My esteemed colleague Tami McKnew today filed the following comment on the NLRB proposed joint employer rulemaking, 83 FR 46681:

The proposed rule specifically acknowledges the effects of the 2015 shift in joint employer analysis evident in the Board’s decision in Browning-Ferris Industries, 362 NLRB No. 186 (“Browning-Ferris”). Following the Browning-Ferris decision, franchisors, temporary employment firms, contract employers and others whose businesses necessitate some degree of interaction with and arguable control over non-employed workers found themselves as joint employers, despite decades of precedent otherwise. The effect on such businesses was immediate and profound.

With this proposed rulemaking the NLRB more clearly defines the conditions under which joint employment may be evident, and largely restores the pre-Browning-Ferris analytical framework. This is entirely appropriate, given the decades of business relationships and industries whose very structure incorporated and depended upon the prior established analytical framework. As recognized in the Notice, the proposed rule also reflects the pre-Browning-Ferris well-established and long-standing joint employment analytical framework.

However, that the Notice fails to adequately address, by specific acknowledgement or by example, the concerns of licensors and licensees of intellectual property, in particular patent, trademark or service mark licensors. Owners of such intellectual property rights must police and protect those rights; failure to do so may render such rights unenforceable. In legal jurisprudence, a patent owner’s policing obligations have been whittled down, especially given the elimination of a laches defense in infringement actions, SGA Hygiene Products Aktiebolag v. First Quality Baby Products, 137 S.Ct. 954 (2017), but affirmative action must be undertaken by the licensor to protect against infringement. The policing obligation remains for trademark owners, however. 15 U.S.C. §1064(5)(A).

Patent and trademark owners may license rights to practice patented technology or use trademarks or service marks. Such licenses require the licensee to abide by standards and/or to adhere to particular practices. Certain types of patents, for instance, process or method patents, may dictate an entire process and all the operations required to perform the method or process; the licensee has little or no choice as to the operations governed by the patent license.

Similarly, trademark or service mark licenses may dictate extensive quality control standards, processes and procedures. The most obvious example is the central role that trademark and service mark licensing have in a franchise system. But such licenses are not limited to the franchise industry. A dealer or distributor may sell products bearing the trademarks of one or more licensors; it may service products pursuant to licenses from different licensors; and it may lease products under license from yet a third licensor. The scenario is not unlikely. A tire dealer may be licensed to sell multiple brands; it may be licensed to provide recapping services, as directed in the license, by a different licensor; it may lease products under the service marks of yet a third licensor. Each of the licenses will include mandated procedures and operations over which the dealer has no control.

In each of these cases, control over significant operations in the licensee’s business is dictated by the licensor. Will the efforts of the licensors to police and enforce the licensed rights expose them to the risk of being considered the joint employer of the licensee’s employees whose employment is to perform such operations? And for a licensee who holds licenses from multiple licensors, as in the distribution example above, are multiple licensors potential joint employers? In each situation, the licensor can be said to offer “direct and immediate” control over the licensee’s employees, in that the licensor dictates the operations that form the central part of their employment. The ability of an owner of intellectual property to reap the potential financial benefits of a patent or trademark/service mark is ephemeral at best if enforcing those rights exposes one to the risk of becoming a joint employer of the licensee’s employees. More importantly in the context of the NLRB’s proposed rulemaking, it makes little sense to include such licensors at the bargaining table. Absent specific recognition in the proposed rule of the unique position of intellectual property licensors and licensees, the application of the joint employer analysis is unclear.

I respectfully suggest amending the proposed rule to include language which provides that the status of joint employment is inappropriate based solely on a licensor’s policing or enforcement of its patent, trademark or service mark requirements and standards. Intellectual property owners should not be dissuaded from enforcing their rights to control, police and enforce their patent, trademark or service mark rights.

Note:  Comments were originally due November 14th, but that deadline has been extended to December 13, 2018. See 83 FR 55329.

