What are the Laws of the FDD (Franchise Disclosure Document)?

•What is the FDD?

Franchise Disclosure Document (FDD) is a format for disclosing franchisor information to prospective franchisees. The purpose of the FDD is to protect the public by providing information about the franchise company.

Currently, franchise investment laws exist in 15 states. Those states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington and Wisconsin. All of these states make it a requirement that franchisors compile and provide a Uniform Franchise Offering Circular (UFOC).

This is a very important document, as it gives information concerning the financial status of the franchise, both current and within the past fiscal year. Further, it gives information on who is now and who has operated a franchise within the past fiscal year, and whether they are still doing so.

Thirteen of the fifteen states requiring UFOCs also consider the sale of a franchise to be considered just as if a security had been sold. They will not allow the franchise to be sold until a state agency designated for such a purpose has registered and made available as a public record a UFOC.

Two states of the fifteen, however, do not require that UFOC be filed. The information on what is and is required by the states mandating UFOCs can be found on the Federal Trade Commission’s website.

Besides UFOC requirements, the state laws in the 15 listed states provide franchisees, both current and prospective, with certain legal rights. One of these is the right to file a private lawsuit if it is discovered that a franchise or franchisor is violating the disclosure laws of that particular state.

•What are the laws of the FDD?

The laws vary by state. You will have to consult a franchise attorney or your state office that is responsible for overseeing franchises to determine what they are for your particular state.

•Just how do they affect me?

You must be in compliance with these laws in order to legally operate your franchise. Failure to do so can result in civil and legal sanctions. Civil sanctions can include the franchiser exercising his right or privilege to terminate the franchise agreement, civil fines or penalties if you are found to be in violation of any of the franchise agreement terms, and other civil sanctions as may be found or deemed appropriate. Legal sanctions can include fines, penalties, and possible criminal action if you are found to have broken any laws. These can include state ethics and financial disclosure laws.

•Am I in compliance?

If you have any doubt at all as to whether or not you are, immediately consult your franchise attorney. If you are found to be in non-compliance, take the necessary steps to correct the infractions as soon as possible.

Do not try to shift blame or to deny it, especially if the evidence is apparent. By accepting and admitting that you are in the wrong, you are showing good faith that you will attempt to rectify the situation.