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The Federal FTC Franchise Disclosure Rule prohibits franchisors from sharing, discussing, giving, or showing prospective franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD). 

What about after the franchise agreement is signed?  All rules are off.  The FTC Franchise Disclosure Rule applies to the prospective franchisees.  Once the franchisee signs the franchise agreement, the franchisee is no longer a prospect. The upshot is the FTC Franchise Disclosure Rule does not apply to the disclosing, sharing, discussing, giving, or showing franchisees financials information.  Franchisors are free to share financials information post the signing of the franchise agreement.

Because they were no longer “prospective franchisees” when Haines showed them the profit and loss statements, showing them the statements did not violate the Franchise Rule. See 16 C.F.R. §§436.1(e) and 436.5(s).

Relo Franchise Services, Inc., Plaintiff v. Connor Gilman, et al., Defendants.  Case No. 1:18-cv-578 Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,350

One caution should be rendered.  Commonly, franchisors will negotiate with existing franchisees about the purchase of new or additional franchises or opportunities.  In this case, the existing franchisee may be considered a prospective franchisee in regards to the new or additional franchise and to wit, the franchisor should not share, discuss, give, or show prospective existing franchisees financial performance information unless the information is contained in the franchisor’s franchise disclosure document (FDD).

State laws very as to when the franchise registration expire.  Some states only require a one-time filings or exemptions.  Other state franchise registrations and exemptions must be renewed yearly. 

Annual Filing Required	One Time Filing Required
California	Connecticut
Florida	Georgia
Hawaii	Kentucky
Illinois	Louisiana
Indiana	Maine
Maryland	Nebraska
Michigan	*North Carolina *South Carolina
Minnesota	Texas
New York
North Dakota
Utah
Rhode Island
South Dakota
Virginia
Washington
Wisconsin

* South Carolina and North Carolina allow for an exemption if franchisor has a federally registered trademark and franchisee do not purchase products from franchisor for re-sale. 

Federal law requires that all franchisors update their franchise disclosure document (FDD) 120 days from the close of their fiscal year.  For franchisors with a fiscal year that follow a calendar year ending December 31^st, the FDD must be updated by April 30^th. 

Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30^th date. 

Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30^th date. 

There are only 7 state: California, Hawaii, Illinois, New York, Minnesota, North Dakota and South Dakota follow the federal rule and expire 120 days from the close of the fiscal year (April 30th).

Expiration 120 Days from Close of Fiscal Year (April 30th)	Calendar Expiration (365 days)
** California	Florida
Hawaii	Illinois
New York	Indiana
Minnesota	Maryland
North Dakota	Michigan
South Dakota	Utah
	Rhode Island
	Virginia
	Washington
	Wisconsin

* California registration action Expires April 20th (10 days early)

Not all states, if fact most states registrations and exemptions don’t follow the Federal April 30^th date. 

There are 9 state that follow a calendar year expiration:  Florida, Indiana, Maryland, Michigan, Utah, Rhode Island, Virginia, Washington, Wisconsin.

The quandary becomes post April 30^th, Federal Law requires an update of the FDD.  However, what if the state registration has not expired.  The state prohibits giving prospective franchisees the updated FDD until it has been register with the state.  But, giving prospective franchisees last year’s FDD that is registered with the state is violation of Federal law. 

Franchisee as commonly asked to sign a general release of claims when entering to a franchise agreement when to transfer a franchise, when renewing a franchise, and when entering to a settlement agreement.  Under a general release of claims, franchisees give up their right to sue the franchisor. 

However, not always does the release of claims effective operate to release or prevent claims against a franchisor.  Hence the case involving Charlie Grainger hot dog franchises.[i]   It this case a class of franchisees and area representative sued the franchisor making claims of  (1) rescission; (2) fraud, intentional misrepresentation, and concealment; (3) negligent misrepresentation; (4) breach good faith and fair dealing; (5) breach of fiduciary duty; (6) violation of North Carolina’s Unfair and Deceptive Trade Practices Act; (7) racketeering activity, in violation of 11 U.S.C. §1962(b); (8)  a pattern of racketeering activity, in violation of 11 U.S.C. §1962(c); (9) conspiring to violate the RICO Act; and (10) breach of contract.

The franchisor sought dismissal of the claims based on release claims signed by each of franchisees and area representatives incident to the signing of their franchise agreements.  Under the release of the claims, franchisees and area representative waived their right to sue the franchisor.

