Franchise Advertising: There’s More to it Than Meets the Eye

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As competition for new franchisees becomes heated, advertising and promotional materials directed to prospective franchisees is likely to get more creative.

By Charles S. Modell, CFE 

Attracting new franchisees to their brand is of critical importance to franchisors in these difficult economic times. Franchisors who previously relied on word-of-mouth, a few search engines, their own Web sites, and possibly some broker referrals, are looking for new ways of getting their message to prospective franchisees. As franchisors look to advertise for new franchisees, they should be mindful of the laws that regulate advertising in general, and advertising for franchisees in particular.

Advertising as an “Offer” to Sell a Franchise 
Most franchisors know that a number of states have laws requiring the registration of a franchise before any franchise can be sold in that state. However, these laws not only regulate sales of franchises, but also “offers” of franchises. As a result, because advertising for franchisees is deemed to be an “offer” of a franchise, no advertisement can be directed to any of the franchise registration states until the franchise has been registered for sale in that state. 

While most franchisors are also aware that franchise advertising is regulated in a number of states, not all franchisors understand that the franchise laws governing advertising apply not only to traditional print advertising placed in the media, but also to any materials directed to prospective franchisees, including franchise brochures and form letters sent to targeted groups. If a piece is developed to attract prospects to your brand, or to convince prospects to acquire your franchise (as opposed to a form answer that is developed to respond to specific objections that arise on an individual basis), it is an advertisement that is subject to state franchise laws regulating advertising.

There are only two types of advertisements that are not considered “offers” in a particular state, and therefore not governed by state regulations directed at franchise advertising. One relates to advertising in national publications. If the publication does not originate from the registration state, and more than two-thirds of the circulation is outside that state, then it is not deemed to be an offer in that state. Of course, that exception applies to media advertising, and would not apply to letters or brochures mailed into the state. In addition, since the World Wide Web, by its nature, is available in every state, a franchisor does not have to be registered in a particular state to advertise on the Internet. However, to take advantage of this exemption, any advertising on the franchisor’s Web site must specify in a conspicuous place any registration state in which the franchise has not been registered for sale, and confirm that no franchises will be sold in those states until registration has been achieved.

Eight states also require that all advertising be filed with state franchise regulators at least three business days before they are first used, during which time the regulator may object to the piece or more likely, object to certain statements. (The actual time varies from three business days to seven business days, depending on the state.)

State Regulation of the Content of Franchise Advertising 
Several states also regulate the substantive content of advertisements. Advertisements should not make any statement that is inconsistent with statements in the franchisor’s Franchise Disclosure Document. Thus, if a brochure touts a new development, the disclosure document may first need to be amended to disclose the development. A number of states also have prohibitions on the inclusion of representations concerning actual or potential revenue or profits in any advertisements. Even where state law does not prohibit revenue or profit information in advertisements, the Federal Trade Commission Rule on Franchising prohibits such information unless it is included in Item 19 of the disclosure document.

Several state laws prohibit franchisors from making any guarantees that the business will be profitable or successful. States that require filing of advertisements therefore have their radar out for words like “success,” and will reject advertisements if that word is used in any form that could even suggest franchisees will be successful.

Half the states that regulate franchise advertising require that the name and address of the franchisor appear in the advertisement (i.e. no blind ads). Minnesota requires that the registration number assigned to the franchisor in Minnesota be included in the advertisement. New York requires a disclaimer indicating that an offer of the franchise can only be made by prospectus.

California takes the unique position that no rankings of franchise companies are permitted in advertisements for prospective franchisees unless the advertisement gives both the source of the ranking, and explains the methodology for achieving the ranking. Thus, rankings such as an Entrepreneur 500 ranking, which could never be explained in a simple advertisement, will be prohibited in California, but, for example, a ranking of the fastest-growing franchise companies will be permissible if the advertisement shows exactly how the ranking was calculated (such as, based on the number of units added in the last calendar year).

General Restrictions on Advertising 
Apart from the franchise laws, franchisors need to be familiar with a variety of other laws affecting the content of advertising. These laws include deceptive trade practice laws, unfair competition laws and intellectual property laws.

Obviously, all advertising must be truthful and not misleading. There is, however, a “gray area” involving subjective statements. A statement that a particular franchise is the “best opportunity on the market,” may or may not be true, but such a statement is a subjective statement, which constitutes “puffery,” and is not actionable. On the other hand, a statement to that effect that surveys confirm this franchise system offers the “pizza most favored by Italians,” is a statement of fact, and statements of fact must be literally correct. The key issue is whether the statement is, as one court has said, a “specific and measurable claim, capable of being proved false or being reasonably interpreted as a statement of objective fact.” If it is, then the franchisor must have evidence affirming its accuracy before making the claim. In the case of a statement that a particular product is most favored by a particular group, the statement should be supportable based on an independent, unbiased survey.