The Fox Rothschild associate team of Megan Center and Alex Radus recently gave a presentation at the International Franchise Expo in New York City on the “Top Ten Provisions to ‘Never’ Negotiate in a Franchise Agreement”. A summary of this presentation will be prepared in four separate blog posts. The first post focused on central themes of franchise negotiation, and the second post addressed protecting the confidentiality of franchise negotiations.

This installment details the first five of our top ten provisions to “never” negotiate.

1)           Signing “then-current” franchise agreement

  • Typical Provision: Upon transfer, renewal or purchase of an additional unit, the franchisee must sign the franchisor’s then-current form of franchise agreement.
  • Franchisee Argument: Franchisees want the same terms for the entire franchise relationship. Uncertainty increases investment risk and hinders growth.
  • Franchisor Argument: Franchisors spend time and money on continually developing and refining their form of franchise agreements. Franchisors need to rely on the uniform use and enforceability of their then-current franchise agreements. Franchisors cannot predict the future and, given that a renewal franchise agreement will be signed many years after the initial franchise agreement, franchisors need the flexibility to use their then-current form of franchise agreements at that time.
  • Compromise: Parties often agree not to change fees, territory and terms they initially negotiated. If any terms were negotiated due to the “newness” of the relationship, these generally lapse as the relationship matures.

2)           Reservation of Rights – Competitive Units or Brands

  • Typical Provision: Except for the franchisee’s right to operate in the territory, the franchisor reserves all other rights, including to open units in non-traditional venues (stadiums, shopping malls, etc.) and to operate competitive brands in the franchisee’s territory.
  • Franchisee Argument: Franchisees won’t want to compete with company units, which may have greater resources, preferred pricing from suppliers, and may not pay royalties. They may also seek locations near non-traditional venues to capitalize on that market.
  • Franchisor Argument: Franchisors are unable to predict every future business opportunity they may encounter and need flexibility for future growth. Franchisors cannot restrict the sale of the entire franchise system because one franchisee objects. Franchisors need to reach customers through every avenue possible, including non-traditional venues, which may increase brand exposure and visitation of a franchisee’s unit.
  • Compromise: Parties can mitigate competition risk by carving out venues near the franchisee’s location, or granting the franchisee a ROFR to purchase units in non-traditional venues.

3)           Right of First Refusal

  • Typical Provision: Except for the right to operate in the territory, the franchisee has no other rights to operate additional units (within or outside the territory).
  • Franchisee Argument: From the franchisee’s perspective, a right of first refusal (“ROFR”) to purchase additional units is optimal: if the investment is successful, the franchisee can double down, while avoiding the obligation to open additional units under a development agreement.
  • Franchisor Argument: Franchisors need to protect their right to make additional sales without having to check with franchisees. Franchisors will likely be starting out a relationship with a new franchisee and may be unsure as to whether this franchisee would be a good fit as a multi-unit owner.
  • Compromise: The parties can agree to a ROFR subject to certain stipulations. First, the ROFR should lapse if a franchisee refuses it more than a certain number of times. Second, the ROFR will only be available after the franchisee has been successfully operating a unit for a certain period of time. Lastly, it’s important to outline a process for how a franchisee can exercise this right, including a time period on the response.

4)           Marketing Fund

  • Typical Provision: The franchisee must contribute to a national marketing fund. The franchisor can spend the funds as it sees fit.
  • Franchisee Argument: Franchisees want assurances that marketing funds will be spent in their territories. They may also seek to limit the franchisor’s discretion via restrictions on the use of proceeds or oversight (including audits or formation of a franchisee advisory committee).
  • Franchisor Argument: Franchisors are in the best position to determine the most effective way to advertise the franchise system on a national basis. Franchisors need flexibility to promote the franchise systems, including ability to spend in any geographical region. The purpose of the marketing fund is to promote the brand on a national basis and the franchisee should focus its efforts on local advertising in its territory.
  • Compromise: If franchisors have an internal marketing team, they can offer franchisees additional marketing assistance free of charge. Alternatively, franchisors can waive a franchisee’s requirement to contribute to the marketing fund only after a certain number of units are open and operating. In exchange, the franchisee must expend the amount it would have contributed to the marketing fund on local advertising. That way, the funds are still being utilized to promote the brand.

