Franchise Rule Upgrade

The franchise industry has just been ushered into the 21st century by the Federal Trade Commission with a small but momentous change in the FTC Franchise Rule. The revision allows franchisors to disclose legally mandated information through e-mail, on company Websites, or using any other medium as long as the prospective franchisee may “store, download, print, or otherwise maintain the document for future reference.” The new allowances will substantially impact the bottom line of businesses that are spending copious amounts of money printing and sending out lengthy legal documents.

Under the original FTC Franchise Rule, which went into effect in the late 1970s, franchisors were limited to a business model that did not reflect the impact of the technologies available today within the business community. At the heart of the FTC’s amendments to the Franchise Rule is the notion of disclosure compliance–a critical industry benchmark that helps establish and facilitate an understanding between a franchisor and a potential franchisee. In fact, before the franchisor and franchisee can enter into any legally binding agreement, both state and federal laws require a level of disclosure that specifically outlines the relationship between the two parties.

“The amendments to the rule recognize the realities of today’s marketplace [and] the speed [by] which businesspeople communicate with one another,” says Stuart Hershman, a Chicago-based franchise attorney with the firm DLA Piper. “The overarching emphasis of the amendment is to modernize the rule … it allows for franchisors to provide disclosure through any medium, as long as they can prove that they made appropriate disclosure.”

Instead of issuing bulky, paper Uniform Franchise Offering Circulars (UFOCs) to prospective franchisees to comply with the disclosure laws and the original FTC rule, franchisors now have the option of releasing a UFOC via the Internet. “It doesn’t cost any money,” adds Hershman, “to give someone access to your Website.”

The amendment to the FTC rule included many other changes that can be reviewed at 01/R511003 FranchiseRuleFRNotice.pdf and will go into effect in July. Franchisors have until July 1, 2008, to comply with the new FTC Franchise rule revision.