Franchisors have known for over a year that the traditional Uniform Franchise Offering Circular must be replaced this July by the new Franchise Disclosure Document under the U.S. Federal Trade Commission’s Amended Franchisor Disclosure Rule. Some have already complied with the new disclosure document, while others are pushing it to the wire – and the debate over the requirements still wages.
Franchise companies have had over a year to comply to the U.S. Federal Trade Commission’s Amended Franchisor Disclosure Rule’s July 1 deadline. However, many have waited and franchise attorneys are faced with the extra work to attain compliance. Lawyers say the new rule is complex and raises many questions. Photo courtesy of clipart.com
Attorney Michael Einbinder, founding member of the New York-based franchise law firm Einbinder & Dunn, represents clients on both sides of the franchisor/franchisee divide and has a good view of the different perspectives regarding the new disclosure document.
According to Einbinder, many franchisors have still not implemented the changes and gone to the new disclosure document. Some of the toughest sticking points for the franchisors are the requirements that they must disclose to their franchisees new information such as: the existence of direct/indirect parent companies and the litigation/bankruptcy record of these companies, lawsuits that the franchisors has filed against franchisees, a specific warning when the franchisee is not granted exclusive territory, the right of the franchisor to use other distribution channels to make sales within the franchisee’s territory and the franchisor’s use of confidentiality clauses restricting franchisees from discussing their experience in the franchise system.
While the franchisors are particularly concerned about having to disclose lawsuits they have filed against franchisees, the franchisees are clamoring for this information, Einbinder pointed out. “I think that is critically important to franchisees,” he said. “From a franchisor perspective, I can tell you, that is not something you are going to want to disclose.”
Information about franchisee advisory council has also received a warm welcome from franchisees. “That was really pushed for by the franchisee community,” Einbinder said. “That gives potential franchisees a new way to do due diligence.”
Einbinder said overall, the new disclosure document includes much more information, which the franchisees are happy about. “Prospective franchisees benefit from more information being provided,” he said. “That is what you want. More is better. And there is definitely more here.”
On the flip side, Einbinder sees several changes that benefit the franchisor. These include: discontinuance of the requirement that franchisors discloses “risk factors” in the disclosure document, elimination of the requirement that franchisors deliver the disclosure document on the first personal face-to-face meeting, and the removal of the requirement that franchisors disclose their franchise brokers.
Still bristling at some of the new requirements, Einbinder said there are some franchisors who have decided to use the traditional franchise offering circular right up until July when conforming to the new disclosure rule is mandatory.
He believes the proliferation of this practice may lead to an influx of new disclosure documents and the FTC will likely have a backlog to deal with them. In addition, many of the new disclosure documents may not be up to speed and there are many questions about how these will be dealt with.
“We are concerned about it. We are not sure how it is going to sort itself out,” Einbinder said. “There are going to be questions about compliance and there is going to be some confusion.”
Carl E. Zwisler, an attorney in the Washington, D.C., office of Texas law firm Haynes and Boone LLP, expresses a similar concern about the FTC’s ability to handle what will surely be an overwhelming influx of new disclosure documents as the July 1 deadline approaches.
He is particularly concerned because the FTC’s main franchise expert has recently left the department – and the timing couldn’t be worse. “There is a void at the FTC, in terms of knowledge, about this rule,” said Zwisler. “We have questions and we have nobody who can answer them definitively.”
Zwisler feels the complexity of the new disclosure document requires an overall authority to answer questions about compliance, and right now attorneys are shouldering the burden. “We are kind of crawling through this when [the FTC] had 15 years to develop this,” he said. “There are some issues that we just may not know … but they are issues we need to address in order to comply.”
As the July 1 deadline nears, Zwisler believes the challenge will only get worse.
“We are starting to see the avalanche of the new conversions coming in,” he said. “There are a lot of questions and potential for ambiguity.”
“We are feeling it and we know they are going to feel it at the state administrator level,” he added.
According to Zwisler, the new disclosure document is taking lawyers five to 10 hours more to deal with – at the very least – than it took to update the old franchise offering circular.
“The degree of difficulty in making the conversion really depends on the company and its set of specific circumstances,” he said. “In some respects it is going very smoothly, but every once and awhile you hit one of these pumps.”
Still, despite the challenges, Zwisler feels that, overall, the new franchise disclosure rule is good for the franchise industry.
“There are parts of it franchisors say are good … there are parts of it that franchisees say make sense,” said Zwisler. “Everybody likes the fact that the disclosure about the history of the franchise program is a lot clearer.”
“There is something favorable in the amended rule for everybody,” he added. “The FTC did a very good job of listening to the input of everybody.”
Figaro’s Italian Pizza, based in Salem, Ore., is one franchise chain that has not waited to switch to the new disclosure document. The company has already filed the new document twice: once in November 2007 and once this February.
“Last year, when we studied the rule, I must tell you, we were very impressed,” said Figaro’s chairman and chief executive officer Ron Berger. “And we thought, let’s do this first and get ahead of everyone else.”
According to Berger, adherence to the new franchise disclosure rule was not challenging for Figaro’s.
“Our attorneys embraced it from the get go and said, ‘This is going to be a relatively low-cost thing to do,’” he said. “It was not a problem for us.”
Figaro’s features pizzas that can be baked in the restaurant or taken home in oven-ready baking trays for home baking. Pizza is also sold by the slice in some stores. There are 4,000 topping combinations to choose from. Dependent upon location, other menu items may include lasagna, sandwiches, calzones, salads and soft drinks.
The chain currently has over 100 locations operating across the country.
The first Figaro’s Pizza opened in 1981 in Salem, Ore., with only unbaked pizzas available for takeout. Cooked pizzas became available in 1995.
In June 2001, Figaro’s Pizza was purchased by Ron Berger along with his wife, Carol, and business partner, Bill LeVine, who brought with them a wealth of franchising experience. Berger got his start in franchising in 1974 and, in 1980, founded National Video Inc. National Video grew into a publicly traded company with 750 locations in 46 states and every Canadian province. LeVine is the founder of Postal Instant Press and built it to 1,200 stores before selling the business.
Berger particular likes the “liberalized rules” on financial performance and earnings claims in the new disclosure document. According to him, Figaro’s never previously published this information, mostly because the chain was worried about being held legally to the numbers.
“We could have given this information before, but the rules were challenging so we didn’t do it,” he said. “The lawyers scared you into believing you shouldn’t make earnings claims.”
But Berger believes the new disclosure rules changes that. “I believe you are going to see a lot more franchisors putting disclosures in their on earnings, or at least revenues,” he said
“I think that is everything that the franchisee prospect always wanted to know,” he added. “It is a big, big improvement … If you are a franchisee now you know.”