5)           Renewal

  • Typical Provision: Franchisee has the right to renew the franchise agreement a limited number of times (1-2) if certain conditions are satisfied.
  • Franchisee Argument: Franchisees want unlimited renewals. They will argue that as long as they are in compliance with the franchise agreement, they should not lose their business, which is often a franchisee’s livelihood.
  • Franchisor Argument: Franchisors want to avoid creating an evergreen contract. An evergreen contract has an indefinite duration and is difficult to terminate. Franchisors need the ability to evaluate franchisees on a semi-regular basis to determine whether they are still a good fit for the franchise system.
  • Compromise: The parties may agree to longer renewal terms (e.g., one 10-year renewal term instead of two 5-year renewal terms). Clear renewal conditions and a cap on renewal costs will also help franchisees budget and prepare.

In the next installment, we’ll launch into the remaining top 10 provisions to “never” negotiate:

  1. Changing Marks/Renovations/Upgrades
  2. Termination/Cure Period
  3. Indemnification
  4. Assignment
  5. Personal Guaranty

Renewed Efforts to End No Poaching Provisions

Franchisors need to review their franchise agreements and take immediate action in response to the recent onslaught of legal action over “naked no poaching” provisions in franchise agreements.

In a typical franchise agreement, a franchisor will prohibit a franchisee from poaching its or its other franchisees’ employees during the term of the franchise agreement and for a period of time after the franchise agreement ends. Until now, these provisions were fairly commonplace. Franchisors argue these provisions are protect each franchisee’s investment of time and money in its employees, including general managers who sometimes participate in extensive training programs.

Critics of such provisions argue that the practice keeps wages for these employees low and that this is a manipulation of the market. Worker advocacy groups have long pushed for an end to this alleged “anti-competitive” practice. Economists generally agree that no poaching provisions have a negative impact on low-level employee wages.

Moreover, in October 2016, the U.S. Department of Justice (“DOJ”) and the FTC issued guidance that naked no poaching agreements are “per se” illegal–meaning that their very existence violates the law and sets companies up for criminal charges.  The DOJ further stated that it intended to criminally prosecute companies employing naked no poaching agreements. While most observers expected that the DOJ under Attorney General Jeff Sessions would retreat from this position, it has not, citing pro-competitive concerns. In fact, in April 2018, the DOJ initiated a criminal complaint against a number of companies respecting naked no poaching agreements. While the case settled with only civil penalties imposed, the DOJ expressly stated that it was reserving the criminal question and planned to “zealously enforce” the law.

Major Brands Settle After Attorney General Files Suit

In July, seven international brands agreed to no longer enforce the no poaching provisions in response to a lawsuit being led by the State of Washington Attorney General’s Office.

In August, eight more large brands followed this trend. Additionally, several state attorneys general, led by  Massachusetts Attorney General Martha Healy but including the AGs of California, Illinois, Maryland, Minnesota, New Jersey, New York, Oregon and Pennsylvania, have sent investigation letters to eight large international franchisors regarding each of their no poaching agreements.

This is only the beginning of the attack on no poaching provisions. In the past year, civil antitrust actions have been filed by employees of franchisees of several large international franchisors.

The potential liability under these actions could be substantial because the class sizes could be immense with treble damages and attorneys’ fees potentially being awarded in any franchisee employee victory.

McDonald’s Loses Bid to Dismiss

McDonald’s’ recent motion to dismiss was denied so the case against that company will proceed. The outcome of this case will be closely watched as a test case for this issue overall. The need to act is further supported by the fact that Senator Elizabeth Warren (MA) and Senator Cory Booker (NJ) are strong advocates of removing the “no poaching” provisions and have introduced legislation to make these acts illegal.

And the DOJ is bringing a criminal antitrust complaint against franchisors for what they call vertically assisted, horizontal conspiracies to fix labor rates, allegedly in violation of Section 1 of the Sherman Anti-Trust Act.