Plaintiffs [Franchisees] argue that the General Release is void because it violates federal law. In particular, they argue that the release violates the Federal Trade Commission’s Franchise Rule, which provides in pertinent part that it is “an unfair or deceptive act or practice” to “[d]isclaim or requires a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” 16 C.F.R. 436.9(h).

Id.

Not so fast, the court rejected the release of claims.  In agreement with the franchisees and area representatives, the court held that the release of claims was in violation of the federal law; more particularly the FTC Franchise Disclosure Rule.  The FTC Franchise Disclosure Rule prohibits disclaiming or waiver of any disclosures made in the franchise disclosure documents. 

For other reasons the court dismissed RICO and Racketeering, but allow claims of (2) fraud, intentional misrepresentation, and concealment; (3) negligent misrepresentation; 5) breach of fiduciary duty; and (6) violation of North Carolina’s Unfair and Deceptive Trade Practices Act to proceed.

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[i] Trident Atlanta, LLC, Dual Energy, LLC, Cynergetic AR, LLC, Ms. Marcie Bindes d/b/a KS Enterprises, LLC, Mr. Dale Atkinson & Mrs. Rose Atkinson d/b/a Rosedale Three, LLC, and Mr. Trent Moore d/b/a LindsTan, Inc., Plaintiffs v. Charlie Graingers Franchising, LLC, Charlie Graingers Franchising, Inc., Louis Craig North, Gregory Bruce George, and Jason Matthew Nista, Defendants. No. 7:18-CV-10-BO Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,354

The Federal Trade Commission (FTC) drafter of the Franchise Disclosure Rule, which requires the delivery of the Franchise Disclosure Document to prospective franchisee is looking for comments.  The comment requires part of the FTC periodic review of the cost and benefits of the regulations.  Specifically, the FTC is looking for comments on the following questions: 

1.                              Is there a continuing need for the [Franchise Disclosure] Rule? Why or why not?

2.            What benefits, if any, has the Rule provided to prospective franchisees, including small businesses? What evidence supports the asserted benefits?

3.            What modifications, if any, should be made to the Rule to increase its benefits to prospective franchisees, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers, including small businesses?

c.             How would these modifications affect the benefits to prospective franchisees?

4.            What impact has the Rule had on the flow of truthful information and on the flow of deceptive information to prospective franchisees?

5.            What significant costs, if any, has the Rule imposed on prospective franchisees, including small businesses? What evidence supports the asserted costs?

6.            What modifications, if any, should be made to the Rule to reduce any costs on prospective franchisees, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the benefits provided by the Rule?

7.            What benefits, if any, has the Rule provided to franchisors and franchise sellers, including small businesses? What evidence supports the asserted benefits?

8.            What modifications, if any, should be made to the Rule to increase its benefits to franchisors and franchise sellers, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers?

c.             How would these modifications affect the benefits to prospective franchisees?

9.            What significant costs, if any, including costs of compliance, has the Rule imposed on franchisors and franchise sellers, including small businesses? What evidence supports the asserted costs?

10.          What modifications, if any, should be made to the Rule to reduce the costs imposed on franchisors and franchise sellers, including small businesses?

a.            What evidence supports the proposed modifications?

b.            How would these modifications affect the costs the Rule imposes on franchisors and franchise sellers?

c.             How would these modifications affect the benefits to prospective franchisees?

11.          What evidence is available concerning the degree of industry compliance with the Rule?

12.          What modifications, if any, should be made to the Rule to account for changes in relevant technology or economic conditions? What evidence supports the proposed modifications?

13.          Provide comment on any overlap or conflict with other federal, state, or local laws, or regulations.

a.            What evidence supports any asserted conflicts?

b.            With reference to asserted conflicts, should the Rule be modified? If so, why or why not?

The questions posed by the FTC provide a chance for introspective of the Franchise Disclosure Rule and perhaps more particularly the Franchise Disclosure Document.  I would gander to say the Franchise Disclosure Rule and Franchise Disclosure Document (FDD) will not be abandon or eliminated by the FTC.  And, if the FTC did abandon the Rule, many states have enacted like statutes and regulations that mirror or greater than the federal FTC Franchise Disclosure Rule, and therefore, such abandonment will cause minor alteration the regulatory nature of franchising. 

Back in 1925, Congress passed a law allowing for the enforceability of arbitration clause in contracts.  

A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.  9 U. S. C. §2.

