1. How Franchise Sales Laws Affect The Franchise Sales Process Starting A Franchise Washington, DC Economic Partnership Presented By: Carl E. Zwisler Gray Plant Mooty Wednesday, January 12, 2011

2. (c) 2011 Gray Plant Mooty 2 How Franchise Laws Help New Franchisors And New Franchisees What is a franchise which is subject to franchise regulations? Which laws regulate franchise sales in metropolitan Washington, DC? What does the FTC Franchising Rule require franchisors to do?

3. (c) 2011 Gray Plant Mooty 3 What additional requirements do the MD and VA franchise laws impose on franchisors? How do these laws help: –new franchisors? –prospective franchisees and franchisees?

4. (c) 2011 Gray Plant Mooty 4 What Is A Franchise For Purposes Of USA Laws? FRANCHISING DEFINED by FTC Rule* Trademark () or service mark license Promise of: –Substantial assistance or –Substantial control regarding the operation of a Business Payment of a Fee *State definitions differ somewhat

5. (c) 2011 Gray Plant Mooty 5 How Is Franchising Regulated? Two general types of laws apply to franchisors –Franchise sales laws –Franchise relationship laws

6. (c) 2011 Gray Plant Mooty 6 What Are Franchise Sales Laws? Franchise sales laws regulate when and how a franchise may be offered and sold. The Federal Trade Commission Franchising Trade Regulation Rule (FTC Rule) is a federal law which applies to all franchises offered and sold in the USA

7. (c) 2011 Gray Plant Mooty 7 FTC Overview When must FDDs be delivered to prospective franchisees? –14 calendar days before: Paying a fee Signing an agreement –Earlier if reasonably requested

8. (c) 2011 Gray Plant Mooty 8 When Must Prospective Franchisees Be Given Complete Agreements? Franchisees must receive franchise contracts containing all material terms at least 7 calendar days before the franchisee signs the agreements, but only if standard disclosed agreements are unilaterally changed by Franchisor e.g. if description of an exclusive territory was not contained in disclosed franchise agreement

9. (c) 2011 Gray Plant Mooty 9 What Is The FDD? The FDD is a form of disclosure which is designed to satisfy disclosure requirements of the FTC Rule and state laws

10. (c) 2011 Gray Plant Mooty 10 What Is The FDD? TABLE OF CONTENTS ITEM 1.The Franchisor and any Parents, Predecessors, and Affiliates 2. Business Experience 3.Litigation 4. Bankruptcy 5. Initial Fees 6. Other Fees 7. Estimated Initial Investment 8. Restrictions on Sources of Products and Services 9. Franchisees Obligations 10.Financing 11.Franchisors Assistance, Advertising, Computer Systems, and Training 12.Territory

11. (c) 2011 Gray Plant Mooty 11 What Is The FDD? TABLE OF CONTENTS ITEM 13.Trademarks 14.Patents, Copyrights, and Proprietary Information 15.Obligation to Participate in the Actual Operation of the Franchise Business 16.Restrictions on What the Franchisee May Sell 17.Renewal, Termination, Transfer, and Dispute Resolution 18.Public Figures 19.Financial Performance Representations 20.Outlets and Franchisee Information 21.Financial Statements 22.Contracts 23.Receipts 24.Exhibits

12. (c) 2011 Gray Plant Mooty 12 Updating FDDs must be updated: –whenever information required to be disclosed changes materially; –annually within 120 days of the franchisors fiscal year end

13. (c) 2011 Gray Plant Mooty 13 Exemptions $ 1 Million initial investment $1 Million includes investment in multiple franchises under: Area Development and Master Franchise Agreements $1 Million does not include: –Amounts financed by the franchisor and its affiliates. –Investments in unimproved real property (raw land)

14. (c) 2011 Gray Plant Mooty 14 Exemptions $5 Million net worth and 5 years business experience of franchisee, its parent or affiliates.

