Potential Changes to FTC Franchise Rule

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There are potential changes in 2022 to the FTC Franchise Rule. Last year the Federal Trade Commission held a virtual public workshop as part of its regular review of its regulations and focused on three issues:  (1) Financial performance representations; (2) The use of disclaimers;  and (3) The format of the Franchise Disclosure Document.

While the FTC has not directly stated what, if any changes will be made to the FTC Franchise Rule, it is likely that modest revisions will be proposed.  It remains to be seen whether the FTC will adopt changes to the FTC Franchise Rule, and if so, the nature of the changes.  Among the most likely changes that we anticipate are the following:

  • Incorporation of the Recent NASAA Financial Performance Representation Commentary into the FTC Franchise Rule. This change is a relatively easy one for the FTC. The commentary has been vetted by the franchise administrators of the roughly fifteen states that regulate the offer and sale of franchises and addresses the Item 19 requirements of the FTC Franchise Rule. It imposes additional requirements regarding FPRs, such as the inclusion of both a mean and median where only one of the two would have otherwise been included. Moreover, because the NASAA commentary has, for all practical purposes, been adopted by the state franchise administrators, franchisors that are lawfully offering and selling franchises in one or more of these fifteen states are already complying with the NASAA commentary. As a result, the FTC’s adoption of the NASAA commentary would have little impact on most franchisors.
  • Clarity Regarding Prohibited Disclaimers. The use of disclaimers in Item 19 has been prohibited for quite some time. However, it is often unclear whether a statement is an unlawful disclaimer or a permitted description. The FTC could, and likely should fill this void. A uniform definition or set of guidelines would reduce the uncertainty and thus reduce the unnecessary legal risk that has resulted from it.
  • Additional Regulations to Promote Electronic Disclosure. The FTC Franchise Rule currently permits franchisors to deliver their FDDs through electronic means and a significant number and percentage of franchisors do so. However, the FTC Franchise Rule prohibits the inclusion of any content and links beyond the FDD itself, other than basic navigational tools. The FTC may loosen this regulation, permitting hyperlinks to, among other things, the FTC and state websites. It may also encourage franchisors to post their FDDs on their websites.

We do not expect that the FTC will mandate financial performance representations or the addition of a summary document to the FDD. These changes would be far more substantive and significant than the changes we anticipate and would likely cause confusion and uncertainty (as well as heightened legal risk and disputes resulting from that confusion and uncertainty).

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