The new FTC Franchise Rule that went into effect last summer continues to confuse franchisors and franchisees alike. Here is a link to the final rule: Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities; Final Rule. I think reading the disclosure requirements and prohibitions first hand is better than my summarizing here.

In order to help consumers and franchisors understand the new rule and its application, the FTC has now posted its Compliance Guild on the FTC website. In addition, recent FAQ’s interpreting the amended Rule are also available, as well as links to other information about the amended Franchise Rule.

Too often prospective franchisees merely skim through the technical detail found in a uniform franchise offering circular (UFOC), preferring instead to rely on the pitch of the franchise sales person. It’s important, however, for those considering the purchase of a franchise to familiarize themselves with the rules in order to understand the mechanics of the UFOC, and why each item is in the document. Even a basic understanding of the federal rules, and their application, will give franchise purchasers greater insight into the business strategies and intentions of franchisors in their dealings with franchisees. I found the FAQ’s well written and consumer-friendly. With an understanding of the FTC Franchise Rule, you will be a better consumer of legal services, and a more informed investor in a franchise system.

This week a California court upheld a distant venue arbitration clause against a California franchisee Smith v. The Paul Green School of Rock Music LLC, CV 08-00888 (C.D. Ca May 5, 2008). The clause forces the franchisee to arbitrate its dispute in Pennsylvania. In 2006, the 9^th Circuit Court of Appeals held that such clauses could be challenged as unconscionable Nagrampa v. MailCoups, Inc., No 03-15955 (9^th Cir. Dec. 4, 2006). Common sense dictates that the practice of demanding franchisees, usually independent business owners with little in the way of liquid assets, at least by the time of default, to travel across the country, pay for room, board, and retain counsel, to defend or bring actions against cash rich franchise organizations, is unconscionable. It is a boiler plate provision in nearly, if not all, franchise agreements. And for some reason, it is a provision that most franchisees blow right over when reading a franchise disclosure document and draft franchise agreement. In Smith, the California Central District Court upheld the distant venue clause on a technicality (the Pennsylvania “choice of law” provision) rendering the Nagrampa unconscionably decision unenforceable. Franchisors and their counsel are delighted.