FTC Franchise Rule

Guide to FTC Franchise Rule (Prior to July 1, 2007/2008)

I. Rule Overview

A. Basic Requirement: Franchisors must furnish potential franchisees with written disclosures providing important information about the franchisor, the franchised business and the franchise relationship, and give them at least ten business days to review it before investing.

B. Disclosure Option: Franchisors may make the required disclosures by following either the Rule's disclosure format or the Uniform Franchise Offering Circular Guidelines prepared by state franchise law officials.

C. Coverage: The Rule primarily covers business-format franchises, product franchises, and vending machine or display rack business opportunity ventures.

D. No Filing: The Rule requires disclosure only. Unlike state disclosure laws, no registration, filing, review or approval of any disclosures, advertising or agreements by the FTC is required.

E. Remedies: The Rule is a trade regulation rule with the full force and effect of federal law. The courts have held it may only be enforced by the FTC, not private parties. The FTC may seek injunctions, civil penalties and consumer redress for violations.

F. Purpose: The Rule is designed to enable potential franchisees to protect themselves before investing by providing them with information essential to an assessment of the potential risks and benefits, to meaningful comparisons with other investments, and to further investigation of the franchise opportunity.

G. Effective Date: The Rule, formally titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," took effect on October 21, 1979, and appears at 16 C.F.R. Part 436.

II. Rule Requirements

A. General: The Rule imposes six different requirements in connection with the "advertising, offering, licensing, contracting, sale or other promotion" of a franchise in or affecting commerce:

1. Basic Disclosures: The Rule requires franchisors to give potential investors a basic disclosure document at the earlier of the first face-to-face meeting or ten business days before any money is paid or an agreement is signed in connection with the investment (Part 436.1(a)).2. Earnings Claims: If a franchisor makes earnings claims, whether historical or forecasted, they must have a reasonable basis, and prescribed substantiating disclosures must be given to a potential investor in writing at the same time as the basic disclosures (Parts 436.1(b)-(d)).3. Advertised Claims: The Rule affects only ads that include an earnings claim. Such ads must disclose the number and percentage of existing franchisees who have achieved the claimed results, along with cautionary language. Their use triggers required compliance with the Rule's earnings claim disclosure requirements (Part 436.1(e)).4. Franchise Agreements: The franchisor must give investors a copy of its standard-form franchise and related agreements at the same time as the basic disclosures, and final copies intended to be executed at least 5 business days before signing (Part 436.1(g)).5. Refunds: The Rule requires franchisors to make refunds of deposits and initial payments to potential investors, subject to any conditions on refundability stated in the disclosure document (Part 436.1(h)).6. Contradictory Claims: While franchisors are free to provide investors with any promotional or other materials they wish, no written or oral claims may contradict information provided in the required disclosure document (Part 436.1(f)).

B. Liability: Failure to comply with any of the six requirements is a violation of the Franchise Rule. "Franchisors" and "franchise brokers" are jointly and severally liable for Rule violations.

1. A "franchisor" is defined as any person who sells a "franchise" covered by the Rule (Part 436.2(c)).2. A "franchise broker" is defined as any person who "sells, offers for sale, or arranges for the sale" of a covered franchise (Part 436.2(j)), and includes not only independent sales agents, but also subfranchisors that grant subfranchises (44 FR 49963)

III. Business Relationships Covered

A. Alternate Definitions: The Rule employs parallel coverage definitions of the term "franchise" to reach two types of continuing commercial relationships: traditional franchises and business opportunities.

B. "Traditional Franchises": There are three definitional prerequisites to coverage of a business-format or product franchise (Parts 436.2(a)(1)(i) and (2)):

1. Trademark: The franchisor offers the right to distribute goods or services that bear the franchisor's trademark, service mark, trade name, advertising or other commercial symbol. 2. Significant Control or Assistance: The franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation. 3. Required Payment: The franchisee is required to make any payment to the franchisor or an affiliate, or a commitment to make a payment, as a condition of obtaining the franchise or commencing operations. (NOTE: There is an exemption from coverage for required payments of less than $500 within six months of the commencement of the franchise (Part 436.2(a)(3)(iii)).

C. Business Opportunities: There are also three basic prerequisites to the Rule's coverage of a business opportunity venture (Parts 436.2(a)(1)(ii) and (2)):

  1. No Trademark: The seller simply offers the right to sell goods or services supplied by the seller, its affiliate, or a supplier with which the seller requires the franchisee to do business.
  2. Location Assistance: The seller offers to secure retail outlets or accounts for the goods or services to be sold, to secure locations or sites for vending machines or rack displays, or to provide the services of someone who can do so.
  3. Required Payment: The same as for franchises.

D. Coverage Exemptions/Exclusions: The Rule also exempts or excludes some relationships that would otherwise meet the coverage prerequisites (Parts 436.2(a)(3) and (4)):

