Guide To The FTC Franchise and Business Opportunity Rule
Table of Contents
- Rule Overview
- Rule Requirements
- Business Relationships Covered
- Disclosure Options
- Potential Liability for Violations
- Legal Resources
- A. Basic Requirement: Franchisors must furnish
potential franchisees with written disclosures providing
important information about the franchisor, the
franchised business and the franchise relationship, and
give them at least ten business days to review it before
- B. Disclosure Option: Franchisors may make the
required disclosures by following either the Rule's
disclosure format or the Uniform Franchise Offering
Circular Guidelines prepared by state franchise law
- C. Coverage: The Rule primarily covers
business-format franchises, product franchises, and
vending machine or display rack business opportunity
- D. No Filing: The Rule requires disclosure only.
Unlike state disclosure laws, no registration, filing,
review or approval of any disclosures, advertising or
agreements by the FTC is required.
- E. Remedies: The Rule is a trade regulation rule
with the full force and effect of federal law. The courts
have held it may only be enforced by the FTC, not private
parties. The FTC may seek injunctions, civil penalties
and consumer redress for violations.
- F. Purpose: The Rule is designed to enable
potential franchisees to protect themselves before
investing by providing them with information essential to
an assessment of the potential risks and benefits, to
meaningful comparisons with other investments, and to
further investigation of the franchise opportunity.
- G. Effective Date: The Rule, formally titled
"Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures," took
effect on October 21, 1979, and appears at 16 C.F.R. Part
- A. General: The Rule imposes six different
requirements in connection with the "advertising,
offering, licensing, contracting, sale or other
promotion" of a franchise in or affecting commerce:
- Basic Disclosures: The Rule requires
franchisors to give potential investors a basic
disclosure document at the earlier of the first
face-to-face meeting or ten business days before
any money is paid or an agreement is signed in
connection with the investment (Part 436.1(a)).
- Earnings Claims: If a franchisor makes
earnings claims, whether historical or
forecasted, they must have a reasonable basis,
and prescribed substantiating disclosures must be
given to a potential investor in writing at the
same time as the basic disclosures (Parts
- Advertised Claims: The Rule affects only
ads that include an earnings claim. Such ads must
disclose the number and percentage of existing
franchisees who have achieved the claimed
results, along with cautionary language. Their
use triggers required compliance with the Rule's
earnings claim disclosure requirements (Part
- Franchise Agreements: The franchisor must
give investors a copy of its standard-form
franchise and related agreements at the same time
as the basic disclosures, and final copies
intended to be executed at least 5 business days
before signing (Part 436.1(g)).
- Refunds: The Rule requires franchisors to
make refunds of deposits and initial payments to
potential investors, subject to any conditions on
refundability stated in the disclosure document
- Contradictory Claims: While franchisors
are free to provide investors with any
promotional or other materials they wish, no
written or oral claims may contradict information
provided in the required disclosure document
- Basic Disclosures: The Rule requires franchisors to give potential investors a basic disclosure document at the earlier of the first face-to-face meeting or ten business days before any money is paid or an agreement is signed in connection with the investment (Part 436.1(a)).
- B. Liability: Failure to comply with any of the
six requirements is a violation of the Franchise Rule.
"Franchisors" and "franchise brokers"
are jointly and severally liable for Rule violations.
- A "franchisor" is defined as
any person who sells a "franchise"
covered by the Rule (Part 436.2(c)).
- A "franchise broker" is defined
as any person who "sells, offers for sale,
or arranges for the sale" of a covered
franchise (Part 436.2(j)), and includes not only
independent sales agents, but also subfranchisors
that grant subfranchises (44 FR 49963).
- A "franchisor" is defined as any person who sells a "franchise" covered by the Rule (Part 436.2(c)).
- A. Alternate Definitions: The Rule employs
parallel coverage definitions of the term
"franchise" to reach two types of continuing
commercial relationships: traditional franchises and
- B. "Traditional Franchises": There are
three definitional prerequisites to coverage of a
business-format or product franchise (Parts
436.2(a)(1)(i) and (2)):
- Trademark: The franchisor offers the right to distribute goods or services that bear the franchisor's trademark, service mark, trade name, advertising or other commercial symbol.
- Significant Control or Assistance: The franchisor exercises significant control over, or offers significant assistance in, the franchisee's method of operation.
- Required Payment: The franchisee is
required to make any payment to the franchisor or
an affiliate, or a commitment to make a payment,
as a condition of obtaining the franchise or
commencing operations. (NOTE: There is an
exemption from coverage for required payments of
less than $500 within six months of the
commencement of the franchise (Part
- C. Business Opportunities: There are also three
basic prerequisites to the Rule's coverage of a business
opportunity venture (Parts 436.2(a)(1)(ii) and (2)):
- No Trademark: The seller simply offers the right to sell goods or services supplied by the seller, its affiliate, or a supplier with which the seller requires the franchisee to do business.
