The Federal Trade Commission ("FTC") approved an Amended FTC Franchise Disclosure Rule ("Amended Rule") on January 22, 2007. The Amended Rule, which took effect on July 1, 2007 and became mandatory on July 1, 2008, is the most significant change in franchise sales regulation in over a decade.

The Original FTC Franchise Disclosure Rule ("Franchise Rule"), which has been in existence for more than 30 years, and its amendments provide prospective purchasers of franchises detailed and relevant information needed in order to consider the benefits and risks of a potential investment.

The Amended Rule generally improves the current system of pre-sale disclosure, while expanding the reach of mandatory disclosures into new areas not previously required.  The Amended Rule gives new definition to pre-sale delivery rules, adds new exemptions that were previously unavailable, and eases the furnishing of cost data to prospective franchisees.

In addition to certain advantages to the franchisee, the Amended Rule also provides various benefits to the franchisor - some of which were not available under the original Franchise Rule.

In short, the original Franchise Rule required franchisors to provide prospective franchisees with a disclosure document, formerly known as the Uniform Franchise Offering Circular ("UFOC"), and now called, in the Amended Rule, the Franchise Disclosure Document ("FDD"). The FDD contains specific items of information about the offered franchise.

The Amended Franchise Rule applies only to franchise locations in the United States or its territories. Further, the Amended Rule does not apply to franchisees investing $1 million or more initially or franchise buyers who have been in the business for at least five years and have a net worth of at least $5 million. Business opportunities will no longer be covered by the Amended Rule, but instead they will be regulated by a separate Business Opportunity Rule which was approved by the FTC in January 2007.

The Amended Rule complements, in large part, the federal rule with various state franchise disclosure laws by updating the Franchise Rule to adapt to changes in the marketing of franchises and new technologies, reducing compliance costs, and addressing complaints about franchisees’ experience with franchisors after they have signed a franchise agreement and entered into a relationship.

Understandably, changes to the Franchise Rule were necessary given the ever-changing franchisor-franchisee marketplace. The FTC has been working on revisions to the Franchise Rule for the past decade, as the original Franchise Rule has been in existence since 1978.

The Amended Rule provides several benefits to the franchisee that were not available under the original Franchise Rule. For example, the Amended Rule requires franchisors to disclose a summary of all litigation commenced by the franchisor against any of their franchisees over the prior year.

The recent expansion of litigation disclosures includes: (1) all material lawsuits involving the franchise relationship in the last fiscal year, filed by or against (a) a franchisor, (b) a franchisor’s parent company that promises to back the franchisor financially or otherwise guarantees the franchisor’s performance, or (c) a franchisor’s affiliate that either offers franchises under the franchisor’s principal trademark or promises to back the franchisor financially or otherwise guarantees the franchisor’s performance; and (2) certain pending and past litigation against the parent company or affiliate. Conversely, the original Franchise Rule required only the disclosure of lawsuits brought by franchisees.

In addition to the recently added litigation disclosure, the Amended Rule has also added disclosure of bankruptcy history of any parent company as a requirement. The new litigation disclosures assist potential franchisees in determining how litigious the franchisor has been during the last several years and are significantly more broad than the original Franchise Rule, which did not require disclosure of lawsuits initiated by the franchisor and limited the disclosure of lawsuits against the franchisor to those alleging a violation of a franchise, antitrust, or securities law; fraud; unfair or deceptive trade practices; or similar allegations.

The Amended Rule also requires franchise companies to identify officers, directors or management personnel of the franchisor who may have a financial interest in a particular supplier that the franchisee would be required to do business with. This newly required disclosure under the Amended Rule provides the franchisee with a more upfront understanding regarding the amount of flexibility it will have in running its franchise should it choose to proceed in that direction.

The Amended Rule requires franchise companies to disclose on their FDD each and every current or former franchisee that has signed a confidentiality agreement within the last three years, whereas such was not the case under the original Franchise Rule. In short, this new requirement was put into place in an effort to allow prospective franchisees to become cognizant of which current or former franchisees are prohibited as to speaking about their experiences, good and bad, with the franchisor.

The Amended Rule also offers several benefits to the franchisor. The first significant advantage to the franchisor is that the Amended Rule permits electronic disclosure, thereby providing greater flexibility to the company.

Specifically, as part of the Amended Rule, disclosure documents can now be disseminated via electronic mail, posting on a website, etc. The franchisee must be able to store, download, print, or otherwise maintain the documents. The cover page of the disclosure document must also include the franchisor’s email address and website. As such, franchisors no longer have to hand out disclosure documents in paper form or disseminate them via regular mail. This benefit is just one example of the FTC "catching up to the times."

Another new benefit to the franchisor under the Amended Rule allows franchise companies an additional 30 days to update their disclosure documents at the end of each fiscal year. While the original Franchise Rule provided a 90-day window, the Amended Rule provides 120 days. Moreover, while offering circulars must still be updated quarterly if there is a material change, under the Amended Rule, franchise companies are now also given 120 days after the end of the fiscal year to update their offering circulars.

The original Franchise Rule required franchise companies to furnish their disclosure documents to prospective franchisees at the earlier of the "first personal meeting" with the prospect or 10 business days prior to the franchisee’s execution of any contract or the payment of any money to the franchise company.

The Amended Rule, however, provides a new benefit to the franchisor by eliminating the "first personal meeting" requirement entirely and instead only requires the franchisor to distribute disclosure documents to prospective purchasers at least 14 days prior to the franchisee’s execution or any agreement or its payment of any money. An important note, however, is that the new disclosure trigger is limited to the 35 states which do not feature state specific franchise regulation disclosure statutes.

Additionally, the Amended Rule changes the circumstances under which the franchisor must give the prospective franchisee a specified amount of time to review a copy of the complete franchise agreement.

Under the original Franchise Rule, franchisors and brokers had to provide the prospective franchisee with a copy of the completed franchise agreement and related documents at least five business days before the date of execution.  The Amended Rule alters this period to seven calendar days and such contract review period is only mandatory where the franchisor makes unilateral changes to the franchise agreement or a related document. Therefore, negotiated changes will not trigger any mandatory contract review period, under the Amended Rule.

The Amended Rule also provides new exemptions favorable to the franchisor. These new exemptions are referred to as "sophisticated investor transactions."

The Amended Rule represents a belated, yet necessary, overhaul of the original 1978 Franchise Rule. The Amended Rule provides benefits to both sides of the table and relieves inconsistencies, inefficiencies, and outdated issues that had been readily in existence throughout the original Franchise Rule for some time.