1. Minimum investment: This exemption applies if all payments to the franchisor or an affiliate until six months after the franchise commences operation are $500 or less (Part 436.2(a)(iii)). 2. Fractional Franchises: Relationships adding a new product or service to an established distributor's existing products or services, are exempt if: (i) the franchisee or any of its current directors or executive officers has been in the same type of business for at least two years, and (ii) both parties anticipated, or should have, that sales from the franchise would represent no more than 20% of the franchisees sales in dollar volume (Parts 436.2(a)(3)(i) and 436.2(h)). 3. Single Trademark Licenses: The Rule language excludes a "single license to license a [mark]" where it "is the only one of its general nature and type to be granted by the licensor with respect to that [mark]" (Part 436.2(a)(4)(iv)). The Rule's Statement of Basis and Purpose indicates it also applies to "collateral" licenses [e.g., logo on sweatshirt, mug] and licenses granted to settle trademark infringement litigation (43 FR 59707-08). 4. Employment and Partnership Relationships: The Rule excludes pure employer-employee and general partnership arrangements. Limited partnerships do not qualify for the exemption (Part 436.2(a)(4)(i)). 5. Oral Agreements: This exemption, which is narrowly construed, applies only if no material term of the relationship is in writing (Part 436.2(a)(3)(iv)). 6. Cooperative Associations: Only agricultural co-ops and retailer-owned cooperatives "operated 'by and for' retailers on a cooperative basis," and in which control and ownership is substantially equal are excluded from coverage (Part 436.2(a)(4)(ii)). 7. Certification/Testing Services: Organizations that authorize use of a certification mark to any business selling products or services meeting their standards are excluded from coverage (e.g., Underwriters Laboratories) (Part 436.2(a)(4)(iii)). 8. Leased Departments: Relationships in which the franchisee simply leases space in the premises of another retailer and is not required or advised to buy the goods or services it sells from the retailer or an affiliate of the retailer are exempt (Part 436.2(a)(3)(ii)).

E. Statutory Exemptions: Section 18(g) of the FTC Act authorizes "any person" to petition the Commission for an exemption from a rule where coverage is "not necessary to prevent the acts or practices" that the rule prohibits (15 U.S.C. § 57a(g)). Franchise Rule exemptions have been granted for service station franchises (45 FR 51765), many automobile dealership franchises (45 FR 51763; 49 FR 13677; 52 FR 6612; 54 FR 1446), and wholesaler-sponsored voluntary chains in the grocery industry (48 FR 10040).

IV. Disclosure Options

A. Alternatives: Franchisors have a choice of formats for making the disclosures required by the Rule. They may use either the format provided by the Rule or the Uniform Franchise Offering Circular ("UFOC") format prescribed by the North American Securities Administrators' Association ("NASAA").

B. FTC Format: Franchisors may comply by following the Rule's requirements for preparing a basic disclosure document (Parts 436.1(a)(1)-(24)), and if they make earnings claims, for a separate earnings claim disclosure document (Parts 436.1(b)(3), (c)(3), and (d)). The Rule's Final Interpretive Guides provide detailed instructions and sample disclosures (44 FR 49966).

C. UFOC Format: The Uniform Franchise Offering Circular format may also be used for compliance in any state:

1. Guidelines: Effective January 1, 1996, franchisors using the UFOC disclosure format must comply with the UFOC Guidelines, as amended by NASAA on April 25, 1993. (44 FR 49970; 60 FR 51895).2. Cover Page: The FTC cover page must be furnished to each potential franchisee, either in lieu of the UFOC cover page in non-registration states or along with the UFOC (Part 436.1(a)(21); 44 FR 49970-71).3. Adaptation: If the UFOC is registered or used in one state, but will be used in another without a franchise registration law, answers to state-specific questions must be changed to refer to the law of the state in which the UFOC is used.4. Updating: If the UFOC is registered in a state, it must be updated as required by the state's franchise law. If the same UFOC is also adapted for use in a non-registration state, updating must occur as required by the law of the state where the UFOC is registered. If the UFOC is not registered in a state with a franchise registration law, it must be revised annually and updated quarterly as required by the Rule.5. Presumption: The Commission will presume the sufficiency, adequacy and accuracy of a UFOC that is registered by a state, when it is used in that state.

D. UFOC vs. Rule: Many franchisors have adopted the UFOC disclosure format because roughly half of the 13 states with franchise registration requirements will not accept the Rule document for filing. When a format is chosen, all disclosure must conform to its requirements. Franchisors may not pick and choose provisions from each format when making disclosures (44 FR 49970).

E. Rule Primacy: If the UFOC is used, several key Rule provisions will still apply:

1. Scope: Disclosure will be required in all cases required by the Rule, regardless of whether it would be required by state law.2. Coverage: The Rule will determine who is obligated to comply, regardless of whether they would be required to make disclosures under state law.3. Disclosure Timing: When disclosures must be made will be governed by the Rule, unless state law requires even earlier disclosure.4. Other Material: No information may appear in a disclosure document not required by the Rule or by non-preempted state law, regardless of the format used, and no representations may be made that contradict a disclosure.5. Contracts: Failure to provide potential franchisees with final agreements at least 5 days before signing will be a Rule violation regardless of the disclosure format used.6. Refunds: Failure to make promised refunds also will be a Rule violation regardless of which document is used.

V. Potential Liability for Violations

A. FTC Action: Rule violations may subject franchisors, franchise brokers, their officers and agents to significant liabilities in FTC enforcement actions.

1. Remedies: The FTC Act provides the Commission with a broad range of remedies for Rule violations:

a. Injunctions: Section 13(b) of the Act authorizes preliminary and permanent injunctions against Rule violations (15 U.S.C. § 53(b)). Rule cases routinely have sought and obtained injunctions against Rule violations and misrepresentations in the offer or sale of any business venture, whether or not covered by the Rule.b. Asset Freezes: Acting under their inherent equity powers, the courts have routinely granted preliminary asset freezes in appropriate Rule cases. The assets frozen have included both corporate assets and the personal assets, including real and personal property, of key officers and directors.c. Civil Penalties: Section 5(m)(1)(A) of the Act authorizes civil penalties of up to $11,000 for each violation of the Rule (15 U.S.C. § 5(m)(1)(A)). The courts have granted civil penalties of as much as $870,000 in a Rule case to date. d. Monetary Redress: Section 19(b) of the Act authorizes the Commission to seek monetary redress on behalf of investors injured economically by a Rule violation (15 U.S.C. § 57b). The courts have granted consumer redress of as much as $4.9 million in a Rule case to date.e. Other Redress: Section 19(b) of the Act also authorizes such other forms of redress as the court finds necessary to redress injury to consumers from a Rule violation, including rescission or reformation of contracts, the return of property and public notice of the Rule violation. Courts may also grant similar relief under their inherent equity powers.