The time to address naked no poaching provisions is now. Franchisors should not wait until the update of your franchise disclosure document in 2019. If you need any assistance navigating through this process, the franchise team at Fox Rothschild is more than happy to assist.

In a major policy announcement, on Friday, September 14, 2018, the National Labor Relations Board (the “Board”) proposed a new regulation establishing the standard for determining whether two employers, as defined in Section 2(2) of the National Labor Relations Act (the “NLRA”), are a joint employer of a group of employees under the NLRA.

Under the regulation proposed by the Board, an employer may be considered a joint employer of a separate employer’s employees only if the two employers share or codetermine the employees’ essential terms and conditions of employment, such as hiring, firing, discipline, supervision, and direction. More specifically, to be deemed a joint employer under the proposed regulation, an employer must possess and actually exercise substantial direct and immediate control over the essential terms and conditions of employment of another employer’s employees in a manner that is not limited and routine.

This proposed rule will overrule the Browning-Ferris decision, under which a company could be deemed a joint employer even if its “control” over the essential working conditions of another business’s employees was indirect and limited, or contractually reserved but never exercised. The Board, in its proposed rule, explains that Browning-Ferris’ relaxation of the concept that both of the putative employers of an employee must have “direct and immediate” control over the employee to be particularly troubling.  In what it calls an attempt to “clarify” the proposed standard, the proposed rule also includes a number of examples.

There was a dissent from one member of the Board.  The dissent essentially argues that the proposed standard of “direct and immediate” is no more clear that the Browning-Ferris standard, and that the Board is interfering with the natural development of the NLRA through the common law.  I think it is fair to criticize the proposed rule due to the the proposed standard of “direct and immediate” being less than clear, and I expect that it will be further developed in the rulemaking process.  Any proposed rule, however, is intended to short circuit the common law, and so I find that criticism to be extremely weak.

Comments, of course, are a key element of the rulemaking process. They must be received by no later than November 13, 2018.  Reply comments to initial comments must be received by November 20, 2018.  Comments may be submitted electronically through http://www.regulations.go or sent by mail or hand delivery to: Roxanne Rothschild, Associate Executive Secretary, National Labor Relations Board, 1015 Half Street SE, Washington, DC 20570-0001.  The Board cautions that comments sent via mail are often delayed due to security concerns.

This is THE time for the franchising community to be heard on the joint employer question. Comment now. Let your voice be heard.

I attended the International Franchise Association’s Franchise Action Network (“FAN”) Annual Meeting last week in Washington D. C. Basically, this is an educational event culminating in the participants being sent out to the “Hill” to lobby their senators and representatives on issues effecting small businesses – and especially franchised businesses. Speakers from the Hill, this year including Donna Brazile, Michael Steele and Senator Rand Paul, spoke to the delegations about the state of politics and the issues we were presenting to our representatives. I was part of the Pennsylvania delegation and most of the attendees in my district were franchisees.

The issues we discussed with our representatives focused in the joint employer issue and tax reform. Though some headway has been made regarding the joint employer issue, there is still work to be done for those wishing to reverse the standard set forth in 2015 by the National Labor Relations Board (NLRB) in the Browning-Ferris Industries decision, which replaced the “direct and immediate control” standard with a test based on “indirect” and “potential” control. Many feel this shift will cause franchisors to be “joint employers” with their franchisees which could invalidate the franchise model’s goal of providing opportunities for small business owners to run their own independent business.

Recent headway on the joint employer issue has been the passage in 2017 by the US House of Representatives of the Save Local Business Act (HR 3441) to simplify the joint employer standard for franchised businesses. However, that legislation has stalled in the Senate. In addition, the NLRB has announced plans for rulemaking relating to the joint employer standards.

Our first task on the Hill was to ask our congress to sign onto letters written by their fellow congressmen and senators to ask Labor Secretary Alexander Acosta to begin rulemaking on the joint employer issue under the Fair Labor Standards Act, under which franchises have seen many joint employer lawsuits as it allows individuals to file private actions. The hope is that this would help standardize the varied rulings that are coming out of the different federal circuit courts on the issue.

