Item 9 of the Franchise Disclosure Document: Franchisee’s Obligations

Item 9 of the Franchise Disclosure Document (FDD) discloses to prospective franchisees their principal obligations in operating a franchise unit, should they decide to enter the franchise system. Item 9 enables these prospects to easily find the contractual language that governs those obligations in the franchise agreement or other relevant franchisor-franchisee contracts, as well as where the summaries of those obligations can be found in the FDD. Our knowledgeable attorneys could discuss the information a franchisor must disclose, the format it must take, and the best practices for drafting this information under Item 9 of the FDD.

What Information is Required Item 9 of the FDD?

The disclosure requirements under Item 9 are codified under the Federal Trade Commission’s Amended Franchise Rule, 16 C.F.R. §436 et seq. (the “Amended Rule”); in particular, at § 436.5(i). The Amended Rule requires that a franchisor disclose a franchisee’s principal obligations in a three-column table with reference to the franchise agreement or other relevant agreements as well as the Item in the FDD where more information about the particular obligation can be found. Unlike most other Items in the FDD, there is little substance that a franchisor must disclose under Item 9. Rather, the franchisor’s primary focus should be on disclosing that substance in the required format. Here is an example:

Item 9

FRANCHISEE’S OBLIGATIONS

This table lists your principal obligations under the franchise and other agreements. It will help you find more detailed information about your obligations in these agreements and in other items of this disclosure document.

Starting at the top, the franchisor must provide the title “FRANCHISEE’S OBLIGATIONS” above the table in bold type and all capital letters. Next, the franchisor must include (word-for-word) the brief disclosure underneath the title; preferably, in bold type.

The first column should be titled “Obligation” and set forth a list of the franchisee’s obligations under the franchise agreement or any other relevant franchisor-franchisee information, such as a multi-unit development agreement. The Amended Rule requires every franchisor to provide in Item 9 of the franchise disclosure document the first twenty-four obligations stated in rows (a) through (x) in the example above. Those obligations cannot be modified or omitted from Item 9. If one of the first twenty-four obligations is not imposed on the franchisee in an agreement with the franchisor or discussed in the FDD, the franchisor need only state “Not Applicable” next to the particular obligation, as is the case in row (k) in the example above. If the franchise agreement or other relevant franchisor-franchisee contract impose an obligation on the franchisee that does not fall within the first twenty-four categories, the franchisor can disclose that additional responsibility under a category labeled “Other” placed at the end of the table, followed by a short statement of what the obligation is.

The second column should be titled “Section in Agreement.” For each obligation, the franchisor must state where the contractual language discussing that responsibility can be found in the franchise agreement or other relevant franchisor-franchisee contract. Similarly, the third column should be titled “Disclosure Document Item,” and the franchisor must provide the corresponding Item of the FDD where information about that obligation can be found.

Best Practices When Drafting Item 9

Item 9 is plain and transparent. Franchisors merely fill in the blanks in the second and third columns and provide additional “Other” obligations when necessary. Like in the example above, footnotes can be utilized to explain those “Other” obligations with candor and transparency. Other than that, Item 9 provides little room for artful drafting.

However, when a franchise system involves multiple relevant agreements such as a supply agreement, development agreement, and a franchise agreement, franchisors do have some stylistic choices. Where there is more than one relevant agreement underlying the franchise relationship, a franchisor may combine these contracts into one table or, to reduce clutter, draft a separate table for each agreement. The latter option simply requires the franchisor to provide “Not Applicable” more often.

Having the franchise agreement, other relevant contracts, and the FDD close by when drafting the disclosures under Item 9 allows franchisors to ensure they are inputting the correct information. As always, but particularly for those franchise systems that utilize multiple agreements, consulting with a franchise attorney is the best way for a franchisor to ensure that the cross-references for each column are current with those agreements, and that Item 9 of the franchise disclosure document complies with its required format.