2. Personal Liability: Individuals who formulate, direct and control the franchisor's activities can expect to be named individually for violations committed in the franchisor's name, together with the franchisor entity, and held personally liable for civil penalties and consumer redress.3. Liability For Others: Franchisors and their key officers and executives are responsible for violations by persons acting in their behalf, including independent franchise brokers, sub-franchisors, and the franchisor's own sales personnel.

B. Private Actions: The courts have held that the FTC Act generally may not be enforced by private lawsuits.

1. Rule Claims: The Commission expressed its view when the Rule was issued that private actions should be permitted by the courts for Rule violations (43 FR 59723; 44 FR 49971). To date, no federal court has permitted a private action for Rule violations.2. State Disclosure Law Claims: Each of the franchise laws in the 15 states with franchise registration and/or disclosure requirements authorizes private actions for state franchise law violations.3. State FTC Act Claims: The courts in some states have interpreted state deceptive practices laws ("little FTC Acts") as permitting private actions for Rule violations

VI. Legal Resources

A. Text of Rule: 16 C.F.R. Part 436.

B. Statement of Basis and Purpose: 43 FR 59614-59733 (Dec. 21, 1978) (Discusses the evidentiary basis for promulgation of the Rule, and shows Commission intent and interpretation of its provisions - particularly helpful in resolving coverage questions).

C. Final Interpretive Guides: 44 FR 49966-49992 (Aug. 24, 1979) (Final statement of policy and interpretation of each of the Rule's requirements - important discussions of coverage issues, use of the UFOC and requirements for basic and earnings claims disclosures in the Rule's disclosure format).

E. Staff Advisory Opinions: Business Franchise Guide (CCH) ¶6380 et seq. (Interpretive opinions issued in response to requests for interpretation of coverage questions and disclosure requirements pursuant to 16 C.F.R.


What will the Franchise Rule begin to look like as it is phased in BEGINING JULY 1, 2007?

Here's a link to a nice summary.

Amended Franchise Rule

Amended Franchise Rule

What will the Franchise Rule begin to look like as it is phased in?

Here's a link to a nice summary.

Amended Franchise Rule 

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 28th, 2007

4 Benefit of Michael & Guest...

REFERENCING the thread which began at Ask for More

I believe the following tidbits of data will surely support the point that a Franchisor is free to provide additional information outside of the UFOC.  AND That the UFOC can ONLY contain that which is required, AND not more!

II. Rule Requirements

A. General: The Rule imposes six different requirements in connection with the "advertising, offering, licensing, contracting, sale or other promotion" of a franchise in or affecting commerce:

6. Contradictory Claims: While franchisors are free to provide investors with any promotional or other materials they wish, no written or oral claims may contradict information provided in the required disclosure document (Part 436.1(f)).

IV. Disclosure Options

E. Rule Primacy: If the UFOC is used, several key Rule provisions will still apply:

4. Other Material: No information may appear in a disclosure document not required by the Rule or by non-preempted state law, regardless of the format used, and no representations may be made that contradict a disclosure.

SUMMARY: The UFOC provides that which the Franchisor is REQUIRED to provide.  The Franchisor is FREE to provide as much additional information as the choose, provided that such additional information is not inconsistent with that provided by the UFOC.

I REST MY CASE and will now put it into the hands of the Bluemaumau Jury of Public Opinion.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 28th, 2007

Remedies, regulators, & reality

(First, thanks for moving this to an on-point thread!)

In practice, Mr. Webster is correct. You would be amazed at the number of salespeople who have not read the UFOC, particularly in larger systems. It is rather like the frequent claims that "the FTC prohibits us from making earnings claims" and "we would never hurt a franchisee because we make money off the royalties so we have the same goal. Our lawyers make us put in that language about not having an exclusive territory, but you know how lawyers are--we would never do something to hurt your business."

And as Robert Tingler of the Illinois AG office has written, the question of what is a "material" representation (or mis-representation) is not always cut-and-dry, neither is it always clear as to what extrinsic information can be provided without having disclosure statute concerns; also, there is a difference between an "integration" clause and a "no reliance" clause. As Mr. Solomon briefly noted, that latter distinction is hugely important in the event of litigation.

Assume, arguendo, a blatant violation of the Franchise Rule. So what?

Next, of course, we have the impact of the "no reliance" clause on the aggrieved franchisee. Parol evidence is hard enough to get admitted. Add a "no reliance" and Justice Marshall himself would have a tough time representing Ma & Pa Franchisee.

A basic axiom of law is "there is no right without a remedy."

Relational contracts are by their nature difficult for the law to deal with. Personally, I find that the overwhelming majority of issues are not Franchise Rule issues, but relational issues; Mr. Webster and I have had some discussion on this board as to our respective views on the prevalence of Rule violations. However, to the extent that there are Rule violations, the question becomes what to do about them. I would suggest that the AAFD is on the right track in terms of a pragmatic solution, but ultimately the franchise-buying marketplace needs to become more discriminating--and more demanding.

on May 28th, 2007

Paul, Webster right about?


Relative to this discussion, what is it that you feel Mr. Webster is correct about?  In Practice or otherwise?


DALE to GUEST: ASK FOR MORE   and FURTHERMORE, the UFOC is a minimum level of disclosure.  There are guidelines for what is to be included in the UFOC.  There are some state regulators who do not like to see things included which are not 'required' to be included.  There are somethings like Earnings Claims which if disclosed must be disclosed correctly.  

However there is nothing which says a franchisor can not expand upon Item 20, outside of the UFOC.  Why don't you call on GREAT FRANCHISORS to disclose the additional information, even if it is outside of the UFOC.

