Under the Federal Trade Commission (FTC) Franchise Rule and various state franchise laws, franchisors have a legal obligation to disclose certain information to prospective franchisees. While franchisees cannot pursue claims under the FTC Franchise Rule, they can pursue claims under state franchise laws in many cases. In this article, franchise attorney Jeffrey M. Goldstein explains what constitutes a franchise disclosure violation, and discusses the potential implications for disputes between franchisees and franchisors.
4 Common Franchise Disclosure Violations
Not all states have franchise disclosure laws, and not all of the existing state franchise disclosure laws are uniform. As a result, in order to determine your rights, you will need to consult with a franchise attorney regarding the law (if any) in your state. With that said, there are a number of disclosure violations that are common among state franchise disclosure laws. For example:
1. Failure to Provide a Complete Franchise Disclosure Document (FDD)
State franchise disclosure laws generally require franchisors to provide prospective franchisees with a franchise disclosure document (FDD) that complies with the FTC Rule. Many states have additional disclosure requirements as well. Failing to include state-specific terms or a state-specific addendum is a common disclosure violation.
2. Failure to Provide a Sufficient “Cooling Off” Period
Under the FTC Franchise Rule, franchisors must deliver their FDD to prospective franchisees at least 14 calendar days prior to signing a franchise agreement or requiring any payment. State franchise disclosure laws frequently include “cooling off” periods as well. If a franchisor enters into a franchise agreement or requires payment of a deposit or any fee during the cooling-off period, this may provide a cause of action under state law.
3. Omitting Material Information from the FDD
Franchisors frequently omit material information from their FDDs. Whether intentional or inadvertent, omitting material information from an FDD is a state franchise disclosure law violation.
4. Misrepresenting Information in the FDD
Misrepresenting material information in the FDD can also give rise to claims under state franchise disclosure laws. From trademark rights to financial performance representations (FPRs), and from pending litigation to projected franchise openings, there are many items in the FDD that can have a direct and significant impact on prospective franchisees’ buying decisions.
What if Your Franchisor Committed a Franchise Disclosure Violation?
If your franchisor committed a disclosure violation, what does this mean for you? The short answer is, “It depends.” From the severity of the violation to the prohibitions contained in your state’s franchise disclosure law (if any), there are several factors that a franchise attorney will need to consider when evaluating your legal rights. In some cases, disclosure violations may not give rise to a cause of action. But, in others, recission, restitution and damages could all be on the table.
Request a Free Consultation with Franchise Attorney Jeffrey M. Goldstein
If you believe that your franchisor may have committed a disclosure violation, we encourage you to contact us for a free, no-obligation consultation. To discuss your legal rights with franchise attorney Jeffrey M. Goldstein in confidence, please call 202-293-3947 or request an appointment online today.