Franchise Law

Our objective with this column is to identify issues and best practices that will enable franchisors to more effectively address state registration/disclosure matters in connection with their franchise development efforts. The IFA 2009 Legal Symposium's "Ask the Regulators" session provided insight on a number of those fronts. During this session, state regulators identified several common mistakes franchisors make during the registration process, many related to the Revised FTC Rule. We discuss five of those common mistakes, with another five to be discussed next month.

1) First Personal Meeting. Under the Revised FTC Rule, franchisors no longer have to provide a franchise disclosure document (FDD) at the first personal meeting...

Let's look at some recent trends. The stock market: trending downward. Franchise system sales: flat or downward in well over the majority of cases. Sales of new franchises: definitely on the downturn, almost dormant. How depressing!

And yet, in the last four weeks, I have been contacted by three groups about how they have dollars they want to invest in franchise systems; they have put on their buying paint. Two are parent companies of entities that already own franchise systems. They are satisfied with their current portfolio's performance and want to expand their financial exposure in the franchising arena. The other is a New York venture capital fund.

In each case, we are talking about big dollars, at least by my meager standards...

Let's play Jeopardy. The answer: "Document!"The question: "What is the most effective way to minimize risk in the franchise sales process?"

To be honest, my answer is a form of shorthand, but it succinctly makes my point.
The inspiration for this pedantic piece was a recent decision by an Australian trial court, Van Camp v. Muffin Break Pty Ltd. Foreign court decisions are typically not given great weight in the U.S., but the Australian franchise regulatory scheme, particularly in the area of disclosure, is very similar to ours. Moreover, Australian trial judges are typically more detailed and more open about saying what is on their minds than their U.S. counterparts. Thus, their decisions, although often quite lengthy, make interesting reading for the legal community--plus they can be helpful in what I will describe as prophylactic counseling...

We now have all of the requirements of the FTC's Amended Franchise Rule being implemented.

All franchisors should be complying with the Amended Rule's disclosure requirements, and most franchisors who have sales activities in the registration states are now doing battle with the state examiners, as they test the procedures and borders of the revised disclosure requirements. That brings to mind two topics of discussion, one of which I will address below, and the other (a look at the overall system for regulating franchise sales disclosure) I will save for another column.

Today's subject: How are the state examiners reacting to the changes in franchise disclosure/registration?

Answer: I can't respond to this question from the examiner's viewpoint, but from this practitioner's standpoint, not well...

As revenue for the state's revised franchise tax continues to add up, several bills have been introduced to the state legislature to change the tax and give business owners some breathing room.

As of Nov. 25, the total revenue from the state's revised franchise tax for fiscal year 2009, which includes September, October and November, is about $195.7 million, said R.J. DeSilva, spokesperson for the State Comptroller's office.

"This number could change as we finish up processing final reports and issue any refunds as well, if companies had previously made overpayments," DeSilva said. "We're also analyzing data for the Business Tax Advisory Committee report. That report will break down the distribution of the franchise tax among industries and various sizes of businesses in those industries...

Local governments and video providers should find out by Nov. 3 if a Louisiana state court judge will accept language in the state's new franchising law that allows incumbent operators to opt out of current local contracts.

The law was challenged in August, after it was signed into law by Gov. Bobby Jindal but two days before it was to go into effect, by municipalities and the Police Jury Association of Louisiana, the trade group for parishes there.

Parishes and municipalities argue that the bill, which moves franchising authority to the secretary of state's office, violates the Louisiana constitution. The constitution prevents the state from passing laws that "extinguish" obligations between local governments and companies...

The current economic climate remains high in the minds of both state Senate candidates for District 14.

Democrat Bob Williams and Republican Gary Howell are both vying for the seat that would represent Barbour, Mineral, Preston, Taylor and Tucker counties as well as part of Grant and Monongalia counties.

"West Virginia has a lot of advantages as a state," Howell said. "We have the natural resources that many states don't have ... Unfortunately, we have a business climate of the Legislature doing the same thing over and over again and that's what hurts us."