Item 17 of the Franchise Disclosure Document (FDD) requires franchisors to disclose the location and summarize the substance of certain contractual terms in the franchise agreement that govern the franchise relationship, including those relating to renewal, termination, transfer and dispute resolution. Depending on the nature of the franchise system, Item 17 may be one of the shorter and less complex Items in the FDD. While it is not as dense as other Items, a franchisor may employ artful drafting in Item 17 so as to paint the franchise system in the best possible light. Our skilled attorneys could provide information on what a franchisor must disclose, the format it must take, and the best practices for artful drafting, under Item 17 of the FDD.
There are two disclosure requirements for Item 17 set forth under 16 C.F.R §436.5(q). These are: (1) a template statement and (2) a table, each of which must be disclosed in a similar format to the sample below:
THE FRANCHISE RELATIONSHIP
This table lists certain important provisions of the franchise and related agreements. You should read these provisions in the agreements attached to this Disclosure Document.
|Provision||Section in Franchise/Other Agreement||Summary|
|a. Length of the franchise term||Section 1 (also Section 1 of Lease)||Term is equal to lease term (10 years). (Exhibits A and B).|
|b. Renewal or extension of the term||Section 20||If you are in good standing, upon expiration of|
your original franchise agreement, you will
have the right to renew your franchise for
another 10-year term by signing the then
current franchise agreement. This means that you may be asked to sign an agreement with terms and conditions that are materially different from those in your original agreement.
|c. Requirements for franchisee to renew or extend||Section 20||Sign then-current franchise agreement, pay renewal fee, remodel, and sign or extend lease.|
|d. Termination by franchisee||None|
|e. Termination by franchisor without cause||None|
|f. Termination by franchisor with cause||Section 21||Franchisor can terminate only if you default.|
|g. “Cause” defined—curable defaults||Section 21B||You have 30 days to cure: non-payment of fees, sanitation problems, non-submission of reports, and any other default not listed in Section 21A.|
|h. “Cause” defined—non-curable defaults||Section 22||Non-curable defaults: conviction of felony,|
repeated defaults even if cured, abandonment,
trademark misuse, and unapproved transfers.
|i. Franchisee’s obligations on termination/non-renewal||Section 22||Obligations include complete de-identification|
and payment of amounts due (also see r.
|j. Assignment of contract by franchisor||Section 18||No restriction on Franchisor’s right to assign.|
|k. “Transfer” by franchisee—defined||Section 19A||Includes transfer of contract or assets or ownership change.|
|l. Franchisor approval of transfer by franchisee||Section 19B||Franchisor has the right to approve all transfers but will not unreasonably withhold approval.|
|m. Conditions for franchisor approval of transfer||Section 19C||New franchisee qualifies, transfer fee is paid, purchaser transfer agreement approved, training arranged, release signed by you, and current agreement signed by new franchisee (also see r, below).|
|n. Franchisor’s right of first refusal to acquire franchisee’s business||Section 19F||Franchisor can match any offer for the franchisee’s business.|
|o. Franchisor’s option to purchase franchisee’s business||None, but see policy described in Note 1|
|p. Death or disability of franchisee||Section 19D||Franchise must be assigned by estate to|
approved buyer within 6 months.
|q. Non-competition covenants during the term of the franchise||Section 11||No involvement in competing business|
anywhere in the U.S.
|r. Non-competition covenants after the franchise is terminated or expires||Sections 19C and 22C||No competing business for 2 years within 20 miles of another franchise unit (including after assignment).|
|s. Modification of the agreement||Section 8A||No modifications generally, but Operating Manual is subject to change.|
|t. Integration/merger clause||Section 29||Only the terms of the franchise agreement are|
binding (subject to state law).
Any representations or promises outside of the
disclosure document and franchise agreement
may not be enforceable.
|u. Dispute resolution by arbitration or mediation||Section 29||Except for certain claims, all disputes must be|
arbitrated in [State] (subject to state law).
|v. Choice of forum||Section 27||Litigation must be in [State] (subject to state law).|
|w. Choice of law||Section 28||[State] law applies (subject to state law).|
|Notes: (1) Franchisor is not obligated by the Agreement to do so, but, if the franchise is terminated, franchisor’s policy is to buy back inventory at fair market value. This policy is subject to change at any time|
Item 17 should look nearly identical to the example above. Three areas of the table are specifically required: (1) the title “The Franchise Relationship” must be in bold type and all caps; (2) the disclosure statement under the title must be in bold type and word-for-word; and (3) the twenty-four rows under the “Provisions” column must be included, word-for word, and a franchisor may supplement the table with additional provisions, if necessary. The content provided under the “Section in Franchise/Other Agreement” and “Summary” columns, as well as the footnotes, is merely illustrative. The titles of the column headers, while not technically required by the FTC Rule, are preferable.
Under the “Section in Franchise/Other Agreement” column, a franchisor should cross reference the section of the franchise or related agreement where that provision appears. If any of the provisions are not contained in the franchise or related agreement, the franchisor must state “Not Applicable.” If, however, the franchise or related agreement is silent on one of provisions, but the franchisor voluntarily offers to provide certain benefits or protections to franchisees as a matter of policy, the franchisor must use a footnote to describe the policy and indicate whether it is subject to change.
Under the “Summary” column, the FTC Rule generally requires that a franchisor briefly describe corresponding contractual provision. However, for provision (c), franchisors must state what the term “renewal” means for their franchise system. In particular, if the franchisor’s policy is that franchisees may be asked to sign the then-current agreement at the time of renewal, then the franchisor must indicate that the terms and conditions of the renewal contract may differ materially from those of their initial contract.
The FTC states that franchisors should not include a list franchise relationship laws under Item 17 of the FDD. However, be aware that a state may require a summary of its franchise relationship laws in an Addendum.
Item 17 of the franchise disclosure document requires clarity and precision for artful drafting. It is best practice to provide Item 17 disclosures in a clear and concise fashion, and in accordance with the formatting requirements. However, Item 17 is not all dry and rigid, as it allows for artful drafting through footnotes. Because the Item 17 table houses multiple citations to legal documents, it is prudent to double-check the correct language and cross-references are used. Having the franchise agreement and other relevant agreements close by when drafting the Item 17 is a prudent way to ensure the information is input correctly. Consulting with a franchise attorney is the best way for a franchisor to ensure that the format and substance of this section complies with the FTC Rule, and is helpful in determining how a franchisor’s state law may affect their Item 17 disclosures.