FRANCHISE SALES AND DISCLOSURE LAW

COMPLIANCE ISSUESDAVID J. KAUFMANN

Kaufmann, Feiner, Yamin, Gildin & Robbins LLPNew York, New York

JOEL R. BUCKBERGBaker Donelson Bearman, Caldwell & Berkowitz, P.C.

Nashville, TennesseeAdministrator, IFA Compliance Training

AN OVERVIEW OF THE LAW OF FRANCHISINGTHEY DIDN’T SEE IT COMING: THE GENESIS OF FRANCHISE

REGULATION

AN OVERVIEW OF THE LAW OF FRANCHISING

INTRODUCING THE THREE BODIES OF FRANCHISE LAW:

• FEDERAL AND STATE REGISTRATION / DISCLOSURE STATUTES

• STATE ‘RELATIONSHIP’ LAWS• FEDERAL AND STATE BUSINESS

OPPORTUNITY LAWS

FEDERAL AND STATE FRANCHISE REGISTRATION/DISCLOSURE LAWS

• FTC FRANCHISE RULE (NO REGISTRATION REQUIRED – DISCLOSURE ONLY)

• 3 State Approaches:– Merit Review– Annual Notice Filing– Single Notice Filing

FEDERAL AND STATE FRANCHISE REGISTRATION/DISCLOSURE LAWS

• CALIFORNIA• HAWAII• ILLINOIS• INDIANA• MARYLAND• MICHIGAN• MINNESOTA• NEW YORK

• NORTH DAKOTA• OREGON• RHODE ISLAND• SOUTH DAKOTA• VIRGINIA• WASHINGTON• WISCONSIN

FEDERAL AND STATE FRANCHISE REGISTRATION/DISCLOSURE LAWS

Annual Notice Filings:

• Florida• Indiana• Michigan• Utah• Wisconsin

Single Notice Filing:

• Connecticut• Kentucky• Nebraska• Texas

STATE FRANCHISE RELATIONSHIP LAWS

• ARKANSAS • MINNESOTA• CALIFORNIA • MISSISSIPPI• CONNECTICUT • MISSOURI• DELAWARE • NEBRASKA• HAWAII • NEW JERSEY• ILLINOIS • SOUTH DAKOTA• INDIANA • VIRGINIA• IOWA • WASHINGTON• MICHIGAN • WISCONSIN

BUSINESS OPPORTUNITY LAWS

• ALABAMA• ALASKA• CALIFORNIA• CONNECTICUT• FLORIDA• GEORGIA• ILLINOIS• INDIANA• IOWA• KENTUCKY

• LOUISIANA • MAINE • MARYLAND • MICHIGAN • MINNESOTA • NEBRASKA• NEW

HAMPSHIRE • N. CAROLINA• OHIO

• OKLAHOMA • S. CAROLINA • S. DAKOTA • TEXAS • UTAH• VIRGINIA • WASHINGTON • FTC

FRANCHISE RULE

THE FTC FRANCHISE RULE

• WHAT IS COVERED / WHAT IS REQUIRED• LIMITED PREEMPTION OVER STATE

FRANCHISE LAWS

THE FTC FRANCHISE RULE

• THE DISCLOSURE “TRIGGER”• UPDATING DISCLOSURES• PROHIBITED PRACTICES /

PENALTIES FOR NONCOMPLIANCE

THE FTC FRANCHISE RULE

• NO PRIVATE RIGHT OF ACTION (BEWARE STATE ‘LITTLE FTC ACTS’ HOWEVER!)

• REVISIONS TO THE FTC FRANCHISE RULE ANNOUNCED JANUARY 22, 2007; PHASED IMPLEMENTATION 2007-2008

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

• SCOPE OF COVERAGE – WHAT IS A FRANCHISE? (BEWARE THE INADVERTANT FRANCHISOR SCENARIO)

STATE FRANCHISE REGISTRATION /

DISCLOSURE LAWS• DISCLOSURE TRIGGER – THE “OFFER”• JURISDICTIONAL COVERAGE – WHICH

STATE LAWS MAY APPLY?( WHERE OFFERED / WHERE ACCEPTED / FRANCHISEE’S RESIDENCE / WHERE UNIT WILL BE LOCATED )

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

THE UNIFORM FRANCHISE OFFERING CIRCULAR (“UFOC”) – WHAT IT IS;

HOW IT CAME TO BE; WHAT IT MUST CONTAIN.

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

• HOW DO YOU GET REGISTERED?

• A REVIEW OF THE REGISTRATION PROCESS

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

REGISTRATION OF SALESPERSONS AND FRANCHISE BROKERS (AND

THE DIFFERENCE BETWEEN THEM)

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

FILING REQUIREMENTS FOR FRANCHISE ADVERTISING

(AND JUST HOW IS THE WORD “ADVERTISING” DEFINED IN THE

FRANCHISE REGULATORY WORLD?)

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

EXEMPTIONS FROM STATE FRANCHISE REGISTRATION /

DISCLOSURE REQUIREMENTS

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

FRANCHISOR CAPITALIZATION REQUIREMENTS

STATE FRANCHISE REGISTRATION/DISCLOSURE

LAWS

UFOC AMENDMENTS / RENEWALS OF FRANCHISE REGISTRATIONS

STATE FRANCHISE REGISTRATION/DISCLOSURE LAWS

Penalties For Noncompliance• What is prohibited?• What powers do state franchise

administrators possess to investigate/order/litigate/prosecute?

• What civil and criminal penalties may be assessed – and against whom?

• What rights do franchisees have to go to court?

FEDERAL AND STATE FRANCHISE

REGISTRATION/DISCLOSURE LAWS

PERMITTED AND PROHIBITED NEGOTIATIONS WITH

PROSPECTIVE FRANCHISEES

FEDERAL AND STATE FRANCHISE

REGISTRATION/DISCLOSURE LAWS

EARNINGS CLAIMS / FINANCIAL PERFORMANCE REPRESENTATIONS

• What are they?• When can / can’t I make them?• How can I sell a franchise without them?• Beware the inadvertent earnings claim!

STATE FRANCHISE RELATIONSHIP LAWS

• TERMINATION / NONRENEWAL• TRANSFER AND ASSIGNMENT• ENCROACHMENT / GOOD FAITH• DISCLOSURES TO TRANSFEREES• PENALTIES FOR NONCOMPLIANCE

BUSINESS OPPORTUNITY LAWS:

AN OVERVIEW

THE FRANCHISE LAW COMPLIANCE PROGRAM

WHAT IT IS – AND WHY YOUR COMPANY NEEDS ONE!

WHY YOU SHOULD CARE ABOUT THE FEDERAL SENTENCING

GUIDELINES

FRANCHISE SALES AND DISCLOSURE LAW

COMPLIANCE ISSUES

•CONCLUSION•QUESTIONS AND ANSWERS