Comparisons with Competitors 
When business is booming, there may be enough business for everyone. However, in recessionary times, when business is more limited, competition tends to become cutthroat, and more direct. In general, comparisons to a competitor are permissible, but they are also dangerous.

There are many examples of franchisors suing other franchisors over consumer advertising. In the 1960s, Steak & Shake and Burger King fought over the use of the term “steakburger.” In the 1980s, Avis and Hertz went to court over advertising claims as to the size of inventories carried by both companies. In the 1990s, Pizza Hut and Papa John’s were embroiled in litigation as to who used better ingredients, and had the better pizza. In this decade, Carl’s Jr. sued Jack in the Box over advertising by the latter that, without naming Carl’s Jr., used a play on a word contained in Carl’s Jr.’s advertising to suggest that competitors who sold hamburgers made from “Angus” beef were using a part of the cow that was one letter removed from “angus.”

Accurate statements concerning your brand, or that of a competitor, are permissible. If a false statement is made about a competitor, it is actionable. However, even if an advertisement does not contain a statement that is literally false, “if the words or images, considered in context, necessarily and unambiguously imply a false message,” courts have found the advertisement to be actionable. Thus, if your advertisement implies a benefit of your brand that is not correct, or a deficiency in a competitor’s brand that is not accurate, your competitors may be able to enjoin your further use of the advertising, and recover damages caused by the advertisement.

It is also problematic to “borrow” a competitor’s advertising slogan, advertising style or trademark. Thus, as an example, if you have a new hamburger you want to advertise, either in consumer advertising or for franchisees, you should not discuss the sandwich as “a whopper of a sandwich,” even though you may not actually be naming it a “Whopper” sandwich. That is not to say that you cannot compare yourself to a competitor, and in doing so, use the competitor’s trademark, but you must identify the trademark as the property of the competitor, and cannot use it in a way that is intended to identify your business or your products.

Use of Testimonials 
Testimonials are permissible, but you cannot include in a testimonial any statement that you could not make directly. Thus, for example, since franchisors cannot detail revenues of their highest-grossing franchisees, a testimonial cannot include any statement as to a particular franchisee’s revenues. In addition, testimonials that purport to be from bona fide third-party franchisees, but are actually from people who work for the franchisor without disclosure of that fact, may be actionable. In fact, testimonials that purport to be from actual franchisees, but who are, in fact, actors, are specifically prohibited by the recently revised Federal Trade Commission’s Rule on Franchising.

Franchisors also have used celebrities, licensed characters, and other famous materials to promote their franchises. However, be certain that you obtain permission from the celebrity to use their name or likeness, or a “look alike” in your advertising material. In the case of copyrighted materials, whether a cartoon character, a work of art, music, or reproduction of a famous sports highlight, it is a violation of federal copyright law to use that material without obtaining a license from the holder of the copyright.

Use of Advertising Agencies
A good advertising agency should be able to help you steer your way through most of the laws that affect advertising in general. (They will not, however, likely be familiar with the franchise laws, including the filing requirements and the regulations pertaining to the content of that advertising.) However, if you do use an advertising agency, or an independent contractor, to prepare your advertising, be certain you have a contract making it clear that you own all rights to the advertising. Otherwise, the person creating the advertising may own those rights, and when your contract with the agency or consultant terminates, not only will you find yourself unable to continue using the advertisement, even worse, the identical advertisement may be made available to your competitors.

Careful Attention Suggested 
The laws that regulate advertising are many and varied. It is not just the franchise laws with which you must be familiar, but trademark and copyright law, common laws relating to misrepresentation, and trade practice laws. Most of the advertising that has engendered litigation against franchise companies to date has either been focused on consumer advertising, where competitors compete for the same retail dollar, or has been referenced in misrepresentation claims brought against franchisors by their franchisees. However, as competition for new franchisees becomes as heated as competition for the retail dollar, advertising and promotional materials directed to prospective franchisees is likely to get more creative. As that happens, competing franchisors who may not appreciate some of that creativity, as well as disgruntled franchisees, may turn to the courts to pursue a variety of claims related to such advertising. This is therefore an area where careful attention, and advice of counsel, will become more critical in the future.

Charles S. Modell, CFE, is chairman of the Franchise Group at Larkin Hoffman Daly & Lindgren Ltd. in Minneapolis. He represents small and large franchisors on a variety of issues, including advertising matters. He can be reached at 952-896-3341 or cmodell@lhdl.com.

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