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Item 22 of the Franchise Disclosure Document (FDD) requires a franchisor to disclose, and attach as an exhibit to the FDD, any contract that a franchisee must sign in connection with the grant of the franchise and the opening of the franchised business. These proposed agreements include not only the franchise agreement, but also leases, options, and financing and purchase agreements. Our team could discuss the agreements that a franchisor must disclose, and the best practices for disclosing such agreements, under Item 22 of the FDD.
In particular, the disclosure requirement for Item 22 is set out concisely in twenty-two words in 16 C.F.R §436.5(v): “Attach a copy of all proposed agreements regarding the franchise offering, including the franchise agreement and any lease, options, and purchase agreements.” The agreements that must be attached are not only those that the franchisor currently provides to each franchisee, but also those that the franchisor plans to make arrangements for. For example, if a franchisor intends to sublease property to a franchisee for the franchised business, the franchisor would need to reference that sublease in Item 22 and attach a copy of it as an exhibit to the FDD.
The mechanics of the disclosure under Item 22 are simple. The franchisor need only state a short opening sentence—something along these lines: “The following agreements and other required exhibits are attached to this disclosure document in the pages immediately following”—and then list the agreements and other required exhibits that are attached to the FDD. Importantly, the FTC Rule requires that franchisors list their agreements in Item 22 using letters not numbers.
Contracts that are commonly referenced in Item 22 of the FDD are the development agreement, franchise agreement, confidentiality agreement, guarantee, state addenda to agreements, compliance questionnaire, loan documents, option agreements, and real estate contracts, as well as any other document referenced in other Items of the FDD that the FTC Rule allows for franchisors to attach in Item 22. For example, in Items 13 and 14, the FTC Rule allows franchisors to provide a summary of an attorney’s opinion on the merits of ongoing litigation relating to the franchisor’s intellectual property, provided that the full opinion of the attorney is attached as an exhibit and referenced in Item 22.
In 2008, the North American Securities Administrators Association (NASAA) adopted the disclosure requirements of the FTC Rule, and added some additional requirements, to form its Franchise Registration and Disclosure Guidelines (the “Guidelines”). The Guidelines serve as a model for states with a specific franchise registration and disclosure law.
For Item 22 in particular, the commentary to the Guidelines provides that for collateral contracts with variations (e.g., loan agreements that vary from state to state), a franchisor need not attach every variation of that collateral contract to the FDD. Instead, attaching a sample document of the collateral contract will suffice. However, if there are any material differences in the contracts, a franchisor should disclose those differences in the text of the FDD or in the state specific addenda.
As franchisors are likely aware, there is little room for artful drafting in Item 22 of the FDD. However, it is still important that franchisors ensure that every exhibit attached to the FDD is included in the list of agreements in Item 22. This can best be accomplished by cross-referencing the agreements listed in the table of contents to the FDD, or in Item 23, to those listed in Item 22. Consulting with a seasoned franchise attorney is the best way to ensure that the necessary contracts are referenced in Item 22 and attached as exhibits to the franchise disclosure document.