The Federal Trade Commission has been periodically releasing new “Amended Franchise Rule FAQs” in response to certain questions that have been asked about the Amended Franchise Rule. These questions are published on the FTC website, here, and, while not technically binding, the answers provide further guidance to franchisors on issues that may not otherwise be clear.
As the questions and answers are posted electronically, franchisors are not always aware when a new FAQ is posted. Thus, to assist you in ensuring you are up-to-date with the latest FTC guidance, the following is a summary of recent FAQs posted that may require changes or revisions to your franchise agreements or franchise disclosure document.
The latest FAQ, released in October 2009, pertains to general releases in franchise agreements. Importantly, it provides that a general release in a franchise agreement is a violation of the Amended Rule (specifically, Section 436.9(h), which prohibits franchisors from requiring a prospective franchisee to disclaim or waive reliance on representations made in the FDD). As such, in order to avoid violation of the Amended Rule, the general release must “expressly exclude claims arising from representations in the FDD, and its exhibits and amendments. This applies not only to general releases in the franchise agreement itself, but also to all general releases of claims that franchisees are required to sign as a condition to obtaining a franchise.
Additionally, five new FAQs were issued in May 2009. Although our previous newsletter touched on the subject of these FAQs, the following summary is a refresher of the topics addressed:
- Compliance with FAQs: If a new FAQ is issued that requires a franchisor to revise its disclosure document in order to comply with the interpretation of the Amended Rule, the disclosure document does not need to be amended, but should be revised before any new filing required by a registration state or quarterly update.
- Parent Financials. A franchisor’s parent company that is the sole supplier of a good or service, without which the franchise cannot be operated, must include its financial statements in the disclosure document.
- Effect of Amended Rule Annual Update Deadline in Certain Registration States. With regard to a situation in which a franchisor’s registration does not expire in a state until after the 120 day annual update deadline set forth in the Amended Rule, the franchisor may continue to use its old disclosure document in that state until either its registration expires, or the state completes registration of its new disclosure document. Nevertheless, franchisors may only use an updated disclosure document in non-registration states after the 120 day annual update deadline.
- Financial statement standards. Financial statements must be prepared in accordance with standards issued by the Financial Accounting Standards Board, which is considered the authority on U.S. generally accepted accounting principles.
- Location of Financial Performance Representations. Any financial performance representation made must be located in Item 19 itself, and cannot be located in an exhibit or attachment to the disclosure document.