Franchise disclosure obligations and registration can carry significant costs of compliance and can be an administrative burden. Initially drafting a compliant Franchise Disclosure Document (“FDD”) is a time-intensive process. Then the franchisor must update the FDD annually for as long as it wishes to sell franchises. State registration of the franchisor and review of the FDD can further delay franchise sales. Additionally, an FDD contains confidential information that the franchisor may not wish to make public, especially if the business is a particularly sensitive to competition. Franchise laws restrict otherwise legal sales practices, such as making financial performance representations outside of Item 19, which can be another frustration for franchisors.
Exemptions to the franchise disclosure and registration laws provide both seasoned and start up franchisors the opportunity to reduce these burdens and costs by either (1) avoiding registration in a state or (2) avoiding drafting an FDD at all.
In this blog post series, we summarize the exemptions available under the Federal Trade Commission Franchise Rule (“Rule”), which allow a franchisor to sell a franchise without an FDD. Any analysis of what exemptions apply to your brand is incomplete if you do not also consider the application of state law. States may not recognize the federal exemptions and may offer different exemptions to their registration requirements.
The Rule contains eight exemptions, and the focus of this post is are three exemptions that are less frequently used by franchisors: Leased Department, Petroleum Marketers and Resellers Exemptions, and Oral Contracts.
Leased Departments Exemption
The leased department exemption primarily benefits large retailers (“landlords”) who allow independent sellers of certain merchandise (“tenants”) to rent a portion of the landlord’s locations. In doing so, the tenant associates itself with the landlord’s trademarks, but the only payment it makes to the landlord is rent. The tenant cannot be required to purchase goods or services from the landlord or from suppliers that the landlord approves, or the exemption is lost. This exemption is available to any retailer, though it is most used by department stores, big box retailers, and warehouse clubs.
Petroleum Marketers and Resellers Exemption
The Petroleum Marketing Practices Act (“PMPA”) contains protections that are similar to those of the Rule, so the FTC determined that petroleum marketers and resellers did not need to be subject to the franchise regulations as well. Please note that a single franchise agreement that sells both a gas station and an associated business, such as a repair center, car wash, or convenience store, will be subject to the PMPA, not the Rule. On the other hand, if the franchisor is selling a business, like a convenience store, to an existing gas station under a separate franchise agreement, that transaction is subject to the Rule.
Oral Contracts Exemption
The oral contracts exemption applies in an extremely limited set of circumstances and is not recommended for use by any franchisor. The exemption applies when there is no written evidence of the material terms of the franchise agreement; the agreement is purely oral. Written evidence can be a myriad of items, including unsigned handwritten notes, promotional materials or fact sheets, purchase invoice, sales receipts, or other written and electronic communications about the relationship. Written evidence even includes future writings that memorialize the franchise relationship. In short, this exemption is practically impossible to take advantage of and, more importantly, franchisors would be unwise to rely on purely oral agreements.
These three exemptions have niche applicability. However, you may still be able to reduce your costs and administrative burden by implementing one of five other FTC Rule exemptions and can learn more about each of them in the following posts:
Manning Fulton attorneys are available to help you determine if any of these exemptions apply to your franchise system or business opportunity.