MICHAEL WEBSTER: UFOC DISCLOSURE  Information required to be disclosed to the franchisee must be in the UFOC.  In a single document.

DALE:  MICHAEL???  What????

MICHAEL WEBSTERNothing but the law.

GUEST:  Michael is Right.  The only thing a franchisor can dislcose is what is contained in the UFOC, unless they make a supplemental disclosure which would then be part of the UFOC and must comply with any state rules on additional disclosure.

In other words if it is not formally disclosed as part of the UFOC it is improper.

DALE Nope!!!  I disagree.  A Franchisor can provide information beyond that which is required to be included in the UFOC, outside of the UFOC, provided that such is not contradictory to that which is included in the UFOC.  If what you're saying were correct the franchisor could say nothing that is not in the UFOC.

GUEST:  YES  If the information is to relied upon a material and substantive statement has to properly disclosed in the UFOC.

DALE:  NO COMPRENDE'  I realize that this is an Australian thread.  I realize that Michael is in Canada.  So maybe we have a comunication barier or something.

If you want to get your UFOC kicked back to you, start disclosing a lot of extra information about the processes, procedures, etc... etc.... beyond the basic template of the UFOC.

Do you think that when you visit the Franchisor and review the Ops Manual, the Training Manual, that you do not rely on that?  Yet the UFOC requires minimum info in a specified format.  Do you think over lunch as you visit with the President, CEO, Chairman of the Board and you discuss his/her family values, ethics, morals, religion, educational background, previous experience etc.... etc... that one does not rely on this?  Or do you think they say oooppps I can only tell you this 1 paragraph verbatim to what is in the UFOC? 

MICHAEL WEBSTERIntegration Clause and Non UFOC Disclosure.  The integration clause will foreclose any liability for non-UFOC representations.  It doesn't matter that you relied upon it, the integration clause you agreed to will bar you from suing on what you relied upon.

This is why prospective franchisees need experienced franchise counsel - to tease out from them what they thought they could rely upon and show them the truth before they lose their investment.

Believing and succeeding doesn't work.

DALE.  MICHAEL.  First, your most recent statement does not support your assertion that information can not be provided outside of that required to be provided by the UFOC.  Are you now joining the Red Herring Club?

Second, in an effort of being fair, informative, and accurate do you not think that you should have disclosed the limited accurate life of your statement regarding integration clauses?

Third, gaining information or providing information to aid and assist in the performance of due diligence and/or to better understand the franchise opportunity is far different than information provided for legal reliance.  Should you not have pointed this out as well.

Fourth, do you feel that by taking a cheap shot at me it shows your prowess as legal counsel?

Fifth, if you have a problem with me .... why don't you pick up the phone and call me?  Feel free to use the toll free number, my extension is 701!

R. SOLOMON   Integration Clauses.  I'm sorry, but that is simply incorrect. Some integration clauses will foreclose some extrinsic evidence. Integration clauses are regularly drafted incompetently and leave a lot of things open to offers of evidence one might have hoped to foreclose by having an integration clause in the first place. In the instance of fraud claims,  it is the common law of all 50 states that an integration clause does not foreclose evidence of fraud and misrepresentation that induced the franchise investment decision. You can find the occasional lower court case in which it appears that integration clauses are effective, but there are always extrinsic particular facts that make that case come out the way it does, or the lower court is simply wrong and the loser does not appeal.  

MICHAEL WEBSTERIntegration Clauses and Fraud.  Richard,  Yes, a poorly drafted integration clause will not do its job.

Fraud will ofcourse trump the contractual terms.  Never easy to prove, in my experience.

But, the general point was that material information disclosed outside of the ufoc document cannot be legally relied upon.

Do you take issue with this statement?

R. SOLOMON:   RELIANCE UPON EXTRA INFORMATION: Yes. I do take issue with that statement. The essence of misrepresentation cases is that what is in the UFOC is affected by what is stated outside the UFOC. Even a perfectly drafted integration clause will not preclude reliance and evidence of reliance on materials outside the UFOC. In fact, if you look at the FTC admonition on the cover page of every UFOC, you are instructed not to rely on the UFOC alone. Fraud and misrepresentation are not that difficult to prove if fraud and misrepresentation have actually taken place. However, investment fraud litigation is a discrete specialty, and if you don;t try those kinds of cases a lot, it is more difficult than it is for someone who does that all the time. 

MICHAEL WEBSTER: UFOC DISCLOSURE.  We are talking, I believe, at cross-purposes.

I responded to Dale's claim that the UFOC was  a minimal disclosure document and that you should ask the franchisor for more information about some of the itemized disclosures.

I pointed out that the franchisor was required to include all required disclosures in one document.  Asking for more on the itemized disclosures from the franchisor won't get you far with a responsible franchisor.  Contrary to Dale's suggestion.

Do you disagree with this?  Do you agree with Dale that the UFOC is a minimal disclosure document and that you could obtain more information from the franchisor by asking more questions about the itemized information?

The cover to the FTC cautions you not to rely upon the truth of the UFOC, which doesn't mean you are entitled to more disclosure from the franchisor.  The UFOC is it.

I then explained the usual effect of intergration clauses, but this was not central to my point, which was - the franchisor's duty to disclose the itemized or statutory items entails that the disclosure is contained in one document.

With respect to the rest of your points, we are probably in more agreement than disagreement.

In fact, one of my first meetings with franchise clients is designed to make sure that what they believe the deal is, the result of many oral representations, is actually the written deal. 

(On a statutory note, I observe that the FTC Franchise Rule does make it offence to represent something orally that this inconsistent with the written UFOC, and I believe the Illiinois Franchise Act contains a similar regulation.)