The second issue on our list to discuss with our congressional representatives was also related to the joint employer issue. The Trademark Licensing Protection Act was recently introduced into the House of Representatives by Rep. Steve Chabot (R-OH) and Rep. Henry Cuellar (D-TX) to help resolve the conflict between federal trademark law and the rationale supporting claims of joint employment. Federal trademark law requires the owners of trademarks, in this case the franchisor, to maintain control over its trademark and to monitor its use. Franchisors do this by controlling the use of the mark, which could be wearing standard uniforms, use in advertisement or otherwise, and the quality of the products supported by the mark, as well as other controls. However, this control supports the claim that a franchisor is a joint employer of the franchisee, thus catching the franchisor in the middle of these two laws. The Trademark Licensing Protection Act is being proposed to clarify that franchisors who control the actions of franchised businesses to maintain their brand will not be considered “joint employers” as a result under federal law.

The last issue for discussion was tax reform, particularly focused on aspects impacting pass-through entities, like limited liability companies which is the dominant form of company franchisees employ. First, we asked to make the individual tax cuts permanent as they effect owners of pass-through entities. Second was to clarify the exemption relating to professional service entities from those tax cuts. Certain professions, such as attorneys, are exempt from the tax cuts, but due to the vagueness of the wording, other unintended businesses may be covered by the exemption such as home health services. The IFA has requested that the Department of the Treasury fix this so this may go forward without the need for congressional action. Finally, because of a purported error in the tax bill, the ability to depreciate certain property and capital expenses at an accelerated rate has been eliminated so that these assets depreciate over an extremely long period of time. This causes a great disincentive for businesses to renovate and buy new equipment. The final ask was to fix that error and allow bonus depreciation.

I have gone to the Hill to lobby for similar issues before. I enjoy the meetings with the Representatives because the groups are smaller and the Representatives and their staff seem to be more responsive. I have always met with staff members for the Senators, but it is important to communicate with the staff as they are the ears of the Senators. Of course, for issues that are not bipartisan, if the congressman or senator is of the other party, they are less likely to act. But this is an important part of our democracy and I encourage all to go to the Hill or your state capital to meet with your representatives on issues important to you.

The Fox Rothschild team of Megan Center and Alex Radus recently gave a presentation at the International Franchise Expo in New York City on the “Top Ten Provisions to ‘Never’ Negotiate in a Franchise Agreement.” A summary of this presentation is being presented in four separate blog posts.  The first post focused on the central theme of franchise negotiation from the perspective of the franchisor and franchisee.

This installment highlights a few practice pointers that can save time and money during the negotiation process and protect the confidentiality of your negotiations.  Installments three and four will examine the top ten things never to negotiate in in detail, including typical franchisee requests, franchisor counter-arguments, and common compromises.

When negotiating a franchise agreement, the franchisee should provide a memorandum of the terms he or she proposes to revise.  This can take many forms, from a formal letter of intent to an informal email.  The level of detail will vary, but at a minimum it should cover all of the franchisee’s requests and be thorough enough for the parties to begin negotiations and understand what they are agreeing to.  This process focuses the parties on the most impactful terms and identifies potential deal breakers early in the process, saving time and money.

Copyright: / 123RF Stock Photo

Once the negotiated terms are established, we suggest that they should preferably be included in an addendum to the franchise agreement, which will be attached to the franchisor’s standard form of franchise agreement.  We strongly encourage you to avoid revising the standard franchise agreement.  There are a few reasons for this.  First, it is generally easier and faster to draft and negotiate an addendum rather than redline the entire franchise agreement.  Second, sticking to an addendum will keep revisions focused and precise.  The franchisee’s attorney is likely to make more changes if he or she has the opportunity to redline the entire franchise agreement. Finally, when you need to review the negotiated terms of multiple franchise agreements, short addendums will be easier to review than redlined franchise agreements.

