copyrights, and Proprietary

Information15. Obligation to Participate in the Actual

Operation of the Franchise Business16. Restrictions on What the Franchisee May

Sell



1 Only laws pertaining specifically to the industrysector of the franchised business, and notbusinesses generally, must be disclosed in this Item.For example, a real estate brokerage franchisorshould disclose the existence of broker licensinglaws; an optical products franchisor should disclose

the existence of applicable optometrist/opticianstaffing regulations and licensing requirements; alawn care franchisor should disclose that certainenvironmental laws regulating pesticide applicationto residential lawns will require that franchiseespost notices on treated lawns. It is not necessary toinclude laws or regulations that apply to businessesgenerally, such as general business licensing laws,tax regulations, or labor laws.

2 Franchisors are not required to disclose actionsthat were dismissed by final judgment withoutliability or entry of an adverse order. However,franchisors must disclose dismissal of a materialaction in connection with a settlement.

3 Franchisors may include a summary opinion ofcounsel concerning any action if a consent to usethe summary opinion is included as part of thedisclosure document.

4 If a settlement agreement must be disclosed inthis Item, all material settlement terms must bedisclosed, whether or not the agreement isconfidential. Because of difficulties in retrievinginformation and/or obtaining releases from olderconfidentiality agreements, franchisors are notrequired to disclose the settlement terms ofsettlements entered before April 15, 1993,consistent with the policy adopted by the North

17. Renewal, Termination, Transfer, andDispute Resolution

18. Public Figures19. Financial Performance Representations20. Outlets and Franchisee Information21. Financial Statements22. Contracts23. Receipt

Exhibits

A. Franchise Agreement

§ 436.5 Disclosure items.(a) Item 1: The Franchisor, Its Parents,

Predecessors, and Affiliates.(1) Disclose the name of the

franchisor. Also disclose the names ofany parent and affiliates of thefranchisor and the relationship with thefranchisor. For purposes of thisparagraph (a) the term ‘‘affiliate’’ meansan entity controlled by, controlling, orunder common control with thefranchisor, that offers franchises in anyline of business or is providing productsor services to the franchisees of thefranchisor.

(2) Disclose the name of anypredecessors during the 10-year periodimmediately before the close of thefranchisor’s most recent fiscal year.

(3) Disclose the name under whichthe franchisor does or intends to dobusiness.

(4) Disclose the principal businessaddress of the franchisor, its parent,predecessors, and affiliates, and thefranchisor’s agent for service of process.

(5) Disclose the type of businessorganization used by the franchisor (e.g.,corporation, partnership), and the Statein which it was organized.

(6) Disclose the following informationabout the nature of the franchisor’sbusiness and the franchises to beoffered:

(i) Whether the franchisor operatesbusinesses of the type being franchised;

(ii) The franchisor’s other businessactivities;

(iii) The business to be conducted bythe franchisee;

(iv) The general market for theproduct or service to be offered by thefranchisee. In describing the generalmarket, consider factors such aswhether the market is developed ordeveloping, whether the goods will besold primarily to a certain group, andwhether sales are seasonal;

(v) In general terms, any laws orregulations specific to the industry inwhich the franchise business operates; 1

and

(vi) A general description of thecompetition.

(7) Disclose the prior businessexperience of the franchisor, its parent,predecessors, and affiliates, including:

(i) The length of time each hasconducted the type of business to beoperated by the franchisee;

(ii) The length of time each hasoffered franchises providing the type ofbusiness to be operated by thefranchisee; and

(iii) Whether each has offeredfranchises in other lines of business,including:

(A) A description of each other line ofbusiness;

(B) The number of franchises sold ineach other line of business; and

(C) The length of time offering eachother line of business.

(b) Item 2: Business Experience.Disclose the position and name of thedirectors, trustees, general partners,officers, and subfranchisors of thefranchisor or any parent who will havemanagement responsibility relating tothe offered franchises. List all franchisebrokers. For each person listed, state theprincipal positions and employersduring the past five years, includingeach position’s beginning date, endingdate, and location.

(c) Item 3: Litigation.(1) Disclose whether the franchisor,

its parent, predecessor, a personidentified in paragraph (b) of thissection, or an affiliate who offersfranchises under the franchisor’sprincipal trademark:

(i) Has pending against that person:(A) An administrative, criminal, or

material civil action alleging a violationof a franchise, antitrust, or securitieslaw, or alleging fraud, unfair ordeceptive practices, or comparableallegations; or

(B) Civil actions, other than ordinaryroutine litigation incidental to thebusiness, which are significant in thecontext of the number of franchiseesand the size, nature, or financialcondition of the franchise system or itsbusiness operations.

(ii) Is a party to any pending materialcivil action involving the franchiserelationship. For purposes of thisparagraph, ‘‘franchise relationship’’means contractual obligations betweenthe franchisor and franchisee directly

relating to the operation of thefranchised business (e.g., royaltypayment and training obligations). Itdoes not include suits involving third-parties such as suppliers orindemnification for tort liability.

(iii) Has during the 10-year periodimmediately before the disclosuredocument’s issuance date:

(A) Been convicted of a felony orpleaded nolo contendere to a felonycharge;

(B) Been held liable in a civil actionby final judgment. ‘‘Held liable’’ meansthat, as a result of claims orcounterclaims, the franchisor must paymoney or other consideration, mustreduce an indebtedness by the amountof an award, cannot enforce its rights, ormust take action adverse to its interests;or

(C) Been a defendant in a materialaction involving an alleged violation ofa franchise, antitrust, or securities law,or involving allegations of fraud, unfairor deceptive practices, or comparableallegations.2

(iv) Is subject to a currently effectiveinjunctive or restrictive order or decreeresulting from a pending or concludedaction brought by a public agency andrelating to the franchise or to a Federal,State, or Canadian franchise, securities,antitrust, trade regulation, or tradepractice law.

(2) For each action identified inparagraph (c)(1) of this section, state thetitle, case number or citation, the initialfiling date, the names of the parties, andthe forum. State the relationship of theopposing party to the franchisor (e.g.,competitor, supplier, lessor, franchisee,former franchisee, or class offranchisees). Summarize the legal andfactual nature of each claim in theaction, the relief sought or obtained, andany conclusions of law or fact.3 Inaddition:

(i) For pending actions, state thestatus of the action;

(ii) For prior actions, state the datewhen the judgment was entered and anydamages and/or settlement terms; 4



American Securities Administrators Association’sUniform Franchise Offering Circular Guidelines.

5 If fees may increase, disclose the formula thatdetermines the increase or the maximum amount ofthe increase. For example, a percentage of grosssales is acceptable if the franchisor defines the term‘‘gross sales.’’

(iii) For injunctive or restrictiveorders, state the nature, terms, andconditions of the order or decree; and

(iv) For convictions or pleas, state thecrime or violation, the date ofconviction, and the sentence or penaltyimposed.

(d) Item 4: Bankruptcy.(1) Disclose whether the franchisor,

its parent, predecessor, a personidentified in paragraph (b) of thissection or an affiliate who offersfranchises under the franchisor’sprincipal trademark has, during the 10-year period immediately before the dateof this disclosure document:

(i) Filed as debtor (or had filed againstit) a petition under the U.S. BankruptcyCode (‘‘Bankruptcy Code’’);

(ii) Obtained a discharge of its debtsunder the Bankruptcy Code; or

(iii) Been a principal officer of acompany or a general partner in apartnership that either filed as a debtor(or had filed against it) a petition underthe Bankruptcy Code or that obtained adischarge of its debts under theBankruptcy Code while or within oneyear after the officer or general partnerheld the position in the company.

(2) For each bankruptcy:(i) State the name, address, and

principal business of the debtor;(ii) If the debtor is not the franchisor,

state the relationship of the debtor to thefranchisor (e.g., affiliate, officer); and

(iii) State the date of the originalfiling. Identify the bankruptcy court,and the case name and number. Ifapplicable, state the debtor’s dischargedate, including discharges underChapter 7 and confirmation of any plansof reorganization under Chapters 11 and13 of the Bankruptcy Code.

(3) Disclose cases, actions, and otherproceedings under the laws of foreignnations relating to bankruptcy, as if theytook place under the Bankruptcy Code.

(e) Item 5: Initial Franchise Fee.Disclose the initial franchise fee and theconditions under which this fee isrefundable. If the initial fee is notuniform, disclose the range or theformula used to calculate the initial feespaid in the fiscal year before theissuance date and the factors thatdetermined the amount. For purposes ofthis Item, ‘‘initial fee’’ means all feesand payments for services or goodsreceived from the franchisor before thefranchisee’s business opens, whetherpayable in lump sum or installments.

(f) Item 6: Recurring or OccasionalFees. Disclose, in the tabular formshown below, any recurring oroccasional fees that the franchisee must

pay to the franchisor or its affiliates, orthat the franchisor or its affiliatesimpose or collect in whole or in part onbehalf of a third party. Include anyformula used to compute the fees.5

(1)Type of

fee

(2)Amount

(3)Due date

(4)Remarks

(1) In column (1), disclose the type offee (e.g., royalties, and fees for leasenegotiations, construction, remodeling,additional training or assistance,advertising, advertising cooperatives,purchasing cooperatives, audits,accounting, inventory, transfers, andrenewals).

(2) In column (2), disclose the amountof each fee.

(3) In column (3), disclose theapplicable due date for recurring fees.

(4) In column (4), include anyrelevant remarks, definitions, or caveatsthat elaborate on the information in thetable. If remarks are lengthy, franchisorsmay use footnotes instead of theremarks column. If applicable, includethe following information in theremarks column or in a footnote:

(i) If the fees are payable only to thefranchisor;

(ii) If the fees are imposed andcollected by the franchisor;

(iii) The terms and conditions underwhich any fee is refundable; and

(iv) The voting power of franchisor-owned outlets on any fees imposed bycooperatives. If franchisor-ownedoutlets have controlling voting power,disclose the maximum and minimumfees that may be imposed.

(g) Item 7: Estimated InitialInvestment. Disclose, in the tabular formshown below, the franchisee’s estimatedinitial investment. Title the table ‘‘YourEstimated Initial Investment For TheFirst [reasonable initial phase] Months.’’A reasonable initial phase is at leastthree months or a reasonable period forthe industry. Franchisors may includeadditional expenditure tables to showexpenditure variations caused bydifferences such as in site location andpremises size.

YOUR ESTIMATED INITIAL INVESTMENT FOR THEFIRST [REASONABLE INITIAL PHASE] MONTHS

(1)Type of

ex-pendi-ture

(2)Amount

(3)Meth-od ofpay-ment

(4)Whendue

(5)To

whompaid

Total.

(1) In column (1), disclose each typeof expense, beginning with pre-openingexpenses. Include the followingexpenses, if applicable. Use footnotes tocomment on expenditures.

(i) The initial franchise fee.(ii) Training expenses.(iii) Real property, whether purchased

or leased.(iv) Equipment, fixtures, other fixed

assets, construction, remodeling,leasehold improvements, and decoratingcosts, whether purchased or leased.

(v) Inventory required to beginoperation.

(vi) Security deposits, utility deposits,business licenses, and other prepaidexpenses.

(vii) List separately and by name anyother specific payment (e.g., additionaltraining, travel, or advertisingexpenses).

(viii) Include an additional expensecategory named ‘‘other payments’’ forany other miscellaneous expenses thatthe franchisee will incur beforeoperations begin and during the initialphase.

(2) In column (2), state the amount ofthe payment. If the specific amount isnot ascertainable, use a low-high rangebased on the franchisor’s currentexperience. If real property costs cannotbe estimated in a low-high range,disclose the approximate size of theproperty and building, and describe theprobable location of the building (e.g.,strip shopping center, mall, downtown,rural, or highway).

(3) In column (3), disclose the methodof payment.