- Location Assistance: The seller offers to secure retail outlets or accounts for the goods or services to be sold, to secure locations or sites for vending machines or rack displays, or to provide the services of someone who can do so.
- Required Payment: The same as for franchises.
- D. Coverage Exemptions/Exclusions: The Rule also
exempts or excludes some relationships that would
otherwise meet the coverage prerequisites (Parts
436.2(a)(3) and (4)):
- Minimum investment: This exemption applies if all payments to the franchisor or an affiliate until six months after the franchise commences operation are $500 or less (Part 436.2(a)(iii)).
- Fractional Franchises: Relationships
adding a new product or service to an established
distributor's existing products or services, are
exempt if: (i) the franchisee or any of its
current directors or executive officers has been
in the same type of business for at least two
years, and (ii) both parties anticipated, or
should have, that sales from the franchise would
represent no more than 20% of the franchisees
sales in dollar volume (Parts 436.2(a)(3)(i) and
- Single Trademark Licenses: The Rule
language excludes a "single license to
license a [mark]" where it "is the only
one of its general nature and type to be granted
by the licensor with respect to that [mark]"
(Part 436.2(a)(4)(iv)). The Rule's Statement of
Basis and Purpose indicates it also applies to
"collateral" licenses [e.g., logo on
sweatshirt, mug] and licenses granted to settle
trademark infringement litigation (43 FR
- Employment and Partnership Relationships:
The Rule excludes pure employer-employee and
general partnership arrangements. Limited
partnerships do not qualify for the exemption
- Oral Agreements: This exemption, which is
narrowly construed, applies only if no material
term of the relationship is in writing (Part
- Cooperative Associations: Only
agricultural co-ops and retailer-owned
cooperatives "operated 'by and for'
retailers on a cooperative basis," and in
which control and ownership is substantially
equal are excluded from coverage (Part
- Certification/Testing Services:
Organizations that authorize use of a
certification mark to any business selling
products or services meeting their standards are
excluded from coverage (e.g., Underwriters
Laboratories) (Part 436.2(a)(4)(iii)).
- Leased Departments: Relationships in
which the franchisee simply leases space in the
premises of another retailer and is not required
or advised to buy the goods or services it sells
from the retailer or an affiliate of the retailer
are exempt (Part 436.2(a)(3)(ii)).
- E. Statutory Exemptions: Section 18(g) of the FTC
Act authorizes "any person" to petition the
Commission for an exemption from a rule where coverage is
"not necessary to prevent the acts or
practices" that the rule prohibits (15 U.S.C. §
57a(g)). Franchise Rule exemptions have been granted for
service station franchises (45 FR 51765), many automobile
dealership franchises (45 FR 51763; 49 FR 13677; 52 FR
6612; 54 FR 1446), and wholesaler-sponsored voluntary
chains in the grocery industry (48 FR 10040).
- A. Alternatives: Franchisors have a choice of
formats for making the disclosures required by the Rule.
They may use either the format provided by the Rule or
the Uniform Franchise Offering Circular
("UFOC") format prescribed by the North
American Securities Administrators' Association
- B. FTC Format: Franchisors may comply by following
the Rule's requirements for preparing a basic disclosure
document (Parts 436.1(a)(1)-(24)), and if they make
earnings claims, for a separate earnings claim disclosure
document (Parts 436.1(b)(3), (c)(3), and (d)). The Rule's
Final Interpretive Guides provide detailed instructions
and sample disclosures (44 FR 49966).
- C. UFOC Format: The Uniform Franchise Offering
Circular format may also be used for compliance in any
- Guidelines: Effective January 1, 1996, franchisors using the UFOC disclosure format must comply with the UFOC Guidelines, as amended by NASAA on April 25, 1993. (44 FR 49970; 60 FR 51895).
- Cover Page: The FTC cover page must be furnished to each potential franchisee, either in lieu of the UFOC cover page in non-registration states or along with the UFOC (Part 436.1(a)(21); 44 FR 49970-71).
- Adaptation: If the UFOC is registered or used in one state, but will be used in another without a franchise registration law, answers to state-specific questions must be changed to refer to the law of the state in which the UFOC is used.
- Updating: If the UFOC is registered in a state, it must be updated as required by the state's franchise law. If the same UFOC is also adapted for use in a non-registration state, updating must occur as required by the law of the state where the UFOC is registered. If the UFOC is not registered in a state with a franchise registration law, it must be revised annually and updated quarterly as required by the Rule.
- Presumption: The Commission will presume the sufficiency, adequacy and accuracy of a UFOC that is registered by a state, when it is used in that state.
- D. UFOC vs. Rule: Many franchisors have adopted
the UFOC disclosure format because roughly half of the 13
states with franchise registration requirements will not
accept the Rule document for filing. When a format is
chosen, all disclosure must conform to its requirements.