DALEMICHAEL DON'T MISQUOTE:  You tell me I'm wrong.  You take a cheap shot.  You argue the wrong points.  Now your going to state what I said incorrectly!

I'm Impressed! I guess you're one of those who can ask a question, answer the question, and then tell the other person why they are wrong!  Hmmm.

I said...The UFOC is the minimum level of  disclosure requireed by law.  A franchisor has the ability to provide additional information beyond that which is required in the UFOC.  A candidate should assume the responsibility of learning more than that which is contained in the UFOC.

My comment begin in responding to a Guest post in which I stated their time might be better utilized trying to get a franchisor to disclose additional information.  If a franchisor wanted to provide a detail of each transfered franchise they could, provided what was disclosed was reasonably accurate. 

MICHAELAND YOU'RE STILL WRONG.    Dale said: "I said...The UFOC is the minimum level of  disclosure requireed by law.  A franchisor has the ability to provide additional information beyond that which is required in the UFOC. "

And you are: a) wrong because the franchisor cannot legally provide information outside the disclsoure package or b) misleading using the term "ability". 

DALE:  Well then....  Terminate all franchise salespeople.  Tear up all contracts with Brokers and lead sources.  Cancel the Trade Shows, Stop the presses on all Trade Publications.  Cancel Discovery Day and Orientation Day. 

Franchisors simply need a Receptionist to answer the calls, a Mail Room to send out UFOC's and a Legal Department to administer filings and execute agreements. 

I guess the good news is Franchisors will reduce marketing expense, and commissions and now have the time, and money to focus on what is truly the most important aspect of franchising "Franchise Support". 

RICHARD SOLOMONEXTRANEOUS INFORMATION PROVIDED.   All franchisors provide information beyond what is found in the UFOC. They all use sales/marketing brochures and sales pitches. Then later, when it is pointed out that there are inconsistencies, the franchsors try to use the Integration clause to get out of the dilemna. That just doesn't work, and they are caught on their own BS. Then they add to the Integration clause another clause called the Non Reliance Clause. which says that you agree that you are not relying on anything that they say to you that aint in the UFOC.

Frankly, the courts are having trouble trying to help bozo franchisees who sign things that say they didn't rely on anything out side the UFOC and then later on in litigation  claim that they did rely. The courts are starting to get tired of people too stupid to understand that when you rely on something and then agree that you didn't rely on it, you may not really be smarter than a 5th Grader. So far, deliberate misrepresentations are not being let off the hook because of the combination of Integration  and non  reliance clauses. I think that now that competent due diligence is available to those willing to pay for it, that attitude may start to change.  If you're too stupid to understand what you read, and too cheap to pay for good help, you may in the future be stuck with the result of your ineptitude.


Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 28th, 2007

UFOC Disclosure

1.  Ask any experienced franchisor lawyer about the need to disclose in a single document.  You will find out that 9 out 10 lawyers prefer my view over yours.

2.  Richard Solomon made a good observation about the difference between the integration clause and the non-reliance clause.  I should have addressed this in my first post.  But, this distinction makes your case worse.

3.  But please, for the sake of all of the starving franchisee litigation lawyers, continue to give out your advice to your franchisor clients.  (Prospective franchisees, ignore Dale's advice and get counsel who understands fraud, is skeptical, and won't tell you that belief entails success.)

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on May 28th, 2007


Probably no practical change in how life really works at all.

Richard Solomonwww.FranchiseRemedies.com

Posted by RichardSolomon on May 29th, 2007

Interesting to Listen in! Rule is Subsidy of Franchising

Interesting to listen in on conversations between attorneys and experts about the UFOC and the legal ramifications of the franchise agreements in court, etc. and the need to protect oneself with killer DUE DILLIGENCE in the marketplace.

We can see that the new FTC rule will really not do anything at all to help the new prospects, the immigrants with money, the reduction -in force corporate refugees and early retired, the veterans and retired military and retired government personnel from getting misled into a bad deal that can destroy them financially and emotionally.

Because of the internet and the change in Rule 2, the Brokers will be free to lie even more than they lie now and the Rule will not act to help those who don't hire highly competent and agressive "killer due diligence" to protect them from bad franchise deals.

We see from the UPS Store and the Quiznos situation that their visibility and the appearance of endorsement by government and Entrepreneur and the AARP has misled many into the trap and down the hole into bad investments.

We see that the discussion of territory, etc.. doesn't get into the competition within the sectors, etc.. that can make territorial prorection mean nothing but I think Paul Steinberg did touch on this at one time.

Just came in from a drive through our fourth new shopping Mall that has been in the process of development for three or more years and where some restaurants have been in and out of business in 10 or 11 eleven months. We see a Quiznos and a Pizza Franchise with lots of help and not many customers and there are three other sub type franchises within a mile of this beautifully appointed and new Quiznos. How long will this first generation franchisee be able to stay alive before he is squeezed into letting that store go for nothing? While this Up-Scale Mall is being constructed next to and near two very upscale housing areas, I guess it is a secret that many people who live in half-million dollar homes shop at WalMart and watch their dollars to make that big house payment.

It is the overdevelopment in the economy ---the endless new shopping Malls that put the old Malls out of business ---the endless moving down the road leaving the old behind to rot and decay or to look for new venture capital to tear the old down and build anew to keep the fires of development ever burning.

Franchising is part of the scheme to feed the fires of development and weak government regulation is part of the scheme to keep those dollars available for the franchisors.

The Rule is a subsidy of franchising and public policy and LET THE BUYER BEWARE and not buy any franchise without KILLER DUE DILIGENCE.

on May 29th, 2007

Michael, 1,2,3...


