Friday, 

March 30, 2007 

Part V 

Federal Trade 

Commission 

16 CFR Parts 436 and 437 

Disclosure Requirements and Prohibitions 

Concerning Franchising and Business 

Opportunities; Final Rule 


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15444 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

1 See 16 CFR Part 436. Provisions of the original 

Rule are cited in this document as 16 CFR 436.[ ]. 

Citations to the final amended Rule are cited simply 

as 436.[ ] or 437.[ ], respectively. The text of the 

final amended Rule is set forth in Section VII. 2 The specific definition of the term ‘‘franchise’’ 

is discussed below in connection with section 

436.1(h). 3 We were assisted in the effort to reduce 

inconsistencies between the original Rule and 

UFOC Guidelines by NASAA’s submission of a 

document entitled ‘‘Comparison of UFOC and 

Proposed FTC Disclosure Requirements’’ (‘‘NASAA 

Comparison’’) (Jan. 8, 2002). A copy of this 

document is on the public record in this 

proceeding. 

4 The definition of ‘‘business opportunity’’ is 

discussed below in connection with section 

437.2(a). 

5 71 FR 19054 (Apr. 12, 2006). 

FEDERAL TRADE COMMISSION 

16 CFR Parts 436 and 437 

Disclosure Requirements and 

Prohibitions Concerning Franchising 

Disclosure Requirements and 

Prohibitions Concerning Business 

Opportunities 

AGENCY: Federal Trade Commission. 

ACTION: Final rule. 

SUMMARY: The Federal Trade 

Commission (the ‘‘Commission’’ or 

‘‘FTC’’) amends its Trade Regulation 

Rule entitled ‘‘Disclosure Requirements 

and Prohibitions Concerning 

Franchising and Business Opportunity 

Ventures’’ (‘‘Franchise Rule’’ or ‘‘Rule’’) 

to streamline the Rule, minimize 

compliance costs, and to respond to 

changes in new technologies and market 

conditions in the offer and sale of 

franchises. Part 436 sets forth those 

amendments to the Franchise Rule 

pertaining to the offer and sale of 

franchises. Part 437 sets forth a revised 

form of the original Franchise Rule 

pertaining solely to the offer and sale of 

business opportunities. This document 

provides background on the Franchise 

Rule and this proceeding; discusses the 

public comments the Commission 

received; and describes the amendments 

the Commission is making based on the 

record. This document also contains the 

text of the final amended Rule and the 

Rule’s Statement of Basis and Purpose 

(‘‘SBP’’), including a Regulatory 

Analysis. 

EFFECTIVE DATES: The effective date of 

the final amended Rule is July 1, 2007. 

Permission to use the original Franchise 

Rule, however, will continue until July 

1, 2008. After that date, franchisors and 

business opportunity sellers must 

comply with the final amended Rule 

only. 

ADDRESSES: Requests for copies of the 

final amended Rule and the SBP should 

be sent to: Public Reference Branch, 

Room 130, Federal Trade Commission, 

600 Pennsylvania Avenue, NW, 

Washington, D.C. 20580. The complete 

record of this proceeding is also 

available at that address. Relevant 

portions of the proceeding, including 

the final amended Rule and SBP, are 

available at www.ftc.gov. 

FOR FURTHER INFORMATION CONTACT: 

Steven Toporoff, (202) 326–3135, 

Division of Marketing Practices, Room 

286, Bureau of Consumer Protection, 

Federal Trade Commission, 600 

Pennsylvania Avenue, NW., 

Washington, D.C. 20580. 

SUPPLEMENTARY INFORMATION: The final 

amended Rule retains most of the 

original Rule’s pre-sale disclosures.1

Part 436 pertains to franchising— 

business arrangements that offer 

purchasers the right to operate under a 

trademark or other commercial symbol 

and that typically offer a specific format 

or method of doing business, such as 

chain restaurants and hotels.2 Part 436 

modifies the original Rule, however, by 

reducing inconsistencies with state 

franchise disclosure laws, by adopting, 

in large measure, the disclosure 

requirements and format of the Uniform 

Franchise Offering Circular (‘‘UFOC’’) 

Guidelines used by the 15 states with 

pre-sale franchise disclosure laws.3 Part 

436 of the final amended Rule, however, 

is not identical to the UFOC Guidelines. 

In several instances, part 436 is 

narrower. For example, part 436 does 

not incorporate the UFOC Guidelines’ 

mandatory cover page risk factors, 

disclosures pertaining to brokers, or 

detailed disclosures pertaining to 

franchisees’ computer equipment 

requirements. Part 436 also permits a 

phase-in of audited financial statements. 

Further, part 436 of the final amended 

Rule corrects a problem with the UFOC 

Guidelines identified in the rulemaking 

record. Specifically, the record 

establishes that the current Item 20 of 

the UFOC Guidelines—a provision 

requiring the disclosure of franchisee 

statistics—results in inflated turnover 

rates. Part 436 of the final amended Rule 

corrects this problem, based upon 

suggestions contained in the record. 

In a few instances, part 436 of the 

final amended Rule is broader than the 

UFOC Guidelines, addressing franchise 

relationship issues that the rulemaking 

record establishes are a prevalent source 

of franchisee complaints. To that end, 

part 436 of the final amended Rule 

provides additional information to 

prospective franchisees with which to 

assess the quality of the franchise 

relationship before they buy, including: 

(1) franchisor-initiated litigation against 

franchisees pertaining to the franchise 

relationship; (2) protected territories; (3) 

the use of confidentiality clauses; and 

(4) trademark-specific franchisee 

associations. 

Finally, part 436 of the final amended 

Rule updates the original Rule and 

UFOC Guidelines by addressing new 

marketing techniques and new 

technologies. For example, part 436 

permits franchisors to comply with presale disclosure obligations 

electronically. It also updates territorial 

protection disclosures to address sales 

via the Internet, catalogs, and 

telemarketing. 

Part 437 of the final amended Rule 

pertains to business opportunity 

ventures. Business opportunities, such 

as vending machine routes and rack 

display ventures, typically do not 

involve the right to use a trademark or 

other commercial symbol and the seller 

must provide purchasers with locations 

for machines or equipment or with 

clients.4 Based upon the rulemaking 

record, the Commission has proposed 

that business opportunities covered by 

the original Rule should be addressed in 

a separate, narrowly-tailored trade 

regulation rule. On April 12, 2006, the 

Commission published a Notice of 

Proposed Rulemaking (‘‘Business 

Opportunity NPR’’) for a separate 

Business Opportunity Rule.5 Pending 

completion of the proceeding initiated 

with that notice, business opportunities 

presently covered by the requirements 

of the original Rule will remain covered, 

as set forth as part 437 of the final 

amended Rule. 

Part 437 of the final amended Rule 

differs from the original Rule in three 

respects only. First, references to 

‘‘franchisor’’ and ‘‘franchisee’’ in the 

original Rule have been changed to 

‘‘business opportunity seller’’ and 

‘‘business opportunity purchaser,’’ 

respectively. Second, the original Rule’s 

definition of ‘‘franchise’’ set out at 

section 436.(2)(a) has been changed to 

‘‘business opportunity’’ and the first 

part of the original definition—the 

‘‘franchise’’ elements—have been 

deleted; the definition now focuses on 

the second part of the original 

definition—the business opportunity 

elements. Third, part 437 sets forth a 

new exemption for franchises that 

comply with, or are exempt from, part 

436. Except for these three changes, all 

disclosures and prohibitions in part 437 

are identical to those of the original 

Franchise Rule. 


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Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 15445 

6 43 FR 59614 (Dec. 21, 1978). Along with the 

original Rule, the Commission published a 

Statement of Basis and Purpose (‘‘original SBP’’), 43 

FR 59621 (Dec. 21, 1978) and later Final 

Interpretive Guides to the Rule (‘‘Interpretive 

Guides’’), 44 FR 49966 (Aug. 24, 1979). Since 

promulgation of the original Rule in 1978, the 

Commission staff has also issued more than 100 

advisory opinions to help assist the public in 

interpreting various Rule provisions. 

7 Original SBP, 43 FR at 59625. 

8 Id., at 59627–39. 

9 The Commission used the same approach in 

other trade regulation rules. See, e.g., Funeral Rule, 

16 CFR Part 453; Used Car Rule, 16 CFR Part 455. 

10 60 FR 17656 (Apr. 7, 1995). 

11 Written Rule Review comments are cited as: 

[Commenter] RR [comment number]. A list of all 

commenters during the Rule Review and Rule 

amendment proceeding, and the abbreviations used 

to identify each, is set forth in Attachment A to this 

document. Many of the comments in this 

proceeding are available online at: www.ftc.gov. 

12 Rule Review transcripts are cited as 

[Commenter] RR, [Sept.95] or [Mar.96] Tr. 

13 The UFOC Guidelines disclosure format is 

similar in many respects to the original Rule’s 

disclosure requirements. To reduce compliance 

costs and burdens, the Commission has permitted 

franchisors to comply with the original Rule by 

using the UFOC Guidelines format, provided that 

they did so completely and accurately. See 60 FR 

51895 (Oct. 4, 1995) (authorizing states to use 

revised UFOC Guidelines). A copy of the UFOC 

Guidelines can be found at the corporate finance 

section of the North American Securities 

Administrators Association website: 

www.nasaa.org. It should be noted, however, that 

the UFOC Guidelines address only required pre-sale 

disclosures. Other provisions of state law applicable 

to franchise sales—such as the time for making 

disclosures, disclosure document updating 

provisions, and exemptions—vary according to 

each state’s franchise statute or regulations. 

14 62 FR at 9115 (Feb. 28, 1997). 

15 Written ANPR comments are cited as: 

[Commenter] ANPR [comment number]. 

16 In general, the first day of each public 

workshop discussed specific issues announced in 

advance. Participants at these meetings were 

selected based upon their comments or interest in 

the subject matter. The second day of each 

conference was an open forum in which the public 

was invited to express their views on any franchise 

or business opportunity issue. ANPR workshop 

transcripts are cited as: [Commenter] ANPR [date] 

Tr. 

STATEMENT OF BASIS AND 

PURPOSE 

I. INTRODUCTION 

A. Overview of the Original Franchise 

Rule 

The Commission promulgated the 

original Franchise Rule on December 21, 

1978.6 Based upon the original 

rulemaking record, the Commission 

found widespread deception in the sale 

of franchises and business opportunities 

through both material 

misrepresentations and nondisclosures 

of material facts.7 Specifically, the 

Commission found that franchisors and 

business opportunity sellers often made 

material misrepresentations about: the 

nature of the seller and its business 

operations, the costs to purchase a 

franchise or business opportunity and 

other contractual terms and conditions 

under which the business would 

operate, the success of the seller and its 

purchasers, and the seller’s financial 

viability. The Commission also found 

other unfair or deceptive practices 

pervasive: franchisors’ and business 

opportunity sellers’ use of false or 

unsubstantiated earnings claims to lure 

prospective purchasers into buying a 

franchise or business opportunity, and 

franchisors’ and business opportunity 

sellers’ failure to honor promised refund 

requests. The Commission concluded 

that all of these practices led to serious 

economic harm to consumers.8

To prevent deceptive and unfair 

practices in the sale of franchises and 

business opportunities and to correct 

consumers’ misimpressions about 

franchise and business opportunity 

offerings, the Commission adopted the 

original Franchise Rule, which is 

primarily a pre-sale disclosure rule. The 

original Rule did not purport to regulate 

the substantive terms of the franchise or 

business opportunity relationship. 

Rather, it required franchisors and 

business opportunity sellers to disclose 

material information to prospective 

purchasers on the theory that informed 

investors can determine for themselves 

whether a particular deal is in their best 

interest.9

B. The Rule Amendment Proceeding 

This Rule amendment proceeding 

began with a regulatory review of the 

Franchise Rule in 1995.10 To initiate the 

Rule Review, the Commission published 

a Federal Register notice seeking public 

comment on whether there was a 

continuing need for the Rule and, if so, 

how to improve it in light of industry 

changes since its promulgation in 1978. 

In response to this notice, the 

Commission received 75 written 

comments.11

In addition, the Commission staff held 

two public workshops, in which a total 

of fifty individuals participated. The 

workshops were transcribed.12 The first 

workshop—held on September 11–13, 

1995, in Bloomington, Minnesota—

focused on the comments on the Rule, 

in particular whether the Commission 

should retain the Rule and, if so, 

whether the Commission should reduce 

inconsistencies between federal and 

state pre-sale disclosure law by 

incorporating in the Rule the UFOC 

Guidelines adopted by each of the 15 

states with franchise disclosure laws.13

Participants also discussed issues 

arising from business opportunity sales. 

The second workshop—held on March 

11, 1996, in Washington, D.C.—focused 

on the Franchise Rule’s application to 

sales of franchises to be located outside 

the United States. 

As a result of the Rule Review, the 

Commission determined that the 

Franchise Rule continues to serve a 

useful purpose and that it should be 

retained. The Commission also 

determined to modify the Rule in order 

to reduce inconsistencies with the 

UFOC Guidelines, while updating the 

Rule to address new technologies 

developed since the original Rule was 

promulgated. Accordingly, in February 

1997, the Commission published an 

Advance Notice of Proposed 

Rulemaking (‘‘ANPR’’).14 The ANPR 

solicited comment on several proposed 

Rule modifications which would, 

among other things, create a separate 

trade regulation for business 

opportunity sales, revise the Rule’s 

disclosure requirements to mirror those 

of the UFOC Guidelines, limit the Rule’s 

application to sales of franchises located 

in the United States, and permit 

electronic disclosure. In response to the 

ANPR, the Commission received 166 

written comments.15 The staff also held 

six public workshops on the issues 

raised in the comments, as set forth 

below.16

Topic(s) Location Dates 

Trade Show Promoters Washington, D.C. July 28–29, 1997 

Business Opportunities Chicago, IL August 21–22, 1997 

UFOC, Internet, International, Co-branding, Alternatives to Traditional 

Law Enforcement 

New York, NY September 18–19, 1997 

Business Opportunities Dallas, TX October 20–21, 1997 


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15446 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

17 64 FR 57294 (Oct. 22, 1999). 

18 16 CFR 1.13. 

19 Franchise NPR, 64 FR at 57324. 

20 Franchise NPR comments are cited as: 

[Commenter] NPR [comment number]. 21 Many commenters enthusiastically supported 

the Commission’s overall approach to revising the 

Rule. E.g., IL AG, NPR 3, at 10; PMR&W, NPR 4, 

at 1; Holmes, NPR 8, at 1; H&H, NPR 9, at 2; Baer, 

NPR 11, at 1; NFC, NPR 12, at 2; Lewis, NPR 15, 

at 1; IFA, NPR 22, at 3; AFC, NPR 30, at 3; J&G, 

NPR 32, at 1; Tricon, NPR 34, at 1; Marriott, NPR 

35, at 2. 

22 Accordingly, no Presiding Officer was 

established in this proceeding. See Rules of 

Practice, 16 CFR 1.13(c). 

23 See Bureau of Consumer Protection, Staff 

Report to the Federal Trade Commission and 

Proposed Revised Trade Regulation Rule (16 CFR 

Part 436) (Aug. 2004) (‘‘Staff Report’’). The Staff 

Report is available at: www.ftc.gov/os/2004/08/ 

0408franchiserulerpt.pdf. In September, 2004, the 

Commission published a notice in the Federal 

Register announcing the availability of, and seeking 

comment on, the Staff Report. See 69 FR 53661 

(Sept. 2, 2004). The announcement is also available 

at: www.ftc.gov/os/2004/08/ 

040825franchiserulefrn.pdf. 

24 Staff Report comments are cited as 

‘‘[Commenter], at lll .’’ These comments simply 

refer to the commenter and not to a specific 

comment number. After the Franchise NPR, the 

Commission’s Secretary’s Office discontinued the 

practice of assigning a specific comment number to 

each comment. 

25E.g., Bundy, at 1; Cendant, at 1 (representing 

Ramada, Days Inn, Howard Johnson, Travelodge, 

Knights Inn, Super 8 Motel, Wingate Inn, 

AmeriHost, Century 21, Coldwell Banker, ERA, 

Sotherby’s Intl Realty, Avis, and Budget); IFA, at 1; 

IL AG, at 1; J&G, at 1; Kaufmann, at 2 (representing 

Kaufmann, Feiner, Yamin, Gildin & Robbins; YUM! 

Brands [Pizza Hut, KFC, Taco Bell, Long John 

Silvers, and A&W]; 7-Eleven, Inc.; and Arby’s 

[Arby’s and T.J. Cinnamons Classic Bakery]); 

Marriott, at 2; NASAA, at 2; Piper Rudnick, at 1; 

Spandorf, at 1; Starwood, at 1 (representing Four 

Points Hotels, Sheraton Hotels,Westin Hotels, and 

Luxury Collection Hotels); Wiggin and Dana, at 1. 

26 Fourteen comments focused solely on a single 

issue. For example, eight comments addressed only 

the original Rule’s exclusion for cooperatives 

(Affiliated Foods; CHS; Graber; IDC; NCBA; NCFC; 

NGA; Riezman Burger). Additional one-issue 

comments were received on: the disclosure of 

franchisee associations (AAFD); the single 

trademark exclusion (Pillsbury Winthrop); the 

sophisticated investor exemptions (NADA); the 

Petroleum Marketing Practices Act (Chevron); the 

disclosure of parent information (PREA); and 

integration clauses (Lagarias). Two comments were 

beyond the scope of the Staff Report: Marks (urging 

Commission to adopt franchise arbitration 

standards); Koutsoulis (opposing the proposed 

merger of two franchisors). 

27 Compliance Guides, which the Commission 

anticipates staff will issue on part 436, would 

update existing Interpretive Guides issued in 1979. 

See generally Interpretive Guides, 44 FR 49966. 

Compliance Guides on part 437 will be issued by 

staff once any rulemaking on business opportunity 

ventures is concluded. 

28E.g., Selden, at 2; Haff, at 1–3; Blumenthal, at 

1; Karp, at 2; Steinberg, at 1. 

29E.g., Blumenthal, at 1; Karp, at 3; Steinberg, at 

1–2. 

Topic(s) Location Dates 

UFOC, Internet, International, Co-branding, Alternatives to Traditional 

Law Enforcement 

Seattle, WA November 6–7, 1997 

Business Opportunities Washington, D.C. November 20–21, 1997 

A total of sixty-five individuals 

participated in the various ANPR public 

workshops, including franchisees, 

franchisors, business opportunity sellers 

and their representatives, state franchise 

and business opportunity regulators, 

and computer consultants. 

After the ANPR workshops, the 

Commission published a Notice of 

Proposed Rulemaking (‘‘Franchise 

NPR’’) in October 1999.17 Focusing on 

franchise sales only, the Franchise NPR 

included the text of a proposed revised 

Franchise Rule and a detailed 

discussion of each proposed Rule 

revision. Among other things, the 

Franchise NPR addressed: (1) the 

application of the Franchise Rule to 

franchise sales outside the United 

States; (2) the scope of certain existing 

disclosure requirements, such as those 

regarding litigation and franchisee 

statistics; (3) new disclosure 

requirements, such as those for 

franchisee associations; and (4) new 

instructions permitting disclosure via 

the Internet. It also proposed creating 

exemptions from the Franchise Rule for 

sophisticated prospective franchisees. 

The Franchise NPR also specified the 

process the Commission would follow 

in amending the Franchise Rule, as it 

pertains to franchise sales. Pursuant to 

the Commission’s Rules of Practice, 16 

CFR 1.20, the Commission determined 

to use a modified version of the 

rulemaking process set forth in section 

1.13 of those Rules.18 Specifically, the 

Commission announced that it would 

publish an NPR, with a 60-day comment 

period, followed by a 40-day rebuttal 

period. In addition, pursuant to Section 

18(c) of the FTC Act, the Commission 

announced that it would hold hearings 

with cross-examination and rebuttal 

submissions only if an interested party 

requested a hearing. The Commission 

also stated that, if requested to do so, it 

would contemplate holding one or more 

informal public workshops in lieu of 

hearings. Finally, pursuant to 16 CFR 

1.13(f), the Commission announced that 

staff would issue a Report on the 

Franchise Rule (‘‘Staff Report’’), which 

would be subject to additional public 

comment.19

In response to the Franchise NPR, the 

Commission received 40 comments.20

Overwhelmingly, the comments 

supported the proposed revisions, albeit 

with fine-tuning.21 No commenters 

requested a hearing, although, as noted, 

the Franchise NPR allowed for them.22

The staff also determined that the record 

was fully developed for franchise issues, 

requiring no additional public 

workshops to explore further Rule 

amendment issues. 

Pursuant to the Rule amendment 

process announced in the Franchise 

NPR, the Commission’s Bureau of 

Consumer Protection issued a Staff 

Report on the Franchise Rule in August 

2004.23 The Staff Report explained in 

detail the history of the Rule 

amendment proceeding. It also 

summarized the issues raised during the 

various notice and comment periods, in 

particular those that arose in response to 

the Franchise NPR. For each Franchise 

NPR issue, the Staff Report discussed: 

(1) similarities and differences between 

the proposed revised Rule approach and 

both the original Rule and the UFOC 

Guidelines approaches; (2) pertinent 

comments; and (3) the staff 

recommendations on franchise issues 

for inclusion in a final amended Rule. 

Forty-five commenters responded to 

the Staff Report.24 For the most part, the 

commenters supported the proposed 

Rule revisions pertaining to 

franchising.25 Several, however, voiced 

concern about the scope of one or more 

Rule provisions, or offered various 

suggestions to fine-tune the Rule to 

avoid ambiguities.26 In other instances, 

several commenters raised issues for 

further discussion in anticipated 

Compliance Guides, or offered 

interpretations of Rule provisions for 

inclusion in the Compliance Guides.27

In several instances, franchisee 

representatives reiterated views 

previously expressed during the various 

comment periods to the effect that the 

proposed revised Rule is deficient 

because it does not mandate disclosure 

of financial performance data28 or does 

not adopt various substantive franchise 

relationship provisions.29 As explained 

in greater detail below, the Commission 

has considered each of these comments 

in determining the form and content of 

the final amended Rule. 


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Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 15447 

30 As of the date of this Notice, the Commission 

has filed more than 210 suits against more than 650 

defendants (both franchises and business 

opportunities) for Franchise Rule violations since 

the Rule was promulgated in 1978. See also 

Business Opportunity NPR, 71 FR 19054 (Apr. 12, 

2006) (discussing the Commission law enforcement 

history in combating business opportunity covered 

by the Franchise Rule). 

31E.g., H&H, ANPR 28, at 2; Kaufmann, ANPR 33, 

at 2; NCL, ANPR 35, at 2; SBA Advocacy, ANPR 

36, at 2–3; IL AG, ANPR 77, at 1. See also Staff 

Report, at notes 15–16. But see, generally, Winslow 

(opposing the Rule). 

32E.g., Kaufmann, ANPR 33, at 3 (‘‘Both the Rule 

and . . . state franchise laws have gone a long way 

toward eradicating massive franchise frauds and, by 

doing so, have restored franchising’s reputation for 

integrity and thus cleared the marketplace for the 

offerings of legitimate franchisors.’’). 

33 E.g., Marks, ANPR, 19 Sept. 97 Tr., at 8–9, 29; 

Wieczorek, RR, Sept.95 Tr., at 62–63. But see 

Winslow, at 21. 

34E.g., H&H, ANPR 28, at 2; SBA Advocacy, 

ANPR 36, at 2; Zarco & Pardo, ANPR 134, at 1; ABA 

Antitrust, RR 22, at 7. 

35 E.g., WA Securities, ANPR 117; Shay, RR, 

Sept.95 Tr., at 104. 

36 Kaufmann, ANPR 33, at 3. 

37E.g., Brown, ANPR 4, at 3; AFA, ANPR 62, at 

3; Slimak, ANPR 130; Leap, ANPR 147; Vidulich, 

ANPR, 22 Aug. 97 Tr., at 21. 

38 E.g., Brown, ANPR 4, at 2; Donafin, ANPR 14; 

AFA, ANPR 62, at 1; Buckley, ANPR 97; Zarco & 

Pardo, ANPR 134, at 2. 

39 E.g., Brown, ANPR 4, at 2; Weaver, ANPR 17; 

Colenda, ANPR 71; Haines, ANPR 100; Chiodo, 

ANPR, 21 Nov. 97 Tr., at 293–94. 

40See AFA, ANPR 62, at 1 (‘‘Our members feel so 

strongly about the Commission’s inability to deal 

with substantive issues of concern to them, they 

would rather work to abolish the FTC rule than 

suffer the abuses of both a government agency and 

their franchisors.’’). 

41 15 U.S.C. 45(n). 

42 15 U.S.C. 57a. 

43 There are many factors that influence the 

success or failure of a franchisee, including 

downturns in the economy, shifting consumer 

preferences, or even franchisees’ own conduct. 

Accordingly, franchisor conduct post-sale may be 

only one factor that leads to injury to franchisees. 

The record is inconclusive, with respect to the 

franchising overall, as to whether franchisor acts or 

practices are a direct and primary cause of poor 

performance or failure by franchisees. In this 

regard, it is noteworthy that in its 2001 audit of the 

Commission’s Franchise Rule Program, the General 

Accounting Office (‘‘GAO’’) concluded that there 

are ‘‘no readily available, statistically reliable data 

on the overall extent and nature of [franchise 

relationship] problems.’’ United States General 

Accounting Office, GAO Report to Congressional 

Requesters, Federal Trade Commission 

Enforcement of the Franchise Rule, GAO–01–776, at 

29 (July 31, 2001). See also Staff Report, at 10–11. 

44See FTC v. J.K. Publ’ns, Inc., 99 F. Supp. 2d 

1176, 1201 (C.D. Cal. 2000) (‘‘With regard to 

[avoidability], the focus is on ‘whether consumers 

had a free and informed choice that would have 

enabled them to avoid the unfair practice.’’’). 

C. Continuing Need for the Rule 

Based upon the original rulemaking 

record and the Commission’s law 

enforcement experience extending 

nearly 30 years,30 the Commission 

concludes that a pre-sale disclosure rule 

continues to serve a useful purpose. 

Overwhelmingly, the comments 

submitted during the Rule amendment 

proceeding supported the continued 

need for the Franchise Rule.31 For 

example, some commenters emphasized 

that pre-sale disclosure is still necessary 

to prevent fraud.32 Others observed that 

pre-sale disclosure is a cost-effective 

way to provide material information to 

prospective purchasers about the costs, 

benefits, and potential legal and 

financial risks associated with entering 

into a franchise relationship. These 

commenters also stressed that the Rule 

assists prospective franchisees in 

conducting a due diligence investigation 

of the franchise offering by providing 

information that is not readily available, 

such as the franchisor’s litigation 

history and franchisee termination 

rates.33 Other commenters noted that 

pre-sale disclosure helps franchisees 

understand the franchise relationship 

they are entering better than they could 

absent such disclosure, thereby 

reducing potential conflicts in franchise 

systems and post-sale litigation costs.34

Indeed, some commenters expressed the 

view that repeal of the Franchise Rule 

might actually increase franchisors’

costs and compliance burdens by 

opening the door for individual states to 

enact franchise disclosure laws that may 

be inconsistent, making it difficult for 

franchisors to conduct business on a 

national basis.35 One commenter noted 

that retaining a uniform pre-sale 

disclosure rule enables prospective 

franchisees to comparison shop for the 

best franchise offering.36

On the other hand, many franchisees 

and their advocates criticized the Rule 

for not going far enough. They urged the 

Commission to address in this 

rulemaking a variety of post-sale 

franchise contract or ‘‘relationship’’

issues, including prohibiting or limiting 

the use of post-contract covenants not to 

compete,37 encroachment of 

franchisees’ market territory,38 and 

restrictions on the sources of products 

or services.39 Indeed, some franchisees 

asserted that if the Rule cannot address 

post-sale relationship issues, then the 

Commission should abolish the Rule.40

To address post-sale relationship 

issues by adopting rule provisions that 

prohibit or limit the use of certain 

contract terms would require record 

evidence demonstrating specific unfair 

acts or practices. The FTC Act defines 

an unfair act or practice as one that is 

‘‘likely to cause substantial injury to 

consumers which is not reasonably 

avoidable by consumers themselves and 

not outweighed by countervailing 

benefits to consumers or to 

competition.’’41 The Act also requires 

that, to justify an industry-wide rule, 

such practice be prevalent.42 This 

proceeding did not yield adequate 

evidence to support a finding of 

prevalent acts or practices that meet 

each of the three prerequisites for 

unfairness as articulated in Section 

45(n) of the FTC Act. 

With regard to the first prerequisite, 

substantial injury, the record shows that 

some franchisees in several franchise 

systems have suffered post-sale harm in 

the course of operating their franchises, 

and in some instances this injury may 

be ascribable to acts or practices of a 

franchisor.43 The record, however, 

leaves open the related questions of 

whether such franchisor acts or 

practices are prevalent and whether the 

injury resulting from acts or practices is 

substantial, when viewed from the 

standpoint of the franchising industry as 

a whole, not from just a particular 

franchise system. 

With regard to avoidability of injury, 

the unfairness analysis falls short. A 

franchise purchase is entirely voluntary. 

The Franchise Rule ensures that each 

prospective franchisee receives 

disclosures—expanded in key respects 

by the current amendments—that 

explain the terms and conditions under 

which the franchise will operate. 

Prospective franchisees can avoid harm 

by comparison shopping for a franchise 

system that offers more favorable terms 

and conditions, or by considering 

alternatives to franchising as a means of 

operating a business. Prospective 

franchisees are also free to discuss the 

nature of the franchise system with 

existing and former franchisees, as well 

as trademark-specific franchisee 

associations, and the amended Rule 

facilitates such discussion by providing 

prospects with contact information. 

Under these circumstances, the 

Commission cannot categorically 

conclude that prospective franchisees 

who voluntarily enter into franchise 

agreements, after receiving full 

disclosure, nonetheless cannot 

reasonably avoid harm resulting from a 

franchisor enforcing the terms of its 

franchise agreement.44

The third element requires an analysis 

of whether injury to franchisees 

deriving from specific franchisor acts or 

practices outweighs countervailing 

benefits to the public at large or to 

competition. In our law enforcement 

experience investigating relationship 

issues in individual franchise systems, 

it has been the case that the franchisor 

actions allegedly causing harm to 

individual franchisees also frequently 

generate countervailing benefits to the 

system as a whole or to consumer 

welfare overall that may or may not be 


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45 The Commission notes that it has voiced 

concern that government-mandated contractual 

terms may result in affirmative harm to consumer 

welfare. Contractual terms that are driven by market 

forces and forged by private parties acting in their 

own self-interest are the ones most likely to result 

in products being brought to market quickly and 

efficiently. The Commission therefore has 

authorized its staff to file a number of advocacy 

comments recommending against proposed state 

bills that would have unduly limited manufacturers 

in managing their distribution systems, such as by 

requiring exclusive territories, prohibiting or 

seriously burdening wholesaler terminations, or 

limiting the ability to reorganize a distribution 

system in response to changing competitive 

conditions. See, e.g., Letter from Maureen 

Ohlhausen, Dir., Office of Policy Planning, et al., to 

the Hon. Wesley Chesbro, Cal. State Senate (Aug. 

24, 2005) (comment on proposed beer franchise 

act); Letter from C. Steven Baker, Dir., Chicago 

Regional Office, to the Hon. Dan Cronin, Ill. State 

Senate (Mar. 31, 1999) (comment on proposed 

legislation on wine and spirits distribution); cf. 

Testimony of Jerry Ellig, Deputy Dir., Office of 

Policy Planning, before joint committee hearings of 

the Haw. state legislature (recommending against 

gasoline price control legislation, in part on 

grounds that repeal of anti-encroachment statute 

would be a more effective means of reducing prices 

(Jan. 28, 2003)). 

46 Authorization to use the UFOC Guidelines to 

comply with the original Rule’s disclosure 

requirements was first granted by the Commission 

in the Interpretive Guides, 44 FR at 49970–71, on 

the grounds that the UFOC Guidelines, taken in 

their entirety, provide equal or greater consumer 

protection as the original Rule. The Commission 

ratified this position following subsequent 

amendments to the UFOC requirements by the 

NASAA, most recently in 1993, 58 FR 69224 (Dec. 

30, 1993). 

Beginning on July 1, 2008, however, franchisors 

may use part 436 of the final amended Rule only. 

Permission to use the UFOC Guidelines will be 

withdrawn on that date because those Guidelines 

will no longer afford prospective franchisees equal 

or greater protection as part 436. This would not 

preclude consideration of any new or revised UFOC 

Guidelines promulgated by the states in the future. 

47E.g., H&H, ANPR 28, at 5–6; Kaufmann, ANPR 

33, at 3; Kestenbaum, ANPR 40, at 1; WA Securities, 

ANPR 117, at 1. 

48 E.g., IFA, NPR 22, at 4–5; Stadfeld, NPR 23, 

at 2; Karp, ANPR, 19 Sept. 97 Tr., at 90. 

49 NASAA, ANPR 120, at 2. See also WA 

Securities, ANPR 117, at 1. 

50 E.g., PMR&W, NPR 4, at 1; H&H, NPR 9, at 2; 

7-Eleven, NPR 10, at 2; Lewis, NPR 15, at 5; 

NASAA, NPR 17, at 2–4; Bundy, NPR 18, at 6; 

Gurnick, NPR 21, at 2; IFA, NPR 22, at 4–5; 

Stadfeld, NPR 23, at 2; J&G, NPR 32, at 2; Marriott, 

NPR 35, at 2; Brown, ANPR 4, at 1; Duvall, ANPR 

19, at 1; Baer, ANPR 25, at 2; Kaufmann, ANPR 33, 

at 3; SBA Advocacy, ANPR 36, at 3; Kestenbaum, 

ANPR 40, at 1; AFA, ANPR 62, at 2; IL AG, ANPR 

77, at 1; WA Securities, ANPR 117, at 1; Selden, 

ANPR 133, at 1; Zarco & Pardo, ANPR 134; at 1; 

Cendant, ANPR 140, at 2. 

outweighed by the alleged harm to 

franchisees. Commenters advocating 

that the Rule include unfairness 

remedies have asserted injury, but have 

failed to bring forth evidence that such 

injury outweighs potential 

countervailing benefits that arise from 

the alleged acts or practices. Therefore, 

the Commission declines to impose 

industry-wide provisions mandating 

substantive terms of private franchise 

contracts that would impact on the 

entire franchise industry, not just those 

franchise systems that are the subject of 

commenters’ complaints.45

Notwithstanding this determination, the 

Commission, in pursuit of its law 

enforcement mission can consider 

whether individual franchisors’ conduct 

constitutes an unfair act or practice on 

a case-by-case basis. 

Nonetheless, the Commission 

concludes that the record is sufficient to 

show that misunderstandings about the 

state of the franchise relationship are 

prevalent, and some more disclosure is 

warranted to ensure that prospective 

franchisees are not deceived about the 

quality of the franchise relationship 

before they commit to buying a 

franchise. Franchisee concerns about 

relationship issues persuade us that 

better disclosure is necessary to ensure 

that prospective franchisees are fully 

informed about the relationships that 

they will be entering. To that end, part 

436 of the final amended Rule expands 

the Rule’s pre-sale disclosures in a few 

instances to address franchise 

relationship issues, as detailed 

throughout this document. 

D. Overview of the Final Amended Rule 

The final amended Rule maintains the 

benefits of the original Rule, preventing 

deceptive and unfair practices identified 

in the original rulemaking through presale disclosure of material information 

necessary to make an informed 

purchasing decision and prohibition of 

specified misrepresentations. At the 

same time, part 436 of the final 

amended Rule reduces unnecessary 

compliance costs. First, part 436 covers 

only the sale of franchises to be located 

in the United States and its territories. 

Second, based upon the record, the 

Commission also has created several 

new exemptions for sophisticated 

franchise purchasers, including 

exemptions for large investments and 

large franchisees with sufficient net 

worth and prior experience. 

Part 436 of the final amended Rule 

also reduces inconsistencies between 

federal and state pre-sale disclosure 

requirements. Since the original Rule 

was promulgated, NASAA, which 

represents the 15 states with pre-sale 

franchise disclosure laws, has 

developed a standard disclosure 

document, the UFOC. The Commission, 

as a matter of policy, has in the past 

permitted franchisors to comply with 

the Franchise Rule by furnishing 

prospective franchisees with a UFOC, 

even in the 35 states without franchise 

disclosure laws.46 The Commission 

found that the UFOC Guidelines, taken 

as a whole, offer consumers the same or 

greater consumer protection as that 

provided by the original Rule. As a 

result, the UFOC Guidelines already are 

used by the vast majority of franchisors 

to comply with the Rule,47 and, in fact, 

the UFOC Guidelines have become the 

national franchise industry standard.48

Further, as NASAA noted, the UFOC 

Guidelines were developed with 

significant input from franchisors, 

franchisees, and franchise 

administrators, and were subject to 

public hearings and notice and 

comment.49 Therefore, the UFOC 

Guidelines, like the Franchise Rule, 

reflect a balance of interests among all 

affected parties. 

Overwhelmingly, franchisors, 

franchisees, and franchise regulators 

urged the Commission throughout the 

Rule amendment proceeding to adopt 

the UFOC Guidelines disclosure format. 

These commenters include a broad 

range of interests, such as NASAA, the 

International Franchise Association 

(‘‘IFA’’), the American Bar Association’s 

Antitrust Section, the American 

Franchisee Association, the State Bar of 

California Business Law Section, and 

major franchisors, such as Cendant, 

Marriott, YUM! Brands, 7-Eleven, 

Arby’s, and Starwood Hotels and 

Resorts.50

Accordingly, part 436 of the final 

amended Rule closely tracks the UFOC 

Guidelines. Nevertheless, part 436 is not 

identical to the UFOC Guidelines. In a 

few instances, part 436 omits or 

streamlines a UFOC Guidelines 

disclosure requirement that the 

Commission believes is unnecessary or 

is overly burdensome—for example, 

mandatory cover page risk factors, 

broker disclosures, and detailed 

computer equipment disclosures. As 

explained in greater detail below, part 

436 of the final amended Rule also 

avoids problems with Item 20 of the 

UFOC Guidelines (the disclosure of 

statistical information on franchisees in 

the system) that were revealed during 

the proceeding and that were examined 

in detail by a number of commenters, 

including NASAA. 

Part 436 of the final amended Rule 

also retains a few provisions from the 

original Rule that are not in the UFOC 

Guidelines, because the Commission 

believes they are necessary to prevent 

deception. For example, part 436 of the 

final amended Rule retains the original 

Rule’s requirement that, in some 

instances, franchisors disclose 

information about a parent. Similarly, 

part 436 retains the original Rule’s 

phase-in of audited financial statements, 


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51 A decision to retain any portion of the original 

Rule may be based upon evidence gathered during 

the original rulemaking and the Commission’s 

subsequent enforcement experience, as well as 

evidence adduced during the current rulemaking. 

Indeed, to the extent that nothing supplements 

evidence from the initial rulemaking, there is a 

presumption that the existing rule should be 

retained. See Motor Vehicle Mfrs. Ass’n v. State 

Farm Mut. Auto. Ins. Co., 463 U.S. 29, 42 (1983). 

52 The Commission’s Rules of Practice prescribe 

procedures to follow in seeking such advice. 16 

CFR 1.3. 

53 Throughout the Rule amendment proceeding, 

commenters have requested that the Commission 

explain or interpret various provisions in 

Compliance Guides. The Commission anticipates 

that staff will respond affirmatively to those 

requests. Compliance Guides on part 437 (the 

business opportunity section) will be issued after 

the conclusion of the business opportunity 

rulemaking proceeding. 

54 The Commission also recognizes that over the 

course of the years, franchisors have developed 

specific language approved by the states for 

compliance with the UFOC Guidelines. The 

Commission anticipates that part 436 of the final 

amended Rule will be interpreted, where consistent 

with the public interest, in a manner that conforms 

with historic industry practices. 

55 15 U.S.C. 57a(d)(2)(B). The Commission’s 

rulemaking standards applicable to the 

promulgation and amendment of a Section 18 rule 

require a preponderance of reliable evidence. See 

Statement of Basis and Purpose, Funeral Rule, 59 

FR 1592 (Jan. 11, 1994); Credit Practices Rule, 49 

FR 7740 (Mar. 1, 1984). 

56 Rules of Practice, 16 CFR 1.14(a)(1)(i)–(iv). In 

addition, the SBP must specify how the public may 

obtain a copy of the Rule’s final regulatory analysis. 

16 CFR 1.14(a)(v). The current notice does not set 

forth a separate regulatory analysis. Instead, it 

incorporates the Commission’s regulatory analysis 

throughout the SBP portion of the notice. This 

notice, including the SBP, is being published in the 

Federal Register and posted on the FTC’s website 

at: www.ftc.gov. 

57 Support in the record for each factor is set forth 

in the substantive discussion of each provision of 

the final amended Rule. 

thereby preserving flexibility not 

present in the UFOC Guidelines. 

At the same time, part 436 of the final 

amended Rule adds to the UFOC 

Guidelines a few narrowly tailored 

disclosures based upon the 

Commission’s law enforcement 

experience and the rulemaking record, 

mostly to prevent deception involving 

the nature of the franchise 

relationship.51 For example, as 

explained in greater detail below, part 

436 of the final amended Rule expands 

the UFOC Guidelines’ Item 3 litigation 

disclosure requirements to include the 

disclosure of franchisor-initiated 

litigation. In addition, part 436 of the 

final amended Rule goes beyond the 

UFOC Guidelines’ Item 20 franchisee 

statistics disclosures to require 

disclosure of information about the 

franchisor’s use of confidentiality 

clauses and the existence of trademarkspecific franchisee associations. In 

addition, in a few instances, part 436 of 

the final amended Rule requires 

franchisors to make prescribed 

statements to clarify issues that the 

record established are often 

misinterpreted by prospective 

franchisees, particularly in the area of 

protected territories and financial 

performance representations. 

Further, part 436 of the final amended 

Rule updates the original Rule and 

UFOC Guidelines by addressing changes 

in the marketplace and new 

technologies. For example, as explained 

below, part 436 of the final amended 

Rule permits franchisors to furnish 

disclosures electronically and enables 

franchisees to use electronic signatures. 

Part 436 of the final amended Rule also 

updates the original Rule and UFOC 

Guidelines to address the impact of the 

Internet on a franchisor’s business 

operations. Specifically, part 436 

requires more disclosure about the affect 

of the Internet on sales restrictions 

imposed on franchisees and any right of 

franchisors to compete online. It also 

addresses financial performance 

representations made on the Internet. 

Finally, part 436 of the final amended 

Rule contains a few provisions and 

prohibitions that are necessary to make 

the Rule effective, to facilitate 

compliance, and to prevent deception. 

For example, part 436 of the final 

amended Rule prohibits a franchisor 

from unilaterally altering the material 

terms and conditions of its franchise 

agreements, unless the franchise seller 

informs the prospective franchisee 

about the changes within a reasonable 

time before execution. Part 436 of the 

final amended Rule also prohibits the 

use of shills, who are persons paid or 

otherwise given consideration to 

provide a false favorable report about 

the franchisor’s performance history. 

E. Continued Application of 

Commission and NASAA Precedent 

As noted throughout, most of the 

provisions of the original Rule have 

been retained in the final amended 

Rule. Accordingly, the original SBP 

remains valid, except to the extent of 

any conflict with the final amended 

Rule. In the event of any conflict, this 

document supersedes the original SBP. 

In the same vein, all former informal 

staff advisories remain a source of Rule 

interpretation, except where this SBP 

contradicts a staff advisory. To the 

extent that any member of the public is 

concerned that a previous advisory may 

no longer be applicable in light of the 

final amended Rule, we invite that 

person or entity to seek further 

clarification from the Commission or the 

staff.52

Further, the Commission anticipates 

issuance of new Compliance Guides on 

part 436 that will replace the original 

Interpretive Guides.53 Because much of 

part 436 of the final amended Rule is 

based upon the UFOC Guidelines, the 

Commission anticipates that 

Compliance Guides will likely 

incorporate, in large measure, the UFOC 

Guidelines’ existing sample answers 

and NASAA’s previously issued 

commentaries on the UFOC Guidelines, 

to the extent such sample answers and 

commentaries do not deviate from the 

final amended Rule.54 The Commission 

intends that the staff coordinate the 

issuance of Compliance Guides, and 

future interpretations of part 436 of the 

final amended Rule, with NASAA’s 

Franchise and Business Opportunity 

Project Group in order to minimize 

differences between FTC and state Rule 

interpretations. 

II. THE LEGAL STANDARD FOR 

AMENDING THE RULE 

A. Section 18 Rulemaking 

Section 18(d)(2)(B) of the FTC Act 

states that ‘‘[a] substantive amendment 

to, or repeal of, a rule promulgated 

under subsection (a)(1)(B) shall be 

prescribed, and subject to judicial 

review, in the same manner as a rule 

prescribed under such subsection.’’55

Thus, the standard for amendment or 

repeal of a Section 18 rule is identical 

to that for promulgating a trade 

regulation rule pursuant to Section 18. 

Additionally, an SBP must address 

four factors: (1) the prevalence of the 

acts or practices addressed by the rule; 

(2) the manner and context in which the 

acts or practices are unfair or deceptive; 

(3) the economic effect of the rule, 

taking into account the effect on small 

businesses and consumers; and (4) the 

effect of the rule on state and local 

laws.56 These four factors are discussed 

in detail throughout this document. In 

the next section, we summarize our 

findings regarding each of these 

factors.57

1. The effect of the rule on state and 

local laws 

The Commission begins with the 

effect of the final amended Rule on state 

and local laws, because that factor is 

unusually prominent in this proceeding. 

As noted above, 15 states have pre-sale 

franchise disclosure laws in the form of 

the UFOC Guidelines. The rulemaking 

record shows that, as a practical matter, 

the UFOC Guidelines are, in fact, the 

national disclosure standard for the 

franchise industry. Therefore, by design, 

the overwhelming effect of the final 

amended Rule on state franchise law 

will be to mesh more closely with it and 


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58 As noted above, part 437 (the business 

opportunity section) of the final amended Rule is 

identical in all respects to the original Rule, except 

for its scope of coverage. Accordingly, the 

amendments to the original Rule set forth in part 

437 will have no effect on state or local business 

opportunity laws. 

59 The Commission intends to continue working 

with NASAA and individual states after the final 

amended Rule goes into effect in order to 

harmonize federal and state franchise disclosure 

laws. The Commission recognizes that the states 

have a wealth of experience in interpreting the 

UFOC Guidelines that form the basis of the final 

amended Rule. Accordingly, the Commission 

anticipates that the staff will coordinate with 

NASAA and the states in issuing future Compliance 

Guides and informal staff advisory opinions, in 

keeping with our goal of federal and state 

harmonization. 

60 As noted above, part 437 (the business 

opportunity section) of the final amended Rule is 

identical in all respects to the original Rule, except 

for its scope of coverage. Accordingly, there are no 

amendments in part 437 that must be addressed 

here. 

enhance its effectiveness by promoting 

consistency and extending its reach to 

nationwide scope.58 Moreover, the 

overwhelming majority of commenters 

throughout the Rule amendment 

proceeding, including NASAA and 

other state law advocates, urged the 

Commission to update the original Rule 

by adopting the UFOC Guidelines to 

bring greater uniformity to the field of 

franchise pre-sale disclosure.59

Accordingly, in considering the factors 

outlined above, the Commission has 

given great weight to state franchise 

laws and their impact on the market, as 

well as the desire of all parties in the 

field to reduce inconsistencies between 

federal and state franchise disclosure 

laws. 

The Commission has also carefully 

weighed the benefits of any suggestion 

to revise the Rule that would compound 

inconsistencies between the Rule and 

the UFOC Guidelines. Only in very few 

instances, an existing weakness in the 

UFOC Guidelines compels deviation 

from those Guidelines. The chief 

example is the revision to the Item 20 

franchise statistics disclosures. Part 436 

of the final amended Rule adopts a 

proposal submitted by NASAA to 

eliminate revealed problems with UFOC 

Item 20 in a streamlined fashion that 

provides prospective franchisees with 

material information about the franchise 

system, while reducing unnecessary 

compliance burdens. 

The Commission also has adopted 

several suggestions offered by state 

regulators, mostly through NASAA, for 

streamlining the Rule. For example, in 

part 436 the Commission has revised the 

financial performance claim disclosures 

to eliminate the original Rule’s 

requirements that: (1) existing franchise 

performance data be prepared according 

to generally accepted accounting 

principles; (2) financial performance 

data be presented to a prospective 

franchisee in a separate financial 

performance document; and (3) cost 

information alone trigger the Rule’s 

financial performance disclosure and 

substantiation requirements. 

2. Deceptive practices 

The original Rule remedied through 

pre-sale disclosure five types of harmful 

material misrepresentations or 

omissions that were found to be 

widespread —specifically, 

misrepresentations about: (1) the 

opportunity being offered for sale (2) 

costs; (3) contractual terms; (4) success 

of the seller and prior purchasers; and 

(5) the seller’s financial viability. Each 

part 436 disclosure amendment to the 

original Rule addresses one of these five 

types of misrepresentations or 

omissions of material information.60

a. Misrepresentations about the 

franchisor and the franchise system 

In the original rulemaking, the 

Commission found that franchisors and 

business opportunity sellers routinely 

misrepresented the nature of the 

business. For example, franchisors 

misrepresented how long they had been 

in business or the extent of their 

directors’ and officers’ prior business 

experience. Such misrepresentations 

mislead consumers acting reasonably 

under the circumstances into believing 

that the franchise offered for sale is a 

safe or low risk investment. 

To prevent such deception, the 

original Rule required franchisors and 

business opportunity sellers to disclose 

background information on the 

franchisor or business opportunity seller 

and the business, including: the name 

and address of the franchisor or 

business opportunity seller and any 

parent company; the name under which 

the franchise or business opportunity 

seller does or intends to conduct 

business; its trademarks; the prior 

business experience of the franchisor or 

business opportunity seller and its 

directors and officers; and the business 

experience of the franchisor or business 

opportunity seller —e.g., experience 

selling franchises under the same or 

different trademarks, as well as the 

franchisor or business opportunity 

seller’s other lines of business. 

Part 436 of the final amended Rule 

continues to address misrepresentations 

about the nature of the franchisor and 

the franchise system by requiring the 

same disclosures as did the original 

Rule. In a few instances, part 436 

expands on these disclosures to remedy 

aspects of this type of misrepresentation 

that have been revealed by our 

enforcement experience or the record 

developed here. Specifically, part 436 of 

the final amended Rule requires 

franchisors to disclose information 

about the franchisor’s predecessors. 

Similarly, based upon the Commission’s 

law enforcement experience in over 50 

franchise cases, part 436 also remedies 

misrepresentations about those 

controlling the franchise system by 

requiring not only disclosures about 

directors and officers, but also about 

other individuals who have 

management responsibility relating to 

the sale or operation of the franchises 

being offered for sale. 

b. Misrepresentations about costs 

In promulgating the original Rule, the 

Commission recognized the harm to 

franchisees and business opportunity 

purchasers resulting from misleading 

cost representations. Representing that 

costs of buying and operating a 

franchise, for example, are less than 

they actually are is likely to mislead 

prospective franchisees, acting 

reasonably under the circumstances, 

into believing that the franchise is more 

financially attractive than is actually the 

case. Obviously, cost representations are 

highly material. Thus, the original Rule 

required franchisors and business 

opportunity sellers to disclose fully not 

only the initial fee, but continuing costs 

throughout the relationship. For 

example, franchisors must disclose 

required purchases or leases for, among 

other things, inventory, signs, supplies, 

and equipment. In addition, the 

Commission was concerned about 

undisclosed indirect payments to the 

franchisor or business opportunity 

seller, and therefore required 

franchisors and business opportunity 

sellers to disclose the basis for 

calculating payments to the franchisor 

or business opportunity seller from 

suppliers that franchisees or business 

opportunity purchasers are required to 

use. Similarly, franchisors and business 

opportunity sellers must disclose any 

interest or payments made to celebrity 

endorsers. 

Part 436 of the final amended Rule 

retains these required cost disclosures. 

It also adopts a few additional cost 

disclosures that the states found 

necessary to address related 

misrepresentations or omissions, or 

misrepresentations revealed by our law 

enforcement experience or the record 

developed here. These include, for 

example, a description of laws or 

regulations specific to the industry in 

which the franchise operates. 

Obviously, a franchisee’s operating costs 


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may increase if he or she must incur 

hidden costs in the form of compliance 

with various industry-specific 

regulations governing the particular 

field. Part 436 of the final amended Rule 

also adopts the UFOC Guidelines’

required disclosure of fees that the 

franchisee is expected to pay within the 

first three months of operation (or other 

reasonable time for the industry), as 

well as more details about payments, 

such as to whom a payment is to be 

made and whether a payment is 

refundable. At the same time, part 436 

of the final amended Rule updates cost 

disclosures by requiring, for example, 

additional information about any 

required computer systems, based upon 

the UFOC Guidelines. Each of these 

UFOC provisions is designed to prevent 

misrepresentation of the costs required 

to commence operation of a franchised 

outlet. 

c. Misrepresentations about contractual 

terms 

Another area of deception identified 

in the original rulemaking record 

concerns the underlying franchise or 

business opportunity contract. For 

example, the Commission found that 

franchisors may misrepresent the extent 

of promised assistance, or fail to 

disclose restrictions and other 

obligations imposed on the franchisee. 

Accordingly, the original Rule specified 

a number of disclosures pertaining to 

the legal obligations of both parties 

under their agreement. Specifically, the 

original Rule required franchisors, for 

example, to disclose information about 

contractual requirements to use 

designated suppliers, financing 

arrangements, product sales restrictions 

and protected territories, site selection, 

and training programs. In addition, 

franchisors had to disclose basic terms 

of the contract, such as the duration, 

renewal and termination rights, 

assignment rights, and covenants not to 

compete. 

Part 436 of the final amended Rule 

retains these disclosure requirements. 

Adopting the UFOC Guidelines 

approach, however, the contract 

disclosures are required to be presented 

in easy-to-read tables, with references to 

the franchise agreement, rather than in 

the form of more detailed descriptions. 

In addition, part 436 updates the 

disclosures by, for example, requiring 

franchisors to explain how they use the 

term ‘‘renewal’’ in their system. 

d. Misrepresentations about success 

False or misleading representations 

about the success of franchise systems 

and business opportunities were 

perhaps the most prevalent 

misrepresentations identified in the 

original rulemaking record. These 

included misrepresentations about: the 

number of franchisees or business 

opportunity purchasers, the expected 

growth of the system, and, most 

important, the financial performance of 

existing purchasers. 

To remedy misleading success claims, 

the original Rule required franchisors 

and business opportunity sellers to 

disclose statistics about the system, 

including the number of purchasers in 

the system, the number of purchasers 

who left the system in the previous year, 

and why they left (i.e., termination, 

cancellation, non-renewal, 

reacquisition). The original Rule also 

required franchisors and business 

opportunity sellers to furnish the names 

and contact information for at least 10 

current purchasers. This information 

enabled prospective purchasers to verify 

the seller’s claims of success, and it gave 

prospective purchasers additional 

sources from which to obtain financial 

performance data. 

The original Rule also remedied 

misleading success claims by requiring 

franchisors and business opportunity 

sellers to disclose lawsuits filed by 

purchasers against them pertaining to 

their relationship and counterclaims 

filed by a franchisor or business 

opportunity seller in response to a suit 

filed by a purchaser. The existence of 

such lawsuits is material because this 

information would likely influence a 

prospective purchaser’s decision about 

what can be a sizeable investment in a 

franchise or business opportunity. The 

nature of the relations between the 

seller and the purchaser, as reflected in 

litigation, is of central importance. 

In the original rulemaking, the 

Commission also sought to ensure the 

accuracy and reliability of any financial 

performance claims made by a 

franchisor or business opportunity 

seller. Accordingly, the Commission 

prohibited the making of earnings 

claims unless the franchisor or business 

opportunity seller possessed a 

reasonable basis for the claim, along 

with written substantiation, at the time 

the claim was made. In addition, the 

seller had to set forth the claim in a 

separate earnings claims statement 

containing the bases and assumptions 

underlying the claim. Franchisors and 

business opportunity sellers were also 

required to warn prospective purchasers 

that there is no assurance that they will 

achieve the same level of earnings. 

Part 436 of the final amended Rule 

retains each of these disclosures, and it 

expands on them by requiring 

franchisors to provide, consistent with 

the UFOC Guidelines, the names of up 

to 100 franchised outlets, as well as 

contact information for former 

franchisees. Part 436 of the final 

amended Rule also provides additional 

sources of information about the 

franchise system, including the 

disclosure of trademark-specific 

franchisee associations. These 

provisions prevent misrepresentations 

by giving prospective franchisees 

additional sources of information with 

which to assess franchisor claims. With 

respect to financial performance 

representations, it follows the more 

streamlined approach of the UFOC 

Guidelines. Specifically, part 436 of the 

final amended Rule eliminates the need 

for a separate earnings claims 

document. Instead, the required 

information is incorporated into the text 

of the disclosure document itself (Item 

19). 

Finally, as discussed throughout this 

document, franchisees have brought to 

the Commission’s attention what they 

believe to be abusive practices in 

franchising. These practices include 

encroachment of territories, imposition 

of source of supply restrictions, 

modification of original franchise 

agreements as a precondition for 

renewal, and the use of disclaimers to 

limit liability for misrepresentations, 

among others. As detailed in Section 

I.C. above, the Commission declines to 

attempt to promulgate a franchise 

relationship law and, further, concludes 

that the record does not support the 

promulgation of such a law. 

Nonetheless, the record is sufficient to 

support requiring additional disclosures 

that will help inform prospective 

franchisees about the quality of the 

franchise relationship. These include: 

expanded litigation disclosures to 

include franchisor-initiated litigation 

against franchisees; a warning of the 

consequences to a franchisee when a 

franchisor offers no exclusive territory; 

a statement of what the term ‘‘renewal’’

means in the franchise system; and a 

disclosure of the use, if any, of 

confidentiality clauses. Taken together, 

each of these amended disclosures in 

part 436 will enable prospective 

franchisees to better assess the quality of 

the franchise relationship, and their 

likely success as franchisees. 

e. Misrepresentations about financial 

viability 

In the original rulemaking record, the 

Commission found that franchisors and 

business opportunity sellers often 

misrepresented or failed to disclose 

material information about their 

financial viability. As a result, 

prospective purchasers invested 

thousands of dollars in systems having 


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61 In so doing, the Commission specifically 

rejected the suggestion that franchisors should 

prepare individual disclosure documents tailored to 

each specific foreign market. Not only would such 

a requirement put American franchisors at a 

competitive disadvantage with franchisors from 

countries lacking comparable disclosure 

regulations, the minimal benefits of such a 

requirement would not likely outweigh the 

extraordinary costs and burdens involved. 

a poor financial history, or even facing 

bankruptcy. Obviously, a franchisee’s 

investment, for example, is at risk if the 

franchisor is not able to perform its 

contractual obligations as promised. To 

remedy these practices, the original 

Rule required franchisors and business 

opportunity sellers to disclose 

bankruptcy information, as well as to 

provide audited financial information. 

The final amended Rule continues to 

require these disclosures. 

3. The economic effect of the rule 

At every stage of the Rule amendment 

proceeding, the Commission solicited 

comment on the economic impact of the 

Rule, as well as the costs and benefits 

of each proposed Rule amendment. In 

finalizing the final amended Rule, the 

Commission has carefully weighed 

these costs and benefits, reducing 

compliance costs wherever possible. 

Thus, for example, part 436 reduces 

compliance costs by limiting the Rule’s 

scope of coverage to the sale of 

franchises to be located in the United 

States and its territories.61

In the same vein, part 436 of the final 

amended Rule reduces compliance 

burdens where the record establishes 

that the abuses the Rule is intended to 

address are not likely to be present. 

Thus, part 436 of the final amended 

Rule retains the exemptions in the 

original Rule as the ones for fractional 

franchises and leased departments. Part 

436 of the final amended Rule also 

incorporates the Commission’s longstanding policies exempting from Rule 

coverage franchises covered by the 

Petroleum Marketing Practices Act, as 

well as instances where the only 

required payments made by the 

franchisee are for inventory at bona fide 

wholesale prices. Further, part 436 of 

the final amended Rule adds new 

exemptions for large investments of at 

least $1 million (excluding unimproved 

land and any amounts financed by the 

franchisor), investments by large 

franchisees with five years of business 

experience and $5 million net worth, 

and for franchise sales to company 

insiders who are already familiar with 

the company’s operations. 

The Commission also has limited the 

required disclosures of part 436 in order 

to minimize compliance burdens. For 

example, the Commission has declined 

to adopt two UFOC Guidelines 

provisions on the grounds that such 

provisions are unnecessarily 

burdensome, without corresponding 

benefits to prospective franchisees. 

These provisions are mandatory risk 

factors (choice of law and venue) on the 

disclosure document cover page and the 

disclosure of franchise broker 

information in Items 2, 3, and 4 of the 

UFOC Guidelines. 

Further, for each disclosure item, the 

Commission considered less costly 

disclosure alternatives. For example, 

part 436 of the final amended Rule 

requires the disclosure of franchisorinitiated litigation. In response to 

concerns raised by franchisor 

representatives, Item 3 of part 436 

makes clear that this disclosure is 

limited to a one-year snap-shot in time 

and franchisors need only update the 

disclosure on an annual basis. 

Franchisors also can reduce costs by 

grouping similar franchisor-initiated 

suits under a single descriptive heading, 

in lieu of detailed summaries for each 

suit. 

Similarly, the Commission has 

adopted in part 436 a narrow 

requirement to disclose independent 

trademark-specific franchisee 

associations. Franchisors must make 

this disclosure only if the franchisee 

association asks to be included in the 

franchisor’s disclosure document, and 

the association’s request must be 

updated on an annual basis. 

Part 436 of the final amended Rule 

also reduces the franchisors’ burdens 

associated with making financial 

performance claims. Among other 

things, the original Rule specified that: 

(1) all financial performance claims 

must be geographically relevant to the 

franchise being offered for sale; and (2) 

all historical earnings data from existing 

franchisees must be presented using 

generally accepted accounting 

principles. Moreover, the original Rule 

required franchisors to disseminate 

financial performance information in a 

separate document. Part 436 of the final 

amended Rule eliminates these 

requirements. 

Part 436 of the final amended Rule 

also promotes efficiency and reduces 

compliance costs by enabling 

franchisors to use their own judgment in 

deciding how to disseminate disclosure 

documents. For example, part 436 

permits franchisors to furnish 

disclosures electronically through a 

variety of media, including CD–ROM, 

Internet website, and email. Individual 

sections of the disclosure document also 

allow more flexibility than the original 

Rule, again to promote efficiency and 

reduced compliance costs. For example, 

Item 5 permits franchisors to disclose 

either fixed fees or ranges of fees. 

Similarly, Item 11 permits franchisors to 

summarize computer system 

requirements, in lieu of more extensive 

disclosures. 

In amending the Rule, the 

Commission has been guided by a 

preference for an approach that 

prohibits identified harmful practices 

and eschews burdensome affirmative 

compliance obligations that may only be 

warranted for some few unscrupulous 

actors. Thus, part 436 of the final 

amended Rule drops the original Rule’s 

across-the-board obligation to furnish 

disclosures early in the sales process—

at the first personal meeting between the 

prospective purchaser and the franchise 

seller. Instead, part 436 of the final 

amended Rule allows greater flexibility, 

requiring that franchisors furnish 

disclosures early in the sales process 

only if the prospective franchisee 

requests them at that point. Similarly, 

part 436 of the final amended Rule 

eliminates burdensome waiting periods 

in some instances. Thus, in lieu of the 

original Rule’s mandate that all 

franchisors furnish copies of their 

completed franchise agreements at least 

five business days before execution, part 

436 targets potential fraud directly by 

prohibiting a franchisor from failing to 

disclose unilateral changes to a 

franchise agreement seven days prior to 

its execution. As a final example, part 

436 of the final amended Rule prohibits 

a franchisor from failing to furnish a 

copy of its most recent disclosure 

document and any quarterly updates to 

a prospective franchisee, upon 

reasonable request, before the prospect 

signs the franchise agreement. This 

prohibition is in lieu of suggestions that 

the Commission impose onerous 

disclosure updating obligations on an 

ongoing basis. 

Finally, in numerous instances the 

Commission has rejected suggestions to 

impose certain additional requirements 

upon franchisors, and has opted instead 

to address the underlying issues that 

prompted those suggestions through 

redoubled consumer education efforts. 

For example, several commenters in the 

rulemaking record urged the 

Commission to expand the disclosure 

document to provide prospective 

franchisees with more general 

information about the nature of 

franchising. Others suggested more 

disclosure on post-termination 

obligations to third-party vendors, 

obligations to purchase from specific 

suppliers, and sources of financing, 

among others. While there is merit in 

their suggestions, the Commission has 

concluded that the appropriate vehicle 


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62 The Commission is also considering 

amendments to the original Rule as they pertain to 

business opportunity sales. See Business 

Opportunity NPR, 71 FR 19054 (Apr. 12, 2006). 

63 Multiple franchisor-initiated suits could 

indicate franchisees’ inability to comply with 

royalty payment obligations, or possibly a royalty 

boycott by franchisees. Suits to enforce system 

standards, on the other hand, could show active 

involvement by the franchisor in maintaining 

standards for the benefit of all franchisees within 

its system. In either case, this is information 

material to prospective franchisees attempting to 

determine the nature of the franchisor’s relationship 

with its franchisees. 

64See 16 CFR 436.2(f). 

65 See 16 CFR 436.2(g). 

66See 16 CFR 436.2(o). The original Rule required 

franchisors to provide disclosure documents at the 

earlier of the first ‘‘personal meeting’’ or ‘‘the time 

for making disclosures,’’ which generally meant 10 

business days before the prospective franchisee 

paid any fee or signed any contract in connection 

with the franchise sale. The final amended Rule 

streamlines this requirement by eliminating those 

timing provisions in favor of a clear, bright-line 14 

calendar-day provision. Accordingly, the terms 

‘‘time for making disclosures,’’ ‘‘personal meeting,’’

and ‘‘business day’’ are obsolete. 

67 See 16 CFR 436.2(l). Cooperative associations 

are one of four non-franchise relationships that the 

Commission has excluded from the final amended 

Rule. Unlike Rule exemptions (which are 

substantive limitations on the Rule’s scope), the 

original Rule exclusions are explanatory, helping 

the public better distinguish between franchise and 

non-franchise relationships. Accordingly, the 

Commission anticipates that staff will address nonfranchise relationships—including the four 

exclusions—in the Compliance Guides instead of in 

the text of the amended Rule. 

68See 16 CFR 436.1(a)(4). 

to disseminate such information is 

through consumer education materials, 

not through the Rule itself. To that end, 

the cover page of the disclosure 

document set forth in part 436 of the 

final amended Rule references the 

Commissions’ Consumer Guide to 

Buying a Franchise, where such 

background information is furnished. 

This approach enables prospective 

franchisees to obtain desirable 

information without imposing new 

compliance burdens on franchisors. 

4. Statement of prevalence 

The Commission promulgated the 

original Rule based upon its finding of 

prevalent deception in the offer and sale 

of franchises and business opportunity 

ventures, leading to significant 

consumer injury. That finding retains its 

validity and the final amended Rule 

retains almost all of the original Rule’s 

disclosure requirements for both 

franchises and business opportunity 

sellers. In the franchise context, 

modifications of those requirements 

have been driven by four 

considerations: the goal of harmonizing 

the Rule with the UFOC Guidelines; the 

need to update the original Rule to 

address new technologies; to reduce 

unnecessary compliance burdens; and, 

based on the record developed here, to 

remedy prevalent nondisclosure on 

issues relating to the franchise 

relationship.62

This last category of modifications 

constitutes the most significant 

additions to the original Rule. 

Throughout the Rule amendment 

proceeding, franchisees have 

complained repeatedly about various 

practices in franchising that they believe 

are abusive. These practices include 

encroachment of territories, source of 

supply restrictions, modification of 

franchise agreements upon renewal, and 

the use of confidentiality clauses to 

prevent franchisees from speaking with 

prospects. To address these issues, 

franchisees urged the Commission to 

promulgate a substantive franchise 

relationship law. As detailed above in 

Section I.C., the applicable legal 

standard that could theoretically 

support promulgation of such a law has 

not been met. Nonetheless, the 

Commission is persuaded by evidence 

in the record that nondisclosure of 

material information about franchise 

relationships is prevalent and the record 

supports additional disclosures that will 

help obviate deception of prospective 

franchisees. 

To that end, part 436 of the final 

amended Rule adopts a few new 

disclosures that provide prospective 

franchisees with material information 

about the quality of the franchise 

relationship or with sources of 

information about such relationships. 

For example: 

• In section 436.5(c), the Item 3 

requirements to disclose information 

about franchisor litigation have been 

amended to encompass franchisorinitiated litigation, such as suits to 

collect royalty payments, in order to 

ensure prospective franchisees have 

material information about the nature of 

the franchisor’s relationship with its 

franchisees;63

• In section 436.5(l), the Item 12 

requirements to disclose information 

about territories contain a new warning 

to prospective franchisees about the 

consequences of not having an exclusive 

territory— that, as a result of having no 

exclusive territory, the franchisee ‘‘may 

face competition from other franchisees, 

from outlets that we own, or from other 

channels of distribution or competitive 

brands that we control;’’

• In section 436.5(q), the Item 17 

requirements to disclose information 

about renewal of the franchise mandate 

that a franchisor describe what the term 

‘‘renewal’’ means for its system, and 

state what has been absent from 

disclosure to date—that franchisees will 

be required to sign a different agreement 

when renewing, as opposed to 

extending the term of their original 

agreement. 

These new disclosure requirements are 

tailored to address the prevalent 

franchisor nondisclosure of material 

information that prospective franchisees 

need to avoid forming the kind of 

misconceptions about these three key 

aspects of the franchise relationship that 

have prompted the franchisee 

complaints noted in this record. 

III. SECTION–BY–SECTION ANALYSIS 

OF PART 436 

A. Section 436.1: Definitions 

In many instances, the part 436 

definitions of the final amended Rule 

are substantively similar to those 

contained in either the original Rule or 

UFOC Guidelines. These include the 

terms: ‘‘affiliate,’’ ‘‘fiscal year,’’

‘‘fractional franchise,’’ ‘‘franchise,’’

‘‘franchisee,’’ ‘‘franchisor,’’ ‘‘leased 

department,’’ ‘‘person,’’ ‘‘prospective 

franchisee,’’ and ‘‘sale of a franchise.’’

Part 436 of the final amended Rule, 

however, adds several new definitions 

to the original Rule, including the terms: 

‘‘action,’’ ‘‘confidentiality clause,’’

‘‘disclose, state, describe, and list,’’

‘‘financial performance representation,’’

‘‘franchise seller,’’ ‘‘parent,’’ ‘‘plain 

English,’’ ‘‘predecessor,’’ ‘‘principal 

business address,’’ ‘‘required payment,’’

‘‘signature,’’ ‘‘trademark,’’ and 

‘‘written.’’ At the same time, part 436 of 

the final amended Rule eliminates four 

of the original Rule’s terms, and their 

definitions, that are no longer necessary: 

‘‘business day,’’64 ‘‘time for making of 

disclosures,’’65 ‘‘personal meeting,’’66

and ‘‘cooperative association.’’67

Section 436.1 of the final amended 

Rule is very similar to the 

corresponding section of the proposed 

Rule published in the Franchise NPR, 

but makes the following revisions: (1) 

substitutes a definition of 

‘‘confidentiality clause’’ for the 

definition of ‘‘gag clause;’’ (2) omits 

proposed definitions of ‘‘Internet,’’

‘‘officer,’’ and ‘‘material;’’ and (3) makes 

non-substantive revisions to improve 

readability, organization, and precision 

throughout, as well as some substantive 

revisions in response to the comments. 

The following sections discuss each 

definition of part 436 of the final 

amended Rule. 

1. Section 436.1(a): Action 

Consistent with the original Rule,68

section 436.5(c) of the final amended 


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69 This definition is also consistent with the 

Commission’s interpretation of the term ‘‘action,’’

as discussed in the Interpretive Guides to the 

Franchise Rule. Interpretive Guides, 44 FR at 49973. 

70See UFOC Guidelines, Item 3 Definitions, ii. 

71 NFC, NPR 12, at 25. 

72 Lewis, NPR 15, at 7. 

73 E.g., FTC v. Joseph Hayes, No. 

4:96CV02162SNL (E.D. Mo. 1996). 

74 IL AG, at 2. 

75E.g., Sections 436.5(a) (Item 1); 436.5(c) (Item 

3); 436.5(d) (Item 4); 436.5(h) (Item 8). 76 16 CFR 436.2(i). 77See NASAA Commentary on the Uniform 

Franchise Offering Circular Guidelines (1999), Bus. 

Franchise Guide (CCH), ¶ 5790, at 8466 (‘‘NASAA 

Commentary’’ or ‘‘Commentary’’). The Commentary 

notes that this general definition of affiliate should 

be used throughout a UFOC, unless a particular 

disclosure Item defines it differently or limits its 

use. The record contains no indication that the 

UFOC Guidelines’ narrower definition is deficient 

or would impede the Commission’s ability to target 

affiliates in law enforcement actions, where 

warranted. 78See Triarc, NPR 6, at 2. The Staff Report 

recommended that the term ‘‘affiliate’’ mean 

‘‘controlled by, controlling, or under common 

control with, the franchisor or a franchisee.’’ See 

Staff Report, at 21 (emphasis added). While this 

version was intended to capture franchisee 

affiliates, for purposes of the ‘‘large franchisee’’

exemption, it also had the unintended consequence 

of broadening affiliate disclosures generally. For 

example, section 436.5(d) (Item 4) requires a 

franchisor to disclose a prior bankruptcy of an 

affiliate. Defining ‘‘affiliate’’ expressly to include 

‘‘franchisee’’ would arguably require a franchisor to 

list in its Item 4 bankruptcy disclosures the 

bankruptcy history of its franchisees’ affiliates. The 

final amended Rule does not follow this 

problematic recommendation. 

79 Section 436.5(t)(7). 

80 Originally, the Commission proposed using the 

term ‘‘gag clause’’ to refer to such provisions. 

Franchise NPR, 64 FR at 57332. Several 

commenters, however, opposed the term ‘‘gag 

clause’’ because, in their view, it is pejorative. They 

prefer a neutral term, such as ‘‘confidentiality 

agreement,’’ ‘‘confidentiality clause,’’

‘‘nondisclosure clause,’’ or ‘‘privacy clause.’’ E.g., 

NFC, NPR 12, at 26; BI, NPR 28, at 10. Accordingly, 

the Commission has adopted the term 

‘‘confidentiality clause.’’

81See section 436.5(t)(5). See also UFOC 

Guidelines Item 20 B. 

82 At the same time, the confidentiality clause 

disclosure requirement is not designed to cover 

specific settlement terms if the franchisee is 

otherwise free to discuss his or her experience 

within the franchise system, including the existence 

of a litigated action with the franchisor. 

Rule requires a franchisor to disclose 

certain legal actions involving the 

franchisor and its directors and officers. 

The original Rule did not define the 

term ‘‘action.’’ Section 436.1(a) in the 

final amended Rule is nearly identical 

to the definition proposed in the 

Franchise NPR, and closely tracks the 

UFOC Guidelines’ definition of the term 

‘‘action.’’69 That definition is: ‘‘Action 

includes complaints, cross claims, 

counterclaims, and third-party 

complaints in a judicial action or 

proceeding, and their equivalents in an 

administrative action or arbitration.’’70

The definition differs from the UFOC 

Guidelines definition only in that it 

refers to a ‘‘judicial action or 

proceeding,’’ in lieu of just a ‘‘judicial 

proceeding.’’ This modification 

addresses one commenter’s observation 

that some states may retain the 

distinction between an ‘‘action’’ at law 

and a ‘‘proceeding’’ in equity.71 Clearly, 

both types of legal matters must be 

disclosed. 

The Commission has declined to 

adopt an additional suggestion that 

‘‘complaints’’ referred to in the 

definition of ‘‘action’’ be limited to 

‘‘served complaints.’’72 Such a 

narrowing of the definition of ‘‘action’’

would be inconsistent with the UFOC 

Guidelines. Moreover, it would 

effectively enable a franchisor to avoid 

disclosing potentially material 

litigation, even though it had notice of 

an action, merely because it was not 

served with the papers yet or had 

successfully avoided service of process. 

In the Commission’s law enforcement 

experience, it is not uncommon for 

defendants to know that a Commission 

action was filed prior to service either 

by learning of the suit from codefendants or as a result of an asset 

freeze.73

In the same vein, IL AG suggested that 

the term ‘‘action’’ should refer to both 

‘‘ filed’’ and ‘‘served’’ complaints.74 A 

reference to ‘‘filed complaints’’ is 

unnecessary, however, and would be 

inconsistent with the UFOC Guidelines: 

the definition of action already refers to 

‘‘complaints . . . in a judicial action or 

proceeding’’ and ‘‘complaints . . . in 

. . . an arbitration,’’ meaning that a 

complaint has already been filed. 

Accordingly, the Commission declines 

to adopt these additional revisions to 

the definition of ‘‘action.’’

2. Section 436.1(b): Affiliate 

Many of the part 436 disclosures 

pertain to both the franchisor and its 

affiliates.75 The original Rule defined 

the term ‘‘affiliated person’’ to mean a 

person: 

(1) Which directly or indirectly 

controls, is controlled by, or is 

under common control with, a 

franchisor; or 

(2) Which directly or indirectly 

owns, controls, or holds with power 

to vote, 10 percent or more of the 

outstanding voting securities of a 

franchisor; or 

(3) Which has, in common with a 

franchisor, one or more partners, 

officers, directors, trustees, branch 

managers, or other persons 

occupying similar status or 

performing similar functions.76

Section 436.1(b), like the 

corresponding definition in the 

proposed Rule, harmonizes federal and 

state law, closely following the UFOC 

Guidelines by defining ‘‘affiliate’’ to 

mean: ‘‘an entity controlled by, 

controlling, or under common control 

with, another entity.’’77 This is slightly 

broader than the UFOC Guidelines’

definition, however. The UFOC 

Guidelines’ definition uses the narrower 

term ‘‘franchisor’’ in place of ‘‘another 

entity.’’ This slight departure from the 

UFOC Guidelines is necessary for the 

‘‘large franchisee’’ exemption, section 

436.8(a)(5)(ii), as discussed below in the 

section covering that exemption.78

3. Section 436.1(c): Confidentiality 

clause 

Part 436 of the final amended Rule 

requires franchisors for the first time to 

disclose the use of confidentiality 

clauses that prohibit or restrict existing 

or former franchisees from discussing 

their experience with prospective 

franchisees.79 Accordingly, section 

436.1(c) of the final amended Rule adds 

to the original Rule definitions the term 

‘‘confidentiality clause,’’80 defined as 

follows: 

any contract, order, or settlement 

provision that directly or indirectly 

restricts a current or former 

franchisee from discussing his or 

her personal experience as a 

franchisee in the franchisor’s 

system with any prospective 

franchisee. It does not include 

clauses that protect a franchisor’s 

trademarks or other proprietary 

information. 

As explained below, the 

confidentiality clause disclosure 

requirement is intended to prevent 

deception in the offer and sale of 

franchises by assisting prospective 

franchisees in verifying a franchisor’s 

claims. Specifically, this disclosure 

requirement is tied to the requirement to 

disclose contact information for existing 

franchised outlets.81 Knowing that a 

franchisor uses a confidentiality clause 

enables prospective franchisees to 

understand that a former or current 

franchisee may be prohibited from 

speaking about his or her experience 

and will make efforts to contact other 

former or current franchisees not subject 

to such a clause. This being the 

disclosure’s purpose, the operant 

definition is limited to confidentiality 

clauses impinging on communications 

between current or former franchisees 

and prospective franchisees only.82 It 

would not cover clauses that prohibit 

communications between current or 


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83 PMR&W, NPR 4, at 15. 

84 NFC, NPR 12, at 33. 

85E.g., Baer, ANPR 25, at 3; AFA, ANPR 62, at 3; 

Zarco & Pardo, ANPR 134, at 4. 

86 Bundy, NPR 18, at 3. 

87See UFOC Guidelines, General Instruction 150. 

The phrase ‘‘plain English’’ is defined separately in 

section 436.1(o), consistent with the UFOC 

Guidelines. 

88 This presentation requirement would be 

consistent with the Commission’s approach in the 

original Rule. See 16 CFR 436.1(b)(4). 

89 Gust Rosenfeld, at 2–3; Wiggin & Dana, at 6–

7. 

90 J&G, at 2. 

91 IL AG, at 2. 

92 Bundy, at 3; Cendant, at 3; IL AG, at 3. The 

Staff Report recommended deletion of this 

definition based on use of the term in the Rule text 

in at least two distinguishable ways, creating 

unnecessary confusion. Staff Report, at 68–9. 

93 See Cendant, at 3. 

94 16 CFR 436.2(n). 

95See generally Federal Trade Commission Policy 

Statement on Deception, appended to Cliffdale 

Assocs., 103 FTC 110 (1984). 

former franchisees and, for example, the 

media. 

After carefully considering the 

comments, the Commission has rejected 

suggestions to limit the definition of 

confidentiality clause to cover only 

broad clauses that prohibit all 

communications by current or former 

franchisees83 or only circumstances 

where all or at least 20% of franchisees 

are under speech restrictions.84 These 

suggestions are narrower than necessary 

and would defeat the very purpose of 

the confidentiality clause disclosure. 

Moreover, as stated throughout this 

document, the Commission favors 

bright-line standards that enable 

franchisors, prospective franchisees, 

and law enforcers to know when a Rule 

provision applies without resort to factfinding. In this instance, the parties 

should know whether the 

confidentiality clause is applicable 

without having to first determine the 

exact number of franchisees under 

speech restrictions at any given period. 

Finally, the definition expressly 

excludes confidentiality agreements 

designed to protect proprietary 

information. Many commenters—both 

franchisor and franchisee 

representatives alike—agreed that 

proprietary information should be 

exempted from the definition because a 

franchisor has a reasonable and 

legitimate concern about protecting its 

trademark and business secrets.85 One 

commenter suggested that the 

Commission make clear that the 

existence of a confidentiality agreement 

cannot be considered ‘‘proprietary 

information.’’86 Otherwise, according to 

this commenter, a franchisor could 

attempt to circumvent the 

confidentiality agreement disclosure by 

having a prospective franchisee sign an 

agreement stating that the existence of a 

confidentiality agreement is itself 

‘‘proprietary.’’ The Commission, 

however, intends that the term 

‘‘proprietary information’’ be limited to 

trade secrets and intellectual property, 

the type of information that, if 

disclosed, would put a franchisor at a 

competitive disadvantage. 

4. Section 436.1(d): Disclose, state, 

describe, and list 

Section 436.1(d) sets forth the 

definition of the terms ‘‘disclose,’’

‘‘state,’’ ‘‘describe,’’ and ‘‘list,’’ which 

are used throughout part 436. This is 

another definition not contained in the 

original Rule. The proposed definition 

published in the Franchise NPR was 

taken from the UFOC Guidelines, stating 

that these terms mean ‘‘to present all 

material facts accurately, clearly, 

concisely, and legibly in plain 

English.’’87

The Commission is persuaded that 

franchisors should have flexibility in 

presenting their disclosures, provided 

that the disclosures are clear and 

legible. The Staff Report recommended 

that franchisors should be required to 

make disclosures in at least 12 point 

upper and lower case type.88 This 

recommendation generated two 

comments, however, asserting that the 

Commission should not mandate 12 

point type. The commenters noted that 

12 point type may result in some of the 

Rule’s charts being split into two 

sections. They suggested that smaller 

fonts, especially in charts, can be very 

readable and result in reduced 

compliance costs.89 The Commission 

agrees. Accordingly, part 436 of the final 

amended Rule does not mandate any 

specific font size: franchisors may 

choose any font size, provided that their 

disclosures are clear and likely to be 

noticed, read, and understood by a 

reasonable prospective franchisee. 

Two additional Staff Report 

commenters sought refinements to 

section 436.1(d), as proposed therein. 

One commenter opined that the 

definition could be interpreted to mean 

that a franchisor must disclose ‘‘every 

material fact regarding the offered 

franchise, rather than disclosing all 

material facts pertaining specifically to 

the disclosures required pursuant to the 

Rule.’’90 The Commission believes that 

this reading of the definition is strained 

and expressly notes that it does not 

intend such a reading. Throughout the 

final amended Rule, the topic on which 

the franchisor is required to ‘‘present all 

material facts accurately, clearly, 

concisely, and legibly in plain English’’

is clear. Moreover, nothing in the record 

suggests that a virtually identical 

definition in the UFOC Guidelines has 

generated the problems anticipated by 

this commenter. This being the case, the 

Commission is disinclined to deviate 

from the UFOC Guidelines on this issue. 

Therefore, the Commission adopts the 

definition as quoted above. 

Another commenter urged that the 

definition specify that the meaning of 

‘‘disclose,’’ ‘‘state,’’ ‘‘describe,’’ and 

‘‘list’’ incorporates the concept that the 

language must be ‘‘understandable by a 

person unfamiliar with the franchise 

business.’’91 The Commission believes 

that the final amended Rule’s definition 

of ‘‘plain English’’ in section 436.1(o) 

gives more direction to franchisors in 

preparing their disclosures than the 

more general phrase ‘‘understandable by 

a person unfamiliar with the franchise 

business.’’ Therefore, we decline to 

adopt this suggestion. 

Finally, we note that three 

commenters urged the Commission to 

define separately the term ‘‘material.’’92

In particular, they asserted that it is 

unclear whether materiality should be 

determined from the franchisor’s or the 

prospective franchisee’s viewpoint. For 

example, isolated instances of 

franchisee-initiated lawsuits might not 

be material to a franchisor (i.e., not 

affecting the franchisor’s financial 

status), but could be highly material to 

a prospective franchisee seeking 

information on the quality of the 

franchise relationship.93

The original Rule defined ‘‘material, 

material fact, and material change.’’94

The Commission, however, believes that 

such definitions are not necessary. An 

understanding of materiality under the 

final amended Rule can best be gained 

by looking to long-established 

Commission jurisprudence. 

‘‘Materiality’’ is a cornerstone concept 

of that jurisprudence. To be clear on this 

important point, the Commission, when 

interpreting Section 5, regards a 

representation, omission, or practice to 

be deceptive if: (1) it is likely to mislead 

consumers acting reasonably under the 

circumstances; and (2) it is material; 

that is, likely to affect consumers’

conduct or decisions with respect to the 

product at issue.95 Accordingly, it is 

amply clear that ‘‘materiality’’ is 

determined by the reasonable consumer 

standard, or in franchise matters, by the 

reasonable prospective franchisee 

standard. Moreover, since violations of 

the Franchise Rule constitute violations 

of Section 5, we believe that the Section 


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96 The part 436 definition is nearly identical to 

the definition as proposed in the Franchise NPR, 

with slightly modified language in some places to 

improve clarity and precision. No commenter raised 

any concerns about the basic ‘‘financial 

performance representation’’ definition. 

Nevertheless, IL AG posed a number of questions 

about how the definition would be applied in 

various situations, such as representations based 

upon earnings of a franchisor’s affiliates or 

representations based upon industry data. IL AG, at 

2. Questions such as these are best addressed in the 

Compliance Guides or in staff advisory opinions, 

where they can be analyzed in the context of 

specific facts. 

97 The final amended Rule uses the broad term 

‘‘financial performance representation,’’ rather than 

the original Rule’s more limited term ‘‘earnings 

claim.’’ This modification recognizes that some 

industries, such as hotels, use variables other than 

earnings to measure performance, such as room 

occupancy rates. See Franchise NPR, 64 FR at 

57297. 

98 The original Rule described performance 

information as ‘‘any oral, written, or visual 

representation to a prospective franchisee which 

states a specific level of potential sales, income, 

gross, or net profit for the prospective franchisee, 

or which states other figures which suggest such a 

specific level.’’ 16 CFR 436.1(b) and (c). 

99 To address implied claims, the original Rule 

used the term ‘‘suggests.’’ The proposed definition 

of ‘‘financial performance representation’’

published in the Franchise NPR similarly used that 

term. One franchisee representative observed that 

the word ‘‘suggests’’ in this context is flawed: it 

would not reach the furnishing of fragments of 

financial data from which a prospect may readily 

estimate or calculate earnings. Bundy, NPR 18, at 

1. The Commission agrees that a franchisor can 

imply a performance claim by giving a prospect a 

few pieces of financial information from which the 

prospect can fill in the blanks and draw his or her 

own conclusion about a specific level of potential 

earnings. In addition, a franchisor can imply that 

a prospect can earn a specific level of income, such 

as by using a proxy for earnings (for example, ‘‘You 

will do so well that you can buy that Porsche.’’). 

See Interpretive Guides, 44 FR at 49982. Both types 

of implied claims constitute financial performance 

representations that are, and should be, covered by 

the final amended Rule. To clarify this policy, the 

final amended Rule uses the phrase ‘‘states, 

expressly or by implication.’’ This phrase is widely 

used, for example, in connection with 

representations challenged under Section 5. E.g., 

FTC v. Prophet 3H, Inc., 06 CV 1692 (N.D. Ga. 

2006); FTC v. Morrone’s Water Ice, Inc., No. 02–

3720 (E.D. Pa. 2002). 

100See 16 CFR 436.1(e). 

101 This streamlines the original Rule, which 

addressed historical performance representations 

and projections in two distinct Rule provisions, 16 

CFR 436.1(b) (projections) and 436.1(c) (historical 

information). 

102 The staff of the Commission has adopted the 

same position in several informal advisory 

opinions. E.g., Handy Hardware Centers, Bus. 

Franchise Guide (CCH) ¶ 6426 (1980) (The Rule’s 

‘‘earnings claim requirements are applicable to ‘any 

oral, written, or visual representation.’’’); Diet 

Center, Inc., Bus. Franchise Guide (CCH) ¶ 6437 

(1983) (table with arithmetic calculations uniformly 

demonstrating net profits constitutes a financial 

performance representation). 

103 See Interpretive Guides, 44 FR 49982. 

104 See Interpretive Guides, 44 FR at 49984–85. 

105 Neither the original Rule nor the final 

amended Rule includes mention of expenses in the 

definition of ‘‘financial performance 

representation,’’ but the Commission indicated its 

intended interpretation in the Franchise NPR’s 

discussion of the definition of the term. 

Specifically, it stated that ‘‘[w]hile the Commission 

does not consider the disclosure of such expense 

information alone to constitute the making of a 

financial performance claim, others arguably may 

interpret some expense information as implying a 

financial performance representation, such as a 

break-even point. To avoid any confusion, the 

proposed definition of ‘financial performance 

representation’ . . . specifically omits expense 

information.’’ Franchise NPR, 64 FR at 57329. This 

interpretation is a departure from the Commission’s 

former policy, as articulated in the Interpretive 

Guides. The Guides expressed the view that cost 

information alone could be a financial performance 

claim because a prospective franchisee could use 

such information to calculate likely profits by 

simply selecting arbitrary sales figures. Interpretive 

Guides, 44 FR at 49982. It also departs from UFOC 

Guidelines Item 19, which expressly lists costs 

among the items of information that constitute an 

earnings claims. See also UFOC Guidelines, Item 

19, Instructions i. Nevertheless, in light of the 

comments and the Commission’s long law 

enforcement history, the Commission, reiterating its 

Franchise NPR statement quoted immediately 

above, states its intent that expense information not 

be included in the part 436 definition of ‘‘financial 

performance representation.’’ As discussed above, 

the states agree. See NASAA, NPR 17, at 2. 

106E.g., IL AG, NPR 3, at 3; Baer, NPR 11, at 7; 

NFC, NPR 12, at 13; NASAA, NPR 17, at 2; BI, NPR 

28, at 10. But see Bundy, NPR 18, at 2 (arguing that 

expense disclosures inevitably will lead prospective 

franchisees to extrapolate earnings without the 

protection of an Item 19 disclosure). 

107 IL AG, NPR 3, at 8–9. See also Baer, NPR 11, 

at 7. 

108 NFC, NPR 12, at 13. The NFC also suggested 

that the Commission modify the Rule to exclude 

from the definition of ‘‘financial performance 

representation’’ financial data furnished to existing 

franchisees. Id. The Commission concludes, 

however, that part 436 need not be revised to 

address this issue. A franchisor is always free to 

furnish truthful information about its system to 

5 deception jurisprudence provides 

adequate guidance on what the term 

‘‘material’’ means in the Franchise Rule 

context. 

5. Section 436.1(e): Financial 

performance representation 

This section of part 436 defines the 

term ‘‘financial performance 

representation’’ to mean: 

any representation, including any 

oral, written, or visual 

representation, to a prospective 

franchisee, including a 

representation in the general media, 

that states, expressly or by 

implication, a specific level or 

range of actual or potential sales, 

income, gross profits, or net profits. 

The term includes a chart, table, or 

mathematical calculation that 

shows possible results based on a 

combination of variables.96

This definition comes into play in one 

of the most important sections of the 

final amended Rule, section 436.5(s), 

corresponding to Item 19 of the UFOC 

Guidelines. Like Item 19, it governs the 

making of financial performance 

representations.97 The definition 

incorporates the original Rule’s 

approach, in that it specifies that a 

financial performance representation 

may be in an ‘‘oral, written, or visual’’

format.98 To ensure that part 436 covers 

implied financial performance 

representations, the definition also 

refers to financial performance 

representations that are made both 

‘‘expressly or by implication.’’99 It also 

retains the original Rule’s reference to 

financial performance representations 

made in the general media.100 At the 

same time, section 436.1(e) adopts 

several aspects of the UFOC Guidelines 

definition, including references to 

‘‘actual’’ and ‘‘potential’’ performance 

(to capture both historical financial 

performance and projections),101 as well 

as the use of charts, tables, and 

mathematical calculations.102

Two aspects of the definition of the 

term ‘‘financial performance 

representation’’ generated significant 

comment: whether the Commission 

should treat information about costs and 

expenses as financial performance 

representations;103 and whether the 

Commission should interpret the 

definition’s express inclusion of any 

‘‘representation in the general media’’ to 

include all financial information 

available on a franchisor’s website or 

through a franchisor’s speeches and 

press releases.104 Each of these 

interpretive issues is discussed in the 

sections immediately below. 

a. Treatment of cost and expense 

information 

In the Franchise NPR, the 

Commission made it clear that the 

section 436.1(e) definition of ‘‘financial 

performance representation’’ is not 

intended to reach disclosures of expense 

information, and specifically sought 

comment on this issue.105 Most 

commenters who responded on this 

issue felt that disclosures of expense 

information should not fall within the 

definition.106 Some, however, sought 

additional clarification. For example, 

the IL AG urged the Commission to 

modify the definition of ‘‘financial 

performance representation’’ to 

expressly exclude expense disclosures 

mandated in Items 5–7 of the final 

amended Rule (initial fees, ongoing 

costs, and initial investment), offering 

the following additional sentence: 

‘‘Expenses required in Items 5, 6, and 7 

of the disclosure document are not to be 

considered performance claims and do 

not contradict Item 19 requirements.’’107

Others went further, arguing that the 

dissemination of any expense 

information should not trigger the Item 

19 disclosure requirements.108


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existing franchisees, especially if no additional 

franchise sales are contemplated. If the franchisor 

contemplates an additional franchise sale under 

materially different terms and conditions than the 

franchisee’s original purchase, then the existing 

franchisee, like any prospective franchisee, could 

be misled and therefore should receive financial 

performance disclosures in the form of an Item 19 

disclosure. For example, an Item 19 disclosure will 

assist an existing franchisee operating in a shopping 

mall or urban area in the northeast to understand 

an earnings projection for an additional stand-alone 

outlet or outlet to be located in a rural section of 

the southwest. 

109 Interpretive Guides, 44 FR at 49982. 

110 At any rate, according to NASAA, franchisors 

do not routinely disseminate individualized 

expense information geared to a specific offering 

that might be used to insinuate an earnings level. 

NASAA, 17 NPR, at 2. 

111 See 16 CFR 436.1(b)(5)(i); 436.1(c)(6)(i); 

436.1(e)(5)(ii). Unlike other financial performance 

claims, a claim made in the general media need not 

be geographically relevant to the market in which 

franchises are being offered for sale. 

112 Although the UFOC Guidelines do not address 

general media claims, many of the states with 

disclosure laws require franchisors to register their 

advertisements in advance of their use. E.g., Cal. 

Corp. Code § 31156 (1997) (franchisor must register 

advertising at least three business days before first 

publication); Md. Code Ann., Bus. Reg. § 14–225 

(1998) (franchisor must register advertising at least 

seven business days before publication). 

113 In the proposed Rule, the term ‘‘financial 

performance representation’’ expressly included ‘‘a 

representation disseminated in the general media 

and Internet.’’ Franchise NPR, 64 FR at 57297, 

57332. (emphasis supplied.) In accordance with the 

discussion in this section of the SBP, the 

Commission has deleted this phrase to dispel 

potential readings that financial information posted 

on the Internet is per se a financial performance 

representation. 

114E.g., PMR&W NPR 4, at 16; H&H, NPR 9, at 14; 

NFC, NPR 12, at 23–24. 

115E.g., Gust Rosenfeld, at 7; Quizno’s, NPR 1, at 

3; PRM&W, NPR 4, at 16; NFC, NPR 12, at 24; BI, 

NPR 28, at 9. 

116E.g., Quizno’s, NPR 1, at 3. See also BI, NPR 

28, at 9. 

117E.g., Quizno’s, NPR 1, at 3; PMR&W, NPR 4, 

at 16; H&H, NPR 9, at 14; BI, NPR 28, at 9. 

118 Quizno’s, NPR 1, at 3. 

119 Interpretive Guides, 44 FR at 49984–85. The 

Commission excluded, however, ‘‘communications 

to financial journals or the trade press in 

connection with bona-fide news stories, or directly 

to lenders in connection with arranging financing 

for the franchisee.’’ Id. at 49985. 

120 Kaufmann, at 6. See also Cendant, at 2. 

121 Indeed, the staff previously has advised that 

the dissemination of financial performance 

information through bona fide news stories may 

generate benefits to the public that outweigh 

potential harm to prospective franchisees. ‘‘For 

example, such information may be useful to 

potential suppliers seeking growing businesses as 

customers; shopping center or mall developers 

seeking promising franchised systems as tenants; 

and financial analysts who follow market or 

industry trends. Accordingly, the exemption from 

the general media earnings claims disclosure 

requirements ensures that the Rule does not chill 

the free flow of newsworthy information about 

franchising or particular franchise systems.’’

Advisory 97–5, Bus. Franchise Guide (CCH) ¶ 6485 

at 9687 (July 31, 1997). 

Notwithstanding language to the 

contrary in the original Interpretive 

Guides,109 the Commission is persuaded 

that expense information alone is 

insufficient to enable prospective 

franchisees to gauge their potential 

earnings with any degree of specificity 

that could rise to the level of a financial 

performance claim.110 The Commission 

explained in the Franchise NPR and 

now reiterates here that mere disclosure 

of cost information does not, in its view, 

constitute a financial performance 

representation triggering Item 19 

disclosure obligations. The Commission 

intends that the explanation that mere 

expense disclosures alone do not 

constitute a financial performance 

representation, coupled with the 

deliberate omission of any mention of 

expense information from section 

436.1(e) of the final amended Rule, will 

be enough to address this issue. 

b. General media claims 

Section 436.1(e) of the final amended 

Rule retains the original Rule’s 

provision governing the making of 

financial performance representations in 

the general media. Under the original 

Rule, a general media financial 

performance representation, like all 

other financial performance 

representations, must have a reasonable 

basis and state the number and 

percentage of outlets earning the 

claimed amount, among other 

substantiation and disclosure 

requirements.111 There is no comparable 

provision in the UFOC Guidelines.112

In the Franchise NPR, the 

Commission proposed that the term 

‘‘financial performance representation’’

should broadly include the 

dissemination of financial performance 

information via the Internet.113 The 

majority of commenters who addressed 

this issue, however, questioned whether 

financial performance information 

posted online should constitute 

‘‘financial performance 

representations,’’ thus triggering the 

Rule’s disclosure and substantiation 

requirements.114 These commenters 

asserted that the Commission should 

not deem financial performance 

information posted on a franchisor’s 

website to be financial performance 

representations under the Rule, unless 

the information is located in a section 

of a website that solicits franchise 

purchasers or otherwise specifically 

targets prospective franchisees.115 In 

their view, financial performance 

information on a franchisor’s website—

including links to press releases, 

interviews, or articles—is intended to 

educate the general public about the 

company, rather than to attract 

prospective franchisees.116 Indeed, 

some posted information may consist of 

copies of publicly filed reports, such as 

10–Qs and 10–Ks, that are submitted to 

the SEC.117 At least one commenter 

feared that equating online financial 

performance information with financial 

performance representations under the 

Rule would have a chilling effect, 

unreasonably restricting the kinds of 

materials a franchisor could have on its 

website: ‘‘Does this mean that a 

franchise company, unlike any other 

business, must choose between taking 

advantage of articles or press releases 

about itself on its own web site page or 

risk the claim that a prospective 

franchisee has been given unauthorized 

non-Item 19 financial data?’’118

Two Staff Report commenters 

broadened this argument beyond the 

online context to encompass 

franchisors’ speeches and news releases. 

In the Interpretive Guides, the 

Commission described ‘‘general media’’

broadly to include: ‘‘advertising (radio, 

television, magazines, newspapers, 

billboards, etc) as well as those 

contained in speeches or press 

releases.’’119 David Kaufmann, for 

example, asserted that the inclusion of 

speeches and news releases harms 

franchisors by making it difficult for 

them to disseminate financial 

performance information in ‘‘speeches, 

press interviews, and other forums not 

specifically geared to the franchise sales 

process.’’120 He urged the Commission 

to permit franchisors and their 

executives to disseminate financial 

performance information to the public 

freely, unless copies are subsequently 

used in the franchisor’s franchise 

marketing effort. 

Based upon the comments, the 

Commission is persuaded that it is 

unwarranted to sweep broadly into the 

part 436 definition of ‘‘financial 

performance representation’’ all 

financial performance information 

posted online or appearing in press 

releases or speeches. The dissemination 

of financial information online and in 

press stories and releases is for the 

benefit of more than prospective 

franchisees, including investors, 

potential suppliers, and members of the 

general public.121 Further, the 

Commission believes that the 

commenters’ concerns are well-founded 

with respect to publicly filed reports 

required by the SEC. The Commission 

agrees that such filings are already 

publicly available and, more important, 

have indicia of reliability. Indeed, the 

dissemination of false financial data by 

publicly traded franchisors is already 

illegal. Thus, to impose the Rule’s 

substantiation and disclosure 

requirements with respect to SEC filing 


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122See Advisory 97–5, Bus. Franchise Guide 

(CCH) at 9687 (‘‘By disseminating copies of [news 

articles containing earnings claims], the franchisor 

effectively ratifies the journalist’s words as its own 

and, in so doing, converts the article into an 

advertising piece designed to solicit prospective 

franchisees.’’). 

123 Interpretive Guides, 44 FR at 49984–85 

(‘‘‘General media claim’ does not include 

communications to financial journals or the trade 

press in connection with bona-fide news stories, or 

directly to lenders in connection with arranging 

financing for franchisees.’’). 

124E.g., section 436.5(a) (Item 1); section 436.5(c) 

(Item 3); section 436.5(e) (Item 5); section 436.5(t) 

(Item 20); section 436.5(u) (Item 21). 

125 16 CFR 436.2(m). 

126 The fractional franchise is one of several 

exemptions contained in the original Rule that are 

retained in the final amended Rule. In contrast, the 

UFOC Guidelines contain no exemptions. State 

exemptions, which vary from state to state, are set 

out in state statutes or regulations. In general, state 

franchise laws do not exempt franchisors from the 

basic obligation to furnish prospects with UFOCs. 

At most, states may exempt franchisors from state 

registration requirements. 

127 In the original SBP, the Commission reasoned, 

with respect to fractional franchisees, that pre-sale 

disclosure is unwarranted where the prospective 

franchisee already is familiar with the products and 

services to be sold through the franchise and where 

the prospective franchisee faces a minimal 

investment risk. Original SBP, 43 FR at 59707. 

128 The Commission believes that greater 

precision in the Rule text is warranted in light of 

numerous requests for advisory opinions on the 

scope of the fractional franchise exemption since 

the original Rule was promulgated. See, e.g., 

Advisory 93–5, Bus. Franchise Guide (CCH),¶ 6449 

(1993); Advisory 94–4, id., at ¶ 6460 (1994); 

Advisory 95–2, id., at ¶ 6467 (1995); Advisory 96–

1, id., at ¶ 6476 (1996); Advisory 97–1, id., at ¶

6481 (1997). 

129See Interpretive Guides, 44 FR at 49968. 

130 The proposed definition in the Franchise NPR 

formulated this as ‘‘The parties reasonably 

anticipate . . .’’ The final language is more 

precisely in line with basic concepts of FTC 

jurisprudence. 

131 Piper Rudnick, at 4 (suggesting experience in 

the same basic industry should suffice); H&H, NPR 

9, at 4 (complementary experience should suffice). 

would be pointless, unworkable, and 

unduly burdensome. 

With respect to the dissemination of 

other financial performance 

information, the Commission believes 

that a distinction should be made 

between information disseminated in 

advertisements directed at franchisees—

be it in print, radio, television, or 

Internet—and information disseminated 

to the general public. We are convinced 

that deeming financial performance 

information disseminated publicly to be 

‘‘financial performance representations’’

under the Rule would have a chilling 

effect, discouraging franchisors from 

furnishing truthful information to the 

public. However, where a franchisor 

utilizes financial performance 

information disseminated, or intended 

to be disseminated, to the general public 

in its franchise promotional materials 

(e.g., in a brochure or franchisee section 

of a website), includes in its franchise 

promotional materials a reference to 

general financial information on its 

website, or otherwise repeats the general 

financial information to prospective 

franchisees (such as in a face-to-face 

meeting with an audience of prospective 

franchisees), such information will be 

deemed ‘‘financial performance 

representations,’’ triggering part 436’s 

disclosure and substantiation 

requirements.122

The Commission anticipates that staff 

will address the narrowed scope of 

general media financial performance 

representations in the Compliance 

Guides. This is consistent with the 

approach historically adopted, whereby 

the Commission explained the scope of 

general media claims in the Interpretive 

Guides, providing illustrative examples 

and more detailed discussion than is 

possible in the text of the Rule itself. As 

an initial matter, the Commission 

anticipates that staff will retain in the 

Compliance Guides the original 

Interpretive Guides’ determination that 

communications about financial 

performance made to the trade press 

and directly to lenders do not constitute 

general media financial performance 

representations.123 At the same time, the 

Commission anticipates that staff will 

add SEC filings, speeches, and news 

releases to the list of communications 

not constituting financial performance 

representations under the final amended 

Rule. There is one important caveat, 

however. Where the franchisor directs 

the speeches or news releases to 

prospective franchisees or uses copies of 

speeches or news releases in marketing 

materials aimed at prospective 

franchisees, then such materials will 

constitute general media financial 

performance representations under the 

Rule. 

6. Section 436.1(f): Fiscal year 

Several Rule disclosures are based 

upon the franchisor’s fiscal year.124

Section 436.1(f) retains the original Rule 

definition of the term ‘‘fiscal year,’’

making clear that it ‘‘refers to the 

franchisor’s fiscal year.’’125 This issue 

generated no comment. 

7. Section 436.1(g): Fractional franchise 

Section 436.1(g) of the final amended 

Rule adopts the definition of the term 

‘‘fractional franchise’’ that was proposed 

in the Franchise NPR with only minor 

language changes to improve clarity. 

This definition comes into play in 

section 436.8(a)(2) of the final amended 

Rule, which retains the original Rule’s 

exemption for fractional franchises.126

In most instances, the fractional 

franchise exemption arises where an 

existing business seeks to expand its 

product line through a franchise 

meeting two criteria: (1) the franchisee 

or its principals have more than two 

years of experience in the same line of 

business; and (2) the parties reasonably 

expect that the franchisee’s sales from 

the new line of business will not exceed 

20% of its total sales.127

Section 436.1(g) clarifies the scope of 

the original ‘‘fractional franchise’’

exemption by adding greater precision 

and specificity.128 First, it incorporates 

the Commission’s long-standing policy 

that the parties must ‘‘anticipate that 

sales arising from the relationship will 

not exceed 20% of the franchisee’s total 

volume in sales during the first year of 

operation.’’129 Second, it makes explicit 

what previously has been only implied: 

that the parties must have ‘‘a reasonable 

basis’’ to assert the exemption.130

During the Rule amendment 

proceeding, a few commenters 

suggested that the Commission broaden 

the fractional franchise exemption. Two 

commenters urged the Commission to 

broaden the first prong of the fractional 

franchise exemption —‘‘experience in 

the same type of business’’—to exempt 

franchisees with experience in the same 

industry or selling similar or 

complementary goods or services.131

The suggestion that the exemption be 

broadened to ‘‘experience in the same 

industry’’ goes far beyond the 

underlying rationale that supports the 

fractional franchise exemption—

namely, the notion that prior experience 

in the same line of business reduces the 

likelihood of fraud or deception because 

the fractional franchisee likely will be 

familiar with the products to be offered 

for sale through the franchise 

relationship. 

The Commission does not believe that 

a franchisee in any particular economic 

sector necessarily has sufficient 

experience to operate a different 

franchise within the same sector. For 

example, we would not necessarily 

expect a muffler shop franchisee to 

automatically understand the financial 

risks of operating a quick-lube service 

station, although both operations are in 

the automotive repair industry. Nor 

would we expect a franchisee operating 

a small fast-food kiosk in a mall to 

necessarily appreciate the risks of 

operating a large, sit-down full-service 

restaurant, although both are in the food 

service industry. 

Nevertheless, the Commission has 

never required experience in the 

identical type of business. Rather, the 

sale of similar goods may qualify for the 

exemption. As explained in the current 


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132 Interpretive Guides, 44 FR at 49968. 

133 16 CFR 436.2(h). 

134 Marriott, at 4. 

135 J&G, NPR 32. 

136 The Commission recognizes, however, that in 

some instances, prior experience or the ability to 

consult those with prior experience, can be 

assumed. That is the basis of the new large 

investment exemption from the final amended Rule, 

discussed below. See section 436.8(a)(5)(i). Where 

an investment is sufficiently large—$1 million 

excluding the cost of unimproved land and any 

franchisor financing—we believe that the 

prospective franchisee is sophisticated and can 

obtain the information necessary to assess the 

franchise offering without our mandating that it be 

provided. 

137 See 16 CFR 436.2(a)(1)(i) and 436.2(a)(2). The 

UFOC Guidelines do not define what constitutes a 

franchise. Rather, definitions of the term 

‘‘franchise’’ are set forth in individual state statutes. 

For a discussion of state definitions of the term 

‘‘franchise,’’ see Staff Report, at 37–41, available 

online at: www.ftc.gov/os/2004/08/ 

0408franchiserulerpt.pdf. 

138 See 16 CFR 436.2(a)(1)(ii) and 436.2(a)(2). 

139 See Interpretive Guides, 44 FR at 49966. See 

also FTC v. Morrone’s Water Ice, Inc., No. 02–3720 

(E.D. Pa. 2002). The staff has provided the same 

advice in several informal advisory opinions. E.g., 

Con-Wall Corp. Bus. Franchise Guide (CCH) ¶ 6427 

(1981). 

140 This is not a change of policy. The original 

definition of ‘‘franchise’’ added that ‘‘[a]ny 

Continued 

Interpretive Guides, ‘‘the required 

experience may be in the same business 

selling competitive goods or in a 

business that would ordinarily be 

expected to sell the type of goods to be 

distributed under the franchise.’’132

This approach is reasonable because a 

prospective franchisee who is already 

familiar with the goods or services of 

the franchise can better assess the 

financial risk involved in entering into 

a relationship with the franchisor. 

Our reluctance to expand the 

fractional franchise exemption also 

holds true with respect to the sale of 

‘‘complementary goods.’’ What may be 

viewed as ‘‘complementary goods’’ in 

any particular line of business may be 

quite subjective. For example, 

reasonable minds may differ whether 

the introduction of ice cream sales at a 

donut/coffee shop is ‘‘complementary.’’

While certain products may make 

complementary sales combinations—

such as ice cream and donuts—it does 

not necessarily follow that a donut shop 

franchisee is experienced with the risks 

involved with marketing and selling ice 

cream. 

While the Commission declines to 

revise the Rule to broaden the types of 

experience needed to qualify for the 

fractional franchise exemption, we agree 

that the exemption should be expanded 

with respect to the types of individuals 

whose experience can qualify for the 

exemption. 

The original definition specified that, 

in determining whether a relationship 

qualified as a the fractional franchise 

exemption, a franchisor could consider 

the prior experience of the franchisee 

‘‘or any of the current directors or 

executive officers thereof.’’133 Marriott 

recommended that the prior experience 

of an officer or director of an affiliate or 

parent of the franchisee should also be 

deemed a sound basis for the 

‘‘experience’’ prong of the definition. 

Marriott noted that the Staff Report 

recommended the same approach in 

connection with the prior experience 

prerequisite of the ‘‘large franchisee’’

exemption.134

We are persuaded by Marriott’s 

arguments that a broad reading of the 

fractional franchise exemption is 

warranted when determining which 

individuals may qualify as having the 

requisite prior experience. The principal 

factor in applying the fractional 

franchise exemption of part 436 is 

whether the business seeking to expand 

can obtain practical guidance and 

direction from someone within the 

business with prior experience. It makes 

little difference whether the business 

can call upon its own directors or 

officers for guidance or whether the 

business can call upon those of a 

subsidiary, as long as those individuals 

have prior experience in the same line 

of business. As in the large franchisee 

exemption, we recognize that 

franchisors may establish subsidiaries 

for limited liability or tax purposes. In 

such instances, the operations of the 

franchisor and its subsidiaries are likely 

to be close, such that the prior 

experience of one is available to help 

direct the business decisions of the 

other. We believe the same is no less 

true in the fractional franchise context. 

Finally, one commenter, focusing on 

the second prong of the fractional 

franchise exemption, recommended that 

any franchise arrangement that accounts 

for less than 25% of the franchisee’s 

business in the next year should be 

exempt from the Rule, even if the 

fractional franchisee has had no prior 

experience with the products or services 

being added to his or her product 

line.135 In short, this commenter would 

delete the prior experience prong from 

the fractional franchise definition. We 

reject this suggestion. 

The Commission believes that prior 

experience is a necessary component of 

the fractional franchise exemption. A 

business owner seeking a new 

opportunity is no different from a 

novice when it comes to entering into a 

type of business with which he or she 

is unfamiliar.136 It is precisely in such 

circumstances that the prospective 

franchisee needs the material 

disclosures the Rule affords in order to 

make an informed decision whether to 

invest in the opportunity. What 

distinguishes a fractional franchisee 

from novices and business owners 

generally is that the fractional 

franchisee has prior experience with the 

goods and services being offered for 

sale, and thus is less in need of the 

Rule’s protections. Indeed, the record is 

devoid of any data from which we could 

conclude that ongoing businesses 

seeking to expand into unfamiliar areas 

do not continue to need the Rule’s 

protections. Accordingly, we believe 

retaining the prior experience 

prerequisite for the fractional franchise 

exemption is a sound approach. 

8. Section 436.1(h): Franchise 

The original Rule defined ‘‘franchise’’

broadly to encompass both franchises 

and business opportunity ventures. A 

franchisor was covered by the original 

Rule if it represented that the business 

arrangement it offered entailed the 

following three elements: (1) permission 

to use the franchisor’s trademark; (2) 

significant franchisor control over the 

franchise operation or significant 

franchisor assistance to the franchisee; 

and (3) a required payment from the 

franchisee to the franchisor.137

Similarly, a business opportunity seller 

was covered by the original Rule if the 

seller represented that the business 

arrangement it offered entailed: (1) 

supplying the buyer with goods or 

services to market to the public; (2) 

providing location assistance or 

accounts for vending machines or other 

equipment; and (3) charging a required 

payment from the opportunity 

purchaser.138

Like the proposed section 436.1(h) 

published in the Franchise NPR, this 

section of the final amended Rule 

focuses exclusively on franchise sales, 

eliminating the business opportunity 

section of the definition. The amended 

definition is also more precise than the 

original definition. Specifically, the 

amended definition clarifies two issues 

that the Commission’s Rule enforcement 

experience suggests are not well 

understood: (1) that a business 

relationship will be deemed a franchise 

if it satisfies the three elements of a 

franchise, regardless of the 

nomenclature used to label or describe 

it;139 and (2) that a business relationship 

will be deemed a franchise if the 

franchisor represents that the 

relationship being offered has the 

characteristics of a franchise, regardless 

of any failure on the franchisor’s part to 

perform as promised.140


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relationship which is represented . . . to be a 

franchise (as defined in the original Rule) is subject 

to the requirements of this part.’’ 16 CFR 

436.2(a)(5). However, this provision was set out in 

the original ‘‘franchise’’ definition after exemptions 

and exclusions, and, therefore, was largely 

overlooked or ignored. The final amended Rule 

makes the definition of ‘‘franchise’’ more precise by 

including this policy in the introductory part of the 

amended definition. See also United States v. 

Protocol, Inc., Bus. Franchise Guide (CCH) [1996–

97 Transfer Binder], ¶ 11184 at 29550, 29555 (D. 

Minn. 1997); FTC v. Wolf, Bus. Franchise Guide 

(CCH), ¶ 10401 (S.D. Fla. 1994); FTC v. Int’l 

Computer Concepts, No. 1:94cv1678 (N.D. Ohio 

1994); FTC v. Sage Seminars, Inc., No. C–95–2854–

SBA (N.D. Cal. 1995). The staff of the Commission 

has provided the same advice in several informal 

advisory opinions. E.g., Real America Real Estate 

Corp., Bus. Franchise Guide (CCH) ¶ 6428 (1982) 

(‘‘the applicability of the rule will not be defeated 

by a franchisor’s subsequent failure to live up to 

any such commitment’’). 

141 Baer, NPR 11, at 7. 

142See Staff Report, at 37–41. 

143 Holmes, NPR 8, at 1. See also Gurnick, NPR 

21A; IL AG, NPR 3. 

144Id., at 2. 