(4) In column (4), disclose theapplicable due date.

(5) In column (5), disclose to whompayment will be made.

(6) Total the initial investment,incorporating ranges of fees, if used.

(7) Disclose in a footnote:(i) The conditions under which each

payment is refundable; and(ii) If the franchisor or an affiliate

finances part of the initial investment,the amount that it will finance, therequired down payment, the annualpercentage rate of interest, rate factors,and the estimated loan repayments.Franchisors may refer the reader to Item10 for additional details.



6 Franchisors may include the reason for therequirement. Franchisors are not required todisclose in this Item the purchase or lease of goodsor services provided as part of the franchise withouta separate charge (e.g., initial training, the cost forwhich is included in the franchise fee); such fees

should be described in paragraph (e) of this section.Franchisors should not disclose fees alreadydescribed in paragraph (e) of this section.

7 Figures should be taken from the franchisor’smost recent annual audited financial statement

required in paragraph (u) of this section. If auditedstatements are not yet required, or if the entityderiving the income is an affiliate, disclose thesources of information used in computing revenues.

(h) Item 8: Restrictions on Sources ofProducts and Services. Disclosefranchisees’ obligations to purchase orlease goods, services, fixtures,equipment, real estate, or comparableitems related to establishing oroperating the franchised business eitherfrom the franchisor, its designee, orsuppliers approved by the franchisor, orunder the franchisor’s specifications.Include obligations to purchase imposedby written agreement or by thefranchisor’s practice.6 For eachapplicable obligation:

(1) Disclose the item required to bepurchased or leased.

(2) Disclose whether the franchisor orits affiliates are either approvedsuppliers or the only approvedsuppliers of that item.

(3) Disclose how the franchisor grantsand revokes approval of alternativesuppliers. State:

(i) The criteria for evaluating,approving, or disapproving ofalternative suppliers;

(ii) Whether the franchisor permitsfranchisees to contract with alternativesuppliers who meet the franchisor’scriteria;

(iii) Any fees and procedures tosecure approval;

(iv) How approvals are revoked; and(v) The time period within which the

franchisee will receive notification ofapproval or disapproval.

(4) Disclose whether the franchisorissues specifications and standards tofranchisees, subfranchisees, or approvedsuppliers. Describe how the franchisorissues and modifies specifications.

(5) Disclose whether the franchisor orits affiliates will or may derive revenueor other material consideration as aresult of required purchases or leases byfranchisees.7 Describe the precise basisby which the franchisor or its affiliateswill or may derive such considerationby disclosing:

(i) The franchisor’s total revenue;(ii) The franchisor’s revenues from all

required purchases and leases ofproducts and services;

(iii) The percentage of the franchisor’stotal revenues represented by thefranchisor’s revenues from requiredpurchases or leases; and

(iv) If the franchisor’s affiliates alsosell or lease products or services tofranchisees, disclose affiliate revenuesfrom those sales or leases.

(6) Disclose the estimated proportionof these required purchases and leasesto all purchases and leases by thefranchisee in establishing and operatingthe franchised business.

(7) If a designated supplier will makepayments to the franchisor as a result ofpurchases by franchisees, disclose thebasis for the payment (e.g., specify apercentage or a flat amount). For

purposes of this paragraph, a ‘‘payment’’includes the sale of similar goods orservices to the franchisor at a lowerprice than that available to franchisees.

(8) Disclose the existence ofpurchasing or distribution cooperatives.

(9) Disclose whether the franchisornegotiates purchase arrangements withsuppliers, including price terms, for thebenefit of franchisees.

(10) Disclose whether the franchisorprovides material benefits (e.g., renewalor granting additional franchises) to afranchisee based on a franchisee’spurchase of particular products orservices or use of particular suppliers.

(i) Item 9: Franchisee’s Obligations.Disclose, in the tabular form shownbelow, a list of the franchisees’ principalobligations. Cross-reference each listedobligation with any applicable franchiseagreement and disclosure documentsection(s). Respond to each listedobligation. If a particular obligation isnot applicable, state ‘‘Not Applicable.’’Include additional obligations, as iswarranted.

This table lists your principalobligations under the franchise andother agreements. It will help you findmore detailed information about yourobligations in these agreements and inother items of this disclosure document.

Obligation Section in agreement Disclosure document item

a. Site selection and acquisition/leaseb. Pre-opening purchases/leasesc. Site development and other pre-opening requirementsd. Initial and ongoing traininge. Openingf. Feesg. Compliance with standards and policies/operating manualh. Trademarks and proprietary informationi. Restrictions on products/ services offeredj. Warranty and customer service requirementsk. Territorial development and sales quotasl. Ongoing product/service purchasesm. Maintenance, appearance, and remodeling requirementsn. Insuranceo. Advertisingp. Indemnificationq. Owner’s participation/management/staffingr. Records and reportss. Inspections and auditst. Transferu. Renewalv. Post-termination obligationsw. Non-competition covenantsx. Dispute resolutiony. Other (describe)



8 Payments due within 90 days on open accountfinancing are not required to be disclosed underthis section.

9 Indirect offers of financing include a writtenarrangement between a franchisor or its affiliate anda lender, for the lender to offer financing to afranchisee; an arangement in which a franchisor orits affiliate receives a benefit from a lender inexchange for financing a franchise purchase; and afranchisor’s guarantee of a note, lease, or otherobligation of the franchisee.

10 Include specimen copies of the financingdocuments as an exhibit to paragraph (v) of thissection. Cite the section and name of the documentcontaining the financing terms and conditions.

(j) Item 10: Financing.(1) Disclose the terms and conditions

of each financing arrangement,8including leases and installmentcontracts, that the franchisor, its agent,or affiliates offers directly or indirectlyto the franchisee.9 The franchisor maysummarize the terms of each financingarrangement in tabular form, usingfootnotes to provide additionalinformation. For a sample Item 10 table,see Appendix A to this part. For eachfinancing arrangement, disclose:

(i) A description of what the financingcovers (e.g., the initial franchise fee, siteacquisition, construction or remodeling,initial or replacement equipment orfixtures, opening or ongoing inventoryor supplies, or other continuingexpenses); 10

(ii) The identity of the lender(s)providing the financing and anyrelationship to the franchisor (e.g.,affiliate);

(iii) The amount of financing offeredor, if the amount depends on an actualcost that may vary, the percentage of thecost that will be financed;

(iv) The annual percentage rate ofinterest (‘‘APR’’) charged, computed asprovided by Sections 106–107 of theConsumer Protection Credit Act, 15U.S.C. 1605–1606. If the APR may differdepending on when the financing isissued, disclose the APR on a specifiedrecent date;

(v) The number of payments or theperiod of repayment;

(vi) The nature of any security interestrequired by the lender;

(vii) Whether a person other than thefranchisee must personally guaranteethe debt;

(viii) Whether the debt can be prepaidand the nature of any prepaymentpenalty;

(ix) The franchisee’s potentialliabilities upon default, including any:

(A) Accelerated obligation to pay theentire amount due;

(B) Obligations to pay court costs andattorney’s fees incurred in collecting thedebt;

(C) Termination of the franchise; or(D) Liabilities from cross defaults

such as those resulting directly from

non-payment, or indirectly from the lossof business property; and

(x) Other material financing terms.(2) Disclose whether any provisions of

the loan agreement require franchiseesto waive defenses or other legal rights(e.g., confession of judgment), or bar thefranchisee from asserting a defenseagainst the lender, the lender’s assigneeor the franchisor. If so, describe therelevant provisions.

(3) Disclose whether the franchisor’spractice or intent is to sell, assign, ordiscount to a third party all or part ofthe financing arrangement. If so,disclose:

(i) The assignment terms, includingwhether the franchisor will remainprimarily obligated to provide thefinanced goods or services; and

(ii) That the franchisee may lose all itsdefenses against the lender as a result ofthe sale or assignment.

(4) Disclose whether the franchisor oran affiliate receives any payments forthe placement of financing with thelender. If such payments exist:

(i) Disclose the amount or the methodof determining the payment; and

(ii) Identify the source of the paymentand the relationship of the source to thefranchisor or its affiliates.

(k) Item 11: Franchisor’s Assistance,Advertising, Computer Systems, andTraining. Disclose the franchisor’sprincipal assistance and relatedobligations as described below. For eachobligation, cite the section number ofthe franchise agreement imposing theobligation. Begin by stating: ‘‘Except aslisted below, [the franchisor] is notrequired to provide any assistance toyou.’’

(1) Disclose the franchisor’s pre-opening obligations to the franchiseeincluding any assistance in:

(i) Locating a site and negotiating thepurchase or lease of the site. Disclose:

(A) Whether the franchisor generallyowns the premises and leases it to thefranchisee;

(B) Whether the franchisor selects thesite or approves an area within whichthe franchisee selects a site. Disclosefurther how and whether the franchisormust approve a franchisee-selected site;

(C) The factors that the franchisorconsiders in selecting or approving sites(e.g., general location andneighborhood, traffic patterns, parking,size, physical characteristics of existingbuildings, and lease terms);

(D) The time limit for the franchisorto locate or to approve or disapprove thesite. Disclose further the consequencesif the franchisor and franchisee cannotagree on a site.

(ii) Conforming the premises to localordinances and building codes andobtaining any required permits;

(iii) Constructing, remodeling, ordecorating the premises;

(iv) Hiring and training employees;and

(v) Providing for necessaryequipment, signs, fixtures, openinginventory, and supplies. In addition,disclose further:

(A) Whether the franchisor providesthese items directly or merely providesthe names of approved suppliers;

(B) Whether the franchisor provideswritten specifications for these items;and

(C) Whether the franchisor delivers orinstalls these items;

(2) Disclose the typical length of timebetween the signing of the franchiseagreement or the first payment ofconsideration for the franchise and theopening of the franchisee’s business.Describe the factors that may affect thetime period such as ability to obtain alease, financing or building permits,zoning and local ordinances, weatherconditions, shortages, or delayedinstallation of equipment, fixtures, andsigns.

(3) Disclose the franchisor’sobligations to the franchisee during theoperation of the franchise, includingany assistance in:

(i) Developing products or services tobe offered by the franchisee to itscustomers;

(ii) Hiring and training employees;(iii) Improving and developing the

franchised business;(iv) Establishing prices;(v) Establishing and using

administrative, bookkeeping,accounting, and inventory controlprocedures; and

(vi) Resolving operating problemsencountered by the franchisee.

(4) Describe the advertising programfor the franchise system. Disclose thefollowing:

(i) The franchisor’s obligation toconduct advertising, including:

(A) The media the franchisor may use;(B) Whether media coverage is local,

regional, or national;(C) The source of the advertising (e.g.,

an in-house advertising department or anational or regional advertising agency);and

(D) Whether the franchisor mustspend any amount on advertising in thearea or territory where the franchisee islocated.

(ii) Disclose the conditions underwhich the franchisor permitsfranchisees to use their own advertisingmaterial.

(iii) Disclose whether there is anadvertising council composed offranchisees that advises the franchisoron advertising policies. If so, disclose:



(A) How members of the council areselected;

(B) Whether the council serves in anadvisory capacity only or hasoperational or decision-making power;and

(C) Whether the franchisor has thepower to form, change, or dissolve theadvertising council.

(iv) Disclose whether the franchiseemust participate in a local or regionaladvertising cooperative. If so, disclose:

(A) How the area or membership ofthe cooperative is defined;

(B) How much the franchisee mustcontribute to the fund and whetherother franchisees are required tocontribute at a different rate;

(C) Whether the franchisor-ownedoutlets must contribute to the fund and,if so, whether it is on the same basis asfranchisees;

(D) Who is responsible foradministration of the cooperative (e.g.,franchisor, franchisees, or advertisingagency);

(E) Whether cooperatives mustoperate from written governingdocuments and whether the documentsare available for review by thefranchisee;

(F) Whether cooperatives mustprepare annual or periodic financialstatements and whether the statementsare available for review by thefranchisee; and

(G) Whether the franchisor has thepower to require cooperatives to beformed, changed, dissolved, or merged.