1.  If the advice were to a 'franchisor' I'd write your statement off as typical play it safe legal talk.

2.  Solomon's points does not weaken my case worse, but rather supports the possibility quite well.

3.  Do you really want to go down this road again?  You seem to be quite skilled at dishing it out, but totally inept at taking it.  This is at least the 3rd time that instead of arguing an opposing view point you've questioned my professional skills.  As an attorney do you think that this is a wise approach?

Obviously your problem with me is far deeper than a disagreement over the point I made, which is clearly supported by the Franchise Rule, which you brought into play.  The invite to use that 800 number remains open.  I look forward to hearing from you.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 28th, 2007

Disclosure of franchise brokers in Item 2 is no longer required

While people did complain with much drama how cumbersome it is to list all the Frannet, Franchoice and assorted referral brokers. However, I think that this is the area that needed more oversight. It is commonly and widely known to franchisors that franchise brokers say a lot things to their prospects/customers and ONE BIG ONE is that they call them CLIENTS, and on Earnings Claims/projections don't get me started. A young naive nascent franchisor either may turn a blind eye and deaf ear to what brokers show and say to the "clients" or may just not have a clue in regards to pre-sale goings on. The rule change was in the wrong direction and referral brokers are free to mislead without great risk.

on May 29th, 2007

No Reliance & Integration clauses

No big difference between Solomon and Webster. The matter of zor salespeople making claims with the knowledge that the prospect will ultimately sign a particular Franchise Agreement (containing a merger/integration and a "no reliance" clause) is not news, this was discussed during the multi-year debate over the amended Franchise Rule (and I agree with Solomon and most others that this amendment won't really have much effect.)

What annoyed Webster about your advice to prospects is the implication that they should pay attention to anything other than the UFOC and Franchise Agreement. Although Solomon and Webster differ about the ease of surviving summary judgment in the face of an integration clause, they seem in agreement about the effect of the "no reliance" clause.

I share Webster's concern about consultants and brokers who fail to explain (or don't understand) the legal implications of these 2 clauses, particularly where they are both present in the contract. This happens all the time, with serious consequences if things go wrong.

The prospect can go to trade shows all they want, and have lunch with the zor staff at "Discovery Day" till the cows come home. But if they get into litigation, "discovery day" will not venture into what was said at "Discovery Day"-- because-- you are saying that anything that was said to you is either incorporated into the contract or is of no legal effect, and... drumroll please... even if they lied to you, that lie had no influence on your decision to buy the franchise.

The zee's lawyer will have an exceedingly difficult case to make. Since reliance is an element of a successful claim for fraud in the inducement, all of that information which the broker urged the franchisee to consider in evaluating the business is irrelevant as a matter of law.

Solomon is correct: Franchise Agreements are not consumer contracts, and the courts have little sympathy for zees who try and introduce extrinsic evidence when the zee signed a contract containing a merger/integration and a no-reliance clause. And telling the judge that your consultant said you could rely on extrinsic representations even though you specifically disclaim such reliance is not going to change the outcome.

on May 29th, 2007

No real change is right!. Rule is a Subidy of Franchising

Item 2 changes for the worse and The Rule will result in "probably no practical change in how life really works at all." I like Richard Solomon's use of "killer due diligence." Franchisees will still need killer due diligence to protect themselves.

on May 29th, 2007

UFOC Disclosure 3,2,1,0

3.  You are not a professional, unless you have been hiding your degrees and designation.

2.  Richard points out, correctly, that franchisors are taking the position in their contracts that franchisees cannot rely upon any information that was not in the UFOC.  And yet you think this "supports the possibility quite well."  Odd.

1.  This makes no sense.

0.  Why don't you talk about the operational details of franchising, or things that you have experience with?  Your observations about due diligence are, frankly, dangerously misleading to prospective franchisees.  

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on May 28th, 2007

Well if that is what

Well if that is what annoyed Webster so be it.  What I said was that regulatory action is not required for the Franchisor to provide more information than what the UFOC requires.  And that such information may need to be provided outside the UFOC because the UFOC must follow the standard template and can not contain EXTRA INFORMATION.

In providing this EXTRA information a Franchisor is not released from the requirement that this additional information be consistent with that contained in the UFOC.

AND I TOTALLY DISAGREE, with anyone who would say that a franchise prospect should not pay attention to things outside of the UFOC and the Franchise Agreement.  I prospective franchisee needs to pay attention to EVERYTHING, even the most subtle tones, words, pace and body language.  HOWEVER, it is the FRANCHISE AGREEMENT not the marketing material, not the UFOC, nothing but the FRANCHISE AGREEMENT which will reign supreme in the relationship.

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 29th, 2007

BTW: Lunchtime conversation

Dale wrote:Do you think over lunch as you visit with the President, CEO, Chairman of the Board and you discuss his/her family values, ethics, morals, religion, educational background, previous experience etc.... etc... that one does not rely on this?

I would never advise a prospect to discuss "family values" or "religion" et cetera, over lunch. Quite a number of people consider these to be matters of personal conviction and you can easily offend your host. Moreover, a significant number of franchisees are from overseas, and in case you hadn't noticed, there's people killing even their co-religionists over these matters.

For many of the same reasons, I would suggest that franchisors stay away from such matters of conscience. It is true that you can agree to a religious arbitration, and I have seen this particularly in Muslim and Jewish business transactions. But I have yet to see a Franchise Agreement which specified religious ADR. In all other cases, religious belief, however denominated ("family values", "morals", "ethics") is simply not appropriate for lunch conversation.

I am old enough to remember Jimmy Swaggart's tears, Jim Bakker's sexual and financial escapades, and how Scrushy went to the black church during his trial, and made sure the TV cameras were there to record the event. We have had, of course, Jim Amos-- a more publicly pious man has rarely graced the halls of franchising.

