Copyright:  / 123RF Stock Photo
Copyright: / 123RF Stock Photo

Today, I continue with the fifth installment on Observations from the IFA Convention on the Ins and Outs of Financial Performance Representations (“FPRs”).  Again, my thanks to Max Schott of Gray Plant Mooty for co-authoring this summary with me.  The following FAQ  was released on July 2, 2014 by the FTC but seems to have received little notice.  The FAQ reads as follows:

“If a franchisor is unable to register a franchise offering in a state with a franchise registration law without removing or altering a Financial Performance Representation (“FPR”) in Item 19, may the franchisor use the unaltered FPR in the Franchise Disclosure Document (“FDD”) it delivers to potential purchasers in other states?

Answer: If a franchisor revises its FDD at the request or direction of one registration state, it ordinarily should incorporate the same revisions in the FDDs it uses in other registration and non-registration states to ensure that its disclosures are complete and accurate.  In the case of an FPR in Item 19 questioned by one registration state, a failure to make any resulting voluntary or involuntary changes to the FPR in all other states, or abandonment or withdrawal of the registration application without making changes, will raise significant concerns about whether the FPR meets the requirements of the Franchise Rule.  In particular, any such failure will call into question whether an FPR meets the requirement that a franchisor have written substantiation demonstrating that its FPR had a reasonable factual basis at the time it was made.

As always, the franchisor will bear the burden of proving that its written substantiation shows that factual information in its possession at the time it made the representation supports the FPR as it is likely to be understood by a reasonable prospective franchisee.  Any failure to use the same FPR in all states will not change the franchisor’s burden, but may expose the franchisor to the risk of heightened scrutiny by federal or state franchise law enforcers.”

And the roundtable observations…

So, at the end of the day, what does new FTC FAQ #38 really mean for franchisors?  The release of new FTC FAQ #38 (which mentions FPRs) was not well publicized.  The reason for this may be that it does not really appear to have much of an impact.   While the FAQ implies that if a franchisor is required to revise its FPR in response to one registration state it should ordinarily make the same revisions to the FPR it uses in other states, it concludes by stating that, ultimately, the franchisor bears burden of proving that its FPR meets the requirements of Item 19.  As one attendee pointed out, however, if a franchisor elects not to harmonize the FPR it uses in all registration states, it runs the risk of a franchisee, through an attorney or otherwise, raising the issue in a future claim.

Our next installment in our series will discuss supplemental FPRs.