Finally, be sure to protect the confidentiality of your negotiations – but don’t go overboard.  Franchisees will talk to each other, which can be both good and bad.  You want your star franchisees to speak with new and prospective franchisees.  They’re in a great position to give advice that will boost performance, and to be a cheerleader for your system.  However, avoid permitting them to share negotiated terms, which can hurt morale and give new franchisees unreasonable expectations. For example, original or early franchisees may have obtain concessions that were appropriate for a startup system may no longer be appropriate at later stages of the brand’s development.  Moreover, you must be sure to understand the franchise laws of the states where you are offering franchises, which may require you to disclose negotiated terms in certain cases as briefly mentioned in our first post.  Also, as you probably know, disclosures and representations respecting financial performance are fraught with danger and should never be made by franchisees.

Your addendum should include a confidentiality provision that balances these considerations.  The negotiated terms, and the fact that you negotiated your franchise agreement, should be protected from disclosure.  After all, those are private terms between two business partners.  However, franchisors shouldn’t be so specific as to prevent franchisees from communicating in ways that benefit all members of the system.

In the next installment, we’ll launch into the first 5 of our top 10 provisions to “never” negotiate:

1.       Signing the “then-current” franchise agreement

2.       Reservation of Rights

3.       Right of First Refusal

4.       Marketing Fund

5.       Renewal

We, Megan Center and Alex Radus, recently gave a presentation at the International Franchise Expo in New York City on the “Top Ten Provisions to ‘Never’ Negotiate in a Franchise Agreement” and want to share the highlights of that presentation here.  This first of four blog posts will focus on central themes of franchise negotiation from the perspective of both the franchisor and franchisee.

With that, before we jump into the theme of negotiation, we want to briefly touch on the top ten provisions we will cover over the next few blog posts, which are as follows:

1.      “Then-current” form of Franchise Agreement

2.      Reservation of Rights

3.      Right of First Refusal

4.      Marketing Fund

5.      Renewal

6.      Changing Marks/Renovations/Upgrades

7.      Termination/Cure Period

8.      Indemnification

9.      Assignment

10.  Personal Guaranty

In each of the blog posts that follow, we will discuss the typical provision in a franchise agreement, the typical request by a franchisee, and how both a franchisee and franchisor may argue for its respective provision or revision.

By way of introduction, we want to briefly touch on why a franchisor may want to, or in certain circumstances be required to, negotiate provisions of its franchise agreement. First, economic factors may contribute to negotiation points. As the economy ebbs and flows, the sales of franchises often will follow. A franchisor may have to grant more concessions in a bad economy, or vice versa, in order to make a franchise sale.

Second, if an emerging brand, a franchisor may need to offer its original franchisees a more incentivized franchise package than an established franchisor would. Similarly, if a franchisor is trying to entice a multi-unit franchisee or a franchisee that has experience in operating other franchised businesses to join its franchise system, a franchisor may have to “sweeten the pot” and offer more concessions than it would a standard-single unit-franchisee.

Additionally, if a franchisor is expanding internationally, similarly to an emerging brand, a new franchisee will be developing the brand in an entirely different country, often with no brand recognition.  As such, it may need further incentives to take on this additional obligation.

Lastly, and perhaps most importantly, certain states require that a franchisor amend certain portions of its franchise agreement via a state law addendum. Generally, these changes relate to dispute resolution procedures, governing law, and termination procedures. Further, if you negotiate changes with franchisees in California, you are required to comply with the Negotiated Changes Law in California which mandates disclosure of all material revisions to the franchise documents granted to California franchisees to all California prospects for a year from the closing of the negotiated deal.

The next post in this series will focus on practice pointers if a franchisor chooses to, or is required to, negotiate a franchise agreement.

Change is inevitable in a franchise system, and disclosure then becomes a concern. Disclosure may be a business issue for the existing franchisees, but it becomes a legal issue in the offer and sale of franchises. The question is whether the information would be considered by a hypothetical purchaser of a franchise as significant. Case law is sparse, but certain registration states, such as New York, provide examples of material change requiring disclosure.