145 16 CFR 436.1 (‘‘any relationship which is 

represented . . . to be a franchise’’); 436.2(a)(5) 

(‘‘Any relationship which is represented either 

orally or in writing to be a franchise [as defined in 

the Rule] is subject to the requirements of this 

part.’’). 

146 With respect to required payments, the 

Commission will also consider any obligation to 

make a payment imposed by the franchisor postsale, as long as the payment must be made within 

six months after the franchisee commences 

operation of the business. See section 436.8(a)(1) 

(minimum payment exemption). 

147 16 CFR 436.2(d). 

148 The phrase ‘‘granted a franchise’’ is intended 

to be interpreted consistent with ordinary contract 

law principles. Accordingly, a prospective 

franchisee becomes a ‘‘franchisee’’ at the point 

when he or she enters into a valid and enforceable 

contractual relationship. This clarification is 

necessary to avoid circumvention of the Rule, 

especially the Rule’s financial performance 

requirements. In our experience, we are aware of 

instances where a franchisor obtains full payment 

from a prospective franchisee before the prospective 

franchisee actually enters into a franchise 

agreement. Once payment is made, the franchisor 

then proceeds to furnish the individual with 

earnings information without the accompanying 

disclosures on the mistaken belief that the 

individual has become a franchisee, to whom 

earnings information can be provided without the 

benefit of an Item 19 disclosure. An individual 

becomes a ‘‘franchisee,’’ however, only after the 

franchise is ‘‘granted,’’ meaning both payment of 

consideration and the signing or acceptance of the 

franchise agreement. Otherwise, any franchisor 

could avoid the Rule’s financial performance 

requirements by simply delaying the furnishing of 

financial performance data until after the 

prospective franchisee either makes a ‘‘payment to 

the franchisor’’ or simply agrees to the terms of the 

franchise arrangement. 

149E.g., H&H, NPR 9, at 25; BI, NPR 28, at 2. The 

phrase ‘‘an interest in a franchise’’ has been deleted 

elsewhere in the final amended Rule text for the 

same reason. 

150E.g., Mich. Comp. Laws. 445.1502(4); Wis. Stat. 

Ann. 553.03(5). In response to the Staff Report, one 

commenter, IL AG, suggested that the definition of 

‘‘franchisee’’ make clear that a franchisee who sells 

franchises is also a subfranchisor. IL AG, at 3. This 

is unnecessary. The definition of ‘‘franchisor’’

includes a subfranchisor, which is defined as any 

person who functions as a franchisor by engaging 

in both pre-sale activities and post-sale 

performance. Section 436.1(k). By its terms, this 

would include a franchisee that also engages in 

franchise sales activities, if he or she also has postsale performance obligations. 

151 The original Rule uses the terms ‘‘franchisor’’

and ‘‘franchise broker’’ throughout the Rule, and, in 

some instances, references employees and agents. 

Early in the Rule amendment 

proceeding, a few commenters offered 

suggestions for modifying the definition 

of ‘‘franchise.’’ For example, one 

commenter urged the Commission to 

adopt the states’ definition of the term 

‘‘franchise.’’141 However, there is no 

single state definition of the term 

‘‘franchise.’’142 Nevertheless, the Rule’s 

definition is entirely consistent with the 

principles underlying the various state 

definitions, and the Commission 

concludes that there is no persuasive 

argument to modify the definition 

further. 

Another commenter voiced concern 

over the Commission’s policy that a 

business relationship will be deemed a 

franchise ‘‘if it is offered or represented 

as having the characteristics of a 

franchise, irrespective of whether or not 

the relationship independently meets 

the actual . . . definition of a 

franchise.’’143 He stated that such an 

approach would be a mistake, ‘‘raising 

the form of a description of a business 

relationship to a level which would 

control over the actual substance of the 

relationship.’’144

There are two distinct issues here: (1) 

whether the Rule should apply to a 

business relationship that the parties 

call a ‘‘franchise,’’ even if the 

relationship does not satisfy the three 

definitional elements of a franchise; and 

(2) whether the Rule should apply to a 

business relationship that is represented 

as satisfying the three definitional 

elements of the term ‘‘franchise,’’ even 

if the relationship, in fact, does not 

satisfy those elements—e.g., because of 

the seller’s non-performance. The 

commenter correctly asserted that the 

Rule should not cover situations where 

the parties mistakenly use the term 

‘‘franchise’’ to describe their business 

relationship. A business relationship 

constitutes a franchise only if, as 

promised or represented, it satisfies the 

three elements of the term ‘‘franchise,’’

and nothing in the ‘‘franchise’’

definition is to the contrary. 

The clarification in the amended 

definition addresses the second issue—

whether representing a business 

relationship as satisfying the three 

definitional elements of the ‘‘franchise’’

definition (as opposed to merely calling 

a relationship a franchise) is sufficient 

to bring a business relationship under 

the Rule. The original Rule took the 

position that it was sufficient, and the 

Commission believes that position 

remains sound.145 A prospect seeking to 

purchase an opportunity that is 

represented as being a franchise should 

receive a disclosure document in order 

to make an informed investment 

decision. The prospect should not have 

to investigate whether or not the seller, 

post-sale, actually delivers a franchise 

or some other type of opportunity. For 

example, a start-up company may seek 

to sell its first franchised outlet, 

advertising that, for a $500 fee, it will 

license its mark and provide significant 

assistance to buyers. Under these 

circumstances, a prospect should 

receive a disclosure document before 

the sale because, as represented, the 

business offered satisfies each of the 

three elements of a franchise. This is 

true, even if the franchisor, in fact, lied 

and has no ability to perform as 

promised, such as having no right to the 

trademark offered or having no staff to 

provide promised assistance, facts that 

may only be discovered by the 

purchaser post-sale. In short, the seller 

should not be able to raise as a defense 

to a post-sale Rule violation that it, in 

fact, offered a non-franchise business 

arrangement if, at the time of sale, its 

representations about the business 

satisfied the definition of a franchise.146

9. Section 436.1(i): Franchisee 

The original Rule defined 

‘‘franchisee’’ as: ‘‘any person (1) who 

participates in a franchise relationship 

as a franchisee . . . or (2) to whom an 

interest in a franchise is sold.’’147 The 

definition proposed in the Franchise 

NPR was ‘‘any person who is granted an 

interest in a franchise.’’ Section 436.1(i) 

of the final amended Rule adopts an 

even more precise version: ‘‘Franchisee 

means any person who is granted a 

franchise.’’148 This narrowing of the 

definition is in response to commenters 

who voiced concern that the phrase ‘‘an 

interest in a franchise’’ is too broad, 

arguably sweeping in shareholders of 

publicly traded companies and other 

investors.149 The amended definition’s 

focus on the granting of a franchise (as 

opposed to an interest in a franchise) is 

also consistent with the states’

approach, thereby reducing unnecessary 

inconsistencies.150

10. Section 436.1(j): Franchise seller 

Section 436.1(j) of the final amended 

Rule defines the term ‘‘franchise seller.’’

This term and its definition are needed 

in order to delineate easily all parties 

subject to one or more provisions of the 

final amended Rule.151 Consistent with 


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The term ‘‘franchise seller’’ streamlines the Rule by 

referencing all such individuals, where appropriate, 

through the use of a single term. But see Winslow, 

at 85 (suggesting that the term ‘‘seller’’ in the 

context of franchising is inappropriate). 152 See Interpretative Guides, 44 FR at 49969. 153 See Franchise NPR, 64 FR at 57298. 154 Interpretive Guides, 44 FR at 49969. 

155 The UFOC Guidelines provide that ‘‘[i]n 

offerings by a subfranchisor, ‘franchisor’ means 

both the franchisor and subfranchisor.’’ UFOC 

Guidelines, General Instructions 240. 

156 Bundy, NPR 18, at 3. 

157See IL AG, at 3. 

158 Tricon, NPR 34, at 3. 

159 J&G, NPR 32. See also IL AG, at 2; Michael 

Seid. 

160See also Lewis, NPR 15, at 8 (‘‘broker’’

definition should not ‘‘include a franchisee merely 

because the franchisee receives a payment from the 

franchisor or subfranchisor in consideration of the 

referral or a prospective franchisee to the franchisor 

or subfranchisor, if the franchisee does not 

otherwise participate in the sale of the franchise to 

the prospective franchisee. A franchisee does not 

participate in the sale of a franchise merely by 

participating in initial conversations or 

communications with a prospective franchisee 

about a franchise.’’). 

161 J&G, NPR 32, at 10. But see Baer, NPR 11, at 

9 (‘‘If any party offers to sell a franchise on behalf 

of a franchisor, that person should be considered a 

franchise seller.’’). 

162 Interpretive Guides, 44 FR at 49969. 

163 Moreover, the final amended Rule includes a 

separate definition of ‘‘franchisor,’’ to whom the 

affirmative disclosure requirements apply. 

164 Section 436.9(a). 

165 Frannet, NPR 2, at 1. 

166 16 CFR 436.2(j). 

167 Original SBP, 43 FR at 59717 and nn. 176 and 

178. Staff advisory opinions have interpreted the 

term ‘‘arranges’’ to include, for example, 

discussions with prospective franchisees about 

their specific business interests, pre-screening 

prospects through interest questionnaires, 

recommending specific franchise options, and 

assisting prospects in completing a franchisor’s 

application form. These opinions are based upon 

the original SBP, in which the Commission stated 

that group discussions about franchising and prescreening of prospects may constitute a first 

personal meeting that would require a franchisor or 

broker to furnish disclosure documents. See 

Informal Staff Advisories 99–6 and 99–7, Bus. 

Franchise Guide (CCH), ¶¶ 6503–04 (1999). 

168See generally FTC v. Entrepreneur Media, Inc., 

Bus. Franchise Guide (CCH), ¶ 10583 (C.D. Cal. 

Continued 

long-standing Commission policy, the 

definition also makes explicit that an 

individual franchisee seeking to sell his 

or her own outlet is excluded from Rule 

coverage:152

Franchise seller means a person 

that offers for sale, sells, or arranges 

for the sale of a franchise. It 

includes the franchisor and the 

franchisor’s employees, 

representatives, agents, 

subfranchisors, and third-party 

brokers who are involved in 

franchise sales activities. It does not 

include existing franchisees who 

sell only their own outlet and who 

are otherwise not engaged in 

franchise sales on behalf of the 

franchisor. 

The definition incorporates several 

suggestions submitted during the Rule 

amendment proceeding. First, the 

definition expressly includes 

‘‘subfranchisors,’’ a category of franchise 

sellers not mentioned in the Franchise 

NPR’s proposed definition of ‘‘franchise 

seller.’’153 The inclusion of 

subfranchisors in the definition is 

entirely consistent with current 

Commission policy154 and the UFOC 

Guidelines.155

Second, the definition narrows the 

express exclusion of sales of a franchise 

by an existing franchisee. One 

commenter noted that this exclusion 

should apply only in those situations 

where an existing franchisee transfers 

ownership in his or her franchise to a 

purchaser without any continuing 

obligation to the purchaser. He 

suggested that the Rule make clear that 

the exclusion does not apply where an 

existing franchisee is engaged in 

repeated franchise sales.156 The 

Commission agrees. If an existing 

franchisee engages in repeated franchise 

sales, he or she will be covered by the 

final amended Rule as either the 

franchisor’s agent, broker, or 

subfranchisor. To clarify this point, the 

definition narrows the existing 

franchisee exemption to those existing 

franchisees ‘‘who are otherwise not 

engaged in franchise sales on behalf of 

the franchisor.’’157

Finally, the definition addresses one 

commenter’s concern that the term 

‘‘franchise seller’’ should exclude a 

franchisor’s employees who are not 

actively involved in franchise sales.158

We agree. To that end, the definition 

makes clear that the franchisor’s 

employees, representatives, agents, 

subfranchisors, and third-party brokers 

are covered only if they ‘‘are involved 

in franchise sales activities.’’

The Commission has considered, but 

declines to adopt, two additional 

suggestions with respect to the 

‘‘franchise seller’’ definition. J&G 

suggested that the Commission define 

the term ‘‘broker’’ in the Rule itself and 

proposed the following, narrow 

definition: individuals who: (1) are not 

employed by franchisors or 

subfranchisors; (2) are compensated 

pursuant to a written agreement for 

qualifying prospects; and (3) are active 

participants in the sales process.159 The 

commenter also proposed that the 

definition specifically exclude certain 

individuals who arguably might be 

involved in a franchise sale, including 

franchisees,160 trade show promoters, 

website owners, the mass media, or 

others who may be paid for referrals, but 

‘‘who do not spend more than an hour 

with a prospective franchisee, or engage 

in substantive discussions with a 

prospective franchisee about the terms 

of a franchise agreement.’’161

The Commission believes that a 

separate definition of the term ‘‘broker’’

is unnecessary in part 436. In the 

original Rule, franchise brokers were 

jointly and severally liable with 

franchisors to prepare and to furnish 

prospective franchisees with disclosure 

documents.162 In contrast, under part 

436 of the final amended Rule, brokers 

are no longer obligated to prepare or to 

furnish disclosure documents, as 

explained later in this document. The 

preparation and distribution of the 

disclosure document is the sole 

responsibility of the franchisor. Rather, 

coverage of brokers under the final 

amended Rule is limited to 

prohibitions.163 For example, any 

franchise seller, including brokers, 

cannot make statements that are 

inconsistent with those found in the 

franchisor’s disclosure document.164

Because brokers are no longer liable for 

the preparation and distribution of 

disclosure documents and the term 

‘‘broker’’ does not appear in the final 

amended Rule outside the definition of 

‘‘franchise seller,’’ no separate 

definition of the term ‘‘broker’’ is 

warranted. 

In a similar vein, Frannet, a franchise 

referral company, urged the 

Commission to distinguish between 

franchise brokers and middlemen. The 

company agreed that anyone who sells 

franchises should be included in the 

definition of a franchise seller.165

According to Frannet, middlemen or 

finders who just arrange for prospects to 

meet franchisors—but do not negotiate 

price or terms for the franchisor, or sign 

franchise agreements on behalf of a 

franchisor—should not be deemed 

brokers. 

With respect to ‘‘brokers,’’ we reject 

the suggestion that brokers are 

distinguishable from middlemen or 

finders. When promulgating the original 

Rule, the Commission defined the term 

‘‘broker’’ broadly to mean ‘‘any person 

other than a franchisor or a franchisee 

who sells, offers for sale, or arranges for 

the sale of a franchise.’’166 Similarly, in 

the original SBP, the Commission 

clarified that a broker acts on behalf of 

a franchisor and receives compensation 

for arranging a franchise sale.167 The 

term ‘‘broker,’’ therefore, has not been 

limited to those persons who negotiate 

contract terms or sign franchise 

agreements and accept payments on 

behalf of a franchisor.168


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1994); FTC v. Shulman Promotions, Inc., Bus. 

Franchise Guide (CCH), ¶ 10584 (S.D. Ohio 1994) 

(trade show promoters held jointly and severally 

liable as brokers under the original Rule for 

financial performance claims made by franchisorexhibitors on the trade show floor). 

169 See Gust Rosenfeld, at 2 (supporting the 

above-noted interpretation of the term ‘‘broker’’). 

This interpretation is sufficiently narrow to exclude 

existing franchisees who may refer potential 

franchisees to the franchisor because they are not 

under contract with the franchisor to sell 

franchises. In most instances, it also would exclude 

trade show promoters and the media who, typically, 

are not under contract with the franchisor, do not 

receive compensation from the franchisor for 

franchise selling, and who do not pre-screen or 

otherwise assist prospects in identifying specific 

franchise systems, or otherwise advance the 

franchise sale. 

170 16 CFR 436.2(c). 

171 The Franchise NPR proposed that a franchisor 

include a person who grants an ‘‘interest in a 

franchise.’’ The reference to granting ‘‘an interest’’

is deleted. As BI observed, granting an interest is 

too broad, arguably including a franchisee who sells 

an ownership interest in her own business. BI, NPR 

28, at 2. The amended definition is also consistent 

with the language used in several state franchise 

statutes, namely ‘‘grants a franchise,’’ or ‘‘grants or 

offers to grant a franchise.’’ E.g., Mich. Comp. Laws. 

445.1502(5); Wash. Rev. Code 19.100.010(8). 

172See Lewis, NPR 15, at 11 (suggesting that the 

definition address ‘‘subfranchisors,’’ noting 

comparable language in the Illinois and California 

Franchise Acts). 

173 Spandorf, at 2. 

174 NASAA, at 4; NASAA, NPR 17, at 3. 

175E.g., FTC v. Morrone’s Water Ice, Inc., No. 02–

3720 (E.D. Pa. 2002) (naming Stephen D. Aleardi 

and John J. Morrone, III, individually and as officers 

of corporate defendants); FTC v. Car Wash Guys 

Int’l, Inc., No. 00–8197 ABC (RNBx) (C.D. Cal. 2000) 

(naming Lance Winslow, III, individually and as an 

officer of the corporate defendants). 

176 See 16 CFR 436.2(a)(3)(ii). 

177 Original SBP, 43 FR at 59708. See also 

Interpretive Guides, 44 FR at 49968. 

178 Originally, the Commission proposed in the 

Franchise NPR a much more streamlined version of 

the definition, as follows: Leased department means 

‘‘an arrangement whereby a retailer licenses or 

otherwise permits an independent seller to conduct 

business from the retailer’s premises.’’ Franchise 

NPR, 64 FR 57332. However, one commenter voiced 

concern that this proposed definition could be 

misinterpreted as broadening the exemption to 

include even arrangements where the retailergrantor requires the retailer-lessee to purchase 

goods from, for example, a specific third-party 

supplier. J&G, NPR 32, Attachment 6, at 13. This 

was not the Commission’s intent, and the revised 

definition corrects that possible misinterpretation. 

The Commission declines to follow a 

different approach in adopting the final 

amended Rule. As noted above, the final 

amended Rule prohibits franchise 

sellers from engaging in certain conduct 

that may deceive prospective 

franchisees during the sales process. In 

order to prevent deceptive sales 

practices, the prohibitions section of the 

final amended Rule is broad, covering 

all persons engaged in sales activity. 

Accordingly, the Commission intends 

that the term broker in the ‘‘franchise 

seller’’ definition to mean a person who: 

(1) is under contract with the franchisor 

relating to the sale of franchises; (2) 

receives compensation from the 

franchisor related to the sale of 

franchises; and (3) arranges franchise 

sales by assisting prospective 

franchisees in the sales process.169

11. Section 436.1(k): Franchisor 

The original Rule defined 

‘‘franchisor’’ as: ‘‘any person who 

participates in a franchise relationship 

as a franchisor, as denoted in paragraph 

(a) of this subsection.’’170 The final 

amended Rule streamlines the original 

definition: ‘‘any person who grants a 

franchise and participates in the 

franchise relationship.’’171 Consistent 

with the UFOC Guidelines, the 

definition also makes clear that, 

‘‘[u]nless otherwise stated, it includes 

subfranchisors.’’172

In considering revisions to the 

‘‘franchisor’’ definition, the Commission 

has rejected three additional 

suggestions. First, one commenter 

opined that it is unclear whether the 

phrase ‘‘and participates in the 

franchisor relationship’’ is intended to 

modify ‘‘any person who grants a 

franchise,’’ or is intended to include 

persons other than those who grant a 

franchise. She urged the Commission to 

revise the definition narrowly to mean 

the person who signs the agreement 

granting a franchise.173

The commenter’s suggested change is 

unwarranted. The two definitional 

phrases are read conjunctively. To be 

considered a ‘‘franchisor,’’ a person 

must satisfy two definition elements: (1) 

granting a franchise; and (2) 

participating in the franchise 

relationship. Further, the second 

definitional element—participating in 

the franchise relationship—is necessary 

to distinguish a franchisor (who has 

post-sale performance obligations), from 

others involved solely in the initial 

franchise sales process (such as a 

broker). Indeed, this commenter’s 

proposed substitute definition could 

inappropriately sweep within the 

definition of ‘‘franchisor’’ third-party 

brokers or other agents who are 

authorized by the franchisor to sign the 

franchise agreement, but who have no 

post-sale performance obligations. We 

therefore decline to adopt this 

suggestion. 

Second, NASAA urged the 

Commission to expand the definition to 

include shareholders of privately-held 

corporations.174 Although NASAA did 

not elaborate, its suggestion is 

apparently designed to make it easier to 

hold owners of closely-held 

corporations liable for violations of the 

final amended Rule. We do not believe, 

however, that a mere showing that an 

individual is a shareholder in a 

privately held corporation can suffice, 

without more, as a legal basis for 

subjecting that individual to liability to 

pay potentially significant civil 

penalties or consumer redress175 for 

Rule violations committed by the 

corporation or those actively in control 

of it. At any rate, where warranted, the 

Commission’s enforcement experience 

indicates no difficulty in proving up the 

necessary level of participation in the 

violative conduct to justify civil 

penalties, or the requisite control over 

the corporation and knowledge of its 

violative activity to justify recovery of 

consumer redress. We therefore decline 

to adopt NASAA’s suggestion on this 

issue. 

12. Section 436.1(l): Leased department 

The final amended Rule retains the 

original Rule’s exemption for leased 

department arrangements.176 A leased 

department is created when a retailer 

rents space from a larger retailer in 

order to conduct business. For example, 

a jeweler may rent space from a 

department store to sell jewelry and 

watches. Technically, this relationship 

may be a franchise because the jeweler 

becomes associated with the department 

store’s trademark, and the department 

store may impose what arguably could 

be considered control over the 

operation, such as operating hours. As 

noted in the original SBP, these types of 

relationships need not be protected by 

the Rule because the likelihood of 

deception is not great, the retailer-lessee 

typically being experienced and able to 

assess the value of the location. 

Moreover, the risk is small because the 

retailer-lessee’s financial liability to the 

retailer-grantor is limited to rent.177

Section 436.1(l) of the final amended 

Rule defines the term ‘‘leased 

department’’ as: 

an arrangement whereby a retailer 

licenses or otherwise permits a 

seller to conduct business from the 

retailer’s location where the seller 

purchases no goods, services, or 

commodities directly or indirectly 

from: (1) the retailer; (2) a person 

the retailer requires the seller to do 

business with; or (3) a retaileraffiliate if the retailer advises the 

seller to do business with the 

affiliate.178

No commenter raised any substantive 

concerns about the leased department 

exemption. One commenter, however, 

suggested that the Commission expand 

the definition of leased department to 


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179 J&G, NPR 32, Attachment at 6, 13. Two other 

commenters suggested that the Commission provide 

more guidance about co-branding generally, but not 

in the leased department context. Selden, at 3; 

Quizno’s, ANPR 16, at 2. None of these commenters 

identified specific problems posed by co-branding 

arrangements—other than noting that co-branded 

arrangements can be complex—nor did they offer 

any solutions for the Commission’s consideration. 

180 In the ANPR, the Commission noted its 

uncertainty as to whether the purchaser of a cobranded franchise acquires two individuallytrademarked franchises (and thus should receive 

separate disclosures from each franchisor) or 

acquires a hybrid franchise arrangement that has its 

own risks and, thus, should receive a single unified 

document that discloses information specific to the 

co-branding arrangement. The ANPR asked whether 

franchisors have sufficient guidance under the Rule 

to determine their disclosure obligations with 

respect to the sale of co-branded franchises and 

whether new or different disclosures should apply 

to the sale of co-branded franchises. ANPR, 62 FR 

at 9122. Ten ANPR commenters addressed cobranding. Quizno’s, ANPR 16, at 2; Baer, ANPR 25, 

at 7; H&H, ANPR 28, at 9; Kaufmann, ANPR 33, at 

16; Kestenbaum, ANPR 40, at 2–3; IL AG, ANPR 77, 

at 4–5; IFA, ANPR 82, at 4; Kirsch, ANPR 98; 

Jeffers, ANPR 116, at 9; WA Securities, ANPR 117, 

at 4. With the exception of Quizno’s, the ANPR 

commenters maintained that the Commission’s 

current pre-sale disclosure approach is sufficient to 

address co-branded franchise arrangements. 

181E.g., Kirsch, ANPR, 18 Sept. 97 Tr., at 176; 

Wieczorek, id., at 177–78; Kestenbaum, id., at 178–

79; Simon, id., at 179. 

182 For example, Dale Cantone, of Maryland 

Securities, stated: ‘‘We haven’t had too many 

problems on the issue of co-branding. We’ve had 

franchisors file disclosures and we really haven’t 

had too many issues with it.’’ Cantone, ANPR, 18 

Sept. 97 Tr., at 182. 

183 To the extent that franchisors may be 

uncertain how to apply the final amended Rule in 

a specific co-branded arrangement, they can always 

seek further guidance from Commission staff 

through an informal advisory opinion. To date, no 

such requests have been submitted, suggesting 

limited, if any, confusion over this issue. 

184See section 436.5(a) (Item 1); section 436.5(c) 

(Item 3); section 436.5(d) (Item 4). 

185E.g., PMR&W, NPR 4, at 9; H&H, NPR 9, at 12. 

186 The final amended Rule’s definition of 

‘‘parent’’ is consistent with the definition of the 

term ‘‘parent’’ in the Interpretive Guides: ‘‘an entity 

that controls the franchisor directly, or indirectly 

through one or more subsidiaries.’’ Interpretive 

Guides, 44 FR at 49972. However, because the term 

parent is also used in the final amended Rule to 

refer to a franchisee’s parent—e.g., section 436.8 

(Exemptions)—the definition of ‘‘parent’’ deletes 

the reference to ‘‘franchisor’’ and replaces it with 

the broader term ‘‘another entity.’’ This is the 

identical approach taken in defining the term 

‘‘affiliate.’’ See section 436.1(b) above. 

187 Lewis, NPR 15, at 9. This suggested definition 

appears to derive from the following language in 

UFOC Item 21: ‘‘a company controlling 80% or 

more of a franchisor may be required to include its 

financial statements.’’ Item 21, however, does not 

specifically purport to define the term ‘‘parent.’’

Rather, it merely suggests that a large controlling 

interest may give rise to financial disclosure 

obligations. 

188 Interpretive Guides, 44 FR at 49972. 

189 The Staff Report’s discussion of the ‘‘parent’’

definition generated one comment. Gust Rosenfeld 

suggested that a second sentence should be added 

to the definition to the effect that a parent entity 

is an affiliate, but is separately defined because 

certain requirements apply to a parent, but not to 

other types of affiliates. Gust Rosenfeld, at 2. We 

agree, but believe issues such as this are more 

appropriately addressed in Compliance Guides. 

190See 16 CFR 436.2(b). 

191 Lewis, NPR 15, at 10. 

192 IL AG, at 3; J&G, NPR 32, Attachment, at 14. 

193E.g., Telemarketing Sales Rule, 16 CFR 

310.2(v). 

194 Section 436.6(a). 

195 This definition is based upon the definition 

of ‘‘plain English’’ used in the securities context. 

See Registration Form Used by Open-Ended 

Management Investment Companies, SEC Release 

No. 33–7512, 63 FR 13916, at 13939 (Mar. 23, 1998). 

See also UFOC General Instruction 150. 

include ‘‘co-branding’’ arrangements.179

Co-branding, a relatively new marketing 

development in franchising, enables a 

franchisee to use the trademarks and 

sell the goods or services of more than 

one franchise system. For example, an 

outlet that sells Taco Bell foods might 

also sell Pizza Hut pizza, or a gasoline 

franchise, such as Shell, may operate an 

on-site Subway Shop or 7-Eleven store. 

The Commission declines to adopt 

this suggestion. The issue of Rule 

compliance in co-branded arrangements 

was raised in the ANPR180 and 

discussed in detail at the staff’s New 

York public workshop conference on 

September 18, 1997. The ANPR 

commenters generally agreed that the 

current Rule and UFOC Guidelines are 

sufficient to address any deception 

issues that may arise in co-branded 

franchise arrangements. The same view 

was expressed by the participants at the 

New York workshop.181 Indeed, no 

franchisee or state regulator voiced any 

concerns to the contrary.182 Therefore, 

taken as a whole, the record does not 

support the need to adopt new rule 

provisions specifically addressing cobranding.183

13. Section 436.1(m): Parent 

Section 436.1(m) of the final amended 

Rule defines the term ‘‘parent’’ as ‘‘an 

entity that controls another entity 

directly, or indirectly though one or 

more subsidiaries.’’ Several commenters 

suggested that because several Rule 

provisions address parent 

disclosures,184 the Commission should 

expressly define that term.185 Although 

the Rule proposed in the Franchise NPR 

did not define this term, the 

Commission believes this point is welltaken. Accordingly, part 436 of the final 

amended Rule expressly defines the 

term ‘‘parent.’’186

One commenter suggested an 

alternative definition: ‘‘Parent means an 

entity that directly or indirectly has an 

80% or greater ownership interest in the 

franchisor.’’187 The commenter, 

however, did not state the basis for his 

recommendation. Indeed, in 

promulgating the original Rule, the 

Commission did not adopt an 

ownership test, but focused on 

control.188 We believe that is the proper 

approach.189 It is the control and 

resulting influence over the direction of 

the franchisor—not mere ownership—

that is material to a prospective 

franchisee. 

14. Section 436.1(n): Person 

Section 436.1(n) of the final amended 

Rule retains the original Rule’s 

definition of the term ‘‘person’’—‘‘any 

individual, group, association, limited 

or general partnership, corporation, or 

any other entity.’’190 This is identical to 

the proposed version of this definition 

in the Franchise NPR. During the Rule 

amendment proceeding, a few 

commenters offered suggestions to 

modify the definition. Warren Lewis, for 

example, suggested that the Commission 

add the following to the definition: ‘‘An 

individual is not an entity.’’191 Mr. 

Lewis maintained that this change 

would make it clear throughout the Rule 

that ‘‘person’’ means an individual or 

business entity; while entity means only 

a business entity. As another example, 

IL AG and J&G suggested that the 

definition of ‘‘person’’ reference limited 

liability companies.192

The term ‘‘person’’ is defined in many 

Commission rules, as referring to a 

party, regardless of whether the party is 

an individual, organization, or business 

entity.193 Where necessary, the rule text 

distinguishes between parties by using 

the more specific terms—individual, 

organization, or entity. We believe that 

these more specific terms are clear, and, 

therefore, we need not distinguish 

between individuals and entities in the 

definition of ‘‘person,’’ as suggested. 

The Commission also finds that the term 

‘‘entity’’ is sufficient to cover limited 

liability companies, as well as other 

forms of business arrangements. 

15. Section 436.1(o): Plain English 

Part 436 of the final amended Rule 

adopts the UFOC Guidelines 

requirement that disclosure documents 

be prepared in plain English.194 Section 

436.1(o) defines ‘‘plain English’’ as: 

the organization of information and 

language usage understandable by a 

person unfamiliar with the 

franchise business. It incorporates 

short sentences; definite, concrete, 

everyday language; active voice; 

and tabular presentation of 

information, where possible. It 

avoids legal jargon, highly technical 

business terms, and multiple 

negatives.195

This definition is one of several features 

of the final amended Rule that are 

designed to preserve the integrity of 


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196 UFOC Guidelines, Item 1 Instructions, iii. See 

also NASAA Commentary, Bus. Franchise Guide 

(CCH), ¶ 5790, at 8465 (‘‘The definition of 

predecessor in instruction iii to Item 1 should be 

applied throughout the UFOC.’’). 

197E.g., section 436.5(a)(2) (Item 1); section 

436.5(c) (Item 3); section 436.5(d) (Item 4). 

198 Initially, the Commission proposed in the 

Franchise NPR a broader definition that would 

include as a predecessor a person ‘‘from whom the 

franchisor obtained a license to use the trademark 

or trade secrets in the franchise operation.’’

Franchise NPR, 64 FR at 57332. This proposal was 

widely criticized as overbroad, H&H, NPR 9, at 15; 

BI, NPR 28, at 2, and would result in burdensome 

disclosures that are immaterial to prospective 

franchisees, PMR&W, NPR 4, at 8; Baer, NPR 11, at 

11; NFC, NPR 12, at 3–4; Snap-On, NPR 16, at 2; 

Marriott, NPR 35, at 13–14. See also Gust Rosenfeld, 

at 2. Commenters also observed that information 

about the franchisor’s trademark is already 

disclosed in Items 12–13. E.g., Baer, NPR 11, at 10; 

Lewis, NPR 15, at 10. The staff of the Commission 

agreed. Accordingly, the proposal was deleted in 

the revised proposed Rule set forth in the Staff 

Report. 

199E.g., FTC v. Wolf, Bus. Franchise Guide (CCH) 

¶ 10401 (S.D. Fla. 1994); FTC v. Inv. Dev., Inc., Bus. 

Franchise Guide (CCH) ¶ 9326 (E.D. La. 1989). See 

also United States v. Lasseter, No. 3:03–01177 (M.D. 

Tenn. 2003). 

200 See section 436.5(a). 

201 See UFOC Guidelines, Item 1C, Instructions, 

i. 

202 J&G, at 2. 

203 The final amended Rule definition uses the 

term ‘‘franchise seller’’ in lieu of ‘‘franchisor, or 

franchise broker, or any representative, agent, or 

employee thereof.’’ See section 436.1(i). 

204 BI, NPR 28, at 3. 

205See also Piper Rudnick, at 5 (seeking 

clarification in the Compliance Guides on whether 

the phrase ‘‘agent, representative, or employee’’ also 

includes an individual on behalf of a family 

member (spouse, children, siblings), other general 

and limited partners, shareholders, and/or the 

individual’s corporate employer). 206 J&G, NPR 32, at 7. 207See section 436.1(h)(3). 208 The ‘‘required payment’’ definition 

incorporates the Commission’s long-standing policy 

that a payment can be required by contract or by 

practical necessity. See Interpretive Guides, 44 FR 

at 49967. 

disclosure documents. Application of 

these writing standards will enhance the 

legibility and understandability of 

disclosure documents, thereby reducing 

the likelihood of franchisee deception, 

confusion, or misunderstandings. 

16. Section 436.1(p): Predecessor 

Section 436.1(p) adopts the UFOC 

Guidelines’ definition of ‘‘predecessor’’

as: ‘‘a person from whom the franchisor 

acquired, directly or indirectly, the 

major portion of the franchisor’s 

assets.’’196 This definition comes into 

play in several substantive provisions of 

the final amended Rule, where the 

Commission is adopting the UFOC 

Guidelines requirement that franchisors 

disclose material information about 

their predecessors.197 The original Rule 

did not require the disclosure of 

predecessor information. However, as 

discussed later in this document—in 

particular in connection with Item 3 

litigation disclosures and Item 4 

bankruptcy disclosures—predecessor 

disclosures are necessary to prevent 

fraudulent franchise sales.198 Our law 

enforcement experience demonstrates 

that, in some instances, franchisors 

reincorporate under a new name as a 

simple way to avoid disclosing 

damaging information.199 The 

disclosure of predecessor information 

will prevent such efforts to circumvent 

the final amended Rule. 

17. Section 436.1(q): Principal business 

address 

The final amended Rule requires the 

disclosure of the principal business 

address of the franchisor, as well as any 

parent, predecessors, and affiliates.200

Section 436.1(q) defines the term 

‘‘principal business address’’ to mean: 

‘‘the street address of a person’s home 

office in the United States. A principal 

business address cannot be a post office 

box or private mail drop.’’201 This 

definition was not included in the 

original Rule. Nevertheless, the 

Commission finds that this definition is 

necessary to enable a prospective 

franchisee to contact the franchisor 

easily, as well as to facilitate effective 

law enforcement. 

The proposed version of section 

436.1(q) has been slightly revised to 

improve its precision, as suggested in 

one Staff Report comment. Initially, the 

definition of principal business address 

referred to the franchisor’s home office. 

J&G correctly observed, however, that 

the disclosure of a principal business 

address applies not only to a franchisor, 

but to others, such as a predecessor, as 

well.202 Accordingly, the definition has 

been revised to refer to the more general 

‘‘person’s home office’’—be it the 

franchisor, parent, predecessor, or 

affiliate. 

18. Section 436.1(r): Prospective 

franchisee 

The final amended Rule retains a 

streamlined version of the definition of 

the term ‘‘prospective franchisee’’ set 

forth in the original Rule at 16 CFR 

436.2(e). Specifically, section 436.1(r) 

defines the term to mean ‘‘any person 

(including any agent, representative, or 

employee) who approaches or is 

approached by a franchise seller to 

discuss the possible establishment of a 

franchise relationship.’’203 This is 

identical to the version of this definition 

proposed in the Franchise NPR. 

The amended definition addresses 

several comments raised during the 

Rule amendment proceeding. First, one 

commenter voiced concern about who 

may receive a disclosure document, 

suggesting that the Commission permit 

any representative of the franchisee to 

receive the disclosures.204 The 

Commission agrees that representatives 

of a prospective franchisee should be 

permitted to accept delivery of the 

disclosure document on the prospective 

franchisee’s behalf. Indeed, in some 

instances a prospective franchisee may 

be a corporation or other entity, not an 

individual. Thus, delivery in such 

circumstances can only be made upon a 

representative. Even individuals may 

wish to have their attorney or other 

agent receive the disclosures on their 

behalf, and the Rule should 

accommodate that possibility. We 

believe that the reference to agent, 

representative, or employee in section 

436.1(r) is sufficient for this purpose. 

Further detail about who may accept 

disclosures for a prospective franchisee 

is best addressed in the Compliance 

Guides.205

One commenter also questioned the 

use of the word ‘‘approaches’’ in the 

definition. Specifically, the commenter 

feared that the definition would include 

someone surfing the Internet who 

‘‘approaches’’ a franchisor’s website.206

We believe this concern is unwarranted. 

The ‘‘prospective franchisee’’ definition 

states that the parties must ‘‘discuss the 

possible establishment of a franchise 

relationship.’’ This limiting language 

makes clear that for an individual to 

become a ‘‘prospective franchisee’’ he or 

she must communicate with the 

franchisor about a franchise offering. 

Merely perusing a franchisor’s website 

alone does not turn an ordinary Internet 

surfer into a prospective franchisee. 

Accordingly, no further revision to the 

‘‘prospective franchisee’’ definition is 

warranted. 

19. Section 436.1(s): Required payment 

The making of a ‘‘required payment’’

(or a commitment to make a ‘‘required 

payment’’) is one of the definitional 

elements of the term ‘‘franchise.’’207

Section 436.1(s) defines the term 

‘‘required payment’’ to mean: 

all consideration that the franchisee 

must pay to the franchisor or an 

affiliate, either by contract or by 

practical necessity,208 as a 

condition of obtaining or 

commencing operation of the 

franchise. A required payment does 

not include payments for the 

purchase of reasonable amounts of 

inventory at bona fide wholesale 

prices for resale or lease. 

The only substantive difference between 

the provision as proposed in the 


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209 IL AG, NPR 3, at 5. See also J&G, NPR 32, 

Attachment, at 15 (questioning whether 

‘‘consideration’’ excludes royalty payments). 

210See Interpretive Guides, 44 FR at 49967 

(‘‘Among the forms of required payments are . . . 

continuing royalties on sales.’’). 

211 Baer, NPR 11, at 8. 

212 Interpretive Guides, 44 FR at 49967. 

213Id. 

214See Original SBP, 43 FR at 59703 and note 51 

(discussing problem of ‘‘indirect or disguised’’

franchise fees). 

215See Interpretive Guides, 44 FR at 49967. In the 

Franchise NPR, the Commission proposed 

incorporating the inventory exemption into the 

current minimum payment exemption. See 

Franchise NPR, 64 FR at 57345. The minimum 

payment exemption applies where the total 

required payment made by the franchisee ‘‘from any 

time before to within six months after commencing 

operation of the franchisee’s business, is less than 

$500.’’ 16 CFR 436.2(a)(3)(iii). Accordingly, the 

amount of any ‘‘required payment’’ must be known 

before determining the applicability of the 

minimum payment exemption. Because the 

inventory exemption helps to define what 

constitutes a ‘‘required payment,’’ we conclude that 

it should be included directly in the definition of 

‘‘required payment.’’ See Staff Report, at 61–62. 

216 Gurnick, NPR 21A, at 10. 

217 Baer, NPR 11, at 8. 

218 Interpretive Guides, 44 FR at 49967. 

219 Bundy, NPR 18, at 4. 

Franchise NPR and the final amended 

Rule provision is the addition of the 

second sentence. There is no 

corresponding definition in the original 

Rule. 

During the Rule amendment 

proceeding, several commenters raised 

concerns about the scope of the 

‘‘required payment’’ definition. 

Specifically, commenters voiced 

concern whether the definition: (1) 

covers royalty payments; (2) covers 

payments to obtain or commence the 

franchise relationship; (3) excludes 

payments for inventory; and (4) 

includes payments to third parties. Each 

of these issues is discussed in greater 

detail below. 

a. Royalty payments 

As noted above, the definition of 

‘‘required payment’’ uses the phrase 

‘‘consideration that the franchisee must 

pay.’’ IL AG interpreted the word 

‘‘consideration’’ as excluding royalty 

payments. It urged the Commission to 

clarify that royalties can constitute a 

required fee. Otherwise, ‘‘it will be too 

simple, even for traditional franchisors, 

to evade franchise laws.’’209

The Commission has always 

considered royalty payments to be a 

form of required payment under the 

Rule and nothing in the definition of 

‘‘required payment’’ is to the 

contrary.210 Royalty payments 

constitute a direct form of consideration 

flowing to the franchisor in exchange for 

the ability to conduct business. Indeed, 

if royalties were excluded from the 

required payment definition, then any 

franchisor could avoid Rule coverage by 

charging a large post-sale royalty fee in 

lieu of an initial franchise or related fee. 

The Rule uses the term ‘‘consideration’’

not to imply that only an upfront 

franchise fee constitutes a required 

payment under the Rule, but to avoid 

the circular use of the word ‘‘payment’’

in the definition of ‘‘required payment.’’

Also, alternatives such as ‘‘funds, or 

moneys’’ are too limited because they 

would preclude payments in-kind. 

b. Payments to obtain or commence a 

franchise 

One commenter voiced concern that 

because the definition of ‘‘required 

payment’’ covers payments made ‘‘as a 

condition of obtaining or commencing 

operation of the franchise,’’ it would 

encompass ordinary business expenses 

paid to the franchisor. He urged the 

Commission to narrow the definition by 

specifying that a required payment must 

be made ‘‘for the right to enter into the 

franchise relationship.’’211

The Commission declines to adopt 

this suggestion. The phrase ‘‘right to 

enter into a franchise relationship’’ is 

too narrow, suggesting that the required 

payment definitional element should be 

limited to payments made solely for the 

right to enter into the business, such as 

an up-front franchise fee. However, the 

Commission has made clear that the 

required payment element is not limited 

to up-front fees alone: ‘‘Often, required 

payments are not limited to a simple 

franchise fee, but entail other payments 

which the franchisee is required to pay 

to the franchisor or an affiliate.’’212 The 

Interpretive Guides further provide as 

examples of required payments 

equipment rentals and real estate 

leases.213 Thus, expenses incurred in 

the ordinary course of business and paid 

to a franchisor or its affiliate may 

constitute a required payment. 

Otherwise, unscrupulous franchisors 

could easily circumvent the Rule by 

refraining from imposing any up-front 

fee in favor of charging for ordinary 

business expenses, such as training or 

other services, or purchases of 

equipment or unreasonable amounts of 

inventory.214

c. Payments for inventory 

As a matter of Commission policy, 

reasonable amounts of inventory 

purchased at bona fide wholesale prices 

have not been interpreted to constitute 

a ‘‘required payment’’ under the original 

Rule.215 This is commonly referred to as 

‘‘the inventory exemption.’’ David 

Gurnick urged the Commission to 

update the Rule by incorporating the 

inventory exemption into the definition 

of ‘‘required payment.’’216 (As noted 

above, the definition proposed in the 

Franchise NPR did not exclude 

payments for inventory.) Another 

commenter agreed with Mr. Gurnick 

and urged further expansion of the 

exemption to include not only inventory 

for resale, but inventory for lease. 

Otherwise, the situation could arise 

where inventory obtained from a 

company is intended for resale—thus 

taking it outside of the Rule—but later 

on leased to a customer—thus arguably 

creating a franchise relationship 

retroactively.217

The Commission has concluded that 

the definition of ‘‘required payment’’

should incorporate the inventory 

exemption as these commenters 

suggested. Since the Rule’s inception, 

the Commission’s policy has been that 

reasonable purchases of inventory for 

resale at bona fide wholesale prices are 

not construed to be a ‘‘required 

payment.’’ The Interpretive Guides state 

that it is ‘‘virtually impossible to draw 

a clear line between start-up inventory 

that is purchased at the franchisee’s 

option, and that which is purchased as 

a matter of practical or contractual 

necessity.’’218 Therefore, the final 

amended Rule provision incorporates 

this policy, and extends it to encompass 

inventory purchased for lease as well as 

resale, there being no distinction, as a 

practical matter, between the two 

categories. 

d. Payments to third parties 

Howard Bundy urged expansion of 

the concept of ‘‘required payment’’ to 

include payments made to third parties. 

According to Mr. Bundy, franchisors 

can effectively ‘‘hook’’ a prospective 

franchisee if they can get the prospect 

to expend funds early in the sales 

process, such as paying travel expenses: 

In franchising, it has become 

common to use the ‘‘takeaway 

close’’ to entice prospects to travel 

to the franchisor’s headquarters as a 

condition precedent to receiving a 

disclosure document. Likewise, we 

see instances of franchisors 

requiring a franchisee to contract 

with or pay for demographic or real 

estate services with technically 

‘‘unaffiliated’’ entities as a 

condition precedent to being 

‘‘approved’’ as a franchisee.219

To address this concern, Mr. Bundy 

suggested that the Commission modify 

the definition of ‘‘required payment’’ to 

include, after the word affiliate: ‘‘or to 

a vendor, financing provider or other 

third party that the prospective 


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220Id. 

221 Gurnick, NPR Rebuttal 36, at 2. 

222Id., at 3. 

223Id., at 3–4. Mr. Gurnick also disputed the view 

that franchisors entice prospects to incur costs, 

such as airline tickets. ‘‘No data is [sic] provided 

to support this claim, and frankly I question 

whether companies really have an interest in 

enticing prospects to buy, for example, airline 

tickets.’’ Id., at 4. 

224See Interpretive Guides, 44 FR at 49967. 

225See section 436.9(e). 

226See section 436.2. 

227 16 CFR 436.2(k). See also Interpretive Guides, 

44 FR at 49969. 

228 Franchise NPR, 64 FR at 57333. 

229See H&H, NPR 9, at 11. 

230 Interpretive Guides, 44 FR at 49969. 

231See Interpretive Guides, 44 FR at 49969–70. In 

contrast, a franchisor who actively participates in 

a franchise transfer must make disclosures to a 

potential transferee, no less than to a prospective 

franchisee. In such an event, the prospective 

transferee may rely on the franchisor’s 

representations in deciding to purchase the 

franchise, and therefore, should receive the benefit 

of pre-sale disclosure. 

232 H&H, NPR 9, at 9–10. 

233 H&H, NPR 9, at 10. 

franchisee is required to deal with either 

by contract or practical necessity or to 

any third party as a condition precedent 

to obtaining the Franchise Disclosure 

Document.’’220

Mr. Bundy’s suggestion generated one 

rebuttal comment. David Gurnick 

observed that defining ‘‘required 

payment’’ to include third-party 

payments would be: ‘‘a radical 

departure from the Commission’s longstanding policy regarding the definition 

of a franchise, would create a major 

inconsistency between the Franchise 

Rule and the state franchise laws, and 

would extend coverage to arrangements 

which the Rule was never intended to 

regulate.’’221 Observing that all 

businesses make payments to vendors 

and service providers, he also asserted 

that the Bundy proposal would be 

overbroad: ‘‘For example, ‘practical 

necessity’ may dictate that a business 

use a Microsoft software product or that 

an employee of the business fly to an 

airport that is served by only one 

airline.’’222 Mr. Gurnick added that if a 

franchisor establishes a company to 

receive some monetary benefit from 

prospects, those funds would already 

fall within the ‘‘required payment’’

definition as a payment to an 

affiliate.223

It is true that the Commission has 

never considered ordinary business 

payments to third parties as a ‘‘required 

payment’’ under the Rule. Indeed, doing 

so could sweep very broadly. Ordinary 

business expenses paid to third parties, 

such as the cost of installing telephone 

lines, insurance, and occupancy fees—

expenses typically incurred by all 

businesses—can hardly be deemed a 

precondition imposed by the franchisor 

for obtaining or commencing operation 

of a franchise. Rather, a third-party 

payment constitutes a required payment 

only if the third party collects and 

remits the payment on behalf of the 

franchisor.224

Nonetheless, a franchisor may direct 

or encourage a prospective franchisee to 

incur some costs in order to advance the 

franchise sale. The prospective 

franchisee may incur these costs and 

make these kinds of payments without 

the benefit of pre-sale disclosures. 

Encouraging a prospect to incur 

expenses to advance the franchise sale 

could conceivably increase the 

likelihood that he or she will go through 

with the deal without a thorough duediligence investigation. Therefore, the 

Commission has incorporated into the 

final amended Rule an express 

prohibition barring a franchisor from 

failing to furnish a copy of its disclosure 

document to a prospective franchisee 

early in the sales process, upon 

reasonable request.225 This prohibition 

enables a prospective franchisee to ask 

to see a copy of the franchisor’s 

disclosure document before agreeing to 

travel to company headquarters or 

purchase demographic data, for 

example. The Commission believes this 

approach will better address concerns 

about pre-disclosure third-party 

payments than would an unworkable 

alteration of the definition of the term 

‘‘required payment.’’

20. Section 436.1(t): Sale of a franchise 

The part 436 disclosure obligations 

are triggered only when there is an offer 

for the sale of a franchise.226 Section 

436.1(t) defines the term ‘‘sale of a 

franchise’’ as follows: 

an agreement whereby a person 

obtains a franchise from a franchise 

seller for value by purchase, 

license, or otherwise. It does not 

include extending or renewing an 

existing franchise agreement where 

there has been no interruption in 

the franchisee’s operation of the 

business, unless the new agreement 

contains terms and conditions that 

differ materially from the original 

agreement. It also does not include 

the transfer of a franchise by an 

existing franchisee where the 

franchisor has had no significant 

involvement with the prospective 

transferee. A franchisor’s approval 

or disapproval of a transfer alone is 

not deemed to be significant 

involvement. 

Like the original Rule provision, the 

final amended provision embodies the 

concept that franchisees extending or 

renewing an existing franchise 

agreement, where there is no 

interruption in business operations, will 

not be deemed to be entering into a sale, 

unless their new agreement contains 

terms and conditions materially 

different from their original 

agreement.227

The final amended Rule provision 

differs substantively from the provision 

as proposed in the Franchise NPR228

because it incorporates the Commission 

policy, as stated in the Interpretive 

Guides, that the term ‘‘sale of a 

franchise’’ does not encompass the 

transfer of a franchise by an existing 

franchisee where the prospective 

purchaser has no significant contact 

with the franchisor.229 Under longstanding Commission policy, a 

franchisor or subfranchisor must 

provide disclosures to prospective 

franchisees, but ‘‘a person who 

purchases a franchise directly from an 

existing franchisee, without significant 

contact with the franchisor, is not a 

prospective franchisee.’’230 Where a 

franchisor is not involved in the private 

sale of an existing franchise, the 

franchisor makes no representations to 

the prospective new purchaser. If there 

is any fraud in the private sale, it could 

be only by the current franchisee owner, 

and pre-sale disclosure by the franchisor 

would not likely prevent it. 

Accordingly, section 436.1(t) of part 436 

makes clear that a transfer without 

significant involvement of the 

franchisor is not the sale of a franchise 

within the ambit of the Rule. Further, 

the franchisor’s mere approval or 

disapproval of the purchaser alone is 

not considered to be significant 

involvement.231

At the same time, the Commission 

declines to adopt several suggested 

narrowing modifications to the 

definition of ‘‘sale of a franchise.’’ H&H 

urged the Commission to exclude from 

the definition of ‘‘sale of a franchise’’

the modification of an existing franchise 

agreement where there is no 

interruption in the franchisee’s business 

operation.232 The firm observed that 

material modifications to existing 

franchise agreements typically arise in 

two situations: (1) a settlement of 

litigation or other disputes with 

franchisees, in which the franchisor 

makes concessions; and (2) management 

initiative with the involvement of 

independent franchisee associations or 

franchisee advisory councils.233

According to H&H, these modifications 

typically entail no new investment and 

both sides are familiar with the 


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234Id. 

235Id., at 11. 

236 See discussion of section 436.5(q) below. See 

also Staff Report, at 153–156; Franchise NPR, 64 FR 

at 57308–09. 

237 This assumes, of course, that there is a ‘‘sale,’’

meaning the existing franchisee makes a required 

payment for the right to enter into a new franchise 

agreement. Entering into a new franchise agreement 

without any required payment or extending an 

existing franchise agreement for a fee would not be 

deemed a ‘‘sale of a franchise’’ for Rule purposes. 

238See Interpretive Guides, 44 FR at 49966–967. 

See also UFOC Guidelines, Item 13 Instructions, i. 

239See section 436.6 of the final amended Rule. 

240See also section 436.8(a)(7), which retains the 

original Rule’s exemption for oral statements at 16 

CFR 436.2(a)(3)(iv). 

241 16 CFR 436.1(a). 

242 16 CFR 436.1(g). 

franchise terms: ‘‘An offer to exchange 

different forms of agreement or add an 

addendum to existing franchise 

agreements does not establish a new 

franchise relationship—that relationship 

already exists and will continue 

regardless of the decision the franchisee 

makes.’’234

The Commission agrees that 

disclosure is unwarranted where an 

existing franchisee and the franchisor 

merely seek to amend their ongoing 

contractual relationship. In such 

circumstances, the material information 

the franchisee needs is the actual 

revised franchise agreement itself that 

spells out the terms and conditions that 

will govern the parties’ ongoing 

relationship. Requiring franchisors to 

furnish a new disclosure document 

whenever there may exist agreed upon 

material changes in a contract is likely 

to be an unwarranted formality, the cost 

of which is probably not outweighed by 

any tangible benefit to the existing 

franchisee. In any event, franchise 

agreement modifications, most 

obviously those without any new 

payment, would not constitute a ‘‘sale.’’

The definition of ‘‘sale of a franchise,’’

therefore, need not be revised to address 

this concern. 

H&H further contended that 

disclosure is never warranted for 

renewals, asserting that a renewing 

franchisee makes no investment 

decision: ‘‘His decision relates to 

whether to continue a relationship, with 

which he should be intimately familiar 

at that point, under the terms of a new 

form of franchise agreement. The UFOC 

does little to help him understand the 

terms of that agreement.’’235 After 

considering this suggestion, we are 

unconvinced that renewals should 

always be excluded from the definition 

of ‘‘sale of a franchise.’’

As discussed in greater detail below 

in connection with section 436.5(q)—

Item 17’s renewal disclosure—

franchisees and their representatives 

have voiced concern about renewals, 

arguing that franchisors control the 

governing terms and conditions and 

offer renewals on a take-it-or-leave-it 

basis.236 Franchisees, they have 

asserted, not only lack bargaining power 

over the renewal agreement, but also 

often must accept new onerous terms 

because they are frequently subject to 

covenants not to compete that 

effectively prevent them from 

continuing in the same business 

independently. Especially in an age of 

new technologies and changes in 

franchise marketing, renewal contracts 

may be significantly different from 

original contracts that franchisees 

signed 10 to 20 years ago. A renewing 

franchisee, for example, may reasonably 

wish to see Item 20 closure rates for 

franchises operating under the new 

franchise agreement. Accordingly, the 

Commission concludes that where the 

franchise agreement contains terms and 

conditions materially different from the 

original agreement, the renewing 

franchisee needs advance disclosures in 

order to make an informed renewal 

decision.237

21. Section 436.1(u): Signature 

The original Rule contained no 

definition of ‘‘signature.’’ To facilitate 

the use of electronic signatures, 

however, section 436.1(u) of the final 

amended Rule updates the UFOC 

Guidelines by adding such a definition: 

‘‘a person’s affirmative step to 

authenticate his or her identity. It 

includes a person’s handwritten 

signature, as well as a person’s use of 

security codes, passwords, electronic 

signatures, and similar devices to 

authenticate his or her identity.’’ No 

comments were submitted on this 

definition, but the Commission has 

refined the language of the proposed 

definition to achieve greater precision 

and clarity, expressly including the 

descriptor ‘‘handwritten,’’ substituting 

‘‘electronic’’ for ‘‘digital,‘‘ and adding 

the phrase ‘‘to authenticate his or her 

identity.’’

22. Section 436.1(v): Trademark 

Section 436.1(v) of the final amended 

Rule defines the term ‘‘trademark.’’ The 

original Rule did not define this term. 

Consistent with long-standing 

Commission interpretation of the term 

and the UFOC Guidelines, the final 

amended Rule definition is broad, 

including ‘‘trademarks, service marks, 

names, logos, and other commercial 

symbols.’’238 No comments were 

submitted on this definition, and it is 

identical to the version of the definition 

published in the Franchise NPR. 

23. Section 436.1(w): Written or in 

writing 

The final amended Rule updates the 

original Rule and UFOC Guidelines to 

permit the use of electronic 

disclosures.239 To that end, section 

436.1(w) of the final amended Rule 

defines the term ‘‘written or in writing’’

to include not only printed documents, 

but: 

any document or information . . . 

in any form capable of being 

preserved in tangible form and read. 

It includes: type-set, word 

processed, or handwritten 

document; information on 

computer disk or CD–ROM; 

information sent via email; or 

information posted on the Internet. 

It does not include mere oral 

statements.240

No comments were submitted on the 

Franchise NPR’s proposed definition, 

and only minor non-substantive changes 

in language were made to improve 

clarity. 

B. Section 436.2: Obligation To Furnish 

Documents 

Section 436.2 of the final amended 

Rule retains the original Rule’s 

requirement that franchisors provide 

prospective franchisees with advance 

written disclosures.241 It also retains, in 

streamlined form, elements of the 

original Rule’s requirement that a 

franchisor ‘‘furnish the prospective 

franchisee with a copy of the 

franchisor’s franchise agreement . . . 

prior to the date the agreements are to 

be executed.’’242 The final amended 

Rule provision follows the basic 

concepts of the corresponding provision 

of the proposed Rule published in the 

Franchise NPR, but, as explained below, 

it reflects important refinements 

suggested by the comments, and its 

language has been reorganized to 

improve clarity. 

Section 436.2 of part 436 covers four 

issues relating to the basic obligation to 

provide a disclosure document. First, it 

describes the geographical scope within 

which the disclosure obligation applies. 

Second, it establishes the time frame for 

fulfilling that obligation. Third, it limits 

the obligation of the franchisor to 

furnish to the prospective franchisee an 

advance copy of the completed 

franchise agreement—apart from the 

disclosure document—to only those 

circumstances when the franchisor 

makes material unilateral changes to the 

agreement while the offer is still under 

consideration. Fourth, and finally, the 

provision sets forth the specific actions 


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243 Limitation of the geographic scope of part 436 

of the final amended Rule is not intended to limit 

the FTC’s jurisdiction, as set forth in section 5(a) 

of the FTC Act, 15 U.S.C. 45(a), and section 3 of 

the U.S. SAFE WEB Act of 2006, Pub. L. No. 109–

455, 120 Stat. 3372. 

244 The Staff Report recommended limitation of 

the Rule’s scope to sales of franchises to be located 

in the United States. Staff Report, at 72–5. 

245E.g., MSA, at 3–4; PMR&W, NPR 4, at 1; 7- 

Eleven, NPR 10, at 1; IFA, NPR 22, at 5; AFC, NPR 

30, at 1–2; Duvall, ANPR 19, at 2–3; SBA Advocacy, 

ANPR 36, at 9; Tifford, ANPR 78, at 7; NASAA, 

ANPR 120, at 8–9. Five commenters, however, 

urged the Commission to enforce the Rule with 

respect to foreign franchises, raising essentially 

three points. First, many American foreign 

franchise sales contracts require disputes to be 

resolved in the United States. It would be 

inconsistent for a franchisor to subject a foreigner 

to American law and American courts without 

simultaneously extending the benefits of American 

law, namely pre-sale disclosure. Brown, ANPR 6; 

Argentine Embassy, ANPR 132; Selden, ANPR 133, 

at 2–3. Second, limiting the Rule’s applicability to 

sales of domestic franchises would mean that 

American citizens who purchase a franchise to be 

located abroad from an American franchisor would 

not be protected by American law. Stadfeld, ANPR 

23, at 3; Selden, ANPR 133, at 2–3. See also 

Stubbings, ANPR 21. Third, the Commission has 

jurisdiction over sales of foreign franchises and 

should not willingly restrict its own jurisdiction. 

Brown, ANPR 4. None of the commenters, however, 

have shown that limiting the reach of part 436 to 

franchises to be located in the United States or its 

territories, as a matter of policy, compromises the 

Commission’s jurisdiction over foreign sales under 

the FTC Act. The Commission retains its 

jurisdiction over such sales, and may exercise its 

discretion to bring an action in appropriate cases. 

246 As H&H observed, a close reading of the text 

of both the original Rule and UFOC Guidelines 

indicates an intent to require disclosures involving 

only domestic franchises. For example, UFOC Item 

20 refers to the number of franchise sales ‘‘in this 

state.’’ The firm added: ‘‘Other disclosures about 

the franchise offering, including litigation and 

bankruptcy history, franchisor’s and franchisee’s 

obligations, royalty rates, initial investment, fees, 

and trademarks, are U.S.-specific.’’ H&H, ANPR 28, 

at 3–4. 

247E.g., Miolla, 11 Mar.96 Tr., at 74–79; Shay, id., 

at 84–85; Forseth, id., at 103; Papadakis, id., at 139; 

Zwisler, id., at 163–64. See also Konigsberg, id., at 

97 (franchisees in foreign countries look to their 

own laws, not to anything contained in an 

American disclosure document). 

248See Cendant, ANPR 140, at 4–5 (‘‘Creating a 

disclosure document for . . . international master 

license transactions . . . would be nightmarish. 

. . . The cost of compliance would be high and 

American franchisors placed at an extreme 

disadvantage when competing with foreign 

franchisors.’’). See also Winslow, at 140. 

249 For example, Marriott asserted that the same 

policy concerns about applying the Rule to 

franchises located abroad are also relevant to Puerto 

Rico. Marriott apparently treats Puerto Rico as a 

foreign country. It contended that furnishing 

prospective franchisees in this context with a copy 

of the franchisor’s disclosure document may be 

irrelevant or misleading. Marriott, NPR 35, at 4–5. 

See also J&G, NPR 32, at 3. 

250See section 18(a)(1) of the FTC Act (‘‘The 

Commission may prescribe . . . rules which define 

with specificity acts or practices which are unfair 

or deceptive acts or practices in or affecting 

commerce (within the meaning of section 45(a)(1) 

of this title).’’

251 15 U.S.C. 45(a). 

252 15 U.S.C. 44 (‘‘‘Commerce’’’ means commerce 

. . . in any Territory of the United States . . ., or 

between any such Territory and another, or between 

any such Territory and any State or foreign nation, 

or between the District of Columbia and any State 

or Territory or foreign nation.’’). 

253 15 U.S.C. 44. 

254See 16 CFR 436.1(a), 436.2(g), and 436.2(o). 

255See, e.g., PMR&W, NPR 4, at 1; Holmes, NPR 

8, at 3; NFC, NPR 12, at 13; NASAA, NPR 17, at 

3; Marriott, NPR 35, at 9. The Commission also 

raised this issue in the ANPR, prompting favorable 

that constitute the furnishing of 

disclosures. Each of these aspects of 

section 436.2 generated comments. The 

following sections discuss those issues 

and the various views of the 

commenters. 

1. Geographical scope of the Rule’s 

application 

Section 436.2 of the final amended 

Rule makes clear that the part 436 

disclosure requirements and 

prohibitions are limited to ‘‘the offer or 

sale of a franchise to be located in the 

United States of America or its 

territories.’’243 This provision of part 

436 is substantively identical to the 

corresponding provision in the 

proposed Rule. The original Rule did 

not address whether pre-sale disclosure 

is required for sales of franchises to be 

located outside the United States and its 

territories, and this issue has remained 

an unsettled area of franchise law. This 

issue was raised early in the proceeding 

and, based upon the record developed, 

the Commission concludes that 

application of part 436 to franchises to 

be located outside the United States and 

its territories is unwarranted at this 

time.244

The record reveals overwhelming 

support among various franchise 

interests for limiting the reach of the 

part 436 to sales of domestic 

franchises.245 Among other things, the 

commenters noted that foreign franchise 

purchasers are large sophisticated 

investors represented by counsel and do 

not need the Rule’s protections. Some 

commenters made the point that the 

Commission developed the Franchise 

Rule in response to problems occurring 

in the domestic market.246 Indeed, a 

disclosure document addressing the 

American market may be irrelevant and 

potentially misleading when applied to 

a purchase of a franchise to be located 

outside the United States, due to the 

vast differences between American and 

foreign markets, cultures, and legal 

systems.247 Further, many risks to the 

prospective franchisee arise from 

economic conditions and cultural 

values in those countries, not in the 

United States. To be relevant, a 

franchisor arguably would have to 

prepare individual disclosure 

documents tailored to each specific 

foreign market. Not only would such a 

requirement put American franchisors 

at a competitive disadvantage with 

franchisors from countries lacking 

comparable disclosure regulations, but 

it is likely that any possible benefits of 

such a requirement would not outweigh 

the extraordinary costs and burdens 

involved.248

At the same time, the Commission has 

rejected suggestions to limit the scope of 

the Rule further to exclude sales of 

franchises to be located in American 

territories.249 The FTC Act gives the 

Commission authority to promulgate 

trade regulation rules involving unfair 

or deceptive acts or practices250 ‘‘in or 

affecting commerce.’’251 The FTC Act 

includes multiple references to 

territories in its definition of 

commerce,252 including commerce ‘‘in 

any territory of the United States.’’253

The record does not suggest any 

convincing rationale for contraction of 

the exercise of that authority as 

expressed through part 436 of the final 

amended Rule. Residents of American 

territories rely on American law for 

protection, and the Franchise Rule is 

part of that protection. 

2. Section 436.2(a): Time frame for 

making disclosures 

Part 436 of the final amended Rule 

substantially revises the original Rule’s 

timing for making franchise disclosures. 

Under the original Rule, franchisors and 

brokers had to furnish prospective 

franchisees with disclosure documents 

at the earlier of two time periods: (1) the 

first personal (face-to-face) meeting; or 

(2) ‘‘the time for making disclosures,’’

which was defined as 10 business days 

before the execution of the franchise 

agreement or payment of any fees in 

connection with the franchise sale.254

The final amended Rule streamlines the 

timing provision in two respects. First, 

part 436 eliminates the first personal 

meeting disclosure trigger. Second, part 

436 replaces the original 10-business 

day trigger with a 14 calendar-day 

disclosure trigger. Both of these 

revisions were included in the Rule 

proposed in the Franchise NPR, but 

have been slightly revised for 

clarification and better organization. 

Each is discussed in greater detail 

below. 

a. Elimination of the first personal 

meeting trigger 

The Franchise NPR’s proposal to 

eliminate the first personal meeting 

disclosure trigger prompted 

overwhelming support from franchisors 

and their representatives, as well as 

NASAA.255 These commenters asserted 


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franchisor comment. See Duvall, ANPR 19, at 3; 

Baer, ANPR 25, at 6; Tifford, ANPR, 18 Sept. 97 Tr., 

at 158–59; Staff Report, at 76–8. 

256E.g., IFA, NPR 22, at 9; Stadfeld, NPR 23, at 

4. Kennedy Brooks, for example, observed that 

franchise sales can occur entirely electronically 

‘‘where the contact is made over the Web, where Email is exchanged, where telephone [calls] are 

exchanged, where documents are sent out by 

Federal Express, and where, in fact, there never is 

a face-to-face meeting.’’ Brooks, ANPR, 18 Sept. 97 

Tr., at 160. See also NCL, ANPR 35, at 4–5; SBA 

Advocacy, ANPR 36, at 9; IL AG, ANPR 77, at 3–

4. 

257 Karp, NPR 24, at 5–6. See also Bundy, NPR 

18, at 5–6; Turner, NPR 13, at 1. 

258 In the Interpretive Guides, the Commission 

acknowledged that the term ‘‘first personal 

meeting’’ is imprecise: 

‘‘Even where a face to face meeting occurs, it is 

not necessarily a ‘‘first’’ personal meeting. In 

interpreting this term, the Commission will 

consider such factors as whether the franchisor 

clearly indicated at the outset of the discussion that 

it was not prepared to discuss the possible sale of 

a franchise at that time, whether the meeting was 

initiated by the prospective franchisee rather than 

the franchisor, whether the meeting was limited to 

a brief and generalized discussion and whether 

earnings claims were made. The Commission 

believes that by using common sense precautions, 

franchisors can defer the first personal meeting 

until such time as they are prepared to provide the 

required disclosures.‘‘

Interpretive Guides, 44 FR at 49970. 

259 Karp, at 6. See also Original SBP, 43 FR at 

59639 (‘‘[O]nce a prospect has been ‘hooked,’ it is 

difficult, if not impossible, to ‘extricate himself.’’’). 

260 Staff Report, at 77–8. 

261E.g., Gust Rosenfeld, at 3; Baer, NPR 11, at 10; 

NFC, NPR 12, at 13; AFC, NPR 30, at 2; Marriott, 

NPR 35, at 9. See also Winslow, at 76. 

262 Holmes, NPR 8, at 3. See also Baer, NPR 11, 

at 10. 

263 This approach is consistent with current 

industry practice. See, e.g., 

www.msaworldwide.com/index.cfm/franchise/ 

calendar (2006). But see J&G, at 2 (noting that this 

approach is inconsistent with the approach used in 

the Federal Rules of Civil Procedure). 

264 The Commission also has decided to clarify 

the provision further by specifying that the 

described time period is measured in ‘‘calendardays’’ rather than the possibly ambiguous ‘‘days.’’

265 16 CFR 436.2(g). See also Interpretive Guides, 

44 FR at 49970. 

that the first personal meeting trigger 

has become obsolete in the electronic 

age, where even large investments are 

made by telephone or via the 

Internet.256

Some franchisees and their advocates, 

however, maintained that the first 

personal meeting trigger continues to 

serve a useful purpose. For example, 

one franchisee representative asserted 

that there is no basis to believe that 

personal meetings will completely 

become a thing of the past, and warned 

that eliminating the current first 

personal meeting disclosure trigger 

would enable franchisors to induce a 

high level of commitment on the part of 

prospects through protracted 

discussions without providing the 

disclosure document, with the result 

that ‘‘the 14 day cooling off period will 

then start when the franchisee has 

already decided to make the 

investment.’’257

The Commission believes that a first 

personal meeting trigger alone does 

little to ensure that a prospective 

franchisee will receive disclosures early 

in the sales process.258 While at the time 

the Rule was promulgated it may have 

been routine, or perhaps necessary, to 

have a face-to-face meeting early on, 

that is no longer true. Nowadays, a 

franchisor and a prospect may have 

numerous telephone conversations or 

send documents to each other via fax or 

email long before any personal meeting 

occurs. Therefore, after carefully 

considering the comments, the 

Commission is persuaded that the first 

personal meeting trigger has become 

largely obsolete and should be deleted. 

Nonetheless, the Commission shares 

commenters’ concern about a franchisor 

influencing a prospective franchisee’s 

decision before the prospect receives the 

franchisor’s disclosures.259 To address 

this concern, the Staff Report 

recommended adoption of a new 

provision to prohibit franchise sellers 

from refusing to honor a prospective 

franchisee’s reasonable request for a 

copy of the franchisor’s disclosure 

document during the sales process.260

The Commission has determined to 

follow this recommendation. 

Accordingly, 436.9(e) of the final 

amended Rule specifies that it is an 

unfair or deceptive practice to ‘‘[f]ail to 

furnish a copy of the franchisor’s 

disclosure document to a prospective 

franchisee earlier in the sales process 

than required under § 436.2 of this part, 

upon reasonable request.’’ This 

prohibition does not mean that a 

franchisor must tender a disclosure 

document to any person who may desire 

a copy. Rather, it applies where the 

parties have already conducted specific 

discussions or negotiations or otherwise 

taken steps to begin the sales process. 

This promotes the goal of early 

disclosure in the sales process without 

reliance on the obsolete personal 

meeting trigger. It also is likely to 

impose only a de minimis burden, if 

any, on franchisors, who presumably 

have a disclosure document already 

prepared when discussing a sale with a 

prospective franchisee. 

b. Fourteen calendar-days 

Section 436.2(a) of the final amended 

Rule requires franchisors to furnish 

disclosures ‘‘at least 14 calendar-days 

before the prospective franchisee signs a 

binding agreement with, or makes any 

payment to, the franchisor or an affiliate 

in connection with the proposed 

franchise sale.’’ The Franchise NPR 

proposed this modification of the 

original Rule’s ‘‘10 business day’’

disclosure trigger. Commenters who 

addressed this issue unanimously 

agreed that a 14 calendar-day disclosure 

trigger is clearer than the original Rule’s 

‘‘10 business day’’ trigger.261 One 

commenter, however, urged the 

Commission to clarify further how to 

count the 14 days to ‘‘resolve any 

question as to whether or not the day on 

which the documents are delivered, or 

the day on which they are signed, may 

be counted for purposes of compliance 

with the Rule.’’262 The Commission 

intends that the 14 days commence the 

day after delivery of the disclosure 

document and that the signing of any 

agreement or receipt of payment can 

take place on the 15th day after delivery. 

This ensures that prospective 

franchisees have at least a full 14 days 

in which to review the disclosures.263

Section 436.2(a) of the final amended 

Rule also tightens the language used in 

the proposed version of this provision to 

describe the events that trigger the 14- 

day disclosure requirement.264 The 

original Rule required a franchisor to 

provide its disclosure document: 

ten (10) business days prior to the 

earlier of (1) the execution by a 

prospective franchisee of any 

franchise agreement or any other 

agreement imposing a binding legal 

obligation on such prospective 

franchisee, about which the 

franchisor, franchise broker, or any 

agent, representative, or employee 

thereof, knows or should know, in 

connection with the sale or 

proposed sale of a franchise, or (2) 

the payment by a prospective 

franchisee, about which the 

franchisor, franchise broker, or any 

agent, representative, or employee 

thereof, knows or should know, of 

any consideration in connection 

with the sale or proposed sale of a 

franchise.265

In the proposed Rule, section 436.2(a) 

would have altered this formulation by 

eliminating the franchisor’s knowledge 

as a triggering factor, and rephrasing the 

remaining factors. Specifically, the 

proposed provision would have 

conditioned the disclosure obligation on 

either ‘‘the prospective franchisee 

sign[ing] a binding agreement or 

pay[ing] any fee in connection with the 

proposed franchise sale.’’

Several commenters, focusing on the 

use of the terms ‘‘binding agreement’’

and ‘‘pays any fee,’’ criticized the 

perceived overbreadth of this proposed 

provision. For example, H&H and 


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15470 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

266 H&H, NPR 9, at 21. See also Tricon, NPR 34, 

at 3–4. In a related but distinct vein, Piper Rudnick 

urged the Commission to clarify in the Compliance 

Guides that the 14-day deadline for disclosure is 

not triggered by a confidentiality agreement. The 

firm maintained that prospective franchisees often 

sign confidentiality agreements in the course of 

negotiations with franchisors. Piper Rudnick, at 5. 

While the signing of a confidentiality agreement is 

‘‘in connection with the proposed franchise sale,’’

it does not bind the prospective franchisee to 

purchase the franchise or to undertake other 

obligations, such as the signing of a lease. The firm 

urged clarification that the term ‘‘binding 

agreement’’ in the 14-day rule is limited to 

franchise agreements or other agreements that 

commit the prospective franchisee to purchase a 

franchise. Id. The Commission agrees. A 

confidentiality agreement—often signed by 

prospective franchisees before being granted access 

to the franchisor’s operations manual and other 

proprietary information—may be a necessary initial 

step in the sales process, but is not the type of 

agreement that triggers disclosure obligations. This 

assumes, however, that the confidentiality 

agreement contains no other agreements that, in the 

absence of the confidentiality agreement, would 

trigger disclosure, such as a lease agreement. 

267 Bundy, NPR 18, at 5. 

268See 16 CFR 436.1(g). 

269 The proposed rule provision used the term 

‘‘days’’ instead of the original Rule’s ‘‘business 

days.’’

270 The UFOC Guidelines contain no comparable 

provision requiring advanced disclosure of the 

completed franchise agreement. 

271 PMR&W, NPR 4, at 4. See also IFA, NPR 22, 

at 9; J&G, NPR 32, at 6; Marriott, NPR 35, at 9; GPM, 

NPR Rebuttal 40, at 2. 

272 Marriott, NPR 35, at 9–10. See also Marriott, 

at 4. 

273 Staff Report, at 80–2. As a practical matter, 

five business days typically amounts to seven 

calendar-days. 

Tricon urged inclusion of the phrase 

‘‘with the franchisor or an affiliate of the 

franchisor,’’ arguing that these limiting 

words are needed because ‘‘the 

franchisor cannot control whether a 

prospective franchisee proceeds to 

commit with independent third parties 

(e.g., lessor of real estate) before 

expiration of the cooling off period.’’266

On the other hand, Howard Bundy 

urged broadening the Rule so that a 

franchisor would be required to provide 

the disclosure document at least 14 days 

before the prospective franchisee signs a 

binding agreement, pays any fee in 

connection with the proposed franchise 

sale, or is required to travel or make 

other financial commitments as a 

precondition to receiving additional 

information.267 Mr. Bundy’s concern 

was that prospective franchisees may 

risk losing significant sums of money to 

pursue a franchise before they receive 

any disclosures about the franchise 

offer. 

The Commission believes that the 

concern that prompts Mr. Bundy’s 

suggestion is adequately addressed by 

section 436.9(e) —the new prohibition 

barring franchisors from failing to 

furnish disclosures earlier in the sales 

process upon reasonable request. A 

prospect can always ask the franchisor 

for a disclosure document before 

undertaking such obligations as signing 

a binding agreement, paying any fee in 

connection with the proposed franchise 

sale, or incurring travel or other costs. 

Thus, a broad disclosure trigger such as 

Mr. Bundy advocates is not necessary. 

Furthermore, the Commission agrees 

with the commenters who suggested 

that this provision should be more 

carefully tailored so as not to be overly 

inclusive or imprecise. Accordingly, the 

final provision specifies that disclosure 

must be made at least 14 calendar-days 

‘‘before the prospective franchisee signs 

a binding agreement with, or makes any 

payment to, the franchisor or an affiliate 

in connection with the proposed 

franchise sale.’’ Addition of the 

underscored language adds clarity and 

precision, and puts appropriate limits 

on the provision’s reach. 

3. Section 436.2(b): Modified contract 

review period 

Part 436 of the final amended Rule 

significantly narrows the circumstances 

under which a franchisor must furnish 

a prospective franchisee with a copy of 

the completed franchise agreement in 

advance of the date of execution. The 

original Rule required that franchisors 

and brokers furnish prospective 

franchisees with a copy of the 

completed franchise and related 

agreements at least five business days 

before the date of execution.268 The 

proposed Rule published in the 

Franchise NPR retained this 

requirement.269 During the Rule 

amendment proceeding, several 

franchisors and their supporters, as well 

as NASAA, urged the Commission to 

eliminate the contract review period.270

PMR&W, for example, asserted that the 

delay resulting from the mandatory 

disclosure period often harms 

prospective franchisees: 

In practice, the 5-day rule typically 

hurts rather than aids franchisees, 

since the ‘‘price’’ of an additional 

concession by the franchisor is an 

additional 5-day delay. Franchisees 

often are more time sensitive than 

franchisors, either because of a 

financing commitment or a lease 

option that might be expiring or the 

need to attend a training program. 

As a result, the 5-day rule can 

discourage a franchisee from 

requesting last-minute changes. 

Thus, the current provision, 

especially now that business 

opportunities are not covered, has 

little potential benefit to either 

franchisor or franchisee and may, in 

fact, discourage, rather than 

promote, last minute 

negotiations.271

Similarly, Marriott noted that the timing 

of closing the deal is often critical to the 

franchisee: 

as loan commitments may expire, 

options to acquire sites may expire 

or financial commitments may be 

required to prevent the site from 

being sold or leased to a different 

entity. Securities offerings may be 

held up until franchise agreements 

are executed. Interest rates may 

change so as to make a project 

unavailable unless commitments 

are promptly made.272

The Staff Report recommended that 

the contract review period be restricted 

to instances where the franchisor 

unilaterally modifies its standard 

franchise agreement. It also 

recommended substituting ‘‘seven 

calendar-days’’ for the Franchise NPR 

provision’s ‘‘five days,’’ to be consistent 

with the revision of the former 10-day 

disclosure trigger to 14 calendardays.273 After careful consideration of 

the record, the staff recommendation, 

and the rationale for that 

recommendation, the Commission has 

decided to modify the text of this Rule 

requirement in the manner 

recommended in the Staff Report. 

Section 436.2(b) of the final amended 

Rule specifies that it is a Rule violation 

for any franchisor: 

to alter unilaterally and materially 

the terms and conditions of the 

basic franchise agreement or any 

related agreements attached to the 

disclosure document without 

furnishing the prospective 

franchisee with a copy of each 

revised agreement at least seven 

calendar-days before the 

prospective franchisee signs the 

revised agreement. Changes to an 

agreement that arise out of 

negotiations initiated by the 

prospective franchisee do not 

trigger this seven calendar-day 

period. 

The Commission intended the 

original Rule’s five business day review 

requirement to advance two goals: (1) to 

ensure that prospective franchisees 

would have time to review and 

understand the franchise and any 

related agreement before undertaking 

significant financial and legal 

obligations; and (2) to prevent fraud by 

discouraging a franchisor from 

unilaterally substituting pages or 


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274See Gust Rosenfeld, at 3. Gust Rosenfeld noted, 

however, that while the original Rule referred to 

franchise and related agreements, the Staff Report’s 

proposed Rule focused narrowly on franchise 

agreements. Id. See also J&G, at 3. The final 

amended Rule appropriately broadens the contract 

review provision to refer to franchise and related 

agreements. 

275 As previously noted, part 436 of the final 

amended Rule provision substitutes ‘‘seven 

calendar-days’’ for the Franchise NPR provision’s 

‘‘five days’’ to be consistent with the revision of the 

former 10 business-day disclosure trigger to 14 

calendar-days. 

276See Gust Rosenfeld, at 3; IL AG, NPR 3, at 5; 

Stadfeld, NPR 23, at 4. 

277 J&G questioned whether ‘‘fill-in-the-blank’’

provisions include ‘‘things such as the specific 

radius or geographic area comprising a protected 

territory, or the actual number of stores to be 

opened pursuant to an area development 

agreement, . . . or the specific interest rate payable 

by the franchisee.’’ J&G at 3. The Commission will 

interpret ‘‘fill-in-the-blank’’ provisions narrowly to 

include non-contractual items, such as the parties’

names, addresses, and dates. To the extent that 

substantive contractual details—such as geographic 

area of a protected territory and interest rates—are 

not disclosed in the basic disclosure document or 

its attachments, then the completed document must 

be disclosed seven calendar days before signing. 

278 Gust Rosenfeld, at 3. 

279 Marriott, at 4–5. See also Spandorf, at 2. 

280 One commenter urged the Commission to 

require franchisors to prove that an electronic 

disclosure document was actually delivered. 

Bundy, at 4. He fears that a franchisor could furnish 

a disclosure document using slow bandwidth or 

other procedures, making it difficult for a franchisee 

to actually read the disclosure document. In the 

same vein, another commenter also urged the 

Commission to spell out what specific documents 

or types of evidence would qualify as valid 

evidence of the mailing date. BI, NPR 28, at 4–5. 

Continued 

otherwise altering agreements presented 

to the prospective franchisee for signing. 

The first concern—providing time to 

study the franchise and related 

agreements—is already served by the 

Rule’s basic disclosure requirement.274

Attached to each disclosure document is 

a copy of the franchisor’s basic 

agreement and any related agreements. 

At the very least, these documents 

enable prospects to review the basic 

terms and conditions governing the 

franchise system. Based upon the 

Commission’s experience in enforcing 

and administering the Rule, it also 

appears that franchisors routinely use 

standardized franchise agreements. Lastminute changes to a franchise 

agreement, therefore, most likely arise at 

the franchisee’s initiation. When a 

prospective franchisee is the party 

introducing contract modifications, 

redisclosure by the franchisor is hardly 

warranted. Thus, section 436.2(b) 

expressly states that ‘‘[c]hanges to an 

agreement that arise out of negotiations 

initiated by the prospective franchisee 

do not trigger this seven calendar-day 

period.’’

Further, the Commission does not 

believe that the Rule should impede a 

prospective franchisee’s ability to 

negotiate agreement changes. The delay 

inherent in a mandatory contract review 

period may discourage negotiations if a 

prospective franchisee believes that he 

or she will suffer as a result of the delay. 

As Marriott noted, the timely signing of 

a franchise agreement may be a 

prerequisite for other parts of the overall 

deal, such as obtaining leases and loans. 

Indeed, in most instances a prospective 

franchisee is in the best position to 

judge how much review time is 

warranted and, as a practical matter, can 

seek additional review time, if desired. 

Nonetheless, the possibility of fraud 

remains a concern. To prevent a 

franchisor from substituting at the last 

minute provisions that differ materially 

from those in the agreements previously 

attached to the disclosure document, the 

final amended Rule includes two 

safeguards. First, section 436.2(b) 

retains a mandatory contract review 

period of seven full days275 in situations 

where the franchisor has materially 

altered the terms and conditions of the 

standard agreements attached to the 

disclosure document.276 The 

Commission intends that this not 

include situations where the only 

differences between the standard 

agreements and the completed 

agreements are ‘‘fill-in-the-blank’’

provisions, such as the date, name, and 

address of the franchisee.277 Nor does it 

include instances where deviations from 

the standard agreement are initiated at 

the prospective franchisee’s request. 

Second, the final amended Rule 

targets potential fraud directly by 

adopting a new prohibition, section 

436.9(g), which prohibits a franchisor 

from unilaterally substituting provisions 

or pages in a franchise agreement 

resulting in a material change unless the 

franchisor first alerts the prospective 

franchisee about the change seven days 

before execution of the franchise 

agreement. This approach remedies 

deceptive unilateral modification of 

franchise agreements in a material way 

without imposing additional disclosure 

burdens. 

In response to the Staff Report, a few 

commenters asked for additional 

clarification of the meaning of the term 

‘‘negotiations initiated by the 

prospective franchisee.’’ For example, 

Gust Rosenfeld urged the Commission 

to make clear in the Compliance Guides 

that negotiated changes will be 

considered initiated by the prospective 

franchisee even where some of the 

changes favor the franchisor.278 In the 

same vein, Marriott urged the 

Commission to change the Staff Report’s 

proposed language ‘‘Changes to a 

franchise agreement that result solely 

from negotiations initiated by the 

prospective franchisee . . . .’’ to 

‘‘Changes to a franchise agreement that 

arise out of negotiations initiated by the 

prospective franchisee. . .’’279 Marriott 

contended that the original language—

‘‘result solely from negotiations initiated 

by the prospective franchisee’’—could 

be read narrowly to exclude instances 

where both parties receive benefits 

during the negotiation. 

The Commission recognizes that a 

negotiated franchise or related 

agreement may result in some changes 

favoring the franchisor. Whether or not 

a particular change benefits a particular 

party, however, is irrelevant. What is 

determinative is whether the 

prospective franchisee has knowledge of 

the change before signing the agreement. 

As long as the prospective franchisee 

opens the door to changing documents 

that previously have been presented for 

signing, any discussions about changes 

and any agreed upon changes are clearly 

made with the prospective franchisee’s 

knowledge. Under these circumstances, 

redisclosure would be unwarranted. To 

make this point clear, the final amended 

Rule adopts an edited form of Marriott’s 

suggested language noted above: 

‘‘Changes to an agreement that arise out 

of negotiations initiated by the 

prospective franchisee do not trigger 

this seven calendar-day period.’’

4. Section 436.2(c): Actions that 

constitute the furnishing of disclosures 

Section 436.2(c) of the final amended 

Rule specifies what actions constitute 

furnishing required documents. 

Although the original Rule did not 

include such a provision, such 

specificity is needed now, given the 

wide array of disclosure formats and 

delivery mechanisms available in 

today’s marketplace. Accordingly, a 

franchisor will be considered to have 

furnished a disclosure document if: 

(1) A copy of the document was 

hand-delivered, faxed, emailed, or 

otherwise delivered to the 

prospective franchisee by the 

required date; 

(2) Directions for accessing the 

document on the Internet were 

provided to the prospective 

franchisee by the required date; or 

(3) A paper or tangible electronic 

copy (for example, computer disk or 

CD–ROM) was sent to the address 

specified by the prospective 

franchisee by first-class United 

States mail at least three calendar 

days before the required date.280


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As an initial matter, franchisors always have the 

burden of proof to show that they have complied 

with the Rule’s obligation to furnish disclosures. 

We also believe that the Rule should be as flexible 

as possible, allowing franchisors to keep records 

and to offer proof, in the format that is most 

convenient to them. Nonetheless, to prevent any 

potential abuse in this area, the final amended Rule 

sets forth several safeguards. Among other things, 

a franchisor must notify the prospective franchisee 

in advance of any prerequisites for obtaining a 

disclosure document. Section 436.6(g). That would 

include any unusual bandwidth requirements. In 

addition, the franchisor must ensure that its 

disclosures not only can be downloaded, but 

preserved for future use. Section 436.6(b). Finally, 

the final amended Rule retains a receipt 

requirement, which will effectively prove delivery. 

Section 436.5(w). 

281 For example, where the Franchise NPR 

version said ‘‘has been delivered,’’ the final Rule 

provision says ‘‘was hand-delivered, faxed, 

emailed, or otherwise delivered,’’ to remove any 

doubt that the alternative modes of delivery are 

acceptable. Similarly, where the Franchise NPR 

version said ‘‘if a copy has been sent . . . by first 

class mail,’’ the final amended provision states ‘‘a 

paper or tangible electronic copy (for example, 

computer disk or CD–ROM) was sent . . . by firstclass United States mail’’ to make it clear that a 

disclosure document in an electronic format is 

considered equivalent to paper. 

282 16 CFR 436.1(a)(21). 

283 Franchise NPR, 64 FR at 57302. 

284 In addition, some non-substantive refinements 

have been made to improve the clarity, consistency, 

and organization of the Rule’s text. For example, the 

text now specifies that the various required 

elements of the cover page are to be presented ‘‘in 

the order and form as follows.’’ Similarly, section 

436.3(a) now specifically instructs franchisors that 

the title is to appear ‘‘in capital letters and bold 

type,’’ not merely giving franchisors a model that 

depicts the words ‘‘FRANCHISE DISCLOSURE 

DOCUMENT’’ in capitals in the Rule’s text, as 

proposed in the Franchise NPR. In addition, the 

cover page disclosure informing the prospective 

franchisee that he or she must be given 14 days to 

review the document has been conformed to the 

convention, adopted elsewhere in the Rule text, to 

state time frames in calendar days. See section 

436.2(a) (setting forth the 14 calendar-day time 

frame within which a franchisor must provide 

disclosure documents). Thus, the required cover 

page disclosure now states that a franchisor must 

furnish its disclosures at least 14 calendar-days 

before the prospective franchisee signs a binding 

agreement with, or makes any payment to, the 

franchisor or an affiliate in connection with the 

proposed franchise sale. See J&G, at 4 (noting a 

wording inconsistency in the Staff Report’s 

recommended Rule text between the cover page 

disclosure and the substantive timing requirement). 

Similarly, the Commission has adopted the staff 

recommendation to adapt the UFOC Guidelines 

cover page disclosure requirement on the total 

investment necessary to begin operations (as 

explained more fully in the text), but has modified 

the staff’s recommended version by changing the 

phrase ‘‘including [the total amount in Item 5] that 

must be paid to the franchisor’’ to ‘‘This includes 

[the total amount in Item 5 (§ 436.5(e))] that must 

be paid to the franchisor or affiliate.’’ See NASAA; 

WA Securities (noting a wording inconsistency in 

the Staff Report’s recommended Rule text between 

the cover page disclosure of total investment 

necessary to begin operation and Item 5 initial fee 

disclosure requirements in proposed section 

436.5(e)). 

285See Heron, ANPR 80. A copy of the Consumer 

Guide to Buying a Franchise is currently available 

at the Commission website: www.ftc.gov. 

286 In drafting this provision, we have recognized 

the NFC’s concern that franchisors have flexibility 

in directing prospects to particular individuals who 

can assist the prospects in receiving an alternatively 

formatted disclosure document. NFC, NPR 12, at 27. 

To provide as much flexibility as possible, the 

provision permits franchisors to designate either a 

specific individual or office as a contact. 

287 Kezios, ANPR, 18 Sept. 97 Tr., at 10. See also 

Karp, ANPR, 19 Sept. 97 Tr., at 89–90. 

288See generally UFOC Guidelines, Cover Page, 

Instructions. As explained below, however, the 

Commission has not adopted the UFOC Guidelines’

cover page risk factors. 

289 UFOC Guidelines, Cover Page, 5 (requiring 

franchisors to state the total amounts in Item 5 

(initial fees and payments to the franchisor) and 

Item 7 (initial investment). 

290 BI, NPR 28, at 5. 

The basic concepts of the final 

amended Rule provision track those in 

the corresponding provision proposed 

in the Franchise NPR, but the language 

has been revised, reorganized, and in 

some cases, expanded, to achieve 

greater clarity and specificity.281

C. Sections 436.3–436.5: The Disclosure 

Document 

Sections 436.3–436.5 of part 436 set 

forth the substantive disclosures and 

attachments that franchisors must 

include in their disclosure documents, 

beginning with the cover page. 

1. Section 436.3: Cover page 

The cover page informs prospective 

franchisees that the disclosure 

document they are receiving contains 

important information about the 

franchise offer. The proposed Rule 

published in the Franchise NPR 

incorporated each item of information 

required in the original Rule’s 

counterpart,282 with a few exceptions 

discussed below.283 The final amended 

Rule provision follows the cover page 

proposed in the Franchise NPR, with 

minor editing for clarity. 

The proposed cover page set forth in 

the Franchise NPR generated little 

comment. The few comments received 

generally suggested various 

improvements to the text of the cover 

page, many of which have been 

incorporated into the final amended 

Rule.284 The substantive revisions to the 

cover page requirement fall into four 

broad categories. First, final amended 

Rule section 436.3(e)(4) requires that the 

cover page reference sources of 

additional background information that 

prospective franchisees can use in 

conducting their due diligence 

investigations, such as the FTC’s 

website and its Consumer Guide to 

Buying a Franchise.285 This will enable 

prospective franchisees to find 

additional background information on 

franchising, including information on 

how to use a disclosure document. 

Second, final amended Rule section 

436.3(b) updates the cover page to 

embrace electronic disclosure. It 

requires franchisors to include on the 

cover page their email and primary 

home page addresses, so that 

prospective franchisees can 

communicate with the franchisor 

electronically. In the same vein, section 

436.3(f) permits franchisors to state on 

the cover page how prospective 

franchisees may receive a copy of the 

disclosure document in an alternative 

medium.286

Third, final amended Rule section 

436.3, like the proposed version 

published in the Franchise NPR, 

eliminates information from the original 

Rule’s cover page that might be 

misinterpreted as implying greater 

Commission oversight of franchising 

than is the case. Several franchisees 

contended that phrases in the original 

cover page—such as ‘‘information . . . 

required by the Federal Trade 

Commission’’ and ‘‘to protect you’’—are 

misleading because they imply greater 

federal oversight of franchise offerings 

than actually exists.287

Fourth, to promote greater uniformity 

with state disclosure laws, final 

amended Rule section 436.3 has been 

revised to track more closely the UFOC 

Guidelines’ cover page elements.288 For 

example, section 436.3 includes the 

franchisor’s name, logo, brief 

description of the franchised business, 

total purchase price as reflected in Item 

5 (initial fees) and in Item 7 (estimated 

initial investment), and a notice that 

states may be able to provide sources of 

information about franchising. 

With respect to cover page disclosure 

of the total purchase price, final 

amended section 436.3(e)(1) revises 

slightly the comparable UFOC 

Guidelines requirement,289 based on the 

record developed here. Specifically, BI 

asserted that the total purchase price 

disclosure on the UFOC Guidelines 

cover page can be misleading. 

According to the firm, the cover page 

should put prospects on notice of the 

initial franchise fee that must be paid 

for the right to commence business 

under the mark. BI argued that the 

inclusion of the broader Item 5 initial 

fees would cloud the issue, making 

comparisons of initial franchise fees 

among competitors difficult: ‘‘For 

example, in cases where a franchisor 

sells or leases the premises of the 

franchised business to the franchisee, 

this payment would need to be included 

in Item 5, but would severely distort the 

amount of the initial franchise fee 

disclosed on the cover page.’’290

The Commission’s view, however, is 

that the purpose of the cover page’s 


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291 BI’s concern would be valid if the cover page 

required the disclosure of only Item 5 (initial fees), 

but not Item 7 (estimated initial investment). For 

example, in such a scenario, a franchisor who 

leased premises to a franchisee would include the 

lease payment in the Item 5 initial fees, whereas a 

franchisor who required a franchisee to lease 

premises from a third party would not include such 

payment in Item 5. Arguably, this would distort the 

first franchisor’s Item 5 initial fees. However, lease 

payments to third parties would nonetheless appear 

in Item 7. Accordingly, Item 5 and Item 7, 

considered together, enable prospective franchisees 

to compare initial expenses across franchise 

systems. 

292 See UFOC Guidelines, Cover Page, 

Instructions, iv. 

293 See Cendant, ANPR 140, at 3 (suggesting that 

risk factors belong in the Item 17 disclosures on 

franchise relationship issues). 

294 Other commenters suggested additional risk 

factors. For example, Greg Gaither, a GNC 

franchisee, suggested that the cover page include a 

warning that encroachment—marketing in a 

franchisee’s territory—is a risk that might severely 

affect a franchised outlet’s performance. Michael 

Garner would require franchisors to disclose how 

their contracts may be imbalanced: ‘‘[I]sn’t it better 

to have an unbalanced franchisor/franchisee 

relationship disclosed as such early on rather than 

buried in the legalese of a franchise agreement?’’

Dady & Garner, ANPR 127, at 3. Mr. Garner 

recommended that franchisors disclose up-front on 

the cover page: (1) if franchisees have no protected 

territory; (2) if franchisees can be terminated upon 

failing to comply with the franchise agreement; (3) 

if franchisees cannot transfer without prior 

approval; and (4) if the franchisor reserves the right 

to receive royalty payments even if it breaches 

obligations to provide support services. Dady & 

Garner, ANPR 127, at 3. We conclude that each of 

these issues, for the most part, already is addressed 

in the substantive rule disclosure items, or is better 

handled in Commission consumer education 

materials. 

295See NASAA, at 3–4; WA Securities, at 2 

(Commission should permit state risk factors). See 

also Tifford, ANPR, 18 Sept. 97 Tr., at 15–16 

(suggesting that the Commission accommodate risks 

factors developed by the individual states). One 

commenter, GPM, opposed permitting states to add 

additional risk factors on the cover page. The firm 

suggested that a state should be permitted to require 

additional information only in a state-specific 

addendum. GPM, NPR Rebuttal 40, at 4. We reject 

this suggestion. As discussed below, the final 

amended Rule does not preempt state laws that 

afford greater or equal protection to prospective 

franchisees. Indeed, states enjoy great latitude in 

fashioning franchise disclosure laws, including how 

and when state-specific information is to be 

included in disclosure documents. Therefore, 

franchisors must be permitted to add to an FTC 

disclosure document in order to comply with nonpreempted state law. 

296 AFA, NPR 14, at 4. 

297 In the original Rule, the table of contents was 

set forth in a footnote at the back of the Rule. See 

16 CFR Part 436, note 3. 298 This recognizes the final amended Rule’s 

retention of parent disclosures from the original 

Rule. See discussion of section 436.5(a)(1) below. 

299 Responding to a comment urging that the title 

of Item 5 be changed from ‘‘Initial Franchise Fee’’

(as proposed in the Franchise NPR) to ‘‘Initial Fees’’

so that it would more accurately describe the actual 

subject matter of the Item, the Staff Report 

recommended that the title of Item 5 be ‘‘Initial 

Fees Paid to the Franchisor.’’ Staff Report, at 121. 

However, Howard Bundy’s Staff Report comment 

correctly noted that the recommended reference to 

‘‘franchisor’’ is inaccurate because the disclosure 

applies to fees paid to affiliates as well. 

Accordingly, the final amended Rule deletes the 

phrase ‘‘paid to the franchisor’’ in favor of simply 

‘‘initial fees.’’

price disclosure is not simply to 

indicate the fee paid to the franchisor 

for using the franchisor’s mark, but to 

disclose the total costs paid to the 

franchisor associated with commencing 

business operations. In fact, limiting the 

disclosure to the initial franchise fee 

alone could be misleading because that 

could understate the totality of fees that 

must be paid to the franchisor in order 

to start the business. The cover page 

price disclosures will better enable 

prospective franchisees to assess their 

full potential business costs, and 

ultimately their financial risk, than a 

disclosure limited to the initial 

franchise fee alone.291 Nevertheless, the 

Commission recognizes that it is 

possible to achieve the goal of informing 

prospective franchisees about the 

investment by referring to Item 7 

alone—Initial Investment. Indeed, Item 

5 is basically a subset of Item 7. 

Therefore, to maximize consistency 

between federal and state law, section 

436.3 incorporates a modified version of 

the UFOC cover page references to Item 

5 and Item 7, as follows: ‘‘The total 

investment necessary to begin operation 

of a [franchise system name] franchise is 

[the total amount of Item 7 (§ 436.5(g))]. 

This includes [the total amount in Item 

5 (§ 436.5(e))] that must be paid to the 

franchisor or affiliate.’’

In addition, section 436.3 diverges 

from the UFOC Guidelines in that it 

does not call for the two cover page risk 

factor disclosures required by the UFOC 

Guidelines regarding choice of venue 

and choice of law.292 These two risk 

factors essentially repeat what 

franchisors already must disclose in 

Item 17 of the disclosure document.293

Moreover, mandating the disclosure of 

these two risk factors on the cover page 

might incorrectly signal prospective 

franchisees that these are the most 

important risk factors to consider.294

Nonetheless, section 436.3(g) of the final 

amended Rule expressly permits 

franchisors to ‘‘include additional 

disclosures on the cover page . . . to 

comply with state pre-sale disclosure 

laws.’’ This provision effectively 

permits franchisors to include state 

mandated risk factors on the cover page, 

without adopting risk factor 

requirements into the final amended 

Rule.295

The Commission has decided not to 

make further revisions in the cover page 

requirements that would call for 

additional education messages, 

notwithstanding several comments 

urging us to do so. For example, the 

AFA suggested that the Commission 

warn prospective franchisees that they 

are not purchasing their own business. 

To that end, the AFA would include the 

following warning on the cover page: 

‘‘You will not own your own business. 

You will lease the rights to sell 

[company’s name] goods [services] to 

the public under the [company’s name] 

tradename and trademarks. This 

agreement will expire and you will have 

no rights to continue in operation upon 

expiration.’’296

The Commission agrees in principle 

with the AFA’s broad point that 

prospective franchisees should be fully 

informed about the nature of 

franchising. However, the appropriate 

vehicle for educating prospects is 

through educational materials, not the 

final amended Rule itself. Indeed, the 

cover page advances this goal because it 

will reference the Commission’s 

Consumer Guide to Buying a Franchise, 

which contains the advice the AFA 

wants communicated. 

2. Section 436.4: Table of contents 

The final amended Rule section 436.4 

retains the original Rule’s requirement 

for a table of contents, but, like the 

version of this provision proposed in 

the Franchise NPR, conforms to the 

UFOC Guidelines in the wording and 

the ordering of required disclosure 

items listed.297 This provision generated 

minimal comment. 

The final amended provision revises 

the proposed Rule provision’s use of the 

UFOC Guidelines headings in only a 

few instances to reflect more accurately 

the Rule requirements, as follows: 

(1) Item 1 is changed from ‘‘The 

Franchisor, its Predecessors, and 

Affiliates’’ to ‘‘The Franchisor and any 

Parents, Predecessors, and 

Affiliates;’’298 (2) Item 5 is changed 

from ‘‘Initial Franchise Fees’’ to ‘‘Initial 

Fees;’’299 (3) Item 7 is changed from 

‘‘Initial Investment’’ to ‘‘Estimated 

Initial Investment;’’ (3) Item 11 is 

changed from ‘‘Franchisor’s 

Obligations’’ to ‘‘Franchisor’s 

Assistance, Advertising, Computer 

Systems, and Training;’’ (4) Item 19 is 

changed from ‘‘Earnings Claims’’ to 

‘‘Financial Performance 

Representations;’’ (5) Item 20 is 

changed from ‘‘List of Outlets’’ to 

‘‘Outlets and Franchisee Information;’’

and (6) Item 23 is changed from 

‘‘Receipt’’ to ‘‘Receipts.’’

3. Section 436.5(a) (Item 1): The 

franchisor and any parents, 

predecessors, and affiliates 

Section 436.5(a) of part 436 sets forth 

the first of the final amended Rule’s 

substantive disclosure requirements. As 


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300 Franchise NPR, 64 FR at 57302–03. 

301 See 16 CFR 436.1(a)(1), (3), and (6). The 

Commission historically has emphasized the 

materiality of franchisor background information. In 

the original SBP, the Commission concluded that: 

‘‘the failure to disclose such material information 

. . . may mislead the franchisee as to the business 

experience of the parties with whom he or she is 

dealing and . . . could readily result in economic 

injury to the franchisee because of the franchisee’s 

dependence upon the business experience and 

expertise of the franchisor.’’

Original SBP, 43 FR at 59642. 

302 The final amended Rule also corrects an 

apparent oversight in the UFOC Guidelines. Item 1 

requires franchisors to disclose the address of the 

franchisor’s agent, but does not specifically require 

the franchisor to identify the agent. IL AG, at 4. 

Section 436.5(a)(4) of the final amended Rule now 

requires franchisors to both identify the agent and 

state the agent’s principal business address. 

303See UFOC Guidelines, Item 1. 

304See FTC v. Morrone’s Water Ice, Inc., No. 02–

3720 (E.D. Pa. 2002) (company allegedly 

reincorporated as a ‘‘licensor’’ following an adverse 

arbitration decision); FTC v. Inv. Dev., Inc., Bus. 

Franchise Guide (CCH), ¶ 9326 (E.D. La. 1989) 

(company allegedly reincorporated after filing of 

Commission law enforcement action). Cf. FTC. v. 

Jani-King, Int’l, No. 3–95–CV–1492–G (N.D. Tex. 

1995) (company allegedly conducted business 

through multiple regional corporations thereby 

avoiding certain disclosures). 

305See UFOC Guidelines, Item 1E Instructions, vi. 

306E.g., FTC v. Car Checkers of Am., Inc., No. 93–

623 (mlp) (D.N.J. 1993) (failure to disclose state 

restrictions on the sale of service contracts); United 

States v. Lifecall Sys., Inc., No. 90–3666 (D.N.J. 

1990) (failure to disclose state registration 

requirements). Cf. Funeral Rule, 16 CFR 453.3 (it is 

a misrepresentation to mischaracterize state or local 

funeral industry laws). 

307 UFOC Guidelines, Item 1E Instructions, v. Cf. 

SEC Regulations-K (Standard Instructions for Filing 

Forms Under Securities Act of 1933, Securities Act 

of 1934, and Energy Policy and Conservation Act 

of 1975), 17 CFR 229.101(c)(1)(x) (requiring 

registrants to list, where material, ‘‘the identity of 

the particular market in which the registrant 

competes, an estimate of the number of competitors, 

and the registrant’s competitive position, if known 

or reasonably available to the registrant.’’). This 

disclosure is intended to aid prospective 

franchisees in their decision whether to enter a 

proposed relationship. It is neither intended nor 

interpreted to be a complete antitrust analysis. 

Indeed, such a goal would be impractical in light 

of the number and variety of relevant local antitrust 

markets that might be involved. 

308 Franchisors need only state the types of 

businesses that sell competing goods or services. 

They need not identify specific businesses. See 

UFOC Guidelines, Item 1, Sample Answer 1 (‘‘Your 

competitors include department store service 

departments, service stations, and other national 

chains of muffler shops.’’). This provision is 

designed to prevent deception by ensuring that 

prospective franchisees understand whether the 

business they are entering is unique. While the 

potential benefit of this provision is limited, the 

compliance burden is small. Throughout the 

original SBP, the Commission emphasized that 

potential economic risks to prospective franchisees 

are material. E.g., Original SBP, 43 FR at 59650–651 

(bankruptcy); at 59662 (sales restrictions); at 59668 

(post-term covenants not to compete). A 

competition disclosure is also warranted in light of 

several franchisee comments about competition 

issues. E.g., Packer, ANPR 10 (franchisor has 

opened franchisor-owned stores to compete with its 

own franchisees); Manuszak, ANPR 13 (competition 

from encroachment); Gray, ANPR 22 (franchisor 

sold to competing system); Lopez, ANPR 123 

(competition from franchisor’s co-branded outlets). 

309 The Commission declines to adopt one 

additional recommendation in the Staff Report. 

Specifically, staff recommended that, in addition to 

the disclosure of the general competition a 

franchisor may face, the Rule should also require 

franchisors to disclose ‘‘any competition from any 

entity in which an officer of the franchisor owns an 

interest.’’ Staff Report, at 98. The purpose of this 

recommendation was to require franchisors to 

disclose any potential conflicts of interest by their 

officers. See Bundy, NPR 18, at 6. But see Piper 

Rudnick, at 5 (contending that such a provision 

would be overbroad, sweeping in even minority 

ownership of mutual funds); J&G, at 4 (suggesting 

that such a provision would be overbroad, and 

should be limited to only ‘‘material interests’’ in a 

competitor). However, the Commission believes 

that ordinary corporate fiduciary and conflicts of 

interest law principles are sufficient to resolve any 

potential harm when officers of a franchisor own 

interests in competitors. See generally American 

Law Institute, Principles of Corporate Governance: 

Analysis and Recommendations (2005). 

310See 16 CFR 436.1(a)(1)(i). The Commission 

stated in the original SBP that parent information 

is material and that it would require the disclosure 

of information about a parent, even though it 

recognized that the UFOC Guidelines contained no 

comparable disclosure requirement. Original SBP, 

43 FR at 59639. 

311 Gust Rosenfeld, at 2; PMR&W, NPR 4, at 9; 

H&H, NPR 9, at 15–16; J&G, NPR 32, at 9. 

312 Section 436.1(b). 

313E.g., IFA, at 3; Prudential Financial, at 1; 

Spandorf, at 3. 

314 Vidulich, ANPR, 22 Aug. 97 Tr., at 16–17. 

Similarly, a franchise system with a poor financial 

record or significant litigation could, for example, 

seek to shield itself from disclosure by establishing 

a new subsidiary that will offer identical franchises, 

but under a different trademark. 

proposed in the Franchise NPR,300 it 

retains the original Rule’s requirement 

that franchisors disclose background 

information on the franchisor and any 

parents and affiliates.301 It also expands 

the original Rule in three respects to 

maximize consistency with the UFOC 

Guidelines.302 First, franchisors must 

now disclose information about their 

predecessors for the 10-year period 

immediately before the close of the 

franchisor’s most recent fiscal year.303

This will prevent unscrupulous 

franchisors from hiding prior 

misconduct and avoiding disclosure 

obligations simply by assuming a new 

corporate identity.304 Second, 

franchisors must disclose any 

regulations specific to the industry in 

which the franchise business operates, 

such as any necessary licenses or 

permits,305 that may affect the 

franchisee’s operating costs and ability 

to conduct business.306 Third, 

franchisors must describe the general 

competition prospective franchisees are 

likely to face.307 This disclosure better 

ensures that the prospective franchisee 

can understand the likely economic 

risks in purchasing a franchise.308

The final amended rule provision 

tracks the proposed Rule published in 

the Franchise NPR, but is more 

narrowly tailored in its treatment of 

required disclosures about affiliates. 

Slight non-substantive modifications in 

the provision’s language and 

organization have also been made to 

improve clarity and precision. Two 

aspects of section 436.5(a) that 

prompted comment are discussed in the 

following sections: the required parent 

disclosures, and the required 

predecessor disclosures. Finally, various 

suggestions advanced by commenters 

but not adopted in the final amended 

Rule are discussed in the final part of 

this section.309

a. Parent disclosures 

The retention of the original Rule’s 

parent disclosure requirement was not 

controversial for the vast majority of 

commenters, including NASAA.310 A 

few comments, however, raised two 

concerns about it. First, a few franchisor 

representatives asserted that a separate 

parent disclosure is unnecessary 

because a parent, in most instances, 

would already be covered by the Rule’s 

broad definition of ‘‘affiliate’’311— ‘‘an 

entity controlled by, controlling, or 

under common control with another 

entity.’’312 Other commenters 

questioned the relevance of a parent’s 

information, asserting that a parent is a 

legally distinct entity and that 

disclosing a parent may mislead 

prospective franchisees into believing 

that the parent exercises greater 

oversight or gives financial backing to 

the franchisor than actually exists. 

These commenters add that a parent 

disclosure simply clutters an already 

lengthy disclosure document.313

On the other hand, the materiality of 

parent information was demonstrated by 

Dr. Spencer Vidulich, a Pearle Vision 

franchisee. He related that his franchisor 

was bought by Cole National 

Corporation, which operates companyowned optical departments in Sears 

stores. In this instance, the disclosure of 

parent information would have alerted 

prospective Pearle Vision franchisees 

that their franchisor is owned by a 

company that operates competing 

outlets.314

Also, contrary to some commenters’

assertions, part 436 will not reach all 

parents when, for example, section 

436.5(a) reaches only those affiliates 

that ‘‘offer franchises in any line of 

business or provide products or services 

to the franchisees of the franchisor.’’ As 

Dr. Vidulich suggested, it is possible 

that a parent does not sell franchises at 

all—falling outside the scope of the 

section’s coverage of ‘‘affiliates’’—but 

nonetheless could operate competing 

company-owned outlets. A requirement 


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315 Section 436.5(a)(1). 

316 Section 436.5(a)(7). 

317 Despite the narrow Item 1 parent disclosure 

in section 436.5(a)(1), one commenter asserted that 

the parent disclosure could be a significant burden 

on some franchisors with elaborate corporate 

structures. Spandorf, at 3. She contended that the 

final amended Rule would require a franchisor to 

disclose ‘‘all non-affiliate parents, including all 

intermediate parents, not just the ultimate parent.’’

Id. Accordingly, she urged the Commission to limit 

the parent disclosure to those parents with ultimate 

control ‘‘and any intermediate parent that 

guarantees the franchisor’s obligations to 

franchisees.’’ Id. The Commission rejects these 

suggestions. Item 1 requires franchisors to disclose 

the identity of parents to ensure that a prospective 

franchisee understands who may control or 

influence the franchisor’s operations. As noted 

above in the example of Pearle Vision, it is highly 

material to a prospective Pearle Vision franchisee 

that Pearle Vision is owned and controlled by a 

competing system—Cole Vision. That information 

would escape disclosure, however, if Cole Vision 

did not guarantee Pearle Vision’s performance or if 

Cole Vision were, in turn, a subsidiary of a larger 

corporate parent. 

318 One commenter suggested that the 

Commission address in the Compliance Guides an 

inconsistency between the Item 1 disclosure set 

forth in the Staff Report and the UFOC Guidelines’

Item 1 disclosure. Whereas the UFOC Guidelines 

clearly limit the predecessor disclosures—the 

predecessor’s name and address and prior 

experience—to a 10-year reporting period, the Staff 

Report’s proposed revised Rule could have been 

read as limiting the application of the time period 

to only the predecessor’s name and address. Piper 

Rudnick, at 5. The Commission agrees that the 10- 

year reporting should also limit the reporting of a 

predecessor’s experience, and the final amended 

Rule is revised accordingly by adding a crossreference that limits the applicability of the 

experience disclosures in section 436.5(a)(7) to only 

those predecessors covered by section 436.5(a)(2). 

The commenter also suggested that the prior 

experience of affiliates should similarly be limited 

to 10 years. Id. This suggestion goes too far and 

would introduce an unnecessary inconsistency 

between the final amended Rule and the UFOC 

Guidelines, which does not so limit affiliate 

disclosures. 

319 As noted above, this provision prevents 

franchisors from hiding prior misconduct and 

avoiding disclosure obligations simply by assuming 

a new corporate identity. See FTC v. Morrone’s 

Water Ice, Inc., No. 02–3720 (E.D. Pa. 2002) 

(company allegedly reincorporated as a ‘‘licensor’’

following an adverse arbitration decision); FTC v. 

Inv. Dev., Inc., Bus. Franchise Guide (CCH), ¶ 9326 

(E.D. La. 1989) (company allegedly reincorporated 

after filing of Commission law enforcement action). 

320 H&H, NPR 9, at 16. 

321 GPM, NPR Rebuttal 40, at 4. 

322 IL AG, at 4. 

323 IL AG, at 4. 

324 IL AG, at 4. 

325See 16 CFR 436.1(a)(2). In the original SBP, the 

Commission explained that a franchisor’s failure to 

disclose its business experience violates Section 5 

because ‘‘it (1) misleads the prospective franchisees 

as to the business experience of the parties with 

whom they are dealing, and (2) could readily result 

in economic injury to franchisees due to their heavy 

dependence upon the experience of those persons 

associated with the franchisor.’’ Original SBP, 43 

FR at 59642. See Buckley, ANPR 97, at 1 

(‘‘franchisor represented his company as highly 

trained in all phases of the business and capable of 

supporting a franchise system’’); FTC v. Nat’l 

Consulting Group, Inc., Bus. Franchise Guide (CCH) 

¶ 11335 (N.D. Ill. 1998) (claims regarding medical 

billing expertise and contacts with medical 

community are material); FTC v. Richard L. 

Levinger, No. 94–0925–PHX RCB (D. Ariz. 1994) 

(earnings claims tied to purported expertise in the 

restaurant industry are material); FTC v. Car 

Checkers of Am., Inc., No. 93–623 (mlp) (D.N.J. 

1993) (claims regarding car inspection business 

expertise are material). Cf. FTC v. Goddard Rarities, 

Inc., No. CV93–4602–JMI (C.D. Cal. 1993) 

(representations of expertise in coin investments are 

material). 