Throughout the almost a hundred years later since enactment, the enforceability of arbitration clauses has repeatedly been upheld.  In a case argued before the United Supreme Court on October 29, 2019[i], the high court has again reinforced the bounds of arbitration.  The question at issue before the high court was:

Who decides if a dispute is subject to arbitration pursuant to a contractual arbitration clause- an arbitrator or a judge in a court of law?

The Supreme Court says, if the contract clause such, it is an arbitrator’s place to determine if a dispute is required to resolved by arbitrated.

When the parties’ contract delegates the arbitrability question to an arbitrator, the courts must respect the parties’ decision as embodied in the contract.

HENRY SCHEIN, INC., ET AL. v. ARCHER & WHITE SALES, INC. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 17–1272. Argued October 29, 2018—Decided January 8, 2019.

Here are a few quick statements regarding arbitration in general and franchising. 

• Yes, arbitration offers a quicker resolution than litigation. On average, US District Court cases take more than twelve months longer to get to trial than cases adjudicated by arbitration (24.2 months vs. 11.6 months)[i].
• Your right to challenge an arbitration decision is considerably more limited than in litigation. 
• Arbitration decisions, unlike litigation, are not public; however, both must be disclosed in the Franchise Disclosure Document congruently.

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[i] A New AAA Study Confirms That Arbitration Is Faster To Resolution Than Court – And The Difference Can Be Assessed Monetarily. Posted by John P. Ahlers  https://www.acslawyers.com/a-new-aaa-study-confirms-that-arbitration-is-faster-to-resolution-than-court-and-the-difference-can-bassessed-monetarily/

[i] HENRY SCHEIN, INC., ET AL. v. ARCHER & WHITE SALES, INC. CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT No. 17–1272. Argued October 29, 2018—Decided January 8, 2019

Almost universally, franchise agreements expressly state that the filing of a claim in bankruptcy is grounds for immediate termination of the franchise agreement.  But, in reality, bankruptcy laws, prohibit the franchisor from terminating the franchise agreement based on the franchisee’s filing in bankruptcy.  This is referred to as a stay in bankruptcy. 

A debtor [franchisee] in bankruptcy is shielded by the automatic stay under Sec. 362 of the Bankruptcy Code [11 U.S.C. 362] from debt-related proceedings brought by creditors [franchisor] based on pre-petition events.

A bankruptcy stay means the franchisor is not permitted to terminate or default a franchisee because of the filing of bankruptcy, delinquent royalties, or any other deficiencies that are pre-date the bankruptcy filing. 

So what recourse does a franchisor have against a franchisee in bankruptcy?  Two options include moving to dismiss the bankruptcy and seeking to lift the automatic bankruptcy stay, may be available.  Either way, the franchisor must file a petition with the bankruptcy court.  This is not a matter that can be handled by simply sending a notice to the franchisee or the franchisee’s attorney. 

These two options were pursued by GNC in the case of In re: Meena, Inc[i]. While GNC was not successful in getting the franchisees’ bankruptcy dismissed or the automatic stay lifted,[ii] the court provided a nice outline of what is required for dismissal of bankruptcy claim and was is required to the lift the automatic bankruptcy stay.

The bankruptcy may be dismissed if:

1. the continuing loss to or diminution of the estate [franchised business] and absence of a reasonable likelihood of rehabilitation;
2. inability to effectuate a plan;
3. unreasonable delay by the debtor [franchisee] that is prejudicial to creditors [franchisor]; [or]
4. failure to propose a plan under section 1121 of this title [the federal bankruptcy law] within any time period fixed by the court.4[iii]

To the lift the automatic bankruptcy stay, the franchisor must show:

1. the debor [franchisee] lack of adequate protection of an interest in property [franchise agreement or franchised business assets] of such party in interest; or
2. the debtor [franchisee] does not have an equity in such property [franchise agreement or franchised business assets], and such property is not necessary for an effective reorganization.

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[i] In re: Meena, Inc., Debtor. In re: Desa of NY, Inc., Debtor. In re: SDA, Inc., Debtor. In re: Choudry Sajid Javaid and Gulmeena Javaid, Debtors. ¶16,304. U.S. Bankruptcy Court, E.D. New York. Case Nos. 8-18-74693-reg, 8-18-74694-reg, 8-18-74695-reg, 8-18-74804-reg. Dated November 6, 2018.