(v) Disclose whether the franchiseemust participate in any otheradvertising fund. If so, disclose:

(A) Who contributes to the fund;(B) How much the franchisee must

contribute to the fund and whetherother franchisees are required tocontribute at a different rate;

(C) Whether the franchisor-ownedoutlets must contribute to the fund and,

if so, whether it is on the same basis asfranchisees;

(D) Who administers the fund;(E) Whether the fund is audited and

when it is audited;(F) Whether financial statements of

the fund are available for review by thefranchisee; and

(G) Use of the fund in the mostrecently concluded fiscal year, thepercentages spent on production, mediaplacement, administrative expenses,and a description of any other use.

(vi) If all advertising funds are notspent in the fiscal year in which theyaccrue, explain how the franchisor usesthe remaining amount. Indicate whetherfranchisees will receive a periodicaccounting of how advertising fees arespent.

(vii) Disclose the percentage ofadvertising funds, if any, that thefranchisor uses principally to solicitnew franchise sales.

(5) Disclose whether the franchisorrequires the franchisee to buy or useelectronic cash registers or computersystems. If so, describe the systemsgenerally in non-technical language.

(i) Identify each hardware componentand software program by brand, type,and principal functions.

(A) If the hardware component orsoftware program is the proprietaryproperty of the franchisor, an affiliate,or a third party, state whether thefranchisor, an affiliate, or a third partyhas the contractual right or obligation toprovide ongoing maintenance, repairs,upgrades, or updates. Disclose thecurrent annual cost of any optional orrequired maintenance and supportcontracts, upgrades, and updates;

(B) If the hardware component orsoftware program is the proprietaryproperty of a third party, and nocompatible equivalent component orprogram has been approved by thefranchisor for use with the system toperform the same functions, identify the

third party by name, business address,and telephone number, and state thelength of time the component orprogram has been in continuous use bythe franchisor and its franchisees;

(C) If the hardware component orsoftware program is not proprietary,identify compatible equivalentcomponents or programs that performthe same functions and indicatewhether they have been approved by thefranchisor.

(ii) State whether the franchisee hasany contractual obligation to upgrade orupdate any hardware component orsoftware program during the term of thefranchise and, if so, whether there areany contractual limitations on thefrequency and cost of the obligation.

(iii) For each electronic cash registersystem or software program, describehow it will be used in the franchisee’sbusiness, and the types of businessinformation or data that will becollected and generated. State furtherwhether the franchisor will haveindependent access to the informationand data and, if so, whether there areany contractual limitations on thefranchisor’s right to access theinformation and data.

(6) Disclose the table of contents ofthe franchisor’s operating manual(s)provided to franchisees as of thefranchisor’s last fiscal year-end or amore recent date. State further thenumber of pages devoted to each subjectand the total number of pages in themanual as of this date. Alternatively,this disclosure may be omitted if theprospective franchisee views themanual before purchase of the franchise.

(7) Disclose the franchisor’s trainingprogram as of the franchisor’s last fiscalyear-end or a more recent date.

(i) Describe the nature of the trainingprogram summarized in tabular form, asfollows:

TRAINING PROGRAM

Subject Hours of classroom training Hours of on-the-job training Location

(A) In column (1), state the subjectstaught.

(B) In column (2), state the hours ofclassroom training for each subject.

(C) In column (3), state the hours ofon-the-job training for each subject.

(D) In column (4), state the location ofthe training for each subject.

(ii) Disclose how often training classesare held and the nature of the locationor facility where training is held (e.g.,company, home, office, franchisor-owned store).

(iii) Describe the nature ofinstructional materials and theinstructor’s experience. State the lengthof experience of the instructor in thefield and, specifically, with thefranchisor. State only the experiencethat is relevant to the subject taught andthe franchisor’s operations;

(iv) Disclose any charges franchiseesmust pay for training and who must paytravel and living expenses of theenrollees in the training program;

(v) Disclose who may and who isrequired to attend the training. Statewhether the franchisee or other personsmust complete the program to thefranchisor’s satisfaction. If successfulcompletion is required, state how longafter the signing of the agreement orbefore the opening of the business thetraining must be completed. If trainingis not mandatory, state the percentage ofnew franchisees that enrolled in the




training program during the preceding12 months; and

(vi) Whether any additional trainingprograms and/or refresher courses arerequired.

(l) Item 12: Territory.(1) Disclose the following information

concerning the franchisee’s market area(with or without an exclusive territory):

(i) If applicable, the minimum areagranted to the franchisee (e.g., a specificradius, a distance sufficient toencompass a specified population, oranother specific designation);

(ii) Whether the franchise is grantedfor a specific location or a location to beapproved by the franchisor;

(iii) Any conditions under which thefranchisor will approve the relocation ofthe franchised business or thefranchisee’s establishment of additionalfranchised outlets;

(iv) Whether the franchisor hasestablished or may establish anotherfranchisee who may also use thefranchisor’s trademark within thedefined area;

(v) Whether the franchisor hasestablished or may establish franchisor-owned outlets or other channels ofdistribution using the franchisor’strademark within the defined area;

(vi) Whether the franchisor or itsaffiliate has established or may establishother franchises or franchisor-ownedoutlets or another channel ofdistribution selling or leasing similarproducts or services under a differenttrademark within the defined area;

(vii) Restrictions on the franchisorregarding operating franchisor-ownedstores or on granting franchised outletsfor a similar or competitive businesswithin the defined area; (viii)Restrictions on franchisees fromsoliciting or accepting orders outside oftheir defined territories;

(ix) Restrictions on the franchisorfrom soliciting or accepting ordersinside the franchisee’s defined territory.State further any compensation that thefranchisor must pay for soliciting oraccepting orders inside the franchisee’sdefined territories; and

(x) Franchisee options, rights of firstrefusal, or similar rights to acquireadditional franchises within theterritory or contiguous territories.

(2) Describe any exclusive territorygranted the franchisee.

(i) If the franchisor grants an exclusiveterritory, disclose:

(A) Whether continuation of thefranchisee’s territorial exclusivitydepends on achievement of a certainsales volume, market penetration, orother contingency, and under whatcircumstances the franchisee’s territorymay be altered. Specify any sales or

other conditions. State the franchisor’srights if the franchisee fails to meet therequirements; and

(B) Any other circumstances thatpermit the franchisor to modify thefranchisee’s territorial rights (e.g., apopulation increase in the territorygiving the franchisor the right to grantan additional franchise within the area),and the effect of such modifications onthe franchisee’s rights;

(ii) If the franchisor does not grantexclusive territories, state: ‘‘You will notreceive an exclusive territory.[Franchisor] may establish otherfranchised or franchisor-owned outletsthat may compete with your location.’’

(3) If the franchisor or an affiliateoperates, franchises, or has presentplans to operate or franchise a businessunder a different trademark and thatbusiness sells goods or services similarto those to be offered by the franchisee,describe:

(i) The similar goods and services;(ii) The trade names and trademarks;(iii) Whether outlets will be franchisor

owned or operated:(iv) Whether the franchisor or its

franchisees who use the differenttrademark will solicit or accept orderswithin the franchisee’s territory;

(v) A timetable for the plan;(vi) How the franchisor will resolve

conflicts between the franchisor and thefranchisees and between the franchiseesof each system regarding territory,customers or franchisor support; and

(vii) The principal business address ofthe franchisor’s similar operatingbusiness. If it is the same as thefranchisor’s principal business addressdisclosed in paragraph (a) of thissection, disclose whether the franchisormaintains (or plans to maintain)physically separate offices and trainingfacilities for the similar competingbusiness.

(m) Item 13: Trademarks.(1) Disclose each principal trademark

to be licensed to the franchisee. Forpurposes of this Item, ‘‘principaltrademark’’ means the primarytrademarks, service marks, names, logos,and commercial symbols to be used bythe franchisee to identify the franchisedbusiness. It does not include everytrademark owned by the franchisor.

(2) For each principal trademark,disclose whether the trademark isregistered with the United States Patentand Trademark Office.

(i) For each registration, state:(A) The date and identification

number of each trademark registrationor registration application;

(B) Whether the franchisor has filedall required affidavits;

(C) Whether any registration has beenrenewed; and

(D) Whether the principal trademarksare registered on the Principal orSupplemental Register of the U.S. Patentand Trademark Office, and if not,whether an ‘‘intent to use’’ applicationor an application based on actual usehas been filed with the U.S. Patent andTrademark Office.

(ii) If the trademark is not registeredon the Principal Register of the U.S.Patent and Trademark Office, state: ‘‘Bynot having a Principal Register federalregistration for [name or description ofsymbol], [name of franchisor] does nothave certain presumptive legal rightsgranted by a registration.’’

(3) Disclose any currently effectivematerial determinations of the U.S.Patent and Trademark Office, theTrademark Trial and Appeal Board, orthe trademark administrator of any Stateor court; and any pending infringement,opposition, or cancellation proceeding.Include infringement, opposition, orcancellation proceedings in which thefranchisor unsuccessfully sought toprevent registration of a trademark inorder to protect a trademark licensed bythe franchisor. Describe how thedetermination affects the franchisedbusiness.

(4) Disclose any pending materialfederal or State litigation regarding thefranchisor’s use or ownership rights ina trademark. For each pending action,disclose: 11

(i) The forum and case number;(ii) The nature of claims made

opposing the franchisor’s use or by thefranchisor opposing another person’suse; and

(iii) Any effective court oradministrative agency ruling concerningthe matter.

(5) Disclose agreements currently ineffect that significantly limit the rightsof the franchisor to use or license theuse of trademarks listed in this Item ina manner material to the franchise. Foreach agreement, disclose:

(i) The manner and extent of thelimitation or grant;

(ii) The extent to which the franchiseemay be affected by the agreement;

(iii) The agreement’s duration;(iv) The parties to the agreement;(v) The circumstances under which

the agreement may be canceled ormodified; and

(vi) All other material terms.(6) Disclose whether the franchisor

must protect the franchisee’s right to usethe principal trademarks listed in thisItem, and must protect the franchisee




against claims of infringement or unfaircompetition arising out of thefranchisee’s use of the trademarks.Disclose further:

(i) The franchisee’s obligation tonotify the franchisor of the use of, orclaims of rights to, a trademark identicalto or confusingly similar to a trademarklicensed to the franchisee;

(ii) Whether the franchise agreementrequires the franchisor to takeaffirmative action when notified of theseuses or claims. Identify who has theright to control administrativeproceedings or litigation;

(iii) Whether the franchise agreementrequires the franchisor to participate inthe franchisee’s defense and/orindemnify the franchisee for expensesor damages if the franchisee is a partyto an administrative or judicialproceeding involving a trademarklicensed by the franchisor to thefranchisee, or if the proceeding isresolved unfavorably to the franchisee;and

(iv) The franchisee’s rights under thefranchise agreement if the franchisorrequires the franchisee to modify ordiscontinue the use of a trademark.

(7) Disclose whether the franchisoractually knows of either superior priorrights or infringing uses that couldmaterially affect the franchisee’s use ofthe principal trademarks in the State inwhich the franchised business is to belocated. For each use of a principaltrademark that the franchisor believesconstitutes an infringement that couldmaterially affect the franchisee’s use ofa trademark, disclose:

(i) The nature of the infringement;(ii) The location(s) where the

infringement is occurring;(iii) The length of time of the

infringement (to the extent known); and(iv) Action taken by the franchisor.(n) Item 14: Patents, Copyrights, and

Proprietary Information.(1) Disclose whether the franchisor

owns rights in patents or copyrights thatare material to the franchise. For eachpatent or copyright:

(i) Describe the patent or copyrightand its relationship to the franchise;

(ii) State the duration of the patent orcopyright;

(iii) For copyrights, state:(A) The registration number and date

of each copyright; and.(B) Whether the franchisor can and

intends to renew the copyright.(iv) For patents, state:(A) The patent number, issue date,

and title for each patent, and the serialnumber, filing date, and title of eachpatent application; and

(B) Describe the type of patent orpatent application (e.g., mechanical,process, or design).