326See UFOC Guidelines, Item 2 and Instructions, 

v. 

that a franchisor identify any parent, 

therefore, is necessary to ensure that any 

parent not falling within Item 1’s 

limited use of affiliate will be disclosed. 

Moreover, the Item 1 parent 

disclosure is significantly limited: 

franchisors must simply identify a 

parent.315 In contrast with the Item 1 

disclosures for affiliates and 

predecessors,316 a franchisor need not 

disclose, for example, the parent’s 

business background, length of time 

selling franchises or engaging in other 

lines of business.317 The Commission 

concludes that this limited disclosure 

will, at most, impose a minor burden for 

most franchise systems that is 

outweighed by the potential benefit to 

prospective franchisees. 

b. Predecessor disclosures 

Part 436 of the final amended Rule 

adopts the UFOC Guidelines’

requirement that franchisors disclose 

background information about any 

predecessors for 10 years.318 During the 

rulemaking process, no commenters 

objected to the basic principle that 

predecessor information should be 

disclosed.319 A few commenters, 

however, questioned the scope of the 

disclosure. One commenter asserted that 

the 10-year reporting period is too long, 

noting that Item 2 establishes only a 

five-year disclosure period for business 

experience of company officers and 

managers.320 Another commenter urged 

the Commission to narrow the focus of 

Item 1 to require the disclosure of 

information about only any immediate 

predecessor.321 The Commission is not 

convinced, however, that the burden of 

supplying 10 years of predecessor 

information—as the majority of 

franchisors already do to comply with 

the UFOC Guidelines—is so great as to 

justify deviating from the UFOC 

Guidelines on this issue. 

c. Suggestions for additional disclosure 

requirements that the Commission has 

not adopted 

IL AG urged the Commission to 

expand the scope of Item 1 in several 

respects. First, IL AG would expand the 

types of business organizations that 

must be disclosed under section 

436.5(a)(5) to include ‘‘members with a 

controlling interest in the franchisor.’’

In its view, this is necessary to cover 

limited liability companies.322 The 

Commission declines to adopt this 

suggestion because the examples of 

different types of entities included there 

is intended to be illustrative, not 

exhaustive, and additional examples of 

business organizations are unnecessary. 

In addition, IL AG suggested that Item 

1 be expanded to include the date when 

the franchisor was organized.323 The 

Commission also declines to adopt this 

suggestion. The franchisor already must 

disclose how long it has been in 

business and has offered franchises. We 

believe that time period, not the date of 

organization, is most relevant to a 

prospective franchisee. Moreover, 

neither the original Rule nor the UFOC 

Guidelines requires this information, 

and the Commission is reluctant to 

introduce an inconsistency with the 

Guidelines on this point. 

Finally, IL AG suggested that a 

description of the competition should 

include competitors of the franchisor’s 

affiliates.324 We note that the UFOC 

Guidelines require only a ‘‘general 

description of the competition.’’

Depending upon the franchise system, 

competition of affiliates could be 

sizeable, especially with respect to 

large, publicly traded franchisors. We 

are not inclined to diverge from the 

UFOC Guidelines in the absence of 

evidence showing a problem on this 

point. 

4. Section 436.5(b) (Item 2): Business 

experience 

Consistent with the original Rule and 

UFOC Guidelines, section 436.5(b) of 

the final amended Rule requires the 

disclosure of the business experience of 

the franchisor’s directors, trustees, 

general partnerships, and certain 

executives.325 It differs from the UFOC 

Guidelines’s Item 2, however, in two 

respects. First, it does not require a 

franchisor to disclose brokers.326

Second, it expands the original Rule and 

UFOC Guidelines to prevent fraud by 

requiring the disclosure of prior 

experience of not only directors and 

executives, but other individuals who 

do not necessarily possess a title, but 

nonetheless will exercise management 

responsibility relating to the sale or 

operation of franchises being offered for 

sale. Additionally, this final amended 

Rule provision is narrower than its 

counterpart as proposed in the 

Franchise NPR, in that it deletes the 

proposed requirement to disclose prior 

experience of the officers or executives 


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327 Franchise NPR, 64 FR at 57334. 

328 Franchisors, of course, would still be required 

to include broker information, if mandated by state 

law. 

329 E.g., Gust Rosenfeld, at 4; J&G, NPR 32, at 10. 

330 Frannet, NPR 2, at 2. In this regard, it is 

noteworthy that, had the broker disclosure 

requirement been retained in the final amended 

Rule, broker information also would have been 

required in Items 3 and 4 disclosures. See Staff 

Report, at note 320. 

331 Seid, at 5–7. See also IL AG, at 4. 

332 One commenter voiced concern that Item 2 

could be misinterpreted to include owners with a 

controlling interest and asked the Commission to 

clarify this point in the Compliance Guides. Gust 

Rosenfeld, at 3–4. We note that neither the original 

Rule nor the final amended Rule focuses on 

ownership. Rather, the determining factor is control 

over the franchise operations. Accordingly, an 

owner/investor in a franchise system would not 

ordinarily have to be disclosed in Item 2, unless 

that owner/investor also manages or otherwise 

exercises control over the franchise operation. 

333See FTC v. P.M.C.S., Inc., No. 96–5426 

(E.D.N.Y. 1996) (franchisor failed to disclose control 

figure with prior bankruptcy); FTC v. The Building 

Inspector of Am., Inc., No. 93–10838Y (D. Mass. 

1993) (alleging that the franchisor failed to disclose 

the franchisor’s current executive officers and their 

business experience, litigation history concerning 

fraud or misrepresentation, and bankruptcy 

history); FTC v. Why USA, Inc., No. 92–1227–PHX–

SMM (D. Ariz. 1992) (alleging that franchisor failed 

to disclose officers and their prior litigation). 

During the Chicago public workshop, a former 

franchisee related that his franchisor did not 

disclose that the franchisor’s director of franchising 

(who was not a titled corporate officer) had been 

discharged in bankruptcy. The franchisee stated 

that, because the franchisor was small, operated by 

only five or six people, such a disclosure was 

‘‘critical, even though this person was not formally 

an officer.’’ Lay, ANPR, 22 Aug. 97 Tr., at 6. See 

also NASAA, NPR 17, at 3 (‘‘The law enforcement 

experience of some members of the [NASAA] 

Franchise Project Group reflects that franchisors 

and sellers of business opportunities have 

attempted to avoid litigation disclosures 

. . . by purposefully not giving the title ‘officer’

to individuals who, in fact, exercise significant 

management responsibility over a business.’’). Cf. 

FTC v. Netfran Dev. Corp., No. 05–CV–22223 (S.D. 

Fla. 2005) (failure to disclose that executive was 

subject to a Commission order involving fraud or 

deceptive practices); FTC v. Int’l Bartending Inst., 

No. 94–1104–A (E.D. Va. 1994) (franchisor failed to 

disclose that chairman was subject to a Commission 

order involving fraud or deceptive practices). 

334 The Franchise NPR’s version of Item 2 also 

referenced subfranchisors. As one commenter 

noted, however, a reference to subfranchisors is 

unnecessary because the term ‘‘franchisor,’’ as set 

forth in the Rule’s definitions (and the UFOC 

Guidelines’ definition), already includes the term 

‘‘subfranchisor.’’ Gust Rosenfeld, at 4. Therefore, 

that reference has been deleted. 

335See Staff Report, at 101–02. In the Franchise 

NPR, the Commission proposed achieving this goal 

by including within the definition of ‘‘officer,’’ any 

of any parent of the franchisor. Each of 

these issues is discussed in detail 

below. 

a. Brokers 

The original Rule did not require 

disclosure of brokers. The proposed 

Rule, however, tracking the UFOC 

Guidelines, required that franchisors 

‘‘list all brokers.’’327 As noted above, 

based upon the comments, the final 

amended Rule does not include the 

UFOC Guidelines’ provision that 

franchisors identify its brokers in Item 

2.328 During the Rule amendment 

proceeding, a few commenters asserted 

that such disclosure is unnecessary.329

For example, Frannet, a franchise 

broker, voiced concern that the 

proposed inclusion of brokers in Item 2 

would require franchisors to disclose 

immaterial information about ‘‘literally 

hundreds of business brokers each of 

whom will receive a commission in the 

event that a prospect referred by any 

such person ultimately purchases a 

franchise,’’ resulting in a ‘‘voluminous’’

UFOC, with ‘‘no value to the 

prospective franchisee.’’330

On the other hand, Michael Seid, a 

franchise industry consultant, strongly 

objected to the deletion of broker 

information from Item 2 because 

prospective franchisees often rely on 

statements made by brokers in deciding 

whether to purchase a franchise. In his 

view, prospective franchisees perceive 

brokers as being independent, thirdparty experts. He opined that listing 

them in a disclosure document would 

dispel that notion, making it clear that 

brokers are authorized agents of the 

franchisor.331

Some prospective franchisees may 

rely on a broker’s statements in the 

course of purchasing a franchise, and 

some brokers may make false claims—

such as false financial performance 

representations. Nonetheless, the 

Commission is not convinced that 

broker disclosures are warranted in a 

franchise disclosure document. 

Item 2 appropriately requires 

franchisors to disclose the background 

of those individuals who control the 

franchisor and those who actually 

manage franchisees. That information is 

material because prospective 

franchisees need to know the identity 

and business experience of the 

individuals in command of the 

franchisor in order to assess whether 

these individuals are likely to be able to 

perform as promised under the 

franchise agreement. Unlike franchisors, 

brokers do not create or implement 

franchisor policy, nor do they oversee 

performance of post-sale obligations to 

the franchisee. Accordingly, prospective 

franchisees are less likely to give 

decisive weight to an individual 

broker’s expertise or background in 

assessing the merits of purchasing a 

franchise. 

Moreover, even if a broker were to 

make false claims, the prospective 

franchisee has the benefit of the 

franchisor’s disclosure document to 

assess those claims before purchasing a 

franchise. For example, a franchisor 

statement in Item 19 that it does not 

authorize the making of financial 

performance claims should raise doubts 

about a broker’s veracity if the broker 

were to make his or her own 

performance claims. Similarly, a 

franchisor’s statement in Item 3 that it 

has been sued by franchisees would 

dispel any claim by a broker that the 

franchisor has not been previously sued. 

The counteractive effect of the 

disclosure document gives the 

Commission reason to doubt that the 

inclusion of broker information among 

the required Item 2 disclosures would 

yield more than a scant benefit to 

prospective franchisees. Further, the 

disclosure of brokers would also be 

cumbersome, especially for large 

franchise systems that may employ 

hundreds of brokers nationally. Thus, 

the Commission concludes that this 

benefit would not likely outweigh the 

corresponding compliance costs and 

burdens. 

Finally, the deletion of brokers from 

Item 2 as had been proposed in the 

Franchise NPR obviously does not 

curtail brokers’ liability for false claims. 

Franchise brokers, like virtually all 

other individuals conducing interstate 

commerce, remain liable under Section 

5 of the FTC Act for their own 

misrepresentations. In short, while the 

Commission favors adopting UFOC 

Guidelines approach to the fullest 

extent possible, we believe this is one 

area where an exception is warranted. 

b. Individuals with management 

responsibility 

Section 436.5(b) of part 436 requires 

a franchisor to disclose not only the 

background of the franchisor’s directors 

and executives, but also ‘‘individuals 

who will have management 

responsibility relating to the sale or 

operation of franchises offered by this 

document.’’332 Individuals listed in Item 

2 must also disclosure their litigation 

(Item 3) and bankruptcy (Item 4) 

histories as well. This provision ensures 

that franchisors cannot conceal a 

manager’s lack of experience, prior 

litigation, or bankruptcy history by 

simply avoiding giving the manager a 

formal title.333 Although the language 

has been revised to achieve greater 

clarity and specificity, this aspect of this 

provision is conceptually very similar to 

the rule as proposed in the Franchise 

NPR.334 The breadth of this provision is 

intended to leave no doubt that 

franchisors must disclose all individuals 

who in fact exercise management 

responsibility over the sale or operation 

of franchises being offered for sale, 

regardless of any formal title.335


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‘‘de facto officer,’’ ‘‘namely any individual with 

significant management responsibility for the 

marketing and/or servicing of franchisees whose 

title does not reflect the nature of the position.’’

Franchise NPR, 64 FR at 57332. Some commenters 

agreed with the Commission that it is necessary to 

capture individuals who, without an appropriate 

title, in fact function as officers or directors. E.g., 

NASAA, NPR 17, at 3. Others asserted that the term 

‘‘de facto officer’’ is ‘‘nebulous,’’ creating more 

problems than it would solve. E.g., Snap-on, NPR 

16, at 2; Gurnick, NPR 21, at 3–4; J&G, NPR 32, at 

8; Marriott, NPR 35, at 12. Another voiced concern 

about application to large corporations, where there 

may be many directors or managers, each of whom 

would now have to be disclosed. Tricon, NPR 34, 

at 3. Based upon the Franchise NPR comments, the 

Commission has determined to delete the term and 

description of ‘‘de facto officer’’ from the final 

amended Rule. At the same time, Item 2 requires 

a franchisor to identify all individuals who have 

management responsibility over the franchises, 

regardless of any formal title. This is true even if 

the individual happens to be an officer of a parent 

or an affiliate. 

336 Franchise NPR, 64 FR at 57334. 

337 Lewis, NPR 15, at 12. See also Gust Rosenfeld, 

at 4. BI, NPR 28, at 5. But see Bundy, NPR 18, at 

6–7 (Item 2 should cover not only officers and 

executives of parents, but affiliates as well). 

338See 16 CFR 436.1(a)(4). In the original SBP, the 

Commission stated that a franchisor’s litigation 

history is material because it bears directly on the 

‘‘integrity and financial standing of the franchisor.’’

Original SBP, 43 FR at 59649. See, e.g., United 

States v. We The People Forms and Serv. Centers 

USA, Inc., No. CV 04 10075 GHK FMOx (C.D. Cal. 

2004) (full disclosure would have revealed lawsuits 

and injunctions involving the franchisor’s 

bankruptcy petition preparation services); FTC v. 

WhiteHead, Ltd., Bus. Franchise Guide (CCH) ¶

10062 (D. Conn. 1992) (full disclosure would have 

revealed a $10 million judgment in a fraud action 

brought by former franchisees); FTC v. Joseph 

Hayes, No. 4:96CV02162SNL (E.D. Mo. 1996) (full 

disclosure would have revealed prior state fines and 

injunctions); FTC v. Inv. Dev., Inc., Bus. Franchise 

Guide (CCH) ¶ 9326 (full disclosure would have 

revealed insurance fraud convictions). See also 

Marks, ANPR, 19 Sept. 97 Tr., at 8 (‘‘I always 

counsel clients . . . to look at the litigation section 

among one of the first sections.’’). 

339 See UFOC Guidelines, Item 3. See AFA, at 2. 

340 See UFOC Guidelines, Item 3 A. See also 

AFA, at 2. Under this provision, a fast-food 

restaurant franchisor, for example, would have to 

disclose a product liability class action suit that, if 

successful, might materially affect its financial 

condition or ability to maintain its business 

operations. This disclosure is consistent with longstanding Commission policy that a franchisor’s 

continued financial viability and ability to perform 

as promised is material to a potential investor. See, 

e.g., Original SBP, 43 FR at 59649. 

341 As noted previously, this is one area where 

the original Rule was broader than the UFOC 

Guidelines, which require no disclosure of parent 

information, unless the parent is an affiliate. 

342 Staff Report, at 104. 

343 PMR&W, NPR 4, at 9. See also IFA, at 3; 

PREA, at 1–2; Spandorf, at 4; Triarc, NPR 6, at 2; 

NFC, NPR 12, at 28; PREA, NPR 20, at 1. 

c. Parents 

Part 436 as proposed in the Franchise 

NPR required franchisors to disclose the 

prior experience of a parent’s officers or 

executives.336 This proposal, however, 

was criticized on the grounds that such 

a broad disclosure about directors and 

officers of a parent would clutter Item 

2 with information ‘‘of marginal 

relevance and importance to prospective 

franchisees.’’337 In response to 

commenters’ persuasive arguments, the 

Commission has determined to omit the 

requirement from section 436.5(b). 

The Commission has come to the 

view that the disclosure of prior 

experience of individuals associated 

with a parent of a franchisor is generally 

unnecessary. While in many instances a 

parent’s officers may exercise general 

management responsibilities that may 

affect the franchisor, they are not 

necessarily involved in managing the 

franchisor or its franchises. Because of 

their lack of direct control over the 

franchisor, background information on 

them is unlikely to be material to a 

prospective franchisee. Accordingly, the 

minimal benefit that might accrue to 

prospective franchisees from a 

disclosure of the prior experience of 

individuals associated with the 

franchisor’s parent would not likely 

outweigh the compliance costs and 

burdens. 

5. Section 436.5(c) (Item 3): Litigation 

Section 436.5(c) of the final amended 

Rule retains the original Rule’s 

requirements to disclose certain 

pending and prior litigation, as well as 

current injunctive or restrictive orders. 

Like the original Rule, the final 

amended Rule requires disclosure, in 

some instances, of litigation involving 

the franchisor’s parent.338 Consistent 

with the UFOC Guidelines, however, 

part 436 expands on the original Rule by 

requiring franchisors to disclose actions 

involving not only the franchisor, its 

directors and officers, and affiliates, but 

predecessors as well.339 In addition, 

section 436.5(c)(1)(i)(B), in accord with 

the UFOC Guidelines, now requires the 

disclosure of routine litigation that may 

impact the franchisor’s financial 

condition or ability to operate the 

business.340 At the same time, as also 

proposed in the Franchise NPR, the 

Commission has determined that 

section 436.5(c)(1)(B)(ii) of the final 

amended Rule should expand on both 

the original Rule and UFOC Guidelines 

by requiring franchisors to disclose 

material franchisor-initiated litigation 

against franchisees involving the 

franchise relationship. 

The comments on Item 3 focused on 

five broad topics: (1) whether and to 

what extent disclosures about a 

franchisor’s parent should be required; 

(2) to what extent disclosures about a 

franchisor’s affiliates should be 

required; (3) whether disclosure about 

out-of-court settlements favorable to the 

franchisor or settlements that by their 

terms are confidential should be 

required; (4) whether the Rule as 

proposed in the Franchise NPR needed 

clarification to avoid implying that 

dismissed actions should be disclosed 

in cases when no liability is imposed 

upon or accepted by the franchisor; and 

(5) whether and to what extent 

disclosure of franchisor-initiated 

litigation would be required. Each of 

these topics is discussed in the sections 

that follow. 

a. Parent disclosures 

The original Rule required the 

disclosure of litigation relating to a 

franchisor’s parent.341 Part 436 as 

proposed in the Franchise NPR retained 

this broad approach. The Commission, 

however, has decided that the final 

amended Rule should narrow 

considerably the scope of the 

franchisor’s obligation to disclose 

litigation relating to a parent. As 

recommended in the Staff Report, the 

final amended Rule requires the 

disclosure of litigation relating to a 

franchisor’s parent only in the case of a 

‘‘parent . . . who guarantees the 

franchisor’s performance.’’342

The narrowed scope of the parent 

litigation disclosure responds to 

persuasive comments challenging the 

value of broad parent litigation 

disclosures to prospective purchasers 

and complaining of the burden to 

franchisors. Typical of these comments 

are those submitted by PMR&W, arguing 

that the parent litigation disclosure is 

confusing at best and offers little if any 

benefit to prospective franchisees, and 

noting that a publicly-traded parent may 

face countless securities fraud claims, 

for example, that would have to be 

disclosed, ‘‘overflowing [the disclosure 

document] with largely irrelevant parent 

litigation summaries, obscuring and 

diverting readers from the more 

important disclosures of franchisor 

litigation, and greatly increasing 

compliance burdens and costs.’’343

Based upon review of the record, 

including the Staff Report, the 

Commission is persuaded that litigation 

involving a parent (which may be 

voluminous in the case of a publiclytraded parent) may have little bearing 

on the operation of the franchise system 

itself. Yet, the Commission does not 

believe that complete elimination of the 

parent litigation disclosure is justified. 

Rather, the Commission has determined 

to narrowly tailor the parent litigation 

disclosure to those circumstances where 

the parent guarantees the franchisor’s 

performance, as recommended in the 


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344 See Staff Report, at 104. The Staff Report 

recommendation that the parent litigation 

disclosure be narrowed to instances where the 

parent guarantees the franchisor’s performance 

prompted few comments. PREA and Spandorf 

opined that parent disclosures have merit where the 

franchisor has few assets or a prior history such that 

the prospect is looking to the parent for assurance 

of continued financial viability, and advocated an 

exemption from the Item 3 parent litigation 

disclosure if the franchisor has sufficient net worth 

and experience. They proposed a net worth of not 

less than $5 million and a requirement that the 

franchisor has had at least 25 franchisees for each 

of the preceding five years. PREA, at 1–2; Spandorf, 

at 4–7. See also PREA, NPR 20, at 1. The 

Commission finds this suggestion unworkable. As 

noted throughout this document, the Commission 

favors bright-line provisions that enable franchisors 

to determine easily where the Rule applies to a 

franchise sale. Moreover, the Commission is 

disinclined to adopt exemptions from specific 

required disclosures—as opposed to exemptions 

from the Rule itself. On balance, the Commission 

believes that the narrowly-tailored parent litigation 

disclosure included in the final amended Rule 

strikes the appropriate balance, reducing 

compliance costs and burdens without depriving 

prospective franchisees of material information 

necessary to make an informed investment 

decision. 

345 But see PREA, at 1–2; Spandorf, 4–7 (asserting 

that prior litigation of a parent who guarantees 

performance may be irrelevant, and urging the 

Commission to adopt a net worth standard). As an 

alternative, PREA and Spandorf suggested that the 

Commission adopt an approach similar to that of 

the SEC for the disclosure of legal proceedings to 

securities investors: a guarantor need only disclose 

material legal proceedings other than ordinary 

routine litigation. PREA, at 2. We noted, however, 

that Item 3 is already limited to material suits, or 

individual suits which, in the aggregate, are 

material. This is sufficient to limit Item 3’s reach 

with respect to guarantors. 

346 Item 3 of the proposed Rule published in the 

Franchise NPR required disclosure of government 

enforcement actions only for an affiliate ‘‘who offers 

franchises under the franchisor’s principal 

trademark.’’ The final amended Rule requires such 

disclosure for ‘‘an affiliate who has offered or sold 

franchises in any line of business within the last 10 

years.’’ Section 436.5(c)(2) (emphasis added). 

347 Piper Rudnick urged the Commission to 

clarify in the Compliance Guides that disclosures 

involving affiliates and predecessors—in Items 1, 3 

and 4 —should be limited to the time period when 

the affiliates or predecessors were ‘‘associated’’ or 

‘‘affiliated with the franchisor.’’ Piper Rudnick, at 

5–6. The Commission disagrees. As an initial 

matter, depending upon the facts, a predecessor 

entity and successor franchisor may not exist 

contemporaneously and thus may never be 

‘‘associated’’ or ‘‘affiliated’’ with each other. As for 

affiliates, Piper Rudnick’s suggestion could 

seriously undermine the very purpose for the 

disclosure itself. The affiliate disclosures in Items 

1, 3, and 4 ensure that a prospective franchisee 

understands fully the background of the 

franchisor’s affiliates. Significant litigation or a 

prior bankruptcy, for example, may signal that the 

affiliate lacks business acumen and, therefore, poses 

a potential risk, especially if franchisees of the 

system are contractually required to conduct 

business with the affiliate. For that reason, the 

history of the affiliate as a business entity, not its 

history of association with the franchisor, is 

material to a prospective franchisee and should be 

disclosed. 

348 Staff Report, at 104–5. 

349 The Item 3 disclosure of currently effective 

injunctive or restrictive orders and decrees is also 

broader than the other Item 3 disclosures in that it 

covers Canadian orders and decrees. This is 

consistent with the UFOC Guidelines. See UFOC 

Guidelines, Item 3, C. 

350 We note that there is no private right of action 

to enforce the Franchise Rule. See, e.g., Holloway 

v. Bristol-Meyers Corp., 485 F.2d 986 (D.C. Cir. 

1973) (no implied private right of action under the 

FTC Act); Days Inn of Am. Franchising, Inc., v. 

Windham, 699 F. Supp. 1581 (N.D. Ga. 1988) (no 

private right of action exists to enforce the 

Franchise Rule). 

351 NASAA, at 5. 

Staff Report.344 Where a parent, for 

whatever reason, induces franchise sales 

by promising to back the franchisor 

financially or otherwise guarantees the 

franchisor’s performance, the parent’s 

prior litigation history becomes material 

to the prospective franchisee and must 

be disclosed.345 As noted throughout 

this document, background information 

on all parties having post-sale 

performance obligations is material to a 

prospective franchisee. There is no 

meaningful distinction between parents 

who make performance guarantees and 

franchisors with various contractual 

performance obligations. 

b. Affiliates 

As noted, the original Rule did not 

require the disclosure of litigation 

involving a franchisor’s affiliate. The 

proposed rule published in the 

Franchise NPR incorporated the UFOC 

Guidelines’ requirement that franchisors 

disclose litigation involving an ‘‘affiliate 

who offers franchises under the 

franchisor’s principal trademark.’’

Section 436.5(c) of the final amended 

Rule retains this concept, but modestly 

broadens the requirement, consistent 

with the Staff Report and Staff Report 

comments, to encompass: (1) litigation 

involving not only affiliates who offer 

franchises under the franchisor’s 

principal trademark, but also any 

affiliate who ‘‘guarantees the 

franchisor’s performance;’’ and (2) with 

respect to the requirement to disclose 

government injunctions or restrictive 

orders, actions involving an affiliate 

‘‘who has offered or sold franchises in 

any line of business within the last 10 

years.’’346

The affiliate litigation disclosure 

provision generated limited 

comment.347 One commenter urged the 

Commission to broaden Item 3’s scope 

to include litigation involving all 

affiliates, not just those under the 

franchisor’s principal trademark. The 

UFOC Guidelines’ narrow reach extends 

only to instances where affiliates offer 

franchises under the franchisor’s 

principal trademark. Arguably, this 

restrictive approach could allow a 

franchise system to hide derogatory 

facts about its litigation history by 

acquiring and operating a competing 

franchise system that uses a different 

mark. In such an instance, the newlyacquired franchisor would have no 

obligation to disclose its past litigation, 

falling outside the definition of both 

‘‘predecessor’’ and ‘‘affiliate.’’ On the 

other hand, the record contains no 

suggestion that such instances are 

common. Thus, the Commission does 

not believe it warranted to require 

franchisors to disclose all affiliate 

litigation to address that hypothetical 

concern. Such a measure would be 

broader than necessary to address 

concerns documented in the record, 

would be burdensome, especially for 

large companies with multiple brands, 

and would not likely yield 

commensurate benefits to prospective 

franchisees. 

Nevertheless, as noted above, the 

Commission has determined to expand 

the requirement to disclose affiliate 

litigation in two respects in order to 

provide prospects with material 

information. First, for currently effective 

government injunctive or restrictive 

orders delineated in section 436.5(c)(2), 

the final amended Rule adopts the Staff 

Report recommendation to broaden Item 

3 affiliate coverage to include any 

affiliate who has offered or sold 

franchises in any line of business within 

the last 10 years.348 In the Commission’s 

view, a government injunction or 

comparable order349 (with or without a 

civil penalty or other redress), may be 

an indicator of fraud or other unlawful 

conduct.350 Accordingly, a franchisor 

with a history of fraud or Rule 

violations should not be able to avoid 

disclosure of government actions against 

it merely by establishing a new 

corporation or switching trademarks. 

We believe this approach will result in 

the disclosure of material litigation 

history, without unduly burdening 

large, multi-brand franchise networks. 

Second, section 436.5(c)(1) of the final 

amended Rule requires franchisors to 

disclose litigation involving not only 

affiliates that offer franchises under the 

franchisor’s principal trademark, but 

also any affiliate that guarantees 

performance. This responds to 

NASAA’s comment, urging the 

Commission to make clear that the term 

‘‘affiliate’’ in Item 3 includes those 

guaranteeing performance, similar to the 

parent disclosure noted above.351 As 

NASAA noted, there is no practical 

distinction between a parent and an 

affiliate who guarantees performance. In 

both instances, the prospective 

franchisee may rely on the guarantee in 

considering whether to purchase the 

franchise. Therefore, the litigation 

history of both parents and affiliates 


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352 16 CFR at 436.1(a)(4)(ii). 

353 Footnote 4 in the proposed Rule stated, in 

relevant part: ‘‘If a settlement agreement must be 

disclosed in this Item, all material settlement terms 

must be disclosed, whether or not the agreement is 

confidential.’’ Franchise NPR, 64 FR at 57334. See 

also NASAA Commentary, Item 3. 

354 Footnote 2 in the proposed rule stated: 

‘‘Franchisors are not required to disclose actions 

that were dismissed by final judgment without 

liability or entry of an adverse order. However, 

franchisors must disclose dismissal of a material 

action in connection with a settlement.’’ Franchise 

NPR, 64 FR at 57334. As explained in the text 

above, this footnote has been deleted from the final 

amended Rule. 

355 UFOC Guidelines, Item 3 Definitions, iv. 

356 PMR&W, NPR 4, at 10; Lewis, NPR 15, at 13. 

According to Mr. Lewis, without such a limitation, 

the Rule would penalize franchisors and 

subfranchisors who achieve favorable settlements, 

thereby discouraging settlement of litigation. See 

also Snap On, NPR 16, at 3. 

357 Section 436.5(c)(1)(iii)(B) of the final amended 

Rule specifies that ‘‘held liable’’ as used in Item 3 

means that ‘‘as a result of claims or counterclaims, 

the person must pay money or other consideration, 

must reduce an indebtedness by the amount of an 

award, cannot enforce its rights, or must take action 

adverse to its interests.’’ In other words, a 

franchisor need not disclose a settlement if the 

franchisor neither pays any material consideration, 

nor is bound by obligations that are materially 

adverse to its interests. 

358 Gurnick, NPR 21, at 4. See also J&G, NPR 32, 

at 10–11; Marriott, NPR 35, at 15. 

359 Gurnick, NPR 21, at 5. But see Stadfeld, NPR 

23, at 12 (urging the Commission to keep the UFOC 

requirement of disclosing specific payments in 

settlements regardless of confidentiality 

agreements). 

360 Baer, NPR 11, at 11. 

361 Mr. Baer also suggested that where a case has 

been settled by purchase or re-purchase of a 

franchised business and the amount does not 

exceed the fair market value of the business, a 

franchisor should be permitted to state: ‘‘The 

settlement included a purchase of the franchise . . . 

for an amount which, in our judgment, does not 

exceed its fair market value.’’ Baer, NPR, 11, at 11. 

362 Baer, NPR 11, at 11. 

363 See Franchise NPR, 64 FR at 57334, note 2. 

who guarantee performance is material 

and should be disclosed. 

c. Settlements 

With respect to settled actions, the 

original Rule required disclosure of any 

civil action a person subject to the 

provision ‘‘has settled out of court’’ in 

the previous seven fiscal years. It did 

not distinguish between confidential 

and nonconfidential settlements.352

Consistent with the UFOC Guidelines, 

the Franchise NPR proposed that 

franchisors disclose the terms of any 

settled actions, expressly including 

confidential settlements.353 Several 

commenters voiced concern about the 

requirement to disclose settlements—

including confidential settlements. 

Settlements Favorable to the 

Franchisor. PMR&W and Warren Lewis 

observed that Item 3 in the Rule as 

proposed in the Franchise NPR did not 

allow franchisors to omit settled 

litigation where the settlement is 

favorable to the franchisor or neutral.354

Both commenters cited to the UFOC 

Guidelines,355 which state that 

‘‘settlement of an action does not 

diminish its materiality if the franchisor 

agrees to pay material consideration or 

agrees to be bound by obligations which 

are materially adverse to its 

interests.’’356 The point these 

commenters were making is that the 

UFOC Guidelines, by implication, 

would deem favorable or neutral 

settlements to a franchisor not material 

and would not call for their disclosure. 

The Commission believes this 

interpretation is correct, and intends 

that result in adopting the final version 

of this provision. Item 3, therefore, 

permits franchisors to omit settled 

litigation where a settlement is favorable 

to the franchisor or otherwise neutral.357

Confidential Settlements. With 

respect to the disclosure of confidential 

settlements, David Gurnick commented 

that the disclosure of any settlement 

terms that the parties agreed to keep 

confidential is bad policy because 

confidential settlements benefit both 

parties and the ‘‘opportunity for 

confidentiality is often an important 

dynamic to resolve a dispute.’’358 He 

urged that the Rule permit the 

disclosure of material facts about 

confidential settlements in the 

aggregate, so that the franchisor could 

make the disclosure about a group of 

cases, without violating the 

confidentiality of any one or more cases. 

For example, a franchisor could state: 

‘‘we have settled 10 cases with 

confidentiality agreements. In each of 

these cases, we made payments to the 

franchisee in the mid five figure 

range.’’359

Similarly, John Baer questioned the 

disclosure of exact dollar amounts or 

other confidential settlement terms. 

‘‘This often can expose the franchisor to 

the choice of not being able to register 

its franchise in a particular state or 

making a disclosure and possibly 

breaching the terms of the confidential 

settlement agreement.’’360 He suggested 

that the Commission allow franchisors 

to disclose approximate dollar amounts, 

such as ‘‘the low four figures,’’ or, in the 

alternative, a range of figures.361

In keeping with the goal of reducing 

inconsistencies with the UFOC 

Guidelines, the Commission is 

disinclined, based on this record, to 

deviate from the UFOC Guidelines with 

respect to the scope of the confidential 

settlements disclosure. This issue was 

debated when NASAA revised the 

UFOC Guidelines in 1993, with input 

from many interested parties. Moreover, 

franchisors using the UFOC Guidelines 

format have been living under this 

policy on the state level for more than 

10 years, apparently without much 

hardship. 

Further, NASAA has recognized that 

the disclosure requirements concerning 

confidential settlements might raise 

breach of contract issues. Accordingly, 

the NASAA Commentary on the UFOC 

Guidelines specifically limited the 

disclosure to those settlements that were 

entered into after the adoption of the 

UFOC Guideline revisions on April 25, 

1993. Item 3 of the final amended Rule 

incorporates a similar concept. The 

Commission recognizes that some small 

or regional franchisors who use the 

Franchise Rule format exclusively have 

not had the opportunity to phase-in 

confidential settlement disclosures. 

Based on this consideration, the 

Commission has added a footnote 2 to 

section 436.5(c)(3)(ii) of the final 

amended rule that specifies that ‘‘any 

franchisor who has historically used 

only the Franchise Rule format, or who 

is new to franchising, need not disclose 

confidential settlements entered prior to 

the effective date of this Rule.’’ Thus, 

franchisors historically using only the 

Franchise Rule format need not disclose 

confidential settlements entered into 

prior to the effective date of the final 

amended Rule, and only franchisors 

who have used the UFOC Guidelines 

format in the past must continue to 

disclose confidential settlements, as is 

the current practice. 

John Baer raised a related point that 

the Commission finds persuasive. He 

asserted that it would be unfair to 

require the disclosure of confidential 

settlement agreements ‘‘if they were 

entered into by a company at a time 

when it was not yet engaged in 

franchise activities.’’362 It would be 

unreasonable to expect a non-franchisor 

to negotiate settlements with an eye 

toward the possibility that it may engage 

in franchise sales in the future. 

Accordingly, footnote 2 to section 

436.5(c) of the final amended Rule 

provides that ‘‘franchisors need not 

disclose the terms of confidential 

settlements entered into before 

commencing franchise sales.’’

d. Dismissed actions 

As noted above, Item 3 requires a 

franchisor to disclose certain prior 

actions in which it has been ‘‘held 

liable.’’ Under this standard, a dismissal 

without any imposition or acceptance of 

liability on the franchisor’s part, would 

not have to be disclosed.363

In response to the Staff Report, two 

commenters observed that this 


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364 Piper Rudnick, at 1; Duvall, at 1. 

365 Additionally, H&H opined that Item 3 of the 

proposed Rule published in the Franchise NPR 

seemed to suggest that a franchisor must disclose 

all material civil litigation in which the defendant 

was held liable in the 10-year time period, but only 

the enumerated list of actions if named in civil 

litigation. H&H suggested that the disclosure of civil 

litigation should be limited to the enumerated list 

regardless of whether the franchisor was named or 

was held liable in a prior suit. H&H, NPR 9, at 17–

18. See also NFC, NPR 12, at 28. H&H also 

suggested that the word ‘‘material’’ be substituted 

for ‘‘significant.’’ H&H, NPR 9, at 18. The final 

amended Rule incorporates these suggestions. 

366 16 CFR 436.1(a)(4)(ii). 

367 IL AG asserted that franchisors should be 

permitted to disclose settled litigation in its favor 

or which is neutral. It explains that a state franchise 

examiner would question why a case previously 

listed as pending in one version of a disclosure 

document would then disappear upon settlement or 

dismissal from later versions without explanation. 

IL AG, at 5. We do not find this rationale sufficient 

to justify retaining a redundancy in the final 

amended Rule. As noted throughout this document, 

however, states have the power to include 

additional disclosures, if they so choose, provided 

it is possible simultaneously to comply with both 

the state rule and a corresponding final amended 

Rule provision. 

368 Section 436.5(c)(1)(ii) requires disclosure of 

litigation to which a covered person ‘‘was a party,’’

and therefore reaches more than just actions where 

the franchisor or other covered person was a 

plaintiff. As a practical matter, however, because 

other elements of Item 3 cover various actions 

where the franchisor or other covered person was 

or is the defendant, the significance of this new part 

436 section is that it reaches actions initiated by the 

franchisor or other covered person. 

369 See Cendant, ANPR 140, at 3 (noting that in 

vicarious liability cases—where a customer sues the 

franchisor for alleged wrongdoing by the individual 

franchisee—the franchisor often must sue the 

franchisee to protect its interests and to obtain 

indemnification. Such suits, therefore, are 

essentially between the customer and the franchisee 

and are not indicative of franchise system 

performance.). 

370 The only difference is that the time frame of 

the requirement has been tightened, now covering 

only actions ‘‘within the past fiscal year,’’ instead 

of ‘‘pending actions.’’ This topic is addressed in 

greater detail near the end of the Item 3 discussion. 

371See AFA, at 2; Gee, at 2; Bundy, at 5; Karp, 

at 2; AFA, ANPR 62, at 2; Lagarias, ANPR 125, at 

3; Selden, ANPR 133, Attachment at 2; Karp, ANPR, 

19 Sept. 97 Tr., at 98. 

372 SBA, ANPR 36, at 5–6. See also IL AG, ANPR 

77, at 2. 

373 Peter Lagarias observed that ‘‘[f]ranchisors are 

often able to wield the threat of litigation, especially 

by threatening to seek attorneys’ fees, to deter 

franchisees from suing or maintaining lawsuits 

against them. Thus while loss of a single lawsuit is 

seldom significant to franchisors, loss of a lawsuit 

against their franchisor is often fatal for 

franchisees.’’ Lagarias, ANPR 125, at 3. See also 

Merret, ANPR 126; Brandt, ANPR 137; Doe, ANPR, 

7 Nov. 97 Tr., at 267. 

374 NFA, NPR 27, at 2. See also AFA, NPR 14, 

at 4; NASAA, NPR 17, at 4; Bundy, NPR 18, at 7; 

Stadfeld, NPR 23, at 11; Karp, NPR 24, at 19. 

375 Stadfeld, NPR 23, at 11. See also Karp, NPR 

24, at 20 (disclosure costs pale in comparison with 

litigation costs). 

limitation on prior actions is undercut 

by the inclusion in the proposed 

Franchise NPR version of Item 3 of a 

broad provision requiring franchisors 

and others to disclose if they have ‘‘been 

a defendant in a material action.’’ They 

observed that while dismissals without 

liability need not be disclosed under the 

‘‘held liable’’ requirement of Item 3, 

they would have to be disclosed under 

the second more general ‘‘defendant in 

a material action’’ requirement. They 

urged the Commission to delete the 

‘‘defendant in a material action’’

element of Item 3, to limit prior 

litigation disclosures to only those 

actions in which the defendant incurred 

liability.364 In response to these 

comments, the Staff Report concluded 

that the drafting of the Franchise NPR’s 

version of Item 3 resulted in 

overbreadth, and therefore 

recommended that Item 3 be narrowed 

accordingly.365

The Commission has carefully 

considered this point. As noted above, 

the UFOC Guidelines clearly permit 

franchisors to limit the disclosure of 

prior actions to matters in which they 

were ‘‘held liable.’’ This approach is 

also consistent with the original Rule, 

which limited prior litigation to matters 

in which the franchisor ‘‘has been held 

liable . . . resulting in a final judgment 

or has settled out of court.’’366

Moreover, the language ‘‘been a 

defendant in a material action’’ is 

arguably redundant: if a defendant was 

not held liable in a prior action, then the 

underlying suit was not material. For 

these reasons, the phrase ‘‘been a 

defendant in a material action’’

included in the proposed Rule 

published in the Franchise NPR has 

been deleted from the final amended 

Rule.367

e. Franchisor-initiated litigation 

One of the most important ways part 

436 of the final amended Rule differs 

from both the original Rule and the 

UFOC Guidelines is that part 436 

includes a requirement that franchisors 

disclose franchisor-initiated 

litigation.368 Specifically, section 

436.5(c)(1)(ii) requires a franchisor to 

disclose litigation in which it: 

was a party to any material civil 

action involving the franchise 

relationship in the last fiscal year. 

For purposes of this section, 

‘‘franchise relationship’’ means 

contractual obligations between the 

franchisor and franchisee directly 

relating to the operation of the 

franchised business (such as royalty 

payment and training obligations). 

It does not include suits involving 

suppliers or other third parties, or 

indemnification for tort liability.369

This final amended Rule provision is 

substantially the same as its counterpart 

proposed in the Franchise NPR.370

Throughout the Rule amendment 

proceeding, franchisees and their 

representatives,371 as well as the Small 

Business Administration,372 urged the 

Commission to adopt such a 

requirement, asserting that franchisorinitiated litigation is material because it 

is a clear indicator of: (1) the quality of 

the franchisor-franchisee relationship; 

and (2) the extent to which the 

franchisor may be litigious. Others 

added that the original Rule and the 

UFOC Guidelines compelled franchisors 

to disclose franchisor-initiated litigation 

only if a franchisee subsequently filed a 

counterclaim. Yet, as these commenters 

noted, franchisees often do not have the 

financial resources to initiate a suit or 

to pursue a counterclaim.373 Therefore, 

according to their argument, disclosure 

of franchise relationship litigation 

should not depend upon which party 

happens to have the resources to file a 

suit. Typical of these comments is the 

one submitted by NFA, an association of 

Burger King franchisees, stating that the 

disclosure of such information: 

would be beneficial to potential 

franchisees, as it would allow such 

franchisees to be aware of any 

difficulties current or prior 

franchisees have encountered with 

the franchisor. In addition, the 

required disclosure of franchisorinitiated litigation would further 

aid potential franchisees by serving 

as an indicator of how franchisors 

resolve their disputes, and whether 

or not such franchisors are quick to 

resort to litigation in order to 

resolve disputes. The possibility of 

extensive litigation is important to 

a potential franchisee, as it may 

affect the calculation of costs 

involved in acquiring such a 

franchise. In addition, the 

continued threat of litigation from 

the franchisor may well affect later 

dealings between the parties, and as 

such is critical information of 

which the franchisee should be 

aware.374

A few commenters also maintained 

that compliance costs arising from such 

a disclosure are not great. For example, 

Seth Stadfeld observed that ‘‘once the 

initial changes are made [to the 

disclosure document], all that must be 

done is to update the disclosed 

litigation annually or sooner if material 

changes take place.’’375 The AFA was 

more blunt in its assessment: 

The Commission has a choice. It 

can save franchisors a few pennies 

on a slightly larger offering circular 


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376 AFA, NPR 14, at 4. 

377 H&H, NPR 9, at 17 (little value in requiring 

franchisors to disclose garden variety litigation 

involving franchisees, such as debt collection 

actions). See also Cendant, at 3; Quizno’s, NPR 1, 

at 1; Gurnick, NPR 21, at 5; Kaufmann, ANPR 33, 

at 4. 

378 E.g., Baer, ANPR 25, at 3; Kaufmann, ANPR 

33, at 4; Jeffers, ANPR 116, at 1–2; Forseth, ANPR, 

18 Sept. 97 Tr., at 20. In addition, several 

franchisors voiced concern about the interplay 

between the franchisor-initiated litigation 

disclosure and state registration laws. Specifically, 

they opposed the disclosure because it might trigger 

burdensome state updating requirements. For 

example, Quizno’s asserted that if the disclosure of 

franchisor-initiated litigation is deemed material by 

the Commission, it also would be deemed material 

by the states and, therefore, franchisors would have 

to stop selling in a state every time they filed a suit 

until they could amend their registrations. 

Quizno’s, NPR 1, at 1. See also Lewis, NPR 15, at 

13 (franchisor would have to amend their 

disclosure documents); J&G, NPR 32, at 10 (would 

prevent sales in states that require sales to stop 

until amendments are filed and approved). 

379 E.g., Quizno’s NPR 1, at 1; PMR&W, NPR 4, 

at 9; Holmes, NPR 8, at 4; Quizno’s, ANPR 16, at 

1; Kaufmann, ANPR 33, at 4; IFA, ANPR 82, at 1–

2; Cendant, ANPR 140, at 3. But see Lagarias, ANPR 

125, at 3. 

380 J&G, for example, contended that any material 

information about the franchise relationship can be 

determined from the Item 20 termination rates, as 

well as through the franchisor’s financial 

statements. J&G, NPR 32, at 10. See also GPM, NPR 

Rebuttal 40, at 4–5. 

381 E.g., Kestenbaum, ANPR 40, at 1; Tifford, 

ANPR 78, at 3. PMR&W asserted that Item 3 has a 

limited intent, namely, to: 

‘‘inform the franchisee about proven or alleged 

franchisor actions which may reflect poorly on the 

franchisor; disclosure also is required for 

franchisor-initiated litigation where a defendant 

files a counterclaim containing specified claims. A 

franchisor’s lawsuit against the franchisee, in the 

absence of a relevant counterclaim, does not reflect 

any adverse conduct by the franchisor.’’

PMR&W, NPR 4, at 10. See also Winslow, at 77; 

H&H, NPR 9, at 17; J&G, NPR 32, at 10; Marriott, 

NPR 35, at 14. But see Jeffers, ANPR 116, at 1–2 

(franchisor-initiated suits could be viewed as a 

‘‘positive attribute,’’ showing that the franchisor is 

willing to enforce its standards and trademark, and 

is willing to aggressively eliminate continuing 

violations of its franchise agreement). 

382 Snap-On, NPR 16, at 2. See also, e.g., Gurnick, 

NPR 21, at 5; NaturaLawn, NPR 26, at 1; J&G, NPR 

32, at 10; GPM, NPR Rebuttal 40, at 4–5; Kaufmann, 

ANPR 33, at 4; Tifford, ANPR 78, at 3; Cendant, 

ANPR 140, at 3. 

383 PMR&W, NPR 4, at 9. See also Snap-On, NPR 

16, at 2; J&G, NPR 32, at 10; Marriott, NPR 35, at 

14. 

384 For example, a pattern of franchisor-initiated 

lawsuits, such as royalty collection suits, may 

indicate franchisees’ unwillingness or inability to 

pay. Such information would be material to a 

prospective franchisee because it may be an 

indicator of risk in purchasing a franchise and in 

the quality of the relationship with the franchisor. 

385 See Bundy, NPR 18, at 7; Stadfeld, NPR 23, 

at 13. Eric Karp urged the Commission to broaden 

the disclosure further to include franchisor-initiated 

litigation against third-party suppliers: ‘‘If a 

franchisor were to sue a supplier of goods or 

services it sells to franchisees, over issues relating 

to quality or efficiency of supply or to block sales 

not authorized by the franchisor, the prospective 

franchisee would have good reason to want to know 

about the claim.’’ Karp, NPR 24, at 20. The 

Commission has rejected this suggestion because it 

goes beyond the goal of providing material 

information to prospective franchisees about the 

quality of the franchisor-franchisee relationship. 

386 Piper Rudnick also urged the Commission to 

clarify in the Compliance Guides the definition of 

the term ‘‘franchisor relationship.’’ In particular, the 

firm would limit ‘‘franchise relationship’’ to a 

matter arising from the franchise contract. Piper 

Rudnick, at 6. We believe a definition is 

unnecessary. Since the promulgation of the original 

Rule, franchisors have had to disclose franchiseeinitiated litigation and counterclaims involving the 

franchise relationship. Accordingly, such 

disclosures are not new. Moreover, we disagree that 

the franchise relationship is as narrow as Piper 

Rudnick suggests. Surely, a dispute that arises from 

a lease agreement or promissory note, for example, 

falls within the purview of a relationship issue that 

should be disclosed. 

387 Other suggested alternatives failed to garner 

significant support, including the following. 

PMR&W suggested requiring a franchisor to 

disclose, on an annual basis, the number of 

litigation and arbitration proceedings it has pending 

against franchisees, along with a general summary 

of the types of claims involved. PMR&W, NPR 4, at 

10. Wendy’s suggested that the disclosure should be 

limited to ‘‘specifically enumerated types of claims 

which are significant to the entire franchised 

system,’’ as well as a significant dollar amount. 

Wendy’s, NPR 5, at 2. Wendy’s, however, failed to 

identify a list of appropriate types of suits or an 

appropriate dollar figure. David Holmes would 

limit the disclosure by eliminating counterclaims 

filed by a franchisor merely in response to a 

franchisee-initiated suit. In his view, this is 

appropriate if the Commission’s concern is ‘‘with 

franchisors having a practice of suing their 

franchisees, not merely defending themselves.’’

Holmes, NPR 8, at 4–5. We disagree because a 

counterclaim may shed light on issues in the 

franchise relationship to the same extent as the 

franchisee’s complaint. 

or save a franchisee from investing 

hundreds of thousands of dollars in 

a franchise that he/she might not 

have invested in if he/she would 

have known all of the franchisorinitiated lawsuits against its own 

franchisees.376

In contrast, franchisors generally 

opposed the disclosure of franchisorinitiated litigation. Among other things, 

they asserted that franchisor-initiated 

litigation is immaterial377 and would 

unnecessarily ‘‘bulk up’’ disclosure 

documents, thereby increasing 

compliance costs.378 Others opined that 

the disclosure was unnecessary because, 

in their view, a franchisee aggrieved by 

a franchisor-initiated suit will surely file 

a counterclaim, which clearly must be 

disclosed under the original Rule.379

Other franchisors asserted that the 

disclosure document already informs 

prospective franchisees about the state 

of the relationship.380 Still others 

asserted that Item 3 litigation should be 

limited to suits that imply wrongdoing 

on the franchisor’s part: franchisorinitiated suits simply demonstrate that 

the franchisor is enforcing its rights 

under the franchise agreement.381

Indeed, some franchisors argued that the 

disclosure could be misleading, wrongly 

implying that the franchisor has 

engaged in illegal or other 

misconduct.382 In the same vein, some 

franchisors feared that a mandatory 

franchisor-initiated litigation disclosure 

might actually discourage franchisors 

from bringing suits, even meritorious 

suits, that are needed to maintain the 

integrity of the franchise system.383

Based upon the record developed in 

this proceeding, the Commission is 

convinced that franchisor-initiated 

litigation is material information that 

prospective franchisees need in order to 

assess a critical aspect of the franchise 

relationship—the nature of disputes and 

the level of litigation within a franchise 

system.384 We recognize that the UFOC 

Guidelines’ Item 3, in limiting required 

disclosures to instances where a 

franchisee has filed a counterclaim, may 

have focused more narrowly on suits 

where arguably there was a greater 

probability of wrongdoing on a 

franchisor’s part. We now believe that 

this should be broadened to include 

additional information about the state of 

the franchise relationship. For example, 

we agree with the commenters who 

made the point that franchisor suits to 

enforce system standards could be 

viewed as a positive attribute, showing 

that the franchisor is willing to maintain 

uniformity for the benefit of the entire 

system. A franchisor’s willingness to 

protect its system is a material fact 

about the franchise relationship that 

should be disclosed to prospective 

franchisees. 

Nevertheless, the Commission 

declines to broaden further the 

franchisor-initiated litigation disclosure 

of part 436, as some have suggested, to 

include litigation involving another 

franchise system owned by the 

franchisor, as well as litigation 

involving affiliates and third-party 

suppliers.385 The core concern 

underlying the franchisor-initiated 

litigation requirement is the status of the 

relationship between the franchisor and 

its franchisees in the offered system.386

Accordingly, the Commission has 

weighed the modest potential benefit of 

a broader litigation disclosure against 

the compliance costs and burdens, and 

decided not to require disclosures about 

litigation initiated by the franchisor’s 

affiliates, third-party suppliers, or other 

systems. 

At the same time, the Commission 

also has considered various alternatives 

that franchisors assert would reduce 

franchisors’ compliance burdens. The 

alternative that garnered the most 

support was to tie the disclosure to a 

threshold level of suits.387 For example, 

John Baer suggested a 5% threshold, 

under which a franchisor would not 


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388 Baer, NPR 11, at 11. See also Lewis, NPR 15, 

at 12; BI, NPR 28, at 11; Tricon, NPR 34, at 6. 

NASAA stated that if the Commission were to limit 

the disclosure by imposing a threshold, it would 

support a 5% threshold. NASAA, NPR 17, at 4. Not 

everyone agreed, however, on the proposal to 

establish a threshold. Eric Karp, for example, stated: 

‘‘the prospective franchisee should make his or her 

own determination as to whether the number of 

lawsuits is at a level that indicates a problematic 

franchise system.’’ Karp, NPR 24, at 19–20. 

According to Howard Bundy, the imposition of a 

threshold number of cases before an obligation to 

disclose arises ‘‘invites abuse.’’ Bundy, NPR 18, at 

7. Seth Stadfeld also argued that a threshold 

prerequisite would ‘‘discriminate[] arbitrarily in 

favor of large mature franchise systems to the 

detriment of small franchise systems.’’ Stadfeld, 

NPR 23, at 13. 

389 NFC, NPR 12, at 28. 

390 Holmes, NPR 8, at 4. 

391 AFC, NPR 30, at 3. 

392 IL AG, NPR 3, at 6 (also recommending no 

threshold for smaller systems, such as those with 

fewer than 25 franchisees). 

393 One commenter asserted that the Commission 

should require litigation disclosures only when 

there have been three consecutive fiscal years of 

lawsuits, regardless of the number of such suits. 

NaturaLawn, NPR 26, at 1. The purpose of the 

disclosure, however, is not limited to litigiousness. 

As discussed above, any number of suits initiated 

by the franchisor against its franchisees is material 

because it sheds light on the quality of the franchise 

relationship. 

394 In addition to the refinements noted below, 

the Commission considered, but rejected, several 

others that find no additional support in the 

rulemaking record and which would be 

unnecessarily inconsistent with the UFOC 

Guidelines. For example, Duvall urged limiting the 

disclosure of pending actions to franchise disputes 

only, eliminating the reference to actions for fraud, 

unfair and deceptive trade practices, and the like. 

Duvall, at 1. IL AG urged expansion of the scope 

of the affiliate disclosure to cover all affiliates in 

any line of business. IL AG, at 5. Pu advocated a 

requirement to disclose the name, address, and 

telephone number of the lawyer for the franchisee 

in any litigation. Pu, at 1. 

395 Initially, the Commission proposed that the 

disclosure of franchisor-initiated litigation be 

limited to pending litigation. Franchise NPR, 64 FR 

at 57303–04. Several commenters opposed that 

approach. For example, Howard Bundy would 

require the disclosure of all franchise relationship 

suits by the franchisor or an affiliate commenced 

during at least the last three years. ‘‘Just giving the 

‘pending’ cases is like giving only one month of 

financial statements. It does not permit the prospect 

to see and evaluate trends and developments.’’

Bundy, NPR 18, at 7. See also Stadfeld, NPR 23, at 

13. We agree that focusing on pending litigation is 

insufficient to achieve the goal of shedding light on 

the quality of the franchise relationship. However, 

we believe that a one-year time period is sufficient 

for that purpose, giving a prospective franchisee a 

snap-shot in time of the franchise system. But see 

Karp, at 2 (contending that suits filed in one year 

are not necessarily representative of the problems 

that arise in the system or the propensity of the 

franchisor to sue its franchisees). 

396 One commenter suggested that the 

Commission permit a franchisor to explain in Item 

3 that this disclosure is limited to only certain types 

of actions and only updated annually. Gust 

Rosenfeld, at 4. To the extent that a franchisor finds 

that its compliance with any particular disclosure 

item may result in inaccurate or misleading 

information being furnished to a prospective 

franchisee, the franchisor may add footnotes to 

ensure accuracy or to avoid misleading statements. 

This applies to any misleading Item 3 litigation 

disclosure as well. 

397 This disclosure approach also would be more 

representative of franchisor-initiated litigation than 

‘‘pending litigation,’’ which would omit suits that 

may have been settled during the year, or which 

took less than a year to resolve. 

398 States typically require immediate updating 

upon a material change. 

399 The Commission declines to adopt suggested 

expansion of section 436.5(c)(1)(ii) to encompass all 

suits, regardless of their materiality. Stadfeld, NPR 

23, at 13. 

400 See 16 CFR 436.1(a)(4) (only material actions 

need be disclosed); UFOC Guidelines, Item 3 

Definitions at iii (‘‘Included in the definition of 

material is an action or an aggregate of actions if 

a reasonable prospective franchisee would consider 

it important in making a decision about the 

franchised business.’’). 

have to disclose litigation it initiated 

unless it has filed suit against at least 

5% of the franchisees in its system.388

Others suggested a higher percentage, 

such as 10%,389 15%,390 or 20%,391

while the IL AG suggested a lower 

percentage, such as 2%.392

The Commission is reluctant to tie the 

franchisor-initiated litigation disclosure 

of part 436 to a threshold. We believe 

it is impossible, given the limited record 

on this issue, to fashion a ‘‘one size fits 

all’’ approach for every franchise system 

in all industries. Moreover, any 

threshold would focus on the quantity 

of suits, suggesting that the sole purpose 

of the provision is to reveal 

litigiousness. When it comes to the state 

of the relationship, however, even a 

small number of suits initiated by a 

franchisor could be material to a 

prospective franchisee because they 

may reveal the nature of problems in the 

franchise system or show the 

franchisor’s willingness to enforce 

system standards.393 With full 

disclosure, prospects can review the 

number and types of franchisors’ suits 

for themselves and draw their own 

conclusions about whether those suits 

are significant. 

Turning more generally to Item 3 of 

the final amended Rule, it includes 

several refinements to the proposed rule 

that were offered during the proceeding, 

and that were recommended in the Staff 

Report. These refinements preserve the 

utility of the disclosure, while reducing 

compliance costs.394 First, in order to 

minimize compliance burdens, the 

franchisor-initiated litigation disclosure 

requirement is limited to suits filed in 

the previous one-year period.395 We 

believe this ‘‘snap-shot’’ in time is 

sufficient to reveal the franchisor’s 

practice of initiating litigation, as well 

as to reveal the types of franchise 

relationship problems that typically 

arise in the franchise system.396

Second, Item 3 permits franchisors to 

report franchisor-initiated litigation 

annually, not quarterly. That is, a 

franchisor would disclose all material 

litigation to which it was a party in the 

last fiscal year. This is intended to make 

it clear that quarterly updating 

requirements do not demand disclosure 

of franchisor-initiated actions filed in 

the 12 months prior to the date of the 

updated document. This approach 

improves on the proposed Rule’s 

‘‘pending litigation’’ approach.397 It also 

would have the additional benefit of 

reducing more frequent quarterly 

updating, which may be burdensome 

and perhaps impracticable in franchise 

registration states with more frequent 

updating requirements.398

Third, Item 3 incorporates a 

‘‘materiality’’ standard.399 This is 

consistent with both the original Rule 

and UFOC Guidelines.400 Indeed, 

immaterial information, by definition, is 

unlikely to influence a prospective 

franchisee’s investment decision, while 

imposing unwarranted costs and 

unnecessarily lengthening disclosure 

documents. 

As noted above in the discussion of 

section 436.1(d), materiality is 

determined from the viewpoint of the 

reasonable prospective franchisee. 

Accordingly, any franchisor-initiated 

litigation that goes to the quality of the 

franchise relationship being offered for 

sale is likely to be material. Indeed, the 

Commission intends the disclosure of 

franchisor-initiated litigation to be 

interpreted broadly to cover most suits. 

Nonetheless, we believe a requirement 

that franchisors disclose literally all 

franchisor-initiated suits goes too far. 

There may be instances where a 

franchisor-initiated suit might have no 

bearing on the specific franchise 

relationship being offered for sale. For 

example, franchisors may offer for sale 

‘‘non-traditional’’ outlets operating a 

unique franchise agreement—such as 

the operation of an outlet on a military 

base. Franchisor-initiated litigation 

involving unique franchise agreements 

may be immaterial to the sale of 

‘‘traditional’’ outlets operating under the 

franchisor’s standard franchise 

agreement. A blanket provision 

requiring disclosure of suits involving 

unique agreements might be overbroad 

and might unnecessarily increase the 

size of the Item 3 disclosure to the 

disadvantage of both prospective 

franchisees who must read it, as well as 

the franchisors who must prepare the 

disclosure. A ‘‘materiality’’ standard, 

therefore, will ensure that only suits 

shedding light on the type of 

relationship being offered for sale must 

be disclosed. 


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401 See Staff Report, at 117–18. The Staff Report 

proposal permitting franchisors to limit the 

description of each disclosed suit generated no 

comment. 

402 Under the original Rule, a counterclaim must 

be disclosed for 10 years and the franchisor must 

provide more detailed information about the nature 

and status of the action. 16 CFR 436.1(a)(4)(ii) 

(actions ‘‘brought by a present or former franchisee 

or franchisees and which involves or involved the 

franchise relationship’’). 

403 Wiggin & Dana, at 1–2. 

404 See Wiggin & Dana, at 2. 

405 See 16 CFR 436.1(a)(5). In the original SBP, 

the Commission found that bankruptcy information 

is material because it bears directly on the 

‘‘integrity and managerial ability of the parties with 

whom [the franchisee] is dealing and . . . could 

readily result in drastic economic injury to the 

franchisee because it could lead him or her to invest 

substantial amounts of money in a bankrupt 

business.’’ Original SBP, 43 FR at 59650–51. 

406 See UFOC Guidelines, Item 4. 

407 Franchise NPR, 64 FR at 57304. 

408 Bundy, NPR 18, at 7. See NASAA 

Comparison, at 6. 

409 As previously noted, the definition of 

‘‘affiliate’’ in the UFOC Guidelines varies for 

purposes of specific disclosure items. For example, 

‘‘affiliate’’ for Item 3 (litigation) purposes is limited 

to ‘‘an affiliate offering franchises under the 

franchisor’s principal trademark.’’ UFOC 

Guidelines, Item 3. The more limited Item 3 

definition of affiliate reduces franchisors’

compliance burdens significantly. A franchisor may 

have numerous affiliates, any of which may have 

been involved in, or is currently involved in, 

litigation. The disclosure of such affiliate 

information arguably might impose significant 

compliance costs that may not outweigh any 

benefits to prospective franchisees. Therefore, the 

Item 3 litigation disclosure—limited to affiliates 

offering franchises under the franchisor’s principal 

trademark—strikes the right balance between presale disclosure and costs. On the other hand, where 

any affiliate has a current or prior bankruptcy, that 

fact is highly material because the affiliate’s parent 

may wish to divert funds away from the franchisor 

to the affiliate, thereby depriving the franchisor of 

advertisements, training, or other services. Under 

the circumstances, a broader definition of affiliate 

in the Item 4 bankruptcy disclosure is warranted. 

410 Consistent with Item 2, the final amended 

Rule at Item 4 also extends the UFOC Guidelines 

by requiring the bankruptcy disclosures not only for 

officers or general partners, but for any ‘‘other 

individual who will have management 

responsibility relating to the sale or operation of 

franchises offered by this document.’’ This is 

necessary to prevent franchisors from hiding prior 

bankruptcies of individuals who in fact will manage 

the franchises, but who do not have a formal title. 

411 J&G, at 4. IL AG advocated that the 

Commission deviate from the UFOC Guidelines by 

including in the list of persons needing to disclose 

bankruptcy information ‘‘members,’’ to make it 

clear that limited liability companies are included. 

IL AG, at 5. This is also unnecessary because 

nothing in part 436 would prevent a limited 

liability company from qualifying as a parent, 

predecessor, or affiliate, as those terms are used in 

part 436. 

412See Staff Report, proposed section 436.5(d)(1). 

Fourth, as recommended in the Staff 

Report, Item 3 permits a franchisor to 

provide basic, summary information on 

its initiated litigation, without the need 

for long discussions on each and every 

case.401 In addition, franchisors may list 

individual suits under one common 

heading, which will serve as the 

summary (for example, royalty 

collection suits). The franchisor would 

then merely list each applicable suit 

(case name, court, file number), without 

the need to provide any additional 

explanation. 

Fifth, and finally, the final amended 

Rule clarifies the relationship between 

the disclosure of franchisor-initiated 

litigation and the disclosure of 

counterclaims. Staff Report comments 

by Wiggin & Dana noted that the rule 

proposed in the Franchise NPR did not 

explicitly address the filing of a 

franchisee counterclaim after a 

franchisor initiates a suit.402 The firm 

questioned whether a franchisorinitiated case followed by a 

counterclaim would be treated as a 

franchisor-initiated case only—receiving 

the more narrow disclosure treatment—

or whether the counterclaim would be 

considered like all other 

counterclaims—receiving the more 

extensive disclosure treatment.403

The Commission intends the 

franchisor-initiated litigation provision 

of the final amended Rule to expand 

upon the approach taken by the original 

Rule, not constrict it. Accordingly, 

franchisors must disclose any 

counterclaims in the same manner as 

they would have done under the 

original Rule, providing complete case 

summaries. Only in those instances 

where a franchisor initiates a suit—

absent the filing of any subsequent 

counterclaim filed by the franchisee—

does the franchisor-initiated litigation 

disclosure requirement apply. 

The final amended Rule makes this 

point clear as follows. First, section 

436.5(c)(3) provides instructions for all 

litigation that must be disclosed in Item 

3. It requires, for each suit, the 

disclosure of the case title, number or 

citation, initial filing date, names of the 

parties, the forum, and the relationship 

of the opposing party to the franchisor. 

Following these basic disclosures are 

more specific disclosures (e.g., 

summaries of legal and factual claims, 

relief sought, conclusions of law) that 

pertain to all suits, except for 

franchisor-initiated litigation, which is 

covered in a separate section (section 

436.5(c)(4)). Any counterclaim filed by 

a franchisee in a suit would be covered 

by the section 436.5(c)(3) disclosure 

requirements. 

The next section—section 

436.5(c)(4)—sets forth the instructions 

for ‘‘any other franchisor-initiated suit 

identified’’ in Item 3.404 The use of the 

phrase ‘‘any other franchisor-initiated 

suit’’ is intended to limit the provision 

to suits in which no franchisee 

counterclaim has been filed. This 

section makes clear that, in lieu of the 

more comprehensive disclosure 

instructions of section 436.5(c)(3), a 

franchisor may disclose franchisorinitiated litigation ‘‘by listing individual 

suits under one common heading.’’

Accordingly, Item 3 affords the 

franchisor flexibility, permitting the 

disclosure of franchisor-initiated 

litigation either through the 

comprehensive disclosures of section 

436.5(c)(3) or the more abbreviated 

disclosures of section 436.5(c)(4). 

6. Section 436.5(d) (Item 4): Bankruptcy 

Section 436.5(d) of the final amended 

Rule retains the original Rule’s 

disclosure of prior bankruptcies, 

including any parent’s bankruptcy.405

Consistent with the UFOC Guidelines, it 

extends the original Rule by requiring 

franchisors to disclose bankruptcy 

information about predecessors and 

affiliates, to disclose foreign 

proceedings comparable to bankruptcy, 

and to make bankruptcy disclosures for 

10 years, instead of the original Rule’s 

seven years limitation.406

Item 4 of the final amended Rule also 

incorporates several refinements based 

upon the record developed in this 

proceeding. The Rule as proposed in the 

Franchise NPR, at Item 4, would have 

required the disclosure of an affiliate’s 

prior bankruptcy only if the affiliate 

currently offers franchises under the 

franchisor’s trademark.407 One 

commenter suggested that the 

bankruptcy disclosure should apply to 

all affiliates, consistent with the UFOC 

Guidelines.408 We agree. It is clear that 

the UFOC Guidelines require 

franchisors to disclose the bankruptcy of 

any affiliate of the franchisor, not just 

those affiliates who offer franchises 

under the franchisor’s principal 

mark.409 In order to reduce 

inconsistencies between part 436 and 

the UFOC Guidelines, we have revised 

the disclosure of an affiliate’s 

bankruptcy accordingly.410

In its response to the Staff Report, J&G 

also contended that the introductory 

paragraph of both the proposed Rule in 

the Franchise NPR and the Staff Report 

are unclear.411 As recommended in the 

Staff Report, for example, this paragraph 

would require a franchisor to disclose 

‘‘whether the franchisor, any parent, 

predecessor, affiliate, officer, general 

partner . . . filed for bankruptcy.’’412

J&G contended that it is unclear whether 

this language requires a franchisor to 

disclose the bankruptcy history of 

officers or affiliates of a predecessor, as 

well as officers of a parent or affiliate. 

To eliminate confusion on this point, 

the final amended Rule reads as follows: 


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413 J&G, NPR 32, at 11; Marriott, NPR 35, at 15; 

GPM, NPR Rebuttal 40, at 5. 

414 Gurnick, NPR 21, at 6. 

415 J&G, NPR 32, at 11. 

416 NaturaLawn, NPR 26, at 1. 

417 In the original SBP, the Commission 

recognized that the disclosure of complete and 

accurate information about initial franchise fees is 

material. The failure to disclose such information 

pre-sale is deceptive because ‘‘it (1) misleads, or at 

least confuses prospective franchisees as to the 

amount of the required initial franchise investment 

and (2) could readily result in economic injury to 

a franchisee unable to fully obtain all such funds 

or unable to recoup the full amount of such funds 

in the course of the franchise business.’’ Original 

SBP, 43 FR at 59653. 

418 Lewis, NPR 15, at 14. CA Bar, however, 

asserted that the term ‘‘initial fee,’’ as opposed to 

‘‘initial franchise fee’’ may have negative 

consequences for franchisors selling companyowned stores. CA Bar explained that ‘‘initial fees’’

or ranges of ‘‘initial fees’’ paid to a franchisor for 

a company-owned store may be proprietary 

information, especially if fees charged are not 

uniform. CA Bar, at 9. We disagree. Under the 

current UFOC Item 5, all franchisors must disclose 

the ‘‘initial franchise fee,’’ which is defined to 

include ‘‘all fees and payments for services or goods 

received from the franchisor before the franchisee’s 

business opens.’’ UFOC, Item 5. Accordingly, the 

Item 5 disclosure is not limited to payments marked 

‘‘franchise fee.’’ We decline to introduce a 

distinction between ‘‘initial fees’’ and ‘‘initial 

franchise fees,’’ as CA Bar suggested, which would 

be inconsistent with the UFOC Guidelines. 

419 Lewis, NPR 15, at 14. But see Gust Rosenfeld, 

at 8 (suggesting the broader ‘‘initial payments’’ than 

‘‘fees,’’ which may be misconstrued narrowly to 

refer only to any upfront franchise fee). 

420 Bundy, NPR 18, at 7. (‘‘It should include any 

amounts that the franchisee becomes obligated to 

pay before entering into the franchise. For example, 

if the entire initial franchise fee is deferred into a 

promissory note, that does not change the fact that 

it is an ‘initial fee.’’’). 

421 Section 436.1(h). 

422 The Commission has also clarified the 

language of Item 5 in two respects. First, the final 

amended Rule makes clear that the term ‘‘initial 

fees’’ includes payments or commitments to pay an 

affiliate of the franchisor. See NASAA, at 3. This 

is consistent with the NASAA Commentary on the 

UFOC Guidelines. See also NASAA Comparison, at 

7. Second, the final amended Rule adds, at the end 

of Item 5, the following sentence: ‘‘Disclose 

installment payment terms in this subsection or in 

paragraph 436.5(j) of this section.’’

‘‘Disclose whether the franchisor; any 

parent; predecessor; affiliate; officer, or 

general partner of the franchisor, or any 

other individual who will have 

management responsibility relating to 

the sale or operation of franchises 

offered by this document . . .’’

The Commission has rejected, 

however, other suggestions to modify 

Item 4. Several commenters questioned 

the need to require predecessor and 

parent bankruptcy disclosures. They 

asserted that the additional disclosure 

burden is not outweighed by any benefit 

to prospective franchisees.413 Consistent 

with our discussions in connection with 

Items 1–3, we believe that information 

about predecessors and parents is 

material and should be disclosed. 

Where a parent is in bankruptcy, for 

example, its assets include any 

franchisor-subsidiary. Under such 

circumstances, a prospective franchisee 

should be made aware that the 

franchisor in which it is considering 

investing might be sold, possibly to a 

competitor or to a company lacking 

prior franchise experience. 

Further, David Gurnick suggested that 

the time period for reporting a 

bankruptcy should be reduced from 10 

to five years.414 J&G also observed that 

a 10-year obligation would compel the 

disclosure of a bankruptcy that was 

actually filed significantly earlier: 

[I]t would seem that ten years from 

the date of the filing of a petition 

would be the appropriate beginning 

date. We are aware of one case in 

which an officer was involved with 

a company when a petition was 

filed in 1986, and the bankruptcy 

proceeding is still pending. Were it 

settled this month (December 1999), 

disclosure of that event would be 

required for a total of 23 years!415

Although the 10-year reporting period 

may, in rare instances, result in the 

disclosure of a bankruptcy filed more 

than 10 years earlier, the Commission 

has determined that the 10-year 

reporting period is reasonable in order 

to give prospective franchisees a 

complete picture of the franchisor’s 

bankruptcy history. We are not inclined 

to deviate from the UFOC Guidelines on 

this point. 

Finally, NaturaLawn urged the 

Commission to exclude from Item 4 the 

disclosure of personal bankruptcies. The 

company noted that personal 

bankruptcies can be filed for a variety of 

reasons, such as divorces, medical 

issues, or insurance claims.416 The 

Commission believes that the disclosure 

of personal bankruptcy information is 

necessary to prevent deception or fraud. 

In many instances, prospective 

franchisees entrust considerable initial 

fees and ongoing funds to franchise 

managers for training and advertising, 

among other forms of post-sales 

assistance. Accordingly, prospective 

franchisees may rely to their detriment 

on claims made by such managers. The 

disclosure of a franchisor manager’s 

bankruptcy, therefore, would shed light 

on that manager’s ability to safeguard 

and use those funds properly. Under the 

circumstances, we see no compelling 

reason to omit a personal bankruptcy, 

especially since such an approach 

would also deviate from the UFOC 

Guidelines. 

7. Section 436.5(e) (Item 5): Initial fees 

Section 436.5(e) of the final amended 

Rule requires the disclosure of initial 

fees.417 This disclosure is substantively 

similar to the comparable disclosure 

provision found in the original Rule at 

16 CFR 436.1(a)(7). The final amended 

Rule, like the proposed Rule published 

in the Franchise NPR, follows the UFOC 

Guidelines in explicitly permitting 

franchisors to provide a range of fees, 

whereas the original Rule implicitly 

contemplated a fixed fee. 

Item 5 of the final amended Rule is 

substantially similar to Item 5 in the 

proposed Rule published in the 

Franchise NPR, but it incorporates 

several technical revisions that the 

commenters suggested. One commenter 

recommended that the title of Item 5 

should refer to ‘‘Initial Fees’’ instead of 

the proposed title, ‘‘Initial Franchise 

Fee,’’ recognizing that a prospective 

franchise may pay more than just one 

fee in order to acquire a franchise.418

Consistent with that revision, references 

to ‘‘fee’’ in Item 5 have been revised as 

follows: (1) ‘‘these fees are refundable,’’

in place of ‘‘this fee is refundable;’’ and 

(2) ‘‘Initial fees mean,’’ in place of 

‘‘initial fee means.’’419

Second, another commenter correctly 

noted that the Franchise NPR version of 

Item 5 did not expressly define ‘‘initial 

fees’’ to include commitments to make 

payments to the franchisor. Rather, Item 

5 as proposed in the Franchise NPR 

would have defined an initial fee only 

in terms of cash actually paid at the 

time of the sale.420 The commenter’s 

point is well-taken. The ‘‘initial fees’’

disclosure requirements of Item 5 relate 

to the required payment element in the 

definition of the term ‘‘franchise.’’421

Under that definition, a ‘‘required 

payment’’ is not limited to cash, but 

expressly includes commitments to 

make payments to the franchisor at a 

later date. Otherwise, a franchisor could 

seriously undercut the Item 5 cost 

disclosure by requiring prospects to sign 

notes or other obligations in lieu of 

immediate payment. Accordingly, Item 

5 of the final amended Rule expressly 

includes not just fees that are actually 

paid, but commitments to pay as 

well.422

Commenters also offered various 

proposals for modifying Item 5 that we 

believe are unwarranted. While Item 5 

requires disclosure of ‘‘the range or 

formula used to calculate the initial fees 

paid in the fiscal year before the 

issuance date,’’ Howard Bundy urged 

that it require the disclosure of any 

contractual formulas for determining the 

current initial fee. Mr. Bundy opined 

that it is ‘‘important to have disclosure 

of any contractual formulas that will 


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423 Bundy, NPR 18, at 7. 

424 NFC, NPR 12, at 10–11. 

425 Gurnick, NPR 21, at 6. 

426 BI, NPR 28, at 6. 

427Id. 428 The Commission has decided not to adopt 

various suggested revisions to Item 5 offered by the 

IL AG. For example, IL AG suggested that the Rule 

require franchisors to disclose specific information 

about the amount of fees that are refundable. IL AG, 

at 5. The Commission believes that Item 5 

adequately covers this by requiring a franchisor to 

state ‘‘any conditions under which these fees are 

refundable.’’ Clearly, this language is flexible 

enough to permit a franchisor to state in its Item 

5 disclosure whether it offers a full or partial 

refund. 

429 In the original SBP, the Commission noted 

that the failure to disclose continuing costs violates 

Section 5 because it ‘‘(1) misleads or at least 

confuses the franchisee as to the required amount 

of his or her total investment; and (2) could readily 

result in economic injury to the franchisee unable 

to meet such continuing obligations.’’ Original SBP, 

43 FR at 59654–55. 

430 Lewis, NPR 15, at 14; NASAA, NPR 17, at 4. 

431 As previously noted, NASAA has urged the 

Commission throughout the Rule amendment 

proceeding to reduce inconsistencies with the 

UFOC Guidelines to the fullest extent possible. To 

that end, it has submitted into the record a 

comparison between the original Rule and UFOC 

Guidelines. See NASAA Comparison, at 8; UFOC 

Guidelines, Item 6, Instructions vi. As noted 

throughout this Statement, a primary objective in 

revising this Rule is to align it more closely with 

the UFOC Guidelines. 

432 See NASAA Comparison, at 8. 

433 Staff Report, at 126. 

434 NASAA, NPR 17, at 4. 

435 Bundy, NPR 8, at 8. Mr. Bundy also suggested 

that franchisees need to understand that third-party 

obligations continue even if the franchise is 

terminated. Id. We agree, but believe that this raises 

a consumer education issue, not a pre-sale 

disclosure one, that is best handled by Commission 

and industry educational efforts. 

result in this prospect paying a different 

initial fee than the historic information 

would suggest.’’423

The Commission’s view, however, is 

that as long as the prospect is aware of 

the amount to be paid before the sale, 

the method the franchisor used to derive 

that amount is not necessarily material. 

The Commission notes that Item 5 

ensures that a prospective franchisee 

knows whether fees are uniform and, 

where they are not, enables the prospect 

to bargain for a lower rate. Item 5 

supplies the prospect with some 

historical information that can aid in 

gauging the parameters of the 

franchisor’s willingness to negotiate 

fees. We believe that this is more useful 

by far than including in the disclosure 

document current contractual formulas. 

Thus, there is no reason to diverge from 

the UFOC Guidelines on this issue. 

Three other commenters voiced 

concern about Item 5 as it relates to the 

negotiation of fees. The NFC asserted 

that Item 5 implies that a franchisee can 

seek to negotiate initial fees only if the 

franchisor already disclosed in its Item 

5 a range of previously accepted fees. 

Such a result, in its view, restricts 

prospective franchisees’ ability to 

initiate fee negotiations.424 The 

Commission’s intention is to promote 

the parties’ ability to negotiate terms 

and conditions, including fees and other 

costs. Full and accurate prior disclosure 

furthers that goal. Accordingly, nothing 

in Item 5 or any other provision of part 

436 of the final amended Rule prevents 

the parties from negotiating fees. 

David Gurnick suggested that the Rule 

permit a franchisor to disclose whether 

or not it will negotiate fees, and if it 

does so, permit disclosure of the 

conditions that may affect the 

negotiation.425 Similarly, BI urged that 

franchisors be permitted to disclose that 

they may lower the initial fees.426

As noted above, however, Item 5 

ensures that prospects know when fees 

may vary. This is sufficient to prompt 

them, if they wish, to negotiate for a fee 

level that suits them. A more extensive 

or detailed disclosure on this issue 

would only introduce needless 

nonconformity with the UFOC 

Guidelines without producing any 

appreciably increased benefit to 

prospective franchisees. 

BI also urged that when the initial fee 

is negotiated rather than established by 

applying a formula or fixed calculation, 

the range of such negotiated initial fees 

in the prior fiscal year need not be 

disclosed.427 The Commission’s view, 

however, is that providing a range of 

fees, regardless of how or why these 

ranges came about, is useful to 

prospective franchisees in the 

negotiation process. Such disclosure 

compels neither party to reach 

agreement on unacceptable terms: 

franchisors and prospective franchisees 

remain free to negotiate in and outside 

of any disclosed range. Accordingly, we 

see no reason to deviate from the UFOC 

Item 5 approach in this regard.428

8. Section 436.5(f) (Item 6): Other fees 

Section 436.5(f) of the final amended 

Rule requires franchisors to disclose 

recurring or occasional fees associated 

with operating a franchise (e.g., 

royalties, advertising fees, and transfer 

fees). This requirement recognizes that a 

prospective franchisee’s investment is 

not limited to the initial franchise fee 

alone. Rather, a franchisee may incur 

considerable costs in the operation of 

the business, which will significantly 

impact upon his or her ability to 

continue in business and ultimately be 

successful. This provision covers 

payments made directly to the 

franchisor or an affiliate, or collected by 

the franchisor or affiliate for the benefit 

of a third party. This disclosure is 

substantially similar to the comparable 

original Rule disclosure found at 16 CFR 

436.1(a)(8).429 Following the UFOC 

Guidelines, the Rule, as proposed in the 

Franchise NPR, expanded the scope of 

this original Rule provision by requiring 

a disclosure about the existence of 

advertising and purchasing cooperatives 

from which franchisees may be required 

to purchase goods or services. The 

proposed Rule also required disclosure 

about the voting power of any 

franchisor-owned outlets in the 

cooperative and, if company store 

voting power is controlling, the range of 

required fees charged by the 

cooperative. This is material 

information about restrictions on 

prospective franchisees’ independence 

in operating the offered franchise, as 

well as the total costs of doing so. 

The Commission has determined to 

adopt proposed Item 6 from the 

Franchise NPR, with some fine tuning. 

Accordingly, Item 6 of the final 

amended Rule incorporates a suggestion 

from both Warren Lewis and NASAA 

that the proposed title of Item 6 taken 

from the UFOC Guidelines (‘‘Recurring 

or Occasional Fees’’) be replaced with 

‘‘Other Fees,’’ the term actually used 

throughout the disclosure.430 The 

Commission believes this change 

improves the clarity of the Rule’s text 

and Item 6. 

In addition, to conform more closely 

to the UFOC Guidelines, Item 6 of the 

final amended Rule requires that 

franchisors state explicitly what fees are 

non-refundable (rather than just stating 

the conditions when a fee is 

refundable).431 Again, to conform more 

closely with the UFOC Guidelines, Item 

6 requires franchisors to disclose 

whether continuing fees currently being 

charged are uniformly imposed on all 

franchisees.432

The Staff Report recommended 

expansion of Item 6 to require 

franchisors to disclose required 

payments made to third parties.433 The 

Commission has decided not to adopt 

that recommendation. Early in the Rule 

amendment proceeding, NASAA urged 

this expansion of Item 6.434 Another 

commenter supported this suggestion, 

noting that in the ‘‘vast majority of the 

franchise cases we see, the franchisee’s 

ongoing legal obligations to third parties 

far exceed the franchisee’s ongoing legal 

obligations to the franchisor. However, 

the franchisee cannot obtain the 

franchise without incurring the thirdparty obligations.’’435

Eight Staff Report comments, 

however, opposed the proposed 

expansion of Item 6 to require the 


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436 Gust Rosenfeld, at 4–5. See also Wiggin & 

Dana, at 2 (questioning whether the proposed 

disclosure of payments to third parties in Item 6 

would cover employee wages, uniform dry 

cleaning, or accountant fees to prepare taxes). 

Several commenters recommended that Item 6 be 

limited to ongoing payment made to the franchisor 

or its affiliates. Piper Rudnick, at 2; Spandorf, at 7. 

437 Piper Rudnick, at 2; IFA, at 3. See also J&G, 

at 5 (asserting that the provision would cover not 

only garden variety fees, but an ‘‘infinite plethora 

of potential and unpredictable (or unknowable as a 

practical matter) payments and fees that may vary 

by locality, such as license and permit fees, or may 

arise due to unpredictable events.’’); Duvall, at 1–

2 (a franchisor cannot know all the required 

payments made to hundreds of vendors and 

accounts). 

438 Section 436.5(g)(1)(ii). 

439 Section 436.5(g)(1)(iii). 

440 ‘‘Since . . . fees frequently involve substantial 

sums of money, it must be assumed that if they 

were fully disclosed, they would play a significant 

role in a prospective franchisee’s decision of 

whether to enter into a franchise relationship.’’

Original SBP, 43 FR at 59652. The ‘‘[f]ailure to 

disclose material information as to the true cost of 

the franchise’’ is an unfair and deceptive trade 

practice in violation of Section 5. Id., at 59653. 

441 UFOC Guidelines, Item 7. 

442 PMR&W asserted that the additional funds 

category is too broad. Citing the NASAA 

Commentary, the firm noted that owners’ salary, for 

example, should be excluded. PMR&W, NPR 4, at 

10–11. We agree, but believe this issue is best 

addressed by staff in the Compliance Guides, which 

will explain the term ‘‘additional funds’’ in greater 

detail. 

443 The term ‘‘initial period’’ means at least three 

months or some other reasonable period for the 

industry. A franchisor seeking to apply an initial 

phase other than three months has the burden of 

showing the reasonableness of the phase selected. 

444 Bundy, at 5. 

445 Franchise NPR, 64 FR at 57335. 

446See PMR&W, NPR 4, at 10–11. 

disclosure of payments made to third 

parties. Gust Rosenfeld’s comment is 

typical, noting that a franchisor may 

require franchisees to lease premises, 

obtain necessary licenses, and operate 

in compliance with applicable laws. 

‘‘All of the payments to do these things 

are technically ‘required,’ but they are 

generally applicable to all businesses, 

and the franchisor does not control 

when they are made, to whom they are 

made, or what the amount is.’’436

Similarly, Piper Rudnick and IFA 

asserted that a required listing of all 

possible third-party suppliers of goods 

or services would expose a franchisor to 

liability if it forgot to include one or 

more.437

The Commission agrees that the 

disclosure of third-party fees in Item 6 

would be overbroad, resulting in the 

mandatory disclosure of information 

that might not be readily obtainable by 

the franchisor and unnecessarily 

increasing franchisor’s compliance 

burden without any commensurate 

benefit to prospective franchisees. 

Moreover, estimates of initial payments 

to third parties are already covered by 

Items 7 and 8, as discussed below. 

Specifically, Item 7 requires franchisors 

to disclose estimates of pre-sale 

expenses paid during the initial 

period—typically the first three 

months—and also requires franchisors 

to ‘‘[l]ist separately and by name any 

other specific required payments (for 

example, additional training, travel, or 

advertising expenses) that the franchisee 

must make to begin operations.438

Franchisors must also include an 

‘‘additional funds’’ category to capture 

‘‘any other required expenses the 

franchisee will incur before operations 

begin and during the initial phase of 

operations.’’439 Item 8 already requires 

franchisors to disclose franchisee 

obligations to make purchases from 

required or approved suppliers. These 

include obligations to purchase items 

such as supplies, equipment, inventory, 

computer hardware and software, and 

real estate. The Commission is 

persuaded that the Item 7 and Item 8 

part 436 disclosures are more than 

sufficient to advise prospective 

franchisees of the likely purchase 

obligations incurred in operating a 

franchise. 

9. Section 436.5(g) (Item 7): Estimated 

initial investment 

Section 436.5(g) of the final amended 

Rule requires franchisors to set out in an 

easy-to-read table all the expenses 

necessary to commence business (e.g., 

rent, equipment, and inventory)—not 

just the initial fees covered by Item 5 

and other fees covered by Item 6. It also 

requires franchisors to disclose any 

refund conditions. Comparable cost 

disclosures are found in the original 

Rule at 16 CFR 436.1(a)(7).440 Consistent 

with the UFOC Guidelines,441 Item 7 

also extends the original Rule by 

requiring a franchisor to disclose not 

only payments that the franchisee must 

make to the franchisor or its affiliates, 

but also estimated payments the 

franchisee must make to third parties in 

some instances. For example, 

franchisors must estimate payments for 

utility deposits and business licenses. It 

also requires franchisors to include an 

‘‘additional funds’’ category442 that 

captures other expenses franchisees will 

incur during the ‘‘initial period’’ of 

operations.443

Item 7 generated little comment. In 

response to the Staff Report, Howard 

Bundy asserted that Item 7 is 

insufficient, failing to reveal a 

franchisee’s total initial investment 

because it does not include various 

payments to third parties beyond the 

first 90 days. Specifically, it misses real 

estate costs and equipment financing 

and leasing. Mr. Bundy urged the 

Commission to adopt the following: 

Disclose the total amount (in a 

range, if appropriate) of all 

obligations to third parties during 

the entire initial term of the 

franchise that will be necessary to 

operate the franchised business 

(including real estate leases and 

equipment leases) that the 

franchisee may be required to 

personally guaranty.444

The Commission declines to adopt 

this proposal. By its terms, Item 7 of the 

UFOC Guidelines is designed to furnish 

prospective franchisees with material 

information about the likely expenses 

faced in the start-up phase of the 

franchise. Armed with such 

information, a prospective franchisee 

will know whether or not he or she has 

the financial ability to get the franchised 

outlet operational. Item 7 is not 

intended to capture all expenses made 

over the life of the franchise, which may 

vary depending upon such factors as the 

franchisee’s choice of suppliers and the 

terms he or she negotiates with them. 

For example, Item 7 recognizes that a 

franchisor may not know the exact 

amount of real property expenses. 

Rather than requiring an exact figure, 

Item 7 permits franchisors to give an 

estimate or a low-high range. If neither 

can be determined, Item 7 permits 

franchisors to simply describe property 

requirements, such as property size and 

type, and location. Moreover, 

prospective franchisees may be able to 

get more detailed estimates of long-term 

expenses by speaking directly with 

existing franchisees in their location, or 

with trademark-specific franchisee 

associations. For these reasons, the 

Commission is not inclined to deviate 

from the UFOC Guidelines Item 7 on 

this issue. 

Item 7 of the final amended Rule is 

substantially similar to its counterpart 

in the Franchise NPR, but has been 

modified in a number of ways to adhere 

more closely to the UFOC Guidelines. 

For example, the Franchise NPR 

proposed that the Item 7 table be titled: 

‘‘YOUR ESTIMATED INITIAL 

INVESTMENT FOR THE FIRST 

[REASONABLE INITIAL PHASE] 

MONTHS.’’445 As one commenter 

noted, however, the language proposed 

in the Franchise NPR is unnecessarily 

inconsistent with title of Item 7 table of 

the UFOC Guidelines, which is titled 

‘‘YOUR ESTIMATED INITIAL 

INVESTMENT.’’446 Moreover, the 

‘‘initial phase’’ referenced in UFOC 

Guidelines Item 7 pertains only to the 


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447Id. 

448 Franchise NPR, 64 FR at 57305. 

449 Lewis, NPR 15; Snap-On, NPR 16, at 3; 

Holmes, NPR 8, at 6. 

450 Homes, NPR 8, at 6. See Staff Report, at 159–

62. 

451See 16 CFR 436.1(a)(9)–(11). In the original 

SBP, the Commission noted that buying restrictions 

are common in franchise agreements and are 

material because they will ‘‘have a significant 

impact on the sources of supplies and prices which 

a franchisee will pay for his or her supplies and 

thus also on the profitability of the franchise.’’

Original SBP, 43 FR at 59655. Similarly, required 

purchases ‘‘limit the independence of the 

franchisee, affect the profitability of the franchisee, 

and constitute a potential source of hidden profit 

for the franchisor.’’ Id., at 59656–57. 

452 In the Franchise NPR, the Commission 

proposed that franchisors disclose the actual 

criteria for evaluating, approving, or disapproving 

of alternative suppliers. Franchise NPR, 64 FR at 

57336. Two Franchise NPR commenters voiced 

concern that this proposal goes well beyond what 

the UFOC Guidelines require, forcing franchisors to 

disclose proprietary information. PMR&W, NPR 4, 

at 1; NFC, NPR 12, at 29. See also Staff Report, at 

130–31. The Commission agrees. Consistent with 

the UFOC Guidelines Item 8, the final amended 

Rule requires franchisors to disclose only a general 

description of its selection criteria. 

453E.g., Manuszak, ANPR 13; Weaver, ANPR 17; 

Mueller, ANPR 29; Colenda, ANPR 71; Gagliati, 

ANPR 72; Buckley, ANPR 97; Haines, ANPR 100; 

Myklebust, ANPR 101; Rafizadeh, ANPR, 7 Nov. 97, 

at 288–89; Slimak, ANPR, 22 Aug. 97 Tr., at 26. See 

also Kezios, ANPR 64. 

454E.g., Brickner, ANPR 128; Buckley, ANPR 97, 

at 3; Myklebust, ANPR 101. A few franchisees 

reported that their franchisor failed to approve 

alternative suppliers or made it difficult for 

franchisees to find alternative sources of supplies. 

E.g., Chiodo, ANPR, 21 Nov. 97 Tr., at 308; HockertLotz, id., at 325–27. 

455 Selden, ANPR 133, Appendix B, at 1. 

456 Zarco & Pardo, ANPR 134, at 2. In the same 

vein, the AFA asserted that it is insufficient to 

require a franchisor to disclose whether a franchisee 

can purchase products from unaffiliated suppliers. 

It urged the Commission to require franchisors to 

disclose how long it actually takes for the franchisor 

to approve alternative suppliers, by stating the 

following: 

‘‘We have been known to take up to one year or 

more to approve a non-franchisor-affiliated vendor; 

or We have been known to change the 

specifications for [specific product] during the 

approval process. This has caused delays of 

between [number of days/weeks/months/years] to 

[number of days/weeks/months/years].’’

AFA, NPR 14, at 4. While the Commission 

understands that some franchisees have 

experienced difficulties in obtaining franchisor 

approval to use alternative supply sources, the 

record is insufficient to justify a sweeping 

consumer warning that assumes delay in the 

approval process as a matter of course. Rather, 

advice concerning the approval of alternative 

suppliers can be addressed in consumer education 

materials. 

‘‘additional funds’’ category, not to the 

entire table.447

In addition, Item 7 as proposed in the 

Franchise NPR would have required 

franchisors to disclose ‘‘additional 

funds’’ required before operations begin 

and during the initial phase of the 

franchise.’’448 The Commission noted in 

the Franchise NPR that this language 

was intended to require a working 

capital disclosure that could assist 

prospective franchisees in 

understanding their break-even point. 

Several commenters opposed the 

Franchise NPR’s intention to capture 

working capital and a break-even point; 

they pointed out that such an approach 

goes beyond what the UFOC Guidelines 

require and asserted that this could be 

misleading without more detailed 

earnings information, such as in an 

earnings claim statement.449 Indeed, one 

commenter argued persuasively that the 

Franchise NPR’s proposal could create a 

‘‘back-door’’ mandatory earnings claim, 

a position contrary to the Commission’s 

view that earnings claims should be 

voluntary.450 The Commission finds 

these arguments persuasive. 

Accordingly, the final amended Rule 

tracks the language of UFOC Guidelines 

Item 7 more closely, eliminating any 

implication that the Commission 

intends for franchisors to disclose either 

a working capital or breakeven point. 

10. Section 436.5(h) (Item 8): 

Restrictions on sources of products and 

services 

The original Rule required franchisors 

to disclose obligatory purchases, 

restrictions on sources of products and 

services, and the amount of any revenue 

the franchisor may receive from 

required suppliers.451 The final 

amended Rule requires more detailed 

and extensive disclosures on these 

topics, consistent with the UFOC 

Guidelines. Specifically, section 

436.5(h) of the final amended Rule 

requires franchisors to disclose whether 

it makes the criteria for approving 

suppliers available to franchisees.452 In 

addition, franchisors must state 

whether, by contract or practice, the 

franchisor provides material benefits to 

franchisees who use designated or 

approved suppliers (e.g., permitting 

renewals or additional outlets). Finally, 

it requires franchisors to disclose the 

existence of purchasing or distribution 

cooperatives, and whether the 

franchisor negotiates purchase 

agreements with suppliers on behalf of 

franchisees. These highly material 

disclosures inform prospective 

franchisees about critical restrictions on 

how they will have to operate the 

franchise, which comprise a vitally 

important aspect of the franchise 

relationship. 

During the course of the Rule 

amendment proceeding, franchisee 

advocates raised various concerns about 

Item 8. For example, several franchisees 

voiced concern about source restrictions 

that prevent them from obtaining 

supplies at lower market rates.453

Commenters generally did not allege 

that franchisors fail to disclose source 

restrictions, but complained about the 

‘‘abusive nature’’ of such restrictions.454

Nevertheless, franchisee advocates 

questioned the sufficiency of the Item 8 

disclosures. Specifically, Andrew 

Selden urged the Commission to expand 

the disclosure of supplier restrictions to 

require franchisors to disclose more 

information about their practices and 

intentions with respect to the provision 

of competitive alternative sources of 

supply.455 Mr. Selden, however, offered 

no specific language for the 

Commission’s consideration. Robert 

Zarco urged the Commission to require 

franchisors to warn prospective 

franchisees that: 

The company retains the right to 

approve all outside vendors 

supplying products to the 

franchisees. Our criteria generally 

focus on quality and conceptuniformity, but we reserve the right 

to modify the criteria for approving 

suppliers at any time. Additionally, 

there are no time limitations as to 

how long the review/approval of 

franchisee-endorsed vendors may 

take.456

The Commission agrees that full 

disclosure of source restrictions and 

purchasing obligations is warranted. To 

that end, the final amended Rule adopts 

the broader UFOC Guidelines’ Item 8 

disclosures. Item 8 strikes the right 

balance between pre-sale disclosure and 

compliance costs and burdens. It is 

sufficient to warn prospective 

franchisees about source restrictions, 

purchase obligations, and approval of 

alternative suppliers, without requiring 

franchisors to disclose their past 

practices regarding approving 

alternative suppliers (which may be 

irrelevant to their current practices) or 

their future intentions (which may be 

proprietary information or misleading if 

the franchisor abandons the intended 

direction). Moreover, prospective 

franchisees can always ask existing 

franchisees or trademark-specific 

franchisee associations about a 

franchisor’s history of approving 

alternative suppliers, if this issue is 

important in their decision-making 

process. 

With respect to the disclosure of 

revenues received from suppliers, 

Howard Bundy suggested that 

franchisors should disclose the dollar 

amount of any revenues received during 

some stated period, such as during the 


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457 Bundy, NPR 18, at 8. See also Brown, ANPR 

4, at 3 (urging the Commission to prohibit direct 

and indirect ‘‘kick-backs’’ from third-party vendors 

to the franchisor). 

458 The IL AG also urged the Commission to add 

‘‘affiliates’’ to the list of suppliers. IL AG, at 5. This 

is unnecessary. Franchisors already must disclose 

purchasers from ‘‘the franchisor, its designee, or 

suppliers approved by the franchisor, or under the 

franchisor’s specifications.’’ Accordingly, 

‘‘designee, or suppliers approved by the franchisor’’

would cover any required purchases from affiliates. 

459 Piper Rudnick, at 6. 

460 Piper Rudnick also recommended that the 

Compliance Guides clarify the phrase ‘‘obligations 

to purchase imposed by . . . the franchisor’s 

practice.’’ Piper Rudnick, at 6. As far as we are 

aware, this phrase, taken from the UFOC 

Guidelines, has not previously raised any 

interpretive issues. At the very least, ‘‘franchisor’s 

practice’’ may include purchases that are 

recommended by the franchisor, or purchases that 

are prevalent among franchisees, even if not 

required by contract. 

461 NASAA, at 5. See also WA Securities, at 3. 

462 Franchise NPR, 64 FR at 57305. 

463 Duvall, ANPR 19, at 2. 

464 J&G, NPR 32, at 11. 

465 Stadfeld, NPR 23, at 14. 

466 Item 9 is consistent with other trade 

regulation rules where the Commission has 

recognized that information about legal risks to 

consumers is material. E.g., Negative Option Rule, 

16 CFR 425.1(a)(ii) (minimum purchase 

obligations); Door-to-Door Sales Rule, 16 CFR 429.1 

(obligations regarding cancellations). 

467 The UFOC Guidelines clearly contemplate 

that franchisors should reference other ancillary 

agreements, where appropriate. For example, the 

beginning of UFOC Item 9 reads: ‘‘Disclose the 

principal obligations of the franchisee under the 

franchise and other agreements after the signing of 

these agreements.’’ The express reference to ‘‘other 

agreements’’ and the use of the words ‘‘these 

agreements,’’ clearly indicate that the drafters 

directed franchisors to reference all applicable 

agreements. We see no compelling reason to deviate 

from the UFOC Guidelines on this point. 

468 In the original SBP, the Commission found 

that a prospective franchisee’s ability to obtain 

sufficient funding on reasonable terms is a critical 

last year.457 The disclosure of revenues 

from suppliers serves an ‘‘anti-conflict 

of interest’’ purpose, putting prospective 

franchisees on notice that the 

franchisor, by benefitting materially 

from a relationship with a supplier, may 

be motivated to require franchisees 

obtain goods or services from that 

supplier. Accordingly, the highly 

material fact is that the franchisor 

receives revenues from suppliers it 

requires franchisees to use, not the exact 

dollar amount received. By requiring 

franchisors to disclose the percentage of 

revenue derived from suppliers, Item 8 

achieves that purpose, consistent with 

the UFOC Guidelines. 

Finally, in response to the Staff 

Report, a few commenters offered 

various technical refinements to Item 

8.458 First, Piper Rudnick noted that 

Item 8 of the Staff Report would require 

disclosures about purchases from 

‘‘suppliers . . . under the franchisor’s 

specifications[, including] obligations to 

purchase imposed by written agreement 

or by the franchisor’s practice.’’ The 

firm interpreted the phrase ‘‘imposed by 

written agreement’’ as modifying the 

word ‘‘supplier.’’ If so, it maintained 

that a franchisor would have no reason 

to know if a supplier has a written 

agreement.459 We believe this is a 

strained reading of the provision: 

‘‘written agreement’’ is intended to refer 

to ‘‘franchisor,’’ not to a ‘‘supplier.’’

Nevertheless, in order to avoid any 

confusion, we have modified Item 8 in 

the final amended Rule now to read as 

follows: ‘‘Include obligations to 

purchase imposed by the franchisor’s 

written agreement or by the franchisor’s 

practice.’’460

Second, NASAA addressed the 

placement of footnote 5. Item 8, as 

proposed in the Staff Report, would 

require franchisors to disclose ‘‘whether 

the franchisor or its affiliates will or 

may derive revenue or other material 

consideration from required purchases 

or leases by franchisees,’’ and ‘‘if so 

describe the precise basis by which the 

franchisor or its affiliates will or may 

derive that consideration by stating 

...’’ Footnote 5 added: ‘‘Take figures 

from the franchisor’s recent annual 

audited financial statement . . . If 

audited statements are not yet required, 

or if the entity deriving the income is an 

affiliate, disclose the sources of 

information used in computing 

revenues.’’ NASAA observed that the 

footnote incorrectly seems to modify 

‘‘precise basis,’’ when it should modify 

‘‘franchisor’s total revenue.’’ It 

suggested moving the footnote to the 

end of section 436.5(h)(6)(i) so that it 

will modify ‘‘the franchisor’s total 

revenue.’’461 The final amended Rule 

adopts that suggestion. 

11. Section 436.5(i) (Item 9): 

Franchisee’s Obligations 

Section 436.5(i) of the final amended 

Rule adopts UFOC Item 9, as proposed 

in the Franchise NPR.462 This disclosure 

gives prospective franchisees an easy-tounderstand guide to 25 enumerated 

contractual obligations that are common 

in franchise relationships, with cross 

references to the specific sections of the 

franchise agreement and disclosure 

document that discuss each obligation 

in greater detail. There is no counterpart 

in the original Rule. 

Item 9 generated only a few comments 

during the Rule amendment proceeding. 

One franchisor representative 

maintained that the disclosure is 

unnecessary. He urged that a franchisor 

be permitted to opt out of Item 9 if the 

franchisor provides prospective 

franchisees with a detailed table of 

contents or index to its franchise 

agreement.463 Similarly, another 

franchisor representative suggested that 

the Item 9 disclosures should apply 

only to franchise agreements, but not to 

any accompanying ‘‘licenses, leases, 

subleases, guarantees, security 

agreement, load documents, software 

agreements, etc.’’464 According to this 

commenter, references to these ancillary 

agreements are burdensome and of little 

value to prospective franchisees. On the 

other hand, a franchisee representative 

asserted that Item 9 does not go far 

enough: ‘‘As currently structured, this 

disclosure is not worth the time and 

effort largely because it provides no 

benefit to the prospect.’’465 He suggested 

that franchisors use a remarks column to 

describe briefly the nature of each 

obligation. 

The Commission believes that Item 9 

serves a useful purpose. As stated 

throughout this document, franchisee 

complaints submitted during the Rule 

amendment proceeding supported better 

pre-sale disclosure about the nature of 

the franchise relationship.466 Item 9 

addresses that concern by providing a 

detailed table of contents to the 

franchise agreement, with the additional 

benefit of cross references to the 

relevant sections of the disclosure 

document. It facilitates review of a 

franchise offering by enabling a 

prospective franchisee to find and 

review the contractual provisions 

detailing their legal obligations, better 

ensuring that prospective franchisees 

are not mislead about the nature of the 

franchise relationship. Moreover, many 

franchisors already use the UFOC 

Guidelines and prepare an Item 9 table. 

Further, Item 9 should impose few costs 

or compliance burdens because 

franchisors need only reference existing 

materials, most likely the franchise 

agreement and disclosure document. To 

the extent that legal obligations are 

spelled out in any ancillary agreements, 

franchisors must direct prospects to 

those provisions as well.467

12. Section 436.5(j) (Item 10): Financing 

Consistent with the UFOC Guidelines 

Item 10, section 436.5(j) of the final 

amended Rule requires a franchisor to 

disclose all the material terms and 

conditions of any financing agreements, 

which encompass: the rate of interest, 

plus finance charges, expressed on an 

annual basis; the number of payments; 

penalties upon default; and any 

consideration received by the franchisor 

for referring a prospective franchisee to 

a lender. This disclosure is comparable 

to the original Rule provision found at 

16 CFR 436.1(a)(12).468 The final 


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element in determining whether to enter into a 

franchise relationship. Accordingly, it concluded 

that it is both unfair and deceptive for a franchisor 

to fail to disclose or misrepresent financing terms 

and conditions, and to fail to disclose rebates 

received in connection with franchise financing. 

Original SBP, 43 FR at 59659–60. 

469 The disclosures required by Item 10 are 

modeled on the disclosures lenders make under the 

Federal Reserve’s Regulation M (Consumer 

Leasing),12 CFR Part 213, and Regulation Z (Truth 

in Lending), 12 CFR Part 226. Because these 

regulations cover personal property leases and 

credit transactions that are ‘‘primarily for personal, 

family, or household purposes,’’ however, they 

generally do not apply directly with respect to lease 

and financing transactions undertaken in 

connection with the purchase of a franchise. Sales 

of franchises generally are not undertaken to 

advance personal, family, or household purposes. 

The version of Item 10 proposed in the NPR, 

following Item 10 in the UFOC Guidelines, 

expressly referenced the Consumer Credit 

Protection Act’s Truth in Lending (‘‘TILA’’) 

provisions, 15 U.S.C. 1605–1606. While not 

intending to depart unnecessarily from the UFOC 

Guidelines, the Commission believes that this 

reference is potentially confusing, because the TILA 

likely does not apply to transactions within the 

scope of the amended Rule. Nevertheless, 

franchisors can look to TILA and to the Consumer 

Leasing Act for guidance in crafting their 

disclosures under Item 10. The Commission 

anticipates that staff Compliance Guides will 

illuminate this topic further. 

470 It is worth noting that interest rates or finance 

charges may fluctuate between the time when the 

prospective purchaser receives the disclosure 

document and the time when he or she actually 

executes the financing agreement. Section 

436.5(j)(1)(iv) requires disclosure of what the rate of 

interest, plus finance charges, expressed on an 

annual basis, was on a specified recent date. In 

situations where the rate may change during the life 

of the loan, disclosure of this fact would be required 

under the catch-all requirement of section 

436.5(j)(x), which calls for disclosure of ‘‘other 

material financing terms.’’ Of course, Item 22—

section 436.5(v)—requires that any financing 

agreement be attached to the disclosure document, 

and the Item 10 disclosures merely summarize key 

terms. 

471 The introduction to UFOC Item 10 makes 

clear that franchisors are permitted to provide this 

information in summary table format, and 

Appendix A to the final amended Rule offers a 

sample table. 

472 H&H, NPR 9, at 18. 

473 Gurnick, NPR 21, at 6–7. 

474 The Commission will ensure that the 

Compliance Guides reiterate the point made here: 

nothing in Item 10 restricts the parties’ ability to 

negotiate over financing terms. 

475See 16 CFR 436.1(a)(17) and (18). The offer of 

business assistance is one of the hallmarks of a 

franchise system. In the original SBP, the 

Commission stated that promises of assistance 

made to induce prospective franchisees to purchase 

a franchise are material, especially to those 

prospects with ‘‘little or no experience at running 

a business.’’ Original SBP, 43 FR at 59676–77. 

476See UFOC Guidelines, Item 11. 

477 Our law enforcement experience demonstrates 

that misrepresentation about the level of support 

and assistance is one of the most common problems 

in franchise cases. See Staff Program Review, at 24–

26 (next to earnings claims, support problems are 

the second most frequent issue raised by franchisee 

complainants). E.g., FTC v. Car Wash Guys Int’l, 

Inc., No. 00–8197 ABC (RNBx) (C.D. Cal. 2000); FTC 

v. Indep. Travel Agencies of Am., Inc., No. 95–

6137–CIV Gonzalez (S.D. Fla. 1995); FTC v. Sage 

Seminars, Inc., No. C–95–2854–SBA (N.D. Cal. 

1995); FTC v. Skaife, Bus. Franchise Guide (CCH) 

¶ 9555 (C.D. Cal. 1990). 

Indeed, misrepresentations about support and 

assistance continue to be a source of numerous 

franchisee complaints. For example, one franchiseecommenter reported that her outlet failed, in part, 

because the franchisor did not adhere to its own 

criteria in selecting a store. Based upon her 

experience, she asserted that it is very important to 

have full disclosure on site selection criteria. 

Lundquist, ANPR, 22Aug. 97 Tr., at 45. See also 

Dady & Garner, ANPR 127, at 4; Mousey, ANPR, 29 

July 97 Tr., at 4–7. 

478See, e.g., FTC v. Car Checkers of Am., Inc., No. 

93–623 (mlp) (D.N.J. 1993) (misrepresenting that 

advertising expenses would be minimal or low); 

United States v. Fed. Energy Sys., Inc., Bus. 

Franchise Guide (CCH) ¶ 8180 (C.D. Cal. 1984) 

(misrepresenting extent of company advertising 

assistance); United States v. Ferrara Foods, Inc., 

Bus. Franchise Guide (CCH) ¶ 7926 (W.D. Mo. 

1983) (misrepresenting availability of national 

media advertising). The issue of advertising funds 

continues to generate concerns on the part of 

franchisees and their advocates. E.g., Brown, ANPR 

4, at 3 (favoring restrictions on franchisor’s 

unreasonable use of advertising funds); Manuszak, 

ANPR 13 (franchisor refuses to account for use of 

franchisees’ advertising funds); Weaver, ANPR 17 

(no discretion on use of advertising funds); Rachide, 

ANPR 32 (mismanagement of advertising funds); 

Colenda, ANPR 71 (alleging inappropriate use of 

advertising payments); Zarco & Pardo, ANPR 134, 

at 5 (‘‘A franchisor should be required to disclose 

the extent of its veto power over the allocation of 

Continued 

amended Rule’s Item 10 closely tracks 

the version of this provision as 

proposed in the Franchise NPR, revised 

to improve the clarity and overall 

consistency of the Rule.469

Section 436.5(j), like UFOC 

Guidelines Item 10, extends the original 

Rule disclosures by requiring 

franchisors to disclose any interest on 

the financing in terms of the rate of 

interest, plus finance charges, expressed 

on an annual basis, consistent with such 

disclosures required in consumer credit 

transactions.470 It also requires more 

disclosure than the original Rule about 

what the financing covers, waiver of 

defenses, and the franchisor’s practice 

or intent to sell or assign the obligation 

to a third party.471

Three commenters voiced concerns 

about Item 10. First, H&H suggested that 

leases referred to in Item 10 should be 

called ‘‘‘finance leases,’ a wellestablished term in commercial law.’’472

The Commission declines to adopt this 

suggestion. While ‘‘finance leases’’ may 

be a term of art used in commercial law, 

we do not believe that the UFOC 

Guidelines Item 10—upon which 

section 436.5(j) is based—is ambiguous 

or otherwise unclear. Deviating from the 

UFOC Guidelines on this point, 

therefore, is unwarranted. 

Second, David Gurnick suggested that 

the Rule expressly permit negotiation of 

financial terms, and require disclosure 

indicating ‘‘that there are other sources 

of financing, such as banks, which the 

franchisee should consider.’’473 The 

Commission, of course, intends that 

franchisees be free to negotiate 

financing terms. The Commission does 

not believe that the text of the final 

amended Rule at Item 10 can be read to 

imply that negotiation of financial terms 

is not permitted, or that Item 10 

contemplates any restriction of a 

franchisee’s choice of lender. Therefore, 

we believe it unnecessary to deviate 

from the UFOC Guidelines on this 

point.474

Finally, in response to the Staff 

Report, IL AG raised a technical issue 

about the sample Item 10 Financing 

Table, noting that ‘‘Equip. Lease’’ and 

‘‘Equip. Purchase’’ have separate lines, 

while ‘‘Land/Constr.’’ has a single line. 

The form of the Item 10 Financing Table 

in the final amended Rule, however, is 

taken directly from the UFOC 

Guidelines, and the record does not 

reflect that this format has caused 

difficulty for franchisors or confusion 

on the part of prospective franchisees. 

We therefore decline to deviate from the 

UFOC Guidelines on this point. 

13. Section 436.5(k) (Item 11): 

Franchisor’s assistance, advertising, 

computer systems, and training 

Section 436.5(k) retains the original 

Rule’s disclosure of franchisor’s 

assistance obligations, including preopening assistance (e.g., site selection), 

as well as ongoing assistance (e.g., 

training).475 Item 11 of the final 

amended Rule expands the original 

Rule, however, based upon the UFOC 

Guidelines’ more detailed assistance 

disclosure requirements, including 

disclosures relating to advertising 

assistance and computer system 

requirements.476

Section 436.5(k) requires franchisors 

to begin their Item 11 disclosure with 

the statement, in bold type, that 

‘‘[e]xcept as listed below, [the 

franchisor] is not required to provide 

you with any assistance.’’ This alert 

counters any express misrepresentations 

to the contrary and corrects any 

misconception on the prospective 

franchisee’s part that a minimum degree 

of assistance is inherent in any franchise 

offer.477 Item 11 also requires 

franchisors to explain in detail the 

franchisor’s site selection criteria and 

the franchisor’s training program. As 

noted above, this provision also requires 

franchisors to disclose the extent of any 

advertising assistance and the operation 

of local, regional, and national 

advertising councils or co-ops. These 

disclosures address a common 

franchisee complaint, namely, that 

franchisees do not get the quality or 

quantity of advertising they pay for.478


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any franchisee-generated funds, such as advertising 

cooperatives.’’). 

479 In response to the ANPR, a few commenters 

voiced concerns about obligations to purchase 

computers or related equipment. E.g., Fetzer, ANPR, 

19 Sept. 97 Tr., at 42 (needed to purchase a 

computer converter, an additional $7,000 expense); 

Rafizadeh, ANPR, 7 Nov. 97 Tr., at 292 (GNC 

unilaterally forcing franchisees to pay a new $80 

monthly maintenance fee on computer equipment 

purchased from GNC). 

480See NCA 7-Eleven Franchisees, ANPR 113, at 

2 (noting 7-Eleven’s use of ‘‘point-of-sale’’ cash 

registers, which enable headquarters to monitor 

sales). 