Franchisors may not pick and choose provisions from each
format when making disclosures (44 FR 49970).
- E. Rule Primacy: If the UFOC is used, several key
Rule provisions will still apply:
- Scope: Disclosure will be required in all cases required by the Rule, regardless of whether it would be required by state law.
- Coverage: The Rule will determine who is obligated to comply, regardless of whether they would be required to make disclosures under state law.
- Disclosure Timing: When disclosures must be made will be governed by the Rule, unless state law requires even earlier disclosure.
- Other Material: No information may appear in a disclosure document not required by the Rule or by non-preempted state law, regardless of the format used, and no representations may be made that contradict a disclosure.
- Contracts: Failure to provide potential franchisees with final agreements at least 5 days before signing will be a Rule violation regardless of the disclosure format used.
- Refunds: Failure to make promised refunds also will be a Rule violation regardless of which document is used.
- A. FTC Action: Rule violations may subject
franchisors, franchise brokers, their officers and agents
to significant liabilities in FTC enforcement actions.
- 1. Remedies: The FTC Act provides the
Commission with a broad range of remedies for
- a. Injunctions: Section 13(b) of
the Act authorizes preliminary and
permanent injunctions against Rule
violations (15 U.S.C. § 53(b)). Rule
cases routinely have sought and obtained
injunctions against Rule violations and
misrepresentations in the offer or sale
of any business venture, whether or not
covered by the Rule.
- b. Asset Freezes: Acting under
their inherent equity powers, the courts
have routinely granted preliminary asset
freezes in appropriate Rule cases. The
assets frozen have included both
corporate assets and the personal assets,
including real and personal property, of
key officers and directors.
- c. Civil Penalties: Section
5(m)(1)(A) of the Act authorizes civil
penalties of up to $10,000 for each
violation of the Rule (15 U.S.C. §
45(m)(1)(A)). The courts have granted
civil penalties of as much as $870,000 in
a Rule case to date.
- d. Monetary Redress: Section 19(b)
of the Act authorizes the Commission to
seek monetary redress on behalf of
investors injured economically by a Rule
violation (15 U.S.C. § 57b). The courts
have granted consumer redress of as much
as $4.9 million in a Rule case to date.
- e. Other Redress: Section 19(b) of
the Act also authorizes such other forms
of redress as the court finds necessary
to redress injury to consumers from a
Rule violation, including rescission or
reformation of contracts, the return of
property and public notice of the Rule
violation. Courts may also grant similar
relief under their inherent equity
- a. Injunctions: Section 13(b) of the Act authorizes preliminary and permanent injunctions against Rule violations (15 U.S.C. § 53(b)). Rule cases routinely have sought and obtained injunctions against Rule violations and misrepresentations in the offer or sale of any business venture, whether or not covered by the Rule.
- 2. Personal Liability: Individuals who
formulate, direct and control the franchisor's
activities can expect to be named individually
for violations committed in the franchisor's
name, together with the franchisor entity, and
held personally liable for civil penalties and
- 3. Liability For Others: Franchisors and
their key officers and executives are responsible
for violations by persons acting in their behalf,
including independent franchise brokers,
sub-franchisors, and the franchisor's own sales
- 1. Remedies: The FTC Act provides the Commission with a broad range of remedies for Rule violations:
- B. Private Actions: The courts have held that the
FTC Act generally may not be enforced by private
- Rule Claims: The Commission expressed its view when the Rule was issued that private actions should be permitted by the courts for Rule violations (43 FR 59723; 44 FR 49971). To date, no federal court has permitted a private action for Rule violations.
- State Disclosure Law Claims: Each of the franchise laws in the 15 states with franchise registration and/or disclosure requirements authorizes private actions for state franchise law violations.
- State FTC Act Claims: The courts in some states have interpreted state deceptive practices laws ("little FTC Acts") as permitting private actions for Rule violations.
VI. Legal Resources
- A. Text of Rule: 16 C.F.R. Part 436.
- B. Statement of Basis and Purpose: 43 FR
59614-59733 (Dec. 21, 1978) (Discusses the evidentiary
basis for promulgation of the Rule, and shows Commission
intent and interpretation of its provisions -
particularly helpful in resolving coverage questions).
- C. Final Interpretive Guides: 44 FR 49966-49992
(Aug. 24, 1979) (Final statement of policy and
interpretation of each of the Rule's requirements -
important discussions of coverage issues, use of the UFOC
and requirements for basic and earnings claims
disclosures in the Rule's disclosure format).
- E. Staff Advisory Opinions: Business Franchise
Guide (CCH) �6380 et seq. (Interpretive opinions issued
in response to requests for interpretation of coverage
questions and disclosure requirements pursuant to 16
C.F.R. §§ 1.2-1.4).