(2) Describe any current materialdetermination of the U.S. Patent andTrademark Office, the U.S. CopyrightOffice, or a court regarding the patent orcopyright. Include the forum and casenumber. Describe how thedetermination affects the franchisedbusiness.

(3) State the forum, case number,claims asserted, issues involved, andeffective determinations for any materialproceeding pending in the U.S. Patentand Trademark Office or the U.S. Courtof Appeals for the Federal Circuit.12

(4) If an agreement limits the use ofthe patent, patent application, orcopyright, state the parties to andduration of the agreement, the extent towhich the franchisee may be affected bythe agreement, and other material termsof the agreement.

(5) Disclose the franchisor’s obligationto protect the patent, patent application,or copyright and to defend thefranchisee against claims arising fromthe franchisee’s use of the patented orcopyrighted items. Disclose further:

(i) Whether the franchisee must notifythe franchisor of claims orinfringements or if the action isdiscretionary;

(ii) Whether the franchise agreementrequires the franchisor to takeaffirmative action when notified ofinfringement. Disclose who has the rightto control litigation;

(iii) Whether the franchisor mustparticipate in the defense of a franchiseeor indemnify the franchisee forexpenses or damages in a proceedinginvolving a patent, patent application,or copyright licensed to the franchisee;

(iv) Requirements that the franchiseemodify or discontinue use of the subjectmatter covered by the patent orcopyright; and

(v) The franchisee’s rights under thefranchise agreement if the franchisorrequires the franchisee to modify ordiscontinue use of the subject mattercovered by the patent or copyright.

(6) If the franchisor actually knows ofan infringement that could materiallyaffect the franchisee, disclose:

(i) The nature of the infringement;(ii) The location(s) where the

infringement is occurring;(iii) The length of time of the

infringement; and(iv) Action taken or anticipated by the

franchisor.(7) If the franchisor claims proprietary

rights in other confidential informationor trade secrets, describe in general

terms the proprietary informationcommunicated to the franchisee and theterms and conditions for use by thefranchisee. The franchisor need onlydescribe the general nature of theproprietary information, such aswhether a formula or recipe isconsidered to be a trade secret.

(o) Item 15: Obligation to Participatein the Actual Operation of the FranchiseBusiness.

(1) Disclose the franchisee’s obligationto participate personally in the directoperation of the franchise business andwhether the franchisor recommendsparticipation. Include obligationsarising from any written agreement orfrom the franchisor’s practice.

(2) If personal ‘‘on-premises’’supervision is not required, disclose thefollowing:

(i) If the franchisee is an individual,state:

(A) Whether the franchisorrecommends on-premises supervisionby the franchisee;

(B) Limitations on whom thefranchisee can hire as an on-premisessupervisor, and

(C) Whether an on-premisessupervisor must successfully completethe franchisor’s training program.

(ii) If the franchisee is a businessentity, state the amount of equityinterest that the on-premises supervisormust have in the franchise.

(3) Disclose any restrictions that thefranchisee must place on its manager(e.g., maintain trade secrets, covenantsnot to compete).

(p) Item 16: Restrictions on What theFranchisee May Sell. Disclose anyfranchisor-imposed restrictions orconditions on the goods or services thatthe franchisee may sell or that limit thefranchisee’s customers. Disclose further:

(1) Any obligation on the franchisee tosell only goods and services approvedby the franchisor;

(2) Any obligation on the franchisee tosell all goods and services authorized bythe franchisor;

(3) Whether the franchisor has theright to change the types of authorizedgoods and services and whether thereare limits on the franchisor’s right tomake changes; and

(4) Any restrictions on thefranchisee’s customers.

(q) Item 17: Renewal, Termination,Transfer, and Dispute Resolution.Disclose, in the tabular form shownbelow, a table that cross-references eachenumerated franchise relationship itemwith the applicable provision in thefranchise or related agreement.Summarize briefly each contractualprovision. If a particular item is notapplicable, state ‘‘Not Applicable.’’ If



13 If a financial performance representation is arepresentation concerning historical financialperformance or if historical financial performancedata are used as the basis for a forecast of futureearnings, the historical data must be preparedaccording to U.S. generally accepted accountingprinciples.

14 A statement or prediction of futureperformance that is prepared as a forecast inaccordance with the statement on standards foraccountants’ services on prospective financialinformation (or its successor) issued by theAmerican Institute of Certified Public Accountants,Inc., is presumed to have a reasonable basis.

the agreement is silent concerning oneof the listed provisions, but thefranchisor unilaterally offers to providecertain benefits or protections tofranchisees as a matter of policy, use a

footnote to describe this policy and statewhether the policy is subject to change.

This table lists certain importantprovisions of the franchise and relatedagreements. You should read these

provisions in the agreements attached tothis disclosure document.

Provision Section in franchise or other agreement Summary

a. Length of the franchise term.b. Renewal or extension of the term.c. Requirements for franchisee to renew or extend.d. Termination by franchisee.e. Termination by franchisor without cause.f. Termination by franchisor with cause.g. ‘‘Cause’’ defined—curable defaults.h. ‘‘Cause’’ defined—noncurable defaults.i. Franchisee’s obligations on termination/non-renewal.j. Assignment of contract by franchisor.k. ‘‘Transfer’’ by franchisee—defined.l. Franchisor approval of transfer by franchisee.m. Conditions for franchisor approval of transfer.n. Franchisor’s right of first refusal to acquire franchisee’s

business.o. Franchisor’s option to purchase franchisee’s business.p. Death or disability of franchisee.q. Non-competition covenants during the term of the fran-

chise.r. Non-competition covenants after the franchise is termi-

nated or expires.s. Modification of the agreement.t. Integration/merger clause.u. Dispute resolution by arbitration or mediation.v. Choice of forum.w. Choice of law.

(r) Item 18: Public Figures. Disclosethe following information about anypublic figures involved in the franchise.A public figure means a person whosename or physical appearance isgenerally known to the public in thegeographic area where the franchise willbe located.

(1) Any compensation paid orpromised to a public figure arising fromeither the use of the public figure in thefranchise name or symbol; or theendorsement or recommendation of thefranchise to prospective franchisees.

(2) The extent to which the publicfigure is involved in the actualmanagement or control of thefranchisor. Describe the public figure’sposition and duties in the franchisor’sbusiness structure.

(3) The total investment of the publicfigure in the franchisor. Describe theextent of the amount contributed inservices performed or to be performed.State the type of investment (e.g.,common stock, promissory note).

(s) Item 19: Financial PerformanceRepresentations.

(1) All franchisors begin by stating:The FTC’s Franchise Rule permits a

franchisor to provide information aboutthe actual or potential financialperformance of its franchised and/orfranchisor-owned outlets, if there is areasonable basis for the information,

and if the information is included in thedisclosure document. Financialperformance information that differsfrom that included in Item 19 may begiven only where: a franchisor providesthe actual records of an existing outletyou are considering buying; or afranchisor provides financialperformance information in paragraph(s) of this section and supplements thatinformation by providing, for example,information about possible performanceat a particular location.

(2) If a franchisor does not provideany financial performancerepresentations, also state:

This franchisor does not make anyrepresentations about a franchisee’sfinancial performance. We also do notauthorize our employees orrepresentatives to make any suchrepresentations either orally or inwriting. If you receive any financialperformance information or projectionsof your future income, you shouldreport it to the franchisor’s managementby contacting [name and address ofperson to be notified], the Federal TradeCommission, and the appropriate Stateregulatory agencies.

(3) If the franchisor makes anyfinancial performance representations toprospective franchisees, the franchisormust have a reasonable basis andwritten substantiation for the

representations at the time they aremade, and must state therepresentations in its Item 19 disclosure.The franchisor must also disclose thefollowing:

(i) Whether the representation is anhistorical financial performancerepresentation about the franchisesystem’s existing outlets,13 or a subset ofthose outlets, or is a forecast of theprospective franchisee’s future financialperformance.14

(ii) If the representation relates to thepast performance of the franchisesystem’s existing outlets, disclose thematerial bases for the representation,including:

(A) Whether the representation relatesto the performance of all of the franchisesystem’s existing outlets or only to asubset of outlets that share a particularset of characteristics (e.g., geographiclocation, type of location (such as free



15 An historical financial performancerepresentation will have a reasonable basis if it isrepresentative of the usual experience of thesystem’s outlets or a subset of those outlets thatshare specified characteristics. A representationwould not have a reasonable basis if, for example,only a small minority of the stated set of franchiseesearn such an amount, if profits were due to non-recurring conditions, of if the franchisees used

inconsistent systems for reporting financialperformance information.

16 Franchisors must possess writtensubstantiation for any financial performancerepresentations and must make this substantiationavailable to prospective franchisees and theCommission upon reasonable request. Thefranchisor may impose reasonable time and placelimitations, and may restrict copying of documents.However, restrictions that as a practical matter

frustrate a franchisee’s ability to review thefranchisor’s financial performance information willbe deemed to violate the Rule. See Section 436.10(c)(prohibition on failing to make informationavailable). In order to protect franchisees fromunwarranted disclosure of sensitive financialinformation, the franchisor may delete informationthat might identify the franchisee. This limitation,however, does not apply to disclosures made to theCommission.

standing vs. shopping center), degree ofcompetition in the market area, lengthof time the outlets have been inoperation, services or goods sold,services supplied by the franchisor, andwhether the units are franchised orfranchisor-owned or operated);

(B) The dates during which thereported level of financial performancewas achieved;

(C) The total number of outlets thatexisted in the relevant period and, ifdifferent, the number of outlets that hadthe described characteristics;

(D) The number of outlets with thedescribed characteristics whose actualfinancial performance data were utilizedin arriving at the representation;

(E) Of those outlets whose data wereutilized in arriving at the representation,the number and percent that actuallyattained or surpassed the statedresults; 15 and

(F) Characteristics of the includedoutlets, such as those noted inparagraph (s)(3)(i) of this section, thatmay differ materially from those of theoutlet that may be offered to aprospective franchisee.

(iii) If the representation is a forecastof future financial performance, statethe material bases and assumptions on

which the projection is based. Thematerial assumptions underlying aforecast include significant factors uponwhich a franchisee’s future results areexpected to depend. These factorsinclude, for example, economic ormarket conditions that are basic to afranchisee’s operation, and encompassmatters affecting, among other things, afranchisee’s sales, the cost of goods orservices sold, and operating expenses;

(iv) Include a conspicuousadmonition that a new franchisee’sindividual financial results may differfrom the result stated in the financialperformance representation; and

(v) State that written substantiationfor the financial performancerepresentation will be made available tothe prospective franchisee uponreasonable request.16

(4) If a franchisor wishes to discloseonly the actual operating results for aspecific outlet being offered for sale, itis not required to comply with thissection, provided the information isgiven only to potential purchasers ofthat outlet and is accompanied by thename and last known address of eachowner of the outlet during the priorthree years.

(5) If financial performancerepresentations are provided inparagraph (s) of this section, thefranchisor may deliver to a prospectivefranchisee a supplemental financialperformance representation about aparticular location or variation, apartfrom the disclosure document. Thesupplemental representation must:

(i) be in writing;(ii) explain the departure from the

financial performance representation inthe disclosure document;

(iii) be prepared in accordance withthe requirement set forth above inparagraphs (s)(3)(i)–(iii) of this section;and

(iv) be left with the prospectivefranchisee.