481 Franchise NPR, 64 FR at 57338. 

482 Baer, NPR 11, at 13; J&G, NPR 32, at 11. 

483 Marriott, NPR 35, at 15–16. 

484 Kestenbaum, ANPR 40, at 2. In response to the 

Franchise NPR—which proposed adopting the 

UFOC Item 11’s detailed computer systems 

disclosures—H&H suggested that a franchisor 

should be required to disclose the specifications of 

any mandatory computer system to the extent 

known or available, observing that start-up 

franchisors may not have identified software 

systems before they start franchising. The firm 

suggested that a franchisor should be permitted to 

satisfy the Item 11 requirements by disclosing that 

specifications are not known or available. H&H, 

NPR 9, at 23. Cf. Bundy, NPR 18, at 9 (suggesting 

that a start-up franchisor disclose some guidelines 

it will follow in selecting a computer system). We 

agree. Accordingly, the Commission intends that, 

for start-up franchisors, the computer system 

disclosures of Item 11 should be read to allow 

flexibility: a start-up franchisor may indicate that 

computer requirements are yet unknown, or 

otherwise state its policy concerning computer 

usage, as is warranted. As Mr. Bundy noted, the 

lack of selected computer systems by the franchisor 

itself reveals material information: that the 

franchisor is not yet computerized, which may 

‘‘plac[e] the franchisee at a disadvantage in many, 

if not most industries.’’ Bundy, NPR 18, at 9. 

485See Staff Report, at 137–38. It is noteworthy 

that NASAA has not opposed this substantive 

revision to Item 11 of the UFOC Guidelines. 486 Bundy, at 6–7. 

Section 436.5(k) also addresses major 

technological changes in franchising 

since the original Rule was promulgated 

in 1978. Based upon UFOC Item 11, this 

provision requires material disclosure 

about the required use of computers and 

electronic cash registers.479 For 

example, it requires franchisors to 

disclose whether they will have 

independent access to information and 

data stored on electronic cash register 

systems or software programs that the 

franchisee is required to use or buy.480

Item 11, as proposed in the Franchise 

NPR, would have adopted the UFOC 

Guidelines requirement that franchisors 

identify each piece of hardware and 

software by brand, type, and principal 

function, or to identify compatible 

equivalents and whether they have been 

approved by the franchisor.481 The 

computer system disclosure was the 

only Item 11 issue that generated 

significant comment during the Rule 

amendment proceeding. Several 

comments asserted that the UFOC 

Guidelines Item 11 computer system 

disclosures are burdensome, not helpful 

to prospective franchisees, and are 

unnecessary because the costs 

associated with purchasing computers 

and related equipment are already 

disclosed in Items 5, 7, and 8.482

Marriott, for example, explained that its 

Item 11 computer usage disclosure 

‘‘results in four to five pages of 

disclosure in each of Marriott’s offering 

circulars yet provides little or no benefit 

to franchisees.’’483 In addition, one 

franchisor representative noted that 

many start-up franchisors are ‘‘not 

certain which computer system or 

software they expect to have the 

franchisees use. Provision should be 

made for these new franchisors.’’484

The Commission believes that Item 

11’s computer systems disclosures, 

which track the UFOC Guidelines’

disclosures, serve a useful purpose. 

There is no question that the costs a 

franchisee must incur to purchase or 

lease computer and related equipment 

or software, as well as any continuing 

maintenance or upgrade obligations and 

their associated costs, comprise 

information that is material to the 

prospective franchisee’s purchasing 

decision. Information about whether the 

franchisor will have access to 

information stored on the franchisee’s 

computers or electronic cash registers 

also is material, because such access 

very likely would be a key component 

of the relationship between the 

franchisor and franchisee. As noted 

throughout this document, the 

Commission is convinced that 

additional disclosures are warranted 

where they will likely prevent 

deception about the nature of the 

franchise relationship a prospective 

franchisee is deciding to enter. 

Nonetheless, the computer usage 

disclosures as set forth in the UFOC 

Guidelines appear to go beyond what is 

material in some instances and likely 

would impose unwarranted compliance 

burdens. Specifically, we are 

disinclined to require a franchisor to 

identify each and every piece of 

hardware and software by brand, type, 

and principal function, or to identify 

compatible equivalents and whether 

they have been approved by the 

franchisor. We agree with the Franchise 

NPR commenters who observed that 

some franchisors (start-up franchisors in 

particular) may not have decided upon 

specific systems at the time of sale or, 

even if they did, that the technology 

very likely will change over the course 

of the franchise agreement. Thus, the 

compliance burden to prepare 

component-specific disclosures would 

not likely outweigh any tangible 

benefits to prospective franchisees.485

We are persuaded that it is sufficient for 

franchisors to describe generally the 

computer systems to be used, if any; any 

required purchase and maintenance 

costs and obligations; and whether the 

franchisor will have access to 

information contained in those systems. 

This information not only will enable 

prospects to weigh the costs and 

benefits of purchasing a specific 

franchise, but will better enable 

prospects to learn if they will be at a 

technological disadvantage compared to 

other franchise systems in the industry. 

On the other hand, one franchisee 

advocate, Howard Bundy, firmly 

defended the materiality and usefulness 

of detailed itemized disclosures about 

required computer systems. 

Specifically, Mr. Bundy voiced concern 

about franchisors that require 

franchisees to use proprietary 

technology that the franchisor has 

developed or plans to develop. Mr. 

Bundy asserted that this may negatively 

impact upon franchisees’ ability to fix 

flaws in software, for example. He 

contended that prospective franchisees 

should have the right to know whether 

they can use ‘‘off-the-shelf’’ products, 

and whether software can interface with 

common systems such as Microsoft 

Office or Outlook. Similarly, they 

should know whether accounting 

software complies with IRS standards or 

if they will get periodic updates.486

Mr. Bundy’s concern about the 

potential limitations of franchisordeveloped software has merit. However, 

we believe the final amended Rule 

already addresses this issue. As noted 

above, section 436.5(k) requires 

franchisors to ‘‘describe the systems 

(which includes hardware and software 

components) generally in non-technical 

language, including the types of data to 

be generated or stored in these 

systems.’’ Thus, the ‘‘general 

description’’ requirement is broad 

enough to cover proprietary systems 

that can be obtained only from the 

franchisor. Moreover, section 436.5(k) 

will require the franchisor to disclose 

any obligation to provide ongoing 

maintenance, repair, upgrades, or 

updates. Taken together, these 

provisions are sufficient to capture 

instances where franchisors require the 

use of their own software. 

Finally, we note that in response to 

the Staff Report, Gust Rosenfeld raised 

a technical point about the Item 11 

disclosure of the franchisor’s operating 

manual. The firm noted that, under the 

UFOC Guidelines, franchisors must 

include the Table of Contents of the 

operating manual in the disclosure 


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487 Gust Rosenfeld, at 5 (citing UFOC Guidelines, 

Item 11, at B. vii.). 

488See 16 CFR 436.1(a)(13). In the original SBP, 

the Commission recognized that sales restrictions 

and limited territories affect a franchisee’s ability to 

conduct business and are, therefore, material. 

Original SBP, 43 FR at 59662. See, e.g., FTC v. Am. 

Legal Distrib., Inc., Bus. Franchise Guide (CCH) 

[1987–1989 Transfer Binder] ¶ 9090 (N.D. Ga. 

1988); United States v. C.D. Control Tech. Inc., Bus. 

Franchise Guide (CCH), ¶ 9851 (E.D.N.Y. 1985); 

United States v. Fed. Energy Sys, Inc., Bus. 

Franchise Guide (CCH) [1983–85 Transfer Binder] 

¶ 8180 (C.D. Cal. 1984); FTC v. Nat’l Bus. 

Consultants, Inc., Bus. Franchise Guide (CCH) ¶

9365 (E.D. La. 1989). Cf. FTC v. Vendors Fin. Serv., 

Inc., No. 98–N–1832 (D. Colo. 1998); FTC v. Int’l 

Computer Concepts, Inc., No. 1:94cv1678 (N.D. 

Ohio 1994); FTC v. O’Rourke, Bus. Franchise Guide 

(CCH) ¶ 10243; FTC v. Am. Safe Mktg., Inc., Bus. 

Franchise Guide (CCH) ¶ 9350 (N.D. Ga. 1989). 

489 Specifically, Item 12 of the final amended 

Rule extends the original Rule by providing a 

prospective franchisee with material information 

about competition not only through outlets within 

the prospective franchisee’s intended location, but 

through alternative channels of distribution, such as 

the Internet, catalog sales, telemarketing, and direct 

marketing. In the same vein, it addresses any 

restrictions on a franchisee’s ability to conduct 

business outside of his or her territory through 

traditional sales and alternative channels of 

distribution. The Staff Report recommended this 

modification to the proposed Rule. Staff Report, at 

144–45. See PRM&W, NPR 4, at 11 (supporting need 

to update the original Rule to address new 

technologies and marketing practices). 

490E.g., Brown, ANPR 4, at 2; Packer, ANPR 10; 

Manuszak, ANPR 13; Donafin, ANPR 14; Weaver, 

ANPR 17; Rachide, ANPR 32, at 3; AFA, ANPR 62, 

at 1; Orzano, ANPR 73; Buckley, ANPR 97, at 3; 

Marks, ANPR 107, at 2; Zarco & Pardo, ANPR 134, 

at 2. 

491 For example, Laurie Gaither, an owner of a 

GNC franchise, reported that the company opened 

a franchisor-owned outlet in a mall within two 

miles from her store. She claimed that this 

development has reduced her profits by 50%. L. 

Gaither, ANPR 68. 

492E.g., AFA, ANPR 62, at 1 (putting up a new 

outlet to compete with an existing franchisee is an 

unfair trade practice); Bell, ANPR 30 (FTC needs to 

prohibit franchisors from devaluing assets through 

encroachment); Rachide, ANPR 32 (encroachment 

among practices that FTC should prohibit); Marks, 

ANPR 107 (FTC should consider prohibiting 

franchisor encroachment, unless franchisee 

compensated). 

493 Absent an express grant of a protected 

territory, a franchisor is generally free to establish 

as many outlets (franchisor-owned or franchised) in 

any particular market as it wishes. A few state 

courts (or federal courts applying state law), 

however, have held that encroachment violates 

state implied covenants of good faith and fair 

dealing. See, e.g., In re Vylene Enterprises, Inc., 90 

F.3d 1472 (9th Cir. 1996). 

document, unless ‘‘the prospective 

franchisee views the manual before 

purchase of the franchise.’’487 The firm 

asserted that the Staff Report erred in 

recommending that the alternative to 

providing the Table of Contents be 

revised to permit a franchisor to ‘‘offer 

a prospective franchisee the opportunity 

to review the manual before buying the 

franchise.’’

The Commission believes the Staff 

Report is correct. As a practical matter, 

we question how it could be proven that 

a prospective franchisee actually 

reviewed a manual. Even if a franchisor 

had a prospective franchisee initial each 

page of a manual, there is no assurance 

that the prospect actually ‘‘reviewed’’

the manual. For that reason, at most we 

can require a franchisor to afford a 

prospective franchisee the opportunity 

to review the manual. At the same time, 

we stress that the ‘‘opportunity to 

review’’ a manual must be a reasonable 

one. A franchisor would not satisfy its 

disclosure obligation if, for example, it 

offered to show the manual to a 

prospect only if the prospect agreed to 

fly across country to the franchisor’s 

corporate headquarters. In that regard, 

the opportunity to review a manual 

means that the franchisor must show the 

manual to the prospect (for example in 

person or online) and permit the 

prospect sufficient time to review it. 

14. Section 436.5(l) (Item 12): Territory 

Section 436.5(l) of the final amended 

Rule retains the original Rule’s 

disclosures concerning exclusive 

territories and sales restrictions.488 Like 

the proposed Rule published in the 

Franchise NPR, the final amended Rule 

is closely modeled on the UFOC 

Guidelines. It therefore expands the 

original Rule’s disclosure requirements 

regarding territories in several respects. 

These new disclosure requirements 

cover: (1) the conditions, if any, under 

which a franchisor will approve the 

relocation of the franchisee’s business 

and the franchisee’s establishment of 

additional outlets; (2) any present plans 

on the part of the franchisor to operate 

a competing franchise system offering 

similar goods or services; and (3) in 

instances when a franchisor does not 

offer an exclusive territory, a prescribed 

warning about the consequences of 

purchasing a non-exclusive territory. In 

response to some comments, the 

Commission also has decided to make 

additional modifications to the text of 

Item 12 in order to update both the 

original Rule and the UFOC Guidelines 

to address new technologies and market 

developments, such as the Internet and 

alternative channels for distributing a 

franchisor’s goods.489

The Item 12 territory disclosures 

generated several comments. First, 

franchisees and their advocates urged 

the Commission to address 

‘‘encroachment,’’ the practice by which 

a franchisor essentially competes with 

its franchisees by establishing 

franchisor-owned or new franchisedoutlets in the same market territory, by 

purchasing and operating a competing 

franchise system, or by selling the same 

goods or services through alternative 

channels of distribution. Second, other 

commenters questioned the scope of 

Item 12, urging the Commission to 

require franchisors to disclose more 

information about their past expansion 

practices, as well as future expansion 

plans. Third, some commenters 

questioned the terminology used to 

describe territories, urging the 

Commission to avoid implying that a 

protected territory is inherent in the 

concept of franchising. Finally, several 

commenters offered different views on 

the form of warning that might be 

appropriate where a franchisor sells 

franchises without an exclusive 

territory. Each of these issues is 

discussed below. 

a. Encroachment 

Throughout the Rule amendment 

proceeding, franchisees and their 

advocates urged the Commission to 

address ‘‘encroachment.’’490 The 

commenters contended that 

encroachment may have a devastating 

effect upon an individual franchisee 

who does not have a contractually 

protected exclusive territory,491 and 

some urged the Commission to ban 

encroachment as ‘‘an abusive and 

unfair’’ trade practice under Section 5 of 

the FTC Act.492

The Commission’s view is that the 

granting of a protected territory is 

fundamentally a private contractual 

matter for the parties to determine for 

themselves.493 While the record 

establishes franchisees’ concerns about 

encroachment, it falls far short of 

supporting a conclusion that not 

granting a protected territory in a 

franchise agreement constitutes an 

unfair practice within the meaning of 

the FTC Act. Nor does the record 

support a conclusion that a franchisor’s 

expansion where there are existing 

franchisees is an unfair practice. 

Section 5(n) of the FTC Act provides 

that an ‘‘unfair’’ practice is one that 

‘‘causes or is likely to cause substantial 

injury to consumers which is not 

reasonably avoidable by consumers 

themselves and not outweighed by 

countervailing benefits to consumers or 

to competition.’’ While the record 

suggests that some franchisees in several 

franchise systems may have been 

harmed by franchisor encroachment, the 

record leaves open the question whether 

encroachment is prevalent and whether 

the injury resulting from encroachment 

is substantial, when viewed from the 

standpoint of the franchising industry as 


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494 As discussed above in the overview of the 

final rule above (section I.D. of this document), the 

Commission has voiced concern that governmentmandated contractual terms may result in 

affirmative harm to consumer welfare. Accordingly, 

the Commission has authorized staff to file a 

number of advocacy comments recommending 

against proposed state bills that would have unduly 

limited manufacturers in managing their 

distribution systems, such as by requiring exclusive 

territories. 

495See Staff Program Review, at 59. 

496 One commenter in the Rule amendment 

proceeding advocated broadening the scope of the 

Rule to require more expanded disclosures covering 

competition by affiliates, the franchisor’s officers, 

and franchise sellers. Bundy, NPR 18, at 9. In the 

absence of persuasive record evidence that 

competition by franchisor officers or sellers is a 

prevalent problem, however, the Commission has 

determined not to deviate from the UFOC 

Guidelines on this issue. 

497 Selden, ANPR 133, Appendix B. See also 

Dady & Garner, ANPR 127, at 4 (‘‘Explicit 

statements about the nature and extent of protection 

against same-brand competition that will or will not 

be provided is essential to an informed buying 

decision.’’). 

498 H&H, NPR 9, at 23. 

499Id. See also Wendy’s, NPR 5, at 2; Baer, NPR 

11, at 13 ; Lewis, NPR 15, at 15; BI, NPR 28, at 11; 

J&G, NPR 32, at 12; GPM, NPR Rebuttal 40, at 6. 

500 UFOC Item 12C (emphasis added). 

501E.g., Wendy’s, NPR 5, at 2. 

502 Franchise NPR, 64 FR at 57339. 

503 BI, NPR 28, at 6 (‘‘[E]xclusive . . . is 

ambiguous and often misleading.’’). 

504Id. 

505 NFC, NPR 12, at 19. 

506 NFC, NPR 12, at 19. See also J&G, NPR 32, 

at 12. 

507Id. See also J&G, NPR 32, at 12. 

a whole,494 not just from a few franchise 

systems.495 Second, assuming a 

regulatory regime of full and truthful 

pre-sale disclosure on the issue of 

territories, prospective franchisees can 

avoid potential harm from 

encroachment by shopping for a 

franchise opportunity that offers an 

exclusive territory. Finally, the record 

does not support a finding that harm to 

franchisees resulting from 

encroachment necessarily outweighs 

potential benefits (expansion of markets 

and increased consumer choice) to 

consumers or to competition. For these 

reasons, the Commission has 

determined that the criteria for an 

industry-wide prohibition on 

encroachment has not been met. Thus, 

the Commission declines to mandate 

specific contractual terms regarding 

territories. 

b. Scope of the Item 12 disclosures 

A few commenters urged the 

Commission to require franchisors to 

disclose more information about their 

past practices with regard to expansion 

into franchisees’ areas or their future 

plans to do so.496 For example, Andrew 

Selden, a franchisee representative, 

suggested that ‘‘Item 12 should be 

elaborated to require full disclosure of 

past practice, current intention or future 

possibility of franchisor-sponsored 

competitive activities that have the 

prospect of impacting the franchisee’s 

business.’’497

Franchisors addressing current 

development plans uniformly opposed 

any disclosure. H&H’s comment is 

typical. Most franchisors consider 

current development plans to be 

proprietary information ‘‘that would 

place them at a competitive 

disadvantage if they were to be made 

publicly available.’’498 The firm also 

stressed that franchisors need flexibility 

to adapt development plans to market 

realities. ‘‘Disclosure of development 

plans could lead to possible claims by 

franchisees who anticipated greater or 

lesser franchise development in a 

particular area.’’499

Based on review of the record as a 

whole, the Commission has determined 

that requiring disclosure of past and 

planned future expansion is 

unwarranted. With respect to past 

expansion, prospective franchisees 

arguably can discover such information 

on their own by directly observing the 

number and location of outlets in their 

community and by speaking with 

current and former franchisees. 

Moreover, past practices are not 

necessarily a predictor of future intent. 

It is also unreasonable to require 

franchisors to disclose hypothetical 

possibilities about their future 

expansion. Indeed, by not granting an 

exclusive territory, the franchisor has 

effectively reserved to itself the 

unrestricted right to expand into new or 

existing locations or to sell its products 

or services via alternative channels of 

distribution. 

The UFOC Guidelines require a 

franchisor to disclose only if the 

franchisor ‘‘may establish’’ other outlets 

in the area; it does not require the 

franchisor to disclose its specific plans 

for the franchisee’s territory. 

Franchisors need to elaborate on their 

expansion plans only if they have 

‘‘present plans to operate or franchise a 

business under a different trademark 

and that business sells goods or services 

similar to those to be offered by the 

franchisee.’’500 Moreover, the 

Commission is inclined to the view that 

a franchisor’s development plan is 

proprietary information that a franchisor 

should not be required to make 

public.501 It could also subject 

franchisors to future liability for fraud 

or misrepresentation should the 

franchisor alter, abandon, or delay its 

stated expansion plans. Further, 

requiring a franchisor to disclose plans 

to develop a territory may be costly and 

burdensome because the franchisor 

conceivably would have to prepare 

multiple Item 12 disclosures to focus on 

each franchise location. The disclosures 

already contained in Item 12 are 

sufficient to warn prospects about likely 

competition because any prospective 

franchisee who buys a franchise without 

any protected territory is essentially 

taking the risk that the franchisor will 

further develop the market area. For 

these reasons, we have determined not 

to deviate from the UFOC Guidelines on 

this point. 

c. Terminology 

The final amended Rule fine-tunes the 

terminology and organization of Item 

12. As proposed in the Franchise NPR, 

Item 12 would have required that 

franchisors disclose information 

‘‘concerning the franchisee’s market 

area with or without an exclusive 

territory.’’ It also referred to the 

franchisee’s ‘‘defined area.’’502 Several 

commenters raised concerns about the 

use of these terms. 

First, BI opposed the use of the term 

‘‘exclusive territory’’ in the Franchise 

NPR, urging the Commission to use the 

term ‘‘protected territory’’ instead. It 

asserted that the term ‘‘protected 

territory’’ is more descriptive of a 

franchisee’s typical contractual rights 

regarding its territory, if any.503

Similarly, the firm opposed the use of 

the term franchisee’s ‘‘market area.’’ It 

maintained that the term ‘‘market area’’

is undefined and imprecise. BI 

advocated use of the term ‘‘location.’’504

The NFC agreed, asserting that the 

term ‘‘market area’’ is a ‘‘charged 

word.’’505 According to the NFC, under 

franchisee agreements, franchisees have, 

at most, a right only to a specified 

location or narrowly defined geographic 

area. Use of the term ‘‘market area’’ may 

advance the false notion that the grant 

of a franchise inherently ‘‘confers upon 

a franchisee exclusive rights within the 

franchisee’s economic ‘market area,’

despite the terms of the subject 

franchise agreement.’’506 Similarly, the 

NFC opposed the use of the term 

‘‘defined area.’’ In its view, the 

appropriate term should be ‘‘limited 

protected territory,’’ noting that an area 

is almost never granted unconditionally 

by a franchisor. The NFC advised that 

by using the phrase ‘‘limited protected 

territory’’ in lieu of ‘‘defined area,’’ the 

Commission could ‘‘actually reduce the 

misconception which otherwise may be 

engendered in the minds of prospective 

franchisees over what territorial 

protections, if any, they can expect to 

receive.’’507


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508 See, e.g., UFOC Item 12 (‘‘Describe any 

exclusive territory granted the franchisee. 

Concerning the franchisee’s location (with or 

without exclusive territory, disclose . . .’’). See also 

NASAA Comparison at Item 12. 

509 In response to the Staff Report, no 

commenters raised any concerns about the 

recommended choice of terminology used in Item 

12. 

510 This language, with minor editing, was 

suggested by PMR&W, which observed that the 

proposed version of the warning focused only on 

sales from outlets. PMR&W argued convincingly 

that such a warning could be misleading because it 

fails to take into consideration competition from 

other sources, such as the Internet, direct mail, and 

mail order. PMR&W, NPR 4, at 11. See also J&G, 

NPR 32, at 12; IL AG, NPR Rebuttal 38, at 3. 

511 Indeed, several franchisee advocates urged the 

Commission to strengthen the existing UFOC 

Guidelines’ encroachment risk factor. For example, 

Robert Zarco suggested that franchisors be required 

to state: 

‘‘The company reserves the right to increase the 

number of franchised or company-owned units in 

an area. In the past, we have been known to put 

another outlet in close proximity to an existing unit. 

This action generally has a negative impact on the 

gross and/or net sales of the pre-existing unit.’’

Zarco & Pardo, ANPR 134, at 2. See also Dady & 

Garner, ANPR 127, at 3 (suggesting: ‘‘You have no 

protected area. Your franchisor, without any 

compensation to you, may place another store in a 

location that may completely erode your 

profitability.’’). 512 E.g., Brown, ANPR 4, at 2; Parker, ANPR 10; 

Manusak, ANPR 13, at 1; Donaphin, ANPR 14; 

Weaver, ANPR 17; Rachide, ANPR 32, at 3; AFA, 

ANPR 62, at 1; L. Gaither, ANPR 68; Orzano, ANPR 

73, at 1; Buckely, ANPR 97, at 3; Marks, ANPR 107, 

at 2; Zarco & Pardo, ANPR 134, at 2; Vidulich, 22 

Aug. 97 Tr., at 17; Christiano, 19 Sept. 97 Tr., at 

50; Bundy, 6 Nov. 97 Tr., at 135; Cordell, 6 Nov. 

97 Tr., at 136; Kezios, 6 Nov. 97 Tr., at 142. See 

also FTC v. Fax Corp. of Am., Inc., No. 90–983 (D. 

N.J. 1990); FTC v. Nat’l Bus. Consultants, Inc., No. 

89–1740 (E.D. La.1989); FTC v. Am. Legal Distrib., 

Inc., No. 1:89–CV–462–RLV (N.D. Ga. 1989). 513See 16 CFR 436.1(a)(1)(iii). 514 In the original SBP, for example, the 

Commission noted that a key feature of franchising 

is the right to use the franchisor’s trademark. 

Original SBP, 43 FR at 59623. 

515 Bundy, NPR 18, at 9. 

516 On this issue, the UFOC Guidelines 

specifically note that a franchisor need not disclose 

historical challenges to registrations of trademarks 

that were resolved in the franchisor’s favor. UFOC 

Guidelines, Item 13B Instructions, iv. 

517 Franchise NPR, 64 FR at 57339. 

518See NASAA Comparison, at 17. 

519 Franchise NPR, 64 FR at 57339. 

The Commission agrees that terms 

such as ‘‘market area’’ and ‘‘defined 

area’’ are potentially misleading. Such 

terms inaccurately imply an inherent 

right to a territory, where, in fact, the 

right to a territory, protected or 

otherwise, is purely a matter of contract. 

Accordingly, we believe the term 

‘‘exclusive territory’’—as used in the 

UFOC Guidelines508—is more precise. 

While the term ‘‘exclusive territory’’ is, 

perhaps, not as ‘‘descriptive’’ as the 

terms ‘‘protected area,’’ or ‘‘limited 

protected territory,’’ its use is clarified 

for prospective franchisees through the 

disclosures set forth in paragraphs (5) 

and (6) of section 436.5(l). Accordingly, 

in the absence of a stronger showing 

that alternatives to ‘‘exclusive territory’’

are more accurate, the Commission has 

determined to revise Item 12 to adhere 

more closely to the UFOC Guidelines on 

this point, as recommended in the Staff 

Report.509 Thus, the final amended Rule 

substitutes the words ‘‘location’’ or 

‘‘exclusive territory’’ for ‘‘market area,’’

‘‘area,’’ and ‘‘defined’’ area, as 

appropriate. 

d. Warning 

Item 12 of the final amended Rule 

fine-tunes and expands slightly the 

standard warning proposed in the 

Franchise NPR that is required in those 

instances when franchisors do not offer 

exclusive territories: ‘‘You will not 

receive an exclusive territory. You may 

face competition from other franchisees, 

from outlets that we own, or from other 

channels of distribution or competitive 

brands that we control.’’510

Given the potential financial risks 

associated with a non-exclusive 

territory, the Commission believes that 

franchisors who do not offer an 

exclusive territory should warn 

prospective franchisees about such 

possible risks.511 The Commission 

generally disfavors the use of warnings 

that merely repeat what is already 

expressly stated in the franchise 

agreement, but believes that a specific 

warning regarding exclusive territories 

is warranted in light of the volume and 

persuasiveness of franchisee complaints 

regarding territory issues.512 As noted 

previously, the Commission is 

convinced that additional disclosures 

are warranted where they will likely 

prevent deception about the nature of 

the franchise relationship. 

15. Section 436.5(m) (Item 13): 

Trademarks 

The original Rule required a 

franchisor to list the trademark 

identifying the goods or service to be 

sold by the prospective franchisee.513

Consistent with the UFOC Guidelines, 

section 436.5(m) of the final amended 

Rule requires franchisors to disclose 

whether the trademark is registered with 

the United States Patent & Trademark 

Office; the existence of any pending 

litigation, settlements, agreements, or 

superior rights that may limit the 

franchisee’s use of the trademark; and 

any contractual obligations to protect 

the franchisee’s right to use the mark 

against claims of infringement or unfair 

competition. 

These expanded disclosures are 

consistent with the Commission’s longstanding policy of requiring franchisors 

to disclose the material costs and 

benefits of the franchise sale. One of the 

principal reasons that one may wish to 

purchase a franchise—as opposed to 

starting one’s own business—is the right 

to use the franchisor’s mark, which 

presumably creates an instant market for 

the franchisees’ goods or services.514 For 

that reason, trademark usage is one of 

three definitional elements of the term 

franchise. Any pending litigation, 

settlement restrictions, or other 

potential limitations on the use of the 

trademark are material because they will 

necessarily affect the value of the 

trademark to a prospective franchisee 

and ultimately may impact the 

franchisee’s ability to continue 

operating the business. 

Item 13 generated little comment. 

Howard Bundy suggested that 

franchisors should disclose not only 

pending trademark litigation, but all 

such litigation in the last 10 years.515

The Commission declines to adopt this 

suggestion. The fact that the franchisor 

may have been involved in a trademark 

dispute a decade ago is not inherently 

material.516 What influences a decision 

to purchase a franchise is whether there 

are any current restrictions or disputes 

over the trademark license. Obviously, 

any existing trademark restrictions or 

challenges not only may decrease the 

value of the mark and the goodwill 

associated with it, but may increase 

franchisees’ costs if they must switch to 

a different mark. Accordingly, we 

decline to deviate from the UFOC 

Guidelines by requiring more extensive 

disclosures on this point. 

The Commission has determined to 

adopt staff’s recommendation to adhere 

more closely to the UFOC Guidelines on 

Item 13 than did the proposed Rule on 

two points. First, the Franchise NPR 

proposed that franchisors disclose how 

any infringement, opposition, or 

cancellation proceeding ‘‘affects the 

franchised business.’’517 This is 

unnecessarily inconsistent with the 

wording of the UFOC Guidelines, which 

state: ‘‘affects the ownership, use, or 

licensing’’ of the trademark.518

Second, the Franchise NPR included 

a footnote addressing the use of 

summary opinions of counsel: 

‘‘Franchisors may include a summary 

opinion of counsel concerning any 

action if a consent to use the summary 

opinion is included as part of the 

disclosure document.’’519 The footnote, 

however, did not address the 

discretionary use of a full opinion letter, 

nor the need to attach the full opinion 

letter if a summary is used. On this 

point, the UFOC Guidelines state: 

the franchisor may include an 


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520 UFOC Guidelines, Item 13B Instructions, v. 

521 Franchise NPR, 64 FR at 57339. 

522 Arguing that many prospective franchisees 

would not understand the standard disclosure 

prescribed in the Franchise NPR’s proposed Rule—

particularly the phrase ‘‘presumptive legal rights’’—

the Staff Report recommended that the Commission 

simplify it. The simplified version recommended by 

staff, however, was criticized by two commenters 

on the ground that it was not entirely accurate from 

a legal standpoint. Gust Rosenfeld, at 6; Piper 

Rudnick, at 2. The version adopted here corrects the 

problems pointed out by these commenters. 

523 Restrictions on the use of the franchisor’s 

intellectual property are material because they not 

only may seriously diminish the value of the 

franchise, but could undermine the franchisee’s 

ability to operate the business. Item 14 also may 

improve the relationship between franchisors and 

franchisees by preventing any misunderstanding 

about the value or use of the franchisors’

intellectual property. 

524See NASAA Comparison, at 20. 

525 See 16 CFR 436.1(a)(14). In the original SBP, 

the Commission noted that the degree of personal 

participation required of a franchisee is a material 

fact in the franchise relationship. Accordingly, the 

omission of such information is an unfair or 

deceptive practice in violation of Section 5. 

Original SBP, 43 FR at 59663. 

526 NASAA, at 5; WA Securities, at 3–4. 

attorney’s opinion relative to the 

merits of litigation or of an action 

if the attorney issuing the opinion 

consents to its use. The text of the 

disclosure may include a summary 

of the opinion if the full opinion is 

attached and the attorney issuing 

the opinion consents to the use of 

the summary.520

The Commission adopts the UFOC 

Guidelines language in both instances. 

In addition, the final amended Rule 

improves on the clarity and precision of 

the proposed Rule’s standard disclosure 

required when the franchisor’s 

trademark is not registered on the 

Principal Register of the United States 

Patent and Trademark Office. The 

proposed disclosure reads as follows: ‘‘If 

the trademark is not registered on the 

Principal Register of the U.S. Patent and 

Trademark Office, state: ‘By not having 

a Principal Register federal registration 

for [name or description of symbol], 

[name of franchisor] does not have 

certain presumptive legal rights granted 

by a registration.’’’521

The final amended Rule’s disclosure 

is: 

We do not have a federal 

registration for our principal 

trademark. Therefore, our 

trademark does not have as many 

legal benefits and rights as a 

federally registered trademark. If 

our right to use the trademark is 

challenged, you may have to change 

to an alternative trademark, which 

may increase your expenses.522

16. Section 436.5(n) (Item 14): Patents, 

copyrights, and proprietary information 

Section 436.5(n) of the final amended 

Rule adopts the UFOC Guidelines’

requirement for disclosure of 

information about the franchisor’s 

intellectual property. There is no 

comparable provision in the original 

Rule. Item 14 elicited no comment 

during the amendment proceeding. 

Item 14 requires franchisors to 

describe in general terms the types of 

intellectual property involved in the 

franchise and any legal proceedings, 

settlements, and restrictions that may 

impact the franchisee’s ability to use 

such property.523 If counsel permits, 

Item 14 allows a franchisor to include 

a counsel’s opinion or a summary of the 

opinion about legal actions, if the full 

opinion is attached.524

The final amended Rule differs from 

the Franchise NPR proposal, however, 

in several non-substantive respects to 

add precision and improve organization 

of the provision. Specifically, Item 14 of 

the final amended Rule separates those 

disclosures pertaining to patents from 

those pertaining to patent applications. 

At the same time, it also groups closely 

related disclosures—those for patents, 

patent applications, and copyrights—

under a single common direction. For 

example, section 436.5(n)(1) of the 

Franchise NPR stated: ‘‘For each patent 

or copyright: (i) Describe the patent or 

copyright and its relationship to the 

franchisee; (ii) State the duration of the 

patent of copyright.’’ Section 436.5(n)(1) 

of the final amended Rule simplifies 

this language by eliminating the use of 

multiple directions. Instead, it says: ‘‘(1) 

Disclose whether the franchisor owns 

rights in, or licenses to, patents or 

copyrights that are material to the 

franchise. Also, disclose whether the 

franchisor has any pending patent 

applications that are material to the 

franchise. If so, state ...’’ followed by 

the specific disclosure requirement for 

patents, patent applications, and 

copyrights. 

Similarly, section 436.5(n)(1), as 

proposed in the Franchise NPR, referred 

to the ‘‘issue date.’’ The final amended 

Rule instead uses the correct language: 

‘‘issuance date.’’ In the same vein, Item 

14 of the final amended Rule corrects 

imprecise language that would have 

required the disclose of material 

determinations pending in ‘‘the U.S. 

Patent and Trademark Office or the U.S. 

Court of Appeals for the Federal 

Circuit.’’ In fact, patent and copyright 

determinations can be made in courts 

other than the U.S. Court of Appeals for 

the Federal Circuit, as noted in other 

sections of Item 14 (‘‘Describe any 

current material determination of the 

United States Patent and Trademark 

Office, the United States Copyright 

office, or a court regarding the patent or 

copyright.’’). The language now reads 

more broadly ‘‘pending in the United 

States Patent and Trademark Office or 

any court.’’

Finally, Item 14, as proposed in the 

Franchise NPR, would have required 

franchisors to disclose the ‘‘length of 

time of any infringement.’’ However, it 

is possible that a franchisor may not 

know how long a third party has been 

infringing its rights. Accordingly, Item 

14 of the final amended Rule adds the 

qualifying phrase ‘‘to the extent 

known.’’

17. Section 436.5(o) (Item 15): 

Obligation to participate in the actual 

operation of the franchise business 

Section 436.5(o) of the final amended 

Rule retains the original Rule 

requirement that franchisors disclose 

whether franchisees are required to 

participate personally in the direct 

operation of the franchise.525 Like the 

corresponding provision in the 

Franchise NPR’s proposed rule, this 

section of the final amended Rule 

closely tracks the UFOC Guidelines’

Item 15. It therefore expands the 

original Rule on this point by requiring 

franchisors to disclose: (1) participation 

obligations arising not only from the 

parties’ franchise agreement, but from 

other agreements or as a matter of 

practice; (2) whether direct participation 

is recommended; and (3) any limitations 

on whom the franchisee can hire as a 

supervisor and any restrictions that the 

franchisee must place on his or her 

manager. If the franchisee operates as a 

business entity, the franchisor must also 

disclose the amount of equity interest, if 

any, that the supervisor must have in 

the franchise. 

Item 15 generated little comment. In 

response to the Staff Report, NASAA 

and Washington Securities noted an 

inconsistency between the proposed 

final amended Rule and the UFOC 

Guidelines on the disclosure of whom a 

franchisee may hire as an on-premises 

supervisor and that person’s training. 

Whereas the UFOC Guidelines provide 

that these disclosures pertain to all 

franchisees, the Franchise NPR 

suggested that these disclosures should 

be limited to franchisees who are 

individuals, but not to business 

entities.526 We agree with the 

commenters that the Franchise NPR’s 

proposed limitation was based upon an 

erroneous reading of the UFOC 


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527 NASAA, NPR 17, at 4. 

528 NASAA, at 5; WA Securities, at 3–4. 

529See 16 CFR 436.1(a)(13). In the original SBP, 

the Commission recognized that sales restrictions 

are material because they can limit the scope of the 

franchisee’s market and ultimately the franchisee’s 

profitability. Original SBP, 43 FR at 59661. The 

sales restriction disclosures are comparable to other 

Commission trade regulation disclosures 

concerning restrictions on the use of goods and 

services. E.g., Telemarketing Sales Rule, 16 CFR 

310.3(a)(1) (requiring disclosure of all material 

restrictions, limitations, or conditions to purchase, 

receive, or use the goods or services); Negative 

Option Rule, 16 CFR 425.1(a)(1)(ii) (requiring 

disclosure of post-sale minimum purchase 

requirements); Disclosure of Warranty Terms and 

Conditions, 16 CFR 701.3(a)(8) (requiring material 

disclosures of limitations and exclusions on 

warranty coverage). 

530 The final amended Item 16 is reorganized for 

greater precision and uses more precise language. 

For example, the final amended Item 16 eliminates 

a redundancy in the Franchise NPR regarding the 

disclosure of any restrictions on customers, which 

appeared in both the introduction to the Item 

(disclose . . . any franchisor-imposed restrictions 

. . . that limit the franchisee’s customers) and in 

the main text (disclose . . . any restrictions on the 

franchisee’s customers). The final amended Item 16 

also uses more precise language, substituting 

‘‘disclose [any restrictions] . . . that limit access to 

customers,’’ rather than the Franchise NPR’s 

inaccurate language ‘‘any restrictions on the 

franchisee’s customers.’’

531See 16 CFR 436.1(a)(15) (requiring franchisors 

to describe 14 categories of terms and conditions). 

532 In the original SBP, the Commission stated 

that the terms and conditions of the franchise 

relationship—such as those governing transfers, 

renewals, and terminations—are material because 

they ‘‘may limit what the franchisee may do with 

his or her capital asset.’’ Original SBP, 43 FR at 

59664. Given the length and complexity of the 

typical franchise agreement, prospective franchisees 

may overlook, or do not fully appreciate, such terms 

and conditions. Id. 

533 For example, the AFA stated: 

‘‘‘Renewal’ is a misnomer. ‘Re-license,’ ‘rewrite’

or even ‘re-franchise’ is a more accurate description 

of what actually happens at the end of the initial 

contract term. Most franchisees find that when it is 

time to ‘renew,’ they are not ‘renewing’ their 

existing franchise agreement, but are entering into 

a wholly new franchise agreement, often with 

materially different financial and operational terms. 

They are presented these ‘renewal’ contracts on a 

‘take it or leave it’ basis and are under enormous 

coercion pressures to sign—especially if the old 

agreement contains a post-termination covenant not 

to compete. This is truly ‘holding a gun to the head’

of the ‘renewing’ franchisee.’’

AFA, ANPR 62, at 2. 

534E.g., AFA, NPR 14, at 5; Bundy, NPR 18, at 4; 

Karp, NPR 24, at 20–21; Morrell, NPR 31, at 2; 

Bores, ANPR 9, at 1; Rachide, ANPR 32; Chabot, 

Continued 

Guidelines, and the final amended Rule 

makes the appropriate correction. 

NASAA also urged the Commission to 

consider expanding Item 15 to include 

the disclosure of ‘‘operating hours and 

the method used by franchisors to notify 

franchisees of changes in required 

operating hours.’’527 The Commission, 

however, declines to adopt this 

suggestion. While this information 

might be useful for prospective 

franchisees, it does not rise to the level 

of materiality such that non-disclosure 

of it may put prospective franchisees in 

jeopardy of being deceived. Moreover, 

no other commenter raised this point, 

and in the absence of a record dictating 

that we deviate from the UFOC 

Guidelines, the Commission is reluctant 

to do so. 

Finally, NASAA and Washington 

Securities recommended that the 

Commission require franchisors to 

disclose in Item 15 all agreements 

regarding the franchise that apply to the 

owners of the franchise.528 While this 

suggestion is rooted in the NASAA 

Commentary on the UFOC Guidelines, 

nothing in Item 15 of the UFOC 

Guidelines says that franchisors must 

present copies of the actual agreements 

to prospective franchisees. The 

Commission believes such a 

requirement would be duplicative and 

burdensome. Franchisors already must 

include in Item 22 copies of ‘‘all 

agreements proposed for use or in use 

. . . regarding the offering of a 

franchise, including the franchise 

agreement, leases, options, and 

purchase agreements.’’ Presumably, 

contracts with franchise owners would 

already be disclosed in Item 22. Thus, 

this suggested modification is 

unnecessary. 

18. Section 436.5(p) (Item 16): Sales 

restrictions 

Section 436.5(p) of part 436 retains 

the original Rule’s disclosures on sales 

restrictions. Like other disclosure 

requirements addressing how a 

franchisee may conduct business, this 

provision requires franchisors to 

disclose any restrictions limiting the 

goods or services that the franchisee 

may offer for sale or the customers to 

whom a franchisee may sell goods or 

services.529 Consistent with UFOC 

Guidelines, Item 16 also extends the 

original Rule disclosures by requiring a 

franchisor to disclose whether the 

franchisor has the right to change the 

types of goods or services authorized for 

sale, as well as any limits on the 

franchisor’s right to make such changes. 

These disclosures better enable a 

prospective franchisee to understand 

the extent to which the franchisor has 

the contractual right to control sales, 

which may directly affect the prospect’s 

ability to conduct business, its 

independence from the franchisor, and 

ultimately, its profitability. No 

comments were submitted on the Item 

16 sales restrictions disclosures, and the 

adopted version is almost identical to 

the version proposed in the Franchise 

NPR.530

19. Section 436.5(q) (Item 17): Renewal, 

termination, transfer, and dispute 

resolution 

Section 436.5(q) adopts UFOC Item 

17, which requires franchisors to 

summarize in tabular form 23 

enumerated terms and conditions of a 

typical franchise relationship, such as 

the duration of the franchise agreement, 

rights and obligations upon expiration 

of the franchise agreement, post-term 

covenants not to compete, and 

assignment and transfer rights. The final 

amended Rule provision is almost 

identical to the proposed rule in the 

Franchise NPR, with only a slight 

modification, described below, with 

respect to the treatment of the term 

‘‘renewal.’’

The approach taken in the final 

amended Rule greatly streamlines the 

original Rule, which required 

franchisors to detail the rights and 

obligations already spelled out in the 

franchise agreement.531 Item 17, 

therefore, reduces compliance burdens, 

while providing prospective franchisees 

with a detailed road map to the 

franchise contract, where they can read 

the various provisions in greater detail. 

At the same time, Item 17 expands on 

the original Rule by requiring 

disclosures pertaining to dispute 

resolution, including any arbitration or 

mediation requirements, as well as 

forum-selection and choice of law 

provision disclosures. For each 

enumerated contract term, the 

franchisor must cross reference the 

applicable franchise agreement 

provisions and briefly summarize the 

governing terms.532

Most of the comments submitted on 

Item 17 concerned the use of the term 

‘‘renewal.’’ Franchisee advocates 

asserted that the term ‘‘renewal’’ is 

misleading.533 In their view, the term 

implies that a franchisee, upon 

expiration of the franchise term, can 

continue operating the franchise under 

substantially similar terms and 

conditions. They observed, that in 

practice, franchisees who wish to 

continue operating their franchises at 

the end of the franchise term must often 

sign new contracts that impose 

materially different terms and 

conditions, such as higher royalty 

payments or the elimination of an 

exclusive territory. They asserted that 

renewing franchisees, in many 

instances, have no choice but to sign 

even the most abusive, one-sided 

renewal contracts because they have a 

substantial economic investment in 

their franchises and simply cannot walk 

away without incurring significant 

economic loss.534 Worse, when a 


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ANPR 37; Rich, ANPR 65; Orzano, ANPR 73; 

Geiderman, ANPR 131; Karp, ANPR, 19 Sept. 97 

Tr., at 83; Chiodo, ANPR, 21 Nov. 97 Tr., at 303–

04. 

535 NFC, NPR 12, at 30. 

536 J&G, NPR 32, at 13. 

537 Tricon, NPR 34, at 6–7. 

538 Baer, NPR 11, at 13. See also IL AG, NPR 3, 

at 7. 

539 Stadfeld, NPR 23, at 15–16. See also 

NaturaLawn, NPR 26, at 2. 

540 IL AG, NPR 3, at 7. Similarly, the AFA urged 

the Commission to adopt the following warning: 

‘‘You do not own your own business. You are 

leasing the rights to sell our goods/services to the 

public under our trade name. At the end of your 

initial [number of years] term, your current contract 

will expire [terminate]. You will have the choice of 

signing a new contract written by us at the time of 

expiration [termination]. The new contract will be 

written by us with no input from you and will 

contain materially different financial and 

operational terms.’’

AFA, NPR 14, at 5. See also Bundy, at 7; Bundy, 

NPR 18, at 5 (urging the Commission to require 

franchisors to disclose the consequences of 

renewal). 

541 In response to the Staff Report, Spandorf 

opined that Item 17 as recommended by staff was 

still confusing, asserting that it could mean that a 

franchisor would have to make the statement about 

renewal even if the franchisor does not offer 

renewals. Spandorf, at 7. We do not believe this is 

a serious concern. Item 17 clearly states that 

franchisors need only address those issues listed in 

Item 17 if applicable. ‘‘If a particular item is not 

applicable, state ‘Not Applicable.’’’

542 One example of a renewal explanation may 

be: ‘‘If you seek to renew your franchise agreement 

upon expiration, know that royalty payments and 

the size of your exclusive territory may change’’ or 

‘‘Upon expiration, you will renegotiate the terms 

and conditions of your contract. Be aware that these 

terms and conditions may be different from those 

in your original agreement.’’

543 Section 436.5(q)(3). 

544 In response to the Staff Report, Howard Bundy 

urged the Commission to adopt a negative 

disclosure whenever a franchisor does not offer 

renewal on the same exact terms as the original 

agreement: ‘‘We do not give you the right to renew 

or extend your franchise on the same terms as your 

current franchise agreement. You should consult 

your franchise attorney about the consequences of 

this.’’ Bundy, at 7. We believe the Item 17 

requirement that franchisors explain what they 

mean by ‘‘renewal’’ is sufficient to address this 

concern. 

545 In the original SBP, the Commission stated 

that this information is material because it helps 

prospective franchisees understand the extent of 

any financial and managerial commitments from 

the public figure, as well as any obligations to the 

public figure. Prospective franchisees can then 

decide for themselves whether an association with 

a public figure is valuable to them. Original SBP, 

43 FR at 59677–78. 

546 For example, Item 18 of the Franchise NPR 

used the language: ‘‘Disclose . . . any 

compensation paid or promised to the public 

figure.’’ The final amended Rule substitutes the 

word ‘‘given’’ for ‘‘paid,’’ recognizing that a public 

figure may be ‘‘given’’ tangible benefits, such as a 

car, not just a cash payment. Accordingly, the term 

‘‘given’’ is more precise and broader. The final 

amended Rule also improves the organization of 

Item 18. As proposed in the Franchise NPR, Item 

18 included the definition of ‘‘public figure’’

upfront, where it interrupted the flow of the basic 

disclosure requirements. Accordingly, Item 18 of 

the final amended Rule is easier to read. 

franchisee does walk away, he or she is 

often bound by a covenant not to 

compete, which restricts his or her 

ability to operate a similar business for 

a number of years. 

Several franchisor representatives 

supported the view that the term 

‘‘renewal’’ may be inappropriate. The 

NFC, for example, stated that the term 

‘‘renewal’’ is somewhat ambiguous: it 

could mean either ‘‘a simple extension 

of the existing agreement under the 

same terms or—as is far more 

common—the grant of a ‘successor 

franchisor’ under the terms being 

offered at the time that the existing 

agreement expires.’’535 However, the 

NFC did not believe that the term 

‘‘renewal’’ is misleading, and it was 

uncertain whether the ambiguity 

compels a revision of the Rule. J&G 

asserted that the term is potentially 

misleading,536 and Tricon urged the 

Commission to avoid its use entirely.537

On the other hand, several 

commenters maintained that the term 

‘‘renewal’’ is clear and requires no 

modification. For example, John Baer 

stated that ‘‘renewal’’ is a term of art in 

franchising and should not be changed. 

He also observed that the various state 

relationship laws use that term and ‘‘to 

revise it for disclosure purposes is likely 

to cause more confusion than 

clarity.’’538 Seth Stadfeld, a franchisee 

advocate, agreed, explaining that the 

term ‘‘renewal’’ refers to the 

relationship between the franchisor and 

franchisee, not to the underlying 

contract. He also shared Mr. Baer’s 

concern that the term is used in state 

relationship statutes and should not 

readily be changed.539

Several commenters suggested that 

the Commission adopt various 

disclosures or warnings for prospective 

franchisees that would explain the 

concept of renewal in greater detail. The 

IL AG, for example, suggested that 

franchisors make the following 

statement: ‘‘You should learn what 

changes in your agreement might occur 

and what rights you have when your 

contract expires. Renewal may change 

important contract terms.’’540

While the record reveals that there 

may be confusion over the use of the 

term ‘‘renewal,’’ it does not show that 

use of the term is inherently deceptive. 

The Commission concludes that the 

term ‘‘renewal’’ is a franchising term of 

art, meaning that upon the expiration of 

a contract, the franchisees may have the 

right to enter into a new contract, where 

materially different terms and 

conditions may apply. Moreover, as 

several commenters noted, the term 

‘‘renewal’’ is used in various state 

relationship laws, in addition to the 

UFOC Guidelines. In light of that 

background, the Commission is 

disinclined to mandate use of a different 

term or prohibit use of ‘‘renewal.’’ At 

any rate, a prospective franchisee may 

be just as prone to misinterpret the 

substitute language (e.g., ‘‘re-license’’) as 

the term ‘‘renewal.’’ It short, any term 

may be misleading if prospective 

franchisees fail to understand the 

underlying concept that a franchisor 

may require a change in contract terms 

and conditions upon expiration of the 

original agreement as a condition of 

renewal. Therefore, the Commission has 

determined not to introduce 

nonconformity between federal and 

state approaches on the use of this term. 

Nonetheless, the record is persuasive 

that many prospective franchisees may 

not appreciate the legal import of the 

term ‘‘renewal.’’ Indeed, franchisees 

often are surprised to discover that 

‘‘renewal’’ means the continuation of 

their franchise relationship under 

potentially vastly different terms. To 

prevent potential deception with respect 

to use of the term ‘‘renewal,’’ Item 17 of 

the final amended Rule requires 

franchisors to explain their renewal 

policy in the summary field for 

provision Item 17(c) (requirements for 

franchisee to renew or extend).541 We 

do not suggest any particular form of 

explanation, however, because that will 

depend upon the individual policies of 

each franchisor.542 If applicable, the 

franchisor must also state that 

franchisees ‘‘may be asked to sign a 

contract with materially different terms 

and conditions than their original 

contract.’’543 While we are reluctant to 

add consumer education notices to the 

disclosure document, especially where 

the UFOC Guidelines require no parallel 

notice, we believe it is warranted in this 

instance, given the continued concern 

raised by franchisee advocates and 

others about renewals.544

20. Section 436.5(r) (Item 18): Public 

figures 

Consistent with the UFOC Guidelines, 

Item 18 requires franchisors to disclose 

the involvement of a public figure in the 

franchise system, including his or her 

management responsibilities, total 

investment made in the franchise 

system, and compensation, if any. This 

section is substantively similar to the 

comparable disclosure provision of the 

original Rule found at 16 CFR 

436.1(a)(19).545 The final amended Rule 

adopts Item 18 as proposed, with only 

minor language changes for the sake of 

clarity and improved organization.546

Item 18 generated few comments 

during the Rule amendment proceeding. 


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547 H&H, NPR 9, at 18. Howard Bundy agreed, 

proposing instead that the space be used for more 

important issues: ‘‘It would make more sense to 

elevate the renewal issue, the gag order issue, and 

the integration clause issue, and perhaps even the 

arbitration clause issue to full Item status and move 

the public figure information elsewhere.’’ Bundy, 

NPR 18, at 10. Of the franchisees who participated 

in the Rule amendment proceedings, only one 

voiced concerns about a public figure. Dianne 

Mousley purchased a Mike Schmidt’s Philadelphia 

Hoagies franchise, in part based upon the 

representation that Mike Schmidt, a former baseball 

player, would be actively involved in the franchise 

system. However, Ms. Mousley’s primary concerns 

did not involve Mr. Schmidt. Rather, she 

complained about delays in constructing the store 

and lack of promised training and support. See 

generally Mousley, 29 July 97 Tr., at 1–32. 

548 In the original SBP, the Commission found 

that one of the most frequent abuses occurring in 

the marketing of franchises is the use of deceptive 

past and potential franchise sales, income, and 

profits claims. Indeed, the Commission stated that 

the ‘‘use of deceptive and inaccurate profit and loss 

statements by franchisors has resulted in a legion 

of ‘horror stories.’’’ Original SBP, 43 FR at 59684. 

549See 16 CFR 436.(1)(b)(2); 436.(1)(c)(2); 

436.1(e)(2); UFOC Guidelines, Item 19A. 

550See 16 CFR 436.1(b)(3); 436.1(c)(3); 

436.1(e)(5)(i); UFOC Guidelines, Item 19B. 

551See 16 CFR 436.1(b)(4); 436.1(c)(5); 

436.1(e)(5)(iii); UFOC Guidelines, Item 19B 

Instructions, (c). 

552See 16 CFR 436.1(d). 

553See 16 CFR 436.1(b)(1); 436.1(c)(1). 

554See 16 CFR 436.1(c)(4); 436.1(e)(2). 

555See UFOC Guidelines, Item 19 Instructions i. 

556See UFOC Guidelines, Item 19 Instructions ii. 

557 The greatest difference between Item 19 as 

proposed in the Franchise NPR and Item 19 in the 

final amended Rule is the elimination of the GAAP 

requirement, discussed in greater detail, infra. 

558 Piper Rudnick’s comment on the Staff Report 

raised an issue on a separate topic that the 

Commission has decided to address. The firm noted 

that there is a problem with section 

436.5(s)(3)(ii)(A) as proposed in the Franchise NPR 

(and as recommended in the Staff Report). 

Specifically, that provision required that the 

material bases for a financial performance 

representation include a statement of ‘‘the degree of 

competition in the market area.’’ Piper Rudnick 

observed that there may be no single ‘‘market.’’ If 

national performance claims are made, it would be 

extremely difficult to describe the ‘‘market.’’ As a 

result, franchisors are likely to adopt ‘‘some 

meaningless boilerplate’’ to comply. Accordingly, 

the firm recommended dropping the entire quoted 

phrase. Piper Rudnick, at 3. The Commission has 

carefully considered this point, and has determined 

that competition is a factor that may impact upon 

a prospective franchisee’s ability to achieve 

represented financial performance. A reference to 

competition generally, therefore, is warranted. 

Nevertheless, the phrase ‘‘market area’’ may be so 

problematic as to render the particular disclosure 

element meaningless, as the firm predicts. 

Therefore section 436.5(s)(3)(ii)(A) of Item 19 as 

adopted refers simply to ‘‘degree of competition,’’

without reference to a ‘‘market area.’’

559 Franchise NPR, 64 FR 57309–10. 

560 UFOC Guidelines, Item 19. 

Two commenters questioned the utility 

of the disclosure. H&H noted that this 

Item is seldom, if ever, applicable and 

urged the Commission to delete it.547

The Commission has determined that 

the information required under Item 18 

remains material in those instances, 

relatively uncommon though they may 

be, when a public figure creates his or 

her own franchise system or when a 

franchisor uses a public figure 

pitchman. A public figure’s ownership 

or management of a franchise system 

could create the impression of greater 

oversight or influence in the operation 

of the system, making the franchise 

offering appear to be a less risky 

investment. Similarly, a public figure 

pitchman’s endorsement of a franchise 

system may create the impression that 

the franchise system is sound or a low 

risk. How much weight a prospect may 

give a public figure endorser’s pitch 

may vary with the level of 

compensation received from the 

franchisor. If, for example, a pitchman 

is paid a nominal sum, then a 

prospective franchisee may be inclined 

to give the pitch more weight because 

the pitchman has little to gain 

financially and thus little motive to 

fabricate his or her pitch. Accordingly, 

the public figure disclosures concerning 

level of involvement and compensation 

are material and their potential benefits 

to prospective franchisees would 

outweigh their costs. To that limited 

degree, these disclosures still serve a 

useful purpose. In those more typical 

instances when no public figure is 

involved, Item 18 entails no additional 

compliance burden. On balance, 

therefore, the Commission is disinclined 

to deviate from the UFOC Guidelines on 

this point. 

21. Section 436.5(s) (Item 19): Financial 

performance representations 

Section 436.5(s) of part 436, a key 

anti-fraud provision, addresses the 

making of financial performance 

representations.548 Consistent with the 

original Rule and the UFOC Guidelines, 

the final amended Rule permits, but 

does not require, franchisors to make 

such representations under limited 

circumstances. When a franchisor elects 

to make a financial performance claim, 

the franchisor must, among other things, 

have a reasonable basis for the 

representation549 and disclose the basis 

and assumptions underlying the 

representation.550 Franchisors also must 

include an admonition that a 

prospective franchisee’s actual earnings 

may differ.551

Bringing the original Rule’s 

provisions on financial performance 

representations into closer alignment 

with the UFOC Guidelines entailed 

several deletions or departures from the 

original Rule. Specifically, the final 

amended Rule differs from the original 

Rule in that: 

• It eliminates the requirement that 

franchisors who decide to make 

financial performance claims provide 

prospective franchisees with a separate 

financial performance claim 

document.552 Instead, consistent with 

the UFOC Guidelines, it requires any 

performance claim to appear in Item 19 

of the disclosure document itself; 

• It eliminates the requirement that all 

financial performance claims be 

geographically relevant to the franchise 

offered for sale;553

• It eliminates the requirement that 

any historical financial performance 

claims must be based upon generally 

accepted accounting principles 

(‘‘GAAP’’);554

• It permits franchisors, under specific 

circumstances, to disclose, apart from 

the disclosure document, the actual 

operating results of a specific unit being 

offered for sale;555 and 

• It permits franchisors to furnish 

supplemental performance information 

directed at a particular location or 

circumstance.556

For the reasons explained below, the 

final amended Rule provision, however, 

diverges from Item 19 of the UFOC 

Guidelines by permitting greater 

disclosure of financial information 

about subsets of franchisor-owned or 

franchised outlets, provided the 

franchisor discloses specified 

information about the subset at issue. 

With certain additional refinements 

described in the following paragraphs of 

this section, including the preamble 

requirements, Item 19 of the final 

amended Rule closely tracks Item 19 as 

proposed in the Franchise NPR.557

Nearly all comments on the Item 19 

disclosure requirements focused on four 

issues: (1) whether financial 

performance disclosures should be 

mandatory or voluntary; (2) whether the 

Rule should permit disclosure of 

financial performance information about 

geographical or other subsets of 

franchisor-owned or franchised outlets; 

(3) whether the Rule should retain the 

requirement that historical financial 

performance data be prepared according 

to GAAP; and (4) whether the Rule 

should require prescribed preambles. 

Each of these issues is discussed in the 

sections immediately below.558

a. Voluntary disclosure of financial 

performance information 

The Franchise NPR proposed that the 

making of financial performance 

representations remain voluntary, as 

was the case under the original Rule559

and UFOC Guidelines.560 Many 


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561E.g., AFA, at 2; Bundy, at 7–8; Karp, at 3; 

Selden, at 2; Haff, at 2; Blumenthal, at 1. 

562 Karp, ANPR, 19 Sept. 97 Tr., at 100–03. 

Quoting several business texts, Mr. Karp asserted 

that historical financial performance information is 

critical to any evaluation of a business. Internal 

Revenue Service Ruling 59–60, Item D, for example, 

provides that: ‘‘detailed profit and loss statements 

should be obtained and considered for a 

representative period immediately prior to the 

required date of appraisal, preferably five or more 

years.’’ According to Mr. Karp, the failure of 

franchisors to disclose historical performance 

information deprives prospects of material 

information that is essential in evaluating the 

franchise offering. 

563See Staff Report, at 159–60; ANPR, 62 FR at 

9118. See also Brown, ANPR 4, at 4; SBA Advocacy, 

ANPR 36, at 8; Purvin, ANPR 79; Lagarias, ANPR 

125, at 1–2; Dady & Garner, ANPR 127, at 1–2; and 

Selden, ANPR 133, at 1–2 and Appendix C; 

Lundquist, ANPR, 22 Aug. 97 Tr., at 46–47. 

564See Staff Report, at 161–62. E.g., Gust 

Rosenfeld, at 6; Duvall, ANPR 19, at 2; Kaufmann, 

ANPR 33, at 7; Tifford, ANPR 78, at 5; Jeffers, ANPR 

116, at 5. See also 7-Eleven, NPR 10, at 3 

(suggesting that a typical franchisor would be hardpressed to generate financial performance 

information without ‘‘very extensive and significant 

effort.’’). In addition, a few commenters urged the 

Commission to coordinate its financial performance 

disclosure policy with NASAA to promote 

uniformity. For example, John Tifford stated: 

‘‘Federal and state regulators must develop a 

coherent and compatible earnings claim policy in 

order to ensure that franchisors will not be exposed 

to risks caused by inconsistent and uncoordinated 

federal and state policies.’’ Tifford, ANPR 78, at 6. 

See also AFA, ANPR 62, at 4; IL AG, ANPR 77, at 

2; IFA, ANPR 82, at 3. On the other hand, Cendant, 

representing several major franchise systems, 

suggested that the FTC prohibit states from 

mandating financial performance disclosures by 

preempting the field. Cendant, ANPR 140, at 2. 

565See, e.g., FTC v. Minuteman Press, Int’l, 93–

CV–2494 (DRH) (E.D.N.Y.) (1998 Order) (finding 

that the making of false gross sales and profit 

representations to prospective franchisees was 

pervasive in the Minuteman and Speedy Sign-ARama franchise systems). See also, e.g., FTC v. Car 

Wash Guys, Int’l, No. 00–8197 ABD (RNBx) (C.D. 

Cal. 2000); FTC v. Tower Cleaning Sys., Inc., No. 96 

58 44 (E.D. Pa. 1996); FTC v. Majors Med. Supply, 

No. 96–8753–Zloch (S.D. Fla. 1996); FTC v. Indep. 

Travel Agencies of Am., Inc., No. 95–6137–CIV–

Gonzalez (S.D. Fla. 1995); FTC v. Mortgage Serv. 

Assoc., Inc., No. 395–CV–1362 (AVC) (D. Conn. 

1995); FTC v. Robbins Research Int’l, Inc., No. 95–

CV–627–H(AJB) (S.D. Cal. 1995); FTC v. Sage 

Seminars, Inc., No. C–95–2854–SBA (N.D. Cal. 

1995). See generally Vidulich, 22 Aug. 97 Tr., at 18–

19; Marks, 19 Sept. 97 Tr., at 2–3; Fetzer, 19 Sept. 

97 Tr., at 40–41. 

566See, e.g., Bortner, ANPR 37, at 3; NASAA, 

ANPR 43, at 3. 

567See 16 CFR 436.1(b)(1); 436.1(c)(1). The 

original Rule’s geographic relevance prerequisite 

was designed to ensure that a financial performance 

representation was reasonable in light of the 

opportunity being offered for sale. In short, 

geographic relevance ‘‘helps to ensure that the 

representation reflects what the franchisee is likely 

to achieve.’’ Original SBP, 43 FR at 59691. 

568 The UFOC Guidelines, for example, permit a 

franchisor selling a franchise in Florida to disclose 

that franchised outlets in urban areas of Oregon and 

Washington have averaged a specific profit level. In 

contrast, the original Rule barred such a 

performance claim because such claim is not 

geographically relevant to the prospective 

franchisee’s territory—Florida. 

569 Franchise NPR, 64 FR at 57310. 

franchisees and their representatives, 

however, urged the Commission to 

mandate the disclosure of financial 

performance information.561 In support 

of this recommendation, these 

commenters advanced a number of 

arguments: (1) that financial 

performance information is the most 

material information prospective 

franchisees need to make an informed 

investment decision;562 (2) that 

franchisors already have performance 

information and it is a deceptive 

omission for them to fail to disclose this 

information; (3) that franchisors are in 

the best position to collect and 

disseminate performance information; 

(4) that a mandated financial 

performance disclosure would reduce 

the level of false and unsubstantiated 

oral and written financial performance 

claims; and (5) that more disclosure 

regarding performance would benefit 

the marketplace and competition.563

In contrast, franchisors and their 

advocates uniformly opposed 

mandatory financial performance 

disclosures, based on the following 

arguments: (1) it is impossible for the 

Commission to create a single 

performance disclosure format that will 

be relevant for all industries; (2) not all 

franchisors have the contractual right to 

collect extensive financial information 

with which to prepare a reasonable 

performance disclosure; (3) financial 

performance data collected from 

existing franchisees is not necessarily 

complete and accurate; (4) a mandatory 

performance disclosure would be 

misinterpreted as a guarantee of future 

performance, thus increasing litigation; 

and (5) mandating financial 

performance disclosures would have a 

negative impact upon the franchisorfranchisee relationship, subjecting 

franchisees to more extensive 

accounting oversight and audits.564

Based upon its assessment of the 

record as a whole, the Commission 

concludes that financial performance 

representations should remain 

voluntary. In reaching this conclusion, 

we recognize that false or misleading 

financial performance claims are the 

most common allegation in Commission 

franchise law enforcement actions.565

However, there is no assurance that 

mandating performance claims will in 

fact reduce the level of false claims. 

Given that many different industries are 

affected by part 436, what makes a 

financial performance disclosure 

reasonable, complete, and accurate is 

quite varied. Thus, the Commission will 

not mandate a particular set of financial 

performance disclosures. However, if a 

franchisor chooses to make such 

disclosures, they, of course, must be 

reasonable, non-misleading, and 

accurate. 

Mandating financial performance 

disclosures would also impose 

substantial new accounting, data 

collection, and review costs on all 

franchise systems. At the same time, it 

potentially could expose existing 

franchisees, upon whose data the 

franchisor would rely, to more extensive 

audits. In addition, existing franchisees 

might be subject to potential liability for 

indemnification should a franchisor, 

relying on the franchisees’ performance 

data, be found to have violated the Rule 

by failing to furnish accurate financial 

performance data. 

Further, the record reveals that 

approximately 20% or more of 

franchisors choose to make financial 

performance disclosures.566

Accordingly, prospective franchisees 

can find franchise systems that 

voluntarily disclose such information. If 

prospective franchisees were to seek out 

such franchise systems, or demand the 

disclosure of such information from 

franchisors, ordinary market forces 

might compel an increasing number of 

franchisors to disclose earnings 

information voluntarily, without a 

federal government mandate. More 

important, a disclosure document is not 

the only potential source of financial 

performance information. Prospective 

franchisees can obtain financial 

performance information from a variety 

of third-party sources. For example, 

typical expenses, such as labor and rent, 

may be available from industry trade 

associations and industry trade press. 

Prospective franchisees may be able to 

discuss earnings and other financial 

performance issues directly with current 

and former franchisees, as well as with 

trademark-specific franchisee 

associations. For these reasons, we 

conclude that financial performance 

representations should remain 

voluntary, consistent with the original 

Rule and UFOC Guidelines. 

b. Geographic relevance and subgroups 

As noted above, Item 19 of the final 

amended Rule eliminates the original 

Rule’s geographic relevance requirement 

for financial performance 

representations.567 This brings the 

Rule’s financial performance disclosure 

requirements into closer alignment with 

Item 19 of the UFOC Guidelines,568 as 

proposed in the Franchise NPR.569

At the same time, the final amended 

Rule deviates from the Franchise NPR 

by omitting the UFOC Guidelines’

requirement that franchisors disclose 

the number and percentage of all 


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570 Item 19B ii of the UFOC Guidelines 

instructions requires ‘‘a concise summary of the 

basis for the claim including a statement of whether 

the claim is based upon actual experience of 

franchised units and, if so, the percentage of 

franchised outlets in operation for the period 

covered by the earnings claims that have actually 

attained or surpassed the stated results.’’ The 

original Rule did not include any counterpart 

requirement. The original Rule contained the same 

broad number and percentage requirements only for 

financial performance claims made in the general 

media. 16 CFR 436.1(e)(5)(ii). 

571 16 CFR 436.1(b)(5)(i); 16 CFR 436.1(c)(6)(i). 

572 This approach to financial performance 

substantiation, as proposed in the Franchise NPR 

and recommended in the Staff Report, prompted 

few comments from any of the participants in this 

proceeding. 

573See Gust Rosenfeld, at 6 (supporting option of 

marking financial performance representations 

based upon sub-group data). 

574 ‘‘[T]he omission of the geographic relevancy 

requirement represents the removal of a substantial 

impediment to franchisors who might wish to 

provide financial performance data to prospective 

franchisees, because it will lower the obstacles to, 

and cost of, compiling the data necessary to 

produce a meaningful representation. We believe it 

is unlikely to have any material effect on the quality 

of such representation, as geographic relevancy is 

often quite attenuated.’’ BI, NPR 28, at 11. See also 

Baer, NPR 11, at 13. 

575 IL AG, NPR 3, at 7. 

576 Baer, NPR 11, at 14. 

577 Marriott, NPR 35, at 11. But see PMR&W, NPR 

4 (suggesting that these provisions may deter the 

dissemination of financial performance 

information). 

578 See 16 CFR 436.1(c)(4) and 436.1(e)(2). The 

Commission adopted the original GAAP 

requirement to address concerns about the validity 

of franchisee financial statements used by 

franchisors to make historical financial performance 

representations. Not only may some franchisees 

understate profits, but each could have his or her 

own accounting system. ‘‘Differences between 

franchisees also occur due to such factors as 

variations in the drawing accounts of principals, 

fringe benefits of principals, salaries charged to 

income, and preparation of statements on a cash 

rather than an accrual basis.’’ Original SBP, 43 FR 

at 59691. To minimize the potential dangers 

inherent in using franchisee performance data, the 

Commission determined that historical performance 

claims and the data underlying them must have 

been prepared according to GAAP. 

579 Franchise NPR, 64 FR at 57341, note 13: ‘‘If 

a financial performance representation is a 

representation concerning historical financial 

performance or if historical financial performance 

data are used as the basis for a forecast of future 

earnings, the historical data must be prepared 

according to U.S. generally accepted accounting 

principles.’’

existing outlets known to have attained 

a represented performance level.570

Rather, for the reasons explained below, 

Item 19 of the amended Rule is 

consistent with the original Rule in 

requiring franchisors to disclose the 

number and percentage of existing 

outlets known to have attained the 

represented performance level in the 

area that formed the basis for the 

representation.571

The UFOC Guidelines require a 

franchisor to compare the number of 

franchisees who have performed at a 

claimed level against all franchisees in 

its system, not just against franchisees it 

has measured or against franchisees in 

a subgroup. For example, a franchisor 

may have statistics showing that nine 

out of 10 franchised stores in a 

particular location (such as Seattle) 

average $100,000 net profit a year. Yet, 

the UFOC Guidelines prevent the 

franchisor from disclosing truthful 

information about the universe the 

franchisor had measured—the 10 

franchised outlets in Seattle. Rather, the 

franchisor would be forced instead to 

state 9 out of the entire number of all 

franchises nationwide (e.g., 9 out of 

1,000) have earned the $100,000 

claimed. This approach can mislead a 

prospective franchisee because it 

suggests that the franchisor has in fact 

measured the financial performance of 

all franchisees, when that may not be 

true. It also may deflate franchisees’

actual performance records. More 

important, a franchisor may decline to 

disclose performance information if, in 

order to do so, it must first incur the 

expense of conducting a system-wide 

franchisee performance analysis. 

To correct this problem, Item 19 of the 

revised Rule permits franchisors to 

disclose truthful financial performance 

information about a subgroup of existing 

franchisees under limited conditions.572

Specifically, the financial information 

furnished to prospective franchisees 

must have a reasonable basis and the 

franchisor must disclose: (1) the nature 

of the universe of outlets measured; (2) 

the total number of outlets in the 

universe measured; (3) the number of 

outlets from the universe that were 

actually measured; and (4) any 

characteristics of the measured outlets 

that may differ materially from the 

outlet offered to the prospective 

franchisee (e.g., location, years in 

operation, franchisor-owned or 

franchisee-owned, and likely 

competition).573

Few commenters addressed the 

revision of Item 19. Among those that 

commented on Item 19, a few 

specifically supported the elimination 

of the separate geographic relevance 

prerequisite.574 On the other hand, IL 

AG voiced concern that eliminating the 

geographic relevance requirement 

would not prevent franchisors from 

‘‘cherry picking’’ their best performing 

franchise locations and then allowing 

prospects to assume that their 

performance results will be similar.575

At the same time, other commenters 

supported allowing financial 

performance claims based on franchisee 

subgroups with the specified 

substantiation requirements. John Baer, 

for example, maintained that the 

disclosures for subgroups ‘‘provide 

franchisors with sufficient guidance 

about what characteristics of the outlets 

must be disclosed and how they may 

differ materially from outlets offered to 

a prospective franchisee.’’576 Similarly, 

Marriott observed that allowing 

disclosure of subgroup performance is 

laudable ‘‘especially when franchisors 

are frequently adopting new business 

strategies which may result in different 

[financial performance representations], 

depending upon whether the old or new 

system format is followed by the 

franchisees.’’577

Based upon the record, the 

Commission has concluded that 

eliminating the geographic relevance 

requirement, coupled with permitting 

broader disclosure of financial 

performance of subgroups, will remove 

obstacles that discourage franchisors 

from making financial performance data 

available to prospective franchisees. At 

the same time, Item 19 prevents 

franchisors from ‘‘cherry picking’’ their 

best locations as a basis for financial 

performance representations. 

Specifically, Item 19’s substantiation 

requirements ensure that franchisors 

disclose how they derived the 

performance results of subgroups, so 

that prospective franchisees can assess 

for themselves the sample size, the 

number of franchisees responding, and 

the weight of the results. In addition, 

these provisions require franchisors to 

disclose the material differences 

between the subgroup-units tested and 

the units being offered for sale, so that 

prospects can avoid drawing 

unreasonable inferences from the 

representations. 

c. GAAP 

As noted, Item 19 of the final 

amended Rule eliminates the original 

Rule requirement that historical 

financial performance data must be 

prepared according to GAAP.578 The 

Franchise NPR proposed retention of 

this requirement.579 Without exception, 

the commenters who addressed this 

issue opposed the GAAP requirement. 

For example, NASAA advised that 

GAAP goes beyond what the UFOC 

Guidelines require and the accounting 

rules would discourage the making of 

financial performance representations: 

Based upon the experience of states 

that register franchise offerings, 

many franchisors that currently 

include historical financial 

performance data in UFOC Item 19 

may not prepare them according to 

GAAP. In some instances, a 


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580 NASAA, NPR 17, at 5. See also Bundy, at 7; 

Gust Rosenfeld, at 6; PMR&W, NPR 4, at 12; H&H, 

NPR 9, at 13; NFC, NPR 12, at 31; Lewis, NPR 15, 

at 15; Snap-On, NPR 16, at 3; J&G, NPR 32, at 7; 

Marriott, NPR 35, at 12; IL AG, Rebuttal NPR 38, 

at 5. Based on the comments, particularly those 

submitted by NASAA, the Staff Report 

recommended elimination of the GAAP 

requirement. Staff Report, at 166–67. 

581 Franchise NPR, 64 FR 57311 and 57341. Slight 

wording changes have been made to improve 

overall clarity and consistency, and the sentence ‘‘If 

you are purchasing an existing outlet, however, we 

may provide you with the actual records of that 

outlet,’’ to conform with the Rule’s substantive 

liberalization on this point. 

582E.g., Bundy, at 7; CA BLS, ANPR 124, at 1; 

Lagarias, ANPR 125, at 4. See also H&H, ANPR 28, 

at 8; SBA Advocacy, ANPR 36, at 8; AFA, ANPR 

62, at 5; Purlin, ANPR 79, at 2; Jeffers, ANPR 116, 

at 5. 

583E.g., FTC v. Minuteman Press, Int’l, No. 93–

CV–2494 (DRH) (E.D.N.Y. 1998). See also Franchise 

NPR, 64 FR at 57311; ANPR, 62 FR at 9118. 

584 The first preamble reads: 

‘‘The FTC’s Franchise Rule permits a franchisor 

to provide information about the actual or potential 

financial performance of its franchised and/or 

franchisor-owned outlets, if there is a reasonable 

basis for the information, and if the information is 

included in the disclosure document. Financial 

performance information that differs from that 

included in Item 19 may be given only if: (1) a 

franchisor provides the actual records of an existing 

outlet you are considering buying; or (2) a 

franchisor supplements the information provided in 

this Item 19, for example, by providing information 

about possible performance at a particular location 

or under particular circumstances.’’

585 The second preamble reads: 

‘‘We do not make any representations about a 

franchisee’s future financial performance or the past 

financial performance of company-owned or 

franchised outlets. We also do not authorize our 

employees or representatives to make any such 

representations either orally or in writing. If you are 

purchasing an existing outlet, however, we may 

provide you with the actual records of that outlet. 

If you receive any other financial performance 

information or projections of your future income, 

you should report it to the franchisor’s management 

by contacting [name and address], the Federal 

Trade Commission, and the appropriate state 

regulatory agencies.’’

586 AFA, NPR 14, at 3. Several commenters 

confirmed that such misrepresentations are 

prevalent and urged the Commission to clarify the 

Rule to combat them. For example, the CA BLS 

stated: 

‘‘Franchisees have reported to certain members of 

the California Franchise Legislative Committee that 

franchisor salespersons informed them during the 

pre-sale discussions in the offer and sale of a 

franchise that the FTC Rule prohibited them from 

making earnings claims. Based on these reports, we 

agree that there is a need to clarify the Rule to make 

clear that neither the Commission nor the Rule 

prohibits franchisors from making earnings 

representations.’’

CA BLS, ANPR 124, at 1. Peter Lagarias, a 

franchisee representative, similarly told us: ‘‘I am 

personally aware of franchisors (and sometimes 

even their lawyers) stating that earnings claims are 

forbidden by the Commission’s Rule. The 

Commission should clarify in the Rule that the 

franchisor could elect to make earnings claims but 

has elected not to make earnings claims.’’ Lagarias, 

ANPR 125, at 4. 

587 7-Eleven, NPR 10, at 3. See also IFA, NPR 22, 

at 11; Stadfeld, NPR 23, at 17; H&H, ANPR 28, at 

8; Duvall, ANPR 19, at 2; Jeffers, ANPR 116; CA 

BLS, ANPR 124, at 2; Zarco & Pardo, ANPR 134, 

at 6. But see J&G, NPR 32, at 7 (admonition to 

franchisor’s historical financial 

performance data presented may be 

accurate and material, yet may not 

be presented according to GAAP. In 

many other instances, the 

franchisor may not be aware 

whether the data presented is 

according to GAAP. This 

requirement would discourage 

franchisors that have a factual basis 

for making financial performance 

disclosures from doing so. In 

addition, this requirement likely 

would increase costs to franchisors 

who do choose to make historical 

financial performance disclosures 

by requiring them to obtain an 

accountant’s opinion as to whether 

their data is presented according to 

GAAP.580

Based upon an assessment of the 

record, the Commission has determined 

that the GAAP requirement is 

unnecessary and may impede 

franchisors’ ability to disclose 

performance information, to the 

detriment of both franchisors and 

prospective franchisees. GAAP is not 

the only approach to ensure the 

accuracy of historic performance data. 

Franchisors making historical 

performance representations should 

have the flexibility to formulate such 

representations, provided that such 

representations are truthful and 

reasonable. Indeed, franchisors always 

have the burden to establish that any 

financial performance representations 

are reasonable. Moreover, it is apparent 

that some franchisors using the UFOC 

format have disseminated non-GAAP 

compliant historic performance 

representations, without any pattern of 

deception identified by the states. 

Finally, eliminating the GAAP 

requirement is likely to reduce 

compliance burdens, while bringing 

greater uniformity to federal and state 

disclosure law. 

d. Preambles 

As noted above, Item 19 of the final 

amended Rule differs from the original 

Rule and the UFOC Guidelines by 

requiring franchisors to include 

prescribed preambles in their Item 19 

disclosures. The preamble requirements 

are incorporated in Item 19 as proposed 

in the Franchise NPR.581 The preamble 

requirements address two concerns. 

First, there is evidence in the record that 

some franchisors falsely state that the 

Commission or the Franchise Rule 

prohibits franchisors from making 

financial information available.582

Second, our law enforcement 

experience tells us that prospective 

franchisees may rely on unsubstantiated 

financial performance 

representations.583

To prevent deception arising from 

these two practices, Item 19 requires 

franchisors to include in their Item 19 

disclosures a prescribed preamble 

stating that the Rule permits the making 

of financial performance 

representations, if the representations 

are set forth in the franchisor’s 

disclosure document.584 This statement 

counters any suggestion that the 

Franchise Rule prohibits franchisors 

from disclosing financial performance 

information. Armed with such material 

information, prospective franchisees 

could question why a franchisor does 

not provide financial performance data, 

if they wish, or shop for a system that 

discloses financial performance 

information. In addition, this preamble 

will discourage prospects from relying 

on unauthorized financial performance 

claims made outside of the disclosure 

document. 

For those franchisors who elect not to 

disclose financial performance 

information, Item 19 requires a second 

preamble, warning prospective 

franchisees not to rely on unauthorized 

performance representations and to 

report the making of such unauthorized 

representations to the franchisor, the 

Commission, and appropriate state 

agencies.585

Several commenters supported the 

inclusion of preambles in Item 19 in 

order to clarify the state of the law 

regarding the making of financial 

performance representations. In 

particular, the first preamble would 

correct the common misstatement that 

the Rule actually prohibits the making 

of such representations. According to 

the AFA, for example, a clarification of 

the law is crucial: ‘‘[T]he great untruth 

that franchise salespeople have been 

allowed to perpetrate over the years is 

the following statement in one form or 

another—the federal government 

prohibits us from giving you 

information regarding the financial 

performance of [name of our] 

franchises.’’586

Other commenters asserted that the 

preambles, coupled with market forces, 

will encourage the disclosure of 

financial data. For example, 7-Eleven 

stated: ‘‘We believe this approach—

affirmatively informing would-be 

investors about the requirements under 

the Rule and the manner in which such 

information should be disclosed—when 

combined with the competitive force of 

the marketplace, ensures that earnings 

information can be identified and 

properly appraised by franchise 

investors.’’587


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prospective franchisees to notify the FTC and an 

appropriate state agency of an unauthorized 

earnings claim seems a bit excessive). 

588 Karp, at 3. In the same vein, Howard Bundy 

would strengthen the second preamble to read: 

‘‘Financial Performance Information is material to 

any decision to invest. [Franchisor] does not 

provide you with Financial Performance 

Information. The absence of such information 

makes it very difficult for you to estimate your 

prospects of success in the business. You should 

proceed with caution and consult your franchise 

attorney and other business advisors.’’

Bundy, NPR 18, at 10. 

589See 16 CFR 436.1(a)(16). In the original SBP, 

the Commission explained that the required 

statistical information gives prospective franchisees 

material information about the size of the franchise 

system they are contemplating joining and goes to 

the prospect’s likelihood of success. ‘‘Providing a 

prospective franchisee with an accurate statement 

of the number of units operated by his or her 

franchisor will convey information relating to the 

financial success of the particular franchise 

business since the franchisee’s ultimate success 

depends in large measure on public recognition of 

the franchisor’s name.’’ Original SBP, 43 FR at 

59670. See also ANPR, 

62 FR at 9118. In addition, the disclosure of 

contact information for current franchisees prevents 

fraud by arming prospects with a valuable 

alternative source of information with which to 

verify franchisor’s representations. Id. 

590 UFOC Guidelines, Item 20B. 

591 Current and former franchisees often have 

widely different experiences. For that reason, in 

Blenheim Expositions, Inc., 120 FTC 1078 (1995), 

the Commission challenged as a violation of Section 

5, franchisee success claims based upon a Gallup 

Poll study of current franchisees only. 

592 The UFOC Guidelines require the disclosure 

of names, last known home address, and telephone 

number of each franchisee who left the system 

within the last fiscal year. UFOC Guidelines, Item 

20E. The purpose of the disclosure is to reduce 

fraud by enabling prospective franchisees to learn 

about the nature of the franchise system and, most 

important, the nature of the franchise relationship 

from those who recently exited the system, 

voluntarily or involuntarily. To reduce 

inconsistencies between with the UFOC Guidelines, 

the Franchise NPR followed the same approach. 

Franchise NPR, 64 FR at 57343. As explained 

below, however, Item 20, as proposed in the 

Franchise NPR, would require the disclosure of 

personal information, raising privacy concerns. For 

that reason, the Commission has adopted a more 

limited approach in the final amended Rule. 

593 The provision does not require franchisors to 

disclose the existence of broad-based organizations 

that represent franchisee interests generally, such as 

the American Franchisee Association, the American 

Association of Franchisees & Dealers, or the 

International Franchise Association. 

594 The problems with the UFOC Guidelines’ Item 

20 first surfaced during the Rule review that 

preceded initiation of the rule amendment 

proceeding. Simon, RR Tr., at 223–24; Maxey, RR 

Tr., at 224–25. To develop a record on this issue, 

the ANPR solicited comment on whether UFOC 

Guidelines Item 20 accurately reflects franchisees’

performance history and, if it does not, how the 

Commission could modify the Item 20 disclosures 

to reflect performance history more accurately. 

ANPR, 62 FR at 9116. In response to the ANPR, 

several commenters confirmed that Item 20 results 

in ‘‘double-counting’’ of franchise turnover rates. 

E.g., H&H, ANPR 28, at 6; AFA, ANPR 62, at 3; IL 

AG, ANPR 77, at 2; Tifford, ANPR 78, at 4; IFA, 

ANPR 82, at 2; Cendant, ANPR 140, at 3; Karp, 19 

Sept. 97 Tr., at 91. Accordingly, in the Franchise 

NPR, the Commission attempted to address the 

identified problems with the UFOC version. 

Franchise NPR, 64 FR at 57342–44. However, 

commenters criticized proposed Item 20 of the 

Franchise NPR as inadequate to solve the problem. 

E.g., IL AG, NPR 3, at 7; PMR&W, NPR 4, at 13–

14; H&H, NPR 9, at 19; Snap-On, NPR 16, at 4; 

NASAA, NPR 17, at 5; Karp, NPR 24, at 11; 

Frandata, NPR 29, at 10. At that time, NASAA, in 

consultation with an Industry Advisory Committee, 

developed a comprehensive revamping of Item 20, 

which it submitted in its Franchise NPR comments. 

NASAA, NPR 17, at 5–10. Several additional 

commenters either submitted the same proposal or 

endorsed the NASAA proposal. PMR&W, NPR 4, at 

14–66 and Exhibit A; NPC, NPR 12, at 31–32; 

Frandata, NPR 29, at 11. The Staff Report 

recommended adoption of NASAA’s suggested 

revamping of Item 20. Staff Report, at 180. No Staff 

Report comments offered further criticism of the 

staff’s recommendation for revising Item 20. 

595E.g., H&H, ANPR 28, at 6; AFA, ANPR 62, at 

3; IL AG, ANPR 77, at 2; Tifford, ANPR 78, at 4; 

IFA, ANPR 82, at 2; Cendant, ANPR 140, at 3; Karp, 

ANPR, 19 Sept. 97 Tr., at 91; Simon, RR, Sept.95 

Tr., at 223–24. 

At the same time, the Commission has 

rejected various suggestions to require 

more strongly worded preambles. For 

example, Eric Karp would amplify the 

second preamble to warn prospects that, 

although the franchisor collects 

financial information, it does not 

disclose any, and he suggested 

including the phrase, ‘‘Consider why we 

are unwilling to do so.’’588 In effect, 

these commenters would turn the 

absence of a financial performance 

claim into a risk factor. The Commission 

rejects this approach. It does not 

necessarily follow that the absence of a 

financial performance disclosure 

necessarily signals a riskier investment. 

It could well be that a company bent on 

defrauding prospective franchisees 

would manipulate its numbers to create 

a stronger success image, while a 

successful but punctilious system might 

choose not to disclose numbers because 

it may not believe that it can make a 

reasonable disclosure that would be 

applicable to all potential buyers. In 

addition, any concern that prospective 

franchisees need to see actual earnings 

figures in order to judge success is 

mitigated by Item 20, which compels 

the disclosure of franchise turnover 

rates, as well as the names and 

addresses of current and former 

franchisees, who can be contacted for 

information. 

22. Section 436.5(t) (Item 20): Outlets 

and franchisee information 

Section 436.5(t) of the final amended 

Rule retains the original Rule’s 

requirement that franchisors disclose 

the number of franchised and 

franchisor-owned outlets; the names, 

business addresses, and business 

telephone numbers of current 

franchised outlets, and statistical 

information on franchise turn-over rates, 

in particular the number of franchises 

voluntarily and involuntarily 

terminated, not renewed, and 

reacquired by the franchisor.589 To align 

the final amended Rule more closely to 

the UFOC guidelines, it also extends the 

original Rule by requiring franchisors to 

disclose the names, business addresses, 

and business telephone numbers of at 

least 100 current franchised outlets (as 

opposed to the original Rule 

requirement of at least 10 franchised 

outlets).590 It also requires the 

disclosure of some contact information 

for former franchisees591 who have left 

the franchise system in the last fiscal 

year. Finally, it also makes the 

disclosure more user-friendly than it 

was in the original Rule by requiring the 

statistical information to be presented in 

a tabular format. 

Item 20 of the final amended Rule 

differs from the UFOC Guidelines model 

in several respects. First, it corrects a 

double-counting problem brought to the 

Commission’s attention during the Rule 

Review. Second, it requires more 

limited disclosure of personal contact 

information of former franchisees.592

Third, when a franchisor resells a 

specific outlet it has reacquired, it 

mandates that the franchisor disclose 

the outlet’s prior franchisee-owners 

during the franchisor’s last five fiscal 

years. Fourth, it addresses franchisors’

use of ‘‘confidentiality clauses,’’ which 

effectively restrict franchisees from 

discussing their experiences with 

prospective franchisees. Finally, it 

requires the disclosure of trademarkspecific franchisee associations.593 We 

address each of these issues below. 

a. Double-counting 

As proposed in the Franchise NPR, 

the final amended rule avoids a problem 

with the UFOC Guidelines’ version of 

Item 20.594 Like the UFOC Guidelines, 

the final amended Rule Item 20 requires 

disclosure of information about 

franchisees who have recently left the 

franchise system, as well as changes in 

ownership of franchised outlets. During 

the Rule amendment proceeding, no 

commenters opposed this requirement 

in principle, but commenters almost 

unanimously voiced concern that UFOC 

Item 20 is seriously flawed and needs to 

be fixed.595 Specifically, UFOC Item 20 

often results in franchisors ‘‘doublecounting’’ changes in franchised outlet 

ownership, resulting in inflated 

turnover rates. 

The Commission believes that the 

UFOC Guidelines’ ‘‘double-counting’’

problem is attributable to at least two 

factors. First, UFOC Item 20 requires 

franchisors to report changes in 


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596See UFOC Item 20D. See also Wieczorek, 

ANPR, 18 Sept. 97 Tr., at 31. 

597 For a detailed discussion of this issue, see 

Franchise NPR, 64 FR at 57312; Staff Report, at 

173–77. 

598 While the UFOC Item 20 instructions provide 

that the franchisor can add footnotes to clarify the 

numbers, the use of multiple explanatory footnotes 

removes the benefit of presenting information in a 

readily accessible tabular format. In addition, 

prospective franchisees may not read or fully 

appreciate the import of the footnotes. See Zarco & 

Pardo, ANPR 134, at 6–7 (‘‘If the [Item 20] 

information becomes too complicated, the potential 

franchisee will not know how to interpret the data 

and thus, derive no benefit from the increased 

efforts at meaningful disclosure.’’). 

599 Staff Report, at 48–53. The definitions of the 

terms ‘‘transfer’’ and ‘‘reacquisition’’ are the same 

as those proposed in the Franchise NPR, with minor 

reorganization for clarity. The definitions of the 

terms ‘‘termination’’ and ‘‘non-renewal,’’ however, 

have been revised for greater precision. Specifically, 

the Franchise NPR defined the terms ‘‘termination’’

and ‘‘non-renewal’’ as occurring when the 

franchisor sends out an ‘‘unconditional notice of 

intent’’ to exercise its rights to terminate or not to 

renew, respectively. Franchise NPR, 64 FR at 57343. 

One commenter noted, however, that these 

proposed definitions are inaccurate, noting that 

‘‘intent to exercise’’ rights does not ‘‘necessarily 

result in the completion of the event.’’ PMR&W, 

NPR 4, at 13. The Commission agrees. In addition, 

the final amended Rule deletes the proposed 

definition for ‘‘cancellation’’—which would have 

been similar to the definition for ‘‘termination’’—

because the ‘‘cancellation’’ reporting category has 

been deleted from Item 20 because it is duplicative 

of other reporting categories (termination, nonrenewal, or ceased operations). No commenters 

raised any concerns in response to the Staff Report’s 

revised definitions of the terms ‘‘termination’’ and 

‘‘non-renewal.’’

600 Three commenters suggested that the 

Commission address double-counting by adding 

additional reporting categories to the Item 20 

disclosure. For example, Robert Zarco 

recommended that the Commission create multiple 

categories to capture various combinations of 

ownership changes. Transfers, for instance, would 

be divided into four distinct categories: (1) transfers 

by the franchisee to the franchisor; (2) transfers by 

franchisees to the franchisor, but ultimately refranchised; (3) transfers by franchisee directly to 

new franchisee; and (4) transfers by franchisee 

directly to new franchisee more than once. Zarco 

& Pardo, ANPR 134, at 6–7. See also Karp, ANPR 

136 (suggesting that the Commission add columns 

for newly developed outlets and outlets converted 

from franchisor-owned, as well as distinguish 

between units not renewed by franchisor and units 

not renewed by franchisee). Similarly, the AFA 

recommended that franchisors create as many 

categories as needed to capture all combinations of 

ownership changes that might occur at each outlet 

during the course of the year. For example, a 

termination followed by a transfer to a new owner 

would be reported as a ‘‘termination and transfer,’’

while a termination followed by a reacquisition to 

the franchisor and then a transfer to a new 

franchisee would be reported as a ‘‘termination, 

reacquisition, transfer.’’ AFA, ANPR 62, at 3. 

Another franchisor representative opined that most 

double-counting problems are attributable to the 

inclusion of transfers and reacquisitions in the table 

summarizing the status of franchised outlets. He 

advised that transfers and reacquisitions usually 

follow an initial closing, such as a termination or 

non-renewal. He suggested that transfers and 

reacquisitions—which are the consequence of an 

outlet closure—be offset from the outlet closing 

statistics. To that end, he proposed that transfers be 

removed from the main body of the franchisee 

statistics table and placed in a separate column 

located on the side of the franchisee statistics table. 

Further, he suggested that reacquisitions should be 

moved to the second Item 20 table concerning 

franchisor-owned outlets. Wieczorek, ANPR 122, at 

3–4. Mr. Wieczorek attached sample tables for the 

Commission’s consideration. Id. 

601 NASAA, NPR 17, at 5–10. 

602See, e.g., Gust Rosenfeld, at 6; PMR&W, NPR 

4, at 14–66 and Exhibit A; NFC, NPR 12, at 31–32; 

Frandata, NPR 29, at 11. 

603 The instructions to Table No. 1—section 

436.5(t)(1)—defines ‘‘outlet’’ to include ‘‘outlets of 

a type substantially similar to that offered to the 

prospective franchisee.’’ Piper Rudnick urged the 

Commission to clarify the phrase ‘‘substantially 

similar’’ further in the Compliance Guides. 

Specifically, the firm recommended that 

‘‘substantially similar’’ should be limited to where 

the outlet does ‘‘business under the same trademark 

and system.’’ Piper Rudnick, at 6. We disagree. 

Section 436.5(t)(1)’s ‘‘substantially similar’’ outlet 

disclosure serves an important anti-fraud purpose, 

ensuring that a franchise system does not simply 

sell outlets under a new name in order to hide a 

poor growth record or high turnover history. For 

that reason, the focus of the disclosure is properly 

on the similarities between the goods or services 

sold at the outlets, not the name under which the 

outlets conduct business. 

franchised outlet ownership according 

to five enumerated categories: (1) 

transferred; (2) canceled or terminated; 

(3) not renewed; (4) reacquired by the 

franchisor; or (5) reasonably known to 

have ‘‘ceased to do business.’’ The terms 

describing these categories, however, 

are undefined. The absence of precise 

definitions blurs the line between 

categories, resulting in a doublecounting of outlet closures.596 For 

example, a single transaction can quite 

correctly be characterized as either a 

transfer or a reacquisition. They are 

often two sides of the same coin: a 

franchisor’s assumption of control of a 

franchised outlet that has gone out of 

business reasonably could be captured 

either as a transfer by the franchisee, or 

as a reacquisition by the franchisor. 

Second, even if the definitions were 

clear, UFOC Item 20 can be interpreted 

to require the disclosure of each of a 

series of events associated with a single 

outlet ownership change.597 For 

example, after terminating a franchise 

agreement, the franchisor may reacquire 

the outlet. The franchisor could then 

either operate the outlet as a franchisorowned store, or sell it to a new 

franchisee. In such a case, UFOC Item 

20 arguably calls for the franchisor to 

report a termination followed by a 

reacquisition as two separate events. 

Similarly, a franchisee may abandon an 

outlet, and, in response, the franchisor 

may send the franchisee a termination 

letter, reacquire the outlet, and then 

transfer it to a new franchisee. Although 

the outlet has changed franchiseeownership only once, the franchisor 

conceivably would report this event 

four times as a ceased to do business, 

termination, reacquisition, and 

transfer.598

The final amended Rule remedies the 

imprecision that characterized the 

delineated reporting categories. Item 20 

of the final amended Rule sets forth 

precise definitions to avoid overlapping 

categories. Specifically, ‘‘termination’’

means ‘‘the franchisor’s termination of a 

franchise agreement prior to the end of 

its term and without paying 

consideration to the franchisee (whether 

by payment or forgiveness or 

assumption of debt).’’ ‘‘Non-renewal’’

occurs ‘‘when the franchise agreement 

for a franchised outlet is not renewed at 

the end of its term.’’ ‘‘Reacquisition’’

means ‘‘the franchisor’s acquisition of 

an outlet for consideration (whether by 

payment or forgiveness or assumption of 

debt) of a franchised outlet during its 

term.’’ ‘‘Transfer’’ means ‘‘the 

acquisition of a controlling interest in a 

franchised outlet during its term by a 

person other than the franchisor or an 

affiliate.’’599

Beyond better defined reporting 

categories, commenters offered various 

suggestions to improve Item 20.600 The 

approach suggested by NASAA garnered 

the most support. NASAA asserted that 

UFOC Item 20 needs to be revised in its 

entirety and, as noted above, submitted 

for the Commission’s consideration an 

alternative that was produced with the 

assistance of an Industry Advisory 

Committee.601 Several other 

commenters submitted the same 

proposal or endorsed the NASAA 

proposal.602 The Staff Report 

recommended that the NASAA 

suggestion be incorporated into the final 

amended Rule. After careful 

consideration, the Commission has 

determined to adopt NASAA’s proposal. 

It is the best way to solve the Item 20 

double-counting problem. It will be 

easily understood by those in the 

industry, and it will provide prospective 

franchisees with the information they 

need without imposing undue 

compliance burdens on franchisors. 

Accordingly, Item 20 of the final 

amended Rule contains five tables. 

Table No. 1 indicates the status of a 

franchisor’s system. It shows the 

number of franchised and companyowned outlets at the beginning and end 

of each of the last three fiscal years, and 

the total net change.603

Table No. 2 shows transfers, treating 

them separately from terminations and 

non-renewals. This is appropriate 

because, as NASAA observed, transfers 

do not affect the total number of outlets 

in a franchise system, and the mere fact 

that an outlet has been transferred tells 

nothing about the reason for the 

transfer: ‘‘While some transfers are 


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604 NASAA, NPR 17, at 8. 

605 To reduce double-counting, Item 20 specifies 

that multiple events are to be reported using a ‘‘lastin-time’’ approach. See PMR&W, NPR 4, at 13–14. 

See also NASAA, NPR 17, at 5–10; Frandata, NPR 

29, at 11. During the Rule amendment proceeding, 

other commenters offered other options, such as a 

‘‘first-in-time’’ approach, or establishing an order of 

priority among events. We are persuaded that a lastin-time approach is appropriate, for the reasons 

noted in the PMR&W comment: ‘‘A last-in-time 

prioritization is appropriate for at least three 

reasons: (1) it allows for an easily ascertainable 

confirmation of the event; (2) it represents a fact, 

rather than an intention (e.g., a termination notice) 

or a proposal (e.g., a transfer rather than request); 

(3) in dispute situations, it labels the event in a 

manner consistent with the parties’ settlement of 

their dispute.’’ PMR&W, NPR 4, at 13–14. 

606 The instructions accompanying Table No. 3 

include the statement that the franchisor must, in 

column 8 of the table, ‘‘state the total number of 

outlets in each state not operating as one of the 

franchisor’s outlets at the end of each fiscal year for 

reasons other than termination, non-renewal, or 

reacquisition by the franchisor.’’ 607 Karp, at 4; Karp, NPR 24, at 14-19. 

608 UFOC Guidelines Item 20 E. In contrast, the 

comparable provision of the original Rule required 

the disclosure of only the number of franchisees 

who left the system within the last fiscal year. 16 

CFR 436.1(a)(16). 

609 No commenter—including current and former 

franchisees—raised any privacy concerns during 

the course of the Rule amendment proceeding. 

Accordingly, this was not addressed in the Staff 

Report. 

610 In contrast, the disclosure of current 

franchisees’ contact information is limited to their 

business address and business telephone number. 

611 This approach is similar to the proposed 

disclosure of current business opportunity buyers’

contact information in recently published Business 

Opportunity Rule Notice of Proposed Rulemaking, 

71 FR 19054, 19071 (Apr. 12, 2006). 

problematic for franchisees or prompted 

from disputes, many other transfers 

simply reflect a desire on the part of the 

franchisee to cease operating a franchise 

or to pursue other opportunities.’’604

Nonetheless, the total number of 

transfers within a system is material 

because it goes to the stability within 

the franchise system over time. Table 

No. 2 indicates the number of franchise 

transfers in each state over the last three 

fiscal years. 

Table No. 3 tracks the turnover rate of 

franchised outlets.605 Franchisors must 

report, by state and for each of the last 

three fiscal years, the outlets at the start 

of the year, new outlets opened, 

terminations, non-renewals, 

reacquisitions by the franchisor, outlets 

that ceased to do business,606 and 

outlets at the end of the year. 

Table No. 4 tracks the turnover at 

company-owned outlets. Franchisors 

must disclose, for each of the last three 

fiscal years, the number of their outlets 

at the start of the year, new outlets, 

reacquired outlets, closed outlets, 

outlets sold to franchisees, and outlets 

at the end of the year. 

Finally, Table No. 5 retains the 

current UFOC projected openings table. 

This table gives prospective franchisees 

insight into anticipated growth within 

the system by requiring the disclosure of 

both projected franchised and companyowned openings in the next fiscal year. 

It also reveals the number of franchise 

agreements signed in the previous year 

where a store has not yet been opened. 

This information is material because it 

enables a prospective franchisee to 

gauge how long it may take before his 

or her store actually becomes 

operational. 

During the Rule amendment 

proceeding, Eric Karp submitted a 

variation of the NASAA proposal for the 

Commission’s consideration that would 

greatly expand the NASAA proposal. 

For example, according to the Karp 

proposal, Table No. 2 would require 

franchisors to disclose not only the 

number of transfers in each of the last 

three fiscal years, but also the number 

of completed transfers, requests for 

transfer that were denied, and those 

transfers in progress at the end of the 

fiscal year. His Table No. 3 would 

divide new outlets into two categories: 

new outlets that are newly developed 

and new outlets that were purchased 

from a franchisor. Mr. Karp also 

proposed a new table that would 

calculate a specific turnover rate, 

expressed as a percentage, by comparing 

the number of outlets at the beginning 

of a fiscal year with the number of 

outlets during the year that were 

terminated by the franchisor, nonrenewed, repurchased by the franchisor, 

transferred to another franchisee, or 

ceased operations for other reasons. 

Finally, Mr. Karp would revise the new 

growth projection chart, requiring 

franchisors to disclose for each of the 

last three fiscal years: previously 

projected franchised new outlets; actual 

number of franchised new outlets; 

franchise agreements signed but outlets 

not in operation; and projected 

franchised new outlets for next fiscal 

year.607

The Commission is not persuaded to 

expand Item 20 as Mr. Karp suggested. 

The additional proposed disclosures 

would greatly increase the size of the 

already extensive Item 20 disclosure, 

potentially overwhelming prospective 

franchisees while increasing franchisor 

compliance costs. Further, to streamline 

the Rule and reduce inconsistencies 

with the UFOC Guidelines, we are 

disinclined to add new Item 20 charts 

that merely restate information that can 

already be gleaned from the existing 

charts. For example, the amended Item 

20 disclosures enables prospective 

franchisees to calculate turnover rates 

for themselves from the data contained 

in Tables 1 and 3 by comparing outlets 

at the beginning of a fiscal year with the 

number of outlets closed during the 

year. 

b. Identification of former franchisees 

Section 436.5(t)(5) of the final 

amended Rule adopts the Franchise 

NPR proposal that franchisors disclose 

contact information for franchisees who 

have exited the franchise system in the 

most recently completed fiscal year, 

consistent with the UFOC 

Guidelines.608 This disclosure, like the 

parallel disclosure of contact 

information for current franchisees, 

prevents fraud by giving prospective 

franchisees additional sources of 

material information about the 

franchisor, the nature of the franchise 

system and the franchisor-franchisee 

relationship. As explained below, the 

final amended Rule provision differs 

from the UFOC Guidelines and the 

Franchise NPR proposal, however, to 

address privacy concerns regarding the 

disclosure of personal contact 

information.609

The Franchise NPR, incorporating 

UFOC Guidelines Item 20, would have 

required franchisors to disclose the 

name and last known home address and 

telephone number of every franchisee 

that exited the system within the last 

fiscal year.610 While the Commission 

believes that such information serves a 

valuable anti-fraud purpose—enabling 

prospective franchisees to obtain 

material information from those with 

hands-on experience with the franchise 

system—it can be achieved in a more 

limited fashion that also protects former 

franchisees’ privacy—notwithstanding 

that this type of information may be 

available in the public domain from 

such sources as telephone directories. 

To that end, the final amended Rule 

provision requires franchisors to 

disclose only the name, city and state, 

and current business telephone number, 

or, if unknown, the last known home 

telephone number of former franchisees. 

Further, to give prospective franchisees 

notice that their contact information 

may be disclosed even after they leave 

the franchise system, franchisors must 

state the following language in 

immediate conjunction with the list of 

former franchisees: ‘‘If you buy this 

franchise, your contact information may 

be disclosed in the future to other 

buyers when you leave the franchise 

system.’’611 To allow for greater 

flexibility, footnote 10 to the final 

amended Rule provides that franchisors 

may substitute alternative contact 


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612 This modifies slightly the version of Item 20 

set forth in the Staff Report, which stated: ‘‘If a 

franchisor is selling an existing franchised outlet, 

disclose the following additional information . . .’’

Staff Report, at 181 and proposed revised Rule, 64 

FR at 57342–44. Two commenters correctly noted 

that this language is ambiguous because ordinarily 

a franchisor does not sell an existing franchised 

outlet. Rather, a franchisor may sell an outlet in its 

control that was previously owned by a franchisee. 

Wiggin & Dana, at 3; J&G, at 6. We agree. This 

provision applies only where the franchisor has 

reacquired or otherwise gained control of an outlet. 

It would not apply where an existing franchisee 

merely asks for the franchisor’s assistance in 

transferring an outlet to a new owner. 

613 As discussed in the previous section in 

connection with the disclosure of contact 

information for former franchisees, the disclosure of 

contact information for former franchisees of a 

specific outlet differs from the Franchise NPR 

proposal to address privacy issues. To protect the 

privacy of former franchisee-owners of a specific 

outlet, the amended Item 20 requires the disclosure 

of only the name, city and state, business telephone 

number, or, if unknown, last known home 

telephone number of the former franchisee-owners. 

614 IL AG, NPR 3, at 7. See also Singler, at 1. This 

provision also complements Item 19 provision that 

permits a franchisor to provide supplemental 

financial performance information about a specific 

unit being offered for sale. In order to prevent 

misrepresentation, a prospective franchisee should 

be able to speak with former owners of a specific 

unit being offered for sale when a franchisor 

provides financial performance information about 

that specific unit. 

615 We note that the Staff Report urged the 

Commission to adopt a three-year reporting period, 

while the text of the proposed revised Rule attached 

to the Staff Report stated a five-year reporting 

period. Compare Staff Report, at 181 with proposed 

revised Rule, at 56. Some commenters urged the 

Commission to adopt a three year reporting period, 

Wiggin & Dana, at 3, while others said that even a 

five-year period is insufficient to ‘‘discern the most 

egregious trends’’). Singler, at 2. We are convinced 

that a three-year reporting period is too short to 

expose a trend of specific unit sales. For example, 

a single unit could be resold three times: once 

immediately before a three-year reporting period, a 

second time during a three-year period, and a third 

time immediately after the three-year period. In 

such a scenario, a three-year reporting period would 

capture only one resale. We believe a five-year 

reporting period strikes the right balance between 

ensuring material disclosure and reducing 

compliance burdens. 

616 Wiggin & Dana, at 4; J&G, at 6. 

617 Wiggin & Dana, at 4. 

618 Indeed, this approach is consistent with 

UFOC Guidelines Item 19, which permits 

franchisors who have made an Item 19 financial 

performance disclosure to provide prospective 

franchisees with supplemental data ‘‘directed to a 

particular location or circumstance, apart from the 

[disclosure document.]’’ UFOC Guidelines, Item 

19A, Instructions (ii). 

619 Franchise NPR, 64 FR at 57312–14. As set 

forth in the definitions section, the term 

‘‘confidentiality clause’’ means ‘‘any contract, 

order, or settlement provision that directly or 

indirectly restricts a current or former franchisee 

from discussing his or her personal experience as 

a franchisee in the franchisor’s system with any 

prospective franchisee. It does not include clauses 

that protect franchisor’s trademarks or other 

proprietary information.’’ Section 436.1(c). 

information at the request of the former 

franchisee, such as a home address, post 

office address, or a personal or business 

email address. 

c. Identification of former franchiseeowners of a specific outlet being resold 

Section 436.5(t)(6) of the final 

amended Rule extends the original Rule 

and UFOC Guidelines Item 20 by 

addressing turnover at a specific outlet. 

When a franchisor resells an outlet 

under its control that was previously 

owned by a franchisee,612 Item 20 

requires the franchisor to disclose 

contact information for each previous 

owner of that outlet, the time period 

when the previous owner controlled the 

outlet; the reason for each previous 

ownership change; and the time 

period(s) when the franchisor retained 

control of the outlet. As explained 

below, this provision is designed to 

prevent fraud in the resale of a specific 

franchised outlet, by giving prospective 

purchasers of that outlet sources of 

information with hands-on experience 

operating the outlet.613

During the Rule amendment 

proceeding, the IL AG asserted that a 

number of successive sales of a 

franchised outlet could indicate 

‘‘churning,’’ the practice whereby a 

franchisor turns a blind eye to 

franchisee failures—or worse, 

encourages them—in order to sell the 

same outlet repeatedly. The IL AG urged 

the Commission to require franchisors 

to provide a prospect with a detailed 

site history when a buyer is being 

directed to a particular location. ‘‘This 

could be a three year history that would 

chart prior franchisees, their dates of 

operation, dates of store management by 

the franchisor for the site, and the 

reasons previous franchisees departed 

from that site.’’614

The Commission agrees, but is 

convinced that a five-year reporting 

period is warranted in order to allow 

sufficient time to identify a trend.615 As 

noted throughout this document, the 

Commission believes that more 

disclosure is warranted to give 

prospective franchisees information 

about the quality of the relationship 

between the franchisor and franchisee. 

Information about franchise operations 

at a specific unit advances that goal. 

Surely, significant turnover at a 

particular location might indicate a lack 

of promised support for the location, or 

worse, as the IL AG explained, a 

possible franchisor strategy to have the 

franchisee fail in order to resell the unit. 

We believe any compliance costs to the 

franchisor, therefore, are outweighed by 

the countervailing benefits to 

prospective franchisees. 

In response to the Staff Report, two 

commenters raised questions about the 

application of this provision. 

Specifically, they observed that a 

franchisor might not have a particular 

unit in mind when it begins 

negotiations with a prospective 

franchisee. They speculated as to 

whether this provision would be 

triggered if a franchisor were to direct a 

prospect to a particular unit after the 

franchisor has furnished the prospect 

with a disclosure document. In 

particular, they noted that it would be 

an open question under state law as to 

whether a franchisor would have to 

redisclose including unit-specific 

disclosures, and whether redisclosure 

would trigger an additional 14 days 

before signing the agreement.616

The commenters urged that a 

franchisor be permitted to furnish the 

unit-specific disclosures outside the 

disclosure document, just as a 

franchisor may make supplemental 

financial performance claims outside of 

the disclosure document without 

triggering a redisclosure obligation.617

The Commission believes these 

comments are well-taken. The purpose 

of this provision is to provide 

prospective franchisees with material 

information about a specific unit being 

considered for purchase. The need for 

furnishing this information must be 

balanced against the legitimate concerns 

of franchisors about compliance costs. 

On balance, the Commission is 

persuaded that a franchisor who 

recommends a specific unit after having 

made proper disclosure should have the 

option of providing the unit-specific 

information in a supplement to the 

disclosure document, if it so chooses. 

Accordingly, Item 20 provides: ‘‘This 

information may be attached as an 

addendum to a disclosure document, or, 

if disclosure has already been made, 

then in a supplement to the previously 

furnished disclosure document.’’618

d. Confidentiality clauses 

Section 436.5(t)(7) addresses 

franchisors’ uses of confidentiality 

clauses, as proposed in the Franchise 

NPR.619 This is a new provision that is 

not in the original Rule or UFOC 

Guidelines. If, during the last three 

fiscal years, franchisees signed a 

confidentiality clause in a franchise 

agreement, settlement, or in any other 

contract with the franchisor, the 

franchisor must insert in their Item 20 

disclosure the following prescribed 

statement: ‘‘In some instances, current 

and former franchisees sign provisions 

restricting their ability to speak openly 

about their experience with [name of 

franchise system]. You may wish to 


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620E.g., Manuszak, ANPR 13; Paquet, ANPR 18; 

Rachide, ANPR 32; Sibent, ANPR 41 (and 19 

identical ANPR commenters); AFA, ANPR 62, at 3; 

Buckley, ANPR 97; Marks, ANPR 107, at 2; NASAA, 

ANPR 120, at 4; Dady & Garner, ANPR 127, at 2; 

Karp, ANPR, 19 Sept. 97 Tr., at 95. Opponents 

included several franchisor representatives. E.g., 

Kestenbaum, ANPR 40, at 2. Cendant opposed the 

use of confidentiality clauses, except to protect 

trade secrets or other proprietary information. 

Cendant, ANPR 140, at 3. 

621 The franchisee stated: 

‘‘I am at this point not going to state the franchise 

because I am on my way at 1:00 to sign the final 

divorce papers, as such, the papers that separate us 

legally. There’s a gag order there. So, if you are 

planning on putting this on the Internet, that could 

be a problem. . . [T]he gag order . . . prohibits me 

from being able to answer questions, you know, and 

give cautionary remarks to other people who might 

be considering the franchise that I was with.’’

Lundquist, ANPR, 22 Aug. 97 Tr., at 42–43. See 

also Maloney, ANPR 38, at 2 (‘‘When it became 

apparent to both me and Southland Corporation 

that it was time to terminate our business 

relationship, we began negotiating my exit from the 

system. We came to a mutually acceptable 

agreement, however, the agreement contained a 

confidentiality clause. Even if my name appears in 

a UFOC as a former Franchisee, how much help can 

I give to anyone asking a question?’’). 

622 For example, Susan Kezios of the AFA stated 

that ‘‘the use of gag orders is almost 100 percent in 

some franchise systems.’’ Kezios, ANPR, 6 Nov. 97 

Tr., at 241. See also NASAA, at 6 (noting 

‘‘continued prevalence of confidentiality clauses in 

franchising’’); Lagarias, ANPR 125, at 3 (‘‘I have 

found that in most of the actions I have settled, the 

defendant franchisors and their counsel insist on 

confidentiality.’’); Selden, ANPR 133, at Appendix 

B (‘‘[Confidentiality clauses] are becoming 

increasingly problematic to franchisees.’’). See also 

Karp, ANPR, 19 Sept. 97 Tr., at 92–93. Several 

franchisor representatives, on the other hand, 

insisted that confidentiality clauses are rare. E.g., 

Tifford, ANPR 78, at 3; Duvall, ANPR, 6 Nov. 97 

Tr., at 240. 

It is apparent that franchisee and franchisor 

commenters addressed two different types 

confidentiality clauses: pre-sale and post-sale 

confidentiality clauses. The record indicates that 

franchisors do not routinely require franchisees to 

sign confidentiality agreements at the time of sale. 

See Wieczorek, ANPR, 18 Sept. 97 Tr., at 50. 

Indeed, no franchisees who commented on 

confidentiality clauses reported that they were 

required to sign a confidentiality provision in their 

initial franchise agreement. Nonetheless, it is clear 

that franchisors often require franchisees to sign 

post-sale confidentiality provisions in dispute 

settlements or as a condition to termination. See, 

e.g., Slimak, NPR 130; Maloney, ANPR 38, at 2; 

D’Alessandro, ANPR, 22 Aug. 97 Tr., at 40; AFA, 

ANPR 62, at 3; Doe, ANPR, 7 Nov. 97 Tr., at 276; 

Rafizadeh, id., at 299–300; Lundquist, ANPR, 22 

Aug. 97 Tr., at 42–43; Lagarias, ANPR 125, at 3. 

