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.
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:
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.
|Section in Agreement
|Disclosure Document Item
|a. Site selection and acquisition/lease
|Section 2A of franchise agreement
|Items 6 and 11
|b. Pre-opening purchase/leases
|Section 3D of franchise agreement
|c. Site development and other pre-opening requirements
|Sections 3A and 3B of franchise agreement
|Items 6, 7, and 11
|d. Initial and ongoing training
|Section 5 of franchise agreement
|Section 4 of franchise agreement
|Section 6 of franchise agreement
|Items 5 and 6
|g. Compliance with standards and policies/operating manual
|Section 8A of franchise agreement
|h. Trademarks and proprietary information
|Section 7 and 11 of franchise agreement
|Items 13 and 14
|i. Restrictions on products/services offered
|Section 12 of franchise agreement
|j. Warranty and customer service requirements
|Section 8B of franchise agreement
|k. Territorial development and sales quotas
|l. Ongoing product/service purchases
|Section 9 of franchise agreement
|m. Maintenance, appearance, and remodeling requirements
|Sections 8C and 10 of franchise agreement
|Section 13A of franchise agreement
|Items 6 and 8
|Section 15 of franchise agreement
|Items 6 and 11
|Section 13B of franchise agreement
|q. Owner’s participation/management/staffing
|Sections 4, 5, and 14 of franchise agreement
|Items 11 and 15
|r. Records and reports
|Section 17A of franchise agreement
|s. Inspections and audits
|Section 17B of franchise agreement
|Section 18 of franchise agreement
|Section 20 of franchise agreement
|v. Post-termination obligations
|Section 22 of franchise agreement
|w. Non-competition covenants
|Section 11, 18, and 22C of franchise agreement
|x. Dispute resolution
|Section 24 of franchise agreement
|y. Other: Guarantee of Franchisee Obligations (Note 1)
|Section 25 of franchise agreement
(1) Each individual who owns a 5% or greater interest in a franchisee that is a corporation or other business entity must sign an agreement not to compete (Exhibit XX) and an agreement assuming and agreeing to discharge all obligations of the “franchisee” under the Franchise Agreement (Exhibit XX).
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.
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.