Law.com Subscribers SAVE 30%
Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.
Countdown Begins for the Revised FTC Franchise Rule and UFOC
On Aug. 25, 2004, the Federal Trade Commission (FTC) released its long-anticipated report on its proposed changes to the FTC Rule on Franchising and Business Opportunity Ventures (FTC Rule). When the new FTC Rule comes into effect, franchisors will have to make significant changes to their existing disclosure documents and follow new rules for how and when they are delivered to prospective franchisees. There are also new exemptions for large transactions and large franchisees, and the FTC Rule will not apply to international franchise locations.
The FTC Rule has not been changed since it was originally issued in December 1978. However, in October 1999, after years of study, the FTC issued a Notice of Proposed Rulemaking (NPR) that proposed substantial revisions to the FTC Rule (Proposed Rule). The revised FTC rule as proposed in 1999 was further modified by the August 2004 Staff Report. This article outlines the key elements of the latest version of the Proposed Rule, which includes the recent staff report changes.
The Proposed Rule would change the coverage of the existing FTC Rule, including the following:
- It will apply only to franchises for locations in the United States, its possessions, and territories.
- It will no longer cover “business opportunities.”
- It will retain exemptions for franchise fees under $500, “fractional franchises,” “leased departments,” franchises governed by the Petroleum Marketing Practices Act, and “oral franchises.”
- It will delete the exclusions for general partnerships, employer-employee relationships, cooperatives, certification and testing services, and single-trademark licenses (commenting that the exclusions are unnecessary because they were not included in the first place).
- It will not apply to franchises: (a) requiring an investment exceeding $1 million, excluding real estate and amounts financed by the franchisor or its affiliate; (b) sold to a franchisee that is 5 or more years old with a net worth exceeding $5 million; or (c) “insider” transactions in which at least 50% of the owners of the franchisee were 25%-owners or managers of the franchisor.
The Proposed Rule will change the timing of franchisor presale disclosures in the following ways:
- Franchisors will no longer be required to deliver the uniform franchise offering circular (UFOC) at the “first personal meeting” (first face-to-face meeting with the prospective franchisee).
- Franchisors must deliver the UFOC 14 calendar days, rather than 10 business days, before the franchisee signs any franchise or other binding agreement or pays any consideration, or earlier upon a prospect's reasonable request.
- Franchisors must deliver execution-ready copies of the UFOC and all other related agreements 7 calendar days, rather than 5 business days, before they are executed. However, this waiting period applies only if the franchisor unilaterally (ie, not in response to franchisee-initiated negotiations) makes material changes to the terms of the basic franchise agreement attached to the UFOC.
The Proposed Rule changes the updating requirements as follows:
- Annual updates must be made within 120 (rather than 90) days after the franchisor's fiscal year end.
- The Proposed Rule retains FTC Rule quarterly UFOC updates for any material changes, but adds required notice to the franchisee (but not an amended UFOC) of any material changes to any financial performance representations (ie, Item 19 earnings claims) about which the franchisor knows or should have known.
- The Proposed Rule prohibits waivers of any representation in the UFOC but expressly permits negotiated changes.
- The Proposed Rule will allow the UFOC and contracts to be delivered either by paper or electronically via the Internet, e-mail, computer disks, or CD-ROM, and eliminates the requirement for traditional handwritten signatures. The franchisee must be able to store, download, print, or otherwise maintain the documents for future reference. The electronic UFOC may include scrollbars, internal links, and search features, but no other technological developments such as audio, video, “pop-up” screens, or external links.
Under the Proposed Rule, the FTC has formally abandoned its rarely used disclosure format and adopted the 1993 UFOC Guidelines developed by the North American Securities Administrators Association (NASAA), which will entail a number of substantive and stylistic changes to many of the 23 UFOC disclosure items. Even Items that the FTC has left substantively untouched will need to be reorganized, edited, and streamlined by franchisors to comply with the FTC's new requirements. The following outline details some of the key substantive changes:
Major Differences In UK, U.S. Copyright Laws
This article highlights how copyright law in the United Kingdom differs from U.S. copyright law, and points out differences that may be crucial to entertainment and media businesses familiar with U.S law that are interested in operating in the United Kingdom or under UK law. The article also briefly addresses contrasts in UK and U.S. trademark law.
The Article 8 Opt In
The Article 8 opt-in election adds an additional layer of complexity to the already labyrinthine rules governing perfection of security interests under the UCC. A lender that is unaware of the nuances created by the opt in (may find its security interest vulnerable to being primed by another party that has taken steps to perfect in a superior manner under the circumstances.
Strategy vs. Tactics: Two Sides of a Difficult Coin
With each successive large-scale cyber attack, it is slowly becoming clear that ransomware attacks are targeting the critical infrastructure of the most powerful country on the planet. Understanding the strategy, and tactics of our opponents, as well as the strategy and the tactics we implement as a response are vital to victory.
Legal Possession: What Does It Mean?
Possession of real property is a matter of physical fact. Having the right or legal entitlement to possession is not "possession," possession is "the fact of having or holding property in one's power." That power means having physical dominion and control over the property.
The Stranger to the Deed Rule
In 1987, a unanimous Court of Appeals reaffirmed the vitality of the "stranger to the deed" rule, which holds that if a grantor executes a deed to a grantee purporting to create an easement in a third party, the easement is invalid. Daniello v. Wagner, decided by the Second Department on November 29th, makes it clear that not all grantors (or their lawyers) have received the Court of Appeals' message, suggesting that the rule needs re-examination.