Franchisors’ forceful defense of confidentiality 

clauses on the grounds that they promote informal 

settlement of disputes also tends to support the 

view that such clauses are common in settlements. 

See Forseth, ANPR, 18 Sept. 97 Tr., at 40. See also 

Marks, ANPR, 19 Sept. 97 Tr., at 8-9. 

623See IL AG, NPR 3, at 3 (‘‘The ability of a 

prospective franchisee to freely discuss a present or 

former franchisee’s experience with the franchisor 

may be the single most important step in a buyer’s 

due diligence investment evaluation.’’). See also IL 

AG, NPR Rebuttal 38, at 3; Manuszak, ANPR 13, at 

1; Rachide, ANPR 32, at 3; Sibent, ANPR 41, at 1 

(and 19 identical ANPR comments). Three 

franchisees— Raymond Buckley, Roger C. Haines, 

and David E. Myklebust—believed that they were 

kept in the dark about the failure of their 

franchisor’s system due to confidentiality clauses 

imposed on current and former franchisees. 

Buckley, ANPR 97, at 1; Haines, ANPR 100, at 2; 

Myklebust, ANPR 101, at 1. 

624 For example, the AFA stressed that 

confidentiality clauses ‘‘typically release the 

franchisor from legal liability and bar the franchisee 

(under threat of legal action) from making any oral 

or written statements about the franchise system or 

their experience with the franchised business. The 

purpose of such clauses is to shut down any 

negative public comment about the franchise 

system.’’ AFA, NPR 14, at 3. See also, NCL, ANPR 

35, at 3; Baer, ANPR 25, at 3; Karp, ANPR, 19 Sept. 

97 Tr., at 95–96. 

625 For example, Roger Haines, a Scorecard Plus 

franchisee, related: 

‘‘I had spoken to some of the franchisees that had 

left the system. I now feel certain that they painted 

a picture that was not close to being the truth based 

on the gag order that [the franchisor] imposed. Had 

I gotten the truth from these people, my decision 

certainly would have been different. Every 

franchisee leaving the system has had a gag order 

placed on them, making it impossible for current 

and future franchisees to get the facts.’’

Haines, ANPR 100, at 2. See also Cantone, ANPR, 

18 Sept. 97 Tr., at 50 (‘‘[T]he whole concept of a 

gag order is really destructive and . . . needs to be 

addressed.’’). 

626See NASAA, ANPR 120, at 4. 

627 Selden, ANPR 133, Appendix B. 

628 E.g., Kaufmann, ANPR 33, at 5–6. See also, 

e.g., Quizno’s, NPR 1, at 2; H&H, NPR 9, at 20; Baer, 

NPR 11, at 14; NaturaLawn, NPR 26, at 2; Marriott, 

NPR 35, at 16; Snap-On, NPR 16, at 4 (urging the 

Commission either not to adopt the proposed 

disclosure or to revise it in a manner to 

accommodate franchisors’ interests in fostering 

early and amicable settlements). J&G added that a 

confidentiality clause disclosure is unnecessary 

because the Rule already sheds light on the 

franchise relationship. ‘‘If efforts at obtaining 

additional information are unsuccessful because of 

confidentiality agreements, a reasonable 

prospective franchisee should be able to take that 

fact into its evaluation of whether to buy the 

franchise. And additional disclosure about ‘gag 

clauses’ is not helpful.’’ J&G, NPR 32, at 14. 

629E.g., Baer, ANPR 25, at 3. Franchisee advocates 

also recognized franchisor’s legitimate need for 

trademark protection. E.g., Singler, at 2; AFA, 

ANPR 62, at 3; Dady & Garner, ANPR 127, at 2; 

Zarco & Pardo, ANPR 134, at 4. For that reason, the 

definition of ‘‘confidentiality clause’’ specifically 

excludes confidentiality agreements to protect 

trademarks and other proprietary information. 

speak with current and former 

franchisees, but be aware that not all 

such franchisees will be able to 

communicate with you.’’ In addition, a 

franchisor may, at its option, also 

disclose the number and percentage of 

current and former franchisees who 

signed confidentiality agreements, as 

well as the circumstances under which 

such clauses were signed. 

This provision was prompted by 

numerous comments from franchisees 

and their advocates urging the 

Commission to address the use of 

confidentiality clauses in franchising. 

Indeed, one quarter of the ANPR 

commenters (42 out of 166 commenters) 

and several speakers at public workshop 

conferences addressed the 

confidentiality clause issue, the majority 

opposing their use.620 The most 

poignant example was a franchisee of an 

undisclosed franchise system who 

related that she had to speak quickly 

because she was on her way to sign a 

final agreement terminating her 

relationship with her franchisor. The 

agreement she was about to sign 

included a confidentiality clause.621

These commenters complained that the 

use of confidentiality clauses is 

widespread,622 and several commenters 

urged the Commission to ban the use of 

confidentiality clauses as a deceptive or 

unfair trade practice.623

Other opponents of confidentiality 

clauses—including state regulators and 

some franchisors—asserted that such 

provisions inhibit prospective 

franchisees from learning the truth as 

they conduct their due diligence 

investigation of a franchise offer. As 

noted above, current and former 

franchisees are often a valuable source 

of information about the franchise 

investment and can often verify or 

discredit the franchisor’s claims, 

especially financial performance 

representations.624 Attempts to restrict 

franchisee speech through 

confidentiality provisions may deceive 

prospects by effectively eliminating one 

crucial source of information, namely 

those current and former franchisees 

who may have a dispute with the 

franchisor or are otherwise 

disgruntled.625 Indeed, a franchisor, if it 

wished to do so, could attempt to use 

confidentiality provisions to ensure that 

prospects speak with only those 

franchisees who are successful or 

otherwise inclined to give a positive 

report.626 In addition, one franchisee 

representative, contended that the harm 

flowing from confidentiality provisions 

goes beyond individual franchise sales, 

noting that such provisions intimidate 

franchisees into not testifying before 

legislative committees and public 

agencies, such as the Federal Trade 

Commission.627

On the other hand, several franchisors 

and their representatives opposed 

banning the use of confidentiality 

clauses. For example, David Kaufmann 

asserted that confidentiality provisions 

prevent disgruntled franchisees from 

inflaming others and enable franchisors 

to end bad relationships with problem 

franchisees without spending 

considerable resources. He contended 

that banning confidentiality provisions 

would discourage informal settlements 

with franchisees.628 Others added that 

franchisors must have the ability to 

protect their trade secrets from 

disclosure.629

The Commission believes that the 

record does not support an outright ban 


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630 Marriott, NPR 35, at 16. But see Karp, at 8 (‘‘It 

incorrectly implies that the franchisee that signed 

the confidentiality provision had a choice whether 

to do so or not.’’). 

631See AFA, at 3; Karp, at 8. See also FTC v. 

Orion Prods., Bus. Franchise Guide (CCH) ¶ 10970 

(N.D. Cal. 1997) and United States v. Tutor Time 

Child Care Sys., Inc., No. 96–2603 (N.D. Cal. 1996). 

While in these two cases the Commission did not 

challenge the defendants’ use of confidentiality 

clauses as either a Rule or Section 5 violation in its 

complaints, it did obtain fencing-in provisions in 

settlements that prohibited the defendants from 

enforcing or entering into confidentiality provisions 

for a limited time. 

632 Bundy, ANPR, 6 Nov. 97 Tr., at 249. See also 

AFA, at 3; Gee, at 2; Pu, at 1–2; Selden, ANPR 133, 

Appendix B; Zarco & Pardo, ANPR 134, at 4; Jeffers, 

ANPR, 6 Nov. 97 Tr., at 251–52; Wieczorek, ANPR, 

6 Nov. 97 Tr., at 260. But see Singler, at 2 

(permitting disclosure, but accepting that 

individuals may be contractually forbidden to 

discuss the franchisor makes little sense). 

633 Several commenters generally supported this 

provision. See NFA, NPR 27, at 1. See also AFA, 

NPR 14, at 3; Bundy, NPR 18, at 3; Stadfeld, NPR 

23, at 5; Karp, NPR 24, at 21–22. But see NASAA, 

at 6; WA Securities, at 4–5; Singler, at 2 (asserting 

that franchisor should be required to disclose 

number and percentage information concerning 

their use of confidentiality agreements). 

634See Tricon, NPR 34, at 3 (urging the 

Commission to exclude settlement details—such as 

the price paid to reacquire a franchised outlet—

from the disclosure if the franchisee is otherwise 

free to discuss his or her personal experience as a 

franchisee). See also Quizno’s, NPR 1, at 2; Marriott, 

NPR 35, at 16. Marriott asserted that the disclosure 

will create a disincentive for franchisors to 

accommodate franchisees’ needs in non-standard 

deals. It noted that franchisors ‘‘make a variety of 

concessions to franchisees in connection with 

workouts or in connection with sales, or purchasing 

or conversion of multiple units, among others, in 

exchange for which the franchisor will request the 

terms of such arrangements to be kept 

confidential.’’ Id. 

635 The extent to which franchisors must disclose 

confidential settlement terms and conditions is 

spelled out in Item 3. 

636 Commenters maintained that such a 

requirement would accomplish two goals 

simultaneously. It would alert prospective 

franchisees that the franchisor may require 

franchisees to sign a confidentiality provision and 

would save prospects the time and trouble of trying 

to contact franchisees who are not free to speak. See 

AFA, NPR 14, at 3; Stadfeld, NPR 23, at 6; Cordell, 

ANPR, 6 Nov. 97 Tr., at 247–48; Kezios, id., at 256. 

But see GPM, NPR Rebuttal 40, at 7 (opposing 

release of names); Wieczorek, ANPR, 6 Nov. 97 Tr., 

at 258–59 (this approach would be unnecessarily 

burdensome: franchisors would have to update 

their disclosures more frequently, especially in 

franchise registration states). 

637 PMR&W, for example, ‘‘acknowledge[s] the 

FTC’s concern about prospects being unable to raise 

questions with current or former franchisees who 

are subject to confidentiality requirements. The 

FTC’s position is particularly understandable if a 

gag clause prevents all franchisee communication 

about the franchise system.’’ PMR&W, NPR 4, at 15. 

Rather, the firm urged the Commission to limit the 

disclosure’s application to only broad ‘‘noncommunication on any subject’’ prohibitions. Id. 

638 The NFC advised that the disclosure should 

apply ‘‘where either all franchisees, or at least 

twenty percent of the franchisee population, is 

barred from communicating with third parties.’’

NFC, NPR 12, at 33. See Bundy, ANPR, 6 Nov. 97 

Tr., at 249 and Jeffers, id., at 251–52 (arguing in 

favor of a threshold). 

on confidentiality clauses. Clearly there 

are instances where both franchisors 

and franchisees enter into such clauses 

voluntarily. As Marriott noted, 

franchisees in contract modification 

negotiations may seek or at least agree 

to confidentiality in order to gain 

certain advantages.630 Under the 

circumstances, we cannot conclude that 

harm to franchisees from confidentiality 

clauses necessarily outweighs the 

potential benefits to franchisees, as well 

as franchisors. Nevertheless, based upon 

the record, the Commission is 

persuaded to adopt a balanced provision 

requiring franchisors to disclose their 

use of confidentiality clauses over the 

last three years. The Commission is 

convinced that franchisees often sign 

post-sale agreements containing 

confidentiality clauses in connection 

with dispute settlements and 

terminations. This practice may impede 

prospective franchisees’ ability to 

conduct due diligence investigations of 

franchise offerings, undercutting the 

primary goal of pre-sale disclosure.631

The Commission believes that the 

final amended Rule’s confidentiality 

clause disclosure requirement strikes 

the appropriate balance between 

informing prospective franchisees that 

franchisees in the system may not be 

able to share information with them, 

and minimizing compliance burdens. Of 

the various proposals offered by the 

commenters, a general disclosure 

notifying prospects about the 

franchisor’s use of a confidentiality 

provision garnered the most support. 

For example, Howard Bundy told us 

that ‘‘[i]n a perfect world I would have 

a list of those that are subject to 

[confidentiality provisions], so I didn’t 

have to make all those extra 75 calls. 

But I could live with or without that. It’s 

more important to disclose the fact that 

they do exist.’’632

Other than the required statement 

explaining the nature of confidentiality 

clauses to prospects who may be 

unfamiliar with their use, any other 

disclosures—such as number and 

percentage or the reasons for the 

clauses—are entirely voluntary.633

Moreover, we are unpersuaded that this 

approach would discourage settlements. 

Franchisors opting to pursue litigation 

in lieu of settlement in order to avoid 

the confidentiality disclosure would 

most likely have to disclose even more 

revealing information about the suit in 

their Item 3 disclosure. 

Further, the confidentiality disclosure 

does not reach confidentiality clauses 

addressing specific contract negotiation 

terms and conditions.634 We recognize 

that there may be instances where both 

franchisors and franchisees may not 

wish to discuss specific terms of an 

arrangement, such as the price paid for 

a franchise, or other concessions made 

to a franchisee. The confidentiality 

clause disclosure would be 

unwarranted, therefore, where the 

parties agree to a limited restriction that 

still enables franchisees to discuss their 

overall experience in the franchise 

system.635

In reaching our conclusion to adopt 

the confidentiality clause disclosure, we 

have carefully weighed suggestions to 

expand or to narrow the disclosure 

requirement. For example, we reject the 

suggestion that franchisors identify 

specific individual franchisees listed in 

Item 20 who are subject to a 

confidentiality clause.636 We are 

persuaded that this suggestion goes 

beyond what is reasonably necessary to 

address the use of confidentiality 

clauses. No doubt a prospective 

franchisee’s due diligence investigation 

of the franchise offering would be more 

efficient if the prospect could eliminate 

from its contact list those franchisees 

under a confidentiality agreement. 

However, we believe this approach 

would impose an unnecessary burden 

on those franchise systems that list all 

of their franchisees in Item 20 on a 

national basis. Presumably, franchisors 

would have to update records 

continually on each individual 

franchisee. Moreover, a requirement that 

franchisors note which specific 

franchisees are subject to a 

confidentiality clause may have the 

unintended consequence of actually 

encouraging large franchisors to 

eliminate from their list of 100 

franchisees those who are subject to 

confidentiality clauses, thereby leaving 

a biased list of only those franchisees 

who are most successful or satisfied 

with the system. 

We also reject suggestions to limit the 

disclosure to only those circumstances 

where franchisees have signed broad 

provisions restricting all speech637 or 

where a threshold level of franchisees 

have signed confidentiality clauses.638 If 

the purpose of the confidentiality clause 

disclosure were primarily to shed light 

on the extent of problems in the 

franchise relationship, then we might 

agree. As noted above, however, the 

disclosure aims to make prospective 

franchisees aware of the use of 

confidentiality clauses. Armed with 

such knowledge, prospective 

franchisees would understand that: (1) a 

refusal by one or more existing 

franchisees to speak is not necessarily 

benign; and (2) that the sample of 


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639 The growth of trademark-specific system 

franchisee associations is a recent development in 

franchising. These associations are comprised of 

franchisees who operate a franchisor’s particular 

brand. In some instances, these associations are 

franchisor sponsored or endorsed councils, where 

franchisee-participants are either selected by the 

franchisor or are elected by franchisees themselves. 

In other instances, the associations are independent 

of the franchisor. The emergence of independent 

franchisee associations is not always well-received 

by the franchisor. See Winslow, at 141 (‘‘I believe 

franchisors ought to be allowed to put in the 

contract that if any franchisees get together and 

form a franchise association to use as a collective 

bargaining power against the franchisor, other than 

an association approved by the franchisor, then the 

franchisor should have the right to terminate the 

franchise contract with all franchisees in that region 

immediately and shut down further operations 

under the brand name in that area indefinitely.’’). 

Some commenters reported that, in some instances, 

franchisors have filed suit to stop the formation of 

an independent group or have retaliated against 

individuals who have participated in such groups. 

E.g., Donafin, ANPR 14 (noting pending federal 

lawsuit alleging franchisor interference with 

franchisees’ right to form organizations). Cf. 

Mueller, ANPR 29 (‘‘The FTC should take actions 

against franchisors who intimidate or retaliate 

against franchisees for getting together for any 

legitimate business purpose.’’); Rachide, ANPR 32 

(‘‘[The FTC should prohibit [t]he use of retaliation 

against franchisees involved in franchisee 

organizations that work to educate or rally the 

franchise group.’’). See also Karp, at 4; Karp, NPR 

24, Appendix A (listing cases addressing franchisee 

organizations). A few states, including California, 

Illinois, and Washington, have addressed this issue 

by specifically prohibiting franchisors from 

restricting franchisees from freely associating or 

joining franchisee organizations. See Cal. Corp. 

Code 31220; 815 Ill. Comp. Stat. 705/17; Wash. Rev. 

Code 19.100.180(2)(a). 

640 As discussed below, section 436.5(t)(8) also 

makes clear that the franchisor has no obligation to 

verify the association’s continued existence at the 

end of each fiscal year. Franchisors may also 

include the following statement in conjunction with 

the disclosure of independent franchisee 

associations: ‘‘The following independent 

franchisee associations have asked to be included 

in this disclosure document.’’

641 Selden, ANPR 133, Appendix B. Similarly, 

Martin Cordell, a franchise examiner for the State 

of Washington, observed that disclosing trade 

associations could ‘‘be a much more ready source 

of information as opposed to individual franchisees 

who have to take time out of their businesses to 

share information with the prospective franchisee.’’

Cordell, ANPR, 6 Nov. 97 Tr., at 168-69. Susan 

Kezios of the AFA added that these associations 

‘‘have a collective memory of what has been going 

on historically in the franchise system that one or 

another individual franchisees may or may not 

have.’’ Id., at 176. See also, NFA, NPR 27, at 2; 

Stadfeld, NPR 23, at 14; Karp, NPR 24, at 9; Bundy, 

ANPR, 6 Nov. 97 Tr., at 173; Manuszak, ANPR 13; 

Zarco & Pardo, ANPR 134, at 3. 

642See Baer, NPR 11, at 14; Shay, ANPR, 18 Sept. 

97 Tr., at 71; Wieczorek, ANPR, 6 Nov. 97 Tr., at 

169–70; Duvall, id., at 171. J&G asserted that 

independent franchisee associations should qualify 

for inclusion only if they are representative of 

system franchisees and meet or communicate with 

the franchisor at least twice annually for the 

purpose of addressing franchise relationship issues. 

Further, the firm would require the association to: 

‘‘provide written notice to the franchisor no later 

than 30 days after the close of the franchisor’s fiscal 

year end identifying the organization, its mission, 

its form of organization and the number of 

franchisees and franchised units which are duespaying members or otherwise accredited members 

of the organization. If some franchisees are not 

dues-paying members, standards used for 

accreditation should be enclosed in the notice.’’

J&G, NPR 32, at 13. See also PMR&W, NPR 4, at 

15; Marriott, NPR 35, at 16. 

643 While 100 franchisees may know about 

franchisor-sponsored associations, they would not 

necessarily know about independent associations, 

such as those in particular locations, or about 

associations for specific-use franchisee groups (e.g., 

those operating kiosks in malls). Further, there is 

also evidence in the record that franchisors do not 

readily inform prospects about the existence of 

independent associations. For example, Michael W. 

Chiodo, the executive director of the Domino’s 

Franchisee Organization, explained that Domino’s 

does not inform franchisees about the existence of 

Continued 

franchisees listed in the disclosure 

document might actually be skewed. 

More important, adopting a threshold 

would not address the use of 

confidentiality clauses to restrict speech 

by a minority of franchisees (such as 

franchisees located in a particular city), 

which might be the most relevant 

universe of existing franchisees to an 

individual prospective franchisee. 

e. Franchisee associations 

One important difference between the 

original Rule and UFOC Guidelines, on 

the one hand, and the final amended 

Rule, on the other, is the new 

requirement that franchisors disclose 

trademark-specific franchisee 

associations.639 The obligation to 

disclose such associations differs 

depending upon whether the 

association is sponsored or endorsed by 

the franchisor or is an independent 

association. Section 436.5(t)(8) provides 

that identifying information—name, 

address, telephone number, email 

address and Web address, to the extent 

known—must be included for each 

association ‘‘created, sponsored, or 

endorsed by the franchisor.’’ For 

independent associations, the same 

identifying information must disclosed 

only if the independent association: 

is incorporated or otherwise 

organized under state law and asks 

the franchisor to be included in the 

franchisor’s disclosure document 

during the next fiscal year. Such 

organizations must renew their 

request on an annual basis by 

submitting a request no later than 

60 days after the close the 

franchisor’s fiscal year.640

During the Rule amendment 

proceeding, several franchisees and 

their representatives urged the 

Commission to adopt a trademarkspecific franchisee association 

disclosure requirement. For example, 

one franchisee representative stated: 

The UFOC Guidelines currently 

require disclosure of the existence 

of purchasing cooperatives known 

to the franchisor, but this is not 

adequate disclosure of a fact of 

growing importance to franchisees, 

which is the existence, or nonexistence, of an autonomous 

franchisee association representing 

franchisees in that particular 

franchise organization. When an 

organization represents a 

substantial plurality of franchisees 

in the system, perhaps over 30%, 

and its existence is known to the 

franchisor, that fact should be 

disclosed, possibly by an additional 

category in the list of existing 

franchisees required in Item 20, as 

an additional and critical source of 

information about the franchise 

opportunity.641

Some franchisors did not oppose a 

disclosure of franchisee associations, 

especially franchisor-sponsored 

franchisee advisory councils. However, 

they voiced concern about any mandate 

to disclose all independent franchisee 

associations. In their view, independent 

associations are often small, informal 

groups of individual franchisees that 

may come and go at any time, and are 

often formed on the local or regional 

level without the knowledge or 

involvement of the franchisor.642 In 

short, they fear liability for failing to 

disclose a franchisee association that 

they did not know exists. 

Based upon the record developed in 

this proceeding, the Commission is 

convinced that a trademark-specific 

association disclosure is warranted 

under certain circumstances. The 

disclosure of trademark-specific 

franchisee associations—both those 

sponsored or endorsed by the franchisor 

and independent franchisee 

associations—will greatly assist 

prospective franchisees in their due 

diligence investigation of the franchise 

offering, thereby preventing 

misrepresentations in the offer and sale 

of franchises. We recognize that Item 20 

already requires franchisors to disclose 

the names of, and some contact 

information for, franchisees in their 

systems. This disclosure requirement, 

however, is limited to not more than 

100 franchisees. This is true even for 

medium and large franchise systems 

with several hundred, if not several 

thousand, franchisees. Therefore, it is 

possible for some franchisors to handselect franchisees listed in their 

disclosure documents, revealing only 

successful franchisees who maintain a 

good relationship with their 

franchisor.643 Moreover, a franchisor 


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the Organization, nor does Domino’s inform the 

Organization about new franchisees. Chiodo, ANPR, 

21 Nov. 97 Tr., at 294-95. 

644 Bundy, ANPR, 6 Nov. 97 Tr., at 236–37. See 

also, e.g., Hayden, RR 42; Spencer, RR, Sept.95 Tr., 

at 74. 

645 Bundy, ANPR, 6 Nov. 97 Tr., at 237. 

646 Chiodo, ANPR, 21 Nov. 97 Tr., at 294–95. See 

also Galloway, id., at 317–18; Manuszak, ANPR 13. 

647 Franchise NPR, 64 FR at 57344; Staff Report, 

at 58. The original approach was taken in response 

to commenters’ concerns that requiring the 

disclosure of independent associations would be 

too broad, requiring the disclosure of even informal 

groups of franchisees, as noted above. However, 

several comments contended that the incorporation 

requirement was too restrictive, asserting that the 

Commission should permit the inclusion of all 

franchisee association that make their existence 

known to the franchisor. Bundy, at 9; Gust 

Rosenfeld, at 6–7; Singler, at 2–3; Stadfield, NPR 

23. 

648 In response to the Staff Report, AAFD, in 

particular, noted that it is organized as a trust and 

its member franchisee associations form as chapters 

of that trust. It asserted that such association 

members, although not incorporated, are organized 

and should qualify for inclusion in a disclosure 

document. AAFD. See also IL AG, at 8. 

649 The Staff Report recommended that the 

Commission add precision to the Rule by requiring 

franchisee associations to submit their requests 90 

days after the close of the franchisor’s fiscal year. 

Staff Report, at 197. The staff’s thinking was that 

a 90-day period would afford franchisors sufficient 

time to include any franchisee association 

information well before the expiration of the 120- 

day annual update period. Id. This view, however, 

was based on the assumption that a significant 

number of franchisors need 120 days to complete 

their annual updates. One commenter, however, 

argued that 60 days would be sufficient, noting that 

many franchisors complete their annual updates 

earlier than 120 days. Wiggin & Dana, at 4. In 

determining the appropriate time period for 

inclusion requests, it is appropriate not to interfere 

with franchisor’s ordinary business practices. In 

particular, requiring franchisors ready to 

disseminate their updated disclosure documents to 

wait 90 days on the mere chance that a franchisee 

association may ask for inclusion in their document 

is unwarranted. Independent franchisee 

associations seeking inclusion should make their 

requests known to the franchisor as soon as 

possible. Surely, a franchisee association can 

submit its request before the close of the 

franchisor’s fiscal year or soon thereafter. We are 

convinced that a 60-day period is a more balanced 

approach, enabling franchisee associations to 

request inclusion, while minimizing franchisor’s 

compliance burden. 

650 This revises the disclaimer recommended in 

the Staff Report, which added the following 

additional sentence: ‘‘We do not endorse these 

associations and their members may not represent 

all franchisees in the [name of franchisor] franchise 

system.’’ Several commenters criticized this 

additional statement on the grounds that no 

association is going to represent 100% of all 

franchisees in a system. AFA, at 3–4. The 

could use confidentiality clauses to 

achieve the same goal. Therefore, the 

Item 20 list of franchisees may not be a 

random sample or otherwise 

representative of franchisees within a 

particular system. One approach to 

counter any franchisor-bias in Item 20 is 

to require that franchisors disclose the 

existence of certain franchisee 

associations, providing prospective 

franchisees with an alternative view of 

the franchise system. 

The record also suggests that 

individual franchisees often are 

reluctant to share information with 

prospective franchisees. For example, 

Howard Bundy told us that he often 

instructs his franchisee-clients to state 

only their ‘‘name, rank, and serial 

number and refer [the prospect] back to 

the franchisor for everything else.’’644 In 

his view, franchisees who speak in 

connection with a franchise sale might 

be deemed franchise brokers under state 

law and could be liable for any claims 

or damages resulting from the sale. 

Franchisees who volunteer information 

also might be subject to a defamation 

suit by the franchisor.645 The trademarkspecific franchisee association 

disclosure, therefore, is an important 

alternative source of information about 

the franchise system.646

Finally, a franchisee association 

disclosure is particularly important 

given that the final amended Rule does 

not mandate financial performance 

disclosures. One rationale for not 

mandating performance information is 

that prospects can contact franchisees 

directly to obtain such information. 

Indeed, franchisees are the best source 

of information about their own earnings. 

If true, then prospective franchisees, at 

the very least, should be able to contact 

as many existing and former franchisees 

as possible to learn about franchisee 

performance. A franchisee association 

disclosure may greatly assist 

prospective franchisees in their effort to 

obtain and review franchisees’ financial 

performance by providing an 

independent source of information. 

At the same time, the disclosure of 

franchisee associations is very narrowly 

tailored to address franchisors’ concerns 

about the disclosure of independent 

franchisee associations. Specifically, 

Item 20 of the final amended Rule 

provides that a franchisor must list in its 

disclosure document independent 

trademark-specific associations only to 

the extent such associations make their 

existence known to the franchisor on an 

annual basis. This will reduce 

franchisors’ burdens by requiring 

franchisors to disclose only those 

independent associations actually 

known to them. It requires no special 

research or recordkeeping or updating 

requirements on a franchisor’s part. 

Accordingly, the compliance burden 

imposed by disclosing independent 

franchisee associations is minimal. 

The final Rule amendment differs 

from the Franchise NPR, however, to 

add more precision. Specifically, Item 

20 of the final amended Rule: (1) 

broadens the types of associations that 

qualify for inclusion as a trademarkspecific franchisee association; (2) 

requires franchisee associations to 

request inclusion in the franchisor’s 

disclosure document within 60 days of 

the end of the franchisor’s fiscal year 

end; and (3) permits franchisors to add 

qualifying language alerting prospective 

franchisees that the associations listed 

in its disclosure document are 

independent associations. Each of these 

modifications is discussed in the section 

immediately below. 

Item 20 of the final amended Rule 

requires franchisors to disclose only 

those independent franchisee 

associations that are incorporated or 

otherwise organized under state law. 

This differs slightly from the Franchise 

NPR and Staff Report, which 

recommended that only incorporated 

franchisee associations qualify for 

inclusion in a disclosure document.647

The Commission is persuaded that 

informal, unorganized groups of 

franchisees are more akin to individual 

franchisees, than an association. In such 

instances, additional disclosure is 

unwarranted because a prospective 

franchisee can already speak with 

individual franchisees, whose contact 

information is also provided in Item 20. 

At the same time, the Commission 

agrees with Staff Report commenters 

that Item 20 should be read broadly to 

enable any organized independent 

franchisee association to seek inclusion 

in the franchisor’s disclosure 

document.648 Accordingly, any 

organized independent association—

whether it is incorporated, a 

partnership, limited liability company, 

or trust, among other forms of 

association—qualifies for inclusion 

under Item 20. 

Item 20 of the final amended Rule 

makes explicit that an independent 

franchisee association’s request for 

inclusion in a disclosure document 

must be renewed annually by 

submitting a request for inclusion no 

later than 60 days after the close of the 

franchisor’s fiscal year. This is more 

precise than the Franchise NPR, which 

contains no specific time frame during 

which independent associations should 

submit their request to the franchisor.649

Third, Item 20 of the final amended 

Rule permits franchisors to include a 

limited disclaimer, if they wish. 

Specifically, Item 20 provides that a 

franchisor can add to the independent 

franchisee association disclosure the 

following statement: ‘‘The following 

independent franchisee associations 

have asked to be included in this 

disclosure document.’’650 We believe 


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commenters also noted that the proposed additional 

sentence is unnecessarily negative in tone. It should 

suffice that a franchisor simply notes that the 

independent associations have asked to be 

included, without implying that the independent 

association is a renegade group. AFA, at 3–4; 

Blumenthal, at 1–2; Bundy, at 9; Karp, at 5. While 

we are persuaded that an introductory statement 

may be warranted before listing independent 

associations—to distinguish them from franchisor 

endorsed or sponsored associations—the statement 

should be neutral and not imply any opinion on the 

merits of the independent associations. This is the 

same approach taken with respect to franchisorendorsed or sponsored associations, where no such 

disclaimer is required. Accordingly, Item 20 of the 

final amended Rule deletes the last sentence from 

the Staff Report’s version of the trademark-specific 

franchisee association voluntary disclaimer. 

651See PMR&W, NPR 4, at 15; BI, NPR 28, at 13. 

652 Stadfeld, NPR 23, at 14–15. See also H&H, 

NPR 9, at 20–21 (if the organization represents 30% 

of franchisees); NFC, NPR 12, at 33 (if the 

organization represents 20% of the franchisees); BI, 

NPR 28 (unspecified threshold). But see IL AG, NPR 

Rebuttal 38, at 4 (‘‘Setting a minimum percentage 

of franchisees to be a qualified association is 

virtually unworkable.’’). 

653 16 CFR 436.1(a)(20). In the original SBP, the 

Commission noted that a franchisee is purchasing, 

‘‘along with the franchise itself, some assurance of 

the financial stability of the franchisor, of the 

franchisor’s ultimate ability to meet its obligations 

to its franchisees.’’ Original SBP, 43 FR at 59679. 

For that reason, the Commission concluded that the 

disclosure of basic financial information by all 

franchisors ‘‘is essential.’’

654 ‘‘Without the auditing requirement, the 

financial statements remain nothing more than the 

franchisor’s own representation of its financial 

condition.’’ Original SBP, 43 FR at 59679-680. 

Nonetheless, the costs associated with preparing 

audited financial statements might create a barrier 

to entry by start-up franchisors. In the original SBP, 

the Commission made it clear that, as a matter of 

policy, franchisors can use unaudited financials 

during a phase-in period. Id., at 59681. 

655 Franchise NPR, 64 FR at 57344. See 16 CFR 

436.1(a)(20); UFOC Item 21. See also Advisory 02–

4, Bus. Franchise Guide (CCH), ¶ 6515 (Nov. 18, 

2002). 

656 H&H, NPR 9, at 13. See also NFC, NPR 12, 

at 33. 

657 H&H, NPR 9, at 13. Warren Lewis suggested 

that the Commission permit foreign franchisors to 

‘‘use financial statements prepared according to 

their countries’ GAAPs, provided that those GAAPs 

are comparable to US GAAP.’’ Lewis, NPR 15, at 17. 

Mr. Lewis, however, provided no criteria or 

examples that would help us determine what GAAP 

are or are not ‘‘comparable.’’

this statement makes clear that the 

franchisor is not necessarily endorsing 

or supporting the associations listed. 

This statement, coupled with the 

requirement that only an organized 

independent association must be 

disclosed and only upon the 

association’s request, strikes the right 

balance between pre-sale disclosure and 

compliance burdens. 

At the same time, the Commission has 

rejected the suggestion offered by some 

commenters that independent 

franchisee associations seeking 

inclusion in the franchisor’s disclosure 

document should be representative of a 

significant number of franchisees in the 

franchise system.651 These commenters 

urged the Commission to apply a 

threshold qualification test whereby a 

franchisor would not have to disclose an 

independent franchisee association 

unless the association represented a 

portion of system franchisees, such as 

25% of system franchisees.652

The Commission recognizes that Item 

20 may result in the disclosure of 

independent franchisee associations 

that are not necessarily representative of 

franchisees as a whole. However, we 

believe there is value in enabling 

prospective franchisees to speak with an 

association representing similar 

interests, even if not representative of 

the entire system. For example, a small 

independent association of franchisees 

in Anchorage, Alaska, might provide 

prospective franchisees with valuable 

information about local labor costs, 

financial performance data, as well as 

information about third-party suppliers. 

For this reason, we reject the notion that 

an independent association should be 

forced to establish that they represent a 

specific percentage of franchisees in a 

system. Rather, prospective franchisees 

can determine for themselves whether 

to contact independent franchisee 

associations and what weight to give 

any information such associations 

provide. 

23. Section 436.5(u) (Item 21): Financial 

statements 

Section 436.5(u) of the final amended 

Rule retains the original Rule’s basic 

requirement that franchisors disclose 

three years of audited financial 

statements prepared according to 

generally accepted accounting 

principals (‘‘GAAP’’).653 To maximize 

consistency with the UFOC Guidelines, 

it expands the original Rule by 

incorporating the UFOC Guidelines’

requirement that financial disclosures 

be in a tabular format that compares at 

least two fiscal years. This provides 

prospective franchisees with 

information with which to assess 

financial trends, rather than just an 

isolated snap-shot of the franchisor’s 

finances. 

The final amended Rule provision 

differs from UFOC Guidelines Item 2, 

however, in three respects. First, while 

it requires the use of GAAP, it also 

recognizes that what currently is 

‘‘GAAP’’ may change by federal 

government oversight of the accounting 

profession. Accordingly, it provides that 

franchisors must use GAAP, as revised 

by any future government mandated 

accounting principles. It also allows 

flexibility by permitting accounting 

standards recognized by the Securities 

and Exchange Commission. Second, 

consistent with other provisions of the 

final amended Rule, it requires the 

disclosure of a parent’s financial 

information in limited circumstances. 

Specifically, a franchisor must include a 

parent’s financial statements if the 

parent has post-sale performance 

obligations or guarantees the 

franchisor’s performance. Third, Item 23 

retains the Commission’s long-standing 

policy of permitting franchisors to 

phase-in audited financial statements 

over three years.654

Four aspects of section 436.5(u) that 

prompted comment are discussed in the 

following section: (1) the required use of 

GAAP in preparing financial statements; 

(2) the scope of a parent’s obligation to 

disclose financial information; (3) the 

obligation of subfranchisors to disclose 

financial information; and (4) the phasein of audited financial statements. We 

discuss each of these issues below. 

a. The requirement to prepare financial 

statements according to GAAP 

Section 436.5(u)(1) of the final 

amended Rule requires franchisors to 

prepare financial statements according 

to ‘‘United States generally accepted 

accounting principles, as revised by any 

future government mandated accounting 

principles, or as permitted by the 

Securities and Exchange Commission.’’

This differs from the Franchise NPR, 

which proposed that franchisors use 

United States GAAP only in preparing 

their financial statements, consistent 

with the original Rule and UFOC 

Guidelines.655

During the Rule amendment 

proceeding, a few commenters opposed 

the Franchise NPR’s proposed 

requirement that foreign franchisors 

prepare financial statements according 

to United States GAAP only. These 

commenters asserted that this 

requirement would impose expenses 

and burdens on foreign corporations 

entering the American market. H&H’s 

comment was typical: ‘‘For companies 

located in many foreign countries, . . . 

a requirement to convert to US 

accounting standards would be 

enormously expensive.’’656 H&H urged 

the Commission to permit foreign 

franchisors to prepare financial 

statements that ‘‘conform to U.S. GAAP 

or otherwise to generally accepted 

accounting principles established in the 

country of the company’s domicile.’’657

IL AG, however, argued that foreign 

companies should follow United States 

GAAP or be permitted to reconcile their 

financial statements to United States 


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658 IL AG, NPR Rebuttal 38, at 5. 

659 Staff Report, at 201. 

660 We noted that NASAA, in response to the 

Staff Report, suggested that the Rule simply 

mandate United States GAAP, or a reconciliation to 

United States GAAP, without referencing the SEC. 

NASAA, at 7. See also WA Securities, at 5. The 

Commission concludes that referencing the SEC is 

appropriate. Given the absence of any indication in 

the record that foreign accounting principles are 

inherently deceptive, flexibility in preparing 

financial statements is warranted. As long as the 

SEC would permit foreign accounting standards or 

foreign financial statements, we see no policy 

reason to differ. This is particularly true of financial 

statements prepared according to Canadian GAAP, 

which receives more lenient treatment under SEC 

law. See Spandorf, at 8 (recommending an 

accommodation to permit the use of Canadian 

GAAP). 

661 See SEC Form 20–F, Part III, Items 17 and 18. 

The SEC has also made clear that even if a foreign 

company reconciles its financial statements to 

United States GAAP, it must audit the financials 

according to United States generally accepted 

auditing standards (United States GAAS) and the 

auditor must comply with the United States 

standards for auditor independence. See Id., 

General Instruction E(c). 

662 Of course, the Commission retains its Section 

5 authority to challenge any deceptive foreign 

statements. 

663 This modifies the version of Item 21 in the 

Staff Report, which would permit financial 

statements prepared according to ‘‘United States 

generally accepted accounting principles, or as 

permitted by the Securities and Exchange 

Commission, or as revised by any future 

government mandated accounting principles.’’ One 

comment questioned whether the third part—

revised by any future government mandated 

accounting principles—was a third option distinct 

from the other two. Piper Rudnick, at 3–4. The 

language ‘‘or as revised by any future government 

mandated accounting principles’’ recognizes that 

what is currently considered United States GAAP 

may be modified in the future by government 

mandate, especially by regulations or rulings of the 

Federal Accounting Standards Board. Accordingly, 

it is not intended to comprise a separate option, but 

should be read to modify ‘‘United States generally 

accepted accounting principles.’’ The final 

amended Rule adopts this revised language. 

664 Franchise NPR, 64 FR at 57315. We also note 

that the Staff Report recommended that franchisors 

disclose financial statements of any parent ‘‘or other 

entity’’ with post-sale performance obligations or 

which guarantees the franchisor’s performance. The 

inclusion of the phrase ‘‘other entity’’ prompted 

three comments voicing concern that it would 

sweep in suppliers that provide goods or services 

to franchisees. Piper Rudnick, at 3; Spandorf, at 8–

9; Starwood, at 3. The Commission agrees that a 

reference to ‘‘other entity’’ would be an 

unwarranted expansion of Item 21. According, the 

reference to ‘‘other entity’’ has been deleted from 

the final amended Rule. 

665 PMR&W, NPR 4, at 16. See also Lewis, NPR 

15, at 18; Snap-On, NPR 16, at 4; PREA, NPR 20, 

at 2; Marriott, NPR 35, at 17. Similarly, J&G 

opposed consolidated financial statements of 

affiliates where the franchisor has included its own 

financial statements. ‘‘The increased cost and 

potential liability of other affiliates is 

unwarranted.’’ J&G, NPR 32, at 13. 

666 Lewis, NPR 15, at 18. See also Baer, NPR 11, 

at 5; IL AG, NPR Rebuttal 38, at 4. In the same vein, 

Howard Bundy suggested that a franchisor should 

be permitted to use an affiliate’s financial 

statements only ‘‘if the affiliate guarantees all of the 

duties and obligations of the franchisor in writing 

and for the entire term of the franchise, including 

any renewals and extensions’’ and a copy of the 

GAAP through footnotes and 

explanations.658

As noted in our discussion of section 

436.2 concerning the scope of the Rule, 

the sale of franchises outside the United 

States was not an important issue when 

the Commission promulgated the 

Franchise Rule in 1978. The 

Commission recognizes, however, that 

application of only United States GAAP 

in today’s global economy may impede 

competition from foreign franchisors. 

Accordingly, a more flexible approach is 

warranted, especially in the absence of 

any evidence in the record that financial 

statements prepared by foreign 

franchisors to date have been deceptive 

or misleading. 

In determining whether to maintain 

the original Rule’s stance on the use of 

GAAP in Item 21 financial statements, 

the Commission focuses strongly on the 

primary purpose of a disclosure 

document, which is to provide 

prospective franchisees with material 

information in a clear and conspicuous 

manner. Consistent with that principle, 

the Commission believes that 

franchisors must present financial data 

in a format that is meaningful to 

American prospective franchisees, as 

well as to their advisors. To that end, 

the suggestion offered by IL AG—that 

foreign franchisors use United States 

GAAP or reconcile their financial 

statements to United States GAAP—

adds needed flexibility, while reducing 

costs and burdens on foreign 

franchisors. As noted in the Staff 

Report, this is the very position adopted 

by the SEC for the registration of 

securities by foreign companies.659

The SEC permits foreign companies 

registering securities to prepare 

financial statements using accounting 

procedures other than United States 

GAAP under limited circumstances. The 

first prerequisite is that such statements 

be prepared ‘‘according to a 

comprehensive body of accounting 

principles.’’660 The company must also 

disclose the specific comprehensive 

body of accounting principles used to 

prepare the statements and explain 

material differences between the 

principles and United States GAAP. The 

company must also reconcile its 

statements with United States GAAP. 

For example, through additional notes, 

franchisors must reconcile figures for 

net income and total shareholders’

equity for the period presented. Finally, 

the statements must provide all 

additional disclosures required by 

United States GAAP and applicable SEC 

regulations.661

The Staff Report recommended that 

the final amended Rule permit foreign 

financial statements that satisfy the SEC 

criteria. The Commission has 

determined that that recommendation is 

sound. As a starting point, application 

of the SEC accounting standards ensures 

against deception by requiring foreign 

franchisors to establish that their 

financials are prepared ‘‘according to a 

comprehensive body of accounting 

principles.’’ Further, it adds flexibility 

and minimizes costs and burdens on 

foreign franchisors, while ensuring that 

prospective franchisees receive the same 

material financial information as they 

would receive from a domestic 

franchisor. The Commission has 

determined to adopt this flexible 

approach, given the absence of any 

showing or suggestion in the record that 

reconciled foreign financial statements 

are inherently deceptive or 

misleading.662 At the same time, we 

recognize the possibility exists that 

American accounting principles may 

evolve over time. Under the 

circumstances, Item 21 updates the 

original Rule by adding language 

designed to ensure that financial 

statements are prepared according to 

United States GAAP, ‘‘as revised by any 

future government mandated accounting 

principles, or as permitted by the 

Securities and Exchange 

Commission.’’663

b. Parent financial information 

Section 436.5(u)(iv) of the final 

amended Rule requires a franchisor to 

disclose a parent’s financial statements 

in two circumstances: (1) when the 

parent commits to perform post-sale 

obligations for the franchisor; or (2) 

when the parent guarantees obligations 

of the franchisor. This narrows the 

Franchise NPR proposal, which would 

have required disclosure of parent 

financial information in all instances.664

As with other Rule provisions, several 

commenters questioned the routine 

inclusion of parent information in a 

disclosure document. For example, 

PMR&W observed that the UFOC 

Guidelines specify only that state 

examiners may ask for audited 

financials of a parent, but the 

Guidelines do not mandate it. In its 

view, parent financial statements are not 

relevant and are rarely requested.665

Warren Lewis suggested that the 

Commission require the disclosure of 

parent financial statements ‘‘only if (i) 

the company with the control chooses to 

guarantee the obligations of the 

franchisor or subfranchisor to the 

franchisee in writing, and (ii) a copy of 

the written guarantee is included in 

Item 21 or an exhibit.’’666


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written guarantee is included in the disclosure 

document. Bundy, NPR 18, at 11 (emphasis in 

original). 

667 Two commenters voiced concern about the 

‘‘post-sale performance obligation’’ language set 

forth in the Staff Report. Specifically, they 

contended that sections 436.5(u)(1)(ii) and 

436.5(u)(1)(iv) of the Staff Report are inconsistent. 

In their view, section 436.5(u)(1)(iv) requires a 

franchisor to furnish financial statements if the 

franchisor has post-sale performance obligations. 

They then noted that is it highly unlike that a 

franchisor would ever enter into a franchise 

relationship without some post-sale obligations to 

the franchisee. The commenters concluded 

therefore that section 436.5(u)(1)(iv) requires 

franchisor financials in all instances. This 

interpretation is in direct conflict with section 

436.5(u)(1)(ii), however, that expressly permits a 

franchisor to use the financials of an affiliateguarantor. Piper Rudnick, at 3–4; Spandorf, at 8–9. 

The commenters misread section 436.5(u)(1)(iv) of 

the Staff Report. Under that section of the Staff 

Report, a franchisor must provide financial 

statements ‘‘for the franchisor, subfranchisor, and 

any parent . . . that commits to perform post-sale 

obligations for the franchisor or guarantees the 

franchisor’s obligations.’’ The reference to ‘‘postsale obligations’’ refers to ‘‘parent,’’ not to the 

‘‘franchisor.’’ If the commenter’s reading of section 

436.5(u)(1)(iv) were correct, then the section would 

have the following absurd meaning: ‘‘a franchisor 

must provide financial statements for the franchisor 

. . . that commits to perform post-sale obligations 

for the franchisor.’’ To avoid any confusion on this 

point, section 436.5(u)(1)(iv) of the final amended 

Rule has been revised to read: ‘‘Include separate 

financial statements for the franchisor and 

subfranchisor, as well as for any parent that 

commits to perform post-sale obligations for the 

franchisor or guarantees the franchisor’s 

obligations.’’

668 Where a parent guarantees performance, Item 

21 also requires a franchisor to attach a copy of the 

guarantee to the disclosure document. Although the 

UFOC Guidelines are not clear on this point, we 

believe that Item 21, Instruction v. contemplates 

this requirement. Moreover, it is sound policy. 

Before a prospective franchisee is asked to invest 

in a franchise, he or she should be able to assess 

the extent of any performance or financial 

guarantees. 

669 Bundy, at 9; H&H, NPR 9, at 21; Lewis, NPR 

15, at 17. 

670 This approach parallels the UFOC Guidelines, 

which require subfranchisor financial statements 

only when the subfranchisor is the applicant for 

franchise registration. 

671 There is no comparable provision in the 

UFOC Guidelines. The extent to which any state 

may permit a phase-in of audited financial 

statements is a matter of individual state law. For 

example, California and Illinois permit a phase-in 

of audited financial statements under limited 

conditions set forth in their franchise regulations. 

On the other hand, Virginia and Minnesota, for 

example, always require audited financial 

statements. 

672 16 CFR 436.1(a)(20)(ii). 

673Id. 

674See Franchise NPR, 64 FR at 57315. 

675 No comments were submitted on this 

modification of the original Rule’s phase-in of 

audited financial statements. 

676E.g., Duvall, ANPR 19, at 1; Baer, ANPR 25, at 

4; Kaufmann, ANPR 33, at 6; Kestenbaum, ANPR 

40, at 2; AFA, ANPR 62, at 3; IL AG, ANPR 77, at 

3; Tifford, ANPR 78, at 4; IFA, ANPR 82, at 1; 

Jeffers, ANPR 116, at 2. 

677 Bundy, NPR 18, at 11. Mr. Bundy also noted 

that an audit gives a franchisee a potential remedy 

that otherwise would be unavailable. ‘‘[T]here is no 

doubt that the auditor has liability to the franchisee 

if the auditor did not follow proper procedures and 

provide the appropriate warnings—including notes 

to the effect that the company may not be solvent 

or may be reliant upon selling more franchises for 

its economic survival.’’ Bundy, NPR 18, at 11. 

678 ‘‘The Commission should be aware that 

several of the states require the use of audited 

opening balance sheets in order to register a startup franchisor. We believe that this is another 

example of why the Franchise Rule should preempt 

inconsistent state law requirements. One set of 

financials should be acceptable throughout the 

country.’’ Baer, NPR 11, at 15. 

The Commission believes these points 

are well-taken and are consistent with 

our view expressed in other sections of 

this document that a franchisor need not 

disclose parent information in all 

instances. Therefore, proposed Item 21 

has been modified to limit a parent’s 

financial information to those 

circumstances when the parent either: 

(1) commits to perform post-sale 

obligations for the franchisor; or (2) 

guarantees obligations of the franchisor. 

To the extent that a prospective 

franchisee is asked to rely on a parent 

to perform post-sale contractual 

obligations,667 or relies on a parent’s 

guarantee, the financial stability of the 

parent becomes a material fact that 

should be disclosed.668

c. Subfranchisor financial information 

Section 436.5(u)(iv) of the final 

amended Rule also requires the 

disclosure of financial information of 

any subfranchisor. During the Rule 

amendment proceeding, a few 

commenters opined that it is 

unnecessary to require routine financial 

statements of subfranchisors: financial 

statements should be provided only by 

the entity with whom the franchisee 

will have a contractual relationship.669

The commenters, however, interpreted 

the term ‘‘subfranchisor’’ more broadly 

than it is used in the final amended 

Rule. As noted in our discussion of the 

term ‘‘franchisor’’ above, the term 

‘‘subfranchisor’’ is limited in the Rule to 

circumstances where the subfranchisor 

steps into the shoes of the franchisor by 

selling and performing post-sale 

obligations. It does not reach those 

individuals who may be called 

‘‘subfranchisors,’’ but who act like 

brokers, having no post-sale 

commitments to franchisees.670 Where a 

person—be it subfranchisor or parent 

—commits to perform under the 

franchise agreement, its financial 

information becomes material in order 

to provide prospective franchisees with 

the opportunity to assess the person’s 

financial stability before risking their 

own investment. 

d. Phase-in of audited financial 

statements 

Section 436.5(u)(2) of the final 

amended Rule retains the original Rule 

provision permitting start-up franchise 

systems to phase-in audited financial 

statements within three years.671

However, the final amended Rule 

streamlines the phase-in. Under the 

original Rule’s phase-in, a franchisor 

could furnish a balance sheet for ‘‘the 

first full fiscal year following the date 

on which the franchisor must first 

comply with [the Rule.]’’672 This can be 

problematic because it is often unclear 

when the franchisor’s first fiscal year 

ends. For example, a franchisor may 

have started selling franchises three 

months into its first fiscal year (e.g., in 

March 1, 2006, using a calendar fiscal 

year). At the conclusion of that fiscal 

year (December 31, 2006), the franchisor 

would have sold franchises for ten 

months. Yet, under the original Rule’s 

phase-in, the franchisor’s first fiscal year 

would not end until December 31, 2007, 

because the phase-in uses the language 

‘‘first full fiscal year’’ after starting to 

sell franchises.673

To clarify the timing of the phase-in, 

section 436.5(u)(2) of the final amended 

Rule replaces the word ‘‘full’’ with ‘‘first 

partial or full fiscal year’’ so that a 

franchisor’s first fiscal year will end 

consistent with its general accounting 

practices, regardless of when the 

franchisor may have started offering 

franchises within that year.674 Under 

this revised approach, the Commission 

will look to the close of the franchisor’s 

first fiscal year after selling franchises, 

regardless of whether that time period 

was a partial or full year.675

The phase-in of audited financial 

statements generated little comment 

during the Rule amendment proceeding. 

Franchisors, the AFA, and IL AG 

supported the phase-in.676 One 

franchisee advocate, however, noted, 

among other things, that the states do 

not have a comparable provision. He 

also cited Small Business 

Administration statistics showing that 

only 25% of franchisors survive five 

years. ‘‘If we excuse audited financial 

statements for the first two years, for all 

practical purposes, even more investors 

will risk losing everything.’’677 On the 

other hand, John Baer not only 

supported the phase-in, as drafted in the 

Franchise NPR, but urged the 

Commission to make it preemptive.678

NASAA supported the phase-in 

generally, but raised two concerns. First, 

NASAA observed that the phase-in 

section of the Rule does not specifically 

reference GAAP, possibly leading 

franchisors to conclude that unaudited 

financial statements need not be 

prepared according to GAAP. It urged 


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679 NASAA, at 7. See also WA Securities, at 6; 

CA Dept of Corps., at 2. 

680 16 CFR 436.1(a)(20)(i) (‘‘such statements are 

required to have been examined in accordance with 

generally accepted auditing standards by an 

independent certified or licensed public 

accountant). See also IL AG, at 9. 

681 NASAA also noted that the Staff Report 

referred incorrectly to ‘‘United States auditing 

principles,’’ when the proper accounting term is 

‘‘United States auditing standards’’ or ‘‘GAAS.’’

NASAA, at 7-8. See also WA Securities, at 6. Item 

21 of the amended Rule makes that correction. 

682 NASAA, NPR 17, at 11. 

683Id. 

684See Interpretive Guides, 44 FR at 49981 

(‘‘Franchisors may use unaudited financial 

statements . . . if they lack audited statements for 

the fiscal years to be reported when they are first 

required to furnish a basic Disclosure Document.’’). 

685 UFOC Guidelines, Item 22. 

686 See 16 CFR 436.1(g). The attached documents 

would enable prospective franchisees to compare a 

franchisor’s disclosure about the parties’ legal 

obligations with the actual agreements that will 

govern the franchise relationship. In the original 

SBP, the Commission recognized that this 

requirement ‘‘will therefore have a remedial effect 

in that it will encourage accurate discussion of the 

required information in the disclosure statement.’’

Original SBP, 43 FR at 59696. 

687 Gurnick, NPR 21, at 7. 

688 Item 23 of the final amended Rule differs from 

the Franchise NPR in one respect. It deletes the 

Franchise NPR proposal that franchisors obtain a 

signed copy of the Item 23 receipt five days in 

advance of a prospective franchisee’s signing the 

franchise agreement or payment of a fee in 

connection with the franchise sale. Franchise NPR, 

64 FR at 57344. The Commission proposed this 

requirement in the Franchise NPR to ensure that the 

prospective franchisee in fact received the 

disclosures before the franchisor finalized the 

franchise sale. This proposal prompted comments 

both for and against the proposal. Compare 

PMR&W, NPR 4, at 5 with Baer, NPR 11, at 15. The 

Staff Report recommended that this provision be 

deleted. Staff Report, at 207–08. For the reasons 

stated in the Staff Report, we agree. Franchisors 

always have the burden of proof to establish 

compliance with the Rule’s disclosure and timing 

provisions. In addition, the amended Rule’s general 

recordkeeping requirements at section 436.6—

requiring franchisors to retain a copy of each signed 

receipt for at least three years—are sufficient to 

prove compliance. Finally, given the elimination of 

the automatic contract review waiting period from 

the final amended Rule, the addition of another 

waiting period would add an unnecessary 

compliance burden. 

689 Other Commission trade regulation rules 

contain similar messages. E.g., Energy Guides, 16 

CFR Part 305, App. L. (‘‘Compare the energy use 

. . . with others before you buy.’’); Cooling-Off 

Rule, 16 CFR 429.1 (Notice of right to cancel); Used 

Car Rule, 16 CFR 455.2 ( ‘‘Below is a list of some 

major defects that may occur in used motor 

vehicles.’’). 

690See IL AG, NPR 3, at 9 (‘‘If no disclosure 

document is provided we would hope it would 

make the franchisee refuse to sign the receipt. . . . 

[T]he receipt is an extremely important document 

when a franchisee later alleges that disclosure was 

never effected.’’). See also Baer, NPR 11, at 15. 

the Commission to apply GAAP to all 

financial statements, audited or 

unaudited.679 We agree. There are two 

prerequisites for financial statements: 

(1) the data underlying the statement 

must be prepared according to GAAP (or 

according to SEC standards), and (2) the 

financials must be audited according to 

United States generally accepted 

audited standards (‘‘GAAS’’).680 The 

phase-in of audited financials addresses 

only the second prerequisite—audits. 

Where a franchisor takes advantage of 

the phase-in, it nonetheless must satisfy 

the first prerequisite, preparing its 

financial data according to GAAP (or 

SEC standards). 

Nevertheless, we believe that the final 

amended Rule already is clear on this 

point. As noted above, the introduction 

to Item 21 starts with the first 

prerequisite—that financial statements 

must be prepared according to ‘‘United 

States generally accepted accounting 

principles, as revised by any future 

government mandated accounting 

principles, or as permitted by the 

Securities and Exchange Commission.’’

Item 21 then discusses the second 

prerequisite—audits: with the exception 

of the phase-in of audited financials, 

‘‘financial statements must be audited 

. . . using generally accepted United 

States auditing standards.’’ Thus, the 

Rule makes clear that the phase-in 

modifies the GAAS prerequisite only; 

the accounting prerequisite still 

continues to apply to all financial 

statements prepared under Item 21.681

NASAA also questioned the reference 

to ‘‘start-ups’’ in the phase-in provision. 

It voiced concern that: ‘‘[i]f a major 

corporation that has been in business for 

many years and then begins to 

franchise, that corporation should not 

enjoy the same exemption from 

disclosing audited financial statements 

as a new company that just organized as 

a true ‘start up’ franchise system.’’682

The NASAA Project Group suggested 

that franchisors that have been in any 

type of business for three years or more, 

not just the business of selling 

franchises, should be required to 

provide audited financial statements.683

The Commission believes NASAA’s 

point is well-taken, and, therefore we 

wish to clarify that for Item 21 purposes, 

the term ‘‘start-up’’ is to be read 

narrowly, meaning entities that are new 

to franchising and that ordinarily have 

not prepared audited financials 

statements to date. Any non-franchise 

company that has prepared audited 

financials in the ordinary course of 

business must include such audited 

financials in its disclosure documents if 

it decides to begin offering 

franchises.684 The phase-in is also not 

intended for spin-offs, affiliates, or 

subsidiaries of a franchisor, where the 

franchisor has been engaged in 

franchising or has prepared audited 

financial statements for any other 

purpose. 

24. Section 436.5(v) (Item 22): Contracts 

Consistent with the UFOC Guidelines, 

section 436.5(v) requires franchisors to 

attach to the disclosure document a 

copy of all relevant agreements, such as 

the franchise agreement, leases, options, 

or purchase agreements.685 This is 

substantively similar to the original 

Rule requirement that franchisors 

provide prospective franchisees with 

copies of relevant documents at least 

five business days prior to the date of 

execution.686 The final amended Rule’s 

Item 22 is identical to the Item 22 

proposed in the Franchise NPR. 

Only one comment was submitted on 

Item 22. In response to the Franchise 

NPR, David Gurnick expressed concern 

that the term ‘‘contract’’ could be 

misinterpreted to suggest that Item 22 

requires the disclosure of post-sale 

settlement agreements. He suggested 

that Item 22 should expressly state that 

‘‘the contracts to be attached do not 

include forms of negotiated settlement 

agreements,’’ especially since the terms 

of any such agreements are unknown at 

the time of sale.687 While it is possible 

that a franchisor may misread Item 22 

to include future settlement 

negotiations, we do not believe this is 

likely. Item 22 refers to those contracts 

that involve the franchise offering at the 

time of the sale. Clearly, franchisors 

cannot disclose something that may 

only exist at some future date. 

Therefore, we decline to revise Item 22, 

as this commenter suggested. 

25. Section 436.5(w) (Item 23): Receipts 

Section 436.5(w) of the final amended 

Rule reduces inconsistencies with the 

UFOC Guidelines by adopting the UFOC 

Guidelines Item 23 requirement that 

franchisors include an acknowledgment 

of receipt in the disclosure 

document.688 The original Rule has no 

counterpart. Like the cover page, the 

receipt serves an important educational 

purpose,689 informing prospects that 

they have 14 calendar-days to review 

the disclosures, that they should receive 

certain attachments, and that they can 

report possible law violations.690

At the same time, Item 23 is flexible, 

affording franchisors and franchisees 

greater latitude in demonstrating receipt 

than the comparable UFOC Guidelines 

provision. Whereas UFOC Item 23 

requires franchisors to acknowledge 

receipt with a handwritten signature, 

Item 23 updates the Rule by allowing 

the parties to use electronic 

acknowledgments of receipt. As 

discussed in the definitions section 

above, the term ‘‘signature’’ includes not 

only written signatures, but electronic 


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691 Item 23 also provides that franchisors may 

include specific instructions on how prospects 

should submit the receipt, such as via facsimile or 

email. This enables the parties to determine for 

themselves the most efficient and cost-effective way 

for the prospective franchisee to transmit the 

acknowledgment. 

692 Lewis, NPR 15, at 18. 

693 Lewis, NPR 15, at 18. 

694 NASAA, NPR 17, at 11. 

695 H&H, NPR 9, at 21. 

696 At the same time, the final amended Rule 

prohibits a franchisor from failing to furnish 

disclosures earlier in the sale process, upon 

reasonable request. See section 436.9(e). 

697 The version of Item 23 proposed in the 

Franchise NPR referenced ‘‘any subfranchisor or 

broker.’’ Staff recommended instead ‘‘franchise 

seller,’’ and the Commission has adopted this 

approach. 

698 Wiggin & Dana, at 4; Piper Rudnick, at 4; J&G, 

at 7; Duvall, at 2. 

699 This does not mean that a franchisor must 

create individualized disclosure documents for 

each franchise sale. Clearly, a franchisor could 

create a receipt with a fill-in-the-blank for the 

seller’s information. The company or its agent could 

fill in the blank with the appropriate information 

prior to furnishing the disclosure document. 

700 Franchise NPR, 64 FR at 57345. 

701 The Staff Report proposed the same general 

instructions. Staff Report, at 208–09. 

702 Franchise NPR, 64 FR at 57345. 

signatures, passwords, security codes, 

and other devices that enable a 

prospective franchisee to easily 

acknowledge receipt, confirm his or her 

identity, and submit the information to 

the franchisor.691

Item 23 of the final amended Rule 

also incorporates several suggestions 

offered by commenters. For example, 

Warren Lewis advised that the title of 

Item 23 should be ‘‘receipts,’’ observing 

that the current industry practices is to 

have two receipts at the end of the 

disclosure document, one the franchisee 

retains as part of the disclosure 

document and the other returned to the 

franchisor.692 He also urged the 

Commission to replace ‘‘franchisee’s 

signature’’ used in the Franchise NPR 

version of Item 23 with ‘‘prospective 

franchisee’s signature,’’ noting that 

some prospective franchisees object to 

signing receipts as ‘‘franchisees,’’ since 

this designation is inaccurate until they 

have actually signed the franchise 

agreement.693 NASAA also suggested 

that the Commission clarify that the 

acknowledgment page must be placed as 

the last two pages of the disclosure 

document. It observed that ‘‘[t]he States 

that review franchise offerings have 

noted many instances where this page 

was buried in the middle of the 

disclosure document.’’694 We believe 

these suggestions are sound, and Item 

23 of the final amended Rule reflects 

these changes. 

Another commenter addressed the 

second paragraph of the Item 23 receipt. 

As proposed in the Franchise NPR, this 

paragraph stated, in relevant part: ‘‘If 

[name of the franchisor] offers you a 

franchise, it must provide this 

disclosure document to you 14 days 

before the earlier of: (1) the signing of 

a binding agreement; or (2) any payment 

to [name of franchisor or affiliate].’’

H&H urged the Commission to 

substitute ‘‘binding agreement’’ with 

‘‘binding agreement with the franchisor 

or any of its affiliates.’’ The firm 

asserted that the franchisor cannot 

control whether a prospective 

franchisee proceeds to commit with 

independent, third parties before 

expiration of the 14 day period.695 As 

noted in our discussion of the 

disclosure trigger above, we agree with 

this approach and have revised Item 23 

of the final amended Rule 

accordingly.696

At the same time, we reject several 

suggestions offered in response to the 

Staff Report to modify Item 23. Four 

commenters noted that Item 23, as 

recommended in the Staff Report, 

requires franchisors to state the name, 

principal business address, and 

telephone number of each ‘‘franchise 

seller’’ in the receipt.697 These 

commenters maintained that this 

disclosure requirement is a carry-over 

from the UFOC Item 2 requirement, now 

eliminated in the final amended Rule, 

that franchisors disclose brokers. They 

urged the Commission to delete the 

reference to ‘‘sellers’’ in Item 23 as well, 

asserting that this requirement would 

result in franchisors having to disclose 

potentially hundreds of names.698

As a preliminary matter, we note that 

UFOC Item 2 requires not only the 

naming of brokers, but a statement about 

their prior experience. Also, once an 

individual is named in Item 2, the 

franchisor must also disclose their 

litigation history in UFOC Item 3 and 

their bankruptcy history in UFOC Item 

4. As discussed previously, we believe 

such extensive disclosures are 

unnecessary with respect to brokers. 

Nonetheless, we believe that a 

prospective franchisee should have 

contact information for any seller with 

whom he or she is dealing.699

Accordingly, the disclosure of ‘‘sellers’’

in the Item 23 receipt is to be read 

narrowly, referring to the specific 

individual(s) dealing with the 

prospective franchisee. This approach is 

also helpful for law enforcement 

purposes, identifying who may be 

responsible for furnishing the 

disclosures. Accordingly, we believe 

there are sufficient grounds for retaining 

the seller disclosure in Item 23. 

D. Section 436.6: General Instructions 

Section 436.6 of part 436 sets forth the 

basic instructions for preparing a 

disclosure document. In the Franchise 

NPR, the Commission proposed two 

new sections that would set forth the 

basic instructions for preparing a 

disclosure document. The first section—

Franchise NPR section 436.6—set forth 

general instructions applicable to all 

disclosure documents.700 Specifically, 

the Franchise NPR proposed retaining 

the original Rule’s three basic 

instructions: (1) that disclosures be 

prepared clearly, legibly, and concisely 

in a single document; (2) that 

franchisors respond positively or 

negatively to each disclosure item; and 

(3) that franchisors do not add any 

materials to a disclosure document, 

except for information required or 

permitted by non-preempted state law. 

The proposed instructions also 

contained the Commission’s current 

policy that subfranchisors should 

provide disclosures about the 

franchisor, and, to the extent applicable, 

about themselves. Consistent with the 

UFOC Guidelines, disclosure 

documents would also have to be 

written in plain English.701 None of 

these basic instructions generated any 

significant comment in response to the 

Franchise NPR or Staff Report. 

In a second section—Franchise NPR 

section 436.7—the Franchise NPR 

proposed specific instructions 

pertaining to electronic disclosures.702

In order to prevent fraud and 

circumvention of the Rule’s pre-sale 

disclosure requirements, the Franchise 

NPR proposed, among other things, that: 

(1) prospective franchisees consent to 

receiving electronic disclosures; and (2) 

franchisors using electronic media 

provide prospective franchisees with a 

paper summary document containing an 

expanded cover page, table of contents, 

and acknowledgment of receipt. In 

addition, it called for all disclosures to 

be in a form that would permit each 

prospective franchisee to download, 

print, or otherwise maintain the 

document for future reference. 

Multimedia features—such as audio, 

video, ‘‘pop-up’’ screens, and external 

links—would be prohibited in all 

disclosure documents. In order to 

facilitate the reading of an electronic 

disclosure document, however, the 

Franchise NPR proposed permitting 

franchisors to include navigational 

tools, such as internal links, scroll bars, 

and search features. Finally, the 

Franchise NPR proposed that 

franchisors furnishing disclosure 

documents electronically retain a 


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703 15 U.S.C. 7001. 

704 15 U.S.C. 7006(1). 

705 15 U.S.C 45(a); 53(b); 57b. 

706 Franchise NPR, 64 FR at 57301, 57333. A 

showing of knowledge is necessary when seeking to 

hold an individual liable for redress for a 

corporation’s law violations in Section 5 matters, as 

discussed further below. 

707 Baer, NPR 11, at 10. 

708Id. 

709 Tricon, NPR 34, at 6. See also Baer, NPR 11, 

at 10. 

710 NASAA, NPR 17, at 3. 

711E.g., FTC v. Amy Travel Servs., Inc., 875 F.2d 

564, 573 (7th Cir.), cert denied, 439 U.S. 954 (1989); 

FTC v. Atlantex Assocs., 1987–2 Trade Cas. (CCH), 

¶ 67788 at 59255 (S.D. Fla. 1978), aff’d, 872 F.2d 

966 (11th Cir. 1989); FTC v. Kitco of Nevada, 612 

F. Supp. 1282, 1292 (D. Minn. 1985). Under Section 

5 case law, it is also clear that individual franchise 

salespersons are also directly liable for their own 

misrepresentations in connection with franchise 

sales. See, e.g., FTC v. J.K. Publ’ns, Inc., 99 F. Supp. 

2d 1176, 1203 and note 67 (C.D. Cal. 2000). 

712 Mr. Kaufmann observed that the New York 

Franchise Act imposes liability upon any officer, 

director, or management employee who materially 

aids in the act or transaction constituting the 

violation of the Act. Lack of knowledge after due 

diligence is a defense. Kaufmann, at 7–8. 

713See also Cendant, at 2–3 (suggesting that the 

following liability standard: ‘‘Any other franchise 

seller will be liable for the violations . . . if he or 

she directly participated in preparation of the 

disclosure document.’’). 

specimen copy of their disclosures for a 

period of three years. 

On June 30, 2000, Congress enacted 

the Electronic Signatures in Global and 

National Commerce Act (‘‘E–SIGN’’).703

E–SIGN eliminates barriers to 

ecommerce by, among other things, 

giving legal effect to electronic 

transactions, including pre-sale 

disclosure, and permitting electronic 

signatures. Further, E–SIGN preserves 

certain consumer rights. Specifically, it 

provides that consumers must give their 

informed consent before engaging in 

electronic transactions and requires 

companies to disclose any rights 

consumers may have to receive paper 

records and to withdraw previouslygiven consent to receive electronic 

records. E–SIGN, however, limits such 

rights to ‘‘consumer’’ transactions, 

defining ‘‘consumer’’ to mean an 

‘‘individual who obtains, through a 

transaction, products or services which 

are used primarily for personal, family, 

or household purposes.’’704 Thus, by its 

terms, E–SIGN may have prohibited 

restrictions such as those proposed in 

the Franchise NPR for electronic 

franchise disclosure. 

In light of E–SIGN, the Commission 

has reconsidered the Franchise NPR 

proposals. As explained below, the final 

amended Rule eliminates the Franchise 

NPR’s proposed electronic disclosure 

instructions—Franchise NPR section 

436.7. In lieu of specific electronic 

disclosure instructions, the final 

amended Rule contains a broad general 

instructions section that covers the 

furnishing of all disclosure documents, 

paper and electronic alike. We discuss 

each general instruction immediately 

below. 

1. Section 436.6(a): Requirement to 

follow the Rule’s disclosure and 

updating provisions 

Section 436.6(a) of the final amended 

Rule provides that it is an ‘‘unfair or 

deceptive act or practice in violation of 

Section 5 of the FTC Act for any 

franchisor to fail to include the 

information and follow the instructions 

for preparing disclosure documents set 

out in Subpart C (basic disclosure 

requirements) and Subpart D (updating 

requirements) of the Rule. The 

Commission will enforce this provision 

according to the standards of liability 

applicable in actions under Sections 5, 

13(b), and 19 of the FTC Act.’’705

The original Rule specified that 

franchisors and franchise brokers are 

jointly and severally liable for 

furnishing disclosure documents. 

However, it did not specifically address 

who would be liable for a disclosure 

document’s content. During the Rule 

amendment proceeding, the 

Commission sought to clarify liability 

for preparing disclosures, proposing in 

the Franchise NPR that franchise sellers 

would be liable for the contents of a 

disclosure document if they knew or 

should have known of the violation.706

A few commenters voiced concern 

about the proposed standard. John Baer, 

for example, stated that the Franchise 

NPR proposal imposed an ‘‘impossible’’

standard of liability: 

As anyone who has drafted an 

Offering Circular can testify, there 

is no certainty as to the nature of 

the information that has to be 

included in the various disclosure 

sections of the Offering Circular and 

reasonable persons often differ in 

good faith as to what has to be 

disclosed.707

He suggested that the Commission 

revise the standard to ‘‘make it a 

violation for a franchisor to fail to use 

‘commercially reasonable good faith 

efforts’ to disclose the required 

information.’’708 Similarly, Tricon 

stated that the proposal would result in 

all employees being potentially liable 

for Rule violations, even those 

employees who are not involved in any 

franchise sales. According to Tricon, an 

employee should not be liable, even if 

that person had actual knowledge, 

unless that person: 

(a) knew (or should have known) 

the legal significance of those facts, 

and (b) was in a position to 

influence the outcome of the matter. 

For example, a secretary could 

‘‘know’’ that financial performance 

data was routinely provided to 

buyers, but neither knew the 

significance of doing so nor be in a 

position to stop the practice.709

In contrast, NASAA supported the view 

that franchisors and individual owners 

of franchisors should be held liable for 

Rule violations ‘‘regardless of whether 

they knew or should have known of the 

violation.’’710

Based upon the comments, the staff 

recommended a revised liability 

standard in the Staff Report. The staff 

noted that all Commission trade 

regulation rules implement Section 5 of 

the FTC Act and, therefore, the final 

amended Rule should incorporate the 

standard of liability developed in 

Section 5 cases. Under Section 5 law, 

individuals can be enjoined in 

connection with a corporation’s law 

violations if they participated directly in 

them or had the authority to control 

them.711 Applying this standard to the 

Franchise Rule, the Staff recommended 

that franchise sellers (for example, 

third-party brokers and franchisor 

employees) be liable for the content of 

a disclosure document if they either 

directly participated in the document’s 

creation or had authority to control it. 

Several commenters voiced concern 

about the Staff Report’s proposed 

‘‘direct participation or control’’ liability 

standard. In particular, the commenters 

asserted that the ‘‘authority to control’’

language is too broad. For example, 

David Kaufmann noted that all senior 

officers of a corporate franchisor 

technically could be deemed to have the 

authority to control the contents of a 

disclosure document and, therefore, 

could be deemed liable, even if they 

were unaware of the particular 

violation, or had no responsibility for 

it.712 Mr. Kaufmann opined, however, 

that it is appropriate to hold an 

individual liable for directly 

participating in a content violation.713

J&G criticized the Staff Report’s 

proposed liability standard as imposing 

strict liability for all sellers even where 

their ‘‘control’’ is limited, attenuated, or 

indirect. According to J&G, under the 

standard recommended in the Staff 

Report, liability could be found for 

employees, advisors, consultants, 

attorneys, and accountants of a 

franchisor who ‘‘participate’’ in the 

preparation of a disclosure document or 

in the sales process in some manner. 

Outside consultants, advisors, and 

attorneys could be held liable even if 


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714 J&G, at 3–4. 

715 Bundy, at 2. 

716FTC v. Publ’g Clearing House, Inc., 104 F.3d 

1168, 1170 (9th Cir. 1997). See also FTC v. J.K. 

Publ’ns, Inc., 99 F. Supp. 2d at 1203; FTC v. Am. 

Standard Credit Sys., Inc., 874 F. Supp. 1080, 1087 

(C.D. Cal. 1994). Authority to control the company 

can be evidenced by active involvement in business 

affairs and the making of corporate policy, 

including assuming the duties of a corporate officer. 

FTC v. Amy Travel Serv., Inc., 875 F.2d at 573. 

Similarly, an individual’s status as a corporate 

officer and authority to sign documents on behalf 

of the corporate defendant can be sufficient to 

demonstrate the requisite control. FTC v. Publ’g 

Clearing House, Inc., 104 F.3d at 1170. 

717See FTC v. Five-Star Auto Club, Inc., 97 F. 

Supp. 2d 501 (S.D.N.Y. 2000) (individual defendant 

participated directly in the deceptive acts or 

practices by, among other things, drafting and/or 

approving marketing materials); FTC v. Atlantex 

Assocs.,1987–2 Trade Cas. (CCH), ¶ 67788 

(individual defendant liable because he had the 

authority to control the company’s actions, 

including the authority to control representations 

made by salespeople). 

718FTC v. Amy Travel Serv., Inc., 875 F.2d at 574. 

See also FTC v. J.K. Publ’ns, Inc., 99 F. Supp. 2d 

1176 at 1204; FTC v. Atlantex Assocs., 1987–2 

Trade Cas. ¶ 67788; FTC v. Kitco of Nevada, Inc., 

612 F. Supp. at 1282. For the Commission to obtain 

civil penalties against a defendant, the standard of 

knowledge is even higher: ‘‘actual knowledge or 

knowledge fairly implied on the basis of objective 

circumstances that [the] act or practice is unfair or 

deceptive and is prohibited by such rule.’’ 15 U.S.C. 

45(m)(1)(A). 

719FTC v. Publ’g Clearing House,104 F.3d at 1171; 

FTC v. Am. Standard Credit Sys., Inc., 874 F. Supp. 

at 1089; FTC v. Minuteman Press, Int’l, 53 F. Supp. 

2d 248, 259–260 (E.D.N.Y. 1998); FTC v. Int’l 

Diamond Corp., 1983–2 Trade Cas., ¶ 65725 at 

69707 (N.D. Cal. 1983). It is axiomatic that the 

Commission need not show intent to defraud, or 

bad faith. See, e.g., FTC v. World Travel Vacation 

Brokers, Inc., 861 F.2d 1020, 1029 (7th Cir. 1988) 

(citing Beneficial Corp. v. FTC, 542 F.2d 611, 617 

(3rd Cir. 1976), cert denied, 430 U.S. 983 (1977)); 

Removatron Int’l Corp. v. FTC, 884 F.2d 1489, 1495 

(1st Cir. 1989) (citing Chrysler Corp. v. FTC, 561 

F.2d 357, 363 (D.C. Cir. 1977)); Regina Corp. v. FTC, 

322 F.2d 765, 768 (3rd Cir. 1963); FTC v. Patriot 

Alcohol Testers, Inc., 798 F. Supp. 851, 855 (D. 

Mass. 1992). 

720See, e.g., FTC v. Five-Star Auto Club, 97 F. 

Supp. 2d at 501 (failure to reform program in light 

of extensive state law enforcement cease and desist 

orders shows reckless indifference to the truth, or 

an awareness of high probability of fraud coupled 

with an intentional avoidance of the truth); FTC v. 

Safety Plus, Inc., No. 91–352 (E.D. Ky. 1992) (taking 

affirmative steps to remedy deceptive practices 

shows knowledge of the deceptive practices). 

721See FTC. v. H.N. Singer, Inc., 668 F.2d 1107 

(9th Cir. 1982) (sales manager liable for restitution 

because of his authority to control and knowledge 

of the deceptive acts and practices of his 

salespeople). 

722 Franchise NPR, 64 FR at 57345. See 16 CFR 

436.1(a) and 436.1(a)(21). The ‘‘single document’’

requirement prevents ‘‘piecemeal and confusing 

disclosures by the franchisor.’’ Original SBP, 43 FR 

at 59682. 

723See Bundy, ANPR, 6 Nov. 97 Tr., at 129 

(disclosures need to be either downloaded onto disk 

or provided in paper form). 

724 Franchise NPR, 64 FR at 57345. See 16 CFR 

436.1(a)(24). This instruction is intended to ‘‘aid the 

franchisee in using the disclosure document and 

[is] intended as a remedial measure to prevent 

franchisors’ violations of the rule and the [FTC] 

Act.’’ Original SBP, 43 FR at 59684. 

725See 16 CFR 436.1(a)(24). 

they had no knowledge of the facts 

underlying the violation.714

On the other hand, Howard Bundy 

argued that those in a corporate 

structure who have ‘‘authority to 

control’’ content should be liable for 

conduct of the corporation. ‘‘This is 

consistent with what Congress and the 

SEC have mandated in the post-Enron 

world with regard to officers of a public 

corporation.’’715 Mr. Bundy stated that a 

broad standard is important to force 

responsibility for accuracy and 

completeness to the highest levels in the 

franchisor’s organization. 

Because violations of part 436 

constitute violations of Section 5, the 

Commission is persuaded that liability 

for the content of a disclosure document 

must be based upon liability standards 

applicable in FTC enforcement actions 

under Sections 5, 13(b), and 19. In that 

regard, there is a distinction between 

the standard of liability for injunctive 

relief and that for redress. In general, 

case law establishes that an individual 

may be enjoined for corporate 

misconduct if he or she participated 

directly in the wrongful practice or had 

the authority to control the corporate 

defendant.716 In the franchise context, 

an officer or director of a franchisor may 

be enjoined against violating the Rule if 

the officer or director, for example, has 

authority to control or directly prepared, 

or directed others to prepare, false or 

otherwise inaccurate disclosure 

documents.717

In order to hold an individual liable 

to pay consumer redress, however, the 

Commission must show more than just 

authority to control the corporation. It 

must show the individual possessed 

some level of knowledge or awareness 

of the misrepresentations.718 The 

Commission may establish the requisite 

knowledge by showing that the 

individual had ‘‘actual knowledge of 

material misrepresentations, or an 

awareness of a high probability of fraud 

along with an intentional avoidance of 

the truth.’’719 For example, an officer or 

director of a franchisor would be liable 

for redress if he or she directed the 

franchisor’s employees to prepare false 

or misrepresented disclosures, or failed 

to stop the company from using a faulty 

disclosure document that one or more 

states had previously rejected as 

insufficient.720 Similarly, a franchisor’s 

sales manager could be held 

individually liable for redress where the 

sales manager has authority to control 

those preparing disclosure documents, 

and has knowledge that the disclosures 

are false, or otherwise inaccurate.721

2. Section 436.6(b): Formatting 

requirements 

As proposed in the Franchise NPR, 

section 436.6(b) of the final amended 

Rule specifies that all disclosures must 

be prepared ‘‘clearly, legibly, and 

concisely in a single document.’’722 At 

the same time, it includes the UFOC 

Guidelines requirement that disclosures 

must be prepared using plain English. It 

also updates the UFOC Guidelines to 

address electronic disclosure: section 

436.6(b) provides that disclosures must 

be in a form that ‘‘permits each 

prospective franchisee to store, 

download, print, or otherwise maintain 

the document for future reference.’’ This 

prevents deception, ensuring that 

prospective franchisees can review the 

disclosure document at will, as well as 

show a copy of the disclosure document 

to their advisors, if they wish to do 

so.723 Thus, for example, a franchisor 

would violate section 436.6(b) if it 

sought to provide disclosures merely by 

permitting a prospect to glance at a 

paper copy of its disclosure document, 

providing a continuous loop video of its 

disclosure document at a trade show, or 

transmitting its disclosures via email or 

the Internet in a format that was 

incapable of being downloaded or 

printed. No comments addressed this 

issue. Accordingly, the final amended 

Rule adopts this provision as proposed 

in the Franchise NPR. 

3. Section 436.6(c): Affirmative 

responses 

Consistent with the original Rule and 

Franchise NPR, section 436.6(c) of the 

final amended Rule specifies that 

franchisors must respond affirmatively 

or negatively to each disclosure item.724

If a disclosure item is not applicable, 

then the franchisor must respond 

negatively, including a reference to the 

type of information required to be 

disclosed by the Item. For example, a 

franchisor without any litigation would 

state something to the effect: ‘‘The 

franchisor has no litigation required to 

be disclosed by Item 3.’’ In addition, 

each disclosure item must contain the 

appropriate heading.725 No comments 

addressed this issue. Accordingly, the 

final amended Rule adopts this 

provision as proposed in the Franchise 

NPR. 

4. Section 436.6(d): Additional materials 

The final amended Rule retains the 

original Rule’s policy prohibiting 

franchisors from including additional 

materials in their disclosures, except for 

information ‘‘required or permitted by 

this Rule or by state law not pre-empted 


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726 Franchise NPR, 64 FR at 57345. See 16 CFR 

436.1(a)(21). The Franchise NPR referred to ‘‘any 

materials or information other than that required by 

this Rule or by state law not preempted by this 

Rule.’’ One commenter noted that because some of 

the proposed Rule’s disclosures are optional (such 

as the Item 19 financial performance disclosures), 

the prohibition on additional information should 

read ‘‘any materials or information other than that 

required or permitted by this Rule . . .’’ Lewis, 

NPR 15, at 19. We agree, and the final amended 

Rule reflects this change. 

727See Original SBP, 43 FR at 59682. Accordingly, 

franchisors may include information expressly 

required or expressly permitted by state law or 

information requested by a state franchise 

examiner. This provision is not intended to permit 

franchisors to include any information (such as 

testimonials or general promotional materials) in a 

disclosure document on the ground that it is not 

specifically prohibited by state law. 

728 The prohibition on external links, like the 

requirement that a disclosure be a single document, 

effectively prevents franchisors from furnishing 

disclosures through a series of linked, but separate, 

documents. This ensures that electronic 

disclosures, in particular, can be downloaded and 

printed in their entirety. See Bundy, NPR 18, at 13 

(suggesting that the Rule should expressly require 

that all exhibits and attachments must be part of the 

single disclosure document and it should prohibit 

external links). If not, a prospective franchisee 

downloading or printing an electronic disclosure 

document may only capture isolated sections. This 

would violate the very concept of full disclosure 

underlying the Rule. 

729 BI commented that a prohibition on the use 

of multimedia features ‘‘appears to be overly 

broad.’’ BI, NPR 28, at 8. It proposed that the 

Commission consider that some features may assist 

a prospective franchisee in reading a disclosure 

document. BI, however, did not specify which 

features it had in mind or how those features might 

assist prospective franchisees. 

730 Frandata, for example, observed that internal 

links will enable a prospective franchisee to shift 

between the disclosure document and 

corresponding agreement provisions, ‘‘thus 

affording a franchisee a more intelligent and 

efficient review of a disclosure document.’’

Frandata, NPR 29, at 4. Indeed, Frandata suggested 

that the Commission formulate a specific set of 

cross-links and features in order to ensure that all 

electronic disclosure documents are uniform. In its 

view, uniformity would foster comparison shopping 

among franchise offers. In addition, it would avoid 

stigmatizing those franchise systems that fail to 

incorporate features in their electronic disclosure 

documents. ‘‘For example, viewing a document 

with extensive search features keyed to words in 

the disclosure document might predispose a 

prospect to envision that all electronic versions 

contained such a feature, and would therefore 

create a negative impression (or customer service 

issues) for other systems which have not 

incorporated such a feature, while simultaneously 

confusing the prospect.’’ Id. We would not go so far. 

Rather than dictate the features that a franchisor 

should use in preparing disclosure documents, we 

believe the Rule should allow for maximum 

flexibility, enabling franchisors to incorporate those 

navigational features it believes are warranted. 

731 Lewis, NPR 15, at 19. See also Holmes, NPR 

8, at 9; Stadfeld, NPR 23, at 15; BI, NPR 28, at 8. 

732 Section 436.6(d), however, makes clear that 

navigational tools must be for the prospective 

franchisee’s benefit. Accordingly, a franchisor’s 

selective use of navigational tools for its own 

benefit (i.e., to draw the prospect’s attention to, or 

away from, certain disclosure items) is prohibited. 

733 We note that nothing in the Rule prohibits a 

franchisor from furnishing prospective franchisees 

with non-deceptive and non-contradictory 

information outside of its disclosure document. See 

16 CFR 436.1(a)(21) (‘‘This does not preclude 

franchisors . . . from giving other nondeceptive 

information orally, visually, or in separate literature 

so long as such information is not contradictory to 

the information in the disclosure statement.’’). 

734 Kaufmann, Attachment 1, at 10–11. In the 

same vein, Howard Bundy recommended that the 

Commission create a separate, miscellaneous 

section of a disclosure document, where a 

franchisor can add other material disclosures 

necessary to make the disclosure document nondeceptive. Bundy, at 2-3. 

by this Rule.’’726 This prohibition is 

necessary to ensure that franchisors do 

not include information that is nonmaterial, confusing, or distracting from 

the core disclosures.727 As proposed in 

the Franchise NPR, the final amended 

Rule also updates the original Rule by 

prohibiting the use of new technological 

developments, such as audio, video, and 

‘‘pop-up’’ screens, and external links,728

which could be used to call attention to 

favorable portions of a disclosure 

document or to distract prospective 

franchisees from damaging 

disclosures.729 The Commission 

recognizes, however, that navigational 

features may benefit prospective 

franchisees by making it easier to read 

an electronic disclosure document.730

To that end, the final amended Rule, 

consistent with the Franchise NPR, 

specifically permits the use of ‘‘scroll 

bars, internal links, and search 

features.’’

The prohibition against adding to a 

disclosure document generated a 

number of comments during the Rule 

amendment proceeding. Several 

commenters voiced concern that the 

prohibition against adding to a 

disclosure document ‘‘is an unfair trap 

for franchisors and subfranchisors.’’ For 

example, Warren Lewis asserted: 

[W]e note that a franchisor or 

subfranchisor sometimes needs to 

include information in a disclosure 

document that it believes is 

material or possibly material (even 

though the information is not 

required or permitted under federal 

or state law) or that it believes will 

help a prospect to better understand 

required information or its 

significance. Providing 

supplementary or explanatory 

information of this type should not 

be a rule violation, unless the 

information is excessive, 

misleading, or intentionally 

diversionary.731

The Commission believes that its 

long-standing policy limiting 

disclosures to only authorized or 

permitted materials is sound. As 

discussed above, this limitation is 

necessary to ensure that a franchisor 

does not bulk-up a disclosure document 

with unnecessary information or 

features that will discourage a 

prospective franchisee from reading the 

document or distract a prospective 

franchisee’s attention from negative 

disclosures. For example, it is entirely 

proper to prohibit a franchisor from 

including general advertising, 

testimonials, or— in the case of 

electronic media— multimedia tools, in 

its disclosure documents. On the other 

hand, the Commission recognizes that 

unique features of electronic media, 

such as scroll bars, internal links, and 

search features that may aid prospective 

franchisees in reviewing their 

disclosures. Such features serve a useful 

purpose in an electronic environment, 

and the final amended Rule specifically 

permits their use.732

In reaching this conclusion, we agree 

with the commenters’ concern that it 

may be desirable to include additional 

material information in a disclosure 

document to ensure that required 

disclosures are accurate. The 

prohibition on adding to a disclosure 

document should be read narrowly to 

prohibit the inclusion of materials that 

are not specifically required or 

permitted by the Rule.733 Where the 

Rule requires a franchisor to make a 

disclosure, however, the franchisor 

always may add brief footnotes or other 

clarifications to ensure that the 

disclosure is complete and not 

misleading. 

Finally, in response to the Staff 

Report, David Kaufmann asserted that 

the prohibition against adding to a 

disclosure document set forth at section 

436.6(d) creates an inconsistency with 

state anti-fraud laws that require a 

disclosure document to contain all 

material information.734

Section 436.6(d) is not intended to 

preempt state law. As previously 

discussed, a franchisor can always 

include information in a disclosure 

document that is required by state law. 

Typically, such state disclosures will 

arise in two circumstances. First, state 

law may require specific disclosures 

that go beyond those required by the 

Franchise Rule, or may contain a broad 

anti-fraud provision requiring 

franchisors to include in their 

disclosure document all material 

information. Second, a state franchise 

examiner may require, as a matter of 

discretion, on a case-by-case basis, a 

particular disclosure in order to prevent 

deception by a franchisor. In either 

instance, the final amended Rule 

accommodates state interests by 

permitting the franchisor to add state 


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735 Franchise NPR, 64 FR at 57345. 

736See Interpretive Guides, 44 FR at 49969. While 

the Commission has allowed some flexibility in 

how franchisors and subfranchisors should prepare 

disclosure documents, it also made clear that both 

‘‘the franchisor and the subfranchisor are 

responsible for each other’s compliance with the 

rule, and are jointly and severally liable for each 

other’s violations.’’ Id. The Commission also stated 

that it expects franchisors and subfranchisors to 

provide the required background information, 

litigation, and bankruptcy disclosures of both 

parties, and that subfranchisors should provide 

franchisee statistical information in all instances. 

Id. 

737 Bundy, NPR 18, at 11. 

738 H&H, NPR 9, at 6. 

739 In our view, a new definition to address 

subfranchising is unnecessary because the term 

‘‘franchisor’’ adequately addresses the issue. The 

Commission anticipates that staff will also explain 

subfranchising more fully in the Compliance 

Guides, with hypothetical examples. 

740 This instruction is an alternative to the 

originally proposed prior-consent mandate for 

electronic disclosures. Several commenters opposed 

a prior consent requirement. See NFC, NPR 12, at 

15; Frandata, NPR 29, at 5; AFC, NPR 30, at 2. The 

NFC, for example, feared that an advance consent 

precondition would stifle new technological 

advances that would enable franchisors and 

prospective franchisees to conduct business online 

‘‘seamlessly,’’ without any additional contacts or 

discussions. NFC, NPR 12, at 15. See also 

McDonalds, NPR 7, at 2. We agree. Section 436.6 

permits a wide variety of disclosure formats, 

provided that the prospective franchisee is made 

aware of any prerequisites to using them. 

741 As noted above, the Franchise NPR proposed 

a new section—section 436.7—that set forth 

comprehensive electronic disclosure instructions. 

Among other things, that proposed section would 

have permitted prospective franchisees to furnish 

disclosures electronically only with the prospective 

franchisee’s ‘‘express consent.’’ Proposed section 

436.7(a). While an ‘‘express consent’’ requirement 

is now prohibited by E–SIGN, the underlying 

concepts—that a prospective franchisee should 

know the formats in which disclosure documents 

will be provided, and any prerequisites to obtaining 

one—nonetheless continue to apply, regardless of 

the media (i.e., paper document or electronic 

document) selected by the franchisor to comply 

with the final amended Rule. 

742 This is consistent with section 436.3(f) of the 

final amended Rule, allowing franchisors to state in 

the cover page whether alternative disclosure 

formats are available and how prospective 

franchisees may obtain one. 

743 One commenter, however, observed that this 

section does not specify how or when the franchisor 

should communicate this information to the 

prospect. Kaufmann, at 3. He suggested that the 

Commission advise in the Compliance Guides that 

franchisors may communicate this information in 

any fashion and at any time prior to furnishing the 

disclosure document it chooses— in person, 

telephonically, in writing, in email, in its marketing 

materials, or applications. Id. But see Bundy, at 10 

(asserting that the provision does not provide 

sufficient guidance, recommending that the 

Commission specify which formats are preferred). 

We agree that the final amended Rule should be as 

flexible as possible. Section 436.6(g) is not intended 

to be a new trigger or timing for disclosures 

provision. As long as the franchisor has 

communicated this information before the 14 

calendar-days for disclosure starts running, the 

franchisor has complied with this provision. 

Flexibility is also called for, provided that the 

franchisor can demonstrate that it has 

communicated the required information. For many 

systems, the easiest way to impart this information 

will be in the franchisor’s initial application form, 

or in the first written contact after acceptance of the 

application when the issue of furnishing the 

disclosure document first arises. 

744 Franchise NPR, 64 FR at 57345. 

information to its basic disclosure 

document. 

5. Section 436.6(e): Multi-state 

documents 

As proposed in the Franchise NPR, 

section 436.6(e) of the final amended 

Rule permits franchisors to ‘‘prepare 

multi-state disclosure documents by 

including non-preempted, state-specific 

information in the text of the document 

or in Exhibits attached to the disclosure 

document.’’735 This instruction will 

decrease compliance costs significantly, 

by enabling franchisors to use one, 

united disclosure document for both 

federal and state purposes. No 

comments were submitted on this issue. 

Accordingly, the final amended Rule 

adopts this provision, as proposed in 

the Franchise NPR. 

6. Section 436.6(f): Subfranchisor 

disclosures 

Consistent with the original Rule, 

section 436.6(f) makes clear that 

subfranchisors must disclose the 

required information about the 

franchisor, and, to the extent applicable, 

the same information concerning the 

subfranchisor.736

The Franchise NPR proposed that 

subfranchisors ‘‘should’’ disclose the 

required information. Howard Bundy 

suggested that the subfranchisor 

instructions be revised to replace 

‘‘should disclose’’ with ‘‘shall 

disclose.’’737 He noted that the word 

‘‘should’’ implies an advisory only, that 

is, that a subfranchisor has the 

discretion to include its own 

information in the disclosure document. 

We agree, and section 436.6(f) of the 

final amended Rule is revised 

accordingly. 

At the same time, H&H voiced 

concern about subfranchisors’

disclosure obligations, correctly 

observing that ‘‘subfranchising’’ takes 

many different forms. For example, a 

subfranchisor may in fact function as a 

franchisor by signing a franchise 

agreement with a subfranchisee, or the 

franchisor may sign the franchise 

agreement, but delegate many support 

functions to the subfranchisor. In the 

first ‘‘example, the proposed 

[disclosure] requirement may lead to 

disclosure about the franchisor in a 

subfranchise offering that is irrelevant 

and, in some circumstances, could be 

misleading to prospective 

franchisees.’’738 As discussed above in 

connection with the definition of 

‘‘franchisor,’’ subfranchisors are treated 

the same as franchisors under the Rule 

in narrow circumstances only: where 

the subfranchisor steps into the shoes of 

the franchisor by both granting 

franchises, as well as by performing 

post-sale disclosure obligations.739

Accordingly, we believe that the 

subfranchisor instructions set forth at 

section 436.6(f) are clear and no 

additional revision is necessary. 

7. Section 436.6(g): Disclosure of any 

prerequisites to receiving or reviewing 

disclosure documents 

Section 436.6(g) requires that, before 

a franchisor furnishes a disclosure 

document, it must ‘‘advise the 

prospective franchisee of the formats in 

which the disclosure document is made 

available, any prerequisites for 

obtaining the disclosure document in a 

particular format, and any conditions 

necessary for reviewing the disclosure 

document in a particular format.’’740

This provision was not previously 

noted in the Franchise NPR.741 It is 

intended to prevent deception, by 

ensuring that prospective franchisees, 

prior to disclosure, know whether or not 

they will receive a disclosure document 

in a form they can easily review.742 For 

example, a franchisor would disclose if 

it furnishes disclosures via CD-ROM 

only. In addition, the franchisor must 

disclose if there are any special 

conditions to reviewing a disclosure 

document. The franchisor would 

disclose, for example, whether the 

prospective franchisee’s computer must 

be capable of reading pdf files or 

whether any specific applications are 

necessary to view the disclosures (such 

as Windows 2000 or DOS, or a 

particular Internet browser). No 

comments were submitted on this 

proposed Rule amendment. 

Accordingly, the Commission adopts 

this provision in the final amended 

Rule.743

8. Section 436.6(h): Disclosure 

document recordkeeping 

Section 436.6(h) of the final amended 

Rule requires franchisors to ‘‘retain, and 

make available to the Commission upon 

request, a sample copy of each 

materially different version of their 

disclosure documents for three years 

after the close of the fiscal year when it 

was last used.’’ This provision modifies 

slightly the language used in the 

Franchise NPR—which limited the 

recordkeeping instruction to electronic 

disclosure documents.744 Section 

436.6(h) now applies to all disclosure 

documents, regardless of the medium 


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745 Many states require franchisors to keep 

records on franchise sales transactions. E.g., Cal. 

Corp. Code at 31150; Haw. Rev. Stat. at 482E–5; 815 

Ill. Comp. Stat. at 705/36; Md. Code Ann, Bus. Reg. 

at 14–224; Minn. Stat. at 80C.10; N.D. Cent. Code 

at 51–19–16; Or. Rev. Stat. at 650.010; R.I. Gen. 

Laws at 19–28.1–13; Wash. Rev. Code at 19.100.150. 

746 Rule enforcement actions brought under 

Section 19 of the FTC Act have a three-year statute 

of limitations. 15 U.S.C. 57b. Reliance on 

franchisees for copies of disclosure documents in 

law enforcement work is impracticable. Franchisees 

may not retain copies or may not have complete 

copies. Moreover, large franchise systems may use 

multiple versions of their disclosures over time and 

in different states. Obtaining all relevant copies 

from franchisees may be unworkable. Therefore, for 

law enforcement purposes, it is essential that 

franchisors retain copies of their disclosures for 

some length of time, consistent with state practices. 

747 Bundy, NPR 18, at 13; Stadfeld, NPR 23, at 

5. 

748See BI, NPR 28, at 7–8 (This ‘‘provides useful 

clarification regarding the minimum time period 

the Commission expects franchisors to maintain 

such records.’’). 

749 Several Commission trade regulation rules 

also require a three-year recordkeeping 

requirement. See, e.g., Wool Labeling Rule, 16 CFR 

300.31(c); Fur Labeling Rule, 16 CFR 301.41(b); 

Textile Labeling Rule, 16 CFR 303.39(c); Alternative 

Fuel Labeling Rule, 16 CFR 309.23; R-Value Rule, 

16 CFR 460.9. 

750E.g., Cal. Corp. Code at 31150; Haw. Rev. Stat. 

at 482E–5; 815 Ill. Comp. Stat. at 705/36; Md. Code 

Ann, Bus. Reg. at 14–224; Minn. Stat. at 80C.10; 

N.D. Cent. Code at 51–19–16; Or. Rev. Stat. at 

650.010; R.I. Gen. Laws at 19–28.1–13; Wash. Rev. 

Code at 19.100.150. 

751 No comments were submitted on this 

proposed Rule section. 

752See 16 CFR 436.1(a)(22). 

753See 16 CFR 436.1(a)(22). 

754See 16 CFR §§ 436.1(d)(2) and (e)(6). Section 

436.7(e) also retains the Commission’s current 

policy that audited information in a disclosure 

document need not be re-audited on a quarterly 

basis. Rather, a franchisor can update its audited 

disclosures by including unaudited information, 

provided the franchisor discloses that the 

information is unaudited. See 16 CFR 436.1(22). 

755 Franchise NPR, 64 FR at 57345 (retaining the 

original Rule’s 90-day annual update requirement). 

756 PMR&W, NPR 4, at 5. See also Baer, NPR 11, 

at 4; Lewis, NPR 15, at 19–20; IFA, NPR 22, at 11; 

J&G, NPR 32, Attachment, at 3. 

757 In response to the Staff Report, however, Gust 

Rosenfeld suggested that ‘‘120 days’’ should be 

expressed as ‘‘four months.’’ The firm noted that 

during leap years, 120 days would fall on April 29, 

or if the franchisor’s fiscal year end is June 30th, 120 

days would fall on October 28. Gust Rosenfeld, at 

7. While we recognize there may be rare instances 

where 120 days does not fall at the end of a month, 

we are reluctant to change the language of section 

436.7(a) to be inconsistent with state law. 

758 Franchise NPR, 64 FR at 57345. See also 16 

CFR 436.1(a)(22). 

759 PMR&W, for example, noted that the original 

Rule’s quarterly update requirement is a bright-line 

rule that ‘‘is clear and intelligible to franchisors and 

their counsel.’’ PMR&W, NPR 4, at 6. Similarly, the 

NFC states that a quarterly update requirement is 

consistent with long-standing Commission policy. 

NFC, NPR 12, at 16. One commenter, responding to 

the comparable provision in the Staff Report, noted 

that the Franchise NPR would have required a 

franchisor to update information quarterly ‘‘relating 

to the franchise business of the franchisor.’’ J&G, at 

used.745 This is consistent with E–SIGN, 

which generally prohibits 

discriminating between paper and 

electronic commerce. It is also 

consistent with standard business 

practices and state law requirements, 

and, therefore, should impose only a de 

minimis burden on franchisors. At the 

same time, a three-year recordkeeping 

provision will greatly assist the 

Commission in its law enforcement 

work, by ensuring the availability of 

evidence in rule enforcement actions.746

During the Rule amendment 

proceeding, a few commenters urged the 

Commission to adopt a longer 

recordkeeping requirement.747 A longer 

recordkeeping provision, no doubt, 

might also assist franchisees who wish 

to bring common law actions with 

longer limitations periods. However, we 

believe such a step is unnecessary in 

light of the other Rule instructions 

ensuring that prospective franchisees 

can retain copies of their disclosures for 

future reference. In short, franchisees 

should safeguard their disclosure 

documents post-sale, and the Rule 

instructions, as noted above, 

accommodate that interest. 

9. Section 436.6(i): Receipt 

recordkeeping 

Finally, section 436.6(i) of the final 

amended Rule requires franchisors to 

‘‘retain a copy of the signed receipt for 

at least three years.’’748 This section was 

proposed in the Franchise NPR in 

connection with the Item 23 receipt 

requirement. However, because this 

recordkeeping requirement is not a 

disclosure, but is more akin to an 

instruction, it has been moved to the 

final amended Rule’s general 

instructions section. 

Section 436.6(i)’s three-year record 

retention period is consistent with the 

statute of limitations for trade regulation 

rule enforcement actions brought under 

Section 19 of the FTC Act.749 Further, 

many franchise registration states 

already require franchisors to maintain 

complete records involving each 

franchise sales transaction.750 Therefore, 

franchisors routinely ask for and retain 

some kind of receipt in the ordinary 

course of business to protect themselves 

from any future allegations that they 

sold franchises without disclosure. 

Thus, a recordkeeping requirement is 

likely to foster compliance with the 

Rule’s disclosure obligation without 

imposing significant compliance 

costs.751

E. Section 436.7: Updating 

Requirements 

Section 436.7 of the final amended 

Rule specifies three updating 

requirements to ensure that franchisors’

disclosures are timely. In most respects, 

the updating requirements are identical 

to those set forth in the original Rule 

and Franchise NPR, and have generated 

few comments. 

First, section 436.7(a) of the final 

amended Rule retains the current 

requirement that franchisors prepare 

annual updates after the close of their 

fiscal year,752 but it has expanded the 

number of days in which franchisors are 

permitted to prepare updates from 90 to 

120 days. 

Second, sections 436.7(b) and (c) 

retain the requirement that franchisors 

update their disclosures within a 

reasonable time after the close of each 

quarter to reflect any material 

changes.753

Third, section 436.7(d) continues the 

original Rule’s policy that franchise 

sellers, when furnishing their 

disclosures, must notify prospective 

franchisees of any material changes that 

the seller knows or should have known 

in any Item 19 financial performance 

representations.754 We discuss each of 

these provisions immediately below. 

1. Section 436.7(a): Annual updates 

As noted above, section 436.7(a) 

expands the time period proposed in the 

Franchise NPR for making annual 

updates from 90 to 120 days after the 

close of the franchisor’s fiscal year.755 In 

response to the Franchise NPR, several 

commenters urged the Commission to 

adopt a 120-day requirement. For 

example, PMR&W stated that many 

franchisors have difficultly obtaining 

annual audited financial statements 

from their auditors within the current 

90-day period. Because most franchisors 

use the calendar fiscal year, company 

auditors are usually overwhelmed at the 

beginning of the fiscal year, given the 

busy tax season. Recognizing this 

problem, many state franchise regulators 

allow franchisors 120 days to prepare 

updated disclosures.756 For these 

reasons, the Commission is persuaded 

that the updating requirement should be 

expanded from the original Rule’s 90 

days to 120 days. This revision has the 

potential of reducing franchisors’

compliance burdens, while potentially 

reducing inconsistencies with state 

updating policies.757

2. Sections 436.7(b)–(c): Quarterly 

updates 

Sections 436.7(b) and (c) of the final 

amended Rule retain the original Rule 

and Franchise NPR requirement that 

franchisors update their disclosures at 

least quarterly to reflect any material 

changes.758 This requirement generated 

no significant comment during the Rule 

amendment proceeding.759 We believe it 


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7. The firm asserted that this language could require 

the disclosure of more information than is required 

by the actual disclosure Items. It suggested that the 

Commission adopt the alternative language: any 

material change to ‘‘the disclosures included, or 

required to be included, in the disclosure 

document.’’ We agree, and section 436.7(b) of the 

final amended Rule reflects that change. 

760 16 CFR 436.1(d)(2) and 436.1(e)(6). 

761 NPR, 64 at 57319. 

762 IL AG, NPR 3, at 4. See also Bundy, NPR 18, 

at 13; BI, NPR 28, at 8–9. On the other hand, the 

NFC praised the Commission’s flexibility in 

permitting notification by any means. NFC, NPR 12, 

at 16. 

763 Marriott, NPR 35, at 3–4. Marriott noted that 

it, and other large corporations, may have several 

thousand employees in different departments. Each 

department (e.g., training, legal, advertising, 

marketing) may have a different person responsible 

for a portion of the information that is in a 

disclosure document for each different brand 

offered. A continuous updating requirement: 

‘‘would place an unfair burden on franchisors 

like Marriott. For example, it will be virtually 

impossible for the Training Department (every time 

they change a subject or the hours allotted to a 

particular subject in the training program) . . . to 

contact Legal and for Legal to determine if the 

change is material and to then contact development 

to make sure before the closing of every franchise 

deal that there is not a particular piece of 

information that must be notified to a franchisee. 

This requirement will cause complete havoc in the 

franchise sales process. Franchisors will not be able 

to close sales without notifying every department 

out of fear that some minute change in fact may 

later be deemed to be material.’’

Marriott, NPR 35, at 4. 

764 Marriott, NPR 35, at 4. See also PMR&W, NPR 

4, at 6. 

strikes the right balance between 

ensuring the timeliness of disclosures 

and reducing compliance burdens. 

Franchisors need to prepare quarterly 

updates only if there is a material 

change, and they may include the 

quarterly update in an addendum. In 

short, franchisors need not prepare new 

disclosure documents each quarter as a 

matter of course. We believe the current 

quarterly update requirement 

establishes a clear, bright line tied to 

each franchisor’s fiscal year. It has 

worked well and has generated few, if 

any, complaints during the 20 years that 

the Rule has been in existence. 

Section 436.7(c) modifies the 

quarterly update provision proposed in 

the Franchise NPR, however, to 

accommodate the extension of the 

annual update from 90 to 120 days, as 

previously discussed. The obligation to 

update disclosures quarterly necessarily 

precedes the conclusion of the 120-day 

annual update period. Accordingly, 

additional clarification of the 

interrelationship between the annual 

and quarterly update requirements is 

warranted. To that end, section 436.7(c) 

provides that a franchisor’s annual 

update (120 days after the close of the 

fiscal year) ‘‘shall include the 

franchisor’s first quarterly update, either 

by incorporating the quarterly update 

information into the disclosure 

document itself, or through an 

addendum.’’ The following tables 

illustrate the point, by comparing 

procedures under the original Rule with 

those under section 436.7(c). 

HYPOTHETICAL USING PROCEDURES UNDER THE ORIGINAL RULE

December 31, 2005 ........................................... Fiscal year ends. 

January-March, 2006 ......................................... First quarter of new fiscal year. 

April 1, 2006 ....................................................... Franchisor must use annual updated disclosure document. 

Reasonable time after April 1, 2006 .................. Franchisor amends annual update with a quarterly update, if warranted. 

Reasonable time after July 1, 2006 ................... Franchisor amends annual update (and any previous quarterly update) with a quarterly update, 

if warranted. 

Reasonable time after October 1, 2006 ............ Franchisor amends annual update (and any previous quarterly update(s)) with a quarterly update, if warranted. 

Reasonable time after January 1, 2007 ............ Franchisor amends 2006 annual update (and any previous quarterly updates(s)) with a quarterly update, if warranted. 

HYPOTHETICAL USING FINAL AMENDED RULE PROCEDURES

December 31, 2005 ........................................... Fiscal year ends. 

January-March, 2006 ......................................... First quarter of new fiscal year. 

May 1, 2006 ....................................................... Franchisor must use annual updated disclosure document containing any first quarter update 

either integrated in the body of the disclosure document itself or in an addendum. 

Reasonable time after July 1, 2006 ................... Franchisor amends annual update with a quarterly update, if warranted. 

Reasonable time after October 1, 2006 ............ Franchisor amends annual update (and any previous quarterly update(s)) with a quarterly update, if warranted. 

Reasonable time after January 1, 2007 ............ Franchisor amends annual update (and any previous quarterly updates(s)) with a quarterly update, if warranted. 

3. Section 436.7(d): Material changes to 

financial performance information 

Section 436.7(d) retains the original 

Rule requirement that a franchisor 

notify prospective franchisees of any 

material changes to previously 

furnished financial performance 

information.760 The Franchise NPR 

proposed a broader updating 

requirement that would have compelled 

franchisors to notify prospects of any 

material changes before delivery of the 

disclosure document.761 This proposal 

generated several comments, both 

supporting and opposing the expanded 

updating proposal. 

IL AG and Howard Bundy favored the 

broader updating requirement, but they 

would require all such updates to be in 

writing. The IL AG, for example, stated 

that ‘‘[o]ral notification is the 

ammunition for rescission litigation.’’762

On the other hand, several franchisors 

opposed the updating requirement for 

various reasons. Marriott, for example, 

asserted the proposal would be 

extremely burdensome, imposing ‘‘an 

impossible burden on large franchisors, 

especially if they actually operate the 

business that they franchise because of 

the uncertainty of what constitutes ‘any 

material change’ and the requirement of 

‘real time’ ongoing disclosure.’’763

Marriott would eliminate the proposed 

expanded update provision in its 

entirety.764

PMR&W and the NFC advised that the 

proposal is confusing. In particular, 

PMR&W found the relationship between 

the basic quarterly update provision and 

the proposed continuing update 

provision less than clear: 

It is unclear whether these 

‘‘material changes’’ must be more 

‘‘material’’ than any changes 

disclosable in the quarterly updates. 


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765 PMR&W, NPR 4, at 6. 766 NFC, NPR 12, at 16. 

767See section 436.9(f). This provision also 

address the commenters’ concerns about permitting 

franchisors to furnish updates orally. 

768 But see IL AG, at 10 (suggesting that the Rule 

state that franchisors may have other disclosure 

obligations under Section 5 of the FTC Act); Bundy, 

at 3 (suggesting a continuous updating requirement 

for ‘‘materially adverse events.’’). The quarterly 

update provision specifies when a franchisor must 

prepare revised disclosures to ensure that they are 

timely. It does not address whether a franchisor 

may have other obligations to notify prospective 

franchisees of material changes under state common 

law fraud or misrepresentation principles. 

769See 16 CFR 436.1(d)(2) and 436.1(e)(6). Like 

the original Rule, the final amended Rule requires 

the franchisor to ‘‘notify’’ the prospective franchisee 

of any material change in financial performance 

information. It does not require a franchisor to 

update its disclosures more often than quarterly, 

nor does it require a franchisor to re-disclose to a 

prospective franchisee. Rather, ‘‘notification’’

means that the franchisor must inform the 

prospective franchisee, which can be accomplished 

outside of the disclosure document. How a 

franchisor ‘‘notifies’’ a prospective franchisee is 

within the sound discretion of the franchisor. 

Notification can be made in writing, or by 

telephone call, email, or other electronic 

transmission, provided that the franchisor can 

prove that it has informed the prospective 

franchisee about the material change to the 

performance data. 

770But see J&G, at 11 (asserting that financial 

performance information should be updated only 

quarterly). 

771 16 CFR 436.2(a)(3). 

772 This approach is consistent with other 

Commission rules, including the Telemarketing 

Sales Rule, 16 CFR 310.6; the Care Labeling Rule, 

16 CFR 423.8, and the Cooling-Off Period Rule, 16 

CFR 429.3. The UFOC Guidelines do not contain 

any exemptions. Rather, at most, some of the 15 

franchise disclosure states may exempt franchisors 

from registration requirements as a matter of statute 

or regulation. See generally Duvall & Mandel, ANPR 

114. Thus, franchisors exempted from disclosure 

under the final amended Rule may nonetheless 

have to prepare and disseminate UFOCs for state 

law purposes. 

773See 16 CFR 436.2(a)(3)(iii). 

774See 16 CFR 436.2(a)(3)(i). 

775See 16 CFR 436.2(a)(3)(ii). 

776See 16 CFR 436.2(a)(3)(iv). 

777 As discussed below, although the Commission 

is deleting the exclusions from the final amended 

Rule text, it is retaining the exclusions as a matter 

of policy and incorporating them by reference in 

this Document. 

778 Franchise NPR, 64 FR at 57345. The final 

amended Rule provision, however, has been 

renumbered as section 436.8. In the Franchise NPR, 

it was numbered section 436.9. 

779 Original SBP, 43 FR at 59704. 

Depending on the answer to this 

question, is there any need to 

require quarterly updates when 

immediate updates are mandated; 

i.e., does the immediate update rule 

preclude the need for the quarterly 

update?765

In a similar vein, the NFC questioned 

whether a franchisor must provide a 

prospective franchisee with each and 

every quarterly update, as long as the 

prospect is in the sales cycle. If so, it 

asked how franchisors should determine 

whether prospects are no longer in the 

sales cycle.766

It is clear from the comments that 

there are two competing concerns. On 

the one hand, prospective franchisees 

should have all material information 

they need to make an informed 

purchase decision, regardless of when 

they entered the sales process. On the 

other hand, there are practical 

considerations, including the costs and 

burdens on franchisors to update each 

franchisee on a continuing basis, as 

Marriott observed. Indeed, at some 

point, the burden and cost to franchisors 

(which inevitably will be passed along 

to prospective franchisees or other 

consumers) outweighs the potential 

benefit of more frequent updating. 

Based upon the record, the 

Commission is persuaded that, on 

balance, a continuing update 

requirement is unwarranted. We are 

convinced that franchisors should have 

a bright-line directive when they can be 

assured that they have complied with 

the Rule’s disclosure requirements. We 

believe that the original Rule’s quarterly 

update requirement is sufficient to 

ensure timely disclosures, while 

minimizing compliance costs. 