(t) Item 20: Outlets and FranchiseeInformation.

(1) Disclose, in the tabular formshown below, the status of franchisedoutlets by State for each of thefranchisor’s last three fiscal years. Forpurposes of this paragraph, ‘‘outlets’’includes outlets of a type substantiallysimilar to that offered to the prospectivefranchisee. A sample Item 20(1) Table isattached as Appendix B to this part.

FRANCHISED OUTLETS SUMMARY FOR YEARS

[YR–3—YR–1]

State and year

Outlets atbeginningof fiscal

year

Outletswith

sameowner-ship at

end of fis-cal year

Outletstermi-

nated byfranchisorduring the

fiscalyear

Outletsreac-

quired byfranchisorduring the

fiscalyear

Outletstrans-

ferred byfranchisee

to newowner

during thefiscal year

Outletsthat were

not re-newed

during thefiscalyear

Outletsthat

ceasedoperationor closedfor otherreasons


Totalnumber

of outletsdiscon-tinued


Total out-lets in op-eration atend of fis-cal year

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

State:YR–1 ................................. ................ ................ ................ ................ ................ ................ ................ ................ ................YR–2 ................................. ................ ................ ................ ................ ................ ................ ................ ................ ................YR–3 ................................. ................ ................ ................ ................ ................ ................ ................ ................ ................

Totals:YR–1 ................................. ................ ................ ................ ................ ................ ................ ................ ................ ................YR–2 ................................. ................ ................ ................ ................ ................ ................ ................ ................ ................YR–3 ................................. ................ ................ ................ ................ ................ ................ ................ ................ ................

(i) In column (1), list each State where oneor more franchised outlets are located. Beloweach State, list each of the last three fiscalyears.

(ii) In column (2), disclose the number ofoutlets in each State in operation at thebeginning of each fiscal year.

(iii) In column (3), disclose the number ofoutlets in each State where the controlling

ownership of the outlet did not changeduring the year.

(iv) In column (4), disclose the number ofoutlets in each State where the franchiseeoperating the outlet at the beginning of the



fiscal year did not operate the outlet at theend of the fiscal year because the franchisorterminated or canceled the franchiseagreement without providing anyconsideration to the franchisee (whether bypayment or forgiveness or assumption ofdebt) before the end of the agreement term.For purposes of this Item, a termination orcancellation occurs when the franchisorsends the franchisee an unconditional noticeof intent to exercise its right to terminate orcancel the franchise agreement.

(v) In column (5), disclose the number ofoutlets in each State where the franchiseeoperating the outlet at the beginning of thefiscal year did not operate the outlet at theend of the fiscal year because the franchisorreacquired the outlet for consideration(whether by payment or forgiveness orassumption of debt) from that franchiseebefore the end of the agreement term.

(vi) In column (6), disclose the number ofoutlets in each State where the franchiseeoperating the outlet at the beginning of thefiscal year did not operate the outlet at theend of the fiscal year because that franchiseetransferred controlling interest in the

franchise to one or more new owners, otherthan the franchisor or an affiliate, before theend of the agreement term.

(vii) In column (7), disclose the number ofoutlets in each State where the franchiseeoperating the outlet at the beginning of thefiscal year did not operate the outlet at theend of the fiscal year because the franchiseagreement was not renewed at the end of itsterm. For purposes of this Item, a nonrenewaloccurs when the franchisor sends thefranchisee an unconditional notice of intentto exercise its right not to renew the franchiseagreement after it expires.

(viii) In column (8), disclose the number ofoutlets in each State where the franchiseeoperating the outlet at the beginning of thefiscal year did not operate the outlet at theend of the fiscal year for reasons other thantermination, reacquisition, transfer, or post-term non-renewal (include here outlets thatare still owned by the franchisee operatingthe outlet at the beginning of the fiscal year,but which have ceased to do business underthe franchise agreement).

(ix) In column (9), disclose the totalnumber of outlets in the State where a

franchisee operating an outlet at thebeginning of the year did not continue tooperate the outlet at the end of the fiscal year.This figure should be the sum of the figuresin columns (4) through (8).

(x) In column (10), disclose the number ofoutlets in each State in operation at the endof the fiscal year.

(xi) Report the ownership status of eachoutlet only once. The sum of columns (3) and(9) should equal the number of outlets at thebeginning of the fiscal year (column 2). If anoutlet is involved in more than oneownership change in a given fiscal year,report only the change in ownership by thefranchisee operating the outlet at thebeginning of the year. If the change inownership of an outlet could be reported inmore than one category, report only the eventthat occurred first chronologically.

(2) Disclose, in the tabular formshown below, a table showing the statusof franchisor-owned outlets by State foreach of the franchisor’s last three fiscalyears. A sample Item 20(2) Table isattached as Appendix C to this part.

FRANCHISOR-OWNED OUTLETS SUMMARY FOR [YR–3—YR–1]

State and year

Outlets oper-ating at thebeginning of

the fiscal year

Outletsopened duringthe fiscal year

Outlets closedduring the fis-

cal year

Total numberof outlets at

the end of thefiscal year

(1) (2) (3) (4) (5)

State:YR–1 ............................................................................................................ ........................ ........................ ........................ ........................YR–2 ............................................................................................................ ........................ ........................ ........................ ........................YR–3 ............................................................................................................ ........................ ........................ ........................ ........................

Totals:YR–1 ............................................................................................................ ........................ ........................ ........................ ........................YR–2 ............................................................................................................ ........................ ........................ ........................ ........................YR–3 ............................................................................................................ ........................ ........................ ........................ ........................

(i) In column (1), list each State where oneor more franchisor-owned outlets are located.Below each State, list each of the last threefiscal years.

(ii) In column (2), disclose the number offranchisor-owned outlets in each Stateoperating at the beginning of each fiscal year.

(iii) In column (3), disclose the number offranchisor-owned outlets opened in eachState during each fiscal year.

(iv) In column (4), disclose the number offranchisor-owned outlets closed in each Stateduring each fiscal year.

(v) In column (5), disclose the number offranchisor-owned outlets in operation in eachState at the end of each fiscal year.

(3) Disclose, in the tabular formshown below, an estimate for eachapplicable State that reflects the number

of franchised and franchisor-ownedoutlets to be opened during the one-yearperiod after the close of the franchisor’smost recent fiscal year. A sample Item20(3) Table is attached as Appendix Dto this part.

PROJECTED OPENINGS AS OF

[Close of Fiscal Year]

State Franchise agreements signed butoutlet not open

Projected franchised outlets in thenext fiscal year

projected franchisor-owned outletsin the next fiscal year

(1) (2) (3) (4)

Totals .................................. ....................................................... ....................................................... .......................................................

(i) In column (1), list each State where thefranchisor has signed a franchise agreement,but the outlet is not yet opened, as well aseach State where the franchisor expects toopen a new outlet (franchisor-owned orfranchised) in the next fiscal year.

(ii) In column (2), disclose the number offranchise agreements signed in each Statewhere the outlet is not yet opened.

(iii) In column (3), disclose the projectednumber of new franchised outlets in eachState in the next fiscal year.

(iv) In column (4), disclose the projectednumber of new franchisor-owned outlets inthe next fiscal year.

(4) Disclose the names of all currentfranchisees and the address and



telephone number of each of theiroutlets. In the alternative, the franchisormay disclose all franchised outlets inthe State, but if these franchised outletstotal fewer than 100, disclose franchisedoutlets from contiguous States and thenthe next closest State(s) until at least100 franchised outlets are listed.

(5) Disclose the name and last knownhome address and telephone number ofevery franchisee who has had an outletterminated, canceled, not renewed, orotherwise voluntarily or involuntarilyceased to do business under thefranchise agreement during the mostrecently completed fiscal year or whohas not communicated with thefranchisor within 10 weeks of thedisclosure document issuance date.

(6) If franchisees have signed gagclauses in a franchise agreement,settlement, or in any other contract,during the last three fiscal years:

(i) State: ‘‘In some instances, currentand former franchisees sign provisionsrestricting their ability to speak openlyabout their experience with [name offranchise system]. While we encourageyou to speak with current and formerfranchisees, be aware that not all suchfranchisees will be able to communicatewith you.’’

(ii) Franchisors may also disclose thenumber and percentage of current andformer franchisees who during each ofthe last three fiscal years have signedagreements that include gag clauses andmay disclose the circumstances underwhich such clauses were signed.

(7) Disclose the name, address, andtelephone number of each trademark-specific franchisee organizationassociated with the franchise systembeing offered, if such organization:

(i) Has been created, supported, orrecognized by the franchisor; or

(ii) Is incorporated and asks thefranchisor to be included in thefranchisor’s disclosure document duringthe next fiscal year. All suchorganizations must renew their requestfor inclusion in disclosure documentson an annual basis. The franchisor hasno obligation to verify the organization’scontinued existence during or at the endof each fiscal year.

(u) Item 21: Financial Statements.(1) Include the following financial

statements prepared according togenerally accepted United Statesaccounting principles. Except asprovided in paragraph (u)(2) of thissection, these financial statements mustbe audited by an independent certifiedpublic accountant. Present the requiredfinancial statements in a tabular formthat compares at least two fiscal years.

(i) Financial statements: Thefranchisor’s balance sheet for the

previous two fiscal year-ends before thedisclosure document issuance date. Inaddition, include statements ofoperations, of stockholders equity, andof cash flows for each of the franchisor’sprevious three fiscal years.

(ii) Affiliated company statements:Instead of the disclosure required byparagraph (u)(1)(i) of this Section, thefranchisor may include financialstatements of its affiliated company ifthe affiliated company’s financialstatements satisfy paragraph (u)(1)(i) ofthis section and the affiliated companyabsolutely andunconditionallyguarantees to assume the duties andobligations of the franchisor under thefranchise agreement. The affiliate’sguarantee must cover all of thefranchisor’s obligations to thefranchisee, but is not required to extendto third parties. If this alternative isused, disclose the existence of aguarantee.

(iii) Consolidated and separatestatements:

(A) When a franchisor owns a director beneficial controlling financialinterest in another corporation, itsfinancial statements should reflect thefinancial condition of the franchisor andits subsidiaries.

(B) Include separate financialstatements for the franchisor and anysubfranchisor or comparable entity.

(C) Include separate financialstatements for a company controlling 80percent or more of a franchisor.

(2) To the extent that start-upfranchise systems do not yet haveaudited financial statements, they mayphase-in the use of audited financialstatements according to the followingschedule:(i) If this is the

franchisor’s:The following finan-

cial statements in-cluded in thefranchisor’s disclo-sure documentmust be audited.

(A) First partial orfull fiscal yearselling fran-chises.

None.

(B) Second fiscalyear selling fran-chises.

Balance sheet opin-ion as of the endof the last fiscalyear.

(C) Third and sub-sequent fiscalyears sellingfranchises.

All required finan-cial statements forthe previous fiscalyear, plus any pre-viously disclosedaudited statementsthat still must bedisclosed accord-ing to paragraph(u)(1)(i) of this sec-tion.

(ii) Audited financial statements shallbe prepared as soon as practicable.

(iii) Unaudited statements should bein a format that conforms as closely aspossible to audited statements.

(iv) Disclose clearly andconspicuously in paragraph (u) of thissection the following, if applicable:

(A) The franchisor has not been inbusiness for three years or more, andcannot include all of the financialstatements required in paragraph(u)(1)(i) of this section; or

(B) The franchisor includes one ormore years of unaudited financialstatements.

(v) In the event a start-up franchisesystem begins offering franchises beforethe close of its first full fiscal year ofoperations, provide at a minimum thecompany’s unaudited opening balancesheet.

(v) Item 22: Contracts. Attach a copyof all proposed agreements regarding thefranchise offering, including thefranchise agreement and any lease,options, and purchase agreements.

