FTC Approves Amended Franchise Rule

After literally years of waiting, the franchise community received word from the Federal Trade Commission ("FTC") on January 23, 2007, that it approved final amendments to its Franchise Rule (the "Amended Rule"). The Amended Rule is the most significant change in franchise disclosure regulation in years. One of the biggest changes is the FTC's adoption of a modernized disclosure format patterned after the UFOC Guidelines. The FTC, however, has included several different and additional disclosures and, hence, many have dubbed the new format the "UFOC Plus."

The Amended Rule will have a phase-in period. During the period from July 1, 2007, to June 30, 2008, franchisors will have the option of following the current UFOC format or the UFOC Plus format. Beginning on July 1, 2008, however, only the new format will be accepted. The timing of the phase-in period allows fiscal year-end franchisors to complete their 2007 renewal process without having to worry about the Amended Rule. Once their UFOC renewal is completed in the first part of 2007, franchisors then can turn their focus to preparation for the Amended Rule.

The Amended FTC Rule is 398 pages long. The FTC also plans to publish compliance guidelines to assist franchisors in their compliance efforts.

A few of the more significant changes include:

*Disclosure rules:

** No "first personal meeting" trigger


** No need to provide completed contracts in advance unless franchisor unilaterally and materially alters standard franchise contract.




*Adoption of electronic disclosure procedures



* New exemptions (international sales, initial investments of $1 million or more, high-net-worth and experienced franchisees)



* Elimination of franchise broker disclosures



* Several changes to Item 3 litigation disclosure requirements including disclosure of franchisor-initiated suits



* Changes to Item 20 charts



* Franchisor's parent financial statements are required if parent has post-sale performance obligations



* New disclosure requirements on franchisee associations



* Disclosure regarding use of confidentiality agreements

Future issues of the FaegreFranchiseForeword will deal with the Amended Rule in greater detail. In the meantime, it is important to keep in mind that none of these changes can be implemented until July 2007, at the earliest. Also, franchise registration states are not precluded from retaining or adding additional disclosure requirements. For example, it is anticipated that one or more of the registration states may retain the requirement to disclose franchise brokers.

Stay tuned for more information. We will highlight the Amended FTC Rule at our upcoming FaegreFranchiseSummit on May 17, 2007.