Further, any prospective franchisee 

who has been in the sales cycle can 

always request a copy of the franchisor’s 

most recent disclosure document before 

he or she agrees to execute the franchise 

agreement. To facilitate that goal, the 

Commission has adopted a new 

prohibition that would bar franchisors 

from failing to honor a prospective 

franchisee’s reasonable request for a 

copy of the franchisor’s most recent 

disclosure document and/or quarterly 

update before he or she signs a franchise 

agreement.767 We believe this 

prohibition is unlikely to increase 

franchisor’s compliance costs and 

burdens. Franchisors most likely will 

have updated disclosures documents 

prepared in the ordinary course of their 

business. With the advent of electronic 

communications, emailing a copy of the 

updated disclosure document to a 

prospective franchisee, or otherwise 

permitting a prospective franchisee to 

see a copy of the updated disclosure 

document on the franchisor’s website, 

would impose only a small cost. 

At the same time, we are persuaded 

that the final amended Rule should 

retain the original Rule’s continuing 

update requirement for financial 

performance information.768 The 

original Rule required franchisors to 

notify prospective franchisees of any 

material changes in a financial 

performance representation before the 

prospective franchisee pays a fee or 

signs the franchise agreement.769 We 

believe this provision is sound, 

recognizing the particular materiality of 

financial data to prospective 

franchisees. Any false impression 

created by stale data at the time of sale 

is likely to cause significant injury to 

prospective franchisees who rely on 

financial data in making their 

investment decision.770

F. Section 436.8: Exemptions 

Section 436.8 of part 436 sets forth 

exemptions from the final amended 

Rule. In the original Rule, the 

exemptions were set out in the middle 

of the Rule’s definitions, where they 

modified the term ‘‘franchise.’’771 To 

make the exemptions easier to find, the 

Commission has decided to move them 

to a separate ‘‘exemptions’’ section in 

the final amended Rule.772

Section 436.8 retains the original Rule 

exemptions for: (1) franchise sales under 

$500;773 (2) fractional franchises;774 (3) 

leased departments;775 and (4) oral 

contracts.776 Section 436.8 also adds 

two new exemptions, one for franchise 

sales involving petroleum marketers, 

and one for three categories of 

‘‘sophisticated investors.’’ Finally, the 

final amended Rule deletes the original 

Rule’s four exclusions found at 16 CFR 

436.2(a)(4)(i)-(iv) for non-franchise 

relationships involving: (1) employeremployees and general partnerships; (2) 

cooperative organizations; (3) testing or 

certification services; and (4) single 

trademark licenses.777

The final amended Rule section 436.8 

is substantially similar in both form and 

content to its counterpart proposed in 

the Franchise NPR.778 The principal 

difference is a lowering of the dollar 

threshold for the sophisticated investor 

‘‘large investment’’ exemption from $1.5 

million to $1 million. This and the other 

substantive differences between the 

proposed and final amended Rules are 

explained below. 

1. Section 436.8(a)(1): Minimum 

payment exemption 

Section 436.8(a)(1) retains the original 

Rule’s $500 required minimum payment 

exemption found at 16 CFR 

436.2(a)(3)(iii). This exemption ensures 

that the Rule ‘‘focus[es] upon those 

franchisees who have made a personally 

significant monetary investment and 

who cannot extricate themselves from 

the unsatisfactory relationship without 

suffering a financial setback.’’779 As 

explained below, the Commission 

believes the exemption and its $500 


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780 Typical of these comments was H&H, which 

urged the Commission to raise the threshold to 

$1,000 in order to recognize the fact that costs in 

general have increased substantially since the Rule 

was initially promulgated. H&H, NPR 9, at 4. See 

also Gurnick, NPR 21A, at 8; GPM, NPR Rebuttal 

40, at 9. 

781 Baer, NPR 11, at 15-16. In the alternative, Mr. 

Baer suggested that the threshold should be set at 

1% of the amount of average retail sales achieved 

by outlets using the franchise system in the United 

States in the most recent year for which data is 

available. Mr. Baer asserted that if ‘‘a system has 

average retail sales of $1 million, $10,000 is not a 

number which should trigger concerns. There is no 

need for the Commission to regulate de minimis 

investments with this type of burdensome and 

costly disclosure obligation.’’ Id. 

782 J&G, NPR 32, at 14. 

783See H&H, NPR 9, at 4; Baer, NPR 11, at 15-16. 

784 IL AG, NPR Rebuttal 38, at 2 (‘‘To exempt 

franchises that do not have an initial fee, or ones 

that have what appears to be a modest fee of $1,000 

or $2,500, would put too many ‘‘small’’ investors 

at risk.’’). 

785 Bundy, NPR 18, at 14. 

786 Bond’s keeps files on 2,500 American and 

Canadian franchise systems. Of these, Bond’s 

surveyed 2294 systems that it identified as current 

and active. Detailed profiles of the 1050 systems 

responding to the survey appear in Bond’s 2001 

edition. 

787 The Staff Report noted that Bond’s does not 

report ‘‘required payments,’’ but initial franchisees 

fees and total investments. Therefore, it is likely 

that at least some franchise systems charging a 

minimum fee or even no initial fee (14 systems) 

actually collect other required payments (e.g., 

royalties, equipment), making the overall financial 

risk in purchasing a franchise significant. 

788 Howard Bundy opined that the $500 

minimum payment exemption should reference 

payments by contract or by practical necessity. 

Bundy, NPR 18, at 4. The $500 minimum payment 

exemption, however, already references the term 

‘‘required payment,’’ which in turn is defined to 

include both payments by contract and by practical 

necessity. Accordingly, no further refinement of the 

Rule is necessary on this point. 

789 15 U.S.C. 2801. 

790 45 FR 51765 (Aug. 5, 1980). 

791 45 FR at 51766. In reaching its conclusion, the 

Commission nonetheless recognized that 

circumstances may change in the industry that 

would warrant a fresh review: 

‘‘[I]f circumstances change in the future and 

evidence of renewed misrepresentations in the sale 

of petroleum franchises reappears on a significant 

scale, a new rulemaking proceeding may be 

undertaken that is tailored to the specific needs of 

the industry. In the interim, if isolated abuses 

occur, they will be subject to the adjudicative 

procedures and remedies provided by Section 5 of 

the FTC Act.’’

45 FR at 51766. Since 1980, the Commission has 

received only isolated complaints regarding abuses 

in the relationship between petroleum company 

franchisors and their franchisees, and has no reason 

to believe that a pattern of abuse is likely to develop 

in the near future. 

792 J&G, NPR 32, Attachment at 6. 

threshold continue to serve a useful 

purpose. 

During this Rule amendment 

proceeding, no commenter 

recommended eliminating or reducing 

the $500 minimum payment threshold. 

Several commenters, however, urged the 

Commission to raise the $500 minimum 

threshold, with some commenters 

suggesting a $1,000 threshold,780 while 

others suggested a $2,500,781 or a $5,000 

threshold.782 These commenters 

maintained that an upward adjustment 

is warranted to reflect the increase in 

costs since the Rule was promulgated in 

1978. In addition, two commenters also 

urged the Commission to increase the 

thresholds periodically, perhaps every 

four years, to reflect the rate of 

inflation.783

In contrast, the IL AG urged the 

Commission to retain the $500 

threshold in order to protect small 

investors.784 In a similar vein, a 

franchisee representative urged the 

Commission to modify the minimum 

payment exemption to provide that the 

$500 threshold includes ‘‘both amounts 

the franchisee actually pays, but also 

any amounts that the franchisee, during 

the first six months, agrees to pay in the 

future—either by contract or by 

practical necessity.’’785

The Commission has determined to 

retain the original Rule’s $500 minimum 

payment exemption. The original Rule 

included a threshold dollar amount to 

exclude transactions where the 

prospective franchisee was at risk to 

lose an amount of money too small to 

justify imposition of the expense and 

burden of preparing a disclosure 

document upon sellers. This is 

particularly true with less complex 

business opportunities, which, even 

today, may cost under $500. However, 

with the extraction of business 

opportunity regulation to a new rule 

separate from the Franchise Rule, it can 

be argued that any investment in a 

franchise, as a practical matter, will be 

a significant investment risk. This may 

suggest that the exemption may no 

longer serve a useful purpose. 

We note that the Staff Report 

described research exploring the 

relevance of the $500 threshold to the 

amounts actually charged for initial 

franchise fees in the current market. The 

staff examined over 1,000 franchise 

profiles listed in Bond’s Franchise 

Guide (13th ed. 2001).786 All but 41 of 

the franchise systems responding to 

Bond’s survey reported initial franchise 

fees of $5,000 or more (approximately 

96% of reporting systems). Indeed, only 

22 systems reported that an initial fee 

was ‘‘not applicable,’’ or that they 

charged an initial franchisee fee of 

$1,000 or less.787 Thus, even a $5,000 

threshold would not reduce 

significantly the number of franchisors 

that must comply with the Rule’s 

disclosure obligations. 

Given the significant investment 

required to purchase nearly any 

franchise, a plausible argument could be 

made for eliminating the threshold 

altogether. However, the minimum 

payment exemption continues to serve a 

very narrow, but important, purpose: To 

the extent that a less complex business 

opportunity might come close to 

satisfying the elements of a franchise, 

the $500 threshold would help to make 

it clear that such opportunities are 

exempt from the Franchise Rule. Thus, 

the final amended Rule retains the 

minimum payment exemption.788

2. 436.8(a)(4): Petroleum marketers and 

resellers exemption 

Section 436.8(a)(4) of the final 

amended Rule expressly exempts 

petroleum marketers and resellers 

covered by the Petroleum Marketing 

Practices Act (‘‘PMPA’’).789 Although 

this exemption was not part of the 

original Rule, in 1980 the Commission 

granted a petition for an exemption from 

the Rule filed by several oil companies 

and oil jobbers, pursuant to Section 

18(g) of the FTC Act.790

In considering the petition, the 

Commission noted that the most 

frequently cited complaint about the 

petroleum franchise industry concerned 

termination and renewal practices. The 

Commission also noted that, after the 

close of the original franchise 

rulemaking record, Congress had passed 

the PMPA, which specifically addressed 

those complaints, requiring, among 

other things, pre-sale disclosure of 

franchisees’ termination and renewal 

rights. In light of that legislation, the 

Commission concluded that the 

Franchise Rule was largely duplicative 

of the PMPA and related federal 

regulations. 

In granting the petition, the 

Commission stated that the Rule ‘‘shall 

not apply to the advertising, sale or 

other promotion of a [petroleum] 

‘franchise,’ as the term ‘franchise’ is 

defined by the [PMPA].’’791 The final 

amended Rule incorporates the 1980 

exemption as an express Rule 

exemption. 

Two commenters voiced concern 

about this exemption. J&G maintained 

that the exemption leaves unanswered 

whether disclosure is warranted when 

other businesses—such as convenience 

stores, fast food, and ice cream shops—

operate in these exempt gasoline 

franchise establishments.792 In the same 

vein, Chevron noted that the PMPA 

covers agreements not only for gasoline 

sales, but for other refiner-branded 

services or products at a gasoline 

station. For example, a Chevron gasoline 

station may also have a Chevron 

branded (or no brand) car wash, repair 


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793See Pillsbury Winthrop (on behalf of Chevron 

U.S.A. Inc.). 

794 Franchise NPR, 64 FR at 57345. 

795E.g., Gust Rosenfeld, at 7; J&G, at 7; Marriott, 

at 2-4; Starwood, at 2-3; 7-Eleven, NPR 10, at 2; 

NFC, NPR 12, at 17; IFA, NPR 22, at 7; AFC, NPR 

30, at 2-3; Marriott, NPR 35, at 6. See also 

Kaufmann, ANPR, 18 Sept. 97 Tr., at 165; 

Wieczorek, id., at 187-88; Tifford, id., at 194 (noting 

that the Rule imposes unnecessary costs on 

sophisticated franchisees and adds unwarranted 

delay in the high-paced negotiation process, where 

parties often are anxious to cement their deals 

quickly to beat out the competition). 

796See, e.g., Bundy, NPR 18, at 14; Stadfeld, NPR 

23, at 7-8; Karp, NPR 24, at 6-8. But see Caruso, 

ANPR 118 (‘‘[F]ranchisees in the larger successful 

systems are themselves fairly sophisticated and in 

less need of protection by the FTC or any other 

government agency.’’). 

797See Selden, at 1; Gee, at 2; Karp, at 6-7; Pu, 

at 2; Zarco & Pardo, ANPR 134, at 4-5; Kezios, 

ANPR, 6 Nov. 97 Tr., at 47-48; Bundy, id., at 48- 

49; Stadfeld, NPR 23, at 8; Karp, NPR 24, at 6-8; 

NFA, NPR 27, at 3. See also NADA (urging the 

Commission to consider exemptions on a case-bycase basis only). 

798 Two commenters noted that the inclusion of 

the three sophisticated investor exemptions in the 

final amended Rule could be misleading because a 

franchisor may still have obligations to make 

disclosures under state law. Bundy, at 3; IL AG, at 

10. Howard Bundy, for example, urged the 

Commission to include a warning in the final 

amended Rule itself that exemption from the 

Franchise Rule does not necessarily mean 

exemption from state disclosure law. While this 

observation is true, the Commission believes the 

appropriate place to delineate the relationship 

between the final amended Rule and state law is in 

anticipated Compliance Guides and other business 

and consumer education materials. 

799 At least two states provide some form of 

exemption for transactions involving large initial 

investments. Illinois permits a franchisor to apply 

for an exemption from both registration and 

disclosure where the investment for a single 

franchise unit exceeds $1 million. Maryland 

exempts franchises that require an initial 

investment of $750,000 or more from registration, 

but not from disclosure. 

800 These safeguards were included in the 

proposed version of this provision. Franchise NPR, 

64 FR at 57321 and 57345. 

801E.g., PMRW, NPR 4, at 3; Wendy’s, NPR 5, at 

2; McDonalds, NPR 7, at 2; H&H, NPR 9, at 4; Baer, 

NPR 11, at 16; NFC, NPR 12, at 20. Marriott, for 

example, stated that not only are sophisticated 

franchisees able to protect their own interests, but 

the self-interest of others involved in the project, 

such as bankers, is sufficient to protect those 

interests as well. Marriott, NPR 35, at 6. See, e.g., 

Baer, NPR 11, at 16; Gurnick, NPR 21, at 3; J&G, 

NPR 32, at 3. 

802 Stadfeld, NPR 23, at 8; Karp, NPR 24, at 6. 

803 Karp, at 7; Karp, NPR 24, at 6-7. See also 

Stadfeld, NPR 23, at 7-8 (‘‘Being wealthy should not 

be a basis for being screwed.’’). 

center, or mart. According to Chevron, 

all of these services or products are sold 

as part of a unified deal when the 

prospective franchisee purchases the 

franchised gasoline outlet. Therefore, 

the Commission should also exempt the 

sale of such tangential services or goods 

sold along with a gasoline station under 

a unified agreement.793

In response to these comments, the 

Commission intends that it be clear that 

the PMPA exemption should be read 

broadly to cover other branded services 

and products (such as a car wash or 

mart) sold to the prospective franchisee 

under the same franchise agreement as 

the gasoline station. The Commission 

believes that, as a practical matter, it 

may be impossible to divide a single 

franchise agreement for gasoline and 

other services into its component parts 

for disclosure purposes, and such an 

approach is inconsistent with the 

PMPA. Nevertheless, separate or 

subsequent sales of a franchise to a 

gasoline station owner, such as a 7- 

Eleven or Subway outlet, fall outside of 

the exemption. An individual who 

operates a gasoline station is just as 

much in need of pre-sale disclosure for 

the purchase of a non-related franchise, 

such as an ice cream store, as any other 

prospective franchisee. 

3. Sections 436.8(a)(5) and (a)(6): 

Sophisticated investor exemptions 

Sections 436.8(a)(5) and (a)(6) add 

three new exemptions to the final 

amended Rule, collectively referred to 

as the ‘‘sophisticated investor 

exemptions.’’ As noted, the 

sophisticated investor exemptions as 

adopted are substantially similar to their 

counterparts as proposed in the 

Franchise NPR.794

Franchisors enthusiastically 

supported the creation of sophisticated 

investor exemptions.795 They 

maintained that franchising today often 

involves heavily-negotiated, multimillion dollar deals between franchisors 

and highly sophisticated individuals 

and corporate franchisees with highly 

competent counsel. In the course of 

such deals, prospective franchisees 

often demand and receive material 

information from the franchisor that 

equals or exceeds the disclosures 

required by the Rule. These commenters 

asserted that such business 

arrangements are not the kinds of 

franchise sales that the Commission 

originally intended to cover. 

On the other hand, several franchisees 

and their advocates opposed the 

exemptions, or expressed reservations 

about them.796 Some feared that while 

prospective franchisees may appear to 

be sophisticated—either because of their 

net worth or general prior business 

experience—they actually may have 

limited knowledge of the risks inherent 

in operating the specific franchise being 

offered. In short, these commenters 

advised the Commission to protect the 

wealthy, but inexperienced.797

Section 436.8(a)(5)(i)—the ‘‘large 

franchise investment’’ exemption—

exempts franchise sales where the 

initial investment is at least $1 million, 

exclusive of unimproved land and 

franchisor financing. Section 

436.8(a)(5)(ii)—the ‘‘large franchisee’’

exemption—exempts franchise sale to 

ongoing entities—such as airports, 

hospitals, and universities—with at 

least $5 million net worth and five years 

of prior business experience. Section 

436.8(a)(6)—the ‘‘insiders’’ exemption—

exempts franchise sales to the owners, 

directors, and managers of an entity 

before it becomes a franchisor.798 Each 

of these exemptions is discussed in the 

section below. 

a. Section 436.8(a)(5)(i): Large 

investment exemption 

Section 436.8(a)(5)(i) exempts from 

the Rule franchise sales where the 

prospective franchisee makes an initial 

investment totaling at least $1 million, 

excluding the cost of unimproved 

land.799 To ensure that the large 

investment exemption is not overly 

broad and does not create a loophole, 

section 436.8(a)(5)(i) sets forth 

additional safeguards beyond the $1 

million threshold to preserve protection 

for the average investor.800 First, section 

436.8(a)(5)(i) makes clear that funds 

obtained from the franchisor (or an 

affiliate) cannot be counted toward the 

$1 million initial investment threshold. 

Second, section 436.8(a)(5)(i) requires 

the prospective franchisee to sign an 

acknowledgment that the franchise sale 

is exempt from the Franchise Rule 

because the prospective franchisee will 

be making an initial investment of at 

least $1 million. 

i. Need for the large initial investment 

exemption 

As noted above, franchisors urged the 

Commission to adopt a large initial 

investment exemption,801 while 

franchisees either opposed it or offered 

suggestions to limit it.802 Specifically, 

several franchisee commenters asserted 

that wealth or ability to make a large 

franchise investment does not 

necessarily equate with business 

sophistication. They urged the 

Commission to focus instead on the 

investor and his or her business 

background, rather than ability to pay 

alone.803

For example, Eric Karp criticized the 

notion of a large investment exemption 

because it does not consider the source 

of the prospective franchisee’s funds: 

Did she re-mortgage her residence? 

Did he borrow from a friend or 

relative? Did they cash in their 

retirement fund? The investment 

standard also does not consider 

what other assets, liabilities, and 


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Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 15523 

804 Karp, NPR 24, at 7. See also Selden, at 2 (‘‘The 

idea that disclosure becomes unnecessary when the 

investment exceeds an arbitrary threshold, because 

scale is a proxy for sophistication or bargaining 

power, is an oxymoron.’’); Gee, at 3 (‘‘The FTC 

should focus on the capabilities of the investor as 

opposed to the size of the investment.’’). Mr. Selden 

also asserted that franchisors are not always 

forthcoming with information, suggesting that had 

the Commission solicited the views of franchisees 

of large hotel systems, for example, we would have 

a different impression. Id. We note, however, that 

not a single hotel franchisee or large restaurant 

franchisee submitted any comment in response to 

the large investment exemption discussed in the 

ANPR, NPR, and Staff Report. Accordingly, we are 

unconvinced that Mr. Selden’s concerns raise a 

serious issue. 

805See 17 CFR 230.501(5), (6), and (8). See also 

Wendy’s, NPR 5, at 2. 

806 Karp, NPR 24, at 8. 

807 Karp, NPR 24, at 6. See also Bundy, ANPR, 

6 Nov. 97 Tr., at 21-22; Jeffers, id., at 23-24; 

Stadfeld, NPR 23, at 8. 808 45 FR 51763-64 (Aug. 5, 1980). 

809 Section 18(g) of the FTC Act. 15 U.S.C. 57a(g). 

One commenter observed that while franchisors can 

file individual petitions for exemptions from the 

Rule under Section18(g) of the FTC Act, the process 

is costly and the delay involved often renders this 

approach an unviable option. Duvall & Mandel, 

ANPR 114, at 16. Section 18(g) of the FTC Act 

provides a mechanism for parties to petition for 

relief from Commission trade regulation rules 

where potential abuse is unlikely. Section 18(g) 

exemption petitions are placed on the public record 

for comment. The entire process of reviewing and 

granting such a petition may take several months 

to more than one year, depending on any comments 

received. 

income the prospective franchisee 

has from which one can estimate 

his or her financial sophistication 

and tolerance of risk.804

In lieu of the ‘‘investment’’ model 

offered by the Commission, Mr. Karp 

urged the Commission to consider SEC 

Regulation D,805 which ‘‘properly 

focuses on the qualifications of the 

investor, not the size of the investment.’’

In his view, the large franchise 

exemption does the opposite. ‘‘The fact 

that a franchisee may be ready to invest 

a highly leveraged $1.5 million 

franchise investment does not prove 

that such a person is so sophisticated 

that a disclosure document would be of 

no benefit.’’806

Mr. Karp also discounted the 

potential benefit of the large investment 

exemption to franchisors. According to 

Mr. Karp, the exemption would be of 

little benefit to the franchisor unless 

100% of its franchise sales involved 

transactions over the threshold level. If 

so, he insisted, there is no additional 

compliance burden imposed by 

requiring disclosures be given to all 

prospective franchisees because the 

franchisor has to prepare the disclosures 

in any event.807

After reviewing the comments, we are 

persuaded that a large investment 

exemption is warranted. Since the 

Rule’s inception, the Commission has 

considered a prospective franchisee’s 

level of investment as one measure of 

sophistication. For example, in granting 

the Automobile Importers of America’s 

petition for exemption from the Rule 

under Section 18(g), the Commission 

observed: 

Prospective motor vehicle dealers 

make extraordinarily large 

investments. As a practical matter, 

investments of this size and scope 

involve relatively knowledgeable 

investors or the use of independent 

business advisors, and an extended 

period of negotiation. The record is 

consistent with the conclusion that 

the transactions negotiated by such 

knowledgeable investors over time 

and with the aid of business 

advisors produce the pre-sale 

information disclosure necessary to 

ensure that investment decisions 

are the product of an informed 

assessment of the potential risks 

and benefits of the proposed 

investment.808

Accordingly, it is clear that investment 

level is one indicium of sophistication. 

More important, we are convinced 

that franchisors should have a brightline standard that will clearly indicate 

when and under what circumstances the 

sophisticated investor exemption will 

apply. An exemption based upon the 

specific business experience of each 

individual prospective franchisee would 

be burdensome to administer. For 

example, in some instances franchisors 

would not be able to take advantage of 

the exemption unless they first verified 

each prospective franchisee’s business 

background. Similarly, absent such 

verification, law enforcers would not be 

able to discern whether any specific 

franchise relationship was covered by 

the Rule. This approach could create a 

regulatory nightmare for both 

franchisors and franchise law enforcers. 

We are also convinced that the large 

investment exemption offers tangible 

benefits to franchisors. Clearly, there are 

franchise systems, such as lodging, 

where the typical franchise investment 

is likely to exceed the large investment 

exemption’s monetary threshold. 

Accordingly, the large investment 

exemption will provide regulatory relief 

at least in those instances. We recognize 

that the large franchise investment 

exemption, however, will provide only 

limited relief for franchisors that sell 

franchises both above and below the 

threshold. In such instances, the 

franchisor must prepare disclosure 

documents in order to sell at levels 

below the threshold. Accordingly, the 

costs of providing disclosures to all 

franchisees, including those above the 

threshold, may not be large, but neither 

is the potential benefit to the purchaser. 

Indeed, the argument that sophisticated 

investors could benefit from disclosure 

misses the mark. The basis for the large 

investment exemption is not that 

‘‘sophisticated’’ investors do not need 

pre-sale disclosure, but that they will 

demand and obtain material information 

with which to make an investment 

decision regardless of the application of 

the Rule. Where prospective franchisees 

are likely to demand and obtain pre-sale 

material information regardless of 

external prompting or compulsion, then 

the case for federal intervention is not 

compelling. 

Further, the Rule’s costs and burdens 

are unwarranted in situations where the 

likelihood of abuse is low. This concept 

is incorporated into the statutory 

provision of the FTC Act that gives 

franchisors the right to petition the 

Commission for a trade regulation rule 

exemption, including an exemption 

limited to a specific set of facts.809 Thus, 

a franchisor, if it wished, could petition 

the Commission for an exemption only 

for sales above a certain dollar figure 

(although to date none has done so). The 

large investment exemption need not be 

‘‘all or nothing’’ to benefit franchisors. 

The very fact that franchisors uniformly 

supported the large investment 

exemption tends to confirm that it will 

provide them with some desired 

regulatory relief. On balance, we believe 

that a narrowly crafted large investment 

exemption offers the potential for 

reducing franchisors’ regulatory burdens 

and preserving Commission resources 

by reducing the number of exemption 

petitions, without sacrificing 

protections for the average investors the 

Franchise Rule was originally 

promulgated to protect. 

ii. The $1 million investment threshold 

Section 436.8(a)(5)(i) provides that 

franchise sales involving an investment 

of $1 million —excluding the cost of 

unimproved land and franchisor 

financing—qualify for the large 

investment exemption. We are 

convinced that a $1 million threshold 

strikes the right balance between 

providing relief for sophisticated 

investors and protecting consumers. 

The large investment exemption 

proposed in the Franchise NPR 

incorporated a higher $1.5 million 

threshold, based upon the Commission 

staff’s analysis of the costs to purchase 

more than 1,350 franchises listed in 

various trade publications, including 

Enterprise Magazine’s The Franchise 


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15524 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

810 For a detailed discussion of staff’s analysis, 

see Staff Report, at 238. 

811 In light of the management demands on 

operating multiple units, it is reasonable to believe 

that purchasers of multiple units may be persons 

with significant prior business experience. 

812 We also assume that in many instances this 

universe of sophisticated investors will include 

existing franchisees with significant ‘‘hands-on’’

experience with the franchisor. In its Franchise 

NPR comment, NFC describes at length the 

changing nature of franchising in the United States. 

Specifically, NFC notes that: 

‘‘While franchising’s roots may be traced to the 

grant of an individual franchise to one entrepreneur 

(or a small group of entrepreneurs) possessing no 

prior knowledge of or experience in the subject 

industry . . . it is nevertheless the case that over 

the decade many of America’s oldest and largest 

franchisors do not follow that paradigm. Instead, 

they find it far more efficient and profitable for all 

concerned to largely restrict the grant of United 

States franchises to: (i) sophisticated corporations 

with the resources and background necessary to 

optimally operate subject franchises and (ii) 

existing franchisees whose experience, profitability, 

and mastery of the franchisor’s system strongly 

suggest future success.’’

NFC, NPR 12, at 17. Accordingly, at least some 

franchisees purchasing multiple units are existing 

franchisees with prior ‘‘hands-on’’ experience with 

the franchisor. 

813E.g., Baer, NPR 11, at 16; Gurnick, NPR 21, at 

3; Marriott, NPR 35, at 6. 

814 NASAA, NPR 17, at 12. Seth Stadfeld added 

that it is not difficult to invest $1.5 million when 

there is a down payment plus financing of a 

substantial portion of the investment. ‘‘Indeed, 

because they are taking on larger obligations, there 

is all the more reason and urgency why they should 

get the material, factual and contractual information 

that is otherwise available under the Rule.’’

Stadfeld, NPR 23, at 8. See also NFA, NPR 27, at 

3. 

815 ‘‘In our considerable experience, individuals 

purchasing franchises involving a $1 million 

investment have a clear understanding of the terms 

and conditions of the business arrangements and 

have obtained professional financial and/or legal 

advice before entering into the franchise 

agreement.’’ McDonald’s, NPR 7, at 2. See also 7- 

Eleven, NPR 10, at 3; NFC, NPR 12, at 20; BI, NPR 

28, at 13. Wendy’s suggested that the threshold be 

lowered, but did not offer any specific amount. 

Wendy’s, NPR 5, at 2. 

816 As discussed below, IFA initially stated that 

‘‘real estate’’ should be excluded in calculating the 

large investment threshold. IFA, NPR 22, at 7. In its 

Staff Report comment, however, the IFA clarified 

that by ‘‘real estate,’’ it mean raw, unimproved land. 

See IFA, at 3. 

817 IFA, NPR 22, at 7. 

818 The Staff Report recommended a $1 million 

threshold for the exemption, excluding land and 

franchisor financing, as discussed below. Staff 

Report, at 240. 

819 PMR&W opined that the $1.5 million 

threshold would benefit only: 

‘‘a very few franchised businesses, typically 

lodging facilities and perhaps the most expensive 

restaurant franchises. We suggest a $500,000 

threshold as a more reasonable alternative based on 

the franchisee’s likely resort to sophisticated 

advisory services from accountants and/or attorneys 

and the probable need for financing, and resulting 

due diligence oversight, from a financial 

institution.’’

PMR&W, NPR 4, at 3. See also Cendant, ANPR 

140, at 4 (suggesting a $750,000 threshold); H&H, 

NPR 9, at 4 (advocating a lowered threshold, but not 

specifying an amount); Duvall & Mandel, ANPR 

114, at 21 (suggesting a $250,000 threshold 

provided there is a showing that the purchaser, 

alone or with counsel, can understand the merits 

and risks of the investment). The Commission 

rejects this approach as unworkable, because it 

would require franchisors to make subjective 

judgments about each purchaser’s business acumen. 

820 The Commission has a history of considering 

and granting petitions for exemption to the 

Franchise Rule under section 18(g) of the FTC Act. 

In numerous exemption petition proceedings, the 

Commission has considered the size of investment 

as an indicium of sophistication. E.g., Paccar, Inc., 

68 FR 67442 (Dec. 2, 2003); Rolls-Royce Corp., 68 

FR 67443 (Dec. 2, 2003); Austin Rover Cars of North 

America, 52 FR 6612 (Mar. 4, 1987); Volkswagen of 

America, Inc., 49 FR 13677 (Apr. 6, 1984); 

Automobile Importers of America, Inc., 45 FR 

51783 (Aug. 5, 1980). Based upon this experience 

in analyzing various franchise systems, the 

Commission believes that a large investment 

typically entails a sophisticated purchaser: ‘‘As a 

practical matter, investments of this size and scope 

typically involve knowledgeable investors, the use 

of independent business and legal advisors, and an 

extended period of negotiation that generates the 

exchange of information necessary to ensure that 

investment decisions are the product of an 

informed assessment of the potential risks and 

benefits.’’ Mercedes-Benz of North America, Inc., 57 

FR 1745 (Jan. 15, 1992) (granting petition for 

exemption). 

Handbook; (‘‘Franchise Handbook’’); 

Entrepreneur Magazine’s Franchise 500, 

and the International Franchise 

Organization’s Franchise Opportunities 

Guide.810

Very few single-unit franchises cost 

more than $1.5 million: the maximum 

estimated cost of establishing a 

franchise exceeded $1.5 million in only 

about 3% of the listed systems. Thus, an 

investment of $1.5 million most likely 

would involve the purchase of several 

units. For example, more than 90% of 

the franchise systems listed in the cited 

sources involve a maximum investment 

totaling less than $500,000. Thus, in 

order to qualify for the $1.5 million 

exemption, an investment in the vast 

majority of systems would involve the 

purchase of either a single large 

franchise—such as a hotel or the most 

expensive restaurant location—or 

multiple units.811 Of the 12 restaurant 

systems listed in the Franchise 

Handbook with maximum investments 

of $1.5 million or above, all listed a 

minimum investment below $1.5 

million to establish a location. Three 

listed less than $1 million as the 

minimum investment, and seven 

estimated the minimum investment to 

be between $1 million and $1.2 million, 

or the purchase of three or more 

units.812

During this proceeding no consensus 

emerged on the appropriate investment 

threshold for the large investment 

exemption. Several commenters 

supported the Franchise NPR’s 

proposed $1.5 million threshold.813

Other commenters urged the 

Commission to increase the threshold. 

For example, NASAA recommended a 

$3 million threshold. In its view, a $1.5 

million threshold may place too many 

transactions outside the Rule’s 

protections, because, according to 

NASAA, even unsophisticated investors 

may have access to $1.5 million to 

invest in a franchise.814 On the other 

hand, several commenters suggested 

that the threshold should be lower. For 

example, McDonald’s suggested that the 

threshold should be set at $1 million.815

The IFA proposed a variation on this 

theme. It supported a $1 million 

threshold, excluding land.’’816 It 

observed that a 1997 update to the 

Profile of Franchising identified 52 

franchise companies offering franchises 

with an initial investment exceeding $1 

million, excluding land. This equates to 

4.4% or less of all franchise systems.817

Thus, at a $1 million threshold for the 

exemption, more than 95% of all 

franchise systems would remain within 

the ambit of the Rule.818 Some 

commenters recommended an even 

lower threshold. PMR&W, for example, 

recommended $500,000.819

The Commission gives particular 

weight to the statements offered by 

franchisors such as McDonald’s and 

Marriott that, in their experience, a $1 

million investment is likely to involve 

sophisticated investors.820 The 

Commission believes that a $3 million 

dollar threshold would be too high, 

effectively restricting the exemption to 

only the rarest of instances, mostly large 

hotel franchises. On the other hand, the 

suggested $500,000 threshold, in our 

view, is too low. There is insufficient 

record support for the proposition that 

investors at the $500,000 level are 

sophisticated. Thus, the Commission 

has adopted a $1 million threshold for 

the exemption. 

Exclusion of unimproved land. The $1 

million threshold for the large 

investment exemption excludes 

payments for unimproved land. The 

Commission believes that the inclusion 

of unimproved land in the exemption 

would have two negative consequences. 

First, inclusion of unimproved land 

would tend to inflate the initial cost of 

a franchise investment and place too 

many transactions outside the ambit of 

the Rule’s protections. As the IFA noted, 

approximately 52 franchise systems, or 

less than 5% of the universe of franchise 

systems, would qualify for an 

exemption with a threshold investment 

of $1 million, excluding unimproved 

land. 

Second, the Commission has a strong 

preference for a bright-line standard that 

can be readily applied across franchise 

systems. It seems unworkable to require 

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821 IFA, at 3. 

822 IFA, NPR 22, at 7. 

823 Starwood, at 2. See also Marriott, at 2 (an 

‘‘investment’’ should include buildings). 

824 Piper Rudnick, at 6-7. 

825 Marriott, NPR 35, at 6. See also J&G, NPR 32, 

at 4. At the same time, Eric Karp disputed the view 

expressed in the Franchise NPR that lenders may 

act as an effective check, requiring a prospect to 

have sufficient equity capital before granting a loan. 

He contended that there is ‘‘no support in the 

record as to what amount of equity a bank might 

require on a franchise investment of $1.5 Million.’’

Karp, NPR 24, at 7. 

826 Karp, NPR 24, at 7. 

827 BI, NPR 28, at 13. 

828 Stadfeld, NPR 23, at 8. 

829 Bundy, NPR 18, at 14. 

offer basis the cost of land, which could 

vary widely depending on local market 

conditions. A single, clear threshold is 

vastly superior, in our view. 

Accordingly, for these reasons, we 

believe that $1 million, excluding 

unimproved land, strikes the 

appropriate balance. 

Finally, we note that the Staff Report, 

adopting language offered by the IFA in 

response to the Franchise NPR, 

proposed to exclude ‘‘real estate.’’ In 

response to the Staff Report, three 

commenters urged the Commission to 

clarify the meaning of the term ‘‘real 

estate’’ either in the Rule or in 

Compliance Guides. The IFA, for 

example, noted that the term ‘‘real 

estate’’ may encompass ‘‘raw land, 

buildings, leasehold improvements, 

fixtures, and the like.’’821 The IFA 

asserted that the value of the exemption 

would be diminished if all such items 

were excluded from consideration in 

determining whether an initial 

investment totals $1 million. It 

suggested that the term ‘‘real estate’’ be 

defined to exclude only the franchisee’s 

investment in unimproved land.822

Similarly, Starwood urged that only 

‘‘land’’ should be excluded, but ‘‘all real 

estate improvements and fixtures 

should be counted in the sum 

invested.’’823 Piper Rudnick offered yet 

a different version: ‘‘any real property 

acquired to establish and operate the 

franchised business.’’824

After considering the comments, the 

Commission has concluded that the 

phrase ‘‘unimproved land’’ is more 

appropriate than ‘‘real estate.’’ As IFA 

noted, the exclusion of fixtures, 

equipment, and other improvements to 

property from the $1 million threshold 

would leave the exemption so narrow, 

that it would be useless in all but the 

most expensive franchise offerings, 

defeating the very purpose of the 

exemption. Excluding ‘‘real estate’’—

which is significantly broader than the 

more limited term ‘‘unimproved 

land’’—would also impact 

disproportionately real estate-intensive 

companies—such as hotels and 

restaurants. The justification for a large 

investment exemption is that 

individuals investing $1 million or more 

are sufficiently sophisticated that they 

do not need the Rule’s protections. This 

rationale applies equally whether the 

prospective franchisee invests $1 

million to purchase a building or the 

prospective franchisee buys equipment 

or other assets. Accordingly, excluding 

unimproved land from the large 

investment exemption’s $1 million 

threshold strikes the appropriate 

balance between providing franchisors 

with a clear threshold, while ensuring 

regulatory relief for large investments. 

Exclusion of franchisor financing. 

Section 436.8(5)(i) does not count 

monies that are obtained through 

franchisor (or affiliate) financing toward 

the large initial investment exemption’s 

$1 million threshold. The exclusion of 

franchisor financing adds a measure of 

protection to the prospective franchisee 

because traditional lenders are very 

likely to require a due diligence 

investigation of the offering, whereas 

the franchisor or its affiliate likely 

would not. 

A few commenters opposed the 

exclusion of franchisor-financing when 

calculating a prospective franchisee’s 

initial investment. For example, 

Marriott asserted that it does not believe 

that there are inherent risks that would 

justify excluding financing from the 

franchisor. Indeed, it feared that this 

exclusion might have the unintended 

effect of harming franchisees by 

discouraging franchisors from offering 

financing to prospects in order to 

qualify for the exemption.825

After careful assessment of the 

comments, the Commission has 

concluded that financing obtained from 

the franchisor or an affiliate should not 

be counted toward the large investment 

exemption threshold. Otherwise, a 

franchisor could be tempted to increase 

the cost of the initial investment to 

qualify for the large investment 

exemption, while simultaneously 

offering to finance the deal itself, all 

without proper pre-sale disclosures. In 

that regard, the Commission agrees with 

Eric Karp, who observed that the 

assumption that a prospective 

franchisee will have a sufficient level of 

equity tends to disappear ‘‘where a 

franchisee obtains financing from the 

franchisor or its affiliates or from a 

selling franchisee; in such instances, far 

less equity may be required.’’826

Further, it is reasonable to assume 

that a lender, in order to minimize its 

own financial risk, will ensure that a 

prospective franchisee will conduct a 

due diligence investigation of the 

franchise offering. Indeed, by involving 

a lender, the prospective franchisee 

effectively ensures that there is an 

independent, sophisticated entity 

inserted into the sales process. This 

additional safeguard would be lost if 

sources of financing for purposes of the 

exemption included the franchisor and 

its affiliates. 

iii. Acknowledgment 

To take advantage of the large 

investment exemption, section 

436.8(5)(i) requires the franchisor to 

obtain the prospective franchisee’s 

signed acknowledgment that the 

investment satisfies the $1 million 

threshold. This will reduce the 

opportunity for fraud by enabling the 

prospect to verify that the investment 

meets or exceeds the exemption 

threshold. Therefore, it will reduce the 

probability that the franchisor will 

misrepresent the initial cost of the 

franchise to qualify for the exemption, 

as well as provide a paper trail in the 

event an enforcement action becomes 

necessary. 

Several commenters failed to 

understand the purpose of the 

acknowledgment or believed that it 

would serve no useful purpose. For 

example, BI stated: ‘‘We do not 

understand the purpose or the 

importance of the acknowledgment by 

the prospective franchisee of the 

application of the exemption. The 

acknowledgment does not protect the 

prospective franchisee, except, perhaps 

to put the prospect on notice that it may 

be entitled to receive a disclosure 

document.’’827

Seth Stadfeld asserted that the 

acknowledgment requirement could be 

abused. ‘‘[F]ranchisors could further a 

fraud by playing up to and flattering the 

prospective franchisee into thinking that 

he is so sophisticated that he doesn’t 

need the disclosures that the little 

people need.’’828 On the other hand, 

Howard Bundy advised that the 

acknowledgment should be expanded. 

He would revise the Rule to read: ‘‘The 

franchisee’s estimated investment, 

excluding any affiliate financing, totals 

at least $1.5 million and the prospective 

franchisee signs an acknowledgment 

stating the basis for the exemption from 

the Rule and providing the CFR citation 

to the Rule and verifying the grounds for 

the exemption . . .’’829

The Commission is convinced that the 

acknowledgment requirement serves a 

useful purpose. As previously noted, the 

acknowledgment will ensure that a 


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15526 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

830 J&G, NPR 32, Attachment, at 6. 

831 NFC, NPR 12, at 20. See also CA Bar, at 7; 

Marriott, at 2; Marriott, NPR 35, at 6 (‘‘‘Investment’

for purposes of the exemption should be defined as 

the initial investment as set forth in Item 7, plus 

credit extended by any lender and commitments for 

real property (not just mortgage or lease payments 

for the first few months.’’)). Others raised 

alternative calculation approaches. For example, 

Wendy’s observed that the focus on the franchisee’s 

investment should ‘‘exclude those expenses to be 

incurred during the first three months of operation 

which are not offset by sales. . . . [This] artificially 

raises the threshold.’’ Wendy’s, NPR 5, at 2. 

Similarly, J&G urged the Commission to include all 

commitments for real property over the life of the 

contract, not just mortgage or lease payments for the 

first few months. J&G, NPR 32, at 4. 

832 CA Bar, at 7 (including expenses over the life 

of the franchise term ‘‘would likely render the $1 

million threshold meaningless . . . because the 

accumulated expenditures over a 10 or 20 year 

period could easily exceed $1 million dollars.’’). 

833 NFC, NPR 12, at 21. See also H&H, NPR 9, 

at 4. 

834 Staff Report, at 243. 

835 IL AG, at 11. 

836 Marriott, at 3. See also Starwood, at 2. 

837 H&H, NPR 9, at 4. The NFC noted that 

conversion franchise activity is the ‘‘dominant form 

of franchise activity extant in the guest lodging and 

real estate brokerage arenas, and is common in 

other sectors as well. While new construction of 

franchised hotels does transpire, much franchising 

activity in the guest lodging sector involves the 

conversion of existing hotels . . . to the name, 

mark, and system of a guest lodging franchisor.’’

NFC, NPR 12, at 20. See also Starwood, at 2; PREA, 

NPR 20, at 3; Marriott, NPR 35, at 6. 

prospective franchisee receives notice 

that the transaction is exempt from the 

Rule. This would tend to prevent fraud 

by enabling the prospective franchisee 

to verify the applicability of the 

exemption. Further, we believe that 

abuse of the acknowledgment 

requirement is unlikely. A prospective 

franchisee’s signing of the 

acknowledgment does not give rise to 

the exemption. A franchisor must 

furnish disclosures unless the specific 

criteria for the exemption is satisfied. 

Thus, whether a prospective franchisee 

is flattered into signing an 

acknowledgment is irrelevant. At the 

same time, we agree with Mr. Bundy 

that the acknowledgment should 

reference the Franchise Rule itself. This 

would enable a prospective franchisee 

to review the Rule, understand the 

exemption, and, ultimately, verify the 

exemption’s application. Accordingly, 

the acknowledgment requirement of the 

final amended Rule has been revised to 

incorporate these revisions. 

iv. Meaning of ‘‘initial investment’’

During the Rule amendment 

proceeding, several commenters voiced 

concerns about how to define 

‘‘investment’’ for purposes of the large 

investment exemption. For example, 

J&G questioned: ‘‘Is it the initial 

investment described in Item 7? Is it the 

amount of the investment over the term 

of the franchise? Or is it some other 

calculation?’’830 The NFC voiced similar 

concerns and urged the Commission to 

clarify that the term ‘‘investment’’

means the franchisee’s estimated 

investment, as set out in Item 7 of the 

disclosure document.831

The Commission’s intent is that, for 

purposes of the large investment 

exemption, the level of a prospective 

franchisee’s investment should be 

limited to the ‘‘initial investment,’’ as 

set forth in Item 7. For that reason, the 

phrase ‘‘estimated investment’’ has been 

replaced in the Rule’s text with the 

phrase ‘‘initial investment.’’ Focusing 

on Item 7 when applying the exemption 

brings needed certainty to all parties, 

while ensuring that the exemption is 

narrowly focused to protect prospective 

franchisees making smaller investments. 

It is not farfetched to assume that a large 

universe of franchisees investing 

$100,000 or less today might actually 

pay more than $1 million (excluding 

unimproved land) to the franchisor 

during the course of a lengthy franchise 

agreement, especially when royalty and 

advertising fees, as well as ongoing 

product purchases, are considered. For 

that reason, a broad large investment 

exemption would effectively eviscerate 

the Rule’s protection.832

The term ‘‘initial investment,’’

however, need not be limited to a single 

unit. The Commission notes with 

approval the comments of H&H and the 

NFC, urging revision of the Rule to 

clarify that the threshold includes the 

total projected investment, whether in 

single- or multiple-unit transactions. As 

the NFC noted: ‘‘A multi-unit franchisee 

investing the threshold amount (or 

more) in a number of units is just as 

sophisticated as another franchisee 

investing a like amount in a single 

unit.’’833

The Commission has carefully 

considered the Staff Report 

recommendation to place limits on the 

large investment exemption to protect 

investors who pool their resources to 

purchase a franchise at or above the 

threshold level.834 The Commission 

shares the staff’s concern. Clearly there 

is a significant difference between a 

single individual purchasing a franchise 

for $1 million, versus a group of 10, for 

instance, each contributing $100,000. 

Obviously, the larger the group of 

investors, the smaller each individual 

investor’s risk. In such a circumstance, 

the level of each individual investment 

provides no indicium of sophistication. 

Accordingly, the Commission has added 

footnote 11 to the Rule to provide that 

the large franchise exemption applies 

only if at least one individual in an 

investor-group qualifies as 

‘‘sophisticated’’ by investing at the 

threshold level. 

Several commenters assessed this 

issue differently. IL AG suggested that 

each member of an investment group 

should be required to satisfy the $1 

million investment threshold in order to 

be deemed ‘‘sophisticated.835 In 

contrast, Marriott asserted that 

franchisees in large transactions 

typically form joint ventures or obtain 

financing from outside equity investors. 

Marriott maintained that there is little 

benefit in requiring a franchisee to break 

down the relative financial 

responsibilities of each equity investor 

in order to determine the application of 

the large investment exemption.836

Marriott also noted that the list of 

investors may change over the course of 

contract negotiations, making it difficult 

to determine at the time of sale whether 

any single investor qualifies for the 

exemption. 

The Commission has concluded, 

however, that the limitation in footnote 

11 is necessary to ensure that the large 

investment exemption strikes the right 

balance between providing relief for 

franchisors where the likelihood of 

abuse is reduced, and ensuring 

continued protection for those 

prospective franchisees who, although 

wealthy, may lack business experience. 

As explained above, the large 

investment exemption is premised on 

the Commission’s assumption that 

ability to pay indicates sophistication. 

That assumption fails when no one 

investor standing alone is investing at 

the requisite threshold level. In short, 

sophistication does not arise merely by 

aggregating otherwise unsophisticated 

investors. 

v. Conversion franchises and transfers 

During this proceeding, several 

commenters questioned whether the 

large investment exemption would 

cover business arrangements such as 

conversion franchises and transfers. In a 

conversion franchise, a business owner 

has already invested in his or her 

existing business and now seeks to 

associate with a particular franchisor’s 

brand by entering into a franchise 

agreement with that franchisor. H&H 

stated that the term ‘‘‘investment’

should include the fair market value of 

an existing facility as part of the 

investment, so as to include an existing 

facility that is being converted to the 

franchise system.’’837

In a similar vein, the NFC questioned 

whether a transfer of a franchise directly 

from a franchisee to a new purchaser 


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Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 15527 

838 NFC, NPR 12, at 21. 

839 No state has a comparable disclosure 

exemption. Several states—including California, 

Indiana, Maryland, New York, North Dakota, Rhode 

Island, South Dakota, and Washington—have an 

exemption from registration for ‘‘experienced 

franchisors.’’ To qualify for the exemption, a 

franchisor must typically have a net worth of at 

least $5 million and have had 25 franchise locations 

in operation during the previous five years. 

840 Franchise NPR, 64 FR at 57321. See 

Kaufmann, ANPR, 18 Sept. 97 Tr., at 190. But see 

Kezios, 18 Sept. 97 Tr., at 191-92 (opposing 

exemption for large institutions, suggesting that 

they need franchise advice and counsel as well). 

841 For example, in 1997, FTC staff was asked for 

an advisory opinion on whether a travel services 

company would be covered by the Rule if it sold 

outlets to hospitals. The staff advised that the 

hospital could not qualify as a fractional franchisee 

because it did not have the requisite two years of 

experience in providing travel-related services. 

Advisory 97-7, Bus. Franchise Guide (CCH) ¶ 6487 

(1997). Hospitals and other large institutions such 

as airports and universities, however, are hardly 

unsophisticated prospective franchisees. 

842 Gust Rosenfeld, at 7; J&G, at 7; Marriott, at 2; 

Piper Rudnick, at 6-7; Starwood, at 3. 

843 Selden, at 1 (large franchisee exemption 

thresholds are too low); Gee, at 2; Pu, at 2 

(Commission should focus on capabilities of 

franchisee, not size of investment). Two franchisee 

associations—the AAFD and the AFA—did not 

comment on this issue. 

844E.g., IL AG, NPR 3, at 2; PMR&W, NPR 4, at 

3; Wendy’s, NPR 5, at 3; Triarc, NPR 6, at 1; H&H, 

NPR 9, at 5; Baer, NPR 11, at 16; NFC, NPR 12, at 

22; BI, NPR 28, at 14; Tricon, NPR 34, at 7; Marriott, 

NPR 35, at 7. 845 Nothing prevents an ‘‘entity’’ under this 

provision from being an individual, but most 

individuals who have been in business for at least 

five years and have generated an individual net 

worth of at least $5 million are likely to have 

created a corporation or other formal organization 

through which to conduct business. 846 Net worth of an entity can readily be 

determined from the entity’s balance sheet or other 

financial information, typically submitted as part 

the application process. 

847 At the same time, several franchisee 

representatives criticized the large franchisee 

exemption as inappropriate. For example, Andrew 

Selden asserted that the large franchisee exemption 

will ‘‘sweep in thousands of small business 

entrepreneurs who own three or four units or 

independent businesses, or perhaps unrelated 

family wealth. Personal net worth has no 

correlation whatsoever with the need for 

information to make an informed business 

investment decision in respect to an unfamiliar 

franchise.’’ Selden, at 1. As noted above, however, 

the sophisticated investor exemptions are premised 

not on the notion that sophisticated investors do 

not need pre-sale disclosure, but that they are able 

to obtain such information, or greater information, 

without federal government intervention. This is 

particularly true of large franchisees, such as 

hospitals, airports, and universities, among others. 

848 H&H, NPR 9, at 5. 

849Id. 

can qualify for the exemption. It urged 

the Commission to include transfers in 

the definition of ‘‘investment,’’ where 

the purchasing franchisee pays an 

existing franchisee the threshold 

amount and then enters into a new 

franchise agreement with the franchisor. 

‘‘[W]e . . . submit that franchisees 

making such an investment prior to the 

execution of the subject franchise 

agreement are as ‘sophisticated’ as their 

brethren who make the investment after 

executing that agreement.’’838

The Commission’s view is that the 

definition of ‘‘initial investment’’ is 

broad enough to include conversion 

franchises and transfers without 

sacrificing necessary protection for 

franchise purchasers. Specifically, when 

considering a conversion franchisee’s 

‘‘initial investment’’ in a franchise, it is 

reasonable to consider the conversion 

franchisee’s previous investment in the 

unit. Indeed, a strong argument can be 

made that a conversion franchisee is 

even more sophisticated than a new 

franchisee, having worked in the 

business for a period of time. Similarly, 

the sale of an existing franchise would 

qualify for the large investment 

exemption in a transfer. The fact that a 

transferee will assume an existing 

contract or may renegotiate an existing 

contract with the franchisor should have 

no bearing on his or her level of 

sophistication as an investor, as long as 

he or she satisfies the monetary 

threshold. 

b. Section 436.8(a)(5)(ii): Large 

franchisee exemption 

Section 436.8(a)(5)(ii) exempts from 

the final amended Rule franchise sales 

to large entities; namely, those who 

have been in any business for at least 

five years and have a net worth of at 

least $5 million.839 The Commission is 

persuaded that large entities negotiating 

franchise deals—such as airports, 

hospitals, and universities—can obtain 

the benefits of the amended Rule 

without federal government 

intervention. 

i. Need for the large franchisee 

exemption 

In the Franchise NPR, the 

Commission proposed exempting 

franchise sales to large ‘‘corporate’’

franchisees.840 For example, a fast food 

franchisor may sell a number of 

franchised outlets to a hotel chain. Such 

transactions often are heavily negotiated 

by sophisticated counsel who have 

significant experience in the franchise 

industry. Even if a large entity does not 

have prior experience in franchising, or 

in the franchised business in particular, 

it is reasonable to assume that it can 

nevertheless protect its own interests 

when negotiating a franchise deal. 

Indeed, the Commission stated in the 

Franchise NPR that a large franchisee 

exemption is a logical extension of the 

original Rule’s fractional franchise 

exemption. To qualify as a fractional 

franchisee, among other things, a 

prospect must have two years of 

experience in the same line of business. 

Thus, the fractional franchise exemption 

is very narrowly tailored, focusing only 

on persons who wish to expand their 

existing product lines. While the 

fractional franchise exemption is 

appropriate for individuals and small 

businesses seeking to expand, it may be 

unnecessarily narrow for larger, more 

sophisticated corporations seeking to 

become franchisees.841

The Staff Report proposed a large 

franchisee exemption identical to that in 

the Franchise NPR. Five franchisor 

representatives continued to support the 

proposed exemption,842 while three 

franchisees opposed it for the same 

reasons previously voiced in response to 

the Franchise NPR.843

ii. Covered entities 

The large franchisee exemption is 

intended to cover franchisees that are 

‘‘entities.’’ In the Franchise NPR, the 

Commission proposed that the large 

franchisee exemption be limited to 

corporations. Many commenters 

supported the proposed exemption, but 

criticized its narrow application.844

Specifically, several commenters urged 

the Commission to consider exempting 

other large entities, such as 

partnerships, finding no rationale for 

restricting the exemption only to 

corporations. The Commission agrees, 

and has expanded the provision in the 

final amended Rule to encompass 

corporations, partnerships, and similar 

arrangements.845

iii. Net worth 

To qualify for the large franchisee 

exemption, section 436.8(a)(5)(ii) 

specifies that the prospective 

franchisee-entity must have a net worth 

of $5 million.846 During the Rule 

amendment proceeding, several 

commenters opined that the 

exemption’s net worth prerequisite is 

overly restrictive.847 H&H, for example, 

contended that a $5 million net worth 

threshold is too high, limiting the 

exemption to a small number of 

publicly-traded companies. ‘‘Many 

successful private companies do not 

seek to accumulate equity, but instead 

to maximize cash flow to their owners. 

Thus, such a high net worth 

requirement would prevent the 

exemption of many sophisticated 

investors.’’848 The firm urged a net 

worth requirement of $1 million.849 On 

the other hand, Howard Bundy asserted 

that the $5 million net worth 

requirement is too low, sweeping in 

many very small companies. ‘‘That is a 


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15528 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

850 Bundy, NPR 18, at 14. 

851 NFC, NPR 12, at 21-22. Similarly, J&G 

maintained that any ‘‘entity or group of entities 

with a $5 million or more net worth should, by 

definition, be deemed to have the requisite 

sophistication to satisfy the exclusion or 

exemption.’’ J&G, NPR 32, at 4. 

852 Triarc, NPR 6, at 2. 

853 Marriott, NPR 35, at 7. 854See also, e.g., NFC, NPR 12, at 22; J&G, NPR 

32, at 4; H&H, NPR 9, at 5. Triarc, for example, 

noted that one Arby’s franchisee owns 700 units 

and is one of the largest privately owned restaurant 

operators in the world. It asked ‘‘why should we 

have to give disclosure to that franchisee merely 

because he sets up a new corporate entity to own 

his next Arby’s store?’’ Triarc, NPR 6, at 1-2. 

855 Starwood, at 3; NFC, NPR 12, at 22; J&G, NPR 

32, at 4; H&H, NPR 9, at 5. 

856 In the same vein, the definition of ‘‘affiliate’’

covers both franchisee and franchisor affiliates, as 

noted in our discussion of the definitions, above. 

857 This modifies slightly an earlier version of the 

large franchisee exemption which would have 

required the purchaser and its parent or affiliates 

to satisfy the net worth and prior experience 

prerequisites. See Marriott, at 3-4; J&G, at 7. 

858 CA Bar would limit this exemption to those 

with an equity ownership in the company. In its 

view, those with a non-equity interest, such as a 

lender, typically do not participate in the business, 

in contrast to an equity owner, and therefore should 

be excluded from the exemption. CA Bar, at 8. 

While CA Bar’s observation is correct, the Rule 

need not be revised to address this issue. A lender 

or other non-equity interest owner will be excluded 

from the exemption because he or she will not 

satisfy the exemption’s prior experience 

prerequisite. 

859 The ‘‘insider’’ exemption is modeled after 

nearly identical language in California’s statute. 

Washington and Rhode Island have similar 

exemptions. See Duvall & Mandel, ANPR 114, at 21 

(suggesting a narrower approach). 

small enough net worth to not be 

indicative of the level of sophistication 

that would indicate no need for 

mandatory disclosures.’’850 The 

Commission believes that the $5 million 

net worth requirement strikes the right 

balance, granting relief to sophisticated 

entities, while protecting those entities 

for whom the purchase of a franchise 

would be a significant financial risk. 

iv. Prior experience 

In addition to requiring $5 million net 

worth, section 436.8(a)(5)(ii) requires 

large franchisees to have five years of 

prior business experience in any line of 

business, as proposed in the Franchise 

NPR. A few commenters opined that the 

prior experience prerequisite is 

unnecessary, and urged the Commission 

to focus only on the large franchisee’s 

net worth. The NFC, for example, 

asserted that: ‘‘Even if a large 

corporation does not have prior 

experience in franchising specifically, it 

is reasonable to assume that it can 

protect its own interests when 

negotiating for the purchase of a 

franchise.’’851

On the other hand, Triarc urged the 

Commission to focus on prior 

experience in lieu of net worth. It noted 

that it is possible that a franchisee with 

10 years of experience and 50 units may 

wish to finance its operation with debt 

rather than equity. Under the 

circumstances, this presumably 

sophisticated franchisee would fail the 

net worth test: 

What if a large corporate franchisee 

with $20.0 million of net worth 

declares a $16.0 million dividend to 

its shareholders or otherwise does a 

recapitalization which takes its net 

worth below the threshold? Over 

the years, some gigantic companies 

that are financially healthy have 

had huge negative net worths and 

negative earnings. . . . We would 

suggest that net worth is often an 

indicator of how a company 

chooses to finance itself rather than 

of sophistication.852

After considering these arguments, 

the Commission concludes that both the 

$5 million net worth and five years 

experience prerequisites are necessary 

to ensure that the Rule continues to 

protect businesses with limited 

experience, limited assets, and, by 

inference, limited prior success. For 

example, a small sandwich shop 

franchisee is not necessarily 

sophisticated enough to purchase a 

hotel merely because the franchisee has 

operated one or more sandwich shops 

for five years. Similarly, several wealthy 

individuals who form a partnership 

without any prior business experience 

are not necessarily sophisticated merely 

because of their net worth. Both 

prerequisites are necessary to ensure 

that the large franchisee exemption does 

not create a loophole, putting small and 

unsophisticated entities at an 

unacceptable financial risk. 

v. Affiliates and parents 

Finally, section 436.8(a)(5)(ii) refines 

the proposed exemption published in 

the Franchise NPR, which used the term 

‘‘corporation’’ and made no mention of 

parents or affiliates. As revised, a 

franchisor may consider the prior 

experience and net worth of the 

franchisee’s affiliates and parents when 

determining whether the franchisee 

qualifies as a ‘‘large franchisee.’’

A few commenters noted that the 

prior experience and net worth 

prerequisites would essentially 

disqualify new corporations. They 

asserted that there are legitimate tax and 

liability reasons why an experienced 

franchisee may wish to establish a 

separate corporation for a particular 

franchise transaction. For example, 

according to Marriott, it is not unusual 

in the lodging and restaurant industries 

to form ‘‘special purpose entities (SPEs) 

. . . to insulate either a parent company 

or the individual investors from 

liability.’’853 If so, then such a new 

corporation would not meet the 

exemption’s net worth and prior 

experience prerequisites.854 These 

commenters urged the Commission to 

permit the franchisor to consider the 

consolidated net worth and experience 

of franchisee affiliates and parents.855

The Commission is persuaded that the 

net worth and prior experience 

prerequisites may not make sense when 

applied to franchisee spin-off 

subsidiaries or affiliates that are formed 

primarily for tax or limited-liability 

purposes. Accordingly, section 

436.8(5)(ii) makes clear that a franchisor 

may aggregate commonly-owned 

franchisee assets in determining the 

availability of the large entity 

exemption:856

The franchisee (or its parent and 

any affiliates) is an entity that has 

been in business for at least five 

years and has a net worth of at least 

$5 million.857

c. Section 436.8(a)(6): Officers, owners, 

and managers exemption 

Section 436.8(a)(6) of the final 

amended Rule adds a new exemption 

for officers, owners,858 and managers of 

a business before it becomes a 

franchisor.859 In such circumstances, it 

reasonably can be assumed that the 

prospective franchisee already is 

familiar with every aspect of the 

business system and the associated 

risks. Thus, disclosure would serve little 

purpose. Indeed, in some instances, a 

company may wish to offer units only 

to its owners, officers, and managers. If 

not exempt from the Rule, these 

companies would have to go through 

the burden and expense of creating a 

disclosure document for isolated sales 

to company insiders. To ensure that 

individuals qualifying for the exemption 

have recent and sufficient experience 

with the business, however, section 

436.8(a)(6) is limited to individuals who 

have been associated with the company 

within 60 days of the sale and who have 

been involved for at least two years with 

the company. 

Section 436.(8)(a)(6) refines the 

proposed Rule’s ‘‘insiders’’ exemption 

which would have limited the 

exemption to owners and officers. 

During the Rule amendment proceeding, 

several commenters urged the 

Commission to broaden the exemption 

to include ‘‘trustees, general partners 

and any individual who has or had 

management responsibility for the offer 


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860 NFC, NPR 12, at 23. See also AFC, NPR 30, 

at 3. 

861 Stadfeld, NPR 23, at 9. 

862 Bundy, NPR 18, at 14. 

863 For that reason, we decline to include 

‘‘trustees.’’ Nothing in the designation ‘‘trustee’’

ensures that the individual will have an adequate 

level of experience within the system to justify an 

exemption from receiving pre-sale disclosures. On 

the other hand, if a trustee functions as an officer 

or manages the franchise systems, he or she will 

qualify for the exemption as either an officer or 

manager. 

864 CA Bar observed that section 436.8(a)(6) refers 

to ‘‘purchasers’’ It questioned whether the insider 

exemption is limited to individual insiders only, or 

to entities formed by individual-insiders. It 

correctly observed that insiders who are likely to 

purchase a franchise are likely to do so by forming 

a partnership, corporation, or other entity through 

which to conduct business. We believe the term 

‘‘purchaser’’ is broad enough to include an 

individual who intends to operate as an entity. 

865 This approach is also consistent with the 

Commission’s procedures for adjusting thresholds 

or other information in Commission enforced 

statutes. Under the Debt Collection Improvement 

Act of 1996, the Commission adjusted civil penalty 

amounts from $10,000 to $11,000 per violation to 

account for inflation. Those amounts must be 

adjusted at least once every four years. See 61 FR 

54549 (Oct. 21, 1996). Similarly, the Appliance 

Labeling Rule, 16 CFR Part 305, sets forth ranges 

of estimated annual energy costs and consumption 

for various appliances. Because energy cost and 

appliance efficiencies fluctuate, the Commission 

adjusts the label requirements periodically by 

publishing in the Federal Register new costs and 

ranges, which then become part of that rule’s 

labeling requirements. The Commission also 

publishes in the Federal Register adjustments for 

determining illegal interlocking directorates in 

connection with Section 19(a)(5) of the Clayton Act. 

866See, e.g., H&H, NPR 9, at 4; Baer, NPR 11, at 

15-16. 

867 Franchise NPR, 64 FR at 57321-22. 

868 NFC, NPR 12, at 22. 

869 The Staff Report made the same 

recommendation. Staff Report, at 250-51. No 

comments were submitted on this recommendation. 

870 See Federal Maritime Commission, Civil 

Monetary Penalty Inflation Adjustment, 46 CFR 

506.2(c) (‘‘‘Consumer Price Index’ means the 

Consumer Price Index for all urban consumers 

published by the Department of Labor.’’). 

871 See 16 CFR 436.2(a)(4). 

872 43 FR at 59708. 

873E.g, Spandorf, at 12.; Duvall, at 2-3; AMF; CHS; 

IDS. 

874E.g., CHS, at 1-2; IDS, at 2; NCBA, at 2. See 

also J&G, NPR 32, Attachment, at 9; TruServ, NPR 

33, at 2; Baer, NPR 11, at 5; IL AG, NPR 3, at 3; 

PMR&W, NPR 4, at 3; H&H, NPR 9, at 3; Gurnick, 

NPR 21, at 7. 

and sale of the franchisor’s franchises or 

the administration of the franchised 

network.’’860 In short, these comments 

urged that the exemption parallel the 

list of company insiders disclosed in 

Item 2. Seth Stadfeld, however, 

questioned the need for the exemption 

if the company is already providing 

disclosures to others.861 Howard Bundy 

urged the Commission to limit the 

exemption to bona fide officers, fearing 

that a franchisor could attempt to skirt 

disclosure obligations by putting a 

prospective franchisee on the board of 

directors, for example, for a few days or 

weeks before the sale and removing him 

or her shortly thereafter.862

Based upon the record, the 

Commission has adopted the NFC’s 

suggestion that the exemption should 

cover not just owners and officers of a 

franchise system, but others with direct 

management experience.863 It is 

reasonable to assume that managers and 

others with at least two years of direct 

experience in the business should be 

well-informed about its operations.864

Where a non-franchised company 

wishes to sell a limited number of 

outlets to experienced company 

personnel only, it would be overly 

burdensome to force the company to 

create a disclosure document when the 

only beneficiaries of the disclosures are 

already knowledgeable individuals. The 

Commission notes that the exemption is 

company-specific: we do not mean to 

suggest that a manager of one company 

is deemed sophisticated for all franchise 

sales. Rather, the exemption would 

apply only to a manager or other officer 

seeking to purchase a franchise of that 

very company. 

Howard Bundy’s concern that 

franchisors may abuse the exemption in 

an effort to skirt the Rule is adequately 

addressed. Specifically, in order to 

qualify for the exemption, the 

prospective franchisee must have served 

in one of the enumerated positions for 

at least two years. Moreover, their 

relationship with the company must be 

current: within 60 days of the sale. 

These prerequisites are likely to ensure 

that the prospect is in fact a bona fide 

officer or owner. 

d. Section 436.8(b): Inflation adjustment 

Section 436.8(b) of the final amended 

Rule provides that the Commission shall 

adjust the size of the monetary 

thresholds for the exemptions listed in 

section 436.8 every fourth year based 

upon the Consumer Price Index.865 This 

would affect the minimum payment 

exemption,866 as well as the three 

sophisticated investor exemptions. As 

explained below, this approach differs 

from the proposed inflation adjustment 

published in the Franchise NPR in two 

respects: (1) it sets a specific time period 

when the adjustments must occur (every 

fourth year); and (2) adds specificity by 

tying the adjustment to the Consumer 

Price Index. 

In the Franchise NPR, the 

Commission proposed revising the 

amended Rule’s monetary thresholds 

once every four years to adjust for 

inflation.867 The Commission believed 

that a four-year adjustment is necessary 

to ensure that the thresholds reasonably 

keep up with inflation. 

The Franchise NPR proposal garnered 

three comments. PMR&W and John Bear 

agreed with the need for a threshold 

adjustment and supported the Franchise 

NPR proposal. The NFC supported the 

inflation adjustment, but offered a 

slightly different approach. It suggested 

that the Commission tie the threshold 

amounts automatically to reflect 

increases in the Consumer Price Index, 

while placing the burden on the 

franchisor to prove that it qualified for 

the exemption at the time in 

question.868

The Commission is persuaded that the 

final amended Rule should contain 

bright-line thresholds that are clear to 

both franchisor and franchisee alike. 

Thus, any adjustment to the Rule 

thresholds should be imposed only after 

an announcement to the public, where 

the effective date of the adjustment and 

the adjustment amount is clear. The 

most effective way to provide such 

notice is through Federal Register 

announcements and that the 

adjustments should be based upon a 

clear standard—the Consumer Price 

Index.869 Accordingly, the Commission 

intends to publish every fourth year 

adjustments to the amended final Rule’s 

monetary thresholds based upon the 

Consumer Price Index. Finally, to add 

greater specificity, the final amended 

Rule makes clear that the term 

‘‘Consumer Price Index’’ means ‘‘the 

Consumer Price Index for all urban 

consumers published by the Department 

of Labor.’’870

4. Exclusions 

Finally, the final amended Rule 

removes the four exclusions for nonfranchise relationships found in the 

original Rule: (1) employer-employee 

and general partners; (2) cooperative 

associations; (3) certification and testing 

services; and (4) single trademark 

licenses.871 In the original SBP, the 

Commission stressed that these four 

relationships are not franchises, but 

might be perceived as falling within the 

definition of a franchise.872 To avoid 

any confusion, the Commission 

expressly excluded these four 

relationships from Rule coverage. 

During the Rule amendment 

proceeding, several commenters 

opposed the removal of the exclusion 

for cooperatives for various reasons.873

According to these commenters, the 

exclusion helps to distinguish between 

franchises and cooperatives, a 

distinction that may not be apparent to 

new cooperative members.874 Second, 

removing the cooperative exclusion 

from the Rule could lead to costly 


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875E.g., NCBA, at 4; NCFC, at 2. 

876E.g., AMF; CHS; NCBA, at 5. 

877E.g., Spandorf, at 12; CHS; Reizman Burger, at 

3-4. 

878 We also note that there are many other 

business relationships that share some similarities 

with franchises, such as distributorships, multilevel 

marketing programs, and some work-at-home 

schemes. Yet, these arrangements were not 

expressly excluded from the Rule. Rather, the 

definition of the term ‘‘franchise’’ is sufficient to set 

out the parameters of the Rule’s scope. To the 

extent that these relationships may be confused 

with franchises, the Commission has provided 

needed clarification in the Final Interpretative 

Guides. The same approach is warranted for 

cooperatives. Nonetheless, based upon the 

comments, the Commission specifically reaffirms 

the four exemptions in this Statement and 

anticipates that future Compliance Guides will do 

the same. As in other areas of Rule interpretation, 

the staff of the Commission can also address future 

questions concerning the definition of the term 

‘‘franchise’’ on a case-by-case basis through 

informal advisory opinions. 

879See 16 CFR 436.1(f). ‘‘Without this provision, 

the Commission believes that the disclosures 

required by the rule could be contradicted in oral 

sales presentations and rendered of little value 

without violating the rule.’’ Original SBP, 43 FR at 

59695. 

880See 16 CFR 436.1(b)(2) and (c)(2); UFOC Item 

19. Original SBP, 43 FR at 59684-690 (The earnings 

representation standards are ‘‘intended to prevent 

or minimize potential misrepresentations or 

distortions in the representations made by 

franchisors, while at the same time permitting 

franchisors to use informative representations as 

part of their marketing scheme.’’). 

881See 16 CFR 436.1(b)(2) and (c)(2); UFOC Item 

19. In the original SBP, the Commission rejected the 

idea that franchisors should always provide a copy 

of their substantiation of financial performance 

claims to the prospective franchisee. At the same 

time, it found that ‘‘the benefit to be derived from 

permitting those prospective franchisees who so 

wish to review the franchisor’s substantiation far 

outweighs speculative harms that could arise from 

such disclosure.’’ Original SBP, 43 FR at 59691. 

882See 16 CFR 436.1(h). In the original SBP, the 

Commission observed that numerous consumers 

complained about the difficulty they experienced 

when they attempted to obtain refunds from their 

franchisors. ‘‘It is clear from the record that all 

franchisors do not adequately adhere to the refund 

policies they themselves agree to in their 

contracts.’’ Original SBP, 43 FR at 59696-97. See 

also Staff Review, at 29 (some franchisees continue 

to experience problems with obtaining refunds). 

883 We decline to adopt a third prohibition 

recommended in the Staff Report that would have 

prohibited franchisors from failing to furnish a 

prospective transferee of an existing franchised 

outlet with a copy of an existing disclosure 

document of the franchisor, upon request. As 

recommended in the Staff Report, this prohibition 

would not have required a franchisor to prepare a 

current disclosure document solely for the benefit 

of a transferee. Rather, a franchisor would have 

been permitted to give a prospective franchisee a 

copy of its most recent disclosure document. For 

example, a franchisor who stopped selling 

franchises and no longer possessed a current 

disclosure document could have complied with this 

prohibition by giving a prospective transferee a 

copy of its most recent disclosure document, even 

if that document were at the time out-of-date. See 

Staff Report, at 264. In response to the Staff Report, 

five commenters opined that this proposed 

prohibition would have resulted in franchisors 

being forced to disclose information that could have 

been misleading to the prospective transferee, 

subjecting the franchisor to potential liability. CA 

Bar, at 10; Kaufmann, at 6; Seid, at 7; Spandorf, at 

10-11; Wiggin and Dana, at 5. We agree. An 

‘‘existing’’ disclosure document would have no 

relevance to a transfer unless the document were 

current. Moreover, a current disclosure document 

may not accurately portray the business 

arrangement entailed in the transfer, because it 

would explain the terms and conditions of the 

franchisor’s current franchise agreement, while a 

transferee assumes the terms and conditions of an 

ongoing franchise agreement. Moreover, to the 

extent that a potential transferee wishes to see a 

copy of the franchisor’s disclosure document, he or 

she can obtain a copy from a commercial service, 

from a franchise registration state, and more 

frequently online (such as through California’s CalEasi website). But see Bundy, at 10. 

litigation over Rule coverage issues.875

Third, retaining an express exclusion in 

the Rule itself is needed to ensure that 

the Commission does not change its 

view and seek to enforce the Rule 

against cooperatives in the future.876

Fourth, the value of retaining the 

exclusion outweighs any benefit from 

streamlining the Rule.877

The Commission appreciates the 

concern raised by these commenters. 

Nonetheless, we see no compelling 

reason to keep the exclusions in the 

Rule itself. As a preliminary matter, 

removing the exclusions from the Rule 

should not be equated with expanding 

the scope of part 436 to cover entities 

currently dealt with in these exclusions: 

the Commission continues to hold that 

these business relationships do not meet 

the criteria for such coverage. They 

simply do not satisfy the definitional 

elements of the term ‘‘franchise.’’

Removal of the exclusions from the Rule 

is part of the Commission’s effort to 

streamline the Rule. 

Nevertheless, the Commission 

included the exclusions in the original 

Rule to clarify the limits of the term 

‘‘franchise,’’ and for that reason the 

concepts embodied in the exclusions 

continue to serve a valuable consumer 

education function.878 However, as with 

other sections of this document, we are 

disinclined to include general consumer 

education materials in the text of the 

final amended Rule itself, absent 

compelling evidence that such messages 

are warranted to address specific 

problems identified in the record. While 

the commenters asserted that confusion 

exists over the definition of the term 

‘‘franchise,’’ not a single individual 

cooperative member voiced any 

confusion over the scope of the 

‘‘franchise’’ definition, nor any concern 

about the distinction between franchises 

and cooperatives, during the entire Rule 

amendment proceeding. Under the 

circumstances, the proper forum to 

discuss limits to the definition of the 

term ‘‘franchise’’ is in this document 

and in future Compliance Guides. To 

that end, the Commission reaffirms the 

four exclusions and specifically adopts 

the discussion of the exclusions set 

forth in the original SBP at 43 FR 59708- 

10. 

G. Section 436.9: Additional 

Prohibitions 

The final amended Rule prohibits 

nine acts or practices that violate 

Section 5 of the FTC Act. The original 

Rule contained four of them, namely, 

prohibitions against: (1) making 

statements that contradict the 

franchisor’s disclosures;879 (2) making 

financial performance representations 

without a reasonable basis and without 

written substantiation for the 

representation at the time the 

representation is made;880 (3) failing to 

make available written substantiation 

for any financial performance 

representations;881 and (4) failing to 

make promised refunds.882

Second, the final amended Rule adds 

two new prohibitions concerning the 

furnishing of disclosures. Specifically, 

section 436.9(e) prohibits franchise 

sellers from failing to furnish a copy of 

the basic disclosure documents to 

prospective franchisees early in the 

sales process, upon reasonable request. 

Section 436.9(f) prohibits franchise 

sellers from failing to furnish a prospect 

in the sales process who has already 

received the basic disclosure document 

with a copy of any updated disclosure 

document or quarterly update to an 

existing disclosure document, upon 

reasonable request, before the 

prospective franchisee signs a franchise 

agreement.883

Third, the final amended Rule adds 

two anti-fraud prohibitions designed to 

preserve the integrity of the disclosure 

document and franchise agreement. 

Section 436.9(g) prohibits franchise 

sellers from materially altering the terms 

and conditions of any franchise 

agreement presented to a prospective 

franchisee for signing, unless the seller 

informs the prospective franchisee of 

the changes seven days before execution 

of the agreement. Section 436.9(h) 

prohibits franchise sellers from 

disclaiming or requiring a franchisee to 

waive reliance on any representation 

made in a disclosure document or its 

exhibits or attachments. 

Finally, section 436.9, based upon our 

law enforcement history and the 

obviously deceptive nature of the 

practice, adds a new anti-shill 

prohibition designed to prevent the use 

of paid testimonials or shill references. 

Specifically, section 436.9(b) prohibits 

franchise sellers from misrepresenting 

that any person has purchased a similar 

franchise or operated a similar franchise 


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884E.g., FTC v. Netfran Dev. Corp., No. 05-CV22223 (S.D. Fla. 2005); FTC v. Morrone’s Water Ice, 

Inc., No. 02-3720 (E.D. Pa. 2002). 

885 For example, Peter Lagarias stated: ‘‘In my 

experience, the providing of earnings claims in 

contravention of . . . [Item 19] often occurs both 

orally and in writing. The most common written 

method of earnings claims is by newspaper or 

magazine articles about the franchise system which 

contain the earnings claims. These news articles are 

reproduced and provided to prospective franchisees 

in contravention of the Rule.’’ Lagarias, RR 13, at 

2. See also Brown, ANPR 4, at 4 (‘‘There have 

therefore been endless variations of supposedly 

‘indirect’ franchisor representations of profitability, 

[ranging] from the proverbial notation on a napkin 

or envelope, to prearranged referrals to ‘typical’’

franchisees, to use of ‘company store’ figures with 

plain implications of comparability, and to the 

required preparation of a ‘business plan’ by the 

prospective franchisee and its ‘review’ and ‘oral 

adjustment’ by franchisor or personnel.’’); Bundy, 

ANPR 119, at 1 (‘‘I have never met a franchisee who 

had been in operation more than a few weeks who 

did not receive earnings claims before investing in 

a franchise. It simply does not happen. They either 

have received them from the franchisor or its agent 

directly (often in writing or on floppy disk) or from 

third parties to whom they have been directed.’’); 

IL AG, RR 25, at 2 (‘‘The most common situation 

and opportunity for abuse is the franchisor sales 

representative who makes oral representations as to 

earnings potential when talking with prospects.’’); 

WA Securities, RR 37, at 3 (‘‘Our fraud 

investigations reveal that a substantial number of 

franchisors or their sales representatives are making 

written or oral earnings claims to prospective 

franchisees even when the disclosure document 

states that no earnings claims are made.’’); AAFD, 

RR 39, at 6 (‘‘Probably less than 2% of franchisors 

make formal earnings disclosures, [while] the vast 

majority of franchisees claim they have received 

oral (and often informal written) earnings claims 

and projections.’’). 

886 Of course, franchisors are always free to 

disseminate additional truthful information to a 

prospective franchisee. See 16 CFR 436.1(a)(21) 

(franchisors are not precluded from giving other 

nondeceptive information orally, visually, or in 

separate literature so long as such information is 

not contradictory to the information in the 

disclosure document). 

887 The anti-shill prohibition is also broad enough 

to cover the use of ‘‘institutional shills,’’ companies 

that purport to act like a Better Business Bureau 

that provide consumers with ‘‘independent’’ reports 

on its members. See FTC v. United States Bus. 

Bureau, Bus. Franchise Guide (CCH) ¶ 10865 (S.D. 

Fla. 1995). 

888 Scam franchisors frequently use shill 

references in order to bolster their financial 

performance and success claims. E.g., FTC v. Car 

Checkers of Am., Inc., No. 93-623 (mlp) (D.N.J. 

1993); FTC v. Am. Legal Distrib., Inc., No. 1:88-CV519-MHS (N.D. Ga. 1988). Harm resulting from the 

use of shills is also demonstrated by numerous 

Commission business opportunity law enforcement 

actions. E.g., FTC v. Am. Entertainment Distrib., 

Inc., No. 04-22431 CIV-Huck (S.D. Fla. 2004); FTC 

v. Hart Mktg. Enter., No. 98-222-CIV-T-23 E (M.D. 

Fla. 1998); FTC v. Unitel Sys., Inc., No. 3- 

97CV18780-D (N.D. Tex. 1997). 

889 The NCL reported that complaints about fake 

references are among the most common franchisee 

and business opportunity complaints it receives. 

NCL, ANPR 35, at 2. See also Staff Program Review 

at 39 (showing that false or deceptive 

representations pertaining to testimonials and 

references is the second most common Section 5 

allegation (28 counts) in Commission business 

opportunity and franchise cases). 

890 J&G, NPR 32, Appendix, at 9. 

891 This view is consistent with the Commission’s 

Guides Concerning The Use of Endorsements and 

Testimonials In Advertising, 16 CFR 255. These 

guides require that any representation in an ad that 

purports to represent the view of a consumer must, 

in fact, reflect the consumer’s actual views or 

experience: 

‘‘Endorsements must always reflect the honest 

opinions, findings, beliefs, or experience of the 

endorser. Furthermore, they may not contain any 

representations which would deceive, or could not 

be substantiated if made directly by the advertiser.’’

16 CFR at 255.2(a). Therefore, any actor or public 

figure who might run afoul of this provision in the 

Franchise Rule already risks violating the FTC Act. 

from the franchisor, or that any person 

can provide an independent and reliable 

report about the franchise or the 

experiences of any current or former 

franchisees. Each of these prohibitions 

is discussed in the following sections. 

1. Section 436.9(a): Inconsistent 

statements 

Section 436.9(a) of the final amended 

Rule retains the original Rule 

prohibition against making statements 

that contradict the information required 

to be disclosed in the disclosure 

document. Such prohibited 

contradictory statements include those 

made orally, visually, or in writing. 

Because the information in the 

disclosure document must be complete 

and accurate, any statements 

contradicting that information would be 

false or likely to mislead prospective 

franchisees. Moreover, such statements 

would likely influence the purchasing 

decision of a prospect giving reasonable 

interpretation to such statements. 

This is particularly true of financial 

performance representations. Our law 

enforcement experience884 and the 

record885 show that franchisors often 

state in their disclosure document that 

they do not furnish financial 

performance claims, yet give 

prospective franchisees false or 

misleading financial performance data 

outside of the disclosure document. 

Thus, the purpose of this prohibition is 

to prevent deception and to preserve the 

integrity of the information 

disseminated to prospective franchisees 

by ensuring that all required 

information will be disclosed in the 

form of the disclosure document.886

2. Section 436.9(b): Shills 

Section 436.9(b) of the final amended 

Rule prohibits the use of fictitious 

references or ‘‘shills.’’887 Specifically, it 

prohibits franchise sellers from 

misrepresenting that any person has 

actually purchased or operated one of 

the franchisor’s franchises or that any 

person can give an independent and 

reliable report about the experience of 

any current or former franchisee. 

Because information provided by shills 

is inherently false, it is likely to mislead 

prospective purchasers. Yet, a 

reasonable prospective purchaser would 

have no reason to doubt the shill’s 

statements. Also, because shills are 

represented as having experience with 

the franchisor or otherwise able to give 

an independent and reliable report 

about the franchisor, their statements 

are likely to influence the prospect’s 

purchasing decision. Indeed, the 

Commission’s law enforcement 

experience888 shows that shills are often 

the glue that holds a scam together by 

allaying consumers’ concerns about the 

investment risks.889

The anti-shill provision generated 

only one comment. J&G expressed 

concern that actors or public figures 

used in a franchisor’s advertising 

campaigns ‘‘will need to exercise 

caution when making endorsements of 

franchises so as not to run afoul of 

prohibitions against misrepresenting 

that they are able to provide ‘an 

independent and reliable report about 

the franchise or the experiences of any 

current or former franchisees.’’’890

The Commission finds the rulemaking 

record lacks any evidence that would 

shed light on the extent to which 

franchisors use actors or public figures 

to sell franchises, as opposed to selling 

products and services to the end-user. 

Based upon our law enforcement 

experience, we believe such practices 

are rare. More important, our primary 

concern is with preventing deception: 

we see little difference between a 

franchisor paying (or otherwise 

inducing) unknown individuals to 

deceive prospective franchisees, on the 

one hand, and paying (or otherwise 

inducing) actors or celebrities to deceive 

prospective franchisees, on the other. In 

each case, a franchisor should not be 

able to pay (or otherwise induce) 

individuals to lie about their purported 

experience in order to lure unsuspecting 

consumers to buy a franchise.891 We are 

persuaded, therefore, that the anti-shill 

prohibition is entirely proper. 

3. Section 436.9(c): Financial 

performance representations 

Section 436.9(c) of the final amended 

Rule retains the original Rule’s 

prohibition on the making of financial 

performance representations, unless the 

franchisor has a reasonable basis and 

written substantiation for the 

representation at the time the 

representation is made. As discussed 

above in connection with Item 19, false 

and unsubstantiated financial 

performance claims have been prevalent 

in fraudulent sales, are highly material, 

and are inherently likely to mislead 


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892E.g., original SBP, 43 FR at 59684-85 (‘‘The use 

of deceptive and inaccurate profit and loss 

statements by franchisors has resulted in a legion 

of ‘horror stories.’’). See also Staff Review, at 25 

(earnings claims most frequently reported franchise 

problem). 

893E.g., FTC v. Netfran Dev. Corp., No. 05-CV22223 (S.D. Fla. 2005); United States v. Robert 

Lasseter, No. 3:03-1177 (M.D. Tenn. 2003); FTC v. 

Morrone’s Water Ice, Inc., No. 02-3720 (E.D. Pa. 

2002); FTC v. Car Wash Guys Int’l., Inc., No. 00- 

8197 ABC (RNBx) (C.D. Cal.); FTC v. Tower 

Cleaning Sys., Inc., No. 96 58 44 (E.D. Pa. 1996); 

United States v. Tutor Time Child Care Sys., Inc., 

No. 96-2603 (N.D. Cal. 1996); FTC v. Mortgage Serv. 

Assocs., Inc., No. 395-CV-1362 (AVC) (D. Conn. 

1995); FTC v. Sage Seminars, Inc., C-95-2854-SBA 

(N.D. Cal. 1995). 

894 16 CFR 436.1(b)(2); 436.1(c)(2). 

895 The prohibition on failing to give out 

disclosures earlier in the sales process pertains to 

‘‘prospective franchisees’’ only. A franchisor has no 

obligation to furnish disclosures to competitors, the 

media, academicians, or researchers. It applies to 

prospective franchisees already in the sales process. 

Accordingly, a franchisor need not furnish a copy 

of its disclosures to individuals seeking general 

information on the franchisor or who do not qualify 

to purchase a franchise. We would expect a 

franchisor to furnish disclosures, upon request, to 

any prospective franchisees who have submitted a 

franchise application and who have been notified 

that they qualify to purchase a franchise. See IFA, 

at 3. See also Winslow, at 91. 

896 Turner, NPR 13, at 1; Karp, NPR 24, at 5-6; 

Bundy, NPR 18, at 5-6. See also original SBP, 43 

FR at 59639 (‘‘[O]nce a prospect has been ‘hooked,’

it is difficult, if not impossible, to ‘extricate 

himself.’’’). 

897 IFA urged the Commission to define the term 

‘‘reasonable request.’’ IFA, at 3. We note that the 

similar term ‘‘reasonable demand’’ has long been 

part of the original Rule in connection with the 

provision of written substantiation for financial 

performance representations. 16 CFR 436.1(b)(2) 

and 1(c)(2) (‘‘such material is made available to any 

prospective franchisee and to the Commission or its 

staff upon reasonable demand.’’). Similarly, the 

UFOC Guidelines provide that a franchisor making 

financial performance claims must include a 

statement in its Item 19 disclosure that 

‘‘substantiation of the data used in preparing the 

earnings claim will be made available to the 

prospective franchisee on reasonable request.’’

UFOC, Item 19d. There is no indication in the 

record that the use of the terms ‘‘reasonable 

request’’ or ‘‘reasonable demand’’ has been 

confusing or otherwise unclear. We believe 

determinations about ‘‘reasonableness’’ can be 

made only on a case-by-case basis. At a minimum, 

we will consider whether a request is ‘‘reasonable’’

based upon the timing and manner in which the 

request has been made. For example, it may be 

unreasonable for a prospective franchisee to request 

a copy of the disclosure document on the morning 

of the day a franchisor’s representative flies to the 

prospect’s city for a meeting. Similarly, it may not 

be reasonable for a prospective franchisee to make 

the request by leaving a message with the doorman 

at the franchisor’s headquarters, or at the hotel 

where a franchisor’s representative is staying. 

898 It is noteworthy that state franchise laws, at 

the very least, require franchisors to file current 

disclosure documents before franchisors may offer 

franchises for sale. Franchisors typically have 

disclosure documents available at the time they 

make franchise offerings. Accordingly, this new 

prohibition imposes no requirement that did not 

already exist under the original Rule’s first face-toface meeting disclosure requirement and under 

state franchise filing laws. But see Duvall, at 2 (this 

prohibition negates any benefit gained from 

eliminating the ‘‘first personal meeting 

requirement’’). 

prospective franchisees acting 

reasonably under the circumstances.892

Indeed, our law enforcement experience 

demonstrates that prospects rely on 

financial performance claims in making 

their investment decision.893 Thus, this 

prohibition is necessary to prevent 

deception. 

Section 436.9(c) of the amended Final 

Rule revises the original Rule, however, 

by permitting the franchisor to make 

financial representations in Item 19 of 

the disclosure document. This achieves 

greater uniformity with the UFOC 

Guidelines, by eliminating the original 

Rule’s requirement that a franchisor 

making financial performance claims 

furnish prospects with a separate 

earnings disclosure document. 

4. Section 436.9(d): Availability of 

financial performance substantiation 

Section 436.9(d) of the final amended 

Rule also retains the original Rule’s 

prohibition against failing to make 

available to prospective franchisees and 

to the Commission, upon reasonable 

request, written substantiation for any 

financial performance representation 

made in Item 19.894 This prohibition is 

tied to the previous prohibition against 

the making of unreasonable and 

unsubstantiated financial performance 

representations. The prohibition against 

failing to make available written 

substantiation ensures that prospective 

franchisees and the Commission can 

review and verify the data underlying 

any performance representation, while 

relieving franchisors of the burden of 

having to present what could be 

voluminous data in the disclosure 

document itself. Knowing that their 

financial performance claims are subject 

to Commission review—coupled with 

the Commission’s authority to bring 

Rule enforcement actions for false or 

unsubstantiated claims—helps 

discourage the making of 

unsubstantiated claims, thus ultimately 

preventing fraud. 

5. Section 436.9(e): Earlier disclosure 

upon request 

Section 436.9(e) of the final amended 

Rule prohibits a franchise seller from 

failing to furnish a copy of the 

franchisor’s disclosure document to a 

prospective franchisee earlier than 

required, upon request.895 Accordingly, 

any prospective franchisee in the sales 

process can obtain a copy of the 

franchisor’s disclosure document before 

the standard 14-day time for making 

disclosures set out in section 436.2 (14 

calendar-days before the signing of a 

franchise agreement or payment of any 

fee in connection with the franchise 

sale). Because prospects may incur a 

variety of costs in determining whether 

to consider a particular franchise 

offering, a franchisor’s withholding of 

its disclosure document can result in 

economic injury. For example, as 

discussed above in connection with the 

timing of making disclosures, early 

disclosure may prevent injury by 

enabling prospects to review the 

franchisor’s disclosure document before 

agreeing to pay money to advance the 

sale, such as incurring travel expenses 

to visit company headquarters. 

Further, the Commission is convinced 

that this prohibition is also necessary in 

light of our decision to eliminate the 

original Rule’s mandatory face-to-face 

disclosure trigger. As discussed in 

connection with section 436.2 above, 

the Commission is persuaded that the 

face-to-face meeting trigger is 

unnecessary given the explosion of 

alternative media since the original Rule 

was promulgated in the 1970s. 

Nonetheless, the Commission 

recognizes that several commenters 

voiced concern that, absent early 

disclosure, a franchise seller could 

influence a prospective franchisee’s 

investment decision well before the 

prospect could verify the franchisor’s 

claims through the disclosure 

document, or before the prospect 

expends funds reviewing the offering.896

To address these concerns, we are 

persuaded that it is proper to require 

franchise sellers to furnish disclosures 

earlier than the standard 14 calendardays disclosure trigger, upon the 

franchisee’s reasonable request.897 The 

Commission believes this prohibition 

strikes the right balance between 

relieving franchisors of the burden to 

furnish disclosures at the first face-toface meeting in all instances, and the 

prospective franchisee’s desire to review 

disclosures early in the sales process 

before investing significant time, effort, 

and money in considering the franchise 

offering.898

6. Section 436.9(f): Furnishing updated 

disclosures 

Section 436.9(f) prohibits a franchisor 

from failing to furnish a prospective 

franchisee who has received a basic 

disclosure document with updated 

disclosures, upon the prospect’s 

reasonable request. Specifically, it 

prohibits the franchisor from failing to 

furnish ‘‘the franchisor’s most recent 

disclosure document and any quarterly 

updates to a prospective franchisee, 

upon reasonable request, before the 

prospective franchisee signs a franchise 

agreement.’’


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899 For example, a franchisor may have filed for 

bankruptcy after having furnished disclosures to a 

prospective franchisee. A bankruptcy filing, as 

discussed above, is clearly material because it calls 

into question the franchisor’s continued financial 

viability and, thus, ability to perform its obligations 

under the franchise agreement. 

900 This is consistent with the original Rule, 

which required franchisors to update their 

disclosures to ensure accuracy of its current 

disclosure document used with new prospects, but 

did not require re-disclosure to prospective 

franchisees who have already received a basic 

disclosure document. 16 CFR 436.1(a)(22) (setting 

forth two update requirements: (1) the annual 

update after the close of the franchisor’s fiscal year; 

and (2) quarterly updates if there is a material 

change). 

901 Franchise sellers other than the franchisor can 

satisfy their obligation to provide updated 

disclosures by promptly forwarding a prospective 

franchisee’s request to the franchisor, provided that 

the franchisor has promised to fulfill any such 

requests promptly. 

902 For example, Peter Lagarias, a franchisee 

advocate, asserted: 

‘‘In virtually every lawsuit I have filed for 

franchisees alleging fraud, franchise disclosure, or 

unfair or deceptive practices (under California law 

since the FTC rule does not provide a private right 

of action), counsel for the franchisor defendants 

have defended the action on lack of justified 

reliance. Franchisors and their counsel have 

systemically written the agreements to strip 

franchisees of all fraud claims and rights the minute 

the agreement is signed by sophisticated 

integration, no representation, and no reliance 

clauses. . . . The Commission should provide that 

reliance on the disclosure document and other 

representations made in the sale of a franchise is 

per se justified.’’

Lagarias, ANPR 125, at 4. See also, e.g., 

Manuszak, ANPR 13; Bell, ANPR 30; Sibent, ANPR 

41 (and 19 identical ANPR comments); AFA, ANPR 

62, at 3; Bundy, ANPR 119, at 2; Selden, ANPR 133, 

Appendix B, at 2; Zarco & Pardo, ANPR 134, at 3. 

903E.g., AFA, at 4; Bundy, 11-12; Haff, at 3; Karp, 

at 7; Lagarias, at 1-3. 

904 IL AG, NPR 3, at 6; IL AG, NPR Rebuttal 38, 

at 3. 

905 AFA, NPR 14, at 6. 

906 Bundy, NPR 18, at 14. See also Haff, at 3; 

Singler, at 3; IL AG, NPR 3, at 6. 

907 Stadfeld, NPR 23, at 9-10. In the alternative, 

Mr. Stadfeld suggested that the cover sheet contain 

an explicit warning that anything stated by the 

franchisor that is not in the contract should not be 

relied upon in any way. Id., at 10. 

Section 436.9(f) recognizes that the 

information contained in a disclosure 

document may become out-of-date by 

the time a prospect who relies on such 

information is ready to sign a franchise 

agreement.899 It prevents deception by 

enabling such prospective franchisees, if 

they wish, to get any updated 

disclosures prepared by the franchisor. 

At the same time, section 436.9(f) 

imposes no continuous updating 

requirement on franchisors.900 Rather, it 

strikes the appropriate balance, 

preventing deception by enabling a 

prospective franchisee to gain access to 

the most current updated disclosures 

prepared by the franchisor, while 

imposing no new affirmative disclosure 

obligations on the franchisor.901

7. Section 436.9(g): Unilateral 

modifications 

As previously discussed, the final 

amended Rule eliminates the original 

Rule’s requirement that franchisors in 

every case afford a prospective 

franchisee five business days to review 

the completed franchise agreement. The 

Commission concluded that the review 

period is unnecessary, provided that the 

franchise seller does not make any 

unilateral modifications to the basic 

form of the franchise agreement 

previously furnished to the prospective 

franchisee at the time of furnishing its 

disclosure document. Unilateral 

modifications of material contract terms 

by the franchise seller without notice to 

the prospective franchisee are likely to 

mislead a prospect who has been relying 

on a previous draft as setting forth the 

parties’ agreement. 

Indeed, a franchise seller could 

commit fraud at the time of executing a 

franchise agreement by substituting 

material contract provisions, without 

notice to the prospective franchisee, that 

differ materially from those in the 

original standard contract attached to 

the disclosure document. To prevent 

such deception, we adopt a new 

prohibition barring franchise sellers 

from substituting provisions or pages in 

the agreement without first bringing 

such changes to the prospective 

franchisee’s attention at least seven days 

before execution of the agreement. 

8. Section 436.9(h): Disclaimers and 

waivers 

Section 436.9(h) prohibits franchise 

sellers from disclaiming or requiring ‘‘a 

prospective franchisee to waive reliance 

on any representation made in the 

disclosure document or in its exhibits or 

amendments.’’ This prohibition is 

intended to prevent fraud by preserving 

the completeness and accuracy of 

information contained in disclosure 

documents. 

The Franchise NPR proposal to 

prohibit the use of disclaimers and 

waivers prompted comment on three 

issues: (1) the need for the prohibition; 

(2) the scope of the prohibition; and (3) 

the effect of the prohibition on parties’

ability to negotiate contract terms. The 

following section discusses each of 

these issues in detail. 

a. Section 436.9(h) is necessary to 

prevent fraud by preserving the 

truthfulness of information contained in 

a disclosure document 

During the Rule amendment 

proceeding, several franchisees and 

their representatives observed that 

franchisors routinely seek to disclaim 

liability for statements made in their 

disclosure documents through the use of 

contract integration clauses in their 

franchise agreements. By signing a 

franchise agreement containing such a 

clause, franchisees effectively waive any 

rights they may have to rely on 

information contained in the disclosure 

document.902 The use of such clauses, 

therefore, may lead to deception by 

enabling franchisors to make 

incomplete, inaccurate, or even false 

statements in their disclosure 

documents, while prospects effectively 

waive reliance on any such statements 

by signing the franchise agreement. 

To remedy this problem, several 

franchisee advocates and state 

regulators urged the Commission to 

prohibit the use of contract integration 

clauses as a means of disclaiming 

statements made in a disclosure 

document.903 The IL AG, for example, 

asserted that such a prohibition would 

be a valuable addition to the Rule, 

noting that franchisees signing a 

franchise agreement may have no idea 

that they are waiving reliance on the 

disclosure document.904 Similarly, the 

AFA stated: 

The integrity of a franchisor’s 

disclosure document is critical to 

prospective franchisees. The 

prevalent use of integration clauses 

to disclaim liability for required 

disclosures undermines the very 

purpose of the Rule, which is to 

prevent fraud and 

misrepresentation in the pre-sale 

process by ensuring prospective 

franchisees have complete and 

truthful information from which to 

make sound investment 

decisions.905

A few commenters urged the 

Commission to expand on the 

prohibition that was proposed in the 

Franchise NPR. Howard Bundy, for 

example, urged prohibiting franchisors 

from disclaiming liability for any 

authorized statements, including those 

made in their written marketing 

material.906 Seth Stadfeld advocated a 

ban on integration clauses in franchise 

agreements altogether. He asserted that 

such clauses are ‘‘the single greatest tool 

used by franchisors to evade 

responsibility for misrepresentations 

and omissions of material facts that take 

place in a franchise marketing 

program.’’907

Franchisors, on the other hand, either 

opposed the prohibition on disclaimers 

or urged limitation on the prohibition’s 

scope. Several franchisors strongly 

asserted that integration clauses are 

necessary for two purposes. First, as J&G 


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908 J&G, NPR 32, at 4-5. See also Marriott, NPR 

35, at 8; GPM, NPR Rebuttal 40, at 10-11. 

909 PMR&W, NPR 4, at 17. 

910 CA Bar, at 10. 

911 Baer, NPR 11, at 16-17. 

912 J&G, NPR 32, at 4-5. See also Marriott, NPR 

35, at 7-8. 

913 The Staff Report stated that integration clauses 

may be warranted to enable franchisors to disclaim 

liability for statements made by a ‘‘rogue salesman.’’

Staff Report, at 258. This statement generated 

significant comment by franchisee representatives 

asserting that franchisors should always be liable 

for statements made by their sales force. E.g., AFA, 

at 4 (‘‘The franchisor must accept responsibility for 

the person who it authorized and directed to sell 

franchises to prospective franchisees.’’); Bundy, at 

12 (‘‘No one can reasonably argue that the 

franchisor should be able to disclaim statements 

made by its employees or agents within the scope 

of their agency.’’); Gee, at 2 (‘‘Sales staff puff, 

exaggerate, and outright misrepresent the terms of 

the agreement. . . . Appropriate protection . . . for 

such abuses is essential.’’); Haff, at 3 (‘‘That 

salesperson is often the franchisee’s only 

connection to the franchisor.’’); Lagaria, at 2 (‘‘A 

franchisor should remain liable for misconduct in 

the sales process, particularly by its own employees 

and agents.’’); Pu, at 2 (‘‘The FTC should not permit 

franchisors to disclaim responsibility for the 

statements of rogue salespeople.’’). While we agree 

that franchisors in most instances are responsible 

for statements made by their sales force, there may 

be exceptions that can be only be determined based 

upon the particular facts on a case-by-case basis, in 

light of agency law and Section 5 of the FTC Act. 

914See 16 CFR 436.1(f). 

915 Waivers of rights afforded by Commission 

trade regulation rules are disfavored. For example, 

section 455.3(b) of the Used Car Rule, 16 CFR 

455.3(b), requires used car sellers to incorporate the 

Buyers Guide into their sales contracts. This 

ensures that used car sellers cannot technically 

comply with the Rule by affixing the Buyers Guide 

to a car window, and then turn around and require 

consumers to waive the very rights granted them 

under the Rule. Similar anti-waiver provisions can 

be found in the Credit Practices Rule, 16 CFR 444.2 

(barring certain waivers in credit transactions), 

Cooling-Off Period Rule, 16 CFR 429.1(d) (barring 

inclusion in any door-to-door contract of any 

confession of judgment or ‘‘any waiver of any rights 

to which the buyer is entitled under this section’’), 

and Ophthalmic Practices Rule, 16 CFR 456.2(d) 

(barring efforts to have a patient waive or disclaim 

the liability or responsibility of the ophthalmologist 

or optometrist for the accuracy of the eye 

examination). 

916 Prospective franchisees often rely on the 

disclosures in making their investment decision, 

especially when such disclosures appear to have 

the backing of the Federal Trade Commission. Cf. 

FTC v. Minuteman Press, Int’l, No. 93-CV-2494 

(DRH) (E.D.N.Y. 1998) (holding that a reasonable 

consumer could ‘‘legitimately conclude that he or 

she was being furnished important specific earnings 

information . . . notwithstanding . . . general 

disclaimers in the UFOC’’). 

917E.g., Cummings v. HPG Int’l, Inc., 244 F.3d 16, 

21 (1st Cir. 2001) (a party cannot induce a contract 

by fraudulent misrepresentations and then use 

contractual devices to escape liability); Betz Labs. 

v. Hines, 647 F.2d 402 (3d Cir. 1989) (integration 

clause is part of the contract and if fraud taints the 

relationship between the parties, the integration 

clause itself is struck down); Tibo Software, Inc. v. 

Gordon Food Serv., Inc., 51 U.C.C. Rep. Serv. 2d, 

2003 U.S. Dist. LEXIS 12020 (W.D. Mich. 2003) (An 

explicit integration clause bars parol evidence with 

the exception of fraud or other grounds sufficient 

to set aside a contract); Jones Distrib. Co. v. White 

Consol. Indus., 943 F. Supp. 1445, 1470-71 (N.D. 

Iowa 1996) (fine-print, boiler-plate integration 

provision is not legally enforceable when there has 

been fraud that has induced the making of the 

contract); Ron Greenspan Volkswagen v. Ford Motor 

Land Dev. Corp., 38 Cal. Rptr. 2d 783, 790 (Ct. App. 

1995) (merger clause will not insulate a seller from 

liability for misrepresentations, even if the clause 

explained, franchisors have to be able to 

rely on the final franchise agreement as 

the manifestation of the intent of the 

parties. Second, franchisors must be 

able to disclaim liability for 

unauthorized statements made by a 

rogue salesman, such as unauthorized 

earnings claims.908

PMR&W asserted that the prohibition 

would effectively ban the use of 

integration clauses. The firm, however, 

suggested that the Commission could 

limit the prohibition by applying it only 

‘‘if an integration clause or other 

contract provision specifically disclaims 

representations made in the disclosure 

document. Alternatively, or perhaps 

additionally, require a representation by 

the franchisor at the end of Item 17 that 

the information contained in the 

disclosure document is unaffected by 

any integration clause.’’909

CA Bar observed that the disclaimer 

prohibition is likely to increase the use 

of legalese in disclosure documents. It 

opined that, if the prohibition is 

adopted, franchisors are likely to import 

legalese from their franchise agreements 

to the disclosure document in order to 

avoid any conflicting language. On the 

other hand, ‘‘[i]f the franchisor is able to 

include (and rely upon) an integration 

clause, it decreases that potential for 

problems arising from unintentional 

inconsistency.’’910

Finally, a few franchisors suggested 

that the disclaimer prohibition is 

unnecessary. According to John Baer, 

for example, the Commission could 

always take action if a franchisor’s 

disclosure document contains false 

information.911 In the same vein, J&G 

asserted that the basis for the 

prohibition is that integration clauses 

may deny a franchisee a remedy when 

franchisees litigate against franchisors. 

The firm noted, however, that only the 

FTC is authorized to bring a claim for 

violation of the Franchise Rule; the 

Commission’s ability to address false 

representations in a disclosure 

document will survive any integration 

clause between the franchisor and 

franchisee.912

After carefully reviewing the record, 

the Commission is persuaded that a 

limited disclaimer prohibition, rather 

than a total ban, is warranted. As an 

initial matter, the Commission is 

convinced that integration clauses and 

waivers serve valid purposes, including 

ensuring that a prospective franchisee 

relies solely on information authorized 

by the franchisor or within the 

franchisor’s control in making an 

investment decision. For example, a 

franchisor reasonably may seek to 

disclaim responsibility for unauthorized 

claims made by former or existing 

franchisees, or unattributed statements 

found in the trade press. Therefore, at 

the very least, integration clauses and 

waivers protect a franchisor from 

unauthorized statements or 

representations made by non-agent, 

third parties.913

At the same time, we are persuaded 

that franchise sellers should not be able 

to use integration clauses or waivers to 

insulate themselves from false or 

deceptive statements made in a 

franchisor’s disclosure document. This 

is particularly true of those sections of 

the disclosure document pertaining to 

matters other than the terms of the 

franchise agreement that cannot be 

negotiated, such as the franchisor’s prior 

business experience, litigation history, 

financial performance representations, 

and financial statements. The 

Commission has long recognized that 

the integrity of a franchisor’s disclosures 

is critical to prospective franchisees 

who rely on such information in making 

their investment decision. For that 

reason, disclosure documents must be 

complete, accurate, legible, and current. 

Further, as discussed above, the 

original914 and final amended Rules also 

prohibit franchisors from making 

statements that contradict those in their 

disclosure documents. The use of 

integration clauses or waivers915 to 

disclaim statements in the disclosure 

document that the franchisor authorizes 

would undermine the Rule’s very 

purpose by signaling to prospective 

franchisees that they cannot trust or rely 

upon the disclosure document.916

It is true that the Commission can 

bring law enforcement actions against 

false or deceptive disclosures, regardless 

of any contract integration clause or 

waiver. This encourages complete and 

accurate disclosure. Nevertheless, we 

believe that franchisees should not have 

to rely on Commission action post-sale 

to resolve conflict between a disclosure 

document and franchise agreement. 

Rather, we believe that section 436.9(h) 

will prevent pre-sale deception by 

encouraging franchisors to review their 

disclosures for accuracy prior to use, 

thereby avoiding post-sale conflicts and 

litigation. 

Further, courts have limited the 

circumstances where integration clauses 

have the most potential for harm. Where 

there is fraud in the inducement, courts 

are likely to void the contract, regardless 

of any integration clause or waiver.917


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specifically disclaims such misrepresentations); 

Nobles v. Citizens Mortgage Corp., 479 So.2d 822 

(Fla. Dist. Ct. App. 1985) (under Florida law, a 

merger or integration clause will not bar evidence 

of fraud in the inducement). 918 For example, in Alphagraphics Franchising, 

Inc., v. Whaler Graphics, Inc., 840 F. Supp. 708 (D. 

Ariz. 1993), the court held that there was fraud in 

the inducement regarding an arbitration forum 

selection clause, despite the presence of an 

integration clause in the franchise contract. ‘‘It is 

well-settled that a party cannot free himself from 

fraud by incorporating [an integration clause] in a 

contract.’’ Id., at 711 (citations omitted). 919See J&G, NPR 32, at 5. 920 Section 436.6(b). 

921 Haff, at 3; Singler, at 3. Mr. Haff, for example, 

asserted that it is unconscionable for the FTC to 

permit a franchisor to disclaim its own materials 

through a franchise agreement integration clause. 

Haff, at 3. 

922 For example, a franchisor would be liable for 

a Rule violation if its promotional literature made 

financial performance claims, while its Item 19 said 

that no such claims are authorized, or its 

promotional literature stated that exclusive 

territories are available, while its disclosure 

document offered no such benefit. 

923 Two franchisor representatives specifically 

urged the Commission to clarify the Rule to ensure 

that the parties are free to negotiate contract terms. 

See Baer, ANPR 25, at 4-5; Duvall & Mandel, ANPR 

114, at 22. They feared that if the franchisor 

negotiates with a prospective franchisee for 

different terms than what appears in the disclosure 

document, (e.g., a different initial franchise fee or 

royalty payment), the franchisor will effectively 

violate the Rule because the franchisor will not 

have furnished the prospective franchisee with a 

disclosure document spelling out the specific 

agreed-upon terms and conditions in advance of the 

sale. 

924 Bundy, at 11. 

925Id., at 12. 

Finally, integration clauses or waivers 

are not likely to protect franchisors from 

private suits based upon fraudulent 

statements made in a disclosure 

document, even without Commission 

intervention.918

The Commission recognizes that an 

integration clause or waiver may be one 

way for a franchisor to narrow its 

disclosures efficiently in unique 

circumstances. For example, an ice 

cream store franchisor may make an 

Item 19 financial performance 

representation pertaining to units based 

in Florida. If the franchisor sells units 

in southern states, the Florida-based 

representation would be reasonable. 

However, if the franchisor were to sell 

a unit in Alaska, the franchisor might 

wish to use a contract integration clause 

to ensure that the financial performance 

representation is inapplicable to the 

particular sale in Alaska.919

Nevertheless, franchisors could 

protect themselves from liability 

without resort to integration clauses or 

waivers. For example, the ice cream 

store franchisor noted above, at the very 

least, could provide the prospective 

Alaskan franchisee with a disclosure 

document that deletes the Item 19 

representation. In the alternative, the 

statement of bases and assumptions 

attached to the disclosure document 

could make clear that the financial 

performance representation pertains to 

Florida or other southern states only. 

Nothing in section 436.9(h) would 

prevent a franchisor from having a 

prospective franchisee sign a clear and 

conspicuous acknowledgment that the 

Florida-based performance 

representation does not apply to states 

such as Alaska. 

Finally, we recognize the possibility 

that some franchisors may be tempted to 

import into their disclosure documents 

legalese from their franchise 

agreements, in an effort to avoid having 

conflicting provisions. Such a 

possibility, however, is addressed by the 

Rule’s requirement that disclosure 

documents be prepared in plain 

English.920 On balance, however, we are 

persuaded that the benefit of promoting 

the reliability and integrity of 

substantive disclosures outweighs any 

possible loss of clarity in how the 

disclosures are presented. 

b. Scope of section 436.9(h) 

As noted above, section 436.9(h) is 

designed to address a specific problem 

brought to our attention during the Rule 

amendment proceeding: franchisors’ use 

of integration clauses to disclaim 

authorized statements made in 

disclosure documents or in their 

exhibits or attachments. By prohibiting 

this practice, the disclaimer prohibition 

preserves the integrity of the material 

information disclosed in a franchisor’s 

disclosure document, thus preventing 

deception. By its terms, section 436.9(h) 

does not reach statements made in a 

franchisor’s advertising materials. 

A few commenters urged the 

Commission to adopt a broader 

prohibition that would prevent 

franchisors from disclaiming any 

authorized statement—whether in a 

disclosure document or promotional 

materials.921 However, the Commission 

is persuaded that a broader prohibition 

would go beyond what is necessary to 

address the underlying issue identified 

in the record—the need to prevent 

deceptive disclosure documents. 

Further, franchise advertisements, like 

other industry advertisements, are 

already subject to Commission 

substantiation and anti-deception 

requirements under Section 5 of the 

FTC Act. Moreover, any franchisor who 

makes statements in promotional 

literature that are inconsistent with the 

disclosure document and franchise 

agreement would violate the section 

436.9(a) ban on the making of 

contradictory statements.922

Accordingly, a broader disclaimer 

prohibition is unwarranted to achieve 

the goal of preserving the integrity of 

franchisors’ disclosures. 

c. Effect of section 436.9(h) on parties’

ability to negotiate contracts 

Section 436.9(h) states that the 

disclaimer prohibition ‘‘is not intended 

to prevent a prospective franchisee from 

voluntarily waiving specific contract 

terms and conditions set forth in his or 

her disclosure document during the 

course of franchise sales negotiations.’’

This proviso is necessary because, in its 

absence, a franchisor might conclude 

that it is prohibited from agreeing to any 

terms or conditions not spelled out in 

the standard agreement attached as an 

exhibit to its disclosure document.923

Clearly, franchise sellers and 

prospective franchisees should be free 

to negotiate the terms of the franchise 

agreement, as in all other commercial 

transactions. The Commission has no 

interest in preventing the parties from 

seeking the best deal possible, as long as 

the prospective franchisee understands 

in advance of the sale how the terms 

and conditions differ from the standard 

ones set forth in the disclosure 

document and has the opportunity to 

review the actual franchise agreement 

prior to the sale. 

In response to the Staff Report, 

Howard Bundy voiced concern that the 

section 436.9(h) contract negotiation 

proviso is too broad and could subsume 

the Rule.924 He feared that a franchisor 

could initiate negotiations and permit a 

person to become a franchisee only if he 

or she agrees to waive essential terms. 

Mr. Bundy urged the Commission to 

limit the proviso ‘‘to negotiations 

initiated by the prospective franchisee 

and that result in changes that are no 

less favorable to the franchisee than the 

standard terms.’’925

The Commission recognizes that an 

integration clause may facilitate 

negotiations by releasing the parties 

from restraints imposed by the 

contractual terms previously disclosed 

in the disclosure document. The use of 

an integration or waiver clause, 

however, is unnecessary to permit 

contract negotiations. As previously 

discussed, the final amended Rule 

addresses how franchisors and 

prospective franchisees may negotiate 

contracts without violating the Rule. 