(w) Item 23: Receipt.(1) Include the following detachable

acknowledgment of receipt in the formset out below.

(i) State the following:This disclosure document

summarizes certain provisions of thefranchise agreement and otherinformation in plain language. Read thisdisclosure document and all agreementscarefully.

If [name of franchisor] offers you afranchise, it must provide thisdisclosure document to you 14 daysbefore the earlier of:

(1) the signing of a binding agreement;or

(2) any payment to [name offranchisor or affiliate].

You must also receive a franchiseagreement containing all material termsat least 5 days before you sign afranchise agreement.

If [name of franchisor] does notdeliver this disclosure document ontime or if it contains a false ormisleading statement, or a materialomission, a violation of federal law andState law may have occurred and shouldbe reported to the Federal TradeCommission, Washington, D.C. 20580and [State agency].

(ii) Disclose the name, principalbusiness address, and telephone numberof any subfranchisor or franchise brokeroffering the franchise.

(iii) State the issuance date.(iv) If not disclosed in § 436.5(a), state

the name and address of the franchisor’sregistered agent authorized to receiveservice of process.

(v) Provide the following statement:I have received a disclosure document

dated ll that included the followingExhibits:’



(vi) List the title of all attachedExhibits.

(vii) Provide a space for thefranchisee’s signature and date.

(viii) Franchisors may include anyspecific instructions for returning thereceipt (e.g., street address, E-mailaddress, facsimile telephone number).

(2) Franchisors shall obtain a signedcopy of the receipt at least 5 days beforethe franchise agreement is signed or theprospective franchisee pays any fee inconnection with the franchise sale.

(3) For each completed franchise sale,franchisors shall retain a copy of thesigned receipt for a period of at least 3years.

Subpart D—Instructions

§ 436.6 Instructions for PreparingDisclosure Documents

(a) Disclose the information requiredin sections 436.3–436.5 clearly, legibly,and concisely stated in a singledocument, using plain English.

(b) Respond fully to each disclosureItem. If a particular disclosure Item isnot applicable, respond negatively,including a reference to the type ofinformation required to be disclosed bythe Item. Precede each disclosure Itemwith the appropriate heading.

(c) Do not include any materials orinformation other than that required bythis Rule or by State law not preemptedby this Rule. Franchisors may preparemulti-State disclosure documents byincluding State-specific information inthe text of the disclosure document orin Exhibits attached to the disclosuredocument.

(d) Subfranchisors should disclose therequired information about thefranchisor, and, to the extent applicable,the same information concerning thesubfranchisor.

§ 436.7 Instructions For ElectronicDisclosure Documents.

Franchise sellers can furnishdisclosures electronically under thefollowing conditions:

(a) The prospective franchiseeexpressly consents to accept thedisclosures in the electronic mediumoffered by the franchise seller.Prospective franchisees, however,always retain the right to obtain a paperdisclosure document from the franchiseseller up until the time of the sale.

(b) The franchise sellersimultaneously furnishes theprospective franchisee with a papersummary document containing only thefollowing three items from thefranchisor’s disclosure document:

(1) The cover page;(2) The table of contents; and

(3) Two copies of the franchisor’s Item23 Receipt, with instructions toacknowledge receipt through asignature.

(c) The electronic version of thefranchisor’s disclosure document mustbe capable of being printed,downloaded onto computer disk, orotherwise preserved by a prospectivefranchisee as one single document.

(d) The electronic version of thefranchisor’s disclosure document mustbe a self-contained document that is thefunctional equivalent of a paperdisclosure document. A prospectivefranchisee must be able to read eachpart of the disclosure document,including attachments, without havingto take any affirmative action other thanscrolling through the document.

(e) For the sole purpose of enhancingthe prospective franchisee’s ability tomaneuver through the electronic versionof the disclosure document, thefranchisor may include scroll bars,internal links, and search features. Allother features (e.g., multimedia toolssuch as audio, video, animation, or pop-up screens) are prohibited.

(f) The electronic version of thefranchisor’s disclosure document mustremain accessible at least until the timeof the sale. An electronic version willstill be deemed accessible iftechnological failures occur that arebeyond the franchisor’s reasonablecontrol. Further, an electronic versionon the Internet will be deemedaccessible if it is updated and replacedwith a more current version.

(g) Franchisors furnishing disclosuredocuments electronically must retain,and make available to the Commissionupon request, a specimen copy of eachmaterially different version of theirelectronic disclosure documents for aperiod of three years.

§ 436.8 Instructions For UpdatingDisclosures

(a) All information contained in thedisclosure document shall be current asof the close of the franchisor’s mostrecent fiscal year. After the close of thefiscal year, the franchisor shall, within90 days, prepare a revised disclosuredocument, after which the franchisormay distribute only the reviseddocument and no other.

(b) The franchisor shall, within areasonable time after the close of eachquarter of the fiscal year, preparerevisions to be attached to thedisclosure document to reflect anymaterial change in the franchisor orrelating to the franchise business of thefranchisor. Each prospective franchiseeshall receive the disclosure document

and the quarterly revisions for the mostrecent period available at the time.

(c) When furnishing a disclosuredocument, the franchise seller shallnotify the prospective franchisee of anyadditional material change in thefranchisor, the franchise business, orfranchise agreement that has occurredsince the last quarterly disclosuredocument revision. Franchise sellersshall also notify the prospectivefranchisee of any other known materialchange in the franchisor, the franchisebusiness, or franchisee agreement at thetime the completed franchiseagreements are delivered to theprospective franchisee pursuant tosection 436.2(a)(2).

(d) Information that is required to beaudited pursuant to § 436.5(u) is notrequired to be audited for quarterlyrevisions; provided, however, that thefranchisor states in immediateconjunction with the information thatsuch information has not been audited.

Subpart E—Other Provisions

§ 436.9 Exemptions. The disclosurerequirements of sections 436.2—436.8 shallnot apply if the franchisor can establish anyof the following:

(a) The total of the required paymentsto the franchisor or an affiliate that aremade any time before to within sixmonths after commencing operation ofthe franchisee’s business is less than$500, not including payment for thepurchase of reasonable amounts ofinventory at bona fide wholesale pricesfor resale.

(b) The franchise relationship is afractional franchise.

(c) The franchise relationship is aleased department.

(d) The franchise relationship iscovered by the Petroleum MarketingPractices Act, 15 U.S.C. 2801.

(e)(1) The franchisee’s estimatedinvestment, excluding any financingreceived from the franchisor or anaffiliate, totals at least $1.5 million andthe prospective franchisee signs anacknowledgment verifying the groundsfor the exemption; or

(2) The franchisee is a corporationthat has been in business for at least fiveyears and has a net worth of at least $5million. Provided, however, that theCommission may publish revisedthresholds once every four years toadjust for inflation.

(f) One or more purchasers of at leasta 50 percent ownership interest in thefranchise are, or have been within 60days of the sale, an officer, director,managing agent, or an owner of at leasta 25 percent interest in the franchisor,for at least 24 months.



(g) There is no written document thatdescribes any material term or aspect ofthe relationship or arrangement.

§ 436.10 Additional Prohibitions.

It is an unfair or deceptive act orpractice in violation of section 5 of theFederal Trade Commission Act for anyfranchise seller to:

(a) Make any claim or representation,orally, visually, or in writing, thatcontradicts the information required tobe disclosed by this Rule.

(b) Fail to return any funds ordeposits in accordance with anyconditions disclosed in the franchisor’sdisclosure document, franchiseagreement, or related document.

(c) Fail to make available toprospective franchisees, and to theCommission upon reasonable request,written substantiation for any financialperformance representations made in§ 436.5(s).

(d) Disseminate any financialperformance representation toprospective franchisees, including anyrepresentations made in the generalmedia and Internet, unless the franchiseseller has a reasonable basis for therepresentation, has writtensubstantiation for the claim at the timethe claim is made, and therepresentation is included in § 436.5(s)of the franchisor’s disclosure document.

In conjunction with any such financialperformance representation, thefranchise seller shall also:

(1) Disclose the information requiredby § 436.5(s)(3)(ii)(E) if therepresentation relates to the pastperformance of the franchisor’s outlets;and

(2) Include a conspicuous admonitionthat a new franchisee’s individualfinancial results may differ from theresult stated in the financialperformance representation.

(e) Disclaim or require a prospectivefranchisee to waive reliance on anyrepresentation made in the disclosuredocument or its exhibits oramendments. Provided, however, that aprospective franchisee can agree tocontractual terms and conditions thatdiffer from those specified in adisclosure document if:

(1) the franchise seller identifies thechanged terms and conditions;

(2) the prospective franchisee initialsthe changes; and

(3) the prospective franchisee has 5days before signing the contract orpaying any fee to review the revisedcontract.

(f) Misrepresent that any person:(1) Has purchased a franchise from

the franchisor or operated a franchise ofthe type offered by the franchisor; or

(2) Is able to provide an independentand reliable report about the franchise

or the experiences of any current orformer franchisees.

§ 436.11 Other Laws, Rules, Orders.

(a) The Commission does not approveor otherwise express any opinion on thelegality of any matter a franchisor maybe required to disclose by this Rule.Further, franchisors may have otherobligations to disclose materialinformation to prospective franchiseesunder section 5 of the Federal TradeCommission Act. The Commission alsointends to enforce all applicable statutesand trade regulation rules.

(b) If an outstanding FTC orderapplies to a franchisor but differs fromany provision of this regulation, thefranchisor can petition the Commissionto amend the order.

(c) The FTC does not intend topreempt the franchise practices laws ofany State or local government, except tothe extent of any inconsistency with thisRule. A law is not inconsistent with thisRule if it affords prospective franchiseesequal or greater protection, such asregistration of disclosure documents ormore extensive disclosures.

§ 436.12 Severability.

If any provision of this regulation isstayed or held invalid, the remainderwill stay in force.

Appendix A: Sample Item 10 Table

SUMMARY OF FINANCING OFFERED

Item financed Amount fi-nanced

Down pay-ment Term (yrs) APR (per-

cent)Monthlypayment

Prepaypenalty

Securityrequired

Liabilityupon de-

fault

Loss oflegal rightson default

Initial feeLand/ConstrLeased spaceEquip. leaseEquip. purchaseOpening inventoryOther financing

Appendix B: Sample Item 20(1) Table

FRANCHISED OUTLET SUMMARY FOR YEARS 1995–1997

State andyear

Outlets atbeginning offiscal year

Outlets withsame own-ership at

end of fiscalyear

Outlets ter-minated byfranchisorduring thefiscal year

Outlets re-acquired byfranchisorduring thefiscal year

Outletstransferred

byfranchisee

to newowner dur-ing the fis-

cal year

Outlets thatwere not re-newed dur-ing the fis-

cal year

Outlets thatceased op-eration orclosed forother rea-

sons duringthe fiscal

year

Total num-ber of out-lets discon-tinued dur-ing the fis-

cal year

Total outletsin operation

at end offiscal year

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

AL:1997 ...... 2 1 1 0 0 0 0 1 11996 ...... 2 2 0 0 0 0 0 0 21995 ...... 1 1 0 0 0 0 0 0 2



FRANCHISED OUTLET SUMMARY FOR YEARS 1995–1997—Continued

State andyear

Outlets atbeginning offiscal year

Outlets withsame own-ership at

end of fiscalyear

Outlets ter-minated byfranchisorduring thefiscal year

Outlets re-acquired byfranchisorduring thefiscal year

Outletstransferred

byfranchisee

to newowner dur-ing the fis-

cal year

Outlets thatwere not re-newed dur-ing the fis-

cal year

Outlets thatceased op-eration orclosed forother rea-

sons duringthe fiscal

year

Total num-ber of out-lets discon-tinued dur-ing the fis-

cal year

Total outletsin operation

at end offiscal year

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)

