This staff advisory opinion is issued in response to your request dated August 2, 1995, for our views concerning the disclosure of franchisee termination rights and obligations under the Franchise Rule, 16 C.F.R. Section 436.1(a)(15).
According to your letter, a particular franchise agreement is silent as to franchisee termination rights and conditions. The franchisor, however, consistently allows a franchisee to request termination of the franchise agreement, subject to franchisor approval. In all such situations, the franchisor requires the franchisee to execute a general release as a condition of granting the franchisee's request to terminate. In addition, the franchisor often purchases the assets of the franchisee's operation and/or forgives debt owed by the franchisee. Once again, execution of a general release by the franchisee is a condition precedent to the asset purchase and/or debt forgiveness. You ask if either the Franchise Rule or the UFOC requires the franchisor to disclose the franchisee's ability to request termination of the franchise agreement, the conditional approval procedure of the franchisor, or the general release requirement for franchisee termination.
As an initial matter, you ask for a staff interpretation of UFOC disclosure requirements. The UFOC format is required by some states in lieu of the FTC's disclosure document format. The FTC permits franchisors to comply with the Franchise Rule by fully and completely complying with the UFOC requirements. Our response to your request for advice is limited to the Commission's Franchise Rule disclosure format. You may wish to contact the appropriate state officials for their views on complying with the UFOC requirements.
II. The Disclosure of Franchisee Termination Rights and Obligations
Section 436.1(a)(15) of the Franchise Rule requires a franchisor to include in its disclosure document a "statement disclosing, with respect to the franchise agreement and any related agreements," fourteen specific items of information concerning the rights and obligations of the franchisor and franchisee upon termination, modification, or renewal of the franchise. Two such required disclosures are particularly relevant to your request: (1) "The conditions under which the franchisee may terminate" (Section 436.1(a)(15)(iv)); and (2) "The conditions under which the franchisee may sell or assign all or any interest in the . . . assets of the franchise business" (Section 436.1(a)(15)(ix)).
Your request raises the issue whether franchisee termination rights must be disclosed by a franchisor, even though the franchise agreement is silent as to those rights.
Section 436.1(a)(15) of the Franchise Rule appears to limit the required disclosures only to those provisions included in "the franchise agreement or any related agreements." In the Final Interpretive Guides to the Franchise Rule, however, the Commission stated that this Section of the Rule requires the disclosure not just of relevant provisions of the franchise agreement or related agreements, but also of any "franchisor policies which although not part of any franchise agreement, nevertheless are germane to the subsection." 44 Fed. Reg. 49,966, 49,978 (August 14, 1979). Thus, if the termination approval procedures and the general release requirements of the franchisor are germane, they should be disclosed.
In your request, you state that the franchisor has a consistent practice of permitting a franchisee to request termination of the franchise agreement, subject to franchisor approval. In order to obtain franchisor approval, the franchisee must complete a general release. As the Commission noted in the Statement of Basis and Purpose to the Franchise Rule, disclosure of the "conditions under which the franchise business may be terminated" are of "critical importance" to prospective franchisees. 43 Fed. Reg. 59,614, 59,669 (December 21, 1978). Any procedures which a franchisor consistently imposes on franchisees before the franchisee may terminate the franchise agreement therefore must be disclosed. In particular, a franchisor must disclose any pre-termination general release requirement. The Commission has determined that such a release "clearly involve[s] substantial rights which directly affect the value of the franchise." Id. at 59,668.
The franchisor claims that the general release executed by the franchisee is a condition of the asset purchase and/or debt forgiveness, rather than a condition of the termination. The franchisor therefore maintains that such a condition need not be disclosed under the Franchise Rule. We do not agree. Even if the general release is not a "condition under which the franchisee may terminate," it clearly is a condition "under which the franchisee may sell or assign all or any interest in the . . . assets of the franchise business." As such a condition, consistently imposed by the franchisor, it must be disclosed. See 16 C.F.R. § 436.1(a)(15)(ix).
For these reasons, we conclude that the franchisor must disclose the franchisee's ability to request termination of the franchise agreement, the conditional approval procedure of the franchisor, and the general release requirement for franchisee termination.
Please be advised that our opinion is based on all the information furnished in the request. This opinion applies only to your company and to the extent that actual company 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: September 6, 1995
Franchise Rule Staff