[ii] GNC was not successful in getting the franchisees’ bankruptcy dismissed or the automatic stay lifted in part due to issues non-conveyance of the franchise agreement and money security agreement from the individual franchisees to the business entity franchisee.  See are previous blog https://gettinslaw.com/franchising/2018/12/20/who-owns-this-franchise/

[iii] In re C-TC 9 th Avenue Partnership , 113 F.3d. 1304, at 1311 (2d Cir. 1997).

Poaching in the employment realm is the act of scouting, soliciting, recruiting, and hiring employees already employed by another entity.  The consequence of having a key employee poached can be a great hardship on the business, and it can create hard feelings between poacher and poached companies. 

The rationale of anti-poaching clauses are to avoid discord among and promote harmony between franchisees.  Anti-poaching clauses are common in franchise agreements.  Often the anti-poaching clause is cushioned within the non-solicitation provision.  A non-solicitation clause goes something like this:

You covenant that you will not, during the Term and for a period of one year after expiration or termination of the Franchise, employ or seek to employ any person who is employed by us, our Affiliates or by any of our franchisees, or otherwise directly or indirectly solicit, entice or induce any such person to leave their employment

Greer v. Papa John’s, S.D.N.Y., Case No. 1:18-cv-11312, December 4, 2018

The non-solicitation clause prohibits the franchisees from during and post the term of the franchise agreement from deriving Franchised Business customers and employees from another. 

Recent claims by employees are claims are challenging the premise the rationale of anti-poaching clauses is to promote harmony and avoid discord amount franchisees. In two recent cases involving Papa Johns[i] and Jiffy Lube[ii], employees are asserting that anti-poaching clauses unfairly suppress competition and suppress wages. 

Employees are to the only one to challenge anti-poaching provisions in franchise agreements.  The Papa Johns’ employee class action case, follows a settlement between Papa Johns and the Washington Attorney General, in which the Washington Attorney General asserted the Papa Johns’ anti-poaching clause

restricts worker mobility and decrease[s] competition for labor by preventing workers from moving among the chain[]’s franchise locations

[1] http://www.wkcheetah.com/?cpid=WKUS-Legal-Cheetah#/read/8ffbf8ce7d2f1000ba3d90b11c2ac4f101!csh-da-filter!WKUS-TAL-DOCS-PHC-%7BFEE144B1-5FC2-4E25-99A6-968163C6D1D7%7D–WKUS_TAL_1852%23teid-0?searchItemId=&da=WKUS_TAL_1852#8ffbf8ce7d2f1000ba3d90b11c2ac4f101-8ffbf8ec7d2f1000892990b11c2ac4f108

Papa Johns’ settled with the Washington Attorney General, and as part of the settlement, Papa Johns agreed to remove the anti-poaching clause from its franchise agreement. 

Does your franchise agreement include an anti-poaching provision?  What can you do?  What should you do? How can you preeminent any potential governmental or employee claims?

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[i] Greer v. Papa John’s, S.D.N.Y., Case No. 1:18-cv-11312, December 4, 2018

[ii] Fuentes v. Royal Dutch Shell PLC, E.D. Pa., Case No. 2:18-cv-05174-AB, November 29, 2018 priority52

Yes, it is that time of year.  Every year 120 days post the close of the franchisor’s fiscal year, the franchisor disclosure document must be updated with the previous year’s data.  The update is required by the federal FTC Franchise Disclosure Laws.  For must franchisor’s the deadline to update the franchise disclosure document is April 30^th.

It does not matter if you sold any franchises, if you tried to sell franchises last year, you will need an audit.

In the first year of franchising, startup franchisors may have been able to evade getting an audit.  However, post the first year of franchising and every year thereafter, all franchisors must have an auditor completed of the franchisor entity incident to the annual franchise disclosure update[i].

If you offered franchises in last year, you will need an audit.  It does not matter if you only offered franchises for 1 month, 3 months, or 12 months-you will need an audit.

The audit must be prepared in accordance with GAAP, and the audit must be done by an independent auditor.  The audit cannot be completed your in-house accountant or the accountant that you use to complete your taxes.  

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[i] In leu of a franchisor audit, an audit may be completed “…of any of its affiliates if the affiliate’s financial statements satisfy paragraphs (u)(1)(i) and (ii) of this section and the affiliate absolutely and unconditionally guarantees to assume the duties and obligations of the franchisor under the franchise agreement. The affiliate’s guarantee must cover all of the franchisor’s obligations to the franchisee but need not extend to third parties. If this alternative is used, attach a copy of the guarantee to the disclosure document