When is control or support important? The more franchisees reasonably rely on the franchisor`s control or support, the more likely it is that control or support will be considered “significant”. Franchisees are likely to be dependence on themselves if they are relatively inexperienced in the business offered for sale or if they take a significant financial risk. Similarly, it is likely that franchisees will reasonably rely on the franchisor`s control or support if the control or support is unique to that particular franchisor, as opposed to a typical practice applied by all businesses in the same industry. To be classified as “important,” control or support must relate to the general way the franchisee works – not a small part of the franchisee`s business. Control or support that involves the sale of a particular product that has at most a marginal impact on how a franchisee runs the entire business is not considered in determining whether control or support is “important.” Check out this article from the International Franchise Association on the pros and cons of owning a franchise. The termination of the franchise is governed by the franchise agreement between the franchisor and the franchisee. The 2007 franchise rule listed comments from former franchisees about confidentiality agreements and franchise fraud. The franchise rule requires franchisors to provide all potential franchisees with an information document containing 23 specific pieces of information about the franchise offered, its officers and other franchisees. The Federal Trade Commission began investigating franchising practices in 1970. In 1971, the FTC began a formal rule-making process to eventually develop regulations that require disclosure and prohibit unfair practices in the offering and sale of franchises. These developments led to the enactment of the FTC Franchise Rule in 1979. The FTC enforces the Federal Trade Commission Act (“FTC Act”), which prohibits unfair competition practices and unfair or misleading acts or practices in or in commerce. The Federal Trade Commission`s franchise rule, 16 C.F.R.
436.1 et seq., regulates at the federal level the disclosures that a “franchisor” must make available to any potential franchise. There are also many state laws that may apply in a particular situation. The discussion in this article is limited to the requirements of the franchise rule. After July 2008, all franchisors in the United States should use the franchise disclosure document with potential franchisees. The topics of the required franchise disclosure document include: the history of franchise processes, past and current franchisees and their contact information, each exclusive territory that accompanies the franchise, the support the franchisor provides to franchisees, and the cost of purchasing and training a franchise. If a franchisor provides assurances about the financial performance of the deductible, this issue must also be addressed, as well as the material basis that supports these representations. [ 2] [4] The franchise rule defines actions or practices that are unfair or misleading in the franchise industry in the United States. The franchise rule is published by the Federal Trade Commission. The franchise rule is intended to facilitate informed decisions and prevent deception when selling franchises by requiring franchisors to provide important information to potential franchisees prior to the sale. However, it does not regulate the content of the conditions governing relations between franchisors and franchisees. Although the franchise rule removed the regulation of the sale of franchises from the jurisdiction of states under the authority of the FTC to regulate interstate commerce, the FTC`s franchise rule does not require franchisors to share the unitary performance statistics of the franchise system with new franchise buyers, as would be required and essential under federal and state securities laws.
The FTC`s franchise rule was originally adopted in 1978. .