FTC Releases Final Version of Business Opportunities Rule

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The Federal Trade Commission has approved changes to and released the final version of its business opportunity rule that will be effective on March 1, 2012.

The rule (16 CFR Part 437, "Disclosure Requirements and Prohibitions Concerning Business Opportunities") is intended to ensure that consumers have the information they need when considering buying a work-at-home program or any other business opportunity. The Commission vote approving the final amendments to the Business Opportunity Rule was a unanimous 4-0.

Simplified Disclosures

The changes made to the rule simplify the disclosures that business opportunity sellers must provide to prospective buyers. The simplified disclosures will help prospective purchasers assess the risks of buying a business opportunity, while minimizing compliance burdens on businesses, according to the FTC.

The final rule applies to business opportunities previously covered under the rule, as well as work-at-home offers such as envelope stuffing and craft assembly opportunities. The final rule requires business opportunity sellers to give consumers specific information to help them evaluate a business opportunity.

Sellers must disclose five key items of information in a simple, one-page document:

(1)The seller's identifying information;

(2) Whether the seller makes a claim about the purchaser's likely earnings (and, if the seller checks the "yes" box, the seller must provide information supporting any such claims);

(3) Whether the seller, its affiliates or key personnel have been involved in certain legal actions (and, if yes, a separate list of those actions);

(4) Whether the seller has a cancellation or refund policy (and, if yes, a separate document stating the material terms of such policies); and

(5) A list of persons who bought the business opportunity within the previous three years.

Misrepresentations and omissions are prohibited under the rule, and for sales conducted in languages other than English, all disclosures must be provided in the language in which the sale is conducted.

Furthermore, the rule permits earnings claims to be made by sellers of business opportunities only if the seller:

(1) Has a reasonable basis for its claim at the time the claim is made;

(2) Has in its possession written materials that substantiate its claim at the
time the claim is made;

(3) Makes the written substantiation available upon request to the prospective
purchaser and to the Commission; and

(4) Furnishes to the prospective purchaser an earnings claim statement in a required format.

The announcement of a final business opportunity rule completes the process that started on April 12, 2006, when the Commission published an Initial Notice of Proposed Rulemaking and proposed creating a business opportunity rule separate from the franchise rule.

A press release on the action appears here on the FTC website. Text of the Federal Register notice appears here.

The final version of the rule, along with its extensive Statement of Basis and Purpose, will appear in the CCH Business Franchise Guide.

Failure to Disclose Business Plans to Prospective Franchisee Did Not Violate Washington Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A pizza restaurant franchisor did not violate the Washington Franchise Investment Protection Act (WFIPA) by failing to disclose to a prospective franchisee that the franchisor was planning to discontinue its outlet franchises at the time that the franchisee purchased its franchise, according to a Washington appellate court.

Thus, a Washington trial court’s dismissal of the franchisee’s claim that the franchisor’s silence as to its plans was a “material omission” under the WFIPA was affirmed.

The franchisor sold two different models of franchises: an outlet model that sold only “take-and-bake” pizzas and a restaurant model that sold both "take-and-bake" pizzas and “ready-to-eat” pizzas that could be consumed at the store.

The proposed franchise agreement between the parties did not require the franchisee to specify which model they would follow and provided that the franchisor could change store operating methods in the future.

Material Omission

Case law held that nondisclosure of a fact would qualify as a material omission under the WFIPA if a reasonable person would consider that fact important in determining what action to take with respect to the transaction in question, the appellate court observed.

The franchisor presented evidence demonstrating that it had not discontinued its outlet stores after the franchise purchase. In fact, it continued to support outlet store franchisees in several locations throughout the country.

In response, the franchisee pointed to evidence that approximately seven months after its franchise purchase, the franchisor announced a plan to require new franchises to offer some dining facilities. However, under this plan, existing outlet stores were not required to change their operations and they continued to receive support from the franchisor.

The franchisee failed to offer any evidence that this prospective policy affected existing outlet stores such as its franchise, the court determined. At most, it showed that the franchisor was considering a shift in its mix of stores going forward. Moreover, the franchisor disclosed in both its offering circular and the franchise agreement that such a shift could occur if the franchisor decided to change its store operating methods.

Materiality

As to materiality, the franchisor’s mix of outlet and restaurant models was not a key feature of the franchise agreement, the court ruled. Indeed, the number of outlet versus restaurant stores was not mentioned in the franchise agreement. Further, the agreement did not require franchisees to specify which model they would follow or limit their ability to change methods. Thus, there was no reason to expect that the mixture of store models would remain static.

Even assuming that the franchisor was considering a change to the way new stores could operate in the future, the franchisee failed to show that disclosure of this fact would have been necessary to make the franchise offering not misleading, according to the court.

The June 1 unpublished decision is Something Sweet v. Nick-N-Willy’s Franchise Co. It will appear at CCH Business Franchise Guide ¶14,398.

Australia Franchising Code Requires Additional Disclosures, Notice of Nonrenewal

This posting was written by John W. Arden.

Revisions to the Australia Franchising Code of Conduct, announced yesterday, will add categories of presale disclosures that must be provided to prospective franchisees and require franchisors to provide six months’ notice of nonrenewal, among other things.

“These amendments seek to increase franchisor disclosure on a number of different matters and to establish guidance to franchisees and franchisors on the conduct expected of them during dispute resolution processes,” said an explanatory statement issued by the authority of the Treasurer.

“The amendments should place franchisees in a better position to understand the risks of entering into a franchising system by giving them clearer information up front about the terms and conductions on offer.”

The amendments contained in Select Legislative Instrument 2010 No. 125 will become effective on July 1, 2010 and apply to franchise agreements entered on or after that date.

Changes to the disclosure document include the following:

Nonrenewal. A new clause 20A requires franchisors to inform franchisees, at least six months prior to the end of the franchise agreement, of their decision to renew or not renew the franchise agreement. Where franchise agreements are for less than six months, franchisors must give one month notice.

Good faith. A new clause 23A requires inclusion of a statement that nothing in the Code limits any common law obligation to act in good faith.

Dispute resolution. A new subclause 29(8) includes a listing of conduct expected of franchisors and franchisees when engaging in dispute resolution processes, such as attending and participating in mediation and observing duties of confidentiality.

Franchise business failure. Item 22 requires franchisors to provide a statement that franchising is a business and, like any business, the franchise (or franchisor) could fail during the term of the franchise agreement, with consequences to the franchisee.

Other payments. New item 13.6 requires franchisors to disclose details of payments by the franchisee payable to the franchisor (or its associate) or collected by the franchisor for another.

Capital expenditures. Item 13A.1 mandates that franchisors disclose whether a franchisee will be required to undertake significant capital expenditures not foreseen or disclosed before the signing of the franchise agreement.

Unilateral contract variation. Item 17A provides that a franchisor disclose the circumstances in which it has unilaterally varied a franchise agreement within the previous three fiscal years and the circumstances in which unilateral variations may take place in the future.

End of franchise arrangements. Item 17C requires a franchisor to disclose the process that will determine arrangements at the end of the franchise agreement, including options to renew or extend the agreement, exit payments to the franchisee, repurchase of inventory or assets, the franchisee’s right to sell the business, and the franchsior’s right of first refusal in such sale.

In addition to the new disclosures, the amendments make minor technical changes to the formatting of the disclosure document.

Full text of the revisions appears here on the Commonwealth of Australia Law website. An updated version of the Franchising Code of Conduct will appear in the CCH Business Franchise Guide.