Informal Staff Advisory Opinion 02-3

This advisory opinion addresses whether a franchisor must furnish disclosures to an existing franchisee when the franchisee initiates a modification of the franchise agreement's protected territory provision.

I. Introduction

In your letter, you state that you and a partner purchased a franchise in April 1996 for $10,000. The franchised outlet apparently was in a protected territory. Four years later, your lease was terminated by the landlord because of a "construction/demolition project." As an alternative, the landlord offered space at a shopping center about two miles away. Your franchise agreement, however, requires the franchisor's written permission to relocate.

You state that because the proposed new location was not within your protected territory, the franchisor agreed to the proposed relocation only if you purchased a new territory for an additional fee of $850, plus a "$500.00 design fee." It appears that rights to your new territory were set forth in an addendum to your original franchise agreement. Finally, you note that your business was closed for approximately 10 days during the relocation period, and, upon relocating, you were able to offer only limited services for several additional days.

You now ask whether the franchisor should have furnished you with a new disclosure document under the circumstances outlined above. Specifically, you ask three questions:

(1) whether the modification of the existing franchise agreement's territory provision is a material change requiring disclosure; (2) whether the temporary closure and relocation of the franchisee's business is considered an "interruption in the operation of the franchised business by the franchisee" requiring disclosure; and (3) whether a change or replacement of an exhibit or contract attached to the original disclosure document at a later date requires new disclosure.

II. The Obligation to Furnish Disclosures to an Existing Franchisee

Your letter raises the issue of when a franchisor must furnish disclosures to an existing franchisee. In general, the Franchise Rule requires the furnishing of disclosure documents to prospective franchisees. The Rule defines a prospective franchisee as "any person . . . who approaches or is approached by a franchisor . . . for the purpose of discussing the establishment, or possible establishment, of a franchise relationship involving such a person." 16 C.F.R. § 436.2(e).

At the same time, the Rule requires disclosure to existing franchisees purchasing a new outlet in limited circumstances. Specifically, the term "sale of a franchise" is defined to:

include[] a contract or agreement whereby a person obtains a franchise or interest in a franchise for value by purchase, license, or otherwise. This term shall not be deemed to include the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchisee, unless the new contracts or agreements contain material changes from those in effect between the franchisor and franchisee prior thereto.

16 C.F.R. § 436.2(k).(1)

III. A Franchisee-initiated Modification of an Existing Franchise Agreement Alone Does Not Constitute the "Sale of a Franchise"

In order to answer your questions, we must determine whether there was a "sale of a franchise," as defined above. Based upon the facts presented, that does not appear to be the case.

According to your letter, when your landlord terminated your lease, you were compelled to change your outlet's location. In order to effect the relocation, you were required to pay additional fees totaling $1,350 for a new territory. However, the purchase of a new territory is not the equivalent of purchasing a new franchise, which presumably would have cost an additional $10,000. For example, you do not claim that you were seeking to renew or extend your existing franchise agreement upon its expiration or termination. Nor does it appear that you were purchasing an additional franchise under the terms of your existing agreement. Rather, you and the franchisor agreed to modify your existing franchise agreement's protected territory provision.

Under the circumstances, it would appear that you were and continued to be an existing franchisee with continuing rights and obligations under a single, albeit amended, franchise agreement.(2) Nothing in the Franchise Rule requires a franchisor to provide existing franchisees with new disclosures whenever a franchisee initiates an amendment to an existing agreement.

For the same reasons, we also find that a mutually agreed upon change or replacement of an exhibit or contract provision attached to the original disclosure document at a later date ordinarily requires no new disclosure. In cases such as this, where the parties clearly understand the nature of the contract modification, re-disclosure would provide little useful information to the franchisee, while imposing unwarranted compliance costs on the franchisor.

IV. Conclusion

For the reasons noted above, we conclude that a post-sale, franchisee-initiated, mutually agreed upon modification of an existing franchise agreement's protected territory provision ordinarily does not require re-disclosure. Please be advised that our opinion is based on all the information furnished in your request. This opinion applies only to you and to the extent that actual practices conform to the material submitted for review. Please be advised further that the views expressed in this letter are those of the FTC staff. They have not been reviewed, approved, or adopted by the Commission, and they are not binding upon the Commission. However, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.

Date: October 22, 2002

Endnotes:

1. In the Final Interpretive Guides to the Rule, the Commission applied the same principle to existing franchisees who exercise a right under their franchise agreement to establish new outlets for themselves. See 44 Fed. Reg., 49,966, 49,969 (August 24, 1979).

2. Because there was no renewal or extension of a franchise agreement, we need not determine whether there was an interruption in the operation of the franchised business.