Proposed Changes to the FTC Rule: What to Do Now?

The Federal Trade Commission (FTC) Staff Report on the Proposed Revised FTC Franchise Rule was released in Aug 2004. Since then, the staff report has been the subject of a number of explanatory programs presented to the franchising business and legal communities. Now the fact that changes are coming is beginning to hit home. When the new FTC rule comes into effect, franchisors will have to disclose material civil actions involving the franchise relationship irrespective of whether they are initiated by the franchisee or the franchisor. Previously, the decision to sue a franchisee involved a different analysis by franchisors and their counsel. One factor to consider was the likelihood that a franchisee would counter-sue and thus trigger the requirement to include the matter in Item 3 of the offering circular. From a strategic planning perspective, franchisors should consider employing dispute resolution mechanisms, such as ombudsman programs or mediation, before jumping into litigation.