Franchise Alert: What Franchisors Need To Know About The FDD Renewal Process
By Sandra Gibbs on December 23, 2020
Renewal season is coming. The FTC Franchise Rule (FTC Rule) gives franchisors 120 days from the end of their fiscal year to prepare an updated Franchise Disclosure Document (FDD). In some registration states, the deadline to submit updated FDDs and accompanying forms comes even earlier, in order to avoid a sales blackout period in that state.
No franchisor looks forward to the process of updating its FDD, and the urge to do the barest minimum at renewal time is powerful. Change the dates, update the number of units and the financial performance representation, make a couple of other minor changes, add new financial statements, and call it a day. This will keep your immediate expenses to a minimum, but is it the most cost-effective strategy? Maybe not.
The FDD, and the franchise agreement that is included in it, will govern the relationship between the franchisor and its franchisees for a long period of time—usually ten years or more. Do your FDD and franchise agreement accurately reflect your current policies and priorities, and give you the rights and flexibility you need to protect and improve your system over time? Do they take advantage of lessons learned from other systems’ mistakes, and from improvements in language that other systems have adopted? In the event of litigation, will your FDD and franchise agreement hold up?
An experienced franchise lawyer—and especially one with experience in franchise litigation—can help optimize your documents and certain aspects of your system—by reviewing your FDD, your franchise agreement, and other related documents and recommending some improvements. Moreover, it ensures that the FDD and franchise agreement conform to the ever-changing legal landscape. As the law and marketplace have evolved, areas that may benefit most from a tune-up include the following:
Joint employer concerns—How vulnerable is your system to a claim that your franchisees are actually your employees, or that your franchisees’ employees are actually your employees? This is an area of the law that has seen major changes over the past few years; have your documents and your policies kept up?
Non-compete covenants—This is another area of the law that is changing rapidly, with several states adopting new restrictions on non-competes (and more likely to come). Will your covenants be enforceable? If they are deemed to be overbroad, the risk can include fines and even having the covenant get thrown out in its entirety.
Marketing fund—How prevalent was social media when your current FDD was drafted? Does it still reference MySpace? Will your current language give you enough flexibility to take advantage of marketing tools that haven’t been invented yet?
Advertising policies—Does your current franchise agreement prohibit franchisees from advertising outside of their territory? How will you enforce that, when digital advertising is the norm? Does your franchise agreement still require franchisees to advertise in the “yellow pages” or “white pages”?
Insurance requirements—When was the last time you reviewed the insurance requirements that you impose on your franchisees? Are they sufficient to cover both you and your franchisee in the event of litigation? Have you retained the flexibility to require changes in the policies and limits?
Dispute resolution—Is arbitration (still) the best choice for your system? Should you consider allowing for litigation of some or all types of claims? Is your “choice of law” and “choice of forum” language adequate to ensure enforcement?
FDD updates are expensive and time-consuming, and yield little obvious benefit to the franchisor. We do them because they are a necessary part of continuing to offer and sell franchises. But make no mistake: acceptance of your FDD by a registration state provides no assurance that its terms comply with legal requirements, let alone contain language that protects the franchisor’s interests. Too often, franchisors learn that lesson only later, in expensive litigation. This renewal season, consider doing some preventive maintenance on your franchise documents.
This article was prepared by Sandra Gibbs (firstname.lastname@example.org) of the law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation and regulatory firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.