Specifically, section 436.2(b) provides 

that no mandatory contract review 

period is necessary where changes are 

made at the request of the prospective 

franchisee. This recognizes that where 

the prospective franchisee is fully 

informed about the contractual terms 


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926See FTC v. Hillary’s Servs., Inc., No. 94-CV2312 (E.D. Pa. 1994); FTC v. Richard L. Levinger, 

No. 94-0925-PHXRCB (D. Ariz. 1994); FTC v. 

McKleans, Inc., Bus. Franchise Guide (CCH) ¶ 9853 

(D. Conn. 1989) (franchisors violated the Franchise 

Rule by, among other things, failing to provide 

promised refunds). See also FTC v. William A. 

Skaife, Bus. Franchise Guide (CCH) [1989-1990 

Transfer Binder] ¶ 9555 (C.D. Cal. 1990); FTC v. 

Nat’l Bus. Consultants, Inc., Bus. Franchise Guide 

(CCH) ¶ 9385 (E.D. La. 1989); FTC v. Am. Legal 

Distrib., Inc., No. 1:88-CV-519-MHS (N.D. Ga. 1988); 

United States v. Tuff-Tire Am., Inc., Bus. Franchise 

Guide (CCH) [1985-1986 Transfer Binder] ¶ 8353 

(M.D. Fla. 1985); United States v. Fed. Energy Sys., 

Inc., Bus. Franchise Guide (CCH) [1983-85 Transfer 

Binder] ¶ 8180 (C.D. Cal. 1984) (franchisors 

misrepresented refund policy in violation of 

Section 5); FTC v. Nat’l Audit Defense Network, 

Inc., No. CV-S-02-0131 LRH-PAL (D. Nev. 2002); 

FTC v. Travel Bahamas Tours, Inc., No. 97-6181- 

CIV-Ferguson (S.D. Fla. 1997) (companies 

misrepresented refund policy in violation of 

Section 5 of the FTC Act). Cf. Philips Elecs. N. Am. 

Corp., FTC No. 022-3095 (2002); Tim R. Wofford, 

FTC No. 012 3191 (2002) (the failure to honor rebate 

offers as promised violates Section 5 of the FTC 

Act). 

927See original SBP, 43 FR at 59696 (‘‘Numerous 

consumers complained about the difficulty they 

experienced when they attempted to obtain refunds 

from their franchisors.’’). 

928 One commenter, Dady & Garner, suggested 

that franchisees should always receive a refund 

(excluding actual costs) if they never actually open 

or operate an outlet. Dady & Garner, ANPR 127, at 

4. We believe the substantive terms and conditions 

of refunds are a matter of contract between the 

parties, provided the terms and conditions of any 

refund policy are spelled out in the disclosure 

document or franchise agreement. No other 

comments were submitted in connection with the 

Franchise NPR’s proposed retention of the refund 

prohibition. 

929 This is slightly broader than the same 

provision in the original Rule set forth at 16 CFR 

436.3, which is limited to enforcement of statutes: 

‘‘A provision for disclosure should not be construed 

as . . . an indication of the Commission’s intention 

not to enforce any applicable statute.’’ The revised 

language of final amended Rule is also clearer, 

eliminating the use of double negatives. 

930 Franchise NPR, 64 FR at 57346. 

931 Original SBP, 43 FR at 59719. 

932 Howard Bundy urged the Commission to add 

a separate prohibition against a franchisor 

representing to any person that the Commission has 

reviewed or approved the form or content of any 

disclosure document. Bundy, NPR 18, at 15. While 

we agree with Mr. Bundy, in principle, we are not 

persuaded that a new prohibition is warranted. The 

final amended Rule already mandates that 

franchisors state expressly on their disclosure 

document cover page that the Commission has not 

reviewed or approved of the disclosures. This 

should be sufficient to correct any 

misrepresentation to the contrary. Moreover, any 

misrepresentation about Commission approval of a 

disclosure document is already actionable as a 

violation of Section 5 of the FTC Act. 

933 NFC, NPR 12, at 24. 

934 For example, under the original Rule, no 

disclosure of state or local licensing provisions was 

required. Nonetheless, in United States v. Lifecall 

Sys., Inc., No. 90-3666 (D.N.J. 1990), the 

Commission alleged that the defendants violated 

Section 5 by misrepresenting that purchasers of 

their emergency alert system franchises would not 

have to register with state or local authorities. See 

also FTC v. Car Checkers of Am., Inc., No. 93-623 

(mlp) (D.N.J. 1993) (alleging that defendants 

violated Section 5 by failing to disclose state 

insurance licensing requirements); FTC v. Claude 

Blanc, Bus. Franchise Guide (CCH) ¶ 10032 

(alleging that defendants violated Section 5 by 

misrepresenting availability of medical insurance). 

Cf. FTC v. Carribean Clear, Inc., Bus. Franchise 

Guide (CCH) ¶ 10029 (D.S.C. 1992) (permanent 

injunction included prohibition against future 

misrepresentations of the effectiveness and safety of 

defendants’ swimming pool water purifier). 

Similarly, a practice may violate the Rule and 

Section 5 simultaneously. For example, in 

numerous Franchise Rule cases the Commission has 

alleged that the defendants violated Section 5 by 

using shills (fictitious references), even though that 

conduct also violated the Rule’s mandate to 

that will govern the relationship before 

signing the contract, no harm can result. 

Where changes to the contract are 

initiated by the franchisor, however, 

section 436.9(g) prohibits the franchisor 

from failing to point out the changes, 

and section 436.2(b) provides for a 

limited contract review period. These 

Rule provisions are sufficient to prevent 

fraud in the negotiation process, while 

preserving the integrity of the 

franchisor’s disclosures. 

9. Section 436.9 (i): Refunds 

Section 436.9(i) prohibits franchisors 

from failing to make refunds as 

promised in their disclosure document 

or in a franchise or other agreement. The 

failure to honor refund promises is an 

unfair practice in violation of Section 

5.926 It often results in substantial injury 

to franchisees that they cannot 

reasonably avoid.927 Moreover, the 

record is devoid of any evidence 

suggesting that this harm is outweighed 

by any countervailing benefits. 

Section 436.9(i) retains, but slightly 

revises, the original Rule’s prohibition 

against failing to make promised 

refunds. As set forth at 16 CFR 436.1(h), 

the original Rule prohibited franchisors 

and brokers from failing ‘‘to return any 

funds or deposits in accordance with 

any conditions disclosed pursuant to 

paragraph (a)(7) of this section.’’ This 

provision was limited to instances 

where the franchisor or broker makes an 

express refund promise in the 

disclosure document itself. It is 

possible, however, that a franchise seller 

may not make any specific promise in 

the disclosure document itself, but may 

do so either in the franchise agreement, 

or in a separate contract or letter of 

understanding. The harm resulting from 

the failure to honor a promised refund 

is the same, regardless of where that 

promise is written. Accordingly, section 

436.9(i) makes clear that the failure to 

honor any written refund promise will 

constitute a Rule violation.928

H. Sections 436.10 and 436.11: Other 

Laws and Rules, and Severability 

The last sections of the final amended 

Rule address three additional issues: (1) 

the final amended Rule’s effect on other 

Commission laws and rules; (2) 

preemption of state franchise laws that 

may be inconsistent with the Rule; and 

(3) ‘‘severability.’’ Each of these issues 

is addressed below. 

1. Section 436.10(a): Relationship to 

other laws and rules 

The first part of section 436.10(a) 

provides that the Commission does not 

approve or express any opinion on the 

legality of any matter a franchisor may 

be required to disclose by the Rule. At 

the same time, it makes clear that the 

Commission intends to enforce all 

applicable statutes and rules.929 This is 

slightly broader than the same provision 

in the proposed Rule, which was 

limited to ‘‘trade regulation rules.’’930

This provision clarifies the 

relationship between Franchise Rule 

disclosure and other statutes and rules 

enforced by the Commission. As stated 

in the original SBP, some of the Rule’s 

provisions may require franchisors to 

disclose practices that may raise legal 

issues, such as antitrust issues.931 By 

requiring disclosure, the Commission 

does not approve of practices that might 

violate other Commission laws. In short, 

pre-sale disclosure does not create a safe 

harbor for franchisors engaging in 

otherwise unlawful conduct.932

During the Rule amendment 

proceeding, the NFC focused on the 

sentence that the ‘‘Commission also 

intends to enforce all applicable statutes 

and trade regulation rules.’’ The NFC 

contended that, under more recent case 

law, disclosure in some instances may 

shield a practice that otherwise might be 

a law violation. According to the NFC, 

a franchisor’s disclosure of certain 

product or sourcing restrictions, for 

example, may relieve the franchisor 

from antitrust ‘‘tying’’ liabilities.933

The NFC’s concerns are misplaced. 

Section 436.10 restates the general 

policy that disclosure alone does not 

shield a franchisor from otherwise 

illegal conduct. Section 436.10(a) does 

nothing more than state that the 

Commission will continue to enforce 

the laws it administers in accordance 

with its legal authority. If a disclosure 

makes conduct legal, as the NFC 

asserted, then the Commission 

obviously would have no reason to 

believe the franchisor has committed a 

law violation. 

The second part of section 436.10(a) 

provides that ‘‘franchisors may have 

additional obligations to impart material 

information to prospective franchisees 

outside of the disclosure document 

under Section 5 of the Federal Trade 

Commission Act.’’934 During the Rule 


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disclose completely and accurately information 

about existing franchisees. See 16 CFR 436.1(a)(16). 

935 Piper Rudnick, at 4. See also Kaufmann, 

Attachment 1, at 9-10; H&H, NPR 9, at 8. 

936 Elevating the preemption discussion from a 

footnote to a Rule section is consistent with other 

Commission trade regulations rules. See, e.g., 

Appliance Labeling Rule, 16 CFR Part 305.17; 

Cooling-Off Rule, 16 CFR 429.2; Mail Order Rule, 

16 CFR 435.3(b)(2); R-Value Rule, 16 CFR 460.23. 

937 As noted previously, starting on July 1, 2007, 

franchisors have the option of complying with 

either part 436 of the final amended Rule, the UFOC 

Guidelines, or the original Franchise Rule. 

Beginning on July 1, 2008, however, franchisors 

may use part 436 of the final amended Rule only. 

Permission to use the UFOC Guidelines will be 

withdrawn on that date because those Guidelines 

will no longer afford prospective franchisees equal 

or greater protection as part 436. This would not 

preclude consideration of any new or revised UFOC 

Guidelines promulgated by the states in the future. 

938E.g., IFA, at 4; Kaufmann, at 9-10; Spandorf, 

at 10; PMR&W, NPR 4, at 7-8; Baer, NPR 11, at 2; 

Snap-On, NPR 16, at 2; GPM, NPR Rebuttal 40, at 

8. But see IL AG, NPR Rebuttal 38, at 1-2 

(‘‘federalism has served the public well’’). 

939English v. Gen. Elec. Co., 496 U.S. 72, 78 

(1990); Schneidewind v. ANR Pipeline Co., 485 U.S. 

293, 299 (1988). 

940Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 95- 

98 (1983). 

941Cipollone v. Liggett Group, 505 U.S. 504, 517 

(1992). 

942English, 496 U.S. at 79; Rice v. Santa Fe 

Elevator Corp., 331 U.S. 218, 230 (1947). Where the 

field in question has been traditionally occupied by 

the states, congressional intent to supersede state 

laws much be ‘‘clear and manifest.’’ Jones v. Rath 

Packing Co., 430 U.S. 519, 525 (1977) (quoting Rice, 

331 U.S. at 230). 

943City of New York v. FCC, 486 U.S. 57, 62-68 

(1988) (upholding FCC regulations preemping state 

and local standards for the quality of cable 

television signals). 

944English, 496 U.S. at 79; Fla. Lime & Avocado 

Growers, Inc., v. Paul, 373 U.S. 132, 141 (1963). 

945English, 496 U.S. at 79; Gade v. Nat’l Solid 

Wastes Mgmt. Ass’n, 505 U.S. 88, 98-99 (1992); 

Hines v. Davidowitz, 312 U.S. 52, 67 (1941). These 

standards apply to federal regulations as well as 

federal statutes. E.g., Fid. Fed. Sav. & Loan Ass’n 

v. de la Cuesta, 458 U.S. 141, 153 (1982). 

946E.g., Am. Fin. Servs. Ass’n v. FTC, 767 F.2d 

957, 989 (1985). See also Paul R. Verkuil, 

Preemption of State Law by the Federal Trade 

Commission, 1976 Duke L.J. 225. 

947 Preemption would occur where there is an 

‘‘actual conflict between the two schemes of 

regulation [such] that both cannot stand in the same 

area.’’ Fla. Lime & Avocado Growers, 373 U.S. at 

141. See also, Am. Fin. Servs., 767 F.2d 957 (Credit 

Practices Rule); Harry and Bryant Co. v. FTC, 726 

F.2d 993 (4th Cir. 1984) (Funeral Rule); Am. 

Optometric Assoc. v. FTC, 626 F.2d 896 (D.C. Cir. 

1980) (Opthalmic Practices Rule). 

948E.g., Mail or Telephone Order Merchandise 

Rule, 16 CFR 435.3; R-Value Rule, 16 CFR 460.23. 

949 When promulgating the original Rule, the 

Commission authorized franchisors to use the 

UFOC Guidelines to comply with the original 

Rule’s disclosure requirements on the grounds that 

the UFOC Guidelines, taken in their entirety, 

provide equal or greater consumer protection as the 

original Rule. See Interpretive Guides, 44 FR at 

49970-71. The Commission ratified this position 

following subsequent amendments to the UFOC 

requirements by the NASAA, most recently in 1993, 

58 FR 69224 (Dec. 30, 1993). Examples of state and 

local laws not preempted by the original or 

amended Rule include registration of franchisors 

and franchise salespersons, escrow or bonding 

requirements, substantive regulation of the 

franchisor-franchisee relationship (e.g., termination 

practices, contract provisions, and financing 

arrangements), and disclosure laws requiring more 

extensive disclosures than those provided by the 

amended Rule. 

950 Although the Executive Order is not binding 

on independent agencies, such as the Federal Trade 

Continued 

amendment proceeding, a few 

franchisors voiced concern that this 

provision does not give any guidance to 

franchisors about what specific 

information needs to be disclosed. For 

example, Piper Rudnick stated that ‘‘no 

matter how thorough or detailed the 

franchise offering circular may be, this 

sentence places all franchisors at risk of 

violating the Revised Rule by not also 

making whatever disclosure may be 

required by this open-ended and 

ambiguous disclosure obligation.’’935

No franchisor need worry that it may 

violate the Rule for failing to include 

material information not specifically 

required or permitted by the Rule or 

state law. As for every other person over 

which the Commission has jurisdiction, 

franchisors must not engage in unfair or 

deceptive acts or practices. For example, 

Section 5 would prohibit a used car 

seller from misrepresenting a rebate 

program or from misrepresenting 

whether a used car had previous 

damage, even though the seller may 

otherwise comply with the Used Car 

Rule’s warranty disclosures. 

2. Section 436.10(b): Preemption 

Section 436.10(b) retains the original 

Rule’s preemption statement found at 

footnote 2:936

The FTC does not intend to 

preempt the franchise practice laws 

of any state or local government, 

except to the extent of any 

inconsistency with this Rule. A law 

is not inconsistent with this Rule if 

it affords prospective franchisees 

equal or greater protection, such as 

registration of disclosure 

documents or more extensive 

disclosures. 

16 CFR Part 436, note 2.937

During the Rule amendment 

proceeding, several franchisors urged 

the Commission to preempt the field of 

pre-sale disclosure to ensure a single, 

national, disclosure standard.938 The 

preemptive effect of the final amended 

Rule, however, is not a subject of 

Commission discretion. Rather, the 

preemptive effect of any federal law is 

fundamentally a question of 

Congressional intent.939

First, Congress can define explicitly 

the extent to which federal law 

preempts state law.940 If Congress has 

explicitly addressed the issue of 

preemption in a statute, then the 

statutory language governs and no 

further analysis is required.941 Even in 

the absence of explicit statutory 

language, state law is preempted where 

it regulates conduct in a field that 

Congress intended the federal 

government to occupy exclusively. 

Congressional intent to occupy a field 

may be inferred from a ‘‘scheme of 

federal regulation . . . so pervasive as to 

make reasonable the inference that 

Congress left no room for the States to 

supplement it,’’ or where an act of 

Congress ‘‘touch[es] a field in which the 

federal interest is so dominant that the 

federal system will be assumed to 

preclude enforcement of state laws on 

the same subject.’’942 In addition, 

Congress may choose to grant 

sufficiently broad regulatory authority 

to a federal agency as to permit the 

agency itself, by regulation, to provide 

expressly for the preemption of state 

law.943

Finally, state law is preempted to the 

extent that it actually conflicts with 

federal law. Thus, federal law will 

preempt state law where it is impossible 

for a private party to comply with both 

state and federal requirements.944 In 

addition, preemption occurs where state 

law ‘‘stands as an obstacle to the 

accomplishment and execution of the 

full purposes and objectives of 

Congress.’’945

The Federal Trade Commission Act 

does not include any clause directly 

preempting state law or authorizing the 

Commission to do so. Furthermore, the 

legislative history of the Act and of the 

1975 amendments to the Act 

establishing the Commission’s 

rulemaking authority indicate that 

Congress did not intend the Act to 

occupy the field of consumer protection 

regulation.946 Any preemptive effect of 

the Franchise Rule, therefore, is limited 

to instances where it is impossible for 

a private party to comply with both state 

and the Commission regulations, or 

where application of state regulations 

would frustrate the purposes of the 

Franchise Rule.947 In this regard, the 

Commission generally has declared the 

preemptive effect of Commission rules 

to be limited to the extent of an 

inconsistency only.948 Accordingly, the 

amended Franchise Rule would not 

affect state laws providing greater 

consumer protection.949

We further note that preemption of 

state franchise disclosure laws would be 

inconsistent with the current policy on 

federalism, as announced in Executive 

Order 13132 on August 4, 1999.950


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Commission, it nonetheless sets forth principles 

that the Commission might consider in determining 

the preemptive effect of its regulations. 

951 Franchise NPR, 64 FR at 57324. 

952See 16 CFR 436.3. 

953E.g., Pay-Per-Call Rule, 16 CFR 308.8; Used Car 

Rule, 16 CFR 455.7 

954See Interpretive Guides, at 49968. See 

generally Business Opportunity NPR, 71 FR at 

19054-57. 955 15 U.S.C. 57b. 

Among other things, the Executive 

Order provides that federal agencies 

should carefully assess the necessity of 

limiting the policymaking discretion of 

the states and such actions should be 

taken ‘‘only where there is 

constitutional and statutory authority 

for the action and the national activity 

is appropriate in light of the presence of 

a problem of national significance.’’ It 

also encourages agencies, in appropriate 

circumstances, to defer to the states to 

establish standards. As noted above, 

there is no statutory basis for 

preempting the states in the franchise 

pre-sale disclosure arena, nor do we 

find any compelling reason to limit the 

states’ discretion in this field. Rather, by 

adopting the UFOC Guidelines in large 

measure, which the commenters agreed 

is superior to the current Franchise 

Rule, the states have taken a leadership 

role in this field. Under the 

circumstances, we must reject any 

suggestion that the Commission expand 

the Franchise Rule’s preemptive effect. 

There simply is no legal or policy basis 

for such an expansion. 

3. Section 436.11: Severability 

Finally, as proposed in the Franchise 

NPR,951 section 436.11 contains a 

standard severability provision, stating 

that if any provision of this regulation 

is stayed or held invalid, the remainder 

will stay in force.952 This provision is 

comparable to the severability 

provisions in other Commission trade 

regulation rules.953 This provision 

generated no comments in response to 

both the Franchise NPR and Staff 

Report. Accordingly, the amended Rule 

adopts the severability provision 

proposed in the Franchise NPR. 

IV. SECTION-BY-SECTION ANALYSIS 

OF PART 437 

As noted above, part 437 of the final 

amended Rule continues to cover the 

offer and sale of business opportunities, 

such as vending machine and rack 

display promotions.954 Except for the 

three changes discussed immediately 

below, part 437 is identical to the 

original Rule, imposing no new 

substantive disclosure requirements or 

prohibitions. 

A. New definition for ‘‘business 

opportunity’’

Section 437.2(a) of the final amended 

Rule defines the term ‘‘business 

opportunity’’ consistent with the 

original Rule’s business opportunity 

definitional elements. In so doing, it 

eliminates references to franchising, 

which are now addressed in part 437 of 

the final amended Rule. First, the term 

‘‘franchise’’ in the original Rule 

definitions has been eliminated and 

substituted with the term ‘‘business 

opportunity.’’ Second, the franchise 

definitional elements of the original 

Rule’s ‘‘franchise’’ definition have been 

eliminated. Accordingly, the 

definitional elements of the term 

‘‘business opportunity’’ are now 

identical to those set forth in the 

original Rule: 

(a) The term business opportunity 

means any continuing commercial 

relationship created by any arrangement 

or arrangements whereby: 

(1) A person (hereinafter ‘‘business 

opportunity purchaser’’) offers, sells, or 

distributes to any person other than a 

‘‘business opportunity seller’’ (as 

hereinafter defined), goods, 

commodities, or services which are: 

(i)(A) Supplied by another person 

(hereinafter ‘‘business opportunity 

seller’’); or 

(B) Supplied by a third person (e.g., 

a supplier) with whom the business 

opportunity purchaser is directly or 

indirectly required to do business by 

another person (hereinafter ‘‘business 

opportunity seller’’); or 

(C) Supplied by a third person (e.g., 

a supplier) with whom the business 

opportunity purchaser is directly or 

indirectly advised to do business by 

another person (hereinafter ‘‘business 

opportunity seller’’) where such third 

person is affiliated with the business 

opportunity seller; and 

(ii) The business opportunity seller: 

(A) Secures for the business 

opportunity purchaser retail outlets or 

accounts for said goods, commodities, 

or services; or 

(B) Secures for the business 

opportunity purchaser locations or sites 

for vending machines, rack displays, or 

any other product sales displays used by 

the business opportunity purchaser in 

the offering, sale, or distribution of said 

goods, commodities, or services; or 

(C) Provides to the business 

opportunity purchaser the services of a 

person able to secure the retail outlets, 

accounts, sites, or locations referred to 

in paragraphs (a)(ii)(A) and (B) of this 

section; and 

(2) The business opportunity 

purchaser is required as a condition of 

obtaining or commencing the business 

opportunity operation to make a 

payment or a commitment to pay to the 

business opportunity seller, or to a 

person affiliated with the business 

opportunity seller. 

B. Eliminating other references to 

franchising 

Part 437 of the final amended Rule 

further eliminates all other references to 

franchising, by substituting for the terms 

‘‘franchisor,’’ ‘‘franchisee,’’ and 

‘‘franchise’’ used throughout part 437 

the terms ‘‘business opportunity seller,’’

‘‘business opportunity purchaser,’’ and 

‘‘business opportunity.’’ This ensures 

that part 437 will cover only the offer 

and sale of business opportunities. For 

example, section 437.2(a)(3) retains, but 

modifies, the original Rule’s exemption 

for fractional relationships to cover 

business opportunities only: the term 

‘‘fractional franchise’’ is replaced by the 

term ‘‘fractional business opportunity.’’

C. Franchise exemption 

Section 437.2(a)(3)(v) adds a new 

exemption to part 437 of the final 

amended Rule for those business 

arrangements that comply with the 

Franchise Rule, or are exempt from 

compliance with the Franchise Rule, as 

set forth in part 436. Accordingly, it is 

designed to eliminate potential overlap 

and duplicative compliance burdens 

between the franchise rule and the 

business opportunity rule, parts 436 and 

437, respectively. Specifically, section 

437.2(a)(3)(v) exempts from coverage of 

part 437 all business arrangements that 

comply with part 436, or that satisfy one 

or more exemptions to part 436. For 

example, businesses exempt from part 

436 coverage pursuant to the fractional 

franchise exemption would not be 

subjected to coverage under part 437. 

This is an appropriate result because the 

same rationale underlying exemption of 

these types of businesses from part 436 

would also dictate that they not be 

covered by part 437— i.e., in the case 

of a fractional franchise, the franchisor 

is not likely to deceive the prospective 

franchisee or to subject the prospective 

franchisee to significant investment risk. 

Therefore, imposing the requirements of 

either part 436 or part 437 would not be 

justified. 

V. REGULATORY ANALYSIS AND 

REGULATORY FLEXIBILITY ACT 

REQUIREMENTS 

Under section 22 of the FTC Act,955

the Commission must issue a regulatory 

analysis for a proceeding to amend a 

rule only when it: (1) estimates that the 


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956See generally Winslow. However, this 

commenter did not quantify the additional cost 

burdens arising as a result of the Rule 

amendments—as opposed to those imposed by the 

original Rule or by state law—nor provide any data 

or statistics supporting his view, that would permit 

us to assess the economic impact of the Rule 

amendments. 

957 As previously noted, part 437 of the final 

amended rule (the business opportunity section) is 

substantively identical to the business opportunity 

coverage of the original Rule. Part 437 imposes no 

additional disclosures, recordkeeping requirements, 

or prohibitions on business opportunity sellers. 

Accordingly, the part 437 amendments impose no 

economic costs or compliance burdens on business 

opportunities covered by the original Franchise 

Rule. 

958 5 U.S.C. 601- 612. 

959 5 U.S.C. 605. 

amendment will have an annual effect 

on the national economy of 

$100,000,000 or more; (2) estimates that 

the amendment will cause a substantial 

change in the cost or price of certain 

categories of goods or services; or (3) 

otherwise determines that the 

amendment will have a significant effect 

upon covered entities or upon 

consumers. 

In general, the commenters supported 

the proposed franchise amendments 

because they reduce inconsistencies 

with state franchise disclosure laws, 

reduce compliance burdens on 

franchisors that are not likely to engage 

in abusive practices that the Rule was 

intended to prevent, and update the 

original Rule to address new 

technologies. Only one commenter 

addressed the economic impact of part 

436, voicing concern generally that the 

original and amended Franchise Rule 

impose unnecessary costs.956 No 

commenter, however, indicated that the 

amendments would have an annual 

impact of more than $100,000,000, 

cause substantial change in the cost of 

goods or services, or otherwise have a 

significant effect upon covered entities 

or consumers.957

At the same time, some commenters 

questioned whether particular rule 

amendments pertaining to franchising 

might be unnecessary, or offered 

alternatives. Section III of this document 

analyzes these comments in detail. After 

careful consideration of the comments, 

and the record as a whole, the 

Commission has determined that there 

are no facts in the record, or other 

reasons to believe, that the part 436 

amendments will have significant 

effects on the national economy, on the 

cost of goods or services, or on covered 

parties or consumers. In any event, to 

the extent, if any, these final rule 

amendments will have such effects, the 

Commission has previously explained 

above the need for, and the objectives 

of, the final amendments; the regulatory 

alternatives that the Commission has 

considered; the projected benefits and 

adverse economic or other effects, if 

any, of the amendments; the reasons 

that the final amendments will attain 

their intended objectives in a manner 

consistent with applicable law; the 

reasons for the particular amendments 

that the agency has adopted; and the 

significant issues raised by public 

comments, including the Commission’s 

assessment of and response to those 

comments on those issues. 

The Regulatory Flexibility Act 

(‘‘RFA’’),958 requires that the agency 

conduct an analysis of the anticipated 

economic impact of proposed rule 

amendments on small businesses. The 

purpose of a regulatory flexibility 

analysis is to ensure that the agency 

considers the impact on small entities 

and examines regulatory alternatives 

that could achieve the regulatory 

purpose while minimizing burdens on 

small entities. Section 605 of the RFA 

provides that such an analysis is not 

required if the agency head certifies that 

the regulatory action will not have a 

significant economic impact on a 

substantial number of small entities.959

The Commission believes that none of 

the amendments to the original 

Franchise Rule is likely to have a 

significant impact on small businesses. 

Most small businesses covered by the 

original Franchise Rule are likely to be 

business opportunity sellers, such as 

vending machine and rack display route 

sellers. These small businesses will 

continue to be covered by the same 

substantive provisions of the original 

Rule, through part 437. On the other 

hand, the numerous amendments to the 

original Franchise Rule that pertain to 

franchising—set out in part 436—will 

not apply to the offer or sale of business 

opportunities. In short, none of the 

amendments to the original Franchise 

Rule are likely to affect a substantial 

number of small businesses. 

Accordingly, the Commission has no 

reason to believe that the amendments 

will have a significant impact upon 

such entities. 

Moreover, the Commission is 

adopting amendments that in large 

measure reduce inconsistencies with 

state law. In many instances, small 

businesses that sell franchises, 

especially those conducting business on 

a national basis, already comply with 

state disclosure laws in the form of the 

UFOC Guidelines. Accordingly, many of 

the amendments will impose no new 

compliance costs on either small or 

large businesses. Further, in some 

instances, the Commission has 

specifically narrowed a UFOC provision 

to reduce compliance costs, which will 

benefit small business franchisors in 

particular. For example, in considering 

the disclosure of computer systems, the 

Commission declined to adopt the 

states’ sweeping disclosure of computer 

system requirements, in favor of a more 

limited disclosure. In addition, the 

Commission will permit electronic 

compliance with the Franchise Rule, 

which holds the promise of reducing 

costs for all franchisors, including small 

business franchisors. 

In a few instances, the part 436 

amendments will impose new 

disclosure requirements on all 

franchisors. These amendments are 

designed to provide prospective 

franchisees with more information 

about the quality of the franchise 

relationship. In these instances, the 

Commission has taken great care to keep 

compliance costs to a minimum. For 

example, with respect to the new 

franchisor-initiated litigation disclosure, 

franchisors need only report such 

litigation for a period of one year. This 

contrasts with the original Rule’s sevenyear reporting period (and the UFOC 

Guidelines 10-year reporting period) for 

prior litigation against the franchisor. 

Similarly, a franchisor may disclose 

franchisor-initiated litigation by 

grouping any suits under a single 

heading, as opposed to the original Rule 

and UFOC Guidelines approach for 

other litigation, which requires full case 

summaries. 

Similarly, the Commission has 

narrowed the new disclosure of 

independent trademark-specific 

franchisee associations. Franchisors 

need not make this disclosure unless the 

association specifically asks to be 

included in the franchisor’s disclosure 

document. Further, such requests must 

be renewed by the association on an 

annual basis. In addition, franchisors 

need not update this disclosure on a 

quarterly basis. The Commission 

believes that these, and other efforts to 

narrow amendments to the Rule 

discussed throughout this document, 

will result in the easing of compliance 

burdens for all franchisors, especially 

small business franchisors. 

Accordingly, the Commission 

concludes that the amendments to the 

original Franchise Rule will not have a 

significant or disproportionate impact 

on the costs of small business, whether 

they sell franchises or business 

opportunities. Based on available 

information, therefore, the Commission 

certifies that the Franchise Rule 

amendments published in this 

document will not have significant 

economic impact on a substantial 

number of small businesses. 


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960 The SBA size thresholds set forth what 

constitutes a small entity in a particular line of 

business, regardless of whether the entity is a 

franchisor, licensee, contractor, parent corporation, 

affiliate, agent, or other entity. For the same reason, 

it is difficult to estimate the number of small 

entities that will be subject to the business 

opportunity requirements set forth at part 437. 

961 See generally 13 CFR Part 121. According to 

the SBA standards, the $6 million receipts 

threshold applies to retailers as diverse as 

automotive parts and tire stores; floor coverings and 

window treatment stores; camera and photography 

stores; hardware and garden suppliers; many food 

stores; health care product stores; many clothing 

stores; sporting good stores; florists; and pet supply 

stores. The $6 million threshold also is applicable 

to hotels; restaurants; automotive repair centers; car 

washes; and laundry services. While the $6 million 

threshold is typical of a wide cross-section of small 

businesses, some of which may be franchises, it 

sheds no light on the number of franchisors that are 

small businesses. 

962 Industry data are also difficult to come by. In 

the 1990’s, the International Franchise Association 

produced a series of reports called The Profile of 

Franchising that sought to quantify and describe 

franchise systems in the United States. While these 

reports shed light on numerous aspects of 

franchising—such as the number of franchise 

systems in various economic sectors, how long 

companies were in business before beginning to 

franchise, and how many franchisees are in the 

system—the reports did not purport to examine the 

number of staff employed by the franchisors nor 

franchisors’ annual receipts, factors used in a 

regulatory flexibility analysis. More recently, in 

2004, the International Franchise Association 

produced a study called Economic Impact of 

Franchised Businesses. This study examined the 

economic impact that franchised units have in the 

marketplace, for example, the number of 

individuals employed by franchised units. This 

study, like the Profiles of Franchising, is not useful 

in determining the number of franchisors that are 

small businesses and subject to the final amended 

Rule. 

963 Franchise NPR, 64 FR at 57325. See also 70 

FR 51817, 51818-20 (Aug. 31, 2005). 

964 Franchise NPR, 64 FR at 57325. 

Nonetheless, to ensure that no such 

impact, if any, has been overlooked, the 

Commission has conducted the 

following final regulatory flexibility 

analysis, as summarized below. 

A. Need For And Objective Of The Rule 

As previously discussed, the 

Commission is issuing these rule 

amendments to achieve four goals: (1) to 

reduce inconsistencies with state 

franchise disclosure laws; (2) to respond 

to changes in the marketing of 

franchises and new technological 

developments, in particular electronic 

communications; (3) to reduce 

compliance costs where the record and 

the Commission’s law enforcement 

experience shows that the abuses the 

Rule was intended to address are not 

likely to occur; and (4) to address the 

need for franchisors to disclose material 

information about the quality of the 

franchise relationship, the absence of 

which the record shows is a prevalent 

problem. 

B. Significant Issues Raised By Public 

Comment, Summary Of The Agency’s 

Comment, Summary Of The Agency’s 

Assessment Of These Issues, And 

Changes, If Any, Made In Response To 

Such Comments 

The Commission has reviewed the 

comments received during the Rule 

amendment proceeding and has made 

changes to the original Rule, as 

appropriate. Section III of this document 

contains a detailed discussion of the 

comments and the Commission’s 

responses. Among other things, the 

Commission, based upon the record, has 

narrowed the scope of part 436—the 

franchise section—by eliminating 

coverage of business opportunities, 

many of which are small businesses. In 

addition, part 436 will apply only to the 

sale of franchises to be located in the 

United States. 

Further, part 436 of the final amended 

Rule reduces many inconsistencies with 

state franchise laws that use the UFOC 

Guidelines format. Accordingly, many 

of the rule amendments will impose no 

new compliance costs on small 

businesses, especially those that 

conduct, or plan to conduct, business on 

a national basis. Further, in some 

instances, the Commission has 

specifically narrowed a UFOC provision 

to reduce compliance costs, which will 

benefit small businesses in particular. 

For example, based upon the comments, 

the Commission declined to adopt the 

states’ sweeping disclosure of computer 

system requirements, in favor of a more 

limited disclosure. Most important, part 

436 of the final amended Rule permits 

franchisors to furnish disclosure 

documents electronically, which holds 

the promise of reducing costs for all 

franchisors, including small business 

franchisors. 

Where part 436 of the final amended 

Rule imposes new disclosure 

requirements, the Commission has 

carefully considered approaches that 

will reduce compliance burdens, 

especially on small businesses. For 

example, with respect to the new 

franchisor-initiated litigation disclosure, 

franchisors need only report such 

litigation for a period of one year. This 

contrasts with the original Rule’s sevenyear reporting period (and the UFOC 

Guidelines 10-year reporting period) for 

prior litigation against the franchisor. 

Similarly, a franchisor may disclose 

franchisor-initiated litigation by 

grouping any suits under a single 

heading, as opposed to the original Rule 

and UFOC Guidelines approach for 

other litigation, which requires full case 

summaries. Similarly, the Commission 

has narrowed the new disclosure of 

independent trademark-specific 

franchisee associations. Franchisors 

need not make this disclosure unless the 

association specifically asks to be 

included in the franchisor’s disclosure 

document. Further, such requests must 

be renewed by the association on an 

annual basis. In addition, franchisors 

need not update this disclosure on a 

quarterly basis. The Commission 

believes that these, and other efforts to 

narrow amendments to the original 

Franchise Rule discussed throughout 

this document, will result in the easing 

of compliance burdens for all 

franchisors, especially small business 

franchisors. 

C. Description And Estimate Of Number 

Of Small Entities Subject To The Final 

Rule Or Explanation Why No Estimate 

Is Available 

The Commission cannot readily 

estimate the number of small entities 

subject to the final amended Rule. 

Franchising is a method of distribution, 

not an industry, nor an economic sector. 

Accordingly, businesses in a wide array 

of industries engage in the distribution 

of products or services through 

franchising, and the number of 

franchisors in any one economic sector 

is constantly changing. 

Moreover, the SBA’s standards for 

determining size—based on either 

number of employees or annual 

receipts—are inapplicable to 

franchising.960 For example, the most 

relevant SBA standards pertaining to 

franchising are arguably those for the 

retail sales industry. The most common 

‘‘small business’’ threshold (measured 

in receipts) for the retail trade industry 

is $6 million.961 However, these 

standards apply to franchisees engaging 

in retail sales activities, not to the 

franchisors that sell the underlying 

franchised units.962

Nonetheless, in the Franchise NPR the 

Commission estimated that there are 

2,500 business format and product 

franchisors and 2,500 business 

opportunities covered by the original 

Rule.963 The Commission estimated that 

as many as 70% of those 5,000 

franchisors are small entities, including 

some start-up franchise systems and 

most business opportunities.964 The 

Franchise NPR specifically asked for 

comment on these estimates. No 

comments were submitted. Accordingly, 

our best estimate is that 3,500 

franchisors covered by the original Rule 

were small businesses, 2,500 of which 

were business opportunities. 

Once business opportunity ventures 

are no longer covered by part 436 of the 

final amended Rule, the number of 


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965 In preparing disclosure documents for 

franchisor clients, attorneys may also arrange for 

the assistance of accountants, especially to prepare 

audited financial statements. 

966See 67 FR 21243 (Apr. 30, 2002); 67 FR 45734 

(July 10, 2002) (‘‘2002 Notices’’). 

967 67 FR at 21245; 67 FR at 45736. 

968See 70 FR 28937, 28940 (May 19, 2005); 70 FR 

51817, 51819 (Aug. 31, 2005) (‘‘2005 Notices’’). 

‘‘small businesses’’ subject to the Rule 

amendments will be greatly reduced. Of 

the remaining 2,500 franchisors covered 

by part 436 of the final amended Rule, 

many are mature, well-established 

franchise systems, including many 

publicly traded companies. In the 

absence of additional information on the 

size of franchisors, we will estimate for 

purposes of this analysis that 1,000 

franchisors (3,500 covered by the 

original Rule minus the exclusion of 

2,500 business opportunities) will 

qualify as small businesses subject to 

the part 436 amendments. At the same 

time, each of the 2,500 business 

opportunities covered by the original 

Rule—most likely small entities—will 

remain covered by the identical 

disclosure requirements, as set forth in 

part 437. 

D. Description Of The Projected 

Reporting, Recordkeeping, And Other 

Compliance Requirements Of The Rule, 

Including An Estimate Of The Classes 

Of Small Entities That Will Be Subject 

To The Rule And The Type Of 

Professional Skills That Will Be 

Necessary To Comply 

As discussed in the Paperwork 

Reduction Act analysis of this notice 

(Section VI), the amendments will 

impose compliance requirements (e.g., 

disclosure) and minor recordkeeping 

requirements on franchisors. This may 

affect some small business franchisors. 

No additional recordkeeping or 

disclosure requirements are imposed on 

business opportunities that remain 

covered under part 437. The 

incremental cost of the part 436 

amendments on franchisors is difficult 

to estimate. As suggested by the lack of 

comment on the subject, the 

Commission expects that the added 

costs of the amendments will be small. 

Finally, compliance with the amended 

Rule will require, in many instances, the 

professional assistance of an attorney to 

prepare disclosure documents.965

However, franchisors (and business 

opportunity sellers) typically need such 

professional assistance in order to 

comply with state franchise and 

business opportunity disclosure laws, in 

particular the preparation of required 

financial statements. Accordingly, no 

new or additional professional skills are 

required as a result of amendments to 

the original Rule. 

E. Steps The Agency Has Taken To 

Minimize Any Significant Economic 

Impact On Small Entities, Consistent 

With The Stated Objectives Of The 

Applicable Statutes, Including The 

Factual, Policy, And Legal Reasons For 

Selecting The Alternative(s) Finally 

Adopted, And Why Each Of The 

Significant Alternatives, If Any, Was 

Rejected 

As discussed throughout this 

document, the Commission has 

considered all alternatives that would 

reduce compliance costs on all 

franchisors, including small business 

franchisors, while achieving the 

intended objectives of the Rule. For 

example, part 436 of the final amended 

Rule narrows the scope of the original 

Rule by eliminating coverage of 

business opportunities, many of which 

are small businesses. Part 436 of the 

final amended Rule, while reducing 

compliance with state pre-sale 

disclosure laws, minimizes compliance 

costs where possible. For example, part 

436 of the final amended Rule narrows 

the disclosure of computer system 

requirements. Where a part 436 rule 

amendment expands the original Rule, 

it does so in a fashion designed to 

minimize compliance burdens. This is 

most evident regarding the new 

disclosures pertaining to franchisorinitiated litigation and independent, 

trademark-specific franchisee 

associations, as discussed above. 

Further, in many instances part 436 of 

the final amended Rule permits 

franchisors the flexibility to comply 

with Rule provisions in a manner that 

makes the most sense for their particular 

business. For example, franchisors can 

determine the best medium in which to 

furnish their disclosures, as well as to 

receive receipts from prospective 

franchisees. 

Moreover, part 436 of the final 

amended Rule permits disclosure and 

recordkeeping electronically. This offers 

the promise of greatly reducing 

compliance costs, especially for small 

businesses. All franchisors, including 

small businesses, may furnish 

disclosures using the approach that is 

most economical for their business, 

whether that means furnishing a paper 

document, an electronic disclosure 

document made available to prospective 

franchisees through a passwordprotected website, or through email or 

CD-ROM. 

At the same time, the Commission has 

rejected numerous suggestions to revise 

the original Rule that would result in 

significantly increased costs for all 

franchisors, in particular small business 

franchisors. For example, several 

commenters urged the Commission to 

mandate the disclosure of financial 

performance data. Other commenters 

urged the Commission to expand greatly 

the reporting of franchise turnover rates. 

Further, commenters suggested that the 

Commission incorporate into the 

disclosure document various risk factors 

or consumer education notices to 

prospective franchisees. As discussed 

above in Section III, the Commission 

finds that the benefits of these suggested 

amendments would not outweigh the 

compliance costs. 

Finally, the Commission has 

determined to give franchisors ample 

time to come into compliance with the 

final amended Rule. To that end, 

franchisors can start using the final 

amended Rule on July 1, 2007, if they 

so choose. At the very latest, all 

franchisors must come into compliance 

with the final amended Rule by July 1, 

2008. This approach will benefit large 

and more seasoned franchisors that 

wish to take advantage of the 

improvements incorporated in part 436 

of the final amended Rule. At the same 

time, it permits small business 

franchisors, in particular, ample 

opportunity to consider the best and 

most cost-effective means to comply 

with part 436 of the final amended Rule. 

VI. PAPERWORK REDUCTION ACT 

In accordance with the Paperwork 

Reduction Act, as amended, 44 U.S.C. 

3501-3520, the Office of Management 

and Budget (‘‘OMB’’) has approved the 

information collection requirements 

contained in the amended Rule through 

October 31, 2008, and has assigned 

OMB control number 3084-0107. 

No comments were received in 

response to the Franchise NPR 

addressing the Commission’s paperwork 

burden estimates. Nonetheless, the 

Commission staff revised its approach to 

calculating the burden when seeking to 

extend the clearance for the Rule in 

2002.966 Specifically, taking into 

account that new entries are more likely 

to require additional time to prepare 

disclosures than their more seasoned 

counterparts, the Commission staff 

distinguished between existing entities 

covered by the Rule and the likely 

number of new entries when calculating 

compliance burdens.967 This burden 

analysis approach was retained when 

Commission staff sought an extension of 

the clearance for the Rule in 2005.968 As 

with the Franchise NPR, no paperwork 


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969 One Staff Report commenter voiced concern 

that the Franchise Rule imposed unnecessary 

burdens. See generally Winslow. Mr. Winslow’s 

concerns are addressed below. 

970 Unless otherwise noted, ‘‘franchisors’’ as used 

in this document solely pertains to business format 

franchisors. 971 Winslow, at 23-35. 

972 Winslow at 28. 

973 Winslow at 31, 93. 

974 Winslow at 28. 

related comments were received in 

response to the Commission’s 2002 and 

2005 Notices.969

As set forth in the 2005 Notices, based 

on a review of trade publications and 

information from state regulatory 

authorities, staff believes that, on 

average, from year to year, there are 

approximately 5,000 American 

franchise systems, consisting of about 

2,500 business format franchises and 

2,500 business opportunity sellers, with 

perhaps about 10% of that total (500) 

reflecting an equal amount of new and 

departing business entrants.970

A. Part 436 

Staff has calculated burdens based on 

the above estimates. Some franchisors, 

however, for various reasons, are not 

covered by the Rule in certain situations 

(e.g., when a franchisee buys bona fide 

inventory but pays no franchisor fees). 

Moreover, 15 states have franchise 

disclosure laws similar to the Rule. 

These states use a disclosure document 

format known as the Uniform Franchise 

Offering Circular (‘‘UFOC’’). In order to 

ease compliance burdens on the 

franchisor, the Commission has 

authorized use of the UFOC in lieu of 

its own disclosure format to satisfy the 

Rule’s disclosure requirements. Staff 

estimates that about 95 percent of all 

franchisors use the UFOC format. As 

noted throughout this document, 

revised part 436 tracks the UFOC 

Guidelines in large measure. 

Accordingly, the burden hours stated 

below reflects staff’s estimate of the 

incremental burden that part 436 may 

impose beyond information 

requirements imposed by states and/or 

followed by franchisors who use the 

UFOC. 

Estimated annual hours burden for part 

436: 19,500 hours. 

As set forth in the 2005 Notices, staff 

estimates that, during the first year of 

clearance, the 250 or so new franchisors 

will require 32 hours to prepare their 

disclosure document (two more hours 

than under the original Rule) and the 

remaining 2,250 established franchisors 

will require six hours to update their 

existing disclosure document (three 

more hours than under the original 

Rule). After the first year, however, the 

time required for established franchisors 

should be the same as under the original 

Rule, as the new disclosure format 

becomes familiar. Accordingly, during 

the remaining two years of the 

clearance, staff estimates it will take 

three hours for established franchisors 

to update their existing disclosure 

document (same as the original Rule). 

Thus, the average annual hours burden 

for established franchisors during the 

three-year clearance period will be 

approximately 4 hours ((6 hours during 

first year of clearance + 3 hours during 

second year of clearance + 3 hours 

during third year of clearance) ÷ 3 

years). 

As set forth in the 2005 Notices, 

under the original Rule, covered 

franchisors may need to maintain 

additional documentation for the sale of 

franchises in non-registration states, 

which could take up to an additional 

hour of recordkeeping per year. This 

yields a cumulative total of 2,500 hours 

per year for covered franchisors (1 hour 

x 2,500 franchisors). 

Part 436 of the amended Rule would 

also increase franchisors’ recordkeeping 

obligations. Specifically, a franchisor 

would be required to retain copies of 

receipts for disclosure documents, as 

well as materially different versions of 

its disclosure documents. Such 

recordkeeping requirements, however, 

are consistent with, or less burdensome, 

than those imposed by the states. 

Thus, staff estimates the average 

hours burden for new and established 

franchisors during the three-year 

clearance period will be 19,500 ((32 

hours of annual disclosure burden x 250 

new franchisors) + (4 hours of average 

annual disclosure burden x 2,250 

established franchisors) + (1 hour of 

annual recordkeeping burden x 2,500 

franchisors)). 

Estimated annual labor cost burden for 

part 436: $4,282,500. 

One commenter, Lance Winslow, 

stated in response to the Staff Report 

that the average total cost to prepare a 

franchise disclosure document is 

$25,000-35,000.971 The Commission 

agrees that many franchisors typically 

spend $25,000-35,000 on disclosure 

documents. Much of these costs, 

however, are not imposed by part 436, 

but by state law. For example, a large 

portion of the costs that franchisors 

typically pay for disclosures is the result 

of audited financial requirements and 

state registration requirements, costs 

that would continue to exist whether or 

not the Commission adopted the 

amended Rule. As stated above, staff’s 

burden estimates reflect the incremental 

burden that part 436 may impose 

beyond the information requirements 

imposed by states. 

As set forth in the 2005 Notices, staff 

estimates that an attorney will prepare 

the disclosure document at $250 per 

hour. Accordingly, staff estimates that 

250 new franchisors will annually each 

incur $8,000 in labor costs (32 hours x 

$250 per hour) and, during the first year 

of the clearance, established franchisors 

will each incur $1,500 in labor costs (6 

hours x $250). During the remaining two 

years of clearance, staff estimates 

established franchisors will annually 

each incur $750 in labor costs (3 hours 

x $250 per hour). Thus, the average 

annual labor cost estimate for 

established franchisors during the threeyear clearance period will be 

approximately $1,000 (($1,500 in labor 

costs during first year of clearance + 

$750 in labor costs during second year 

of clearance + $750 in labor costs during 

third year of clearance) ÷ 3 years). 

Further, staff anticipates that 

recordkeeping under part 436 will be 

performed by clerical staff at 

approximately $13 per hour. Thus, at 

2,500 hours of recordkeeping burden 

per year for all covered franchisors will 

amount to a total annual cost of $32,500 

(2,500 hours x $13 per hour). 

Thus, the total estimated labor costs 

under part 436 is $4,282,500 (($8,000 

attorney costs x 250 new franchisors) + 

($1,000 attorney costs x 2,250 

established franchisors) + ($13 clerical 

costs x 2,500 franchisors)). 

Estimated non-labor costs for part 436: 

$8,000,000. 

In response to the Staff Report, Mr. 

Winslow stated that the costs of printing 

documents for his franchise system 

exceed $24,000 without postage.972 Mr. 

Winslow further indicated that the 

number of disclosure documents sent 

out each year will increase under the 

amended Rule.973 Finally, Mr. Winslow 

stated that franchisors will incur 

significant costs if they send disclosure 

documents electronically, including 

bandwidth fees and fees associated with 

hiring a contractor to create a searchable 

website.974

As an initial matter, in developing 

cost estimates, Commission staff 

consulted with practitioners who 

prepare disclosure documents for a 

cross-section of franchise systems. 

Accordingly, the Commission believes 

that its cost estimates are representative 

of the costs incurred by franchise 

systems generally. In addition, Mr. 

Winslow fails to provide a basis for his 


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975 In April 2006, the Commission published the 

Business Opportunity NPR, 71 FR 19054 (Apr. 12, 

2006). Among other things, the proposed Business 

Opportunity Rule would amend part 437 

substantially, reducing the number of disclosures 

pertaining to business opportunities. At the same 

time, the proposed Business Opportunity Rule 

would expand part 437 to include a broader array 

of business opportunities than covered by the 

original Franchise Rule. In response to the business 

opportunity NPR, the Commission received over 

17,000 comments, many opposing the inclusion of 

multilevel marketing companies under the 

proposed rule. Several comments specifically 

questioned the paperwork burdens that might be 

imposed by the part 437 amendments. E.g., DSA, 

Business Opportunity NPR. Commission staff is 

currently analyzing the comments. For now, 

however, only those businesses opportunities 

covered by the original Franchise Rule—such as 

vending machine and rack display opportunities—

remain covered under part 437. 

assertion that the demand for disclosure 

documents will increase as a result of 

the amended Rule. Finally, many 

franchisors establish and maintain 

websites for ordinary business purposes, 

including advertising their goods or 

services and to facilitate communication 

with the public. Accordingly, any costs 

franchisors would incur specifically as 

a result of electronic disclosure under 

part 436 appear to be low. 

As set forth in the 2005 Notices, staff 

estimates that the non-labor burden 

incurred by franchisors under part 436 

will differ based on the length of the 

disclosure document and the number of 

disclosure documents produced. Staff 

estimates that 2,000 franchisors (80% of 

total franchisors covered by the Rule) 

will print 100 disclosure documents at 

$35 each. Thus, staff estimates that 80% 

of covered franchisors will each incur 

$3,500 in printing and mailing costs 

($35 for printing and mailing x 100 

disclosure documents). Staff estimates 

that the remaining 20% of franchisors 

(500) will send 50% of the 100 

documents electronically, with a cost of 

$5 per electronic disclosure. Thus, staff 

estimates that 20% of covered 

franchisors will each incur $2,000 in 

distribution costs (($250 for electronic 

disclosure [$5 for electronic disclosure 

x 50 disclosure documents] + $1,750 for 

printing and mailing [$35 for printing 

and mailing x 50 disclosure 

documents])). 

Thus, the cumulative annual hours 

burden for part 436 of the amended Rule 

is approximately 19,500 hours ((32 

hours of annual disclosure burden x 250 

new franchisors) + (4 hours of average 

annual disclosure burden x 2,250 

established franchisors) + (1 hour of 

annual recordkeeping burden x 2,500 

total business format franchisors)). The 

cumulative annual labor costs for part 

436 of the amended Rule is 

approximately $4,282,500 (($8,000 

attorney costs x 250 new franchisors) + 

($1,000 attorney costs x 2,250 

established franchisors) + ($13 clerical 

costs x 2,500 total business format 

franchisors)). Finally, the cumulative 

annual non-labor costs for part 436 of 

the amended Rule is approximately 

$8,000,000 (($3,500 printing and 

mailing costs x 2,000 franchisors) + 

(($250 electronic distribution costs + 

$1,750 printing and mailing costs) x 500 

franchisors)). 

B. Part 437 

As noted throughout this document, 

business opportunities covered by the 

original Franchise Rule will remain 

covered, without any substantive 

change, under part 437 of the amended 

Rule. Part 437 of the amended Rule 

imposes no additional disclosures, 

recordkeeping, or prohibitions.975

Estimated annual hours burden for part 

437: 16,750 hours. 

The burden estimates for compliance 

with part 437 will vary depending on 

the business opportunity sellers’ prior 

experience with the Franchise Rule. As 

set forth in the 2005 Notices, staff 

estimates that 250 or so new business 

opportunity sellers will enter the market 

each year, requiring approximately 30 

hours each to develop a Rule-compliant 

disclosure document. Thus, staff 

estimates that the cumulative annual 

disclosure burden for new business 

opportunity sellers will be 

approximately 7,500 hours (250 new 

business opportunity sellers x 30 hours). 

Staff further estimates that the 

remaining 2250 established business 

opportunity sellers will require no more 

than approximately 3 hours each to 

update the disclosure document. 

Accordingly, staff estimates that the 

cumulative annual disclosure burden 

for established business opportunity 

sellers will be approximately 6,750 

hours (2250 established business 

opportunity sellers x 3 hours). 

Business opportunity sellers may 

need to maintain additional 

documentation for the sale of business 

opportunities in some states, which 

could take up to an additional hour of 

recordkeeping per year. Accordingly, 

staff estimates that business opportunity 

sellers will cumulatively incur 

approximately 2,500 hours of record 

keeping burden each year (2,500 

business opportunity sellers x 1 hour). 

Thus, the total burden for business 

opportunity sellers is approximately 

16,750 hours ((7,500 hours of disclosure 

burden for new business opportunity 

sellers + 6,750 hours of disclosure 

burden for established business 

opportunity sellers + 2,500 of 

recordkeeping burden for all business 

opportunity sellers)). 

Estimated annual labor cost burden for 

part 437: $3,595,000. 

Labor costs are determined by 

applying applicable wage rates to 

associated burden hours. Staff presumes 

an attorney will prepare or update the 

disclosure document at $250 per hour. 

Accordingly, staff estimates that 

business opportunity sellers incur 

approximately $3,562,500 in labor costs 

due to compliance with the Rule’s 

disclosure requirements ((250 new 

business opportunity sellers x $250 per 

hour x 30 hours per business 

opportunity) + (2,250 established 

business opportunity sellers x $250 per 

hour x 3 hours per business 

opportunity)). 

Staff anticipates that recordkeeping 

would be performed by clerical staff at 

approximately $13 per hour. At 2,500 

hours per year for all affected business 

opportunities, this would amount to a 

total cost of $32,500 (2,500 hours for 

recordkeeping x $13 per hour). Thus, 

the combined labor costs for 

recordkeeping and disclosure for 

business opportunity sellers is 

approximately $3,595,000 ($3,562,500 

for disclosures + $32,500 for 

recordkeeping). 

Estimated non-labor cost for part 437: 

$3,887,500. 

Business opportunity sellers must 

also incur costs to print and distribute 

the disclosure document. These costs 

vary based upon the length of the 

disclosures and the number of copies 

produced to meet the expected demand. 

Staff estimates that 2,500 business 

opportunity sellers print and mail 100 

documents per year at a cost of $15 per 

document, for a total cost of $3,750,000 

(2,500 business opportunity sellers x 

100 documents per year x $15 per 

document). 

Business opportunity sellers must 

also complete and disseminate an FTCrequired cover sheet that identifies the 

business opportunity seller, the date the 

document is issued, a table of contents, 

and a notice that tracks the language 

specifically provided in part 437 of the 

Rule. Although some of the language in 

the cover sheet is supplied by the 

government for the purpose of 

disclosure to the public, and is thus 

excluded from the definition of 

‘‘collection of information’’ under the 

PRA, see 5 CFR 1320.3(c)(2), there are 

residual costs to print and mail these 

cover sheets, including within them the 

presentation of related information 

beyond the supplied text. Staff estimates 

that 2,500 business opportunity sellers 


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complete and disseminate 100 cover 

sheets per year at a cost of 

approximately $0.55 per cover sheet, or 

a total cost of approximately $137,500 

(2,500 business opportunity sellers x 

100 cover sheets per year x $0.55 per 

cover sheet). 

Accordingly, the cumulative nonlabor cost incurred by business 

opportunity sellers each year due to 

compliance with part 437 will be 

approximately $3,887,500 ($3,750,000 

for printing and mailing documents + 

$137,500 for completing and mailing 

cover sheets). 

Thus, the cumulative annual hours 

burden for part 437 of the amended Rule 

is approximately 16,750 hours ((30 

hours of average annual disclosure 

burden x 250 new business opportunity 

sellers) + (3 hours of annual disclosure 

burden x 2,250 established business 

opportunity sellers) + (1 hour of annual 

recordkeeping burden x 2,500 total 

business opportunity sellers)). The 

cumulative annual labor costs for part 

437 of the amended Rule is 

approximately $3,595,000 (($7,500 

attorney costs x 250 new business 

opportunity sellers) + ($750 attorney 

costs x 2,250 established business 

opportunity sellers) + ($13 clerical costs 

x 2,500 total business opportunity 

sellers)). Finally, the cumulative annual 

non-labor costs for part 437 of the 

amended Rule is approximately 

$3,887,500 (($1,500 printing and 

mailing costs x 2,500 business 

opportunity sellers) + ($55 cover sheet 

costs x 2500 business opportunity 

sellers)). 

List of Subjects in 16 CFR Part 436 and 

437 

Advertising, Business and industry, 

Franchising, Trade practices. 

VII. FINAL RULE LANGUAGE 

■ For the reasons set out in this 

document, the Commission revises 16 

CFR Part 436 as follows: 

PART 436—DISCLOSURE 

REQUIREMENTS AND PROHIBITIONS 

CONCERNING FRANCHISING 

Subpart A—Definitions 

Sec. 

436.1 Definitions. 

Subpart B—Franchisor’s Obligations 

436.2 Obligation to furnish documents. 

Subpart C—Contents of a Disclosure 

Document 

436.3 Cover page. 

436.4 Table of contents. 

436.5 Disclosure items. 

Subpart D—Instructions 

436.6 Instructions for preparing disclosure 

documents. 

436.7 Instructions for updating disclosures. 

Subpart E—Exemptions 

436.8 Exemptions. 

Subpart F—Prohibitions 

436.9 Additional prohibitions. 

Subpart G—Other Provisions 

436.10 Other laws and rules. 

436.11 Severability. 

Appendix A to Part 436—Sample Item 10 

Table—Summary of Financing Offered 

Appendix B to Part 436—Sample Item 20(1) 

Table—Systemwide Outlet Summary 

Appendix C to Part 436—Sample Item 20(2) 

Table —Transfers of Franchised Outlets 

Appendix D to Part 436—Sample Item 20(3) 

Table—Status of Franchise Outlets 

Appendix E to Part 436—Sample Item 20(4) 

Table—Status of Company-Owned 

Outlets 

Appendix F to Part 436—Sample Item 20(5) 

Table—Projected New Franchised 

Outlets 

Authority: 15 U.S.C. 41-58. 

Subpart A—Definitions 

§ 436.1 Definitions. 

Unless stated otherwise, the following 

definitions apply throughout part 436: 

(a) Action includes complaints, cross 

claims, counterclaims, and third-party 

complaints in a judicial action or 

proceeding, and their equivalents in an 

administrative action or arbitration. 

(b) Affiliate means an entity 

controlled by, controlling, or under 

common control with, another entity. 

(c) Confidentiality clause means any 

contract, order, or settlement provision 

that directly or indirectly restricts a 

current or former franchisee from 

discussing his or her personal 

experience as a franchisee in the 

franchisor’s system with any 

prospective franchisee. It does not 

include clauses that protect franchisor’s 

trademarks or other proprietary 

information. 

(d) Disclose, state, describe, and list 

each mean to present all material facts 

accurately, clearly, concisely, and 

legibly in plain English. 

(e) Financial performance 

representation means any 

representation, including any oral, 

written, or visual representation, to a 

prospective franchisee, including a 

representation in the general media, that 

states, expressly or by implication, a 

specific level or range of actual or 

potential sales, income, gross profits, or 

net profits. The term includes a chart, 

table, or mathematical calculation that 

shows possible results based on a 

combination of variables. 

(f) Fiscal year refers to the franchisor’s 

fiscal year. 

(g) Fractional franchise means a 

franchise relationship that satisfies the 

following criteria when the relationship 

is created: 

(1) The franchisee, any of the 

franchisee’s current directors or officers, 

or any current directors or officers of a 

parent or affiliate, has more than two 

years of experience in the same type of 

business; and 

(2) The parties have a reasonable basis 

to anticipate that the sales arising from 

the relationship will not exceed 20% of 

the franchisee’s total dollar volume in 

sales during the first year of operation. 

(h) Franchise means any continuing 

commercial relationship or 

arrangement, whatever it may be called, 

in which the terms of the offer or 

contract specify, or the franchise seller 

promises or represents, orally or in 

writing, that: 

(1) The franchisee will obtain the 

right to operate a business that is 

identified or associated with the 

franchisor’s trademark, or to offer, sell, 

or distribute goods, services, or 

commodities that are identified or 

associated with the franchisor’s 

trademark; 

(2) The franchisor will exert or has 

authority to exert a significant degree of 

control over the franchisee’s method of 

operation, or provide significant 

assistance in the franchisee’s method of 

operation; and 

(3) As a condition of obtaining or 

commencing operation of the franchise, 

the franchisee makes a required 

payment or commits to make a required 

payment to the franchisor or its affiliate. 

(i) Franchisee means any person who 

is granted a franchise. 

(j) Franchise seller means a person 

that offers for sale, sells, or arranges for 

the sale of a franchise. It includes the 

franchisor and the franchisor’s 

employees, representatives, agents, 

subfranchisors, and third-party brokers 

who are involved in franchise sales 

activities. It does not include existing 

franchisees who sell only their own 

outlet and who are otherwise not 

engaged in franchise sales on behalf of 

the franchisor. 

(k) Franchisor means any person who 

grants a franchise and participates in the 

franchise relationship. Unless otherwise 

stated, it includes subfranchisors. For 

purposes of this definition, a 

‘‘subfranchisor’’ means a person who 

functions as a franchisor by engaging in 

both pre-sale activities and post-sale 

performance. 

(l) Leased department means an 

arrangement whereby a retailer licenses 

or otherwise permits a seller to conduct 


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business from the retailer’s location 

where the seller purchases no goods, 

services, or commodities directly or 

indirectly from the retailer, a person the 

retailer requires the seller to do business 

with, or a retailer-affiliate if the retailer 

advises the seller to do business with 

the affiliate. 

(m) Parent means an entity that 

controls another entity directly, or 

indirectly through one or more 

subsidiaries. 

(n) Person means any individual, 

group, association, limited or general 

partnership, corporation, or any other 

entity. 

(o) Plain English means the 

organization of information and 

language usage understandable by a 

person unfamiliar with the franchise 

business. It incorporates short 

sentences; definite, concrete, everyday 

language; active voice; and tabular 

presentation of information, where 

possible. It avoids legal jargon, highly 

technical business terms, and multiple 

negatives. 

(p) Predecessor means a person from 

whom the franchisor acquired, directly 

or indirectly, the major portion of the 

franchisor’s assets. 

(q) Principal business address means 

the street address of a person’s home 

office in the United States. A principal 

business address cannot be a post office 

box or private mail drop. 

(r) Prospective franchisee means any 

person (including any agent, 

representative, or employee) who 

approaches or is approached by a 

franchise seller to discuss the possible 

establishment of a franchise 

relationship. 

(s) Required payment means all 

consideration that the franchisee must 

pay to the franchisor or an affiliate, 

either by contract or by practical 

necessity, as a condition of obtaining or 

commencing operation of the franchise. 

A required payment does not include 

payments for the purchase of reasonable 

amounts of inventory at bona fide 

wholesale prices for resale or lease. 

(t) Sale of a franchise includes an 

agreement whereby a person obtains a 

franchise from a franchise seller for 

value by purchase, license, or otherwise. 

It does not include extending or 

renewing an existing franchise 

agreement where there has been no 

interruption in the franchisee’s 

operation of the business, unless the 

new agreement contains terms and 

conditions that differ materially from 

the original agreement. It also does not 

include the transfer of a franchise by an 

existing franchisee where the franchisor 

has had no significant involvement with 

the prospective transferee. A 

franchisor’s approval or disapproval of 

a transfer alone is not deemed to be 

significant involvement. 

(u) Signature means a person’s 

affirmative step to authenticate his or 

her identity. It includes a person’s 

handwritten signature, as well as a 

person’s use of security codes, 

passwords, electronic signatures, and 

similar devices to authenticate his or 

her identity. 

(v) Trademark includes trademarks, 

service marks, names, logos, and other 

commercial symbols. 

(w) Written or in writing means any 

document or information in printed 

form or in any form capable of being 

preserved in tangible form and read. It 

includes: type-set, word processed, or 

handwritten document; information on 

computer disk or CD-ROM; information 

sent via email; or information posted on 

the Internet. It does not include mere 

oral statements. 

Subpart B—Franchisors’ Obligations 

§ 436.2 Obligation to furnish documents. 

In connection with the offer or sale of 

a franchise to be located in the United 

States of America or its territories, 

unless the transaction is exempted 

under Subpart E of this part, it is an 

unfair or deceptive act or practice in 

violation of Section 5 of the Federal 

Trade Commission Act: 

(a) For any franchisor to fail to furnish 

a prospective franchisee with a copy of 

the franchisor’s current disclosure 

document, as described in Subparts C 

and D of this part, at least 14 calendardays before the prospective franchisee 

signs a binding agreement with, or 

makes any payment to, the franchisor or 

an affiliate in connection with the 

proposed franchise sale. 

(b) For any franchisor to alter 

unilaterally and materially the terms 

and conditions of the basic franchise 

agreement or any related agreements 

attached to the disclosure document 

without furnishing the prospective 

franchisee with a copy of each revised 

agreement at least seven calendar-days 

before the prospective franchisee signs 

the revised agreement. Changes to an 

agreement that arise out of negotiations 

initiated by the prospective franchisee 

do not trigger this seven calendar-day 

period. 

(c) For purposes of paragraphs (a) and 

(b) of this section, the franchisor has 

furnished the documents by the 

required date if: 

(1) A copy of the document was handdelivered, faxed, emailed, or otherwise 

delivered to the prospective franchisee 

by the required date; 

(2) Directions for accessing the 

document on the Internet were provided 

to the prospective franchisee by the 

required date; or 

(3) A paper or tangible electronic copy 

(for example, computer disk or CDROM) was sent to the address specified 

by the prospective franchisee by firstclass United States mail at least three 

calendar days before the required date. 

Subpart C—Contents of a Disclosure 

Document 

§ 436.3 Cover page. 

Begin the disclosure document with a 

cover page, in the order and form as 

follows: 

(a) The title ‘‘FRANCHISE 

DISCLOSURE DOCUMENT’’ in capital 

letters and bold type. 

(b) The franchisor’s name, type of 

business organization, principal 

business address, telephone number, 

and, if applicable, email address and 

primary home page address. 

(c) A sample of the primary business 

trademark that the franchisee will use in 

its business. 

(d) A brief description of the 

franchised business. 

(e) The following statements: 

(1) The total investment necessary to 

begin operation of a [franchise system 

name] franchise is [the total amount of 

Item 7 (§ 436.5(g))]. This includes [the 

total amount in Item 5 (§ 436.5(e))] that 

must be paid to the franchisor or 

affiliate. 

(2) This disclosure document 

summarizes certain provisions of your 

franchise agreement and other 

information in plain English. Read this 

disclosure document and all 

accompanying agreements carefully. 

You must receive this disclosure 

document at least 14 calendar-days 

before you sign a binding agreement 

with, or make any payment to, the 

franchisor or an affiliate in connection 

with the proposed franchise sale. [The 

following sentence in bold type] Note, 

however, that no governmental agency 

has verified the information contained 

in this document. 

(3) The terms of your contract will 

govern your franchise relationship. 

Don’t rely on the disclosure document 

alone to understand your contract. Read 

all of your contract carefully. Show your 

contract and this disclosure document 

to an advisor, like a lawyer or an 

accountant. 

(4) Buying a franchise is a complex 

investment. The information in this 

disclosure document can help you make 

up your mind. More information on 

franchising, such as ‘‘A Consumer’s 

Guide to Buying a Franchise,’’ which 


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can help you understand how to use 

this disclosure document, is available 

from the Federal Trade Commission. 

You can contact the FTC at 1-877-FTCHELP or by writing to the FTC at 600 

Pennsylvania Avenue, NW., 

Washington, D.C. 20580. You can also 

visit the FTC’s home page at 

www.ftc.gov for additional information. 

Call your state agency or visit your 

public library for other sources of 

information on franchising. 

(5) There may also be laws on 

franchising in your state. Ask your state 

agencies about them. 

(6) [The issuance date]. 

(f) A franchisor may include the 

following statement between the 

statements set out at paragraphs (e)(2) 

and (3) of this section: ‘‘You may wish 

to receive your disclosure document in 

another format that is more convenient 

for you. To discuss the availability of 

disclosures in different formats, contact 

[name or office] at [address] and 

[telephone number].’’

(g) Franchisors may include 

additional disclosures on the cover 

page, on a separate cover page, or 

addendum to comply with state pre-sale 

disclosure laws. 

§ 436.4 Table of contents. 

Include the following table of 

contents. State the page where each 

disclosure Item begins. List all exhibits 

by letter, as shown in the following 

example. 

Table of Contents 

1. The Franchisor and any Parents, 

Predecessors, and Affiliates 

2. Business Experience 

3. Litigation 

4. Bankruptcy 

5. Initial Fees 

6. Other Fees 

7. Estimated Initial Investment 

8. Restrictions on Sources of Products and 

Services 

9. Franchisee’s Obligations 

10. Financing 

11. Franchisor’s Assistance, Advertising, 

Computer Systems, and Training 

12. Territory 

13. Trademarks 

14. Patents, Copyrights, and Proprietary 

Information 

15. Obligation to Participate in the Actual 

Operation of the Franchise Business 

16. Restrictions on What the Franchisee May 

Sell 

17. Renewal, Termination, Transfer, and 

Dispute Resolution 

18. Public Figures 

19. Financial Performance Representations 

20. Outlets and Franchisee Information 

21. Financial Statements 

22. Contracts 

23. Receipts 

Exhibits 

A. Franchise Agreement 

§ 436.5 Disclosure items. 

(a) Item 1: The Franchisor, and any 

Parents, Predecessors, and Affiliates. 

Disclose: 

(1) The name and principal business 

address of the franchisor; any parents; 

and any affiliates that offer franchises in 

any line of business or provide products 

or services to the franchisees of the 

franchisor. 

(2) The name and principal business 

address of any predecessors during the 

10-year period immediately before the 

close of the franchisor’s most recent 

fiscal year. 

(3) The name that the franchisor uses 

and any names it intends to use to 

conduct business. 

(4) The identity and principal 

business address of the franchisor’s 

agent for service of process. 

(5) The type of business organization 

used by the franchisor (for example, 

corporation, partnership) and the state 

in which it was organized. 

(6) The following information about 

the franchisor’s business and the 

franchises offered: 

(i) Whether the franchisor operates 

businesses of the type being franchised. 

(ii) The franchisor’s other business 

activities. 

(iii) The business the franchisee will 

conduct. 

(iv) The general market for the 

product or service the franchisee will 

offer. In describing the general market, 

consider factors such as whether the 

market is developed or developing, 

whether the goods will be sold 

primarily to a certain group, and 

whether sales are seasonal. 

(v) In general terms, any laws or 

regulations specific to the industry in 

which the franchise business operates. 

(vi) A general description of the 

competition. 

(7) The prior business experience of 

the franchisor; any predecessors listed 

in § 436.5(a)(2) of this part; and any 

affiliates that offer franchises in any line 

of business or provide products or 

services to the franchisees of the 

franchisor, including: 

(i) The length of time each has 

conducted the type of business the 

franchisee will operate. 

(ii) The length of time each has 

offered franchises providing the type of 

business the franchisee will operate. 

(iii) Whether each has offered 

franchises in other lines of business. If 

so, include: 

(A) A description of each other line of 

business. 

(B) The number of franchises sold in 

each other line of business. 

(C) The length of time each has 

offered franchises in each other line of 

business. 

(b) Item 2: Business Experience. 

Disclose by name and position the 

franchisor’s directors, trustees, general 

partners, principal officers, and any 

other individuals who will have 

management responsibility relating to 

the sale or operation of franchises 

offered by this document. For each 

person listed in this section, state his or 

her principal positions and employers 

during the past five years, including 

each position’s starting date, ending 

date, and location. 

(c) Item 3: Litigation. (1) Disclose 

whether the franchisor; a predecessor; a 

parent or affiliate who induces franchise 

sales by promising to back the 

franchisor financially or otherwise 

guarantees the franchisor’s performance; 

an affiliate who offers franchises under 

the franchisor’s principal trademark; 

and any person identified in § 436.5(b) 

of this part: 

(i) Has pending against that person: 

(A) An administrative, criminal, or 

material civil action alleging a violation 

of a franchise, antitrust, or securities 

law, or alleging fraud, unfair or 

deceptive practices, or comparable 

allegations. 

(B) Civil actions, other than ordinary 

routine litigation incidental to the 

business, which are material in the 

context of the number of franchisees 

and the size, nature, or financial 

condition of the franchise system or its 

business operations. 

(ii) Was a party to any material civil 

action involving the franchise 

relationship in the last fiscal year. For 

purposes of this section, ‘‘franchise 

relationship’’ means contractual 

obligations between the franchisor and 

franchisee directly relating to the 

operation of the franchised business 

(such as royalty payment and training 

obligations). It does not include actions 

involving suppliers or other third 

parties, or indemnification for tort 

liability. 

(iii) Has in the 10-year period 

immediately before the disclosure 

document’s issuance date: 

(A) Been convicted of or pleaded nolo 

contendere to a felony charge. 

(B) Been held liable in a civil action 

involving an alleged violation of a 

franchise, antitrust, or securities law, or 

involving allegations of fraud, unfair or 

deceptive practices, or comparable 

allegations. ‘‘Held liable’’ means that, as 

a result of claims or counterclaims, the 

person must pay money or other 

consideration, must reduce an 

indebtedness by the amount of an 


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1 Franchisors may include a summary opinion of 

counsel concerning any action if counsel consent to 

use the summary opinion and the full opinion is 

attached to the disclosure document. 

2 If a settlement agreement must be disclosed in 

this Item, all material settlement terms must be 

disclosed, whether or not the agreement is 

confidential. However, franchisors need not 

disclose the terms of confidential settlements 

entered into before commencing franchise sales. 

Further, any franchisor who has historically used 

only the Franchise Rule format, or who is new to 

franchising, need not disclose confidential 

settlements entered prior to the effective date of this 

Rule. 

3 If fees may increase, disclose the formula that 

determines the increase or the maximum amount of 

the increase. For example, a percentage of gross 

sales is acceptable if the franchisor defines the term 

‘‘gross sales.’’

award, cannot enforce its rights, or must 

take action adverse to its interests. 

(2) Disclose whether the franchisor; a 

predecessor; a parent or affiliate who 

guarantees the franchisor’s performance; 

an affiliate who has offered or sold 

franchises in any line of business within 

the last 10 years; or any other person 

identified in § 436.5(b) of this part is 

subject to a currently effective 

injunctive or restrictive order or decree 

resulting from a pending or concluded 

action brought by a public agency and 

relating to the franchise or to a Federal, 

State, or Canadian franchise, securities, 

antitrust, trade regulation, or trade 

practice law. 

(3) For each action identified in 

paragraphs (c)(1) and (2) of this section, 

state the title, case number or citation, 

the initial filing date, the names of the 

parties, the forum, and the relationship 

of the opposing party to the franchisor 

(for example, competitor, supplier, 

lessor, franchisee, former franchisee, or 

class of franchisees). Except as provided 

in paragraph (c)(4) of this section, 

summarize the legal and factual nature 

of each claim in the action, the relief 

sought or obtained, and any conclusions 

of law or fact.1 In addition, state: 

(i) For pending actions, the status of 

the action. 

(ii) For prior actions, the date when 

the judgment was entered and any 

damages or settlement terms.2

(iii) For injunctive or restrictive 

orders, the nature, terms, and conditions 

of the order or decree. 

(iv) For convictions or pleas, the 

crime or violation, the date of 

conviction, and the sentence or penalty 

imposed. 

(4) For any other franchisor-initiated 

suit identified in paragraph (c)(1)(ii) of 

this section, the franchisor may comply 

with the requirements of paragraphs 

(c)(3)(i) through (iv) of this section by 

listing individual suits under one 

common heading that will serve as the 

case summary (for example, ‘‘royalty 

collection suits’’). 

(d) Item 4: Bankruptcy. (1) Disclose 

whether the franchisor; any parent; 

predecessor; affiliate; officer, or general 

partner of the franchisor, or any other 

individual who will have management 

responsibility relating to the sale or 

operation of franchises offered by this 

document, has, during the 10-year 

period immediately before the date of 

this disclosure document: 

(i) Filed as debtor (or had filed against 

it) a petition under the United States 

Bankruptcy Code (‘‘Bankruptcy Code’’). 

(ii) Obtained a discharge of its debts 

under the Bankruptcy Code. 

(iii) Been a principal officer of a 

company or a general partner in a 

partnership that either filed as a debtor 

(or had filed against it) a petition under 

the Bankruptcy Code, or that obtained a 

discharge of its debts under the 

Bankruptcy Code while, or within one 

year after, the officer or general partner 

held the position in the company. 

(2) For each bankruptcy, state: 

(i) The current name, address, and 

principal place of business of the 

debtor. 

(ii) Whether the debtor is the 

franchisor. If not, state the relationship 

of the debtor to the franchisor (for 

example, affiliate, officer). 

(iii) The date of the original filing and 

the material facts, including the 

bankruptcy court, and the case name 

and number. If applicable, state the 

debtor’s discharge date, including 

discharges under Chapter 7 and 

confirmation of any plans of 

reorganization under Chapters 11 and 

13 of the Bankruptcy Code. 

(3) Disclose cases, actions, and other 

proceedings under the laws of foreign 

nations relating to bankruptcy. 

(e) Item 5: Initial Fees. Disclose the 

initial fees and any conditions under 

which these fees are refundable. If the 

initial fees are not uniform, disclose the 

range or formula used to calculate the 

initial fees paid in the fiscal year before 

the issuance date and the factors that 

determined the amount. For this 

section, ‘‘initial fees’’ means all fees and 

payments, or commitments to pay, for 

services or goods received from the 

franchisor or any affiliate before the 

franchisee’s business opens, whether 

payable in lump sum or installments. 

Disclose installment payment terms in 

this section or in § 436.5(j) of this part. 

(f) Item 6: Other Fees. Disclose, in the 

following tabular form, all other fees 

that the franchisee must pay to the 

franchisor or its affiliates, or that the 

franchisor or its affiliates impose or 

collect in whole or in part for a third 

party. State the title ‘‘OTHER FEES’’ in 

capital letters using bold type. Include 

any formula used to compute the fees.3

ITEM 6 TABLE

OTHER FEES 

Column 1 

Type of fee 

Column 2 

Amount 

Column 3 

Due Date 

Column 4 

Remarks 

(1) In column 1, list the type of fee 

(for example, royalties, and fees for 

lease negotiations, construction, 

remodeling, additional training or 

assistance, advertising, advertising 

cooperatives, purchasing cooperatives, 

audits, accounting, inventory, transfers, 

and renewals). 

(2) In column 2, state the amount of 

the fee. 

(3) In column 3, state the due date for 

each fee. 

(4) In column 4, include remarks, 

definitions, or caveats that elaborate on 

the information in the table. If remarks 

are long, franchisors may use footnotes 

instead of the remarks column. If 

applicable, include the following 

information in the remarks column or in 

a footnote: 

(i) Whether the fees are payable only 

to the franchisor. 

(ii) Whether the fees are imposed and 

collected by the franchisor. 

(iii) Whether the fees are nonrefundable or describe the 

circumstances when the fees are 

refundable. 

(iv) Whether the fees are uniformly 

imposed. 

(v) The voting power of franchisorowned outlets on any fees imposed by 


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15548 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

4 Franchisors may include the reason for the 

requirement. Franchisors need not disclose in this 

Item the purchase or lease of goods or services 

provided as part of the franchise without a separate 

charge (such as initial training, if the cost is 

included in the franchise fee). Describe such fees 

in Item 5 of this section. Do not disclose fees 

already described in § 436.5(f) of this part. 

5 Take figures from the franchisor’s most recent 

annual audited financial statement required in 

§ 436.5(u) of this part. If audited statements are not 

yet required, or if the entity deriving the income is 

an affiliate, disclose the sources of information used 

in computing revenues. 

cooperatives. If franchisor-owned 

outlets have controlling voting power, 

disclose the maximum and minimum 

fees that may be imposed. 

(g) Item 7: Estimated Initial 

Investment. Disclose, in the following 

tabular form, the franchisee’s estimated 

initial investment. State the title ‘‘YOUR 

ESTIMATED INITIAL INVESTMENT’’

in capital letters using bold type. 

Franchisors may include additional 

expenditure tables to show expenditure 

variations caused by differences such as 

in site location and premises size. 

ITEM 7 TABLE: 

YOUR ESTIMATED INITIAL INVESTMENT 

Column 1 

Type of expenditure 

Column 2 

Amount 

Column 3 

Method of payment 

Column 4 

When due 

Column 4 

To whom payment is to be 

made 

Total. 

(1) In column 1: 

(i) List each type of expense, 

beginning with pre-opening expenses. 

Include the following expenses, if 

applicable. Use footnotes to include 

remarks, definitions, or caveats that 

elaborate on the information in the 

Table. 

(A) The initial franchise fee. 

(B) Training expenses. 

(C) Real property, whether purchased 

or leased. 

(D) Equipment, fixtures, other fixed 

assets, construction, remodeling, 

leasehold improvements, and decorating 

costs, whether purchased or leased. 

(E) Inventory to begin operating. 

(F) Security deposits, utility deposits, 

business licenses, and other prepaid 

expenses. 

(ii) List separately and by name any 

other specific required payments (for 

example, additional training, travel, or 

advertising expenses) that the franchisee 

must make to begin operations. 

(iii) Include a category titled 

‘‘Additional funds— [initial period]’’ for 

any other required expenses the 

franchisee will incur before operations 

begin and during the initial period of 

operations. State the initial period. A 

reasonable initial period is at least three 

months or a reasonable period for the 

industry. Describe in general terms the 

factors, basis, and experience that the 

franchisor considered or relied upon in 

formulating the amount required for 

additional funds. 

(2) In column 2, state the amount of 

the payment. If the amount is unknown, 

use a low-high range based on the 

franchisor’s current experience. If real 

property costs cannot be estimated in a 

low-high range, describe the 

approximate size of the property and 

building and the probable location of 

the building (for example, strip 

shopping center, mall, downtown, rural, 

or highway). 

(3) In column 3, state the method of 

payment. 

(4) In column 4, state the due date. 

(5) In column 5, state to whom 

payment will be made. 

(6) Total the initial investment, 

incorporating ranges of fees, if used. 

(7) In a footnote, state: 

(i) Whether each payment is nonrefundable, or describe the 

circumstances when each payment is 

refundable. 

(ii) If the franchisor or an affiliate 

finances part of the initial investment, 

the amount that it will finance, the 

required down payment, the annual 

interest rate, rate factors, and the 

estimated loan repayments. Franchisors 

may refer to § 436.5(j) of this part for 

additional details. 

(h) Item 8: Restrictions on Sources of 

Products and Services. Disclose the 

franchisee’s obligations to purchase or 

lease goods, services, supplies, fixtures, 

equipment, inventory, computer 

hardware and software, real estate, or 

comparable items related to establishing 

or operating the franchised business 

either from the franchisor, its designee, 

or suppliers approved by the franchisor, 

or under the franchisor’s specifications. 

Include obligations to purchase imposed 

by the franchisor’s written agreement or 

by the franchisor’s practice.4 For each 

applicable obligation, state: 

(1) The good or service required to be 

purchased or leased. 

(2) Whether the franchisor or its 

affiliates are approved suppliers or the 

only approved suppliers of that good or 

service. 

(3) Any supplier in which an officer 

of the franchisor owns an interest. 

(4) How the franchisor grants and 

revokes approval of alternative 

suppliers, including: 

(i) Whether the franchisor’s criteria 

for approving suppliers are available to 

franchisees. 

(ii) Whether the franchisor permits 

franchisees to contract with alternative 

suppliers who meet the franchisor’s 

criteria. 

(iii) Any fees and procedures to 

secure approval to purchase from 

alternative suppliers. 

(iv) The time period in which the 

franchisee will be notified of approval 

or disapproval. 

(v) How approvals are revoked. 

(5) Whether the franchisor issues 

specifications and standards to 

franchisees, subfranchisees, or approved 

suppliers. If so, describe how the 

franchisor issues and modifies 

specifications. 

(6) Whether the franchisor or its 

affiliates will or may derive revenue or 

other material consideration from 

required purchases or leases by 

franchisees. If so, describe the precise 

basis by which the franchisor or its 

affiliates will or may derive that 

consideration by stating: 

(i) The franchisor’s total revenue.5

(ii) The franchisor’s revenues from all 

required purchases and leases of 

products and services. 

(iii) The percentage of the franchisor’s 

total revenues that are from required 

purchases or leases. 

(iv) If the franchisor’s affiliates also 

sell or lease products or services to 

franchisees, the affiliates’ revenues from 

those sales or leases. 

(7) The estimated proportion of these 

required purchases and leases by the 

franchisee to all purchases and leases by 

the franchisee of goods and services in 

establishing and operating the 

franchised businesses. 


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(8) If a designated supplier will make 

payments to the franchisor from 

franchisee purchases, disclose the basis 

for the payment (for example, specify a 

percentage or a flat amount). For 

purposes of this disclosure, a 

‘‘payment’’ includes the sale of similar 

goods or services to the franchisor at a 

lower price than to franchisees. 

(9) The existence of purchasing or 

distribution cooperatives. 

(10) Whether the franchisor negotiates 

purchase arrangements with suppliers, 

including price terms, for the benefit of 

franchisees. 

(11) Whether the franchisor provides 

material benefits (for example, renewal 

or granting additional franchises) to a 

franchisee based on a franchisee’s 

purchase of particular products or 

services or use of particular suppliers. 

(i) Item 9: Franchisee’s Obligations. 

Disclose, in the following tabular form, 

a list of the franchisee’s principal 

obligations. State the title 

‘‘FRANCHISEE’S OBLIGATIONS’’ in 

capital letters using bold type. Crossreference each listed obligation with any 

applicable section of the franchise or 

other agreement and with the relevant 

disclosure document provision. If a 

particular obligation is not applicable, 

state ‘‘Not Applicable.’’ Include 

additional obligations, as warranted. 

ITEM 9 TABLE: 

FRANCHISEE’S OBLIGATIONS 

[In bold] This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed 

information about your obligations in these agreements and in other items of this disclosure document. 

Obligation Section in agreement Disclosure document item 

a. Site selection and acquisition/lease 

b. Pre-opening purchase/leases 

c. Site development and other pre-opening requirements 

d. Initial and ongoing training 

e. Opening 

f. Fees 

g. Compliance with standards and policies/operating manual 

h. Trademarks and proprietary information 

i. Restrictions on products/services offered 

j. Warranty and customer service requirements 

k. Territorial development and sales quotas 

l. Ongoing product/service purchases 

m. Maintenance, appearance, and remodeling requirements 

n. Insurance 

o. Advertising 

p. Indemnification 

q. Owner’s participation/management/staffing 

r. Records and reports 

s. Inspections and audits 

t. Transfer 

u. Renewal 

v. Post-termination obligations 

w. Non-competition covenants 

x. Dispute resolution 

y. Other (describe) 


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15550 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

6 Indirect offers of financing include a written 

arrangement between a franchisor or its affiliate and 

a lender, for the lender to offer financing to a 

franchisee; an arrangement in which a franchisor or 

its affiliate receives a benefit from a lender in 

exchange for financing a franchise purchase; and a 

franchisor’s guarantee of a note, lease, or other 

obligation of the franchisee. 

7 Include sample copies of the financing 

documents as an exhibit to § 436.5(v) of this part. 

Cite the section and name of the document 

containing the financing terms and conditions. 

(j) Item 10: Financing. (1) Disclose the 

terms of each financing arrangement, 

including leases and installment 

contracts, that the franchisor, its agent, 

or affiliates offer directly or indirectly to 

the franchisee.6 The franchisor may 

summarize the terms of each financing 

arrangement in tabular form, using 

footnotes to provide additional 

information. For a sample Item 10 table, 

see Appendix A of this part. For each 

financing arrangement, state: 

(i) What the financing covers (for 

example, the initial franchise fee, site 

acquisition, construction or remodeling, 

initial or replacement equipment or 

fixtures, opening or ongoing inventory 

or supplies, or other continuing 

expenses).7

(ii) The identity of each lender 

providing financing and their 

relationship to the franchisor (for 

example, affiliate). 

(iii) The amount of financing offered 

or, if the amount depends on an actual 

cost that may vary, the percentage of the 

cost that will be financed. 

(iv) The rate of interest, plus finance 

charges, expressed on an annual basis. 

If the rate of interest, plus finance 

charges, expressed on an annual basis, 

may differ depending on when the 

financing is issued, state what that rate 

was on a specified recent date. 

(v) The number of payments or the 

period of repayment. 

(vi) The nature of any security interest 

required by the lender. 

(vii) Whether a person other than the 

franchisee must personally guarantee 

the debt. 

(viii) Whether the debt can be prepaid 

and the nature of any prepayment 

penalty. 

(ix) The franchisee’s potential 

liabilities upon default, including any: 

(A) Accelerated obligation to pay the 

entire amount due; 

(B) Obligations to pay court costs and 

attorney’s fees incurred in collecting the 

debt; 

(C) Termination of the franchise; and 

(D) Liabilities from cross defaults 

such as those resulting directly from 

non-payment, or indirectly from the loss 

of business property. 

(x) Other material financing terms. 

(2) Disclose whether the loan 

agreement requires franchisees to waive 

defenses or other legal rights (for 

example, confession of judgment), or 

bars franchisees from asserting a defense 

against the lender, the lender’s assignee 

or the franchisor. If so, describe the 

relevant provisions. 

(3) Disclose whether the franchisor’s 

practice or intent is to sell, assign, or 

discount to a third party all or part of 

the financing arrangement. If so, state: 

(i) The assignment terms, including 

whether the franchisor will remain 

primarily obligated to provide the 

financed goods or services; and 

(ii) That the franchisee may lose all its 

defenses against the lender as a result of 

the sale or assignment. 

(4) Disclose whether the franchisor or 

an affiliate receives any consideration 

for placing financing with the lender. If 

such payments exist: 

(i) Disclose the amount or the method 

of determining the payment; and 

(ii) Identify the source of the payment 

and the relationship of the source to the 

franchisor or its affiliates. 

(k) Item 11: Franchisor’s Assistance, 

Advertising, Computer Systems, and 

Training. Disclose the franchisor’s 

principal assistance and related 

obligations of both the franchisor and 

franchisee as follows. For each 

obligation, cite the section number of 

the franchise agreement imposing the 

obligation. Begin by stating the 

following sentence in bold type: 

‘‘Except as listed below, [the franchisor] 

is not required to provide you with any 

assistance.’’

(1) Disclose the franchisor’s preopening obligations to the franchisee, 

including any assistance in: 

(i) Locating a site and negotiating the 

purchase or lease of the site. If such 

assistance is provided, state: 

(A) Whether the franchisor generally 

owns the premises and leases it to the 

franchisee. 

(B) Whether the franchisor selects the 

site or approves an area in which the 

franchisee selects a site. If so, state 

further whether and how the franchisor 

must approve a franchisee-selected site. 

(C) The factors that the franchisor 

considers in selecting or approving sites 

(for example, general location and 

neighborhood, traffic patterns, parking, 

size, physical characteristics of existing 

buildings, and lease terms). 

(D) The time limit for the franchisor 

to locate or approve or disapprove the 

site and the consequences if the 

franchisor and franchisee cannot agree 

on a site. 

(ii) Conforming the premises to local 

ordinances and building codes and 

obtaining any required permits. 

(iii) Constructing, remodeling, or 

decorating the premises. 

(iv) Hiring and training employees. 

(v) Providing for necessary 

equipment, signs, fixtures, opening 

inventory, and supplies. If any such 

assistance is provided, state: 

(A) Whether the franchisor provides 

these items directly or only provides the 

names of approved suppliers. 

(B) Whether the franchisor provides 

written specifications for these items. 

(C) Whether the franchisor delivers or 

installs these items. 

(2) Disclose the typical length of time 

between the earlier of the signing of the 

franchise agreement or the first payment 

of consideration for the franchise and 

the opening of the franchisee’s business. 

Describe the factors that may affect the 

time period, such as ability to obtain a 

lease, financing or building permits, 

zoning and local ordinances, weather 

conditions, shortages, or delayed 

installation of equipment, fixtures, and 

signs. 

(3) Disclose the franchisor’s 

obligations to the franchisee during the 

operation of the franchise, including 

any assistance in: 

(i) Developing products or services 

the franchisee will offer to its 

customers. 

(ii) Hiring and training employees. 

(iii) Improving and developing the 

franchised business. 

(iv) Establishing prices. 

(v) Establishing and using 

administrative, bookkeeping, 

accounting, and inventory control 

procedures. 

(vi) Resolving operating problems 

encountered by the franchisee. 

(4) Describe the advertising program 

for the franchise system, including the 

following: 

(i)The franchisor’s obligation to 

conduct advertising, including: 

(A) The media the franchisor may use. 

(B) Whether media coverage is local, 

regional, or national. 

(C) The source of the advertising (for 

example, an in-house advertising 

department or a national or regional 

advertising agency). 

(D) Whether the franchisor must 

spend any amount on advertising in the 

area or territory where the franchisee is 

located. 

(ii) The circumstances when the 

franchisor will permit franchisees to use 

their own advertising material. 

(iii) Whether there is an advertising 

council composed of franchisees that 

advises the franchisor on advertising 

policies. If so, disclose: 

(A) How members of the council are 

selected. 

(B) Whether the council serves in an 

advisory capacity only or has 

operational or decision-making power. 


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(C) Whether the franchisor has the 

power to form, change, or dissolve the 

advertising council. 

(iv) Whether the franchisee must 

participate in a local or regional 

advertising cooperative. If so, state: 

(A) How the area or membership of 

the cooperative is defined. 

(B) How much the franchisee must 

contribute to the fund and whether 

other franchisees must contribute a 

different amount or at a different rate. 

(C) Whether the franchisor-owned 

outlets must contribute to the fund and, 

if so, whether those contributions are on 

the same basis as those for franchisees. 

(D) Who is responsible for 

administering the cooperative (for 

example, franchisor, franchisees, or 

advertising agency). 

(E) Whether cooperatives must 

operate from written governing 

documents and whether the documents 

are available for the franchisee to 

review. 

(F) Whether cooperatives must 

prepare annual or periodic financial 

statements and whether the statements 

are available for review by the 

franchisee. 

(G) Whether the franchisor has the 

power to require cooperatives to be 

formed, changed, dissolved, or merged. 

(v) Whether the franchisee must 

participate in any other advertising 

fund. If so, state: 

(A) Who contributes to the fund. 

(B) How much the franchisee must 

contribute to the fund and whether 

other franchisees must contribute a 

different amount or at a different rate. 

(C) Whether the franchisor-owned 

outlets must contribute to the fund and, 

if so, whether it is on the same basis as 

franchisees. 

(D) Who administers the fund. 

(E) Whether the fund is audited and 

when it is audited. 

(F) Whether financial statements of 

the fund are available for review by the 

franchisee. 

(G) How the funds were used in the 

most recently concluded fiscal year, 

including the percentages spent on 

production, media placement, 

administrative expenses, and a 

description of any other use. 

(vi) If not all advertising funds are 

spent in the fiscal year in which they 

accrue, how the franchisor uses the 

remaining amount, including whether 

franchisees receive a periodic 

accounting of how advertising fees are 

spent. 

(vii) The percentage of advertising 

funds, if any, that the franchisor uses 

principally to solicit new franchise 

sales. 

(5) Disclose whether the franchisor 

requires the franchisee to buy or use 

electronic cash registers or computer 

systems. If so, describe the systems 

generally in non-technical language, 

including the types of data to be 

generated or stored in these systems, 

and state the following: 

(i) The cost of purchasing or leasing 

the systems. 

(ii) Any obligation of the franchisor, 

any affiliate, or third party to provide 

ongoing maintenance, repairs, upgrades, 

or updates. 

(iii) Any obligations of the franchisee 

to upgrade or update any system during 

the term of the franchise, and, if so, any 

contractual limitations on the frequency 

and cost of the obligation. 

(iv) The annual cost of any optional 

or required maintenance, updating, 

upgrading, or support contracts. 

(v) Whether the franchisor will have 

independent access to the information 

that will be generated or stored in any 

electronic cash register or computer 

system. If so, describe the information 

that the franchisor may access and 

whether there are any contractual 

limitations on the franchisor’s right to 

access the information. 

(6) Disclose the table of contents of 

the franchisor’s operating manual 

provided to franchisees as of the 

franchisor’s last fiscal year-end or a 

more recent date. State the number of 

pages devoted to each subject and the 

total number of pages in the manual as 

of this date. This disclosure may be 

omitted if the franchisor offers the 

prospective franchisee the opportunity 

to view the manual before buying the 

franchise. 

(7) Disclose the franchisor’s training 

program as of the franchisor’s last fiscal 

year-end or a more recent date. 

(i) Describe the training program in 

the following tabular form. Title the 

table ‘‘TRAINING PROGRAM’’ in 

capital letters and bold type. 

ITEM 11 TABLE

TRAINING PROGRAM 

Column 1 

Subject 

Column 2 

Hours of Classroom Training 

Column 3 

Hours of On-The-Job Training 

Column 4 

Location 

(A) In column 1, state the subjects 

taught. 

(B) In column 2, state the hours of 

classroom training for each subject. 

(C) In column 3, state the hours of onthe-job training for each subject. 

(D) In column 4, state the location of 

the training for each subject. 

(ii) State further: 

(A) How often training classes are 

held and the nature of the location or 

facility where training is held (for 

example, company, home, office, 

franchisor-owned store). 

(B) The nature of instructional 

materials and the instructor’s 

experience, including the instructor’s 

length of experience in the field and 

with the franchisor. State only 

experience relevant to the subject taught 

and the franchisor’s operations. 

(C) Any charges franchisees must pay 

for training and who must pay travel 

and living expenses of the training 

program enrollees. 

(D) Who may and who must attend 

training. State whether the franchisee or 

other persons must complete the 

program to the franchisor’s satisfaction. 

If successful completion is required, 

state how long after signing the 

agreement or before opening the 

business the training must be 

completed. If training is not mandatory, 

state the percentage of new franchisees 

that enrolled in the training program 

during the preceding 12 months. 

(E) Whether additional training 

programs or refresher courses are 

required. 

(l) Item 12: Territory. 

Disclose: 

(1) Whether the franchise is for a 

specific location or a location to be 

approved by the franchisor. 

(2) Any minimum territory granted to 

the franchisee (for example, a specific 

radius, a distance sufficient to 

encompass a specified population, or 

another specific designation). 

(3) The conditions under which the 

franchisor will approve the relocation of 

the franchised business or the 

franchisee’s establishment of additional 

franchised outlets. 


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15552 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

8 The franchisor may include an attorney’s 

opinion relative to the merits of litigation or of an 

action if the attorney issuing the opinion consents 

to its use. The text of the disclosure may include 

a summary of the opinion if the full opinion is 

attached and the attorney issuing the opinion 

consents to the use of the summary. 

(4) Franchisee options, rights of first 

refusal, or similar rights to acquire 

additional franchises. 

(5) Whether the franchisor grants an 

exclusive territory. 

(i) If the franchisor does not grant an 

exclusive territory, state: ‘‘You will not 

receive an exclusive territory. You may 

face competition from other franchisees, 

from outlets that we own, or from other 

channels of distribution or competitive 

brands that we control.’’

(ii) If the franchisor grants an 

exclusive territory, disclose: 

(A) Whether continuation of territorial 

exclusivity depends on achieving a 

certain sales volume, market 

penetration, or other contingency, and 

the circumstances when the franchisee’s 

territory may be altered. Describe any 

sales or other conditions. State the 

franchisor’s rights if the franchisee fails 

to meet the requirements. 

(B) Any other circumstances that 

permit the franchisor to modify the 

franchisee’s territorial rights (for 

example, a population increase in the 

territory giving the franchisor the right 

to grant an additional franchise in the 

area) and the effect of such 

modifications on the franchisee’s rights. 

(6) For all territories (exclusive and 

non-exclusive): 

(i) Any restrictions on the franchisor 

from soliciting or accepting orders from 

consumers inside the franchisee’s 

territory, including: 

(A) Whether the franchisor or an 

affiliate has used or reserves the right to 

use other channels of distribution, such 

as the Internet, catalog sales, 

telemarketing, or other direct marketing 

sales, to make sales within the 

franchisee’s territory using the 

franchisor’s principal trademarks. 

(B) Whether the franchisor or an 

affiliate has used or reserves the right to 

use other channels of distribution, such 

as the Internet, catalog sales, 

telemarketing, or other direct marketing, 

to make sales within the franchisee’s 

territory of products or services under 

trademarks different from the ones the 

franchisee will use under the franchise 

agreement. 

(C) Any compensation that the 

franchisor must pay for soliciting or 

accepting orders from inside the 

franchisee’s territory. 

(ii) Any restrictions on the franchisee 

from soliciting or accepting orders from 

consumers outside of his or her 

territory, including whether the 

franchisee has the right to use other 

channels of distribution, such as the 

Internet, catalog sales, telemarketing, or 

other direct marketing, to make sales 

outside of his or her territory. 

(iii) If the franchisor or an affiliate 

operates, franchises, or has plans to 

operate or franchise a business under a 

different trademark and that business 

sells or will sell goods or services 

similar to those the franchisee will offer, 

describe: 

(A) The similar goods and services. 

(B) The different trademark. 

(C) Whether outlets will be franchisor 

owned or operated. 

(D) Whether the franchisor or its 

franchisees who use the different 

trademark will solicit or accept orders 

within the franchisee’s territory. 

(E) The timetable for the plan. 

(F) How the franchisor will resolve 

conflicts between the franchisor and 

franchisees and between the franchisees 

of each system regarding territory, 

customers, and franchisor support. 

(G) The principal business address of 

the franchisor’s similar operating 

business. If it is the same as the 

franchisor’s principal business address 

stated in § 436.5(a) of this part, disclose 

whether the franchisor maintains (or 

plans to maintain) physically separate 

offices and training facilities for the 

similar competing business. 

(m) Item 13: Trademarks. (1) Disclose 

each principal trademark to be licensed 

to the franchisee. For this Item, 

‘‘principal trademark’’ means the 

primary trademarks, service marks, 

names, logos, and commercial symbols 

the franchisee will use to identify the 

franchised business. It may not include 

every trademark the franchisor owns. 

(2) Disclose whether each principal 

trademark is registered with the United 

States Patent and Trademark Office. If 

so, state: 

(i) The date and identification number 

of each trademark registration. 

(ii) Whether the franchisor has filed 

all required affidavits. 

(iii) Whether any registration has been 

renewed. 

(iv) Whether the principal trademarks 

are registered on the Principal or 

Supplemental Register of the United 

States Patent and Trademark Office. 

(3) If the principal trademark is not 

registered with the United States Patent 

and Trademark Office, state whether the 

franchisor has filed any trademark 

application, including any ‘‘intent to 

use’’ application or an application based 

on actual use. If so, state the date and 

identification number of the 

application. 

(4) If the trademark is not registered 

on the Principal Register of the United 

States Patent and Trademark Office, 

state: ‘‘We do not have a federal 

registration for our principal trademark. 

Therefore, our trademark does not have 

many legal benefits and rights as a 

federally registered trademark. If our 

right to use the trademark is challenged, 

you may have to change to an 

alternative trademark, which may 

increase your expenses.’’

(5) Disclose any currently effective 

material determinations of the United 

States Patent and Trademark Office, the 

Trademark Trial and Appeal Board, or 

any state trademark administrator or 

court; and any pending infringement, 

opposition, or cancellation proceeding. 

Include infringement, opposition, or 

cancellation proceedings in which the 

franchisor unsuccessfully sought to 

prevent registration of a trademark in 

order to protect a trademark licensed by 

the franchisor. Describe how the 

determination affects the ownership, 

use, or licensing of the trademark. 

(6) Disclose any pending material 

federal or state court litigation regarding 

the franchisor’s use or ownership rights 

in a trademark. For each pending action, 

disclose:8

(i) The forum and case number. 

(ii) The nature of claims made 

opposing the franchisor’s use of the 

trademark or by the franchisor opposing 

another person’s use of the trademark. 

(iii) Any effective court or 

administrative agency ruling in the 

matter. 

(7) Disclose any currently effective 

agreements that significantly limit the 

franchisor’s rights to use or license the 

use of trademarks listed in this section 

in a manner material to the franchise. 

For each agreement, disclose: 

(i) The manner and extent of the 

limitation or grant. 

(ii) The extent to which the agreement 

may affect the franchisee. 

(iii) The agreement’s duration. 

(iv) The parties to the agreement. 

(v) The circumstances when the 

agreement may be canceled or modified. 

(vi) All other material terms. 

(8) Disclose: 

(i) Whether the franchisor must 

protect the franchisee’s right to use the 

principal trademarks listed in this 

section, and must protect the franchisee 

against claims of infringement or unfair 

competition arising out of the 

franchisee’s use of the trademarks. 

(ii) The franchisee’s obligation to 

notify the franchisor of the use of, or 

claims of rights to, a trademark identical 

to or confusingly similar to a trademark 

licensed to the franchisee. 

(iii) Whether the franchise agreement 

requires the franchisor to take 


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9 If counsel consents, the franchisor may include 

a counsel’s opinion or a summary of the opinion if 

the full opinion is attached. 

affirmative action when notified of these 

uses or claims. 

(iv) Whether the franchisor or 

franchisee has the right to control any 

administrative proceedings or litigation 

involving a trademark licensed by the 

franchisor to the franchisee. 

(v) Whether the franchise agreement 

requires the franchisor to participate in 

the franchisee’s defense and/or 

indemnify the franchisee for expenses 

or damages if the franchisee is a party 

to an administrative or judicial 

proceeding involving a trademark 

licensed by the franchisor to the 

franchisee, or if the proceeding is 

resolved unfavorably to the franchisee. 

(vi) The franchisee’s rights under the 

franchise agreement if the franchisor 

requires the franchisee to modify or 

discontinue using a trademark. 

(9) Disclose whether the franchisor 

knows of either superior prior rights or 

infringing uses that could materially 

affect the franchisee’s use of the 

principal trademarks in the state where 

the franchised business will be located. 

For each use of a principal trademark 

that the franchisor believes is an 

infringement that could materially affect 

the franchisee’s use of a trademark, 

disclose: 

(i) The nature of the infringement. 

(ii) The locations where the 

infringement is occurring. 

(iii) The length of time of the 

infringement (to the extent known). 

(iv) Any action taken or anticipated 

by the franchisor. 

(n) Item 14: Patents, Copyrights, and 

Proprietary Information. (1) Disclose 

whether the franchisor owns rights in, 

or licenses to, patents or copyrights that 

are material to the franchise. Also, 

disclose whether the franchisor has any 

pending patent applications that are 

material to the franchise. If so, state: 

(i) The nature of the patent, patent 

application, or copyright and its 

relationship to the franchise. 

(ii) For each patent: 

(A) The duration of the patent. 

(B) The type of patent (for example, 

mechanical, process, or design). 

(C) The patent number, issuance date, 

and title. 

(iii) For each patent application: 

(A) The type of patent application (for 

example, mechanical, process, or 

design). 

(B) The serial number, filing date, and 

title. 

(iv) For each copyright: 

(A) The duration of the copyright. 

(B) The registration number and date. 

(C) Whether the franchisor can and 

intends to renew the copyright. 

(2) Describe any current material 

determination of the United States 

Patent and Trademark Office, the United 

States Copyright Office, or a court 

regarding the patent or copyright. 

Include the forum and matter number. 

Describe how the determination affects 

the franchised business. 

(3) State the forum, case number, 

claims asserted, issues involved, and 

effective determinations for any material 

proceeding pending in the United States 

Patent and Trademark Office or any 

court.9

(4) If an agreement limits the use of 

the patent, patent application, or 

copyright, state the parties to and 

duration of the agreement, the extent to 

which the agreement may affect the 

franchisee, and other material terms of 

the agreement. 

(5) Disclose the franchisor’s obligation 

to protect the patent, patent application, 

or copyright; and to defend the 

franchisee against claims arising from 

the franchisee’s use of patented or 

copyrighted items, including: 

(i) Whether the franchisor’s obligation 

is contingent upon the franchisee 

notifying the franchisor of any 

infringement claims or whether the 

franchisee’s notification is 

discretionary. 

(ii) Whether the franchise agreement 

requires the franchisor to take 

affirmative action when notified of 

infringement. 

(iii) Who has the right to control any 

litigation. 

(iv) Whether the franchisor must 

participate in the defense of a franchisee 

or indemnify the franchisee for 

expenses or damages in a proceeding 

involving a patent, patent application, 

or copyright licensed to the franchisee. 

(v) Whether the franchisor’s 

obligation is contingent upon the 

franchisee modifying or discontinuing 

the use of the subject matter covered by 

the patent or copyright. 

(vi) The franchisee’s rights under the 

franchise agreement if the franchisor 

requires the franchisee to modify or 

discontinue using the subject matter 

covered by the patent or copyright. 

(6) If the franchisor knows of any 

patent or copyright infringement that 

could materially affect the franchisee, 

disclose: 

(i) The nature of the infringement. 

(ii) The locations where the 

infringement is occurring. 

(iii) The length of time of the 

infringement (to the extent known). 

(iv) Any action taken or anticipated 

by the franchisor. 

(7) If the franchisor claims proprietary 

rights in other confidential information 

or trade secrets, describe in general 

terms the proprietary information 

communicated to the franchisee and the 

terms for use by the franchisee. The 

franchisor need only describe the 

general nature of the proprietary 

information, such as whether a formula 

or recipe is considered to be a trade 

secret. 

(o) Item 15: Obligation to Participate 

in the Actual Operation of the Franchise 

Business. (1) Disclose the franchisee’s 

obligation to participate personally in 

the direct operation of the franchisee’s 

business and whether the franchisor 

recommends participation. Include 

obligations arising from any written 

agreement or from the franchisor’s 

practice. 

(2) If personal ‘‘on-premises’’

supervision is not required, disclose the 

following: 

(i) If the franchisee is an individual, 

whether the franchisor recommends onpremises supervision by the franchisee. 

(ii) Limits on whom the franchisee 

can hire as an on-premises supervisor. 

(iii) Whether an on-premises 

supervisor must successfully complete 

the franchisor’s training program. 

(iv) If the franchisee is a business 

entity, the amount of equity interest, if 

any, that the on-premises supervisor 

must have in the franchisee’s business. 

(3) Disclose any restrictions that the 

franchisee must place on its manager 

(for example, maintain trade secrets, 

covenants not to compete). 

(p) Item 16: Restrictions on What the 

Franchisee May Sell. Disclose any 

franchisor-imposed restrictions or 

conditions on the goods or services that 

the franchisee may sell or that limit 

access to customers, including: 

(1) Any obligation on the franchisee to 

sell only goods or services approved by 

the franchisor. 

(2) Any obligation on the franchisee to 

sell all goods or services authorized by 

the franchisor. 

(3) Whether the franchisor has the 

right to change the types of authorized 

goods or services and whether there are 

limits on the franchisor’s right to make 

changes. 

(q) Item 17: Renewal, Termination, 

Transfer, and Dispute Resolution. 

Disclose, in the following tabular form, 

a table that cross-references each 

enumerated franchise relationship item 

with the applicable provision in the 

franchise or related agreement. Title the 

table ‘‘THE FRANCHISE 

RELATIONSHIP’’ in capital letters and 

bold type. 

(1) Describe briefly each contractual 

provision. If a particular item is not 

applicable, state ‘‘Not Applicable.’’

(2) If the agreement is silent about one 

of the listed provisions, but the 


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franchisor unilaterally offers to provide 

certain benefits or protections to 

franchisees as a matter of policy, use a 

footnote to describe the policy and state 

whether the policy is subject to change. 

(3) In the summary column for Item 

17(c), state what the term ‘‘renewal’’

means for your franchise system, 

including, if applicable, a statement that 

franchisees may be asked to sign a 

contract with materially different terms 

and conditions than their original 

contract. 

ITEM 17 TABLE: 

THE FRANCHISE RELATIONSHIP 

[In bold] This table lists certain important provisions of the franchise and related agreements. You should read these provisions in the 

agreements attached to this disclosure document. 

Provision Section in franchise or other 

agreement Summary 

a. Length of the franchise term 

b. Renewal or extension of the term 

c. Requirements for franchisee to renew or extend 

d. Termination by franchisee 

e. Termination by franchisor without cause 

f. Termination by franchisor with cause 

g. ‘‘Cause’’ defined—curable defaults 

h. ‘‘Cause’’ defined—non-curable defaults 

i. Franchisee’s obligations on termination/non-renewal 

j. Assignment of contract by franchisor 

k. ‘‘Transfer’’ by franchisee—defined 

l. Franchisor approval of transfer by franchisee 

m. Conditions for franchisor approval of transfer 

n. Franchisor’s right of first refusal to acquire franchisee’s business 

o. Franchisor’s option to purchase franchisee’s business 

p. Death or disability of franchisee 

q. Non-competition covenants during the term of the franchise 

r. Non-competition covenants after the franchise is terminated or expires 

s. Modification of the agreement 

t. Integration/merger clause 

u. Dispute resolution by arbitration or mediation 

v. Choice of forum 

w. Choice of law 

(r) Item 18: Public Figures. 

Disclose: 

(1) Any compensation or other benefit 

given or promised to a public figure 

arising from either the use of the public 

figure in the franchise name or symbol, 

or the public figure’s endorsement or 

recommendation of the franchise to 

prospective franchisees. 

(2) The extent to which the public 

figure is involved in the management or 

control of the franchisor. Describe the 

public figure’s position and duties in 

the franchisor’s business structure. 

(3) The public figure’s total 

investment in the franchisor, including 

the amount the public figure 

contributed in services performed or to 

be performed. State the type of 

investment (for example, common stock, 

promissory note). 

(4) For purposes of this section, a 

public figure means a person whose 

name or physical appearance is 

generally known to the public in the 

geographic area where the franchise will 

be located. 

(s) Item 19: Financial Performance 

Representations. 

(1) Begin by stating the following: 

The FTC’s Franchise Rule permits a 

franchisor to provide information about 

the actual or potential financial 

performance of its franchised and/or 

franchisor-owned outlets, if there is a 

reasonable basis for the information, and 

if the information is included in the 


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disclosure document. Financial 

performance information that differs 

from that included in Item 19 may be 

given only if: (1) a franchisor provides 

the actual records of an existing outlet 

you are considering buying; or (2) a 

franchisor supplements the information 

provided in this Item 19, for example, by 

providing information about possible 

performance at a particular location or 

under particular circumstances. 

(2) If a franchisor does not provide 

any financial performance 

representation in Item 19, also state: 

We do not make any representations 

about a franchisee’s future financial 

performance or the past financial 

performance of company-owned or 

franchised outlets. We also do not 

authorize our employees or 

representatives to make any such 

representations either orally or in 

writing. If you are purchasing an existing 

outlet, however, we may provide you 

with the actual records of that outlet. If 

you receive any other financial 

performance information or projections 

of your future income, you should report 

it to the franchisor’s management by 

contacting [name, address, and 

telephone number], the Federal Trade 

Commission, and the appropriate state 

regulatory agencies. 

(3) If the franchisor makes any 

financial performance representation to 

prospective franchisees, the franchisor 

must have a reasonable basis and 

written substantiation for the 

representation at the time the 

representation is made and must state 

the representation in the Item 19 

disclosure. The franchisor must also 

disclose the following: 

(i) Whether the representation is an 

historic financial performance 

representation about the franchise 

system’s existing outlets, or a subset of 

those outlets, or is a forecast of the 

prospective franchisee’s future financial 

performance. 

(ii) If the representation relates to past 

performance of the franchise system’s 

existing outlets, the material bases for 

the representation, including: 

(A) Whether the representation relates 

to the performance of all of the franchise 

system’s existing outlets or only to a 

subset of outlets that share a particular 

set of characteristics (for example, 

geographic location, type of location 

(such as free standing vs. shopping 

center), degree of competition, length of 

time the outlets have operated, services 

or goods sold, services supplied by the 

franchisor, and whether the outlets are 

franchised or franchisor-owned or 

operated). 

