Underneath the Golden Boy - Robson Hall Faculty of Law

Franchise Law Consultation Paper 2007 267
CHAPTER 5: INTERNATIONAL FRANCHISE REGULATION
A. United States
1. FTC Franchise Disclosure Rule and UFOC Guidelines
Franchising in the United States is regulated by the federal government and by
several state governments. 145 Federally, the sale of franchises is regulated by the
Federal Trade Commission Franchise Disclosure Rule, made under the Federal
Trade Commission Act. 146 Under the FTC Rule:
[A] franchise exists in a commercial arrangement between a buyer and seller when the
following three elements are present: (i) a grant of the right to use the seller’s trademark
to offer, sell or distribute goods or services; (ii) the seller offers significant assistance to the
buyer in its operations or reserves the right to control its operations; and (iii) the payment
of a fee ($500 or more within the first six months of operations). The FTC Rule is
interpreted liberally to further its primary goal of investor protection. 147
The FTC Rule requires franchisors to make detailed disclosures to
prospective franchisees. The Rule deals only with franchisor disclosure; there is
no express duty of good faith or fair dealing and franchise relationship issues are
governed by state contract law. 148 There is no filing or registration requirement
145
As of 2002, fifteen state governments required pre-sale disclosure of franchise information: U.S.
Federal Trade Commission, “The Franchise Rule” (Statement before the U.S. House of
Representatives Committee on Energy and Commerce, Subcommittee on Commerce, Trade
and Consumer Protection, June 25, 2002), online:
(date accessed: May 7,
2007);
146
U.S. Federal Trade Commission, Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures, Code of Federal Regulations, 16 CFR 436
[FTC Rule], online: ( date accessed: May
9, 2007); Federal Trade Commission Act, 15 U.S.C. §§ 41-58 [FTC Act], online:
(date accessed: May 12, 2007). See also U.S. Federal
Trade Commission, Guide to the FTC Franchise Rule Table of Contents, online:
(date accessed: May 12, 2007).
147
L. S. Stadfeld, Basic Franchise Law Considerations in Supply Relationships, Weston, Patrick,
Willard & Redding, P.A., Boston, MA, online:
(date accessed: May 12, 2007); see 16 CFR 436. 2. State
law definitions are similar to the FTC definition, except that instead of the ‘assistance and
control’ element, they require a marketing plan prescribed substantially by the franchisor or a
community of interest between the parties with respect to the business.
148
U.S. Federal Trade Commission, supra note 1. The FTC stated that while franchisee advocates
have asserted that “the underlying relationship between franchisor and franchisee is often
unfair, with the franchisor dictating the terms under which the franchisee will conduct
business, often allegedly resulting in significant financial losses”, the FTC has not received a
large number of complaints about relationship issues and it was “unaware of any evidence that
relationship issues are prevalent throughout franchising”, at Part III. Although the FTC