15. (c) 2011 Gray Plant Mooty 15 Exemptions Franchise Officers, Managers and Owners If Franchisor or one or more of its officers, directors, general partners, owners, or managers… –Owns at least 50% of prospective franchisee, the sale is exempt if: as of 60 days before the franchise sale, officers managers, or partners, etc. have been associated with the franchisor for at least 2 years, and owners have owned at least 25% interest in franchisor for at least 2 years

16. (c) 2011 Gray Plant Mooty 16 How Do States Regulate Franchise Sales? Franchise registration and disclosure laws Business opportunity laws Little FTC acts or consumer protection laws Common law prohibiting fraud and misrepresentation

17. (c) 2011 Gray Plant Mooty 17 Franchise Registration And Disclosure Laws Franchise sales laws regulate franchise offers and sales in 15 states, including MD and VA

18. (c) 2011 Gray Plant Mooty 18 State Franchise Registration And Disclosure Laws

19. (c) 2011 Gray Plant Mooty 19 What Must Franchisors Do To Comply With State Franchise Registration And Disclosure Laws? File an application which includes an FDD with a state agency for approval A filing fee of $250 - $600

20. (c) 2011 Gray Plant Mooty 20 What Do State Agencies Review? FDD and franchise agreements to determine compliance with disclosure format requirements and state relationship laws Financial statements to determine franchisors ability to fulfill duties to franchisees Litigation history of franchisor and executives to determine whether their involvement creates unreasonable risk to franchisees

21. (c) 2011 Gray Plant Mooty 21 When Must Franchise Filings Be Made? Before making an offer of a franchise –In or from a state with a registration law –To a resident of a state with a registration law –To one purchasing a franchise to be located in the state (sometimes)

22. (c) 2011 Gray Plant Mooty 22 Advertising All forms of advertising for franchisees are regulated as offers, including internet advertising, and usually must be approved before use N.B., state review, not federal

23. (c) 2011 Gray Plant Mooty 23 How Long Is A Registration Effective? Usually for one calendar year, or until 90 - 120 days after franchisors fiscal year end Amendments to registration are required if a material change occurs to required disclosures

24. (c) 2011 Gray Plant Mooty 24 Sources Of Franchise Disclosure Documents www.corp.ca.gov/CalEASI/caleasi.asp Caleasi is an official site of the California Department of Corporations, which retains files of franchises which are registered under the California Franchise Investment Law Two other sites which offer free access to FDDs are: –www.OpenFran.org –www.FreeFranchiseDocs.com

25. (c) 2011 Gray Plant Mooty 25 How The Franchise Disclosure Requirements Help New Franchisors Preparing an FDD forces new franchisors to consider issues relating to their franchising programs which would often be overlooked –Territorial rights and restrictions –Purchase restrictions –Franchise renewal –Restrictions on transfer of ownership of the franchisee

26. (c) 2011 Gray Plant Mooty 26 How FDDs Help Prospective Franchisees Contact information for current and former franchisees Financial statements of the franchisor Initial investment estimates Litigation, bankruptcy and franchise turnover information

27. (c) 2011 Gray Plant Mooty 27 How Franchise Sales Laws Help Franchisees FTC and state enforcement actions State laws provide right to recover damages or to obtain rescission when a franchisor violates them

28. (c) 2011 Gray Plant Mooty 28 What Franchise Sales Laws Do Not Do Assure that a business will be successful Prohibit a franchisor from making bad business decisions Provide information about earnings of franchisee- and franchisor-owned units (in most cases) Prohibit franchisors from using contract provisions which franchisees may consider to be unfair (in most cases)

29. (c) 2011 Gray Plant Mooty 29 How Can New Franchisors and Franchisees Best Protect Themselves? Use experienced franchise professionals Read and seek to understand all legal documents. If they are not intelligible, the franchise program is destined for problems Obtain references for –Franchise professionals –franchisors

30. (c) 2011 Gray Plant Mooty 30 Trust your instincts. If it does not feel right, dont do it Obtain FDDs from industry competitors and understand their competitive advantages and disadvantages

31. (c) 2011 Gray Plant Mooty 31 Sources Of Information On Franchising Franchising Basics: The Official IFA Course, available online at www.franchise.org www.franchise.org Informative Articles: –How United States Laws Regulate Franchising: An Overview of Franchise Law for Franchisor Executives –How To Evaluate A Franchise e-mail Kimberly Bradshaw at kimberly.bradshaw@gpmlaw.com

32. (c) 2011 Gray Plant Mooty 32 Carl Zwisler Principal 35 years representing franchisors and master franchisees in domestic and international franchise transactions Former IFA General Counsel Author: –Master Franchising: Selecting, Negotiating, and Operating a Master Franchise, Commerce Clearing House, 1999 –International Franchising: A Practitioners Guide, chapter Selecting a Format for International Franchising Author/presenter of more than 100 articles and presentations on all facets of international and domestic franchising

33. (c) 2011 Gray Plant Mooty 33 Thank you. Carl E. Zwisler Gray Plant Mooty 2600 Virginia Avenue, NW Suite 1111 – The Watergate Washington, DC 20037 Phone: 202-295-2225 Facsimile: 202-295-2275 carl.zwisler@gpmlaw.com