(B) The dates when the reported level 

of financial performance was achieved. 

(C) The total number of outlets that 

existed in the relevant period and, if 

different, the number of outlets that had 

the described characteristics. 

(D) The number of outlets with the 

described characteristics whose actual 

financial performance data were used in 

arriving at the representation. 

(E) Of those outlets whose data were 

used in arriving at the representation, 

the number and percent that actually 

attained or surpassed the stated results. 

(F) Characteristics of the included 

outlets, such as those characteristics 

noted in paragraph (3)(ii)(A) of this 

section, that may differ materially from 

those of the outlet that may be offered 

to a prospective franchisee. 

(iii) If the representation is a forecast 

of future financial performance, state 

the material bases and assumptions on 

which the projection is based. The 

material assumptions underlying a 

forecast include significant factors upon 

which a franchisee’s future results are 

expected to depend. These factors 

include, for example, economic or 

market conditions that are basic to a 

franchisee’s operation, and encompass 

matters affecting, among other things, a 

franchisee’s sales, the cost of goods or 

services sold, and operating expenses. 

(iv) A clear and conspicuous 

admonition that a new franchisee’s 

individual financial results may differ 

from the result stated in the financial 

performance representation. 

(v) A statement that written 

substantiation for the financial 

performance representation will be 

made available to the prospective 

franchisee upon reasonable request. 

(4) If a franchisor wishes to disclose 

only the actual operating results for a 

specific outlet being offered for sale, it 

need not comply with this section, 

provided the information is given only 

to potential purchasers of that outlet. 

(5) If a franchisor furnishes financial 

performance information according to 

this section, the franchisor may deliver 

to a prospective franchisee a 

supplemental financial performance 

representation about a particular 

location or variation, apart from the 

disclosure document. The supplemental 

representation must: 

(i) Be in writing. 

(ii) Explain the departure from the 

financial performance representation in 

the disclosure document. 

(iii) Be prepared in accordance with 

the requirements of paragraph (s)(3)(i)- 

(iv) of this section. 

(iv) Be furnished to the prospective 

franchisee. 

(t) Item 20: Outlets and Franchisee 

Information. (1) Disclose, in the 

following tabular form, the total number 

of franchised and company-owned 

outlets for each of the franchisor’s last 

three fiscal years. For purposes of this 

section, ‘‘outlet’’ includes outlets of a 

type substantially similar to that offered 

to the prospective franchisee. A sample 

Item 20(1) Table is attached as 

Appendix B to this part. 

ITEM 20 TABLE NO. 1 

Systemwide Outlet Summary 

For years [ ] to [ ] 

Column 1 

Outlet Type 

Column 2 

Year 

Column 3 

Outlets at the Start of the 

Year 

Column 4 

Outlets at the End of the 

Year 

Column 5 

Net Change 

Franchised 2004 

2005 

2006 

Company-Owned 2004 

2005 

2006 


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ITEM 20 TABLE NO. 1—Continued 

Systemwide Outlet Summary 

For years [ ] to [ ] 

Column 1 

Outlet Type 

Column 2 

Year 

Column 3 

Outlets at the Start of the 

Year 

Column 4 

Outlets at the End of the 

Year 

Column 5 

Net Change 

Total Outlets 2004 

2005 

2006 

(i) In column 1, include three outlet 

categories titled ‘‘franchised,’’

‘‘company-owned, and ‘‘total outlets.’’

(ii) In column 2, state the last three 

fiscal years. 

(iii) In column 3, state the total 

number of each type of outlet operating 

at the beginning of each fiscal year. 

(iv) In column 4, state the total 

number of each type of outlet operating 

at the end of each fiscal year. 

(v) In column 5, state the net change, 

and indicate whether the change is 

positive or negative, for each type of 

outlet during each fiscal year. 

(2) Disclose, in the following tabular 

form, the number of franchised and 

company-owned outlets and changes in 

the number and ownership of outlets 

located in each state during each of the 

last three fiscal years. Except as noted, 

each change in ownership shall be 

reported only once in the following 

tables. If multiple events occurred in the 

process of transferring ownership of an 

outlet, report the event that occurred 

last in time. If a single outlet changed 

ownership two or more times during the 

same fiscal year, use footnotes to 

describe the types of changes involved 

and the order in which the changes 

occurred. 

(i) Disclose, in the following tabular 

form, the total number of franchised 

outlets transferred in each state during 

each of the franchisor’s last three fiscal 

years. For purposes of this section, 

‘‘transfer’’ means the acquisition of a 

controlling interest in a franchised 

outlet, during its term, by a person other 

than the franchisor or an affiliate. A 

sample Item 20(2) Table is attached as 

Appendix C to this part. 

ITEM 20 TABLE NO. 2 

Transfers of Outlets from Franchisees to New Owners (other than the Franchisor) 

For years [ ] to [ ] 

Column 1 

State 

Column 2 

Year 

Column 3 

Number of Transfers 

2004 

2005 

2006 

2004 

2005 

2006 

Total 2004 

2005 

2006 

(A) In column 1, list each state with 

one or more franchised outlets. 

(B) In column 2, state the last three 

fiscal years. 

(C) In column 3, state the total 

number of completed transfers in each 

state during each fiscal year. 

(ii) Disclose, in the following tabular 

form, the status of franchisee-owned 

outlets located in each state for each of 

the franchisor’s last three fiscal years. A 

sample Item 20(3) Table is attached as 

Appendix D to this part. 


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ITEM 20 TABLE NO. 3 

Status of Franchised Outlets 

For years [ ] to [ ] 

Column 1 

State 

Column 2 

Year 

Column 3 

Outlets at 

Start of Year 

Column 4 

Outlets 

Opened 

Column 5 

Terminations 

Column 6 

Non-Renewals 

Column 7 

Reacquired by 

Franchisor 

Column 8 

Ceased Operations-Other 

Reasons 

Column 9 

Outlets at 

End of the 

Year 

2004 

2005 

2006 

2004 

2005 

2006 

Totals 2004 

2005 

2006 

(A) In column 1, list each state with 

one or more franchised outlets. 

(B) In column 2, state the last three 

fiscal years. 

(C) In column 3, state the total 

number of franchised outlets in each 

state at the start of each fiscal year. 

(D) In column 4, state the total 

number of franchised outlets opened in 

each state during each fiscal year. 

Include both new outlets and existing 

company-owned outlets that a 

franchisee purchased from the 

franchisor. (Also report the number of 

existing company-owned outlets that are 

sold to a franchisee in Column 7 of 

Table 4). 

(E) In column 5, state the total number 

of franchised outlets that were 

terminated in each state during each 

fiscal year. For purposes of this section, 

‘‘termination’’ means the franchisor’s 

termination of a franchise agreement 

prior to the end of its term and without 

providing any consideration to the 

franchisee (whether by payment or 

forgiveness or assumption of debt). 

(F) In column 6, state the total number 

of non-renewals in each state during 

each fiscal year. For purposes of this 

section, ‘‘non-renewal’’ occurs when the 

franchise agreement for a franchised 

outlet is not renewed at the end of its 

term. 

(G) In column 7, state the total 

number of franchised outlets reacquired 

by the franchisor in each state during 

each fiscal year. For purposes of this 

section, a ‘‘reacquisition’’ means the 

franchisor’s acquisition for 

consideration (whether by payment or 

forgiveness or assumption of debt) of a 

franchised outlet during its term. (Also 

report franchised outlets reacquired by 

the franchisor in column 5 of Table 4). 

(H) In column 8, state the total 

number of outlets in each state not 

operating as one of the franchisor’s 

outlets at the end of each fiscal year for 

reasons other than termination, nonrenewal, or reacquisition by the 

franchisor. 

(I) In column 9, state the total number 

of franchised outlets in each state at the 

end of the fiscal year. 

(iii) Disclose, in the following tabular 

form, the status of company-owned 

outlets located in each state for each of 

the franchisor’s last three fiscal years. A 

sample Item 20(4) Table is attached as 

Appendix E to this part. 

ITEM 20 TABLE NO. 4 

Status of Company-Owned Outlets 

For years [ ] to [ ] 

Column 1 

State 

Column 2 

Year 

Column 3 

Outlets at 

Start of Year 

Column 4 

Outlets Opened 

Column 5 

Outlets Reacquired 

From Franchisee 

Column 6 

Outlets Closed 

Column 7 

Outlets Sold to 

Franchisee 

Column 8 

Outlets at 

End of the 

Year 

2004 

2005 

2006 

2004 

2005 

2006 

Totals 2004 


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10 Franchisors may substitute alternative contact 

information at the request of the former franchisee, 

such as a home address, post office address, or a 

personal or business email address. 

ITEM 20 TABLE NO. 4—Continued 

Status of Company-Owned Outlets 

For years [ ] to [ ] 

Column 1 

State 

Column 2 

Year 

Column 3 

Outlets at 

Start of Year 

Column 4 

Outlets Opened 

Column 5 

Outlets Reacquired 

From Franchisee 

Column 6 

Outlets Closed 

Column 7 

Outlets Sold to 

Franchisee 

Column 8 

Outlets at 

End of the 

Year 

2005 

2006 

(A) In column 1, list each state with 

one or more company-owned outlets. 

(B) In column 2, state the last three 

fiscal years. 

(C) In column 3, state the total 

number of company-owned outlets in 

each state at the start of the fiscal year. 

(D) In column 4, state the total 

number of company-owned outlets 

opened in each state during each fiscal 

year. 

(E) In column 5, state the total number 

of franchised outlets reacquired from 

franchisees in each state during each 

fiscal year. 

(F) In column 6, state the total number 

of company-owned outlets closed in 

each state during each fiscal year. 

Include both actual closures and 

instances when an outlet ceases to 

operate under the franchisor’s 

trademark. 

(G) In column 7, state the total 

number of company-owned outlets sold 

to franchisees in each state during each 

fiscal year. 

(H) In column 8, state the total 

number of company-owned outlets 

operating in each state at the end of 

each fiscal year. 

(3) Disclose, in the following tabular 

form, projected new franchised and 

company-owned outlets. A sample Item 

20(5) Table is attached as Appendix F 

to this part. 

ITEM 20 TABLE NO. 5 

Projected Openings As Of [Last Day of Last Fiscal Year] 

Column 1 

State 

Column 2 

Franchise Agreements Signed But 

Outlet Not Opened 

Column 3 

Projected New Franchised Outlet 

In The Next Fiscal Year 

Column 4 

Projected New Company-Owned 

Outlet In the Next Fiscal Year 

Total 

(i) In column 1, list each state where 

one or more franchised or companyowned outlets are located or are 

projected to be located. 

(ii) In column 2, state the total 

number of franchise agreements that 

had been signed for new outlets to be 

located in each state as of the end of the 

previous fiscal year where the outlet 

had not yet opened. 

(iii) In column 3, state the total 

number of new franchised outlets in 

each state projected to be opened during 

the next fiscal year. 

(iv) In column 4, state the total 

number of new company-owned outlets 

in each state that are projected to be 

opened during the next fiscal year. 

(4) Disclose the names of all current 

franchisees and the address and 

telephone number of each of their 

outlets. Alternatively, disclose this 

information for all franchised outlets in 

the state, but if these franchised outlets 

total fewer than 100, disclose this 

information for franchised outlets from 

contiguous states and then the next 

closest states until at least 100 

franchised outlets are listed. 

(5) Disclose the name, city and state, 

and current business telephone number, 

or if unknown, the last known home 

telephone number of every franchisee 

who had an outlet terminated, canceled, 

not renewed, or otherwise voluntarily or 

involuntarily ceased to do business 

under the franchise agreement during 

the most recently completed fiscal year 

or who has not communicated with the 

franchisor within 10 weeks of the 

disclosure document issuance date.10

State in immediate conjunction with 

this information: ‘‘If you buy this 

franchise, your contact information may 

be disclosed to other buyers when you 

leave the franchise system.’’

(6) If a franchisor is selling a 

previously-owned franchised outlet now 

under its control, disclose the following 

additional information for that outlet for 

the last five fiscal years. This 

information may be attached as an 

addendum to a disclosure document, or, 

if disclosure has already been made, 

then in a supplement to the previously 

furnished disclosure document. 

(i) The name, city and state, current 

business telephone number, or if 

unknown, last known home telephone 

number of each previous owner of the 

outlet; 

(ii) The time period when each 

previous owner controlled the outlet; 

(iii) The reason for each previous 

change in ownership (for example, 

termination, non-renewal, voluntary 

transfer, ceased operations); and 

(iv) The time period(s) when the 

franchisor retained control of the outlet 

(for example, after termination, nonrenewal, or reacquisition). 

(7) Disclose whether franchisees 

signed confidentiality clauses during 

the last three fiscal years. If so, state the 

following: ‘‘In some instances, current 

and former franchisees sign provisions 

restricting their ability to speak openly 

about their experience with [name of 

franchise system]. You may wish to 


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speak with current and former 

franchisees, but be aware that not all 

such franchisees will be able to 

communicate with you.’’ Franchisors 

may also disclose the number and 

percentage of current and former 

franchisees who during each of the last 

three fiscal years signed agreements that 

include confidentiality clauses and may 

disclose the circumstances under which 

such clauses were signed. 

(8) Disclose, to the extent known, the 

name, address, telephone number, email 

address, and Web address (to the extent 

known) of each trademark-specific 

franchisee organization associated with 

the franchise system being offered, if 

such organization: 

(i) Has been created, sponsored, or 

endorsed by the franchisor. If so, state 

the relationship between the 

organization and the franchisor (for 

example, the organization was created 

by the franchisor, sponsored by the 

franchisor, or endorsed by the 

franchisor). 

(ii) Is incorporated or otherwise 

organized under state law and asks the 

franchisor to be included in the 

franchisor’s disclosure document during 

the next fiscal year. Such organizations 

must renew their request on an annual 

basis by submitting a request no later 

than 60 days after the close of the 

franchisor’s fiscal year. The franchisor 

has no obligation to verify the 

organization’s continued existence at 

the end of each fiscal year. Franchisors 

may also include the following 

statement: ‘‘The following independent 

franchisee organizations have asked to 

be included in this disclosure 

document.’’

(u) Item 21: Financial Statements. (1) 

Include the following financial 

statements prepared according to United 

States generally accepted accounting 

principles, as revised by any future 

United States government mandated 

accounting principles, or as permitted 

by the Securities and Exchange 

Commission. Except as provided in 

paragraph (u)(2) of this section, these 

financial statements must be audited by 

an independent certified public 

accountant using generally accepted 

United States auditing standards. 

Present the required financial 

statements in a tabular form that 

compares at least two fiscal years. 

(i) The franchisor’s balance sheet for 

the previous two fiscal year-ends before 

the disclosure document issuance date. 

(ii) Statements of operations, 

stockholders equity, and cash flows for 

each of the franchisor’s previous three 

fiscal years. 

(iii) Instead of the financial 

disclosures required by paragraphs 

(u)(1)(i) and (ii) of this section, the 

franchisor may include financial 

statements of any of its affiliates if the 

affiliate’s financial statements satisfy 

paragraphs (u)(1)(i) and (ii) of this 

section and the affiliate absolutely and 

unconditionally guarantees to assume 

the duties and obligations of the 

franchisor under the franchise 

agreement. The affiliate’s guarantee 

must cover all of the franchisor’s 

obligations to the franchisee, but need 

not extend to third parties. If this 

alternative is used, attach a copy of the 

guarantee to the disclosure document. 

(iv) When a franchisor owns a direct 

or beneficial controlling financial 

interest in a subsidiary, its financial 

statements should reflect the financial 

condition of the franchisor and its 

subsidiary. 

(v) Include separate financial 

statements for the franchisor and any 

subfranchisor, as well as for any parent 

that commits to perform post-sale 

obligations for the franchisor or 

guarantees the franchisor’s obligations. 

Attach a copy of any guarantee to the 

disclosure document. 

(2) A start-up franchise system that 

does not yet have audited financial 

statements may phase-in the use of 

audited financial statements by 

providing, at a minimum, the following 

statements at the indicated times: 

(i) The franchisor’ first partial or full fiscal year selling franchises. An unaudited opening balance sheet. 

(ii) The franchisor’ second fiscal year selling franchises. Audited balance sheet opinion as of the end of the first partial or full 

fiscal year selling franchises. 

(iii) The franchisor’ third and subsequent fiscal years selling franchises. All required financial statements for the previous fiscal year, plus any

previously disclosed audited statements that still must be disclosed 

according to paragraphs (u)(1)(i) and (ii) of this section. 

(iv) Start-up franchisors may phase-in 

the disclosure of audited financial 

statements, provided the franchisor: 

(A) Prepares audited financial 

statements as soon as practicable. 

(B) Prepares unaudited statements in 

a format that conforms as closely as 

possible to audited statements. 

(C) Includes one or more years of 

unaudited financial statements or 

clearly and conspicuously discloses in 

this section that the franchisor has not 

been in business for three years or more, 

and cannot include all financial 

statements required in paragraphs 

(u)(1)(i) and (ii) of this section. 

(v) Item 22: Contracts. Attach a copy 

of all proposed agreements regarding the 

franchise offering, including the 

franchise agreement and any lease, 

options, and purchase agreements. 

(w) Item 23: Receipts. Include two 

copies of the following detachable 

acknowledgment of receipt in the 

following form as the last pages of the 

disclosure document: 

(1) State the following: 

Receipt 

This disclosure document summarizes 

certain provisions of the franchise 

agreement and other information in plain 

language. Read this disclosure document 

and all agreements carefully. 

If [name of franchisor] offers you a 

franchise, it must provide this disclosure 

document to you 14 calendar-days before 

you sign a binding agreement with, or 

make a payment to, the franchisor or an 

affiliate in connection with the proposed 

franchise sale. 

If [name of franchisor] does not deliver 

this disclosure document on time or if it 

contains a false or misleading statement, 

or a material omission, a violation of 

federal law and state law may have 

occurred and should be reported to the 

Federal Trade Commission, Washington, 

D.C. 20580 and [state agency]. 

(2) Disclose the name, principal 

business address, and telephone number 

of each franchise seller offering the 

franchise. 

(3) State the issuance date. 

(4) If not disclosed in paragraph (a) of 

this section, state the name and address 

of the franchisor’s registered agent 

authorized to receive service of process. 

(5) State the following: 

I received a disclosure document dated 

lllll that included the following 

Exhibits: 

(6) List the title(s) of all attached 

Exhibits. 

(7) Provide space for the prospective 

franchisee’s signature and date. 

(8) Franchisors may include any 

specific instructions for returning the 

receipt (for example, street address, 

email address, facsimile telephone 

number). 


jlentini on PROD1PC65 with RULES4
15560 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

11 The large franchise exemption applies only if 

at least one individual prospective franchisee in an 

investor-group qualifies for the exemption by 

investing at the threshold level stated in this 

section. 

Subpart D—Instructions 

§ 436.6 Instructions for preparing 

disclosure documents. 

(a) It is an unfair or deceptive act or 

practice in violation of Section 5 of the 

FTC Act for any franchisor to fail to 

include the information and follow the 

instructions for preparing disclosure 

documents set forth in Subpart C (basic 

disclosure requirements) and Subpart D 

(updating requirements) of part 436. The 

Commission will enforce this provision 

according to the standards of liability 

under Sections 5, 13(b), and 19 of the 

FTC Act. 

(b) Disclose all required information 

clearly, legibly, and concisely in a single 

document using plain English. The 

disclosures must be in a form that 

permits each prospective franchisee to 

store, download, print, or otherwise 

maintain the document for future 

reference. 

(c) Respond fully to each disclosure 

Item. If a disclosure Item is not 

applicable, respond negatively, 

including a reference to the type of 

information required to be disclosed by 

the Item. Precede each disclosure Item 

with the appropriate heading. 

(d) Do not include any materials or 

information other than those required or 

permitted by part 436 or by state law not 

preempted by part 436. For the sole 

purpose of enhancing the prospective 

franchisee’s ability to maneuver through 

an electronic version of a disclosure 

document, the franchisor may include 

scroll bars, internal links, and search 

features. All other features (e.g., 

multimedia tools such as audio, video, 

animation, pop-up screens, or links to 

external information) are prohibited. 

(e) Franchisors may prepare multistate disclosure documents by including 

non-preempted, state-specific 

information in the text of the disclosure 

document or in Exhibits attached to the 

disclosure document. 

(f) Subfranchisors shall disclose the 

required information about the 

franchisor, and, to the extent applicable, 

the same information concerning the 

subfranchisor. 

(g) Before furnishing a disclosure 

document, the franchisor shall advise 

the prospective franchisee of the formats 

in which the disclosure document is 

made available, any prerequisites for 

obtaining the disclosure document in a 

particular format, and any conditions 

necessary for reviewing the disclosure 

document in a particular format. 

(h) Franchisors shall retain, and make 

available to the Commission upon 

request, a sample copy of each 

materially different version of their 

disclosure documents for three years 

after the close of the fiscal year when it 

was last used. 

(i) For each completed franchise sale, 

franchisors shall retain a copy of the 

signed receipt for at least three years. 

§ 436.7 Instructions for updating 

disclosures. 

(a) All information in the disclosure 

document shall be current as of the 

close of the franchisor’s most recent 

fiscal year. After the close of the fiscal 

year, the franchisor shall, within 120 

days, prepare a revised disclosure 

document, after which a franchise seller 

may distribute only the revised 

document and no other disclosure 

document. 

(b) The franchisor shall, within a 

reasonable time after the close of each 

quarter of the fiscal year, prepare 

revisions to be attached to the 

disclosure document to reflect any 

material change to the disclosures 

included, or required to be included, in 

the disclosure document. Each 

prospective franchisee shall receive the 

disclosure document and the quarterly 

revisions for the most recent period 

available at the time of disclosure. 

(c) If applicable, the annual update 

shall include the franchisor’s first 

quarterly update, either by 

incorporating the quarterly update 

information into the disclosure 

document itself, or through an 

addendum. 

(d) When furnishing a disclosure 

document, the franchise seller shall 

notify the prospective franchisee of any 

material changes that the seller knows 

or should have known occurred in the 

information contained in any financial 

performance representation made in 

Item 19 (section 436.5(s)). 

(e) Information that must be audited 

pursuant to § 436.5(u) of this part need 

not be audited for quarterly revisions; 

provided, however, that the franchisor 

states in immediate conjunction with 

the information that such information 

was not audited. 

Subpart E—Exemptions 

§ 436.8 Exemptions. 

(a) The provisions of part 436 shall 

not apply if the franchisor can establish 

any of the following: 

(1) The total of the required payments, 

or commitments to make a required 

payment, to the franchisor or an affiliate 

that are made any time from before to 

within six months after commencing 

operation of the franchisee’s business is 

less than $500. 

(2) The franchise relationship is a 

fractional franchise. 

(3) The franchise relationship is a 

leased department. 

(4) The franchise relationship is 

covered by the Petroleum Marketing 

Practices Act, 15 U.S.C. 2801. 

(5)(i) The franchisee’s initial 

investment, excluding any financing 

received from the franchisor or an 

affiliate and excluding the cost of 

unimproved land, totals at least $1 

million and the prospective franchisee 

signs an acknowledgment verifying the 

grounds for the exemption. The 

acknowledgment shall state: ‘‘The 

franchise sale is for more than $1 

million—excluding the cost of 

unimproved land and any financing 

received from the franchisor or an 

affiliate— and thus is exempted from 

the Federal Trade Commission’s 

Franchise Rule disclosure requirements, 

pursuant to 16 CFR 436.8(a)(5)(i)’’;11 or 

(ii) The franchisee (or its parent or 

any affiliates) is an entity that has been 

in business for at least five years and 

has a net worth of at least $5 million. 

(6) One or more purchasers of at least 

a 50% ownership interest in the 

franchise: within 60 days of the sale, has 

been, for at least two years, an officer, 

director, general partner, individual 

with management responsibility for the 

offer and sale of the franchisor’s 

franchises or the administrator of the 

franchised network; or within 60 days of 

the sale, has been, for at least two years, 

an owner of at least a 25% interest in 

the franchisor. 

(7) There is no written document that 

describes any material term or aspect of 

the relationship or arrangement. 

(b) For purposes of the exemptions set 

forth in this section, the Commission 

shall adjust the size of the monetary 

thresholds every fourth year based upon 

the Consumer Price Index. For purposes 

of this section, ‘‘Consumer Price Index’’

means the Consumer Price Index for all 

urban consumers published by the 

Department of Labor. 

Subpart F—Prohibitions 

§ 436.9 Additional prohibitions. 

It is an unfair or deceptive act or 

practice in violation of Section 5 of the 

Federal Trade Commission Act for any 

franchise seller covered by part 436 to: 

(a) Make any claim or representation, 

orally, visually, or in writing, that 

contradicts the information required to 

be disclosed by this part. 

(b) Misrepresent that any person: 

(1) Purchased a franchise from the 

franchisor or operated a franchise of the 

type offered by the franchisor. 


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(2) Can provide an independent and 

reliable report about the franchise or the 

experiences of any current or former 

franchisees. 

(c) Disseminate any financial 

performance representations to 

prospective franchisees unless the 

franchisor has a reasonable basis and 

written substantiation for the 

representation at the time the 

representation is made, and the 

representation is included in Item 19 

(§ 436.5(s)) of the franchisor’s disclosure 

document. In conjunction with any such 

financial performance representation, 

the franchise seller shall also: 

(1) Disclose the information required 

by §§ 436.5(s)(3)(ii)(B) and (E) of this 

part if the representation relates to the 

past performance of the franchisor’s 

outlets. 

(2) Include a clear and conspicuous 

admonition that a new franchisee’s 

individual financial results may differ 

from the result stated in the financial 

performance representation. 

(d) Fail to make available to 

prospective franchisees, and to the 

Commission upon reasonable request, 

written substantiation for any financial 

performance representations made in 

Item 19 (§ 436.5(s)). 

(e) Fail to furnish a copy of the 

franchisor’s disclosure document to a 

prospective franchisee earlier in the 

sales process than required under 

§ 436.2 of this part, upon reasonable 

request. 

(f) Fail to furnish a copy of the 

franchisor’s most recent disclosure 

document and any quarterly updates to 

a prospective franchisee, upon 

reasonable request, before the 

prospective franchisee signs a franchise 

agreement. 

(g) Present for signing a franchise 

agreement in which the terms and 

conditions differ materially from those 

presented as an attachment to the 

disclosure document, unless the 

franchise seller informed the 

prospective franchisee of the differences 

at least seven days before execution of 

the franchise agreement. 

(h) Disclaim or require a prospective 

franchisee to waive reliance on any 

representation made in the disclosure 

document or in its exhibits or 

amendments. Provided, however, that 

this provision is not intended to prevent 

a prospective franchisee from 

voluntarily waiving specific contract 

terms and conditions set forth in his or 

her disclosure document during the 

course of franchise sale negotiations. 

(i) Fail to return any funds or deposits 

in accordance with any conditions 

disclosed in the franchisor’s disclosure 

document, franchise agreement, or any 

related document. 

Subpart G—Other Provisions 

§ 436.10 Other laws and rules. 

(a) The Commission does not approve 

or express any opinion on the legality of 

any matter a franchisor may be required 

to disclose by part 436. Further, 

franchisors may have additional 

obligations to impart material 

information to prospective franchisees 

outside of the disclosure document 

under Section 5 of the Federal Trade 

Commission Act. The Commission 

intends to enforce all applicable statutes 

and rules. 

(b) The FTC does not intend to 

preempt the franchise practices laws of 

any state or local government, except to 

the extent of any inconsistency with 

part 436. A law is not inconsistent with 

part 436 if it affords prospective 

franchisees equal or greater protection, 

such as registration of disclosure 

documents or more extensive 

disclosures. 

§ 436.11 Severability. 

If any provision of this part is stayed 

or held invalid, the remainder will stay 

in force. 

APPENDIX A TO PART 436—SAMPLE ITEM 10 TABLE

SUMMARY OF FINANCING OFFERED 

Item 

Financed 

Source of 

Financing 

Down 

Payment 

Amount 

Financed 

Term 

(Yrs) 

Interest 

Rate 

Monthly 

Payment 

Prepay 

Penalty 

Security 

Required 

Liability 

Upon 

Default 

Loss of 

Legal 

Right on 

Default 

Initial Fee 

Land/Constr 

Leased 

Space 

Equip. 

Lease 

Equip. 

Purchase 

Opening 

Inventory 

Other 

Financing 

APPENDIX B TO PART 436—SAMPLE ITEM 20(1) TABLE

Systemwide Outlet Summary 

For years 2004 to 2006 

Column 1 

Outlet Type 

Column 2 

Year 

Column 3 

Outlets at the Start of the 

Year 

Column 4 

Outlets at the End of the 

Year 

Column 5 

Net Change 

Franchised 2004 859 1,062 +203 


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APPENDIX B TO PART 436—SAMPLE ITEM 20(1) TABLE—Continued 

Systemwide Outlet Summary 

For years 2004 to 2006 

Column 1 

Outlet Type 

Column 2 

Year 

Column 3 

Outlets at the Start of the 

Year 

Column 4 

Outlets at the End of the 

Year 

Column 5 

Net Change 

2005 1,062 1,296 +234 

2006 1,296 2,720 +1,424 

Company Owned 2004 125 145 +20 

2005 145 76 -69 

2006 76 141 +65 

Total Outlets 2004 984 1,207 +223 

2005 1,207 1,372 +165 

2006 1,372 2,861 +1,489 

APPENDIX C TO PART 436—SAMPLE ITEM 20(2) TABLE

Transfers of Franchised Outlets from Franchisees to New Owners (other than the Franchisor) 

For years 2004 to 2006 

Column 1 

State 

Column 2 

Year 

Column 3 

Number of Transfers 

NC 2004 1 

2005 0 

2006 2 

SC 2004 0 

2005 0 

2006 2 

Total 2004 1 

2005 0 

2006 4 

APPENDIX D TO PART 436—SAMPLE ITEM 20(3) TABLE

Status of Franchise Outlets 

For years 2004 to 2006 

Column 1 

State 

Column 2 

Year 

Column 3 

Outlets at 

Start of 

Year 

Column 4 

Outlets Opened 

Column 5 

Terminations 

Column 6 

Non-Renewals 

Column 7 

Reacquired by 

Franchisor 

Column 8 

Ceased Operations-Other 

Reasons 

Column 9 

Outlets at 

End of the 

Year 

AL 2004 10 2 1 0 0 1 10 

2005 11 5 0 1 0 0 15 

2006 15 4 1 0 1 2 15 

AZ 2004 20 5 0 0 0 0 25 

2005 25 4 1 0 0 2 26 

2006 26 4 0 0 0 0 30 

Totals 2004 30 7 1 0 0 1 35 

2005 36 9 1 1 0 2 41 


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APPENDIX D TO PART 436—SAMPLE ITEM 20(3) TABLE—Continued 

Status of Franchise Outlets 

For years 2004 to 2006 

Column 1 

State 

Column 2 

Year 

Column 3 

Outlets at 

Start of 

Year 

Column 4 

Outlets Opened 

Column 5 

Terminations 

Column 6 

Non-Renewals 

Column 7 

Reacquired by 

Franchisor 

Column 8 

Ceased Operations-Other 

Reasons 

Column 9 

Outlets at 

End of the 

Year 

2006 41 8 1 0 1 2 45 

APPENDIX E TO PART 436—SAMPLE ITEM 20(4) TABLE

Status of Company-Owned Outlets 

For years 2004 to 2006 

Column 1 

State 

Column 2 

Year 

Column 3 

Outlets at 

Start of Year 

Column 4 

Outlets Opened 

Column 5 

Outlets Reacquired 

From Franchisees 

Column 6 

Outlets Closed 

Column 7 

Outlets Sold to 

Franchisees 

Column 8 

Outlets at 

End of the 

Year 

NY 2004 1 0 1 0 0 2 

2005 2 2 0 1 0 3 

2006 3 0 0 3 0 0 

OR 2004 4 0 1 0 0 5 

2005 5 0 0 2 0 3 

2006 3 0 0 0 1 2 

Totals 2004 5 0 2 0 0 7 

2005 7 2 0 3 0 6 

2006 6 0 0 3 1 2 

APPENDIX F TO PART 436—SAMPLE ITEM 20(5) TABLE

Projected New Franchised Outlets 

As of December 31, 2006 

Column 1 

State 

Column 2 

Franchise Agreements Signed But 

Outlet Not Opened 

Column 3 

Projected New Franchised Outlets 

in the Next Fiscal Year 

Column 4 

Projected New Company-Owned 

Outlets in the Current Fiscal Year 

CO 2 3 1 

NM 0 4 2 

Total 2 7 3 

■ Add a new part 437 as follows: 

PART 437—DISCLOSURE 

REQUIREMENTS AND PROHIBITIONS 

CONCERNING BUSINESS 

OPPORTUNITIES 

Sec. 

437.1 The Rule. 

437.2 Definitions. 

437.3 Severability. 

Authority: 15 U.S.C. 41-58. 

§ 437.1 The Rule. 

In connection with the advertising, 

offering, licensing, contracting, sale, or 

other promotion in or affecting 

commerce, as ‘‘commerce’’ is defined in 

the Federal Trade Commission Act, of 

any business opportunity, or any 

relationship which is represented either 

orally or in writing to be a business 

opportunity, it is an unfair or deceptive 

act or practice within the meaning of 

Section 5 of that Act for any business 

opportunity seller or business 

opportunity broker: 

(a) To fail to furnish any prospective 

business opportunity purchaser with the 

following information accurately, 

clearly, and concisely stated, in a 

legible, written document at the earlier 

of the ‘‘time for making of disclosures’’

or the first ‘‘personal meeting’’: 

(1)(i) The official name and address 

and principal place of business of the 

business opportunity seller, and of the 

parent firm or holding company of the 

business opportunity seller, if any; 

(ii) The name under which the 

business opportunity seller is doing or 

intends to do business; and 

(iii) The trademarks, trade names, 

service marks, advertising or other 

commercial symbols (hereinafter 

collectively referred to as ‘‘marks’’) 

which identify the goods, commodities, 

or services to be offered, sold, or 

distributed by the prospective business 

opportunity purchaser, or under which 


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the prospective business opportunity 

purchaser will be operating. 

(2) The business experience during 

the past 5 years, stated individually, of 

each of the business opportunity seller’s 

current directors and executive officers 

(including, and hereinafter to include, 

the chief executive and chief operating 

officer, financial, business opportunity 

marketing, training and service officers). 

With regard to each person listed, those 

persons’ principal occupations and 

employers must be included. 

(3) The business experience of the 

business opportunity seller and the 

business opportunity seller’s parent firm 

(if any), including the length of time 

each: (i) Has conducted a business of the 

type to be operated by the business 

opportunity purchaser; (ii) has offered 

or sold a business opportunity for such 

business; (iii) has conducted a business 

or offered or sold a business opportunity 

for a business (A) operating under a 

name using any mark set forth under 

paragraph (a)(1)(iii) of this section, or 

(B) involving the sale, offering, or 

distribution of goods, commodities, or 

services which are identified by any 

mark set forth under paragraph (a)(1)(iii) 

of this section; and (iv) has offered for 

sale or sold business opportunities in 

other lines of business, together with a 

description of such other lines of 

business. 

(4) A statement disclosing who, if any, 

of the persons listed in paragraphs (a) 

(2) and (3) of this section: 

(i) Has, at any time during the 

previous seven fiscal years, been 

convicted of a felony or pleaded nolo 

contendere to a felony charge if the 

felony involved fraud (including 

violation of any business opportunity 

law, or unfair or deceptive practices 

law), embezzlement, fraudulent 

conversion, misappropriation of 

property, or restraint of trade; 

(ii) Has, at any time during the 

previous seven fiscal years, been held 

liable in a civil action resulting in a 

final judgment or has settled out of 

court any civil action or is a party to any 

civil action (A) involving allegations of 

fraud (including violation of any 

business opportunity law, or unfair or 

deceptive practices law), embezzlement, 

fraudulent conversion, 

misappropriation of property, or 

restraint of trade, or (B) which was 

brought by a present or former business 

opportunity purchaser or business 

opportunity purchasers and which 

involves or involved the business 

opportunity relationship; Provided, 

however, That only material individual 

civil actions need be so listed pursuant 

to this paragraph (4)(ii) of this section, 

including any group of civil actions 

which, irrespective of the materiality of 

any single such action, in the aggregate 

is material; 

(iii) Is subject to any currently 

effective State or Federal agency or 

court injunctive or restrictive order, or 

is a party to a proceeding currently 

pending in which such order is sought, 

relating to or affecting business 

opportunity activities or the business 

opportunity seller-purchaser 

relationship, or involving fraud 

(including violation of any business 

opportunity law, or unfair or deceptive 

practices law), embezzlement, 

fraudulent conversion, 

misappropriation of property, or 

restraint of trade. 

Such statement shall set forth the 

identity and location of the court or 

agency; the date of conviction, 

judgment, or decision; the penalty 

imposed; the damages assessed; the 

terms of settlement or the terms of the 

order; and the date, nature, and issuer 

of each such order or ruling. A business 

opportunity seller may include a 

summary opinion of counsel as to any 

pending litigation, but only if counsel’s 

consent to the use of such opinion is 

included in the disclosure statement. 

(5) A statement disclosing who, if any, 

of the persons listed in paragraphs (a) 

(2) and (3) of this section at any time 

during the previous 7 fiscal years has: 

(i) Filed in bankruptcy; 

(ii) Been adjudged bankrupt; 

(iii) Been reorganized due to 

insolvency; or 

(iv) Been a principal, director, 

executive officer, or partner of any other 

person that has so filed or was so 

adjudged or reorganized, during or 

within 1 year after the period that such 

person held such position in such other 

person. If so, the name and location of 

the person having so filed, or having 

been so adjudged or reorganized, the 

date thereof, and any other material 

facts relating thereto, shall be set forth. 

(6) A factual description of the 

business opportunity offered to be sold 

by the business opportunity seller. 

(7) A statement of the total funds 

which must be paid by the business 

opportunity purchaser to the business 

opportunity seller or to a person 

affiliated with the business opportunity 

seller, or which the business 

opportunity seller or such affiliated 

person imposes or collects in whole or 

in part on behalf of a third party, in 

order to obtain or commence the 

business opportunity operation, such as 

initial business opportunity fees, 

deposits, down payments, prepaid rent, 

and equipment and inventory 

purchases. If all or part of these fees or 

deposits are returnable under certain 

conditions, these conditions shall be set 

forth; and if not returnable, such fact 

shall be disclosed. 

(8) A statement describing any 

recurring funds required to be paid, in 

connection with carrying on the 

business opportunity business, by the 

business opportunity purchaser to the 

business opportunity seller or to a 

person affiliated with the business 

opportunity seller, or which the 

business opportunity seller or such 

affiliated person imposes or collects in 

whole or in part on behalf of a third 

party, including, but not limited to, 

royalty, lease, advertising, training, and 

sign rental fees, and equipment or 

inventory purchases. 

(9) A statement setting forth the name 

of each person (including the business 

opportunity seller) the business 

opportunity purchaser is directly or 

indirectly required or advised to do 

business with by the business 

opportunity seller, where such persons 

are affiliated with the business 

opportunity seller. 

(10) A statement describing any real 

estate, services, supplies, products, 

inventories, signs, fixtures, or 

equipment relating to the establishment 

or the operation of the business 

opportunity business which the 

business opportunity purchaser is 

directly or indirectly required by the 

business opportunity seller to purchase, 

lease or rent; and if such purchases, 

leases or rentals must be made from 

specific persons (including the business 

opportunity seller), a list of the names 

and addresses of each such person. 

Such list may be made in a separate 

document delivered to the prospective 

business opportunity purchaser with the 

prospectus if the existence of such 

separate document is disclosed in the 

prospectus. 

(11) A description of the basis for 

calculating, and, if such information is 

readily available, the actual amount of, 

any revenue or other consideration to be 

received by the business opportunity 

seller or persons affiliated with the 

business opportunity seller from 

suppliers to the prospective business 

opportunity purchaser in consideration 

for goods or services which the business 

opportunity seller requires or advises 

the business opportunity purchaser to 

obtain from such suppliers. 

(12)(i) A statement of all the material 

terms and conditions of any financing 

arrangement offered directly or 

indirectly by the business opportunity 

seller, or any person affiliated with the 

business opportunity seller, to the 

prospective business opportunity 

purchaser; and 


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(ii) A description of the terms by 

which any payment is to be received by 

the business opportunity seller from (A) 

any person offering financing to a 

prospective business opportunity 

purchaser; and (B) any person arranging 

for financing for a prospective business 

opportunity purchaser. 

(13) A statement describing the 

material facts of whether, by the terms 

of the business opportunity agreement 

or other device or practice, the business 

opportunity purchaser is: 

(i) Limited in the goods or services he 

or she may offer for sale; 

(ii) Limited in the customers to whom 

he or she may sell such goods or 

services; 

(iii) Limited in the geographic area in 

which he or she may offer for sale or sell 

goods or services; or 

(iv) Granted territorial protection by 

the business opportunity seller, by 

which, with respect to a territory or 

area, (A) the business opportunity seller 

will not establish another, or more than 

any fixed number of, business 

opportunities or company-owned 

outlets, either operating under, or 

selling, offering, or distributing goods, 

commodities or services, identified by 

any mark set forth under paragraph 

(a)(1)(iii) of this section; or (B) the 

business opportunity seller or its parent 

will not establish other business 

opportunities or company-owned 

outlets selling or leasing the same or 

similar products or services under a 

different trade name, trademark, service 

mark, advertising or other commercial 

symbol. 

(14) A statement of the extent to 

which the business opportunity seller 

requires the business opportunity 

purchaser (or, if the business 

opportunity purchaser is a corporation, 

any person affiliated with the business 

opportunity purchaser) to participate 

personally in the direct operation of the 

business opportunity. 

(15) A statement disclosing, with 

respect to the business opportunity 

agreement and any related agreements: 

(i) The term (i.e., duration of 

arrangement), if any, of such agreement, 

and whether such term is or may be 

affected by any agreement (including 

leases or subleases) other than the one 

from which such term arises; 

(ii) The conditions under which the 

business opportunity purchaser may 

renew or extend; 

(iii) The conditions under which the 

business opportunity seller may refuse 

to renew or extend; 

(iv) The conditions under which the 

business opportunity purchaser may 

terminate; 

(v) The conditions under which the 

business opportunity seller may 

terminate; 

(vi) the obligations (including lease or 

sublease obligations) of the business 

opportunity purchaser after termination 

of the business opportunity by the 

business opportunity seller, and the 

obligations of the business opportunity 

purchaser (including lease or sublease 

obligations) after termination of the 

business opportunity by the business 

opportunity purchaser and after the 

expiration of the business opportunity; 

(vii) The business opportunity 

purchaser’s interest upon termination of 

the business opportunity, or upon 

refusal to renew or extend the business 

opportunity, whether by the business 

opportunity seller or by the business 

opportunity purchaser; 

(viii) The conditions under which the 

business opportunity seller may 

repurchase, whether by right of first 

refusal or at the option of the business 

opportunity seller (and if the business 

opportunity seller has the option to 

repurchase the business opportunity, 

whether there will be an independent 

appraisal of the business opportunity, 

whether the repurchase price will be 

determined by a predetermined formula 

and whether there will be a recognition 

of goodwill or other intangibles 

associated therewith in the repurchase 

price to be given the business 

opportunity purchaser); 

(ix) The conditions under which the 

business opportunity purchaser may sell 

or assign all or any interest in the 

ownership of the business opportunity, 

or of the assets of the business 

opportunity business; 

(x) The conditions under which the 

business opportunity seller may sell or 

assign, in whole or in part, its interest 

under such agreements; 

(xi) The conditions under which the 

business opportunity purchaser may 

modify; 

(xii) The conditions under which the 

business opportunity seller may modify; 

(xiii) The rights of the business 

opportunity purchaser’s heirs or 

personal representative upon the death 

or incapacity of the business 

opportunity purchaser; and 

(xiv) The provisions of any covenant 

not to compete. 

(16) A statement disclosing, with 

respect to the business opportunity 

seller and as to the particular named 

business being offered: 

(i) The total number of business 

opportunity purchasers operating at the 

end of the preceding fiscal year; 

(ii) The total number of companyowned outlets operating at the end of 

the preceding fiscal year; 

(iii) The names, addresses, and 

telephone numbers of (A) The 10 

business opportunity outlets of the 

named business opportunity business 

nearest the prospective business 

opportunity purchaser’s intended 

location; or (B) all business opportunity 

purchasers of the business opportunity 

seller; or (C) all business opportunity 

purchasers of the business opportunity 

seller in the State in which the 

prospective business opportunity 

purchaser lives or where the proposed 

business opportunity is to be located, 

Provided, however, That there are more 

than 10 such business opportunity 

purchasers. If the number of business 

opportunity purchasers to be disclosed 

pursuant to paragraph (a)(16)(iii)(B) or 

(C) of this section exceeds 50, such 

listing may be made in a separate 

document delivered to the prospective 

business opportunity purchaser with the 

prospectus if the existence of such 

separate document is disclosed in the 

prospectus; 

(iv) The number of business 

opportunities voluntarily terminated or 

not renewed by business opportunity 

purchasers within, or at the conclusion 

of, the term of the business opportunity 

agreement, during the preceding fiscal 

year; 

(v) The number of business 

opportunities reacquired by purchase by 

the business opportunity seller during 

the term of the business opportunity 

agreement, and upon the conclusion of 

the term of the business opportunity 

agreement, during the preceding fiscal 

year; 

(vi) The number of business 

opportunities otherwise reacquired by 

the business opportunity seller during 

the term of the business opportunity 

agreement, and upon the conclusion of 

the term of the business opportunity 

agreement, during the preceding fiscal 

year; 

(vii) The number of business 

opportunities for which the business 

opportunity seller refused renewal of 

the business opportunity agreement or 

other agreements relating to the 

business opportunity during the 

preceding fiscal year; and 

(viii) The number of business 

opportunities that were canceled or 

terminated by the business opportunity 

seller during the term of the business 

opportunity agreement, and upon 

conclusion of the term of the business 

opportunity agreement, during the 

preceding fiscal year. 

With respect to the disclosures 

required by paragraphs (a)(16) (v), (vi), 

(vii), and (viii) of this section, the 

disclosure statement shall also include 

a general categorization of the reasons 


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for such reacquisitions, refusals to 

renew or terminations, and the number 

falling within each such category, 

including but not limited to the 

following: failure to comply with 

quality control standards, failure to 

make sufficient sales, and other 

breaches of contract. 

(17)(i) If site selection or approval 

thereof by the business opportunity 

seller is involved in the business 

opportunity relationship, a statement 

disclosing the range of time that has 

elapsed between signing of business 

opportunity agreements or other 

agreements relating to the business 

opportunity and site selection, for 

agreements entered into during the 

preceding fiscal year; and 

(ii) If operating business opportunity 

outlets are to be provided by the 

business opportunity seller, a statement 

disclosing the range of time that has 

elapsed between the signing of business 

opportunity agreements or other 

agreements relating to the business 

opportunity and the commencement of 

the business opportunity purchaser’s 

business, for agreements entered into 

during the preceding fiscal year. 

With respect to the disclosures 

required by paragraphs (a)(17) (i) and 

(ii) of this section, a business 

opportunity seller may at its option also 

provide a distribution chart using 

meaningful classifications with respect 

to such ranges of time. 

(18) If the business opportunity seller 

offers an initial training program or 

informs the prospective business 

opportunity purchaser that it intends to 

provide such person with initial 

training, a statement disclosing: 

(i) The type and nature of such 

training; 

(ii) The minimum amount, if any, of 

training that will be provided to a 

business opportunity purchaser; and 

(iii) The cost, if any, to be borne by 

the business opportunity purchaser for 

the training to be provided, or for 

obtaining such training. 

(19) If the name of a public figure is 

used in connection with a 

recommendation to purchase a business 

opportunity, or as a part of the name of 

the business opportunity operation, or if 

the public figure is stated to be involved 

with the management of the business 

opportunity seller, a statement 

disclosing: 

(i) The nature and extent of the public 

figure’s involvement and obligations to 

the business opportunity seller, 

including but not limited to the 

promotional assistance the public figure 

will provide to the business opportunity 

seller and to the business opportunity 

purchaser; 

(ii) The total investment of the public 

figure in the business opportunity 

operation; and 

(iii) The amount of any fee or fees the 

business opportunity purchaser will be 

obligated to pay for such involvement or 

assistance provided by the public figure. 

(20)(i) A balance sheet (statement of 

financial position) for the business 

opportunity seller for the most recent 

fiscal year, and an income statement 

(statement of results of operations) and 

statement of changes in financial 

position for the franchisor for the most 

recent three fiscal years. Such 

statements are required to have been 

examined in accordance with generally 

accepted auditing standards by an 

independent certified or licensed public 

accountant. 

Provided, however, That where a 

business opportunity seller is a 

subsidiary of another corporation which 

is permitted under generally accepted 

accounting principles to prepare 

financial statements on a consolidated 

or combined statement basis, the above 

information may be submitted for the 

parent if (A) the corresponding 

unaudited financial statements of the 

business opportunity seller are also 

provided, and (B) the parent absolutely 

and irrevocably has agreed to guarantee 

all obligations of the subsidiary; 

(ii) Unaudited statements shall be 

used only to the extent that audited 

statements have not been made, and 

provided that such statements are 

accompanied by a clear and 

conspicuous disclosure that they are 

unaudited. Statements shall be prepared 

on an audited basis as soon as 

practicable, but, at a minimum, 

financial statements for the first full 

fiscal year following the date on which 

the business opportunity seller must 

first comply with this part shall contain 

a balance sheet opinion prepared by an 

independent certified or licensed public 

accountant, and financial statements for 

the following fiscal year shall be fully 

audited. 

(21) All of the foregoing information 

in paragraphs (a) (1) through (20) of this 

section shall be contained in a single 

disclosure statement or prospectus, 

which shall not contain any materials or 

information other than that required by 

this part or by State law not preempted 

by this part. This does not preclude 

business opportunity sellers or brokers 

from giving other nondeceptive 

information orally, visually, or in 

separate literature so long as such 

information is not contradictory to the 

information in the disclosure statement 

required by paragraph (a) of this section. 

This disclosure statement shall carry a 

cover sheet distinctively and 

conspicuously showing the name of the 

business opportunity seller, the date of 

issuance of the disclosure statement, 

and the following notice imprinted 

thereon in upper and lower case boldface type of not less than 12 point size: 

Information for Prospective Business 

Opportunity Purchasers Required by Federal 

Trade Commission 

* * * * * 

To protect you, we’ve required your 

business opportunity seller to give you this 

information. We haven’t checked it, and 

don’t know if it’s correct. It should help you 

make up your mind. Study it carefully. 

While it includes some information about 

your contract, don’t rely on it alone to 

understand your contract. Read all of your 

contract carefully. Buying a business 

opportunity is a complicated investment. 

Take your time to decide. If possible, show 

your contract and this information to an 

advisor, like a lawyer or an accountant. If 

you find anything you think may be wrong 

or anything important that’s been left out, 

you should let us know about it. It may be 

against the law. 

There may also be laws on business 

opportunities in your state. Ask your state 

agencies about them. 

Federal Trade Commission, 

Washington, D.C. 

Provided, That the obligations to 

furnish such disclosure statement shall 

be deemed to have been met for both the 

business opportunity seller and the 

business opportunity broker if either 

such party furnishes the prospective 

business opportunity purchaser with 

such disclosure statement. 

(22) All information contained in the 

disclosure statement shall be current as 

of the close of the business opportunity 

seller’s most recent fiscal year. After the 

close of each fiscal year, the business 

opportunity seller shall be given a 

period not exceeding 90 days to prepare 

a revised disclosure statement and, 

following such 90 days, may distribute 

only the revised prospectus and no 

other. The business opportunity seller 

shall, within a reasonable time after the 

close of each quarter of the fiscal year, 

prepare revisions to be attached to the 

disclosure statement to reflect any 

material change in the business 

opportunity seller or relating to the 

business opportunity business of the 

business opportunity seller, about 

which the business opportunity seller or 

broker, or any agent, representative, or 

employee thereof, knows or should 

know. Each prospective business 

opportunity purchaser shall have in his 

or her possession at the ‘‘time for 

making of disclosures,’’ the disclosure 

statement and quarterly revision for the 

period most recent to the ‘‘time for 

making of disclosures’’ and available at 


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that time. Information which is required 

to be audited pursuant to paragraph 

(a)(20) of this section is not required to 

be audited for quarterly revisions. 

Provided, however, That the unaudited 

information is accompanied by a 

statement in immediate conjunction 

therewith that clearly and 

conspicuously discloses that such 

information has not been audited. 

(23) A table of contents shall be 

included within the disclosure 

statement. 

(24) The disclosure statement shall 

include a comment which either 

positively or negatively responds to 

each disclosure item required to be in 

the disclosure statement, by use of a 

statement which fully incorporates the 

information required by the item. Each 

disclosure item therein must be 

preceded by the appropriate heading, as 

set forth in Note 3 of this part. 

(b) To make any oral, written, or 

visual representation to a prospective 

business opportunity purchaser which 

states a specific level of potential sales, 

income, gross or net profit for that 

prospective business opportunity 

purchaser, or which states other facts 

which suggest such a specific level, 

unless: 

(1) At the time such representation is 

made, such representation is relevant to 

the geographic market in which the 

business opportunity is to be located; 

(2) At the time such representation is 

made, a reasonable basis exists for such 

representation and the business 

opportunity seller has in its possession 

material which constitutes a reasonable 

basis for such representation, and such 

material is made available to any 

prospective business opportunity 

purchaser and to the Commission or its 

staff upon reasonable demand. 

Provided, further, That in immediate 

conjunction with such representation, 

the business opportunity seller shall 

disclose in a clear and conspicuous 

manner that such material is available to 

the prospective business opportunity 

purchaser; and Provided, however, That 

no provision within paragraph (b) of 

this section shall be construed as 

requiring the disclosure to any 

prospective business opportunity 

purchaser of the identity of any specific 

business opportunity purchaser or of 

information reasonably likely to lead to 

the disclosure of such person’s identity; 

and Provided, further, That no 

additional representation as to a 

prospective business opportunity 

purchaser’s potential sales, income, or 

profits may be made later than the ‘‘time 

for making of disclosures’’; 

(3) Such representation is set forth in 

detail along with the material bases and 

assumptions therefor in a single legible 

written document whose text 

accurately, clearly and concisely 

discloses such information, and none 

other than that provided for by this part 

or by State law not preempted by this 

part. Each prospective business 

opportunity purchaser to whom the 

representation is made shall be 

furnished with such document no later 

than the ‘‘time for making of 

disclosure’’; Provided, however, That if 

the representation is made at or prior to 

a ‘‘personal meeting’’ and such meeting 

occurs before the ‘‘time for making of 

disclosures’’, the document shall be 

furnished to the prospective business 

opportunity purchaser to whom the 

representation is made at that ‘‘personal 

meeting’’; 

(4) The following statement is clearly 

and conspicuously disclosed in the 

document described by paragraph (b)(3) 

of this section in immediate conjunction 

with such representation and in not less 

than twelve point upper and lower-case 

boldface type: 

CAUTION 

These figures are only estimates of what 

we think you may earn. There is no 

assurance you’ll do as well. If you rely upon 

our figures, you must accept the risk of not 

doing as well. 

(5) The following information is 

clearly and conspicuously disclosed in 

the document described by paragraph 

(b)(3) of this section in immediate 

conjunction with such representation: 

(i) The number and percentage of 

outlets of the named business 

opportunity business which are located 

in the geographic markets that form the 

basis for any such representation and 

which are known to the business 

opportunity seller or broker to have 

earned or made at least the same sales, 

income, or profits during a period of 

corresponding length in the immediate 

past as those potential sales, income, or 

profits represented; and 

(ii) The beginning and ending dates 

for the corresponding time period 

referred to by paragraph (b)(5)(i) of this 

section, Provided, however, That any 

business opportunity seller without 

prior business opportunity experience 

as to the named business opportunity 

business so indicate such lack of 

experience in the document described 

in paragraph (b)(3) of this section. 

Except, That representations of the 

sales, income or profits of existing 

business opportunity outlets need not 

comply with paragraph (b) of this 

section. 

(c) To make any oral, written, or 

visual representation to a prospective 

business opportunity purchaser which 

states a specific level of sales, income, 

gross or net profits of existing outlets 

(whether business opportunity 

purchaser-owned or company-owned) of 

the named business opportunity 

business, or which states other facts 

which suggest such a specific level, 

unless: 

(1) At the time such representation is 

made, such representation is relevant to 

the geographic market in which the 

business opportunity is to be located; 

(2) At the time such representation is 

made, a reasonable basis exists for such 

representation and the business 

opportunity seller has in its possession 

material which constitutes a reasonable 

basis for such representation, and such 

material is made available to any 

prospective business opportunity 

purchaser and to the Commission or its 

staff upon reasonable demand, 

Provided, however, That in immediate 

conjunction with such representation, 

the business opportunity purchaser 

discloses in a clear and conspicuous 

manner that such material is available to 

the prospective franchisee; and 

Provided, further, That no provision 

within paragraph (c) of this section shall 

be construed as requiring the disclosure 

to any prospective business opportunity 

purchaser of the identity of any specific 

business opportunity purchaser or of 

information reasonably likely to lead to 

the disclosure of such person’s identity; 

and Provided, further, That no 

additional representation as to the sales, 

income, or gross or net profits of 

existing outlets (whether business 

opportunity purchaser-owned or 

company-owned) of the named business 

opportunity business may be made later 

than the ‘‘time for making of 

disclosures’’; 

(3) Such representation is set forth in 

detail along with the material bases and 

assumptions therefor in a single legible 

written document which accurately, 

clearly and concisely discloses such 

information, and none other than that 

provided for by this part or by State law 

not preempted by this part. Each 

prospective business opportunity 

purchaser to whom the representation is 

made shall be furnished with such 

document no later than the ‘‘time for 

making of disclosures,’’ Provided, 

however, That if the representation is 

made at or prior to a ‘‘personal meeting’’

and such meeting occurs before the 

‘‘time for making of disclosures,’’ the 

document shall be furnished to the 

prospective business opportunity 

purchaser to whom the representation is 

made at that ‘‘personal meeting’’; 

(4) The underlying data on which the 

representation is based have been 


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prepared in accordance with generally 

accepted accounting principles; 

(5) The following statement is clearly 

and conspicuously disclosed in the 

document described by paragraph (c)(3) 

of this section in immediate conjunction 

with such representation, and in not 

less than twelve point upper and lower 

case boldface type: 

CAUTION 

Some outlets have [sold] [earned] this 

amount. There is no assurance you’ll do as 

well. If you rely upon our figures, you must 

accept the risk of not doing as well. 

(6) The following information is 

clearly and conspicuously disclosed in 

the document described by paragraph 

(c)(3) of this section in immediate 

conjunction with such representation: 

(i) the number and percentage of 

outlets of the named business 

opportunity business which are located 

in the geographic markets that form the 

basis for any such representation and 

which are known to the business 

opportunity seller or broker to have 

earned or made at least the same sales, 

income, or profits during a period of 

corresponding length in the immediate 

past as those potential sales, income, or 

profits represented; and 

(ii) The beginning and ending dates 

for the corresponding time period 

referred to by paragraph (c)(6)(i) of this 

section, Provided, however, That any 

business opportunity seller without 

prior business opportunity experience 

as to the named business opportunity 

business so indicate such lack of 

experience in the document described 

in paragraph (c)(3) of this section. 

(d) To fail to provide the following 

information within the document(s) 

required by paragraphs (b)(3) and (c)(3) 

of this section whenever any 

representation is made to a prospective 

business opportunity purchaser 

regarding its potential sales, income, or 

profits, or the sales, income, gross or net 

profits of existing outlets (whether 

business opportunity purchaser-owned 

or company-owned) of the named 

business opportunity business: 

(1) A cover sheet distinctively and 

conspicuously showing the name of the 

business opportunity seller, the date of 

issuance of the document and the 

following notice imprinted thereon in 

upper and lower case boldface type of 

not less than twelve point size: 

Information for Prospective Business 

Opportunity Purchasers About Business 

Opportunity [Sales] [Income] [Profit] 

Required by the Federal Trade Commission. 

To protect you, we’re required the 

business opportunity seller to give you this 

information. We haven’t checked it and 

don’t know if it’s correct. Study these facts 

and figures carefully. If possible, show them 

to someone who can advise you, like a 

lawyer or an accountant. Then take your 

time and think it over. 

If you find anything you think may be 

wrong or anything important that’s been left 

out, let us know about it. It may be against 

the law. 

There may also be laws on business 

opportunities in your State. Ask your State 

agencies about them. 

Federal Trade Commission, 

Washington, D.C. 

(2) A table of contents. 

Provided, however, That each 

prospective business opportunity 

purchaser to whom the representation is 

made shall be notified at the ‘‘time for 

making of disclosures’’ of any material 

change (about which the business 

opportunity seller, broker, or any of the 

agents, representations, or employees 

thereof, knows or should know) in the 

information contained in the 

document(s) described by paragraphs 

(b)(3) and (c)(3) of this section. 

(e) To make any oral, written, or 

visual representation for general 

dissemination (not otherwise covered by 

paragraph (b) or (c) of this section) 

which states a specific level of sales, 

income, gross or net profits, either 

actual or potential, of existing or 

prospective outlets (whether business 

opportunity purchaser-owned or 

company-owned) of the named business 

opportunity business or which states 

other facts which suggest such a specific 

level, unless: 

(1) At the time such representation is 

made, a reasonable basis exists for such 

representation and the business 

opportunity seller has in its possession 

material which constitutes a reasonable 

basis for such representation and which 

is made available to the Commission or 

its staff upon reasonable demand; 

(2) The underlying data on which 

each representation of sales, income or 

profit for existing outlets is based have 

been prepared in accordance with 

generally accepted accounting 

principles; 

(3) In immediate conjunction with 

such representation, there shall be 

clearly and conspicuously disclosed the 

number and percentage of outlets of the 

named business opportunity business 

which the business opportunity seller or 

broker knows to have earned or made at 

least the same sales, income, or profits 

during a period of corresponding length 

in the immediate past as those sales, 

income, or profits represented, and the 

beginning and ending dates for said 

time period; 

(4) In immediate conjunction with 

each such representation of potential 

sales, income or profits, the following 

statement shall be clearly and 

conspicuously disclosed: 

CAUTION 

These figures are only estimates; there is 

no assurance you’ll do as well. If you rely 

upon our figures, you must accept the risk of 

not doing as well. 

Provided, however, That if such 

representation is not based on actual 

experience of existing outlets of the 

named business opportunity business, 

that fact also should be disclosed; 

(5) No later than the earlier of the first 

‘‘personal meeting’’ or the ‘‘time for 

making of disclosures,’’ each 

prospective business opportunity 

purchaser shall be given a single, legible 

written document which accurately, 

clearly and concisely sets forth the 

following information and materials 

(and none other than that provided for 

by this part or by State law not 

preempted by this part): 

(i) The representation, set forth in 

detail along with the material bases and 

assumptions therefor; 

(ii) the number and percentage of 

outlets of the named business 

opportunity business which the 

business opportunity seller or broker 

knows to have earned or made at least 

the same sales, income or profits during 

a period of corresponding length in the 

immediate past as those sales, income, 

or profits represented, and the 

beginning and ending dates for said 

time period; 

(iii) With respect to each such 

representation of sales, income, or 

profits of existing outlets, the following 

statement shall be clearly and 

conspicuously disclosed in immediate 

conjunction therewith, printed in not 

less than 12 point upper and lower case 

boldface type: 

CAUTION 

Some outlets have [sold] [earned] this 

amount. There is no assurance you’ll do as 

well. If you rely upon our figures, you must 

accept the risk of not doing as well. 

(iv) With respect to each such 

representation of potential sales, 

income, or profits, the following 

statement shall be clearly and 

conspicuously disclosed in immediate 

conjunction therewith, printed in not 

less than 12 point upper and lower case 

boldface type: 

CAUTION 

These figures are only estimates. There is 

no assurance you’ll do as well. If you rely 

upon our figures, you must accept the risk 

of not doing as well. 

(v) If applicable, a statement clearly 

and conspicuously disclosing that the 

business opportunity seller lacks prior 


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business opportunity experience as to 

the named business opportunity 

business; 

(vi) If applicable, a statement clearly 

and conspicuously disclosing that the 

business opportunity seller has not been 

in business long enough to have actual 

business data; 

(vii) A cover sheet, distinctively and 

conspicuously showing the name of the 

business opportunity seller, the date of 

issuance of the document, and the 

following notice printed thereon in not 

less than 12 point upper and lower case 

boldface type: 

Information for Prospective Business 

Opportunity Purchasers About Business 

Opportunity [Sales] [Income] [Profit] 

Required by the Federal Trade Commission 

To protect you, we’ve required the 

business opportunity seller to give you this 

information. We haven’t checked it and 

don’t know if it’s correct. Study these facts 

and figures carefully. If possible, show them 

to someone who can advise you, like a 

lawyer or an accountant. If you find 

anything you think may be wrong or 

anything important that’s been left out, let us 

know about it. It may be against the law. 

There may also be laws about business 

opportunities in your State. Ask your State 

agencies about them. 

Federal Trade Commission, 

Washington, D.C. 

(viii) A table of contents; 

(6) Each prospective business 

opportunity purchaser shall be notified 

at the ‘‘time for making of disclosures’’

of any material changes that have 

occurred in the information contained 

in this document. 

(f) To make any claim or 

representation which is contradictory to 

the information required to be disclosed 

by this part. 

(g) To fail to furnish the prospective 

business opportunity purchaser with a 

copy of the business opportunity seller’s 

business opportunity agreement and 

related agreements with the document, 

and a copy of the completed business 

opportunity and related agreements 

intended to be executed by the parties 

at least 5 business days prior to the date 

the agreements are to be executed. 

Provided, however, That the 

obligations defined in paragraphs (b) 

through (g) of this section shall be 

deemed to have been met for both the 

business opportunity seller and the 

broker if either such person furnishes 

the prospective business opportunity 

purchaser with the written disclosures 

required thereby. 

(h) To fail to return any funds or 

deposits in accordance with any 

conditions disclosed pursuant to 

paragraph (a)(7) of this section. 

§ 437.2 Definitions. 

As used in this part, the following 

definitions shall apply: 

(a) The term business opportunity 

means any continuing commercial 

relationship created by any arrangement 

or arrangements whereby: 

(1) A person (hereinafter ‘‘business 

opportunity purchaser’’) offers, sells, or 

distributes to any person other than a 

‘‘business opportunity seller’’ (as 

hereinafter defined), goods, 

commodities, or services which are: 

(i)(A) Supplied by another person 

(hereinafter ‘‘business opportunity 

seller’’); or 

(B) Supplied by a third person (e.g., 

a supplier) with whom the business 

opportunity purchaser is directly or 

indirectly required to do business by 

another person (hereinafter ‘‘business 

opportunity seller’’); or 

(C) Supplied by a third person (e.g., 

a supplier) with whom the business 

opportunity purchaser is directly or 

indirectly advised to do business by 

another person (hereinafter ‘‘business 

opportunity seller’’) where such third 

person is affiliated with the business 

opportunity seller; and 

(ii) The business opportunity seller: 

(A) Secures for the business 

opportunity purchaser retail outlets or 

accounts for said goods, commodities, 

or services; or 

(B) Secures for the business 

opportunity purchaser locations or sites 

for vending machines, rack displays, or 

any other product sales displays used by 

the business opportunity purchaser in 

the offering, sale, or distribution of said 

goods, commodities, or services; or 

(C) Provides to the business 

opportunity purchaser the services of a 

person able to secure the retail outlets, 

accounts, sites or locations referred to in 

paragraphs (a)(ii)(A) and (B) of this 

section; and 

(2) The business opportunity 

purchaser is required as a condition of 

obtaining or commencing the business 

opportunity operation to make a 

payment or a commitment to pay to the 

business opportunity seller, or to a 

person affiliated with the business 

opportunity seller. 

(3) Exemptions. The provisions of this 

part shall not apply to a business 

opportunity: 

(i) Which is a ‘‘fractional business 

opportunity’’; or 

(ii) Where pursuant to a lease, license, 

or similar agreement, a person offers, 

sells, or distributes goods, commodities, 

or services on or about premises 

occupied by a retailer-grantor primarily 

for the retailer-grantor’s own 

merchandising activities, which goods, 

commodities, or services are not 

purchased from the retailer-grantor or 

persons whom the lessee is directly or 

indirectly (A) required to do business 

with by the retailer-grantor or (B) 

advised to do business with by the 

retailer-grantor where such person is 

affiliated with the retailer-grantor; or 

(iii) Where the total of the payments 

referred to in paragraph (a)(2) of this 

section made during a period from any 

time before to within 6 months after 

commencing operation of the business 

opportunity purchaser’s business, is less 

than $500; or 

(iv) Where there is no writing which 

evidences any material term or aspect of 

the relationship or arrangement; or 

(v) Which complies with the franchise 

disclosure requirements set forth at part 

436 or falls under one or more of the 

exemptions set forth at § 436.8 of part 

436. 

(4) Exclusions. The term ‘‘business 

opportunity’’ shall not be deemed to 

include any continuing commercial 

relationship created solely by: 

(i) The relationship between an 

employer and an employee, or among 

general business partners; or 

(ii) Membership in a bona fide 

‘‘cooperative association’’; or 

(iii) An agreement for the use of a 

trademark, service mark, trade name, 

seal, advertising, or other commercial 

symbol designating a person who offers 

on a general basis, for a fee or otherwise, 

a bona fide service for the evaluation, 

testing, or certification of goods, 

commodities, or services; or 

(iv) An agreement between a licensor 

and a single licensee to license a 

trademark, trade name, service mark, 

advertising or other commercial symbol 

where such license is the only one of its 

general nature and type to be granted by 

the licensor with respect to that 

trademark, trade name, service mark, 

advertising, or other commercial 

symbol. 

(4) Any relationship which is 

represented either orally or in writing to 

be a business opportunity (as defined in 

paragraph (a) of this section) is subject 

to the requirements of this part. 

(b) The term person means any 

individual, group, association, limited 

or general partnership, corporation, or 

any other business entity. 

(c) The term business opportunity 

seller means any person who 

participates in a business opportunity 

relationship as a business opportunity 

seller, as denoted in paragraph (a) of 

this section. 

(d) The term business opportunity 

purchaser means any person (1) who 

participates in a business opportunity 

relationship as a business opportunity 

purchaser, as denoted in paragraph (a) 


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of this section, or (2) to whom an 

interest in a business opportunity is 

sold. 

(e) The term prospective business 

opportunity purchaser includes any 

person, including any representative, 

agent, or employee of that person, who 

approaches or is approached by a 

business opportunity seller or broker, or 

any representative, agent, or employee 

thereof, for the purpose of discussing 

the establishment, or possible 

establishment, of a business opportunity 

relationship involving such a person. 

(f) The term business day means any 

day other than Saturday, Sunday, or the 

following national holidays: New Year’s 

Day, Washington’s Birthday, Memorial 

Day, Independence Day, Labor Day, 

Columbus Day, Veterans’ Day, 

Thanksgiving, and Christmas. 

(g) The term time for making of 

disclosures means ten (10) business 

days prior to the earlier of (1) the 

execution by a prospective business 

opportunity purchaser of any business 

opportunity agreement or any other 

agreement imposing a binding legal 

obligation on such prospective business 

opportunity purchaser, about which the 

business opportunity seller, broker, or 

any agent, representative, or employee 

thereof, knows or should know, in 

connection with the sale or proposed 

sale of a business opportunity, or (2) the 

payment by a prospective business 

opportunity purchaser, about which the 

business opportunity seller, broker, or 

any agent, representative, or employee 

thereof, knows or should know, of any 

consideration in connection with the 

sale or proposed sale of a business 

opportunity. 

(h) The term fractional business 

opportunity means any relationship, as 

denoted by paragraph (a) of this section, 

in which the person described therein 

as a business opportunity purchaser, or 

any of the current directors or executive 

officers thereof, has been in the type of 

business represented by the business 

opportunity relationship for more than 

2 years and the parties anticipated, or 

should have anticipated, at the time the 

agreement establishing the business 

opportunity relationship was reached, 

that the sales arising from the 

relationship would represent no more 

than 20 percent of the sales in dollar 

volume of the business opportunity 

purchaser. 

(i) The term affiliated person means a 

person (as defined in paragraph (b) of 

this section): 

(1) Which directly or indirectly 

controls, is controlled by, or is under 

common control with, a business 

opportunity seller; or 

(2) Which directly or indirectly owns, 

controls, or holds with power to vote, 10 

percent or more of the outstanding 

voting securities of a business 

opportunity seller; or 

(3) Which has, in common with a 

business opportunity seller, one or more 

partners, officers, directors, trustees, 

branch managers, or other persons 

occupying similar status or performing 

similar functions. 

(j) The term business opportunity 

broker means any person other than a 

business opportunity seller or a 

business opportunity purchaser who 

sells, offers for sale, or arranges for the 

sale of a business opportunity. 

(k) The term sale of a business 

opportunity includes a contract or 

agreement whereby a person obtains a 

business opportunity or an interest in a 

business opportunity for value by 

purchase, license, or otherwise. This 

term shall not be deemed to include the 

renewal or extension of an existing 

business opportunity where there is no 

interruption in the operation of the 

business opportunity business by the 

business opportunity purchaser, unless 

the new contracts or agreements contain 

material changes from those in effect 

between the business opportunity seller 

and business opportunity purchaser 

prior thereto. 

(l) A cooperative association is either 

(1) an association of producers of 

agricultural products authorized by 

section 1 of the Capper-Volstead Act, 7 

U.S.C. 291; or (2) an organization 

operated on a cooperative basis by and 

for independent retailers which 

wholesales goods or furnishes services 

primarily to its member-retailers. 

(m) The term fiscal year means the 

business opportunity seller’s fiscal year. 

(n) The term material, material fact, 

and material change shall include any 

fact, circumstance, or set of conditions 

that has a substantial likelihood of 

influencing a reasonable business 

opportunity purchaser in the making of 

a significant decision relating to a 

named business opportunity business or 

that has any significant financial impact 

on a business opportunity purchaser or 

prospective business opportunity 

purchaser. 

(o) The term personal meeting means 

a face-to-face meeting between a 

business opportunity seller or broker (or 

any agent, representative, or employee 

thereof) and a prospective business 

opportunity purchaser which is held for 

the purposes of discussing the sale or 

possible sale of a business opportunity. 

§ 437.3 Severability. 

If any provision of this part or its 

application to any person, act, or 

practice is held invalid, the remainder 

of the part or the application of its 

provisions to any person, act, or practice 

shall not be affected thereby. 

Note 1: The Commission expresses no 

opinion as to the legality of any practice 

mentioned in this part. A provision for 

disclosure should not be construed as 

condonation or approval with respect to the 

matter required to be disclosed, nor as an 

indication of the Commission’s intention not 

to enforce any applicable statute. 

Note 2: By taking action in this area, the 

Federal Trade Commission does not intend to 

annul, alter, affect, or exempt any person 

subject to the provisions of this part from 

complying with the laws or regulations of 

any State, municipality, or other local 

government with respect to business 

opportunity practices, except to the extent 

that those laws or regulations are 

inconsistent with any provision of this part, 

and then only to the extent of the 

inconsistency. For the purposes of this part, 

a law or regulation of any State, 

municipality, or other local government is 

not inconsistent with this part if the 

protection such law or regulation affords any 

prospective business opportunity purchaser 

is equal to or greater than that provided by 

this part. Examples of provisions that provide 

protection equal to or greater than that 

provided by this part include laws or 

regulations which require more complete 

record keeping by the business opportunity 

seller or the disclosure of more complete 

information to the business opportunity 

purchaser. 

Note 3: [As per § 437.1(a)(24) of this part]: 

DISCLOSURE STATEMENT 

Pursuant to 16 CFR 437.1 et seq., a Trade 

Regulation Rule of the Federal Trade 

Commission regarding Disclosure 

Requirements and Prohibitions Concerning 

Business Opportunities, the following 

information is set forth on [name of business 

opportunity seller] for your examination: 

1. Identifying information as to the 

business opportunity seller; 

2. Business experience of the business 

opportunity seller’s directors and executive 

officers. 

3. Business experience of the business 

opportunity seller. 

4. Litigation history. 

5. Bankruptcy history. 

6. Description of business opportunity. 

7. Initial funds required to be paid by a 

business opportunity purchaser. 

8. Recurring funds required to be paid by 

a business opportunity purchaser. 

9. Affiliated persons the business 

opportunity purchaser is required or advised 

to do business with by the business 

opportunity seller. 

10. Obligations to purchase. 

11. Revenues received by the business 

opportunity seller in consideration of 

purchases by a business opportunity 

purchaser. 

12. Financing arrangements. 

13. Restriction on sales. 


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14. Person participation required of the 

business opportunity purchaser in the 

operation of the business opportunity. 

15. Termination, cancellation, and renewal 

of the business opportunity. 

16. Statistical information concerning the 

number of business opportunity purchasers 

(and company-owned outlets). 

17. Site selection. 

18. Training programs. 

19. Public figure involvement in the 

business opportunity. 

20. Financial information concerning the 

business opportunity seller. 

By direction of the Commission. 

Donald S. Clark, 

Secretary. 

Note: Attachment A is published for 

information purposes only and will not be 

codified in Title 16 of the Code of Federal 

Regulations. 

ATTACHMENT A. 

TABLE OF COMMENTERS 

Rule Review Commenters 

RR 1. Robert E. Mulloy, Jr. (‘‘Mulloy’’) 

RR 2. Stanley M. Dub, Dworken & 

Bernstein (‘‘Dub’’) 

RR 3. Marvin J. Migdol, Nationwide 

Franchise Marketing Services 

(‘‘Migdol’’) 

RR 4. SCPromotions, Inc. 

(‘‘SCPromotions’’) 

RR 5. R. Dana Pennell (‘‘Pennell’’) 

RR 6. Robin Day Glenn (‘‘Glenn’’) 

RR 7. Jack McBirney, McGrow 

Consulting (‘‘McBirney’’) 

RR 8. SRA International (‘‘SRA 

International’’) 

RR 9. Harold Brown, Brown & 

Stadfeld (‘‘Brown’’) 

RR 10. Ronald N. Rosenwasser 

(‘‘Rosenwasser’’) 

RR 11. Louis F. Sokol (‘‘Sokol’’) 

RR 12. J. Howard Beales III, Professor, 

George Washington University 

(‘‘Beales’’) 

RR 13. Peter Lagarias (‘‘Lagarias’’) 

RR 14. Harold L. Kestenbaum 

(‘‘Kestenbaum’’) 

RR 15. Walter D. Wilson, Better 

Business Bureau of Central Georgia, Inc. 

(‘‘Wilson’’) 

RR 16. Connie B. D’Imperio, Color 

Your Carpet, Inc. (‘‘D’Imperio’’) 

RR 17. Q.M. Marketing, Inc (‘‘Q.M. 

Marketing’’) 

RR 18. David Gurnick, Kindel & 

Anderson (‘‘Gurnick’’) 

RR 19. U-Save Auto Rental (‘‘U-Save 

Auto Rental’’) 

RR 20. The Longaberger Co. 

(‘‘Longaberger’’) 

RR 21. Direct Selling Association 

(‘‘DSA’’) 

RR 22. American Bar Association, 

Section on Antitrust Law (‘‘ABA AT’’) 

RR 23. Dennis E. Wieczorek, Rudnick 

& Wolfe (‘‘Wieczorek’’) 

RR 24. Real Estate National Nework 

(‘‘RENN’’) 

RR 25. Attorney General Jim Ryan 

(‘‘General Ryan’’), State of Illinois 

RR 26. Alan S. Nopar (‘‘Nopar’’) 

RR 27. Snap-On, Inc. (‘‘Snap-On’’) 

RR 28. Steven Rabenberg, Explore St. 

Louis (‘‘Rabenberg’’) 

RR 29. Douglas M. Brooks, Martland 

& Brooks (‘‘Brooks’’) 

RR 30. Robert N. McDonald 

(‘‘Commissioner McDonald’’), Securities 

Commissioner, State of Maryland 

RR 31. Little Ceasars (‘‘Little Ceasars’’) 

RR 32. International Franchise 

Association (‘‘IFA’’) 

RR 33. Brownstein, Zeidman & Lore 

(‘‘Brownstein Zeidman’’) 

RR 34. Jere W. Glover (‘‘Glover’’), 

Counsel for Advocacy, U.S. Small 

Business Administration (‘‘SBA 

Advocacy’’) 

RR 35. Jan Meyers, Chair, House 

Committee on Small Business 

(‘‘Representative Myers’’) 

RR 36. Neil A. Simon, Hogan and 

Hartson (‘‘Simon’’) 

RR 37. Deborah Bortner (‘‘Bortner’’), 

Washington State Department of 

Financial Institutions, Securities 

Division 

RR 38. American Franchisee 

Association (‘‘AFA’’) 

RR 39. American Association of 

Franchisees & Dealers (‘‘AAFD’’) 

RR 40. Warrren Lewis, Lewis & 

Trattner (‘‘Lewis’’) 

RR 41. Century 21 Real Estate Corp. 

(‘‘Century 21’’) 

RR 42. John Hayden (‘‘Hayden’’) 

RR 43. North American Securities 

Administrators Association (‘‘NASAA’’) 

RR 44. Robert L. Perrry (‘‘Perry’’) 

RR 45. The State Bar of California, 

Business Law Section (‘‘CA BLS’’) 

RR 46. Mike Gaston, Barkely & 

Evergreen (‘‘Gaston’’) 

RR 47. The Southland Corp. 

(‘‘Southland’’) 

RR 48. Medicap Pharmacies, Inc. 

(‘‘Medicap’’) 

RR 49. Rochelle B. Spandorf 

(‘‘Spandorf’’), ABA Forum on 

Franchising, Andrew C. Selden 

(‘‘Selden’’), David J. Kaufman 

(‘‘Kaufmann’’) 

RR 50. Joyce G. Mazero, Locke Pernell 

Rain Harrell (‘‘Mazero’’) 

RR 51. Mark B. Forseth, Locke Pernell 

Rain Harrell (‘‘Forseth’’) 

RR 52. Forte Hotels (‘‘Forte Hotels’’) 

RR 53. R.A. Politte (‘‘Politte’’) 

RR 54. Politte (see supra, RR 53). 

RR 55. Brown (see supra, RR 9). 

RR 56. Wieczorek (see supra, RR 23). 

RR 57. Scott Shane, Georgia Institute 

of Technology (‘‘Shane’’) 

RR 58. Friday’s (‘‘Friday’s’’) 

RR 59. Carl E. Zwisler, Keck, Mahin 

& Cate (‘‘Zwisler’’) 

RR 60. Wieczorek (see supra, RR 23) 

RR 61. Enrique A. Gonzalez, Gonzalez 

Cavillo Y Forastierei (‘‘Gonzalez’’) 

RR 62. Pepsico Restaurants 

(‘‘Pepsico’’) 

RR 63. IFA (see supra, RR 32) 

RR 64. Atlantic Richfield Co 

(‘‘ARCO’’) 

RR 65. David Clanton (‘‘Clanton’’) 

RR 66. Leonard Swartz, Arthur 

Andersen & Co. (‘‘Swartz’’) 

RR 67. John R.F. Baer, Keck, Mahin & 

Cate (‘‘Baer’’) 

RR 68. Lynn Scott (‘‘Scott’’) 

RR 69. Eversheds (‘‘Eversheds’’) 

RR 70. Brownstein Zeidman (see 

supra, RR 33) 

RR 71. Penny Ward, Baker & 

McKenzie (‘‘Ward’’) 

RR 72. Matthias Stein (‘‘Stein’’) 

RR 73. Byron Fox, Hunton & Williams 

(‘‘Fox’’) 

RR 74. Papa John’s Pizza (‘‘Papa 

Johns’’) 

RR 75. Harold L. Kestenbaum (see 

supra, RR 14) 

Rule Review September 1995 Public 

Workshop Conference 

Panelists 

Harold Brown, Brown & Stadfeld 

(‘‘Brown’’) 

Sam Damico, Q.M. Marketing, Inc. 

(‘‘Damico’’) 

Connie B. D’Imperio, Color Your 

Carpet, Inc. (‘‘D’Imperio’’) 

Eric Ellman (‘‘Ellman’’), Direct Selling 

Assocation (‘‘DSA’’) 

Mark B. Forseth, Locke Purnell Rain 

Harrell (‘‘Forseth’’) 

Mike Gason, Barkely & Evergreen 

(‘‘Gaston’’) 

Susan Kezios, American Franchisee 

Association (‘‘AFA’’) (‘‘Kezios’’) 

William Kimball, Iowa Coalition for 

Responsible Franchising (‘‘Kimball’’) 

Warren Lewis, Lewis & Trattner 

(‘‘Lewis’’) 

Steven Maxey (‘‘Maxey’’), North 

American Securities Administrators 

Association (‘‘NASAA’’) 

Joyce G. Mazero, Locke Purnell Rain 

Harrell (‘‘Mazero’’) 

Barry Pineles (‘‘Pineles’’), U.S. Small 

Business Administration (‘‘SBA 

Advocacy’’) 

Robert Purvin, American Association 

of Franchisees & Dealers (‘‘AAFD’’) 

(‘‘Purvin’’) 

Steven Rabenberg, Explore St. Louis 

(‘‘Rabenberg’’) 

Matthew R. Shay (‘‘Shay’’), 

International Franchise Association 

(‘‘IFA’’) 

Neil A. Simon, Hogan & Hartson 

(‘‘Simon’’) 

Robin Spencer (‘‘Spencer’’), 

representing American Franchisee 

Association 


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15572 Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations 

Leonard Swartz, Arthur Anderson & 

Co. (‘‘Swartz’’) 

John Tifford, Brownstein Zeidman & 

Lore 

Ronnie Volkening (‘‘Volkening’’), The 

Southland Corp. (‘‘Southland’’) 

Dennis E. Wieczorek, Rudnick & 

Wolfe (‘‘Wieczorek’’) 

William J. Wimmer (Wimmer’’), Iowa 

Coalition for Responsible Franchising 

Public Participants 

Peter Denzen (‘‘Denzen’’) 

Bob Hessler, Wendy’s (‘‘Hessler’’) 

Chris Huke, SC Promotions (‘‘Huke’’) 

Michael Jorgensen (‘‘Jorgensen’’) 

Robert L. Perry (‘‘Perry’’) 

Brian Schnell, Gray, Plant Mooty 

(‘‘Schnell’’) 

March 1996 Public Workshop 

Conference 

Panelists 

Kay M. Ainsley, Ziebart Intl, Corp. 

(‘‘Ainsley’’) 

John R.F. Baer, Keck, Mahin & Cate 

(‘‘Baer’’) 

Michael Brennan, Rudnick & Wolfe 

(‘‘Brennan’’) 

Joel R. Buckberg, HFA, Inc. 

(‘‘Buckberg’’) 

David A. Clanton, Baker & McKenzie 

(‘‘Clanton’’) 

Kenneth R. Costello, Loeb & Loeb 

(‘‘Costello’’) 

Edward J. Fay, Kwik Kopy Corp. 

(‘‘Fay’’) 

Mark B. Forseth, Locke Purnell Rain 

Harrell (‘‘Forseth’’) 

Byron E. Fox, Hunton & Willaims 

(‘‘Fox’’) 

Bruce Harsh, International Trade 

Specialist, U.S. Department of 

Commerce (‘‘Harsh’’) 

Arnold Janofsky, Precision Tune 

(‘‘Janofsky’’) 

Susan P. Kezios (‘‘Kezios’’), American 

Franchisee Association (‘‘AFA’’) 

Alex S. Konigsberg, QC 

(‘‘Konigsberg’’), Lapoint Rosenstein 

Andrew P. Loewinger, Abraham 

Pressman & Bauer (‘‘Loewinger’’) 

H. Bret Lowell, Brownstein Zeidman 

(‘‘Lowell’’) 

John Melle, Office of U.S. Trade 

Representative (‘‘Melle’’) 

Raymond L. Miolla, Burger King Corp. 

(‘‘Miolla’’) 

Alex Papadakis, Hurt Sinisi Papadakis 

(‘‘Papadakis’’) 

Matthew R. Shay (‘‘Shay’’), 

International Franchise Association 

(‘‘IFA’’) 

Neil A. Simon, Hogan & Hartson 

(‘‘Simon’’) 

Leonard Swartz, Arthur Anderson & 

Co. (‘‘Swartz’’) 

Greg L. Walther, Outback Steakhouse 

Intl (‘‘Walther’’) 

Dennis E. Wieczorek, Rudnick & 

Wolfe (‘‘Wieczorek’’) 

Erik B. Wulff, Hogan & Hartson 

(‘‘Wulff’’) 

Philip F. Zeidman (‘‘Zeidman’’) 

Carl Zwisler, Keck, Mahin & Cate 

(‘‘Zwisler’’) 

Public Participants 

Jeff Brams, Sign-A-Rama and 

Shipping Connections (‘‘Brams’’) 

Pamela Mills, Baker & McKenzie 

(‘‘Mills’’) 

Advance Notice of Proposed 

Rulemaking Commenters 

ANPR 1. Kevin Brendan Murphy, Mr. 

Franchise (‘‘Murphy’’) 

ANPR 2. Murphy (see supra, ANPR 

1). 

ANPR 3. Mike Bruce, The Michael 

Bruce Fund (‘‘Bruce’’) 

ANPR 4. Harold Brown, Brown & 

Stadfeld (‘‘Brown’’) 

ANPR 5. Frances L. Diaz (‘‘Diaz’’) 

ANPR 6. Brown (see supra, ANPR 4). 

ANPR 7. Diaz (see supra, ANPR 5). 

ANPR 8. Marian Kunihisa 

(‘‘Kunihisa’’) 

ANPR 9. Kevin Bores, Domino’s Pizza 

Franchisee (‘‘Bores’’) 

ANPR 10. Terrence L. Packer, 

Supercuts Franchisee (‘‘Packer’’) 

ANPR 11. John Delasandro 

(‘‘Delasandro’’) 

ANPR 12. William Cory (‘‘Cory’’) 

ANPR 13. Joseph Manuszak, 

Domino’s Franchisee (‘‘Manuszak’’) 

ANPR 14. Daryl Donafin, Taco Bell 

Franchisee (‘‘Donafin’’) 

ANPR 15. David Muncie, National 

Claims Service, Inc. (‘‘Muncie’’) 

ANPR 16. Patrick E. Meyers, The 

Quizno’s Corp. (‘‘Quizno’s’’) 

ANPR 17. David Weaver, Domino’s 

Pizza Franchisee (‘‘Weaver’’) 

ANPR 18. Karen M. Paquet, Domino’s 

Pizza Franchisee (‘‘Paquet’’) 

ANPR 19. Gary R. Duvall Graham & 

Dunn (‘‘Duvall’’) 

ANPR 20. Andrew J. Sherman, 

Greenberg & Tauris (‘‘Sherman’’) 

ANPR 21. S. Beavis Stubbings 

(‘‘Stubbings’’) 

ANPR 22. Jim & Evalena Gray, Pearle 

Vision Franchisee (‘‘J&E Gray’’) 

ANPR 23. Ernest Higginbotham 

(‘‘Higginbotham’’) 

ANPR 24. Henry C. Su & Bryon Fox 

(‘‘Su’’) 

ANPR 25. John R. F. Baer, Keck, 

Mahin & Cate (‘‘Baer’’) 

ANPR 26. Clay Small & Lowell Dixon, 

Nat’l Franchise Mediation Program 

Steering Committee (‘‘NFMP’’) 

ANPR 27. Richard T. Catalano 

(‘‘Catalano’’) 

ANPR 28. Neil Simon & Erik Wulff, 

Hogan & Hartson (‘‘H&H’’) 

ANPR 29. Glenn A. Mueller, 

Domino’s Pizza Franchisee (‘‘Mueller’’) 

ANPR 30. Doug Bell et al. Supercuts 

Franchisees (‘‘Supercut Franchisees’’) 

ANPR 31. Michael L. Bennett, 

Longaberger Co. (‘‘Longaberger’’) 

ANPR 32. John Rachide, Domino’s 

Pizza Franchisee (‘‘Rachide’’) 

ANPR 33. David J. Kaufmann, 

Kaufmann, Feiner, Yamin, Gildin & 

Robbins (‘‘Kaufmann’’) 

ANPR 34. Joseph N. Mariano, Direct 

Selling Association (‘‘DSA’’) 

ANPR 35. Linda F. Golodner & Susan 

Grant, National Consumers League 

(‘‘NCL’’) 

ANPR 36. Jere W. Glover & Jennifer A. 

Smith, U.S. Small Business 

Administration Office of Chief Counsel 

for Advocacy (‘‘SBA Advocacy’’) 

ANPR 37. Robert Chabot, Domino’s 

Pizza Franchisee (‘‘Chabot’’) 

ANPR 38. Teresa Maloney, National 

Coalition of 7-Eleven Franchisees 

(‘‘Maloney’’) 

ANPR 39. BLANK 

ANPR 40. Harold L. Kestenbaum 

(‘‘Kestenbaum’’) 

ANPR 41. Samuel L. Sibent, KFC 

Franchisee (‘‘Sibent’’) 

ANPR 42. Oren C. Crothers, KFC 

Franchisee (‘‘Crothers’’) 

ANPR 43. Matthew Jankowski, KFC 

Franchisee (‘‘Jankowski’’) 

ANPR 44. Rodney A. DeBoer, KFC 

Franchisee (‘‘DeBoer’’) 

ANPR 45. Liesje Bertoldi, KFC 

Franchisee (‘‘L. Bertoldi)’’

ANPR 46. Steve Bertoldi, KFC 

Franchisee (‘‘S. Bertoldi’’) 

ANPR 47. Charles Buckner, KFC 

Franchisee (‘‘Buckner’’) 

ANPR 48. Walter J. Knezevich, KFC 

Franchisee (‘‘Knezevich’’) 

ANPR 49. Jeffrey W. Gray, KFC 

Franchisee (‘‘J. Gray’’) 

ANPR 50. Fred Jackson, KFC 

Franchisee (‘‘Jackson’’) 

ANPR 51. Ronald L. Rufener, KFC 

Franchisee (‘‘Rufener’’) 

ANPR 52. Tim Morris, KFC 

Franchisee (‘‘Morris)’’

ANPR 53. Scarlett Norris Adams, KFC 

Franchisee (‘‘Adams’’) 

ANPR 54. Calvin G. White, KFC 

Franchisee (‘‘White’’) 

ANPR 55. Nick Iuliano, KFC 

Franchisee (‘‘N. Iuliano’’) 

ANPR 56. Dolores Iuliano, KFC 

Franchisee (‘‘D. Iuliano’’) 

ANPR 57. Ralph A Harman, KFC 

Franchisee (‘‘R. Harman’’) 

ANPR 58. Saundra S. Harman, KFC 

Franchisee (‘‘S. Harman’’) 

ANPR 59. Richard Braden, KFC 

Franchisee (‘‘Barden’’) 

ANPR 60. K.F. C. of Pollys, KFC 

Franchisee (‘‘Pollys’’) 


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ANPR 61. Joan Fiore, McDonalds 

Franchisee (‘‘Fiore’’) 

ANPR 62. Susan P. Kezios, American 

Franchisee Association (‘‘AFA’’) 

ANPR 63. Kenneth R. Costello, Loeb 

& Loeb (‘‘Costello’’) 

ANPR 64. AFA (see supra, ANPR 62) 

ANPR 65. Susan Rich, KFC 

Franchisee (‘‘Rich’’) 

ANPR 66. Fiore (see supra, ANPR 61) 

ANPR 67. Mike Johnson, Subway 

Franchisee (‘‘Johnson’’) 

ANPR 68. Laurie Gaither, GNC 

Franchisee (‘‘L. Gaither’’) 

ANPR 69. Greg Gaither, GNC 

Franchisee (‘‘G. Gaither’’) 

ANPR 70. Greg Suslovic, Subway 

Franchisee (‘‘Suslovic’’) 

ANPR 71. Richard Colenda, GNC 

Franchisee (‘‘Colenda’’) 

ANPR 72. Bob Gagliati, GNC 

Franchisee (‘‘Gagliati’’) 

ANPR 73. Pat Orzano, 7-Eleven 

Franchisee (‘‘Orzano’’) 

ANPR 74. Linda Gaither, GNC 

Franchisee (‘‘Li Gaither’’) 

ANPR 75. Kevin 100 (‘‘Kevin 100’’) 

ANPR 76. Robert James, Florida 

Department of Agriculture & Consumer 

Services (‘‘James’’) 

ANPR 77. Robert A. Tingler, Office of 

the Attorney General, State of Illinois 

(‘‘IL AG’’) 

ANPR 78. John M. Tifford, Rudnick, 

Wolfe, Epstien & Zeidman (‘‘Tifford’’) 

ANPR 79. Robert L. Purvin, Jr. 

(‘‘Purvin’’) 

ANPR 80. Teresa Heron, My Favorite 

Muffin Franchisee (‘‘Heron’’) 

ANPR 81. Purvin (see supra, ANPR 

79) 

ANPR 82. Matthew R. Shay, 

International Franchise Association 

(‘‘IFA’’) 

ANPR 83. Duvall (see supra, ANPR 

19) 

ANPR 84. Lance Winslow, Car Wash 

Guys (‘‘Winslow’’) 

ANPR 85. Winslow (see supra, ANPR 

84) 

ANPR 86. Rick Gue, The Pampered 

Chef, (‘‘Pampered Chef’’) 

ANPR 87. John M. Tifford, Coverall 

North America (‘‘Coverall’’) 

ANPR 88. John M. Tifford, 

Merchandise Mart Properties 

(‘‘Merchanise Mart’’) 

ANPR 89. Dirk C. Bloemendaal, 

Amway Corproation (‘‘Amway’’) 

ANPR 90. Winslow (see supra, ANPR 

84) 

ANPR 91. Winslow (see supra, ANPR 

84) 

ANPR 92. Winslow (see supra, ANPR 

84) 

ANPR 93. Winslow (see supra, ANPR 

84) 

ANPR 94. Andrew A. Caffey 

(‘‘Caffey’’) 

ANPR 95. Entrepreneur Media, Inc. 

(‘‘Entrepreneur’’) 

ANPR 96. Brown (see supra, ANPR 4) 

ANPR 97. Raymond & Robert Buckley, 

Scorecard Plus Franchisees (‘‘Buckley’’) 

ANPR 98. Mark A. Kirsch, Rudnick, 

Wolfe, Epstien & Zeidman (‘‘Kirsch’’) 

ANPR 99. Dale E. Cantone, Maryland 

Division of Securities, Office of the 

Attorney General (‘‘Md Securities’’) 

ANPR 100. Roger C. Haines, 

Scorecard Plus Franchisee (‘‘Haines’’) 

ANPR 101. David E. Myklebust, 

Scorecard Plus Franchisee 

(‘‘Myklebust’’) 

ANPR 102. Robert Larson (‘‘Larson’’) 

ANPR 103. Brown (see supra, ANPR 

4) 

ANPR 104. Mark B. Forseth, CII 

Enterprises (‘‘CII’’) 

ANPR 105. Bertrand T. Unger, PR One 

(‘‘Pr One’’) 

ANPR 106. Dennis E. Wieczorek, 

Rudnick & Wolfe (‘‘Wieczorek’’) 

ANPR 107. Gerald A. Marks, Marks & 

Krantz (‘‘Marks’’) 

ANPR 108. Brown (see supra, ANPR 

4) 

ANPR 109. Everett W. Knell (‘‘Knell’’) 

ANPR 110. Anne Crews, Mary Kay, 

Inc. (‘‘Mary Kay’’) 

ANPR 111. Carl Letts, Domino’s Pizza 

Franchisee (‘‘Letts’’) 

ANPR 112. Kat Tidd (‘‘Tidd’’) 

ANPR 113. Ted Poggi, National 

Coalition of Associations of 7-Eleven 

Franchisees (‘‘NCA 7-Eleven 

Franchisees) 

ANPR 114. Gary R. Duvall & Nadine 

C. Mandel (‘‘Duvall & Mandel’’) 

ANPR 115. Sherry Christopher, 

Christopher Consulting, Inc. 

(‘‘Christopher’’) 

ANPR 116. Carl C. Jeffers, Intel 

Marketing Systems, Inc. (‘‘Jeffers’’) 

ANPR 117. Deborah Bortner, State of 

Washington, Department of Financial 

Institutions, Securities Divisions (‘‘WA 

Securities’’) 

ANPR 118. Carmen D. Caruso, 

Noonan & Caruso (‘‘Caruso’’) 

ANPR 119. Howard Bundy, Bundy & 

Morrill, Inc.(‘‘Bundy’’) 

ANPR 120. Franchise & Business 

Opportunity Committee, North 

American Securities Administrations 

Association (‘‘NASAA’’) 

ANPR 121. Tifford (see supra, ANPR 

78) 

ANPR 122. Wieczorek (see supra, 

ANPR 106) 

ANPR 123. John & Debbie Lopez, 

Baskin & Robbins Franchisee (‘‘Lopez’’) 

ANPR 124. Susan R. Essex & Ted 

Storey, California Bar, Business Law 

Section (‘‘CA BLS’’) 

ANPR 125. Peter C. Lagarias, The 

Legal Solutions Group (‘‘Lagarias’’) 

ANPR 126. James G. Merret, Jr. 

(‘‘Merret’’) 

ANPR 127. W. Michael Garner, Dady 

& Garner (‘‘Garner’’) 

ANPR 128. Jeff Brickner (‘‘Brickner’’) 

ANPR 129. Bernard A. Brynda, Baskin 

& Robbins Franchisee (‘‘Brynda’’) 

ANPR 130. Caron B. Slimak, Jacadi 

USA Franchisee (‘‘Slimak’’) 

ANPR 131. Dr. Ralph Geiderman, 

Pearl Vision Franchisee (‘‘Geiderman’’) 

ANPR 132. Felipe Frydmann, 

Minister of Economic & Trade Affairs, 

Embassy of the Argentine Republic 

(‘‘Argentine Embassy’’) 

ANPR 133. Andrew C. Selden, Briggs 

& Morgan (‘‘Selden’’) 

ANPR 134. Robert Zarco, Zarco & 

Pardo (‘‘Zarco & Pardo’’) 

ANPR 135. Jason H. Griffing, Baskin 

& Robbins Franchisee (‘‘Griffing’’) 

ANPR 136. Erik H. Karp, Witmer, 

Karp, Warner & Thuotte (‘‘Karp’’) 

ANPR 137. William D. Brandt, Ferder, 

Brandt, Casebeer, Copper, Hoyt & 

French (‘‘Brandt’’) 

ANPR 138. Robert S. Keating, Baskin 

& Robbins Franchisee (‘‘Keating’’) 

ANPR 139. A. Patel, Baskin & Robbins 

Franchisee (‘‘A. Patel’’) 

ANPR 140. Joel R. Buckberg, Cendant 

Corporation (‘‘Cendant’’) 

ANPR 141. Duvall (see supra, ANPR 

19) 

ANPR 142. NCL (see supra, ANPR 35) 

ANPR 143. AFA (see supra, ANPR 62) 

ANPR 144. Catalano (see supra, ANPR 

27) 

ANPR 145. DSA (see supra, ANPR 34) 

ANPR 146. Keating (see supra, ANPR 

139) 

ANPR 147. Kathie & David Leap, 

Baskin & Robbins Franchisee (‘‘Leap’’) 

ANPR 148. Ted D. Kuhn, Baskin & 

Robbins Franchisee (‘‘Kuhn’’) 

ANPR 149. Mike S. Lee, Baskin & 

Robbins Franchisee (‘‘Lee’’) 

ANPR 150. R. Deilal, Baskin & 

Robbins Franchisee (‘‘Deilal’’) 

ANPR 151. Frank J. Demotto, Baskin 

& Robbins Franchisee (‘‘Demotto’’) 

ANPR 152. Thomas Hung, Baskin & 

Robbins Franchisee (‘‘Hung’’) 

ANPR 153. Jean Jones, Baskin & 

Robbins Franchisee (‘‘Jones’’) 

ANPR 154. Hang, Baskin & Robbins 

Franchisee (‘‘Hang’’) 

ANPR 155. Dilip Patel, Baskin & 

Robbins Franchisee (‘‘D. Patel’’) 

ANPR 156. Terry L. Glase, Baskin & 

Robbins Franchisee (‘‘Glase’’) 

ANPR 157. R.E. Williamson, Baskin & 

Robbins Franchisee (‘‘Williamson’’) 

ANPR 158. R. M Valum, Baskin & 

Robbins Franchisee (‘‘Valum’’) 

ANPR 159. Rajendra Patel, Baskin & 

Robbins Franchisee (‘‘R. Patel’’) 

ANPR 160. Jerry & Debbie Robinett, 

Baskin & Robbins Franchisee 

(‘‘Robinett’’) 

ANPR 161. Ronald J. Rudolf, Baskin & 

Robbins Franchisee (‘‘Rudolf’’) 


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ANPR 162. Kamlesh Patel, Baskin & 

Robbins Franchisee (‘‘K. Patel’’) 

ANPR 163. Nicholas & Marilyn 

Apostal, Baskin & Robbins Franchisee 

(‘‘Apostal’’) 

ANPR 164. Patrick Sitin, Baskin & 

Robbins Franchisee (‘‘Sitin’’) 

ANPR 165. Paul & Lisa SeLander, 

Baskin & Robbins Franchisee 

(‘‘SeLander’’) 

ANPR 166. S. Bhilnym, Baskin & 

Robbins Franchisee (‘‘Bhilnym’’) 

ANPR 167. Mike & Kathy Denino, 

Baskin & Robbins Franchisee 

(‘‘Denino’’) 

ANPR Workshop Participants 

Michael Bennett, Longaberger 

Company (‘‘Bennett’’) 

Kennedy Brooks (‘‘Brooks’’) 

John Brown, Amway Corporation (‘‘J. 

Brown’’) 

Howard Bundy, Bundy & Morrill 

(‘‘Bundy’’) 

Delia Burke, Jenkins & Gilchrist 

(‘‘Burke’’) 

Andrew Caffey, Esq. (‘‘Caffey’’) 

Dale Catone, Office of the Maryland 

Attorney General (‘‘Cantone’’) 

Emilio Casillas, Washington State 

Securities Division (‘‘Casillas’’) 

Richard Catalano, Esq. (‘‘Catalano’’) 

Sherry Christopher, Esq. 

(‘‘Christopher’’) 

Michael W. Chiodo, Domino’s 

Franchisee (‘‘Chiodo’’) 

Martin Cordell, Washington State 

Securities Division (‘‘Cordell’’) 

Joseph Cristiano, Carvel Franchisee 

(‘‘Cristiano’’) 

John D’Alessandro, Quaker State Lube 

Distributor (‘‘D’Alessandro’’) 

Mark Deutsch, former franchisee 

(‘‘Deutsch’’) 

Steve Doe, Franchisee (‘‘Doe’’) 

Gary Duvall, Graham & Dunn 

(‘‘Duvall’’) 

Eric Ellman, Direct Selling 

Association (‘‘Ellman’’) 

Debbie Fetzer, Snap-On Franchisee 

(‘‘Fetzer’’) 

David Finigan, Illinois Securities 

Department (‘‘Finigan’’) 

Mark B. Forseth, Jenkens & Gilchrist 

(‘‘Forseth’’) 

Richard W. Galloway, Domino’s Pizza 

Franchisee (‘‘Galloway’’) 

Elizabeth Garceau, Pro Design (‘‘E. 

Garceau’’) 

Michael Garceau, Pro Design (‘‘M. 

Garceau’’) 

Roger Gerdes, Microsoft Corp. 

(‘‘Gerdes’’) 

Rick Geu, The Pampered Chef (‘‘Geu’’) 

Judy Gitterman, Jenkens & Gilchrist 

(‘‘Gitterman’’) 

Susan Grant, National Consumers 

League (‘‘Grant’’) 

Bruce Hoar, Hanes Franchisee (‘‘B. 

Hoar’’) 

Thomas Hoar, Hanes Franchisee (‘‘T. 

Hoar’’) 

Nelson Hockert-Lotz, Domino’s Pizza 

Franchisee (‘‘Hockert-Lotz’’) 

Tee Houston-Aldridge, World 

Inspection Network (‘‘HoustonAldridge’’) 

Robert James, Florida Dept. of 

Agriculture & Consumer Services 

(‘‘James’’) 

Carl Jeffers, Intel Marketing Systems 

(‘‘Jeffers’’) 

Erik Karp, Witmer, Karp, Warner & 

Thuotte (‘‘Karp’’) 

David Kaufmann, Kaufmann, Feiner, 

Yamin, Gildin & Robbins (‘‘Kaufmann’’) 

Harold Kestenbaum, Hollenbrug, 

Bleven, Solomon, Ross (‘‘Kestenbaum’’) 

Susan Kezios, American Franchisee 

Association (‘‘Kezios’’) 

Mark Kirsch, Rudnick Wolfe, Epstien 

& Zeidman (‘‘Kirsch’’) 

Charles Lay, Brite Site Franchisee 

(‘‘Lay’’) 

Mike Ludlum, Entreprenuer Media 

(‘‘Ludlum’’) 

Marge Lundquist, Franchisee 

(‘‘Lundquist’’) 

Gerald Marks, Marks & Krantz 

(‘‘Marks’’) 

Philip McKee, National Consumers 

League (‘‘McKee’’) 

Dianne Mousley, Mike Schmidt’s 

Phil. Hoagies Franchisee (‘‘Mousley’’) 

Joseph Punturo, Office of the New 

York Attorney General (‘‘Punturo’’) 

Mehran Rafizadeh, GNC Franchisee 

(‘‘Rafizadeh’’) 

David R. Raymond, Esq. (‘‘Raymond’’) 

Iris Sandow, Blimpie Franchisee 

(‘‘Sandow’’) 

Philip Sanson, Illinois Securities 

Department (‘‘Sanson’’) 

Matthew Shay, International 

Franchise Association (‘‘IFA’’) 

David Silverman, Sportworld Int’l 

(‘‘Silverman’’) 

Neil Simon, Hogan & Hartson 

(‘‘Simon’’) 

Caron Slimak (‘‘Slimak’’), Jacadi USA 

Franchisee 

J. H. Snow, Jenkens & Gilcrist 

(‘‘Snow’’) 

Adam Sokol, Illinois Attorney 

General’s Office (‘‘Sokol’’) 

Kat Tidd, Esq. (‘‘Tidd’’) 

John Tifford, Rudnick Wolfe, Epstien 

& Zeidman, (‘‘Tifford’’) 

Robert Tingler, Franchise Bureau 

Chief. Illinois Attorney General’s Office 

(‘‘Tingler’’) 

Bertrand Unger, PR One (‘‘Unger’’) 

Dr. Spencer Vidulich, Pearle Vision 

Franchisee (‘‘Vidulich’’) 

Dick Way, PR One (‘‘Way’’) 

Dennis Wieczorek, Rudnick & Wolfe 

(‘‘Wieczorek’’) 

Erik Wulff, Hogan & Hartson 

(‘‘Wulff’’) 

Barry Zaslav, Coverall North America 

(‘‘Zaslav’’) 

Franchise Rule Notice of Proposed 

Rulemaking Commenters 

NPR 1. Patrick E. Meyers, The 

Quizno’s Corporation (‘‘Quizno’s’’) 

NPR 2. Steven A. Rosen, Frannet 

(‘‘Frannet’’) 

NPR 3. Robert Tingler, Franchise 

Bureau Chief, Illinois Attorney General 

(‘‘IL AG’’) 

NPR 4. Dennis E. Wieczorek, Piper 

Marbury Rudnick & Wolfe (‘‘PMR&W’’) 

NPR 5. Jack Schuessler, Wendy’s Intl, 

Inc. (‘‘Wendy’s’’) 

NPR 6. Curtis S. Gimson, Triarc 

Restaurant Group (‘‘Triarc’’) 

NPR 7. Eugene Stachowiak, 

McDonald’s (‘‘McDonalds’’) 

NPR 8. David E. Holmes (‘‘Holmes’’) 

NPR 9. Erik B. Wulff, John F. Dienelt, 

Hogan & Hartson (‘‘H&H’’) 

NPR 10. Ronnie R. Volkening, 7- 

Eleven, Inc. (‘‘7-Eleven’’) 

NPR 11. John R.F. Baer, Robert T. 

Joseph, Alan H. Silberman, 

Sonnenschein Nath & Rosenthal 

(‘‘Baer’’) 

NPR 12. Morton A. Aronson, Neil A. 

Simon, David J. Kaufmann, National 

Franchise Council (‘‘NFC’’) 

NPR 13. Alaska Turner (‘‘Turner’’) 

NPR 14. Susan P. Kezios, American 

Franchisee Association (‘‘AFA’’) 

NPR 15. Warren L. Lewis, Lewis & 

Kolton (‘‘Lewis’’) 

NPR 16. John W. Regnery, Snap-On 

Inc. (‘‘Snap-On’’) 

NPR 17. Dale E. Cantone, Stephen W. 

Maxey, Joseph J. Punturo, NASAA 

Franchise and Business Opportunity 

Project Group (‘‘NASAA’’) 

NPR 18. Howard E. Bundy, Bundy & 

Morrill, Inc. (‘‘Bundy’’) 

NPR 19. Laurie Taylor (‘‘Taylor’’) 

NPR 20. Jonathan Hubbell, Prudential 

Real Estate Affiliates (‘‘PREA’’) 

NPR 21. David Gurnick, Arter & 

Hadden (‘‘Gurnick’’) 

NPR 22. Don J. DeBolt, Matthew R. 

Shay, International Franchise 

Association (‘‘IFA’’) 

NPR 23. L. Seth Stadfeld, Weston, 

Patrick, Willard & Redding (‘‘Stadfeld’’) 

NPR 24. Eric H. Karp, Witmer, Karp, 

Warner & Thuotte (‘‘Karp’’) 

NPR 25. Janet L. McDavid, American 

Bar Association, Section of Antitrust 

Law (‘‘ABA AT’’) 

NPR 26. Randall Loeb, NaturaLawn of 

America (‘‘NaturaLawn’’) 

NPR 27. Tony Rolland, National 

Franchisee Association (‘‘NFA’’) 

NPR 28. Andrew P. Loewinger, 

Buchannan Ingersoll (‘‘BI’’) 

NPR 29. Jeffrey E. Kolton, Frandata 

(‘‘Frandata’’) 

NPR 30. AFC Enterprises (‘‘AFC’’) 


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NPR 31. Howard Morrill, Bundy & 

Morrill, Inc. (‘‘Morrill’’) 

NPR 32. Carl E. Zwisler, Jenkens & 

Gilchrist (‘‘J&G’’) 

NPR 33. Diane T. Nauer, TruServ 

Corporation (‘‘TruServ’’) 

NPR 34. Brian H. Cole, Tricon 

(‘‘Tricon’’) 

NPR 35. Steven Goldman, Mark 

Forseth, Marriott Corp. (‘‘Marriott’’) 

NPR Rebuttal 36. Gurnick (see supra, 

FR-NPR 21) 

NPR Rebuttal 37. Kezios (see supra, 

FR-NPR 14) 

NPR Rebuttal 38. IL AG (see supra, 

FR-NPR 3) 

NPR Rebuttal 39. Bundy (see supra, 

FR-NPR 18) 

NPR Rebuttal 40. John W. Fitzgerald, 

Gray, Plant, Mooty, Mooty & Bennett 

(‘‘GPM’’) 

Staff Report 

Affiliated Foods Midwest (‘‘Affiliated 

Foods’’) 

American Association of Franchisees 

and Dealers (‘‘AAFD’’) 

American Franchisee Association 

(‘‘AFA’’) 

Briggs & Morgan (‘‘Selden’’) 

Bundy & Morrill, Inc. (‘‘Bundy’’) 

Car Wash Guys (‘‘Winslow’’) 

Cendant Corp. (‘‘Cendant’’) 

CHS, Inc. (‘‘CHS’’) 

Gary Duvall (‘‘Duvall’’) 

Frost Brown Todd (‘‘Graber’’) 

David Gurnick (‘‘Gurnick’’) 

Gust Rosenfeld (‘‘Gust Rosenfeld’’) 

Illinois Attorney General (‘‘IL AG’’) 

Independent Distributors Cooperative 

(‘‘IDC’’) 

International Franchise Association 

(‘‘IFA’’) 

Jeffrey S. Haff (‘‘Haff’’) 

Jenkens & Gilchrist (‘‘J&G’’) 

Johnson, Hearn, Vinegar, Gee & 

Mercer (‘‘Gee’’) 

Kaufmann, Feiner, Yamin, Gildin & 

Robbins (‘‘Kaufmann’’) 

A. Koutsoulis (‘‘Koutsoulis’’) 

Law Office of Marc N. Blumenthal 

(‘‘Blumenthal’’) 

Law Office of Peter A. Singler 

(‘‘Singler’’) 

Legal Solutions Group (‘‘Lagarias’’) 

Marks & Associates (‘‘Marks’’) 

Michael H. Seid & Assoc. (‘‘Seid’’) 

National Automobile Dealers Assoc. 

(‘‘NADA’’) 

National Cooperative Business Assoc. 

(‘‘NCBA’’) 

National Council of Farmer 

Cooperatives (‘‘NCFC’’) 

National Grocers Assoc. (‘‘NGA’’) 

North American Securities 

Administrators Association (‘‘NASAA’’) 

Pillsbury Winthrop (‘‘Chevron’’) 

Pillsbury Winthrop (‘‘Pillsbury 

Winthrop’’) 

Piper Rudnick (‘‘Piper Rudnick’’) 

Prudential Real Estate Affiliates 

(‘‘PREA’’) 

Richard Pu (‘‘Pu’’) 

Riezman Berger (‘‘Riezman Berger’’) 

Spandorf, Silberman, Joseph, and 

Baer (‘‘Spandorf’’) 

Starwood (‘‘Starwood’’) 

State Bar of California—Franchise 

Law Committee (‘‘CA Bar’’) 

State of California Department of 

Corporations (‘‘CA Dep’t of Corps’’) 

Paul Steinberg (‘‘Steinberg’’) 

Washington State Department of 

Financial Institutions (‘‘WA Securities’’) 

Wiggin & Dana (‘‘Wiggin & Dana’’) 

Witmer, Karp & Warner (‘‘Karp’’) 

[FR Doc. E7–5829 Filed 3–29–07; 8:45 am] 

BILLING CODE 6750–01–S 


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