Examples of material business changes that must be disclosed are closures or buybacks of five percent or more of the franchises in one year, change of control, management, corporate name, state of incorporation, and commencement of any new product, service, or model line increasing the investment or risk of the franchisee, and discontinuing or modifying the marketing plan of system where the total sales affected could be 20% or more of the franchisor’s business. Material financial changes or defaults will also require disclosure.

Often the timing of the disclosure is problematic because some states require immediate disclosure. In the case of a merger discussion, no disclosure is required until definitive or binding contracts are signed. A non-binding letter of intent does not normally trigger a disclosure obligation. Some material changes must be disclosed immediately and some not for 45 days.

Best practices suggest ceasing new sales until counsel has had an opportunity to review the material change and the steps for disclosure are agreed upon. Even in regulated states, protocols are in place to allow sales during the change process and allow disclosure and sale with subsequent disclosures to occur when necessary.

On Fox’s Immigration View blog, my partner Alka Bahal provides a detailed exploration of the I-9 inspection process, in the wake of a recent surge in I-9 audits carried out by the U.S. Immigration and Customs Enforcement (ICE) agency. All employers in the United States are required to have a Form I-9 on file for all employees to verify their identity and authorization to work in the United States.

We invite you to read Alka’s information-packed post addressing concerns facing employers:

Employers Beware: ICE Is Ramping Up I-9 Audits to Record Levels

The North American Securities Administrators Association, Inc. (“NASAA”) is proposing to revise the instructions in the NASAA Franchise Registration and Disclosure Guidelines (the “Guidelines”) that outline policies and procedures regarding the preparation of a franchise disclosure document (“FDD”). Specifically, NASAA has set forth a proposal for public comment that replaces the “State Cover Page”  to the FDD with three separate pages titled “How to Use this Franchise Disclosure Document”, “What You Need to Know About Franchising, Generally”, and “Special Risks to Consider about This Franchise.”

Currently, the Guidelines require that the State Cover Page include certain standard “risk factors” about the franchised business being offered under the FDD, including dispute resolution procedures, governing law, and personal guaranty requirements. Additionally, registration state examiners may, in their discretion, mandate that additional information be included as additional risk factors, such as the franchisor’s financial condition and operating history. In putting this information on the second page of the FDD, NASAA and the state examiners hope to put prospective franchisees on alert of certain factors that are likely important in their decision-making process.

The first new page, “How to Use this Franchise Disclosure Document”, would require a franchisor to disclose, in table format, certain questions a prospect might have and the corresponding Item in the FDD where that information is contained. Similarly to Item 17 of the FDD that provides a summary of certain provisions in the Franchise Agreement, this page would provide prospects with a roadmap to the FDD. NASAA has noted that many prospects find the FDD overwhelming and this page would hopefully alleviate some of these concerns. However, we are concerned that some of the questions seem to put preconceived notions in a prospect’s head about disclosures contained in the FDD.

The second new page, “What You Need to Know About Franchising, Generally”, outlines certain “general” risks a prospect should be aware before entering into a franchise relationship. These additional risks include discussions on personal liability, additional investment requirements, operating and supplier restrictions, and renewal procedures. A franchisor would need to make these disclosures even if a particular factor was inapplicable to the underlying franchise offering. This seems to be counterintuitive and may only cause additional confusion for prospects and the franchisors that have to answer these questions.

The final new page, “Special Risks to Consider about This Franchise”, replaces the current “State Cover Page” and would, again, allow state examiners to require that certain additional risk factors applicable to the specific franchised business be included in the FDD.

Overall, while we believe the NASAA’s intentions are in the right place, these three pages could very well create more confusion due to the use of leading questions on the first page and disclosure of generalized risks without context on the second page. If approved in its current form, franchisors should be prepared to answer many questions about the information on these first two pages. Public comments on this proposal are due on July 13, 2018, so it is important to propose revisions if you have concerns, as we do! We will continue to watch and report on this development with interest.