Item 18 of the Franchise Disclosure Document (FDD) requires franchisors to disclose any public figures who are involved in promoting, endorsing, or recommending the franchise system, and certain aspects of that affiliation. For most franchisors, it is inapplicable. For franchisors that affiliate with publicly recognizable persons to attract prospective franchisees and sell franchises, it is simple and straightforward. Our team could provide an overview of what information must be disclosed, as well as the best practices for drafting such disclosures, under Item 18 of the FDD.
The disclosure requirements for Item 18 are set forth under 16 C.F.R §436.5(r) and pertain solely to public figures. Item 18 requires disclosure of public figures who (1) lend their name or image to the franchise system; (2) control or manage the franchisor; or (3) invest in the franchisor. Under Item 18, a “public figure” is a person whose name or physical appearance is generally known to the public in the geographic area where the franchise will be located. Prototypical examples of public figures include professional athletes, actors, musicians, and similar celebrities. For franchisors that are unaffiliated with public figures in the offer or sale of their franchise, they merely needs to provide the following negative disclosure under Item 18: “We do not use any public figure to promote the franchise.” However, for franchisors are affiliated with public figures, there are three simple disclosures required under Item 18 of the FDD.
First, franchisors must disclose the nature of the public figure’s affiliation with the franchise system, as well as the compensation or other benefits given or promised to the public figure in exchange for that affiliation. There are three affiliations that, if applicable, the FTC Rule requires be disclosed: (1) the public figure’s name is used as part of the franchise name; (2) the public figure’s image is used as a symbol associated with the franchise; or (3) the public figure endorses or recommends the franchise to prospective franchisees. These three affiliations all have one thing in common: the public figure’s involvement with the franchise is for the purpose of selling franchises. As a general rule, franchisors need not disclose public figures that are affiliated with the franchise, but who do not speak to, or participate in the marketing of, the offer and sale of franchises. For example, if a public figure is only used to attract customers to the products and services associated with the franchised system, such as a spokesperson, that public figure need not be disclosed under Item 18.
Second, if a public figure is affiliated with the franchise system, a franchisor must also disclose whether the public figure is involved in the management or control of the franchisor. If so, the franchisor must disclose the extent of that involvement, including the public figure’s position and the extent of the public figure’s duties in the franchise system. The third and last disclosure requirement under Item 18 relates to the public figure’s monetary stake in the franchise system. If a public figure invests in the franchise system, the franchisor must disclose the type and total amount of that investment. Typical types of investments include cash, stock, and promissory notes; however, the amount in Item 18 must also include the value of the public figure’s contributions in services performed or to be performed.
Today, franchisors make less and less use of public figures in connection with the sale of franchises and therefore, for most franchisors, Item 18 of the FDD is quickly completed by stating the negative disclosure. The biggest issue that a franchisor may face when drafting when drafting this Item is whether a certain individual is considered a public figure. To ensure that only necessary and accurate information is disclosed, it is best practice to consult with a seasoned franchise attorney when drafting disclosures under Item 18 of the franchise disclosure document.