On July 1 the world of restaurant franchising will change in a big way. That’s the day the Federal Trade Commission will begin enforcing a rule change that governs the amount of detail franchisors must disclose in their uniform franchise offering circulars, or UFOCs. In a nutshell, franchisors will have to provide more information about their most sensitive business operations, legal matters, future prospects and present operations in a more prominent way, with some of it required to appear on the front page of the UFOC. But Michael Einbinder, a lawyer who represents both franchisees and franchisors for Einbinder & Dunn in New York, says the FTC’s Disclosure Rule is a mixed bag of good and bad for both sides of the table.
Is there a conflict of interest when a law firm represents franchisees and franchisors?
Not at all. In fact, I think when I’m representing a franchisor, my experience with franchisees gives me a unique perspective and vice versa. It really pays off when we help franchisors draft their legal documents.
If there is a contract two parties have signed, why is there so much friction between franchisees and franchisors?
No relationship is without its conflicts. That goes double, at least, for business relationships, but of the disputes between franchisees and their franchisors, many arise at the outset of the relationship. These typically involve allegedly noncompliant, improper or inaccurate disclosure.
Will this new FTC rule fix anything?
Well, it’s not a bad thing for the franchisor, but it’s a good thing for the franchisee. It’s not going to complicate anything, but it could be expensive for some chains to re-write their UFOCs and make them compliant.
Why this new rule change anyway?
The world of franchising has changed a lot in the last 30 years, and as an industry it has grown phenomenally, and regulators came to believe that there needed to be significant changes in the amount of disclosure to make it more helpful for potential franchises to know what they are buying.
Without using the word, I see the FTC really wants franchisors to be more open about encroachment.
They want franchisors to make it clearer. Do you offer exclusive territories? Do you intend to sell ice cream in the supermarket across the street from a franchisee? Can other franchisees move down the block? Make a clear statement, if that’s the case.
There’s also more disclosure required about lawsuits between the franchisor and the franchisees.
Yes. That’s a good thing for the franchisee. A lot of lawsuits in the system can be a sign that the concept is not working. If franchisees are failing or not paying royalties and there’s a ton of litigation, it says something about the business. Lawsuits did not have to be disclosed before. You as a prospective franchisee didn’t know about other litigation until the franchisor went to court.