The Franchise Company

CAN I FULFILL DISCLOSURE REQUIREMENTS BY MAILING A DISK TO A PROSPECTIVE FRANCHISEE?

by Rob Newbold, Esq.

Copyright © 2003, all rights reserved

The current FTC Franchise Rule does not directly address advertising or Internet activities. The FTC's Notice of Proposed Rulemaking to amend the FTC Franchise Rule ("Proposed Franchise Rule"), on the other hand, has a rather forward-thinking provision addressing Electronic Disclosure Documents.

FTC Advisory Opinion

In an advisory opinion issued in 1997, the FTC addressed the issue of whether a franchisor could comply with the FTC Franchise Rule by delivering a disclosure document via computer diskette. While recognizing that a computer diskette containing a word processing form of the disclosures could be as clear, concise and legible as a hard copy and could save money for the franchisor, the FTC expressed concern about potential harm to prospective franchisees if they could not review the disclosures easily and fully. The FTC said a franchisor could satisfy the Franchise Rule by delivering a computer diskette only if six conditions were met.

First,
the prospective franchisee had to have the option to decline receiving the disclosure document via a computer diskette.

Second,
the franchisor had to disclose the computer system and word processing format used to create the electronic version.

Third,
if he determines later within a reasonable time that he cannot readily review the disclosures, then the prospective franchisee must be able to obtain a hard-copy version.

Fourth,
the face of the computer diskette should identify the franchisor and the issuance date of the disclosure document.

Fifth,
the face of the diskette should identify the subject matter of the diskette, together with a notice taken from the cover page "INFORMATION FOR PROSPECTIVE FRANCHISEES REQUIRED BY THE FEDERAL TRADE COMMISSION."

Sixth,
each diskette should state its chronological number and the total number of diskettes.

FTC Internet Notice

On May 6, 1998 , the FTC published a request for public comments in the Federal Register entitled "Interpretation of Rules and Guides for Electronic Media" ("FTC Internet Notice"). The FTC proposed to issue a policy statement regarding the applicability of the rules and guides to new forms of electronic media, such as e-mail, CD-ROMs and the Internet.

The proposed policy statement would clarify (1) that rules and guides that apply to representations generally without reference to, or limitation on, the medium used to disseminate them apply equally to electronic media representations, and that (2) rules and guides that specify how or where representations are disseminated are broad enough to apply to electronic media representations.

Proposed Franchise Rule

The proposed Franchise Rule provisions build on and expand the advisory opinion. Proposed section 436.7 sets forth instructions which will enable franchisors to comply with the disclosure obligations of the FTC Franchise Rule electronically. According to the FTC, the proposed FTC Rule provision has:

two new, modest requirements: (1) that franchisors using electronic media provide prospective franchisees with a paper summary document containing an expanded cover page, table of contents, and acknowledgment of receipt, and (2) that franchisors retain a specimen hard copy of each materially different version of their disclosures.

Proposed Section 436.7(a) requires the franchisor to obtain the prospective franchisee's express consent to accept the disclosures in an electronic format and that prospective franchisees always have the right to obtain a paper disclosure document from a franchise seller up until the time of sale. The FTC says it is concerned that fraudulent operations will gravitate toward electronic media as a new way to avoid pre-sale disclosure. The FTC says it expects the franchisor to disclose in advance the medium used to furnish its disclosures (such as computer disks, CD-ROM, E-mail or Internet) and any specific applications (e.g., Windows 95 or DOS or a particular Internet browser) necessary to view the disclosures. Because the FTC is concerned about fraud, franchisors must allow traditional paper copies to remain available as an option up until the time of sale. The FTC wants the prospective franchisee to be able to easily read a disclosure document.

To ensure that prospective franchisees know they can get a paper copy, Section 436.3(g) of the proposed FTC Rule requires franchisors using electronic disclosure to add a statement to their cover page alerting prospective franchises receiving an electronic version that they have a right to obtain a paper copy:

You may have elected to receive an electronic version of your disclosure document. If so, you may wish to print or download the disclosure document for future reference. You have the right to receive a paper copy of the disclosure document up until the time of sale. To obtain a paper copy, contact [name] at [address] and [telephone number].

Deviating from its advisory opinion, Section 436.7(b) of the proposed FTC Rule requires a franchisor to provide a paper summary document containing only three items: (1) the cover page, (2) the table of contents, and (3) two copies of the Item 23 receipt, with instructions to acknowledge receipt through a signature. The FTC believes this will serve two anti-fraud purposes: (1) advance notice of the information being disclosed, and (2) proof of receipt. The FTC further believes the paper summary document would alert prospective franchisees to the fact that (1) they should receive disclosures, (2) the franchisor's Internet address, (3) that they have 14 days to review the disclosures, and (4) information on how to get a paper copy.

Source: 24th Annual Legal Symposium

For further information or review of your documents please contact Rob Newbold at Buckingham, Doolittle & Burroughs, LLP, 1-888-811-2825 or e-mail at: RNewbold@BDBLaw.com.

The material appearing in this article is meant to provide general information only and not as a substitute for legal advice. With regard to specific legal issues, readers of this article should seek specific advice from legal counsel of their choice.

Robert J. Newbold, Copyright © 2003, all rights reserved. Any reproduction is strictly prohibited.