MI:1997 ...... 4 3 1 0 0 0 0 1 41996 ...... 7 4 0 0 2 1 0 3 41995 ...... 8 6 0 1 0 0 1 2 7

WY:1997 ...... 3 2 0 0 0 0 1 1 21996 ...... 1 1 0 0 0 0 0 0 31995 ...... 0 0 0 0 0 0 0 0 1

Totals:1997 ...... 9 6 2 0 0 0 1 3 71996 ...... 10 7 0 0 2 1 0 3 91995 ...... 9 7 0 1 0 0 1 2 10

Appendix C: Sample Item 20(2) Table

FRANCHISOR-OWNED OUTLETS SUMMARY FOR 1995–1997

State and year

Outlets oper-ating at thebeginning of

the fiscal year

Outletsopened duringthe fiscal year

Outlets closedduring the fis-

cal year

Total numberof outlets at

the end of thefiscal year

(1) (2) (3) (4) (5)

AL:1997 ............................................................................................................. 5 0 0 51996 ............................................................................................................. 3 2 0 51995 ............................................................................................................. 4 2 3 3

MI:1997 ............................................................................................................. 4 1 0 51996 ............................................................................................................. 6 0 2 41995 ............................................................................................................. 5 2 1 6

WY:1997 ............................................................................................................. 1 0 0 11996 ............................................................................................................. 0 2 1 11995 ............................................................................................................. 0 0 0 0

Totals:1997 ................................................................................................... 10 1 0 111996 ................................................................................................... 9 4 3 101995 ................................................................................................... 9 4 4 9

Appendix D: Sample Item 20(3) Table

PROJECTED OPENINGS AS OF DECEMBER 31, 1997

StateFranchise agree-ments signed butoutlet not open

Projected fran-chised outlets inthe next fiscal

year

Projectedfranchisor-owned

outlets in thenext fiscal year

(1) (2) (3) (4)

AL ..................................................................................................................................... 1 1 0MI ..................................................................................................................................... 0 3 2WY ................................................................................................................................... 1 0 0

Totals .................................................................................................................... 2 4 2



By direction of the Commission.Donald S. Clark,Secretary.

NPR Attachment A—Table ofCommenters

Comment 1. Kevin Brendan Murphy, Esq.,Mr. Franchise (‘‘Murphy’’)

Comment 2. Murphy (see supra, Comment 1)Comment 3. Mike Bruce, The Michael Bruce

Fund (‘‘Bruce’’)Comment 4. Harold Brown, Esq., Brown &

Stadfeld (‘‘Brown’’)Comment 5. Frances L. Diaz, Esq. (‘‘Diaz’’)Comment 6. Brown (see supra, Comment 4)Comment 7. Diaz (see supra, Comment 5)Comment 8. Marian Kunihisa (‘‘Kunihisa’’)Comment 9. Kevin Bores, Domino’s Pizza

Franchisee (‘‘Bores’’)Comment 10. Terrence L. Packer, Supercuts

Franchisee (‘‘Packer’’)Comment 11. John Delasandro

(‘‘Delasandro’’)Comment 12. William Cory (‘‘Cory’’)Comment 13. Joseph Manuszak, Domino’s

Pizza Franchisee (‘‘Manuszak’’)Comment 14. Daryl Donafin, Taco Bell

Franchisee (‘‘Donafin’’)Comment 15. David Muncie, National Claims

Service, Inc. (‘‘Muncie’’)Comment 16. Patrick E. Meyers, The

Quizno’s Corporation (‘‘Quizno’s’’)Comment 17. David Weaver, Domino’s Pizza

Franchisee (‘‘Weaver’’)Comment 18 Karen M. Paquet, Domino’s

Pizza Franchisee (‘‘Paquet’’)Comment 19. Gary R. Duvall, Esq., Graham

& Dunn (‘‘Duvall’’)Comment 20. Andrew J. Sherman, Esq.,

Greenberg & Traurig (‘‘Sherman’’)Comment 21. S. Beavis Stubbings, Esq.

(‘‘Stubbings’’)Comment 22. Jim & Evalena Gray, Pearle

Vision Franchisee (‘‘J&E Gray’’)Comment 23. Ernest Higginbotham, et al.,

Strasburger & Price (‘‘Higginbotham’’)Comment 24. Henry C. Su, Esq., & Byron Fox,

Esq. (‘‘Su’’)Comment 25. John R.F. Baer, Esq., Keck,

Mahin & Cate (‘‘Baer’’)Comment 26. Clay Small, Esq., & Lowell

Dixon, Esq., Nat’l Franchise MediationProgram Steering Committee (‘‘NFMP’’)

Comment 27. Richard T. Catalano, Esq.(‘‘Catalano’’)

Comment 28. Neil Simon, Esq., & Erik Wulff,Esq., Hogan & Hartson (‘‘Hogan &Hartson’’)

Comment 29. Glenn A. Mueller, Domino’sPizza Franchisee (‘‘Mueller’’)

Comment 30. Doug Bell, et al., SupercutsFranchisees (‘‘Supercuts Franchisees’’)

Comment 31. Michael L. Bennett, TheLongaberger Co. (‘‘Longaberger’’)

Comment 32. John Rachide, Domino’s PizzaFranchisee (‘‘Rachide’’)

Comment 33. David J. Kaufmann, Esq.,Kaufmann, Feiner, Yamin, Gildin &Robbins (‘‘Kaufmann’’)

Comment 34. Joseph N. Mariano, Esq., DirectSelling Association (‘‘DSA’’)

Comment 35. Linda F. Golodner & SusanGrant, National Consumers League(‘‘NCL’’)

Comment 36. Jere W. Glover, Esq., & JenniferA. Smith, Esq., U.S. Small BusinessAdministration, Office of Chief Counselfor Advocacy (‘‘SBA Advocacy’’)

Comment 37. Robert Chabot, Domino’s PizzaFranchisee (‘‘Chabot’’)

Comment 38. Teresa Maloney, NationalCoalition of Associations of 7–ElevenFranchisees (‘‘Maloney’’)

Comment 39. BLANKComment 40. Harold L. Kestenbaum, Esq.

(‘‘Kestenbaum’’)Comment 41. Samuel L. Sibent, KFC

Franchisee (‘‘Sibent’’)Comment 42. Oren C. Crothers, KFC

Franchisee (‘‘Crothers’’)Comment 43. Matthew Jankowski, KFC

Franchisee (‘‘Jankowski’’)Comment 44. Rodney A. DeBoer, KFC

Franchisee (‘‘DeBoer’’)Comment 45. Liesje Bertoldi, KFC Franchisee

(‘‘L. Bertoldi’’)Comment 46. Steve Bertoldi, KFC Franchisee

(‘‘S. Bertoldi’’)Comment 47. Charles Buckner, KFC

Franchisee (‘‘Buckner’’)Comment 48. Walter J. Knezevich, KFC

Franchisee (‘‘Knezevich’’)Comment 49. Jeffrey W. Gray, KFC

Franchisee (‘‘J. Gray’’)Comment 50. Fred Jackson, KFC Franchisee

(‘‘Jackson’’)Comment 51. Ronald L. Rufener, KFC

Franchisee (‘‘Rufener’’)Comment 52. Tim Morris, KFC Franchisee

(‘‘Morris’’)Comment 53. Scarlett Norris Adams, KFC

Franchisee (‘‘Adams’’)Comment 54. Calvin G. White, KFC

Franchisee (‘‘White’’)Comment 55. Nick Iuliano, KFC Franchisee

(‘‘N. Iuliano’’)Comment 56. Dolores Iuliano, KFC

Franchisee (‘‘D. Iuliano’’)Comment 57. Ralph A. Harman, KFC

Franchisee (‘‘R. Harman’’)Comment 58. Saundra S. Harman, KFC

Franchisee (‘‘S. Harman’’)Comment 59. Richard Braden, KFC

Franchisee (‘‘Braden’’)Comment 60. K.F.C. of Pollys, KFC

Franchisee (‘‘Pollys’’)Comment 61. Joan Fiore, McDonald’s

Franchisee (‘‘Fiore’’)Comment 62. Susan P. Kezios, American

Franchisee Association (‘‘AFA’’)Comment 63. Kenneth R. Costello, Esq., Loeb

& Loeb, LLP (‘‘Loeb & Loeb’’)Comment 64. AFA (see supra Comment 62)Comment 65. Susan Rich, KFC Franchisee

(‘‘Rich’’)Comment 66. Fiore (see supra Comment 61)Comment 67. Mike Johnson, Subway

Franchisee (‘‘Johnson’’)Comment 68. Laurie Gaither, GNC Franchisee

(‘‘L. Gaither’’)Comment 69. Greg Gaither, GNC Franchisee

(‘‘G. Gaither’’)Comment 70. Greg Suslovic, Subway

Franchisee (‘‘Suslovic’’)Comment 71. Richard Colenda, GNC

Franchisee (‘‘Colenda’’)Comment 72. Bob Gagliati, GNC Franchisee

(‘‘Gagliati’’)Comment 73. Pat Orzano, 7-Eleven

Franchisee (‘‘Orzano’’)

Comment 74. Linda Gaither, GNC Franchisee(‘‘Li Giather’’)

Comment 75. Kevin 100 (‘‘Kevin 100’’)Comment 76. Robert James, Florida Dept. of

Agriculture & Consumer Services(‘‘James’’)

Comment 77. Robert A. Tingler, Esq., Officeof the Attorney General, State of Illinois(‘‘IL AG’’)

Comment 78. John M. Tifford, Esq., Rudnick,Wolfe, Epstien & Zeidman (‘‘Tifford’’)

Comment 79. Robert L. Purvin, Jr. (‘‘Purvin’’)Comment 80. Teresa Heron (‘‘Heron’’)Comment 81. Purvin (See supra Comment

79)Comment 82. Matthew R. Shay, Esq.,

International Franchise Association(‘‘IFA’’)

Comment 83. Duvall (See supra Comment 19)Comment 84. Lance Winslow, Car Wash

Guys (‘‘Winslow’’)Comment 85. Winslow (See supra Comment

84)Comment 86. Rick Geu, The Pampered Chef,

Ltd. (‘‘Pampered Chef’’)Comment 87. John M. Tifford, Esq., Coverall

North America, Inc. (‘‘Coverall’’)Comment 88. John M. Tifford, Esq.,

Merchandise Mart Properties, Inc.(‘‘Merchandise Mart’’)

Comment 89. Dirk C. Bloemendaal, Esq.,Amway Corporation (‘‘Amway’’)

Comment 90. Winslow (See supra Comment84)




Comment 94. Andrew A. Caffey, Esq.(‘‘Caffey’’)

Comment 95. Entrepreneur Media, Inc.(‘‘Entrepreneur’’)

Comment 96. Brown (See supra Comment 4)Comment 97. Raymond & Robert Buckley,

Scorecard Plus Franchisee (‘‘Buckley’’)Comment 98. Mark A. Kirsch, Esq., Rudnick,

Wolfe, Epstien & Zeidman (‘‘Kirsch’’)Comment 99. Dale E. Cantone, Esq.,

Maryland Division of Securities, Officeof the Maryland Attorney General (‘‘MDSecurities’’)

Comment 100. Roger C. Haines, ScorecardPlus Franchisee (‘‘Haines’’)

Comment 101. David E. Myklebust,Scorecard Plus Franchisee (‘‘Myklebust’’)

Comment 102. Robert Larson (‘‘Larson’’)Comment 103. Brown (See supra Comment 4)Comment 104. Mark B. Forseth, Esq., CII

Enterprises (‘‘CII’’)Comment 105. Bertrand T. Ungar, Esq., PR

ONE, LLC (‘‘PR ONE’’)Comment 106. Dennis E. Wieczorek, Esq.,

Rudnick & Wolfe (‘‘Wieczorek’’)Comment 107. Gerald A. Marks, Esq., Marks

& Krantz (‘‘Marks’’)Comment 108. Brown (See supra Comment 4)Comment 109. Everett W. Knell (‘‘Knell’’)Comment 110. Anne Crews, Mary Kay, Inc.

