The State of the States Report
I have been a franchise lawyer my entire professional career. I still recall vividly my first project on my first day, September 8, 1987. International Dairy Queen had acquired Orange Julius of America (OJA) earlier that year, and we were updating the Orange Julius UFOC to enable OJA to continue to offer and sell franchises. We then also filed the revised UFOC in the various registration states.
Many aspects of the registration process have changed over the years. The UFOC now is the FDD. Back then I recall sitting at my kitchen table late in the evening with a red marker preparing redlined drafts of the various documents. Redlining the FDD now is done electronically. In 1987 we rarely prepared an Item 19 earnings claim and rarely received comments from state examiners regarding "plain English," although John Hayden, the head California examiner back then, was the front-runner in that regard and clearly pushed franchisors and their franchise lawyers in that direction.
One aspect of the registration process, however, has not changed. Franchisors and franchise lawyers are, and always have been, much better served treating the individual state examiners with respect and the highest level of professionalism. Although that approach is more common sense than anything else, I hear too many anecdotes from state examiners, franchisors, and franchise lawyers that suggest common sense often takes a backseat to other approaches and attitudes. The following is a short list of approaches and attitudes to keep in mind when communicating with state examiners.
State examiners are human. They have good days and bad days, just like everyone else. Particularly during stressful times like the heavy franchise renewal season of March, April, and May, anyone who contacts the state examiners is much better served if they make those contacts with respect, patience, and understanding.
State regulatory agencies generally are trying to do more with less. For example, franchise examiners at the California Department of Corporations have fewer examiners and work fewer days because of state budget constraints - yet until perhaps this year they were handling more franchise filings than ever before. In addition to the increase in numbers, many of the new filings are prepared by the franchisors themselves, without the assistance of experienced franchise counsel. In short, these types of filings often are woefully inadequate and consume far too much examiner review time.
With that backdrop, anyone communicating with the state examiners (whether in writing or by phone) should do so with extreme professionalism. Honor whether an examiner prefers contact by email or by phone. Be patient if the examiner does not immediately return calls or emails. Do not file the registration application and begin calling the next week to see if they have reviewed it. If you follow these principles, you are much more likely to get through the registration process painlessly - and may even get the state examiner to accommodate a special request from time to time.
Understand the process
State examiners are reviewing hundreds of applications at any particular time, especially during the typical franchise renewal season of March to May. Franchisors are well served to plan accordingly. If you wait until the last day before your registration application is due, then you will be in line with hundreds of other applications. If possible, get your application in early, even if just a week or two. Each day matters during the heavy renewal season.
You also should understand what you can and cannot do in a particular registration state upon filing a renewal or amendment application, as each state is different. For example, in Illinois an amendment or renewal application is approved upon receipt by the state (yes, you can conduct offer and sales activity in Illinois immediately upon properly filing a complete renewal or amendment application), but you must understand your obligations if the state later comes back with a comment letter. California also allows a franchisor to continue to conduct certain sales activity with an appropriate notice attached to an FDD that has been filed with the state but not yet approved. Other states require you to discontinue sales until the application is approved. Again, each state varies, so you must recognize and follow the different rules.
Understand the disclosure requirements
One key area that can lead to considerable frustration on everyone's part is the comment letter. You submitted your renewal application on time, received approval in a few states, and then receive a comment letter with 20 or more comments from a particular state. Your initial reaction may be to blame the examiner or the lawyer, but that serves no useful purpose.
The better response is to review each comment carefully. Absolutely understand the FDD disclosure requirements and the different approaches you can use to respond to the comment, meet your business objectives and comply with your legal requirements. In some instances there may be only one approach. In other instances you may have different options, but you must make certain you understand what the FDD Guidelines require - not what you think they require..
You also should understand what the examiner is looking for with the comment. If you are unsure, contact the examiner. If you follow the "Be respectful" principle, the examiners likely will explain their request. You then can talk through options and determine how to respond. You will not get much help from the examiner if your initial approach is to insist they are wrong in their request or their interpretation of the guidelines. My experience is that more often than not you can find a solution that is acceptable to the examiner and the franchisor. The likelihood of finding that resolution is much less if you respond to the comment letter without any communication. That approach will likely result in a second comment letter with 10 comments (because you guessed right on half of the 20 initial comments).
Do not fudge the truth
State examiners communicate with one another. Do not make the "You are the only examiner that has made that comment" statement if it is not true. You can bet that the examiners will discuss that issue among themselves, and your name will be associated with that type of attitude. Further, my suggestion is to avoid making that statement at all. It is devoid of respect. I am not aware of a single instance in which that comment alone has made a state examiner change their mind on a particular issue..
Remember: Be respectful. That aspect of the registration process will never change.
NOTE: This article is provided for general informational purposes only and should not be considered or construed as legal advice or opinion concerning any specific circumstances or facts. You are encouraged to consult with your own franchise lawyer regarding any specific issue, situation or legal question you may have.
Brian Schnell is a leader of the Faegre & Benson Franchise Team, which represents more than 200 franchisors in 35 states and 7 countries. He is a past chair of the IFA Supplier Forum; a member of its Legal/Legislative, Awards, and Membership committees; and in 2009 became the first male to receive the IFA Women's Franchise Committee Crystal Compass. Contact him at 612-766-7472 or firstname.lastname@example.org.
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