On a personal note: I deal with a significant percentage of clients from other countries. I have found that many of the countries which are so avowedly "moral", where religious law and beliefs permeate everyday conversation, are also the countries where protection of women and minorities tends to be the weakest. I have also seen some truly horrible (even, literally, criminal) acts committed with the justifcation that it is permitted by the will of [fill in your choice of deity here].

Keep your lunch conversation to business matters and innocuous topics like the weather. Don't discuss Jesus, the IFA, or BlueMauMau.

on May 29th, 2007

Item 2 Change

I agree with this observation:  the change in Item 2 seems a backward step.  Especially since we see more recruiting over the internet. 

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on May 29th, 2007


I don't think that the combination of No Relaince and Integration clauses will work to foreclose the receipt into evidence of non-UFOC statements in a fraud case as of now. My reason for this is that it is only in the past two years that there has come to be available resources for truly aggressive, competent franchise due diligence - "killer due diligence". Most of the extrinsic information having to do with Item 19 information, for example is not identified as more earnings claim information. It is called something else, and that is extremely confusing for the potential inverstor who has had no access to killer due diligence until very lately. I seriously doubt that summary judgment will be available to a franchisor due to those clauses where the defense to the SJ motion is an offer of rather cynical abusive practices. I don't think the courts are yet ready to make those two clauses a license to lie cheat and steal.

Richard Solomonwww.FranchiseRemedies.com

Posted by RichardSolomon on May 29th, 2007

How is the Rule change a subsidy of franchising?

On what basis do you make your statement?

I agree with the Item 2 comments since I made the original post about Item 2.

on May 29th, 2007

MW...You surprise me!


3.  You are not a professional, unless you have been hiding your degrees and designation.Ahhh Michael.....now I understand!  Not only are you unable to acurately read and interpret the FTC Franchise Rule, you're equally challenged by the likes of the dictionary which would define Professional as:

1 a : of, relating to, or characteristic of a profession b : engaged in one of the learned professions c (1) : characterized by or conforming to the technical or ethical standards of a profession (2) : exhibiting a courteous, conscientious, and generally businesslike manner in the workplace2 a : participating for gain or livelihood in an activity or field of endeavor often engaged in by amateurs <a professional golfer> b : having a particular profession as a permanent career <a professional soldier> c : engaged in by persons receiving financial return <professional football>3 : following a line of conduct as though it were a profession <a professional patriot>

You must be a very new to the legal profession.  Are you really so intimidated by those who earned their degree from the University of Hard Knocks?  I know lots of people who have BA's, MBA's and PHD's but no JOB.   

2.  Richard points out, correctly, that franchisors are taking the position in their contracts that franchisees cannot rely upon any information that was not in the UFOC.  And yet you think this "supports the possibility quite well."  Odd.This is really way off base from what started this entire discussion which was were I said that a franchisor CAN provide additional information beyond that which is contained in the UFOC -- and you said WRONG!  I believe Solomon clearly communicated that NO IT WAS YOU WHO IS WRONG.  I believe I've posted your reference to the FTC Franchise Rule which further proved you were WRONG!  The statement had nothing to do with whether or not the 'additional' information could be relied on.  It's reliability would not be relivant to my point, yet such relivance would not release the franchisor from its responsibility to NOT provide information inconsistent with that contained in the UFOC.   Furthermore in due diligence one can garner a lot of data that is not legaly relivant but be used to prove or disprove information which is legally relivant.

1.  This makes no sense.You said 9 or of 10 FRANCHISOR ATTORNEYs would agree with you.  THUS I'd agree that 9 out of 10 Franchisor Attorneys might advise a franchsior not to provide much information outside of that contained in the UFOC, because the attorneys job to a large degree is to advise and protect against risk.  So Yes, if a franchisor only quoted that contained in the UFOC they would reduce risk.

0.  Why don't you talk about the operational details of franchising, or things that you have experience with?  Your observations about due diligence are, frankly, dangerously misleading to prospective franchisees. As an attorney do you often make these types of open claims in open forums without any substantiation?  Do you find that to be wise?  Do you advise your clients accordingly.  What have I said that you'd find to be dangerous, and misleading????

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 29th, 2007

Jerrold Nadler / Personal services

One of my favorite quotes for business clients (franchised and non-franchised) is Congressman Nadler's quote to the IFA rep. When the witness said he treated his zees as "partners", Nadler replied that partners were great until they had a fight, and then there would be bitter litigation.

Ultimately, in commercial dealings, if something is important to you it needs to be in your contract. That is true whether it is an agreement between shareholders in a close corporation or between zor and zee.

Parenthetically, I would note that franchise company management can change, and companies can be bought and sold with some velocity. Your services as a franchisee may be in the nature of a personal services contract requiring your personal effort, but from the franchisor side of the equation there is a corporate franchisor entity with rights and obligations as enumerated in a writing.

In addition, when you have a dispute with your franchisor that gets serious, any of the larger systems have retained counsel (and quite often in-house counsel) and even if the zee is pro se, the zee will be transferred to the legal department.

Sorry if this bursts any balloons, but franchising is a business, not a "partnership" or a "family". Hopefully, you will never end up in litigation, but if you do, the truth of this will become painfully apparent.

on May 29th, 2007


From having cross examined so many "franchise counsellors", I can tell you that the ones with negative history (litigation/fraud/criminal activity and convictions) don't tell their employer about it. The required negative info that informs you that you are dealing with a hard core recidivist thief doesn't get into the disclosures anyway. No one goes behind the form they fill out to check into its truthfulness. What the bozo put on the form went into the disclosure.

Richard Solomonwww.FranchiseRemedies.com

Posted by RichardSolomon on May 29th, 2007

Buyer Beware

So Dale, who sells back-office solutions, is now trying to pose himself as a franchise lawyer? He feels that the school of hard-knocks qualifies him as a professional legal counselor. Practicing franchise law without a licence?