(‘‘Mary Kay’’)Comment 111. Carl Letts, Dominos Pizza

Franchisee (‘‘Letts’’)Comment 112. Kat Tidd, Esq. (‘‘Tidd’’)



Comment 113. Ted Poggi, National Coalitionof Associations of 7-Eleven Franchisees(‘‘NCA 7-Eleven Franchisees’’)

Comment 114. Gary R. Duvall, Esq., & NadineC. Mandel, Esq. (Duvall & Mandel)

Comment 115. Sherry Christopher, Esq.,Christopher Consulting, Inc.(‘‘Christopher’’)

Comment 116. Carl C. Jeffers, Intel MarketingSystems, Inc. (‘‘Jeffers’’)

Comment 117. Deborah Bortner, Esq., State ofWashington, Department of FinancialInstitutions, Securities Division (‘‘WASecurities’’)

Comment 118. Carmen D. Caruso, Esq.,Noonan & Caruso (‘‘Caruso’’)

Comment 119. Howard Bundy, Esq., Bundy& Morrill, Inc. (‘‘Bundy’’)

Comment 120. Franchise & BusinessOpportunity Committee, North AmericanSecurities Administrators Association,Inc. (‘‘NASAA’’)

Comment 121. Tifford (See supra Comment78)

Comment 122. Wieczorek (See supraComment 106)

Comment 123. John & Debbie Lopez, BaskinRobbins Franchisee (‘‘Lopez’’)

Comment 124. Susan R. Essex, Esq., & TedS. Storey, Esq., Business Law Section,The State Bar of California (‘‘CA BLS’’)

Comment 125. Peter C. Lagarias, Esq., TheLegal Solutions Group (‘‘Lagarias’’)

Comment 126. Jame G. Merret, Jr. (‘‘Merret’’)Comment 127. W. Michael Garner, Esq., Dady

& Garner (‘‘Dady & Garner’’)Comment 128. Jeff Brickner (‘‘Brickner’’)Comment 129. Bernard A. Brynda, Baskin

Robbins Franchisee (‘‘Brynda’’)Comment 130. Caron B. Slimak, Jacadi USA

Franchisee (‘‘Slimak’’)Comment 131. Dr. Ralph Geiderman, Pearl

Vision Franchisee (‘‘Geiderman’’)Comment 132. Felipe Frydman, Minister,

Economic & Trade Affairs, Embassy ofthe Argentine Republic (‘‘ArgentineEmbassy’’)

Comment 133. Andrew C. Selden, Esq.,Briggs & Morgan (‘‘Selden’’)

Comment 134. Robert Zarco, Esq., et al.,Zarco & Pardo (‘‘Zarco & Pardo’’)

Comment 135. Jason H. Griffing, BaskinRobbins Franchisee (‘‘Griffing’’)

Comment 136. Erik H. Karp, Esq., Witmer,Karp, Warner & Thuotte (‘‘Karp’’)

Comment 137. William D. Brandt, Esq.,Ferder, Brandt, Casebeer, Cooper, Hoyt &French (‘‘Brandt’’)

Comment 138. Robert S. Keating, BaskinRobbins Franchisee (‘‘Keating’’)

Comment 139. A. Patel, Baskin RobbinsFranchisee (‘‘A. Patel’’)

Comment 140. Joel R. Buckberg, CendantCorporation (‘‘Cendant’’)

Comment 141. Duvall (See supra, Comment19)

Comment 142. NCL (See supra, Comment 35)Comment 143. AFA (See supra, Comment 62)Comment 144. Catalano (See supra,

Comment 27)Comment 145. DSA (See supra, Comment 34)Comment 146. Keating, (See supra, Comment

139)Comment 147. Kathie & David Leap, Baskin

Robbins Franchisee (‘‘Leap’’)

Comment 148. Ted D. Kuhn, Baskin RobbinsFranchisee (‘‘Kuhn’’)

Comment 149. Mike S. Lee, Baskin RobbinsFranchisee (‘‘Lee’’)

Comment 150. R. Deilal, Baskin RobbinsFranchisee (‘‘Deilal’’)

Comment 151. Frank J. Demotto, BaskinRobbins Franchisee (‘‘Demotto’’)

Comment 152. Thomas Hung, BaskinRobbins Franchisee (‘‘Hung’’)

Comment 153. Jean Jones, Baskin RobbinsFranchisee (‘‘Jones’’)

Comment 154. Hang, Baskin RobbinsFranchisee (‘‘Hang’’)

Comment 155. Dilip Patel, Baskin RobbinsFranchisee (‘‘D. Patel’’)

Comment 156. Terry L. Glase, BaskinRobbins Franchisee (‘‘Glase’’)

Comment 157. R.E. Williamson, BaskinRobbins Franchisee (‘‘Williamson’’)

Comment 158. R.M. Valum, Baskin RobbinsFranchisee (‘‘Valum’’)

Comment 159. Rajendra Patel, BaskinRobbins Franchisee (‘‘R. Patel’’)

Comment 160. Jerry & Debbie Robinett,Baskin Robbins Franchisee (‘‘Robinett’’)

Comment 161. Ronald J. Rudolf, BaskinRobbins Franchisee (‘‘Rudolf’’)

Comment 162. Kamlesh Patel, BaskinRobbins Franchise (‘‘K. Patel’’)

Comment 163. Nicholas & Marilyn Apostal,Baskin Robbins Franchisee (‘‘Apostal’’)

Comment 164. Patrick Sitin, Baskin RobbinsFranchisee (‘‘Sitin’’)

Comment 165. Paul & Lisa SeLander, BaskinRobbins Franchisee (‘‘SeLander’’)

Comment 166. S. Bhilnym, Baskin RobbinsFranchisee (‘‘Bhilnym’’)

Comment 167. Mike & Kathy Denino, BaskinRobbins Franchisee (‘‘Denino’’)

NPR Attachment B—WorkshopConferences: Panelists

Michael Bennett, Esq., Longaberger Company(‘‘Bennett’’)

Kennedy Brooks, Esq. (‘‘Brooks’’)John Brown, Esq., Amway Corporation (‘‘J.

Brown’’)Howard Bundy, Esq., Bundy & Morrill

(‘‘Bundy’’)Delia Burke, Esq., Jenkins & Gilchrist

(‘‘Burke’’)Andrew Caffey, Esq. (‘‘Caffey’’)Dale Cantone, Esq., Office of the Maryland

Attorney General (‘‘Cantone’’)Emilio Casillas, Washington State Securities

Division (‘‘Casillas’’)Richard Catalano, Esq. (‘‘Catalano’’)Sherry Christopher, Esq. (‘‘Christopher’’)Martin Cordell, Esq., Washington State

Securities Division (‘‘Cordell’’)John D’Alessandro (‘‘D’Alessandro’’)Gary Duvall, Esq., Graham & Dunn (‘‘Duvall’’)Eric Ellman, Esq., Direct Selling Association

(‘‘Ellman’’)David Finnigan, Esq., Illinois Securities

Department (‘‘Finnigan’’)Mark B. Forseth, Esq., Jenkens & Gilchrist

(‘‘Forseth’’)Elizabeth Garceau, PRO Design (‘‘E.

Garceau’’)Michael Garceau, PRO Design (‘‘M. Garceau’’)Roger Gerdes, Microsoft Corporation

(‘‘Gerdes’’)Rick Geu, Esq., The Pampered Chef (‘‘Geu’’)

Judy Gitterman, Esq., Jenkens & Gilchrist(‘‘Gitterman’’)

Susan Grant, National Consumers League(‘‘Grant’’)

Tee Houston-Aldridge, World InspectionNetwork (‘‘Houston-Aldridge’’)

Robert James, Florida Dept. of Agriculture &Consumer Services (‘‘James’’)

Carl Jeffers, Intel Marketing Systems(‘‘Jeffers’’)

David Kaufmann, Esq., Kaufmann, Feiner,Yamin, Gildin & Robbins (‘‘Kaufmann’’)

Harold Kestenbaum, Esq., Hollenburg,Bleven, Solomon, Ross (‘‘Kestenbaum’’)

Susan Kezios, America FranchiseeAssociation (‘‘Kezios’’)

Mark Kirsch, Esq., Rudnick, Wolfe, Epstien &Zeidman (‘‘Kirsch’’)

Mike Ludlum, Entrepreneur Media(‘‘Ludlum’’)

Philip McKee, National Consumers League(‘‘McKee’’)

Joseph Punturo, Esq., Office of the New YorkAttorney General (‘‘Punturo’’)

Philip Sanson, Esq., Illinois SecuritiesDepartment (‘‘Sanson’’)

Matthew Shay, Esq., International FranchiseAssociation (‘‘Shay’’)

David Silverman, Sportsworld Int’l.(‘‘Silverman’’)

Neil Simon, Esq., Hogan & Hartson(‘‘Simon’’)

J. H. Snow, Esq., Jenkens & Gilchrist(‘‘Snow’’)

Adam Sokol, Esq., Illinois Attorney General’sOffice (‘‘Sokol’’)

Kat Tidd, Esq. (‘‘Tidd’’)John Tifford, Esq., Rudnick, Wolfe, Epstien &

Zeidman (‘‘Tifford’’)Bertrand Unger, Esq., PR ONE (‘‘Unger’’)Dick Way, PR ONE (‘‘Way’’)Dennis Wieczorek, Esq., Rudnick & Wolfe

(‘‘Wieczorek’’)Erik Wulff, Esq., Hogan & Harston (‘‘Wulff’’)Barry Zaslav, Coverall North America

(‘‘Zaslav’’)Michael W. Chiodo, Domino’s Franchisee

(‘‘Chiodo’’)Joseph Cristiano, Carvel Franchisee

(‘‘Cristiano’’)John D’Alessandro, Quaker State Quick Lube

Distributor (‘‘D’Alessandro’’)Mark Deutsch, Former Franchisee

(‘‘Deutsch’’)Steve Doe,’’ Franchisee (‘‘Doe’’)Debbie Fetzer (‘‘Fetzer’’)Richard W. Galloway, Domino’s Pizza

Franchisee (‘‘Galloway’’)Bruce Hoar & Thomas Hoar, Hanes

Franchisee (‘‘Hoar’’)Nelson Hockert-Lotz, Domino’s Franchisee

(‘‘Hockert-Lotz’’)Robert L. James, Florida Dept. of Agriculture

& Consumers Services (‘‘James’’)Eric Karp, Esq., Witmer, Karp, Warner &

Thuotte (‘‘Karp’’)Susan Kezios, American Franchisee

Association (‘‘Kezios’’)Charles Lay, Brite Site Franchisee (‘‘Lay’’)Marge Lundquist, Franchisee (‘‘Lundquist’’)Gerald Marks, Esq., Marks & Krantz

(‘‘Marks’’)Dianne Mousley, Mike Schmidt’s Phil.

Hoagies Franchisee (‘‘Mousley’’)Mehran Rafizadeh, GNC Franchisee

(‘‘Rafizadeh’’)



David W. Raymond, Esq. (‘‘Raymond’’)Iris Sandow, Blimpie Franchisee (‘‘Sandow’’)Caron Slimak, Jacadi Franchisee (‘‘Slimak’’)

Robert Tingler, Esq., Franchise Bureau Chief,Illinois Attorney General’s Office(‘‘Tingler’’)

Dr. Spencer Vidulich, Pearle VisionFranchisee (‘‘Vidulich’’)

[FR Doc. 99–27425 Filed 10–21–99; 8:45 am]BILLING CODE 6750–01–P