Buyer beware!

on May 29th, 2007

You are not a professional,

You are not a professional, unless you have been hiding your degrees and designation.Ahhh Michael.....now I understand!  Not only are you unable to acurately read and interpret the FTC Franchise Rule, you're equally challenged by the likes of the dictionary which would define Professional as:


 What I believe Michael means is that the term “professional” has morphed from meaning one thing to another; I believe he is adhering as I do, to the old standard.   In days past a professional was someone who practiced before a board of peers who could sanction that person or deny them the right to practice in that profession.  Years ago when I was a professional in the older sense of the word I held several designations and could be sanctioned by professional governing bodies on the basis of my behavior.   Today I am a “consultant”,  there is not profession for my skills.  My peers call themselves professionals, they talk about something they call “professional behavior” but they are not professionals.  Many of them are simply common men with large egos who have utilized the historic usage of the term professional as a marketing tool.  Often companies use the term professional to hide the fact that standards have loosened.  This is akin to the banking game, nearly everyone is a vice president, often it means nothing.  

I have several passions in life, several I have made a living at, and at more then one I was a professional in the older sense of the word.  As a result I also tend to take umbrage at people trying to claim they are professionals when what they do does not rise to of a craftsman, journeyman, distinctions which at one time had meaning. 

This stroll down memory lane brought to you by, someone who cares.




on May 29th, 2007

Interesting observation about franchisee counsellors

Interesting, but Richard, if you knew the name of the franchise counsellor wouldn't a pacer search reveal some but not all of the sorid details? 

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on May 29th, 2007

Playing Attorney

GUEST:  I was not, did not, and do not try to pose as a franchise lawyer!  I do not feel that the school of hard-knocks qualifies me to be a professional legal counselor.  I do not practice law, with or without a license!  There are many aspects to Franchise due-diligence, and the legal review of the Agreement is a small part, although a very important part.  A franchise candidate who only uses the services of their 'family' attorney is making a huge mistake, in my opinion. 

I will state that most executives with business careers spanning a few decades probably do know more about business law than a recent law school graduate.  My granddaddy always said: "A 40-Year old man who thinks a recent college graduate is smarter than he is ---- is probably right!"

ALL BUT THE MOST EXPERIENCE legal counsel should consult with Franchise "Professionals" for advice and guidance as it relates to franchising.  There are far too many attorneys who have taken a 2-Day Workshop on Franchising who are WRONG in believing that they are now qualified to advise anybody on franchising. 

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 29th, 2007

Professional and Indemnity for Negligence


One important difference between attorneys and lay advisors is that generally the former have insurance for negligence.  In Canada, this is required by law, but I understand this is  not required by each state's licensing board or association.

When using a lay advisor or uninsured professional, you may not have an effective recourse for negligent advise. 

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on May 29th, 2007

Dale, who sells

For whatever reason Dale chose not point out the following facts --- I will.

Those back-office solutions which Dale sells include:
Corporate Counsel, a local attorney, to assist and advise on issues affecting your franchise business.
The BNA Legal Library, which provides 100’s of tools that prevent day-to-day operational issues from becoming future legal problems.
The Law & Your Franchise, a comprehensive day-to-day reference manual written exclusively for franchisees who buy Dale’s back office solutions.

You are correct, Dale is not an attorney. But when you buy Dale’s back-office solutions you don’t need one, because he has included one in the FranSynergy Franchise Service Package, all for one low flat monthly fee!

Believing & Succeeding,
John F.
Franchisee & FranSynergy Client

P.S. Dale you owe me a FREE MONTH … NOT!

on May 29th, 2007


That's how I got the information to use in cross examination when the sh*t hit the fan and I had to go after them. 

Richard Solomonwww.FranchiseRemedies.com

Posted by RichardSolomon on May 29th, 2007


None of the states requires E&O insurance. A few states require that an attorney advise a client if he does not carry E&O insurance. 

Richard Solomonwww.FranchiseRemedies.com

Posted by RichardSolomon on May 29th, 2007

Ahhh Shucks!!!!

What are you doing lurking in these shark infested waters? 

Instead of a FREE MONTH, how about a 12 month extension for the price of 10 Months.  (I've marked it down).

Thanks for coming to my "Legal Aid".  I will however need to charge royalties on your use of 'Believing & Succeeding".  LOL

Believe & Succeed,DaleFranSynergy, Inc.Synergizing Franchising!www.fransynergy.com

Posted by FranSynergy on May 29th, 2007

E&O Insurance for US Attorneys

Absolutely fascinating - I did not know this.

Although I knew about the disclosure issue, I wasn't aware that it was not wide spread.

Just another question to ask your franchisee lawyer - ya bonded, pal?

Michael Webster PhD LLB

Misleading Advertising Law

Posted by michael webster on May 29th, 2007


Posted by coleman on August 24th, 2009

I think the Attorney General

I think the Attorney General shoud take a look at these companies and weed out the bads from the goods, <a href="http://www.uklondons.com/">links of london</a> the consumer's rights and safety must be protected - it is fair to allow the good companies to stay in business, and those bad companies should be shut down. <a href="http://www.ilinkslondon.com/">links of london</a> XpresSmile should be closed down for practing both legal and dental without any licenses.. <a href="http://www.dresseslife.com/">Evening Dresses</a> I doubt it if the owner finished and dental or law school curriculums or even was enrolled in either programs. Good luck!

Posted by Guest on June 10th, 2010

  The people are loosing


The people are loosing their moral while becoming modern. The society needs to be attentive that moral value. Well, it shocking and needed and immediate attention to short out at the earlier.



Posted by helenth01 on November 27th, 2010