Transactional practitioners undoubtedly are familiar with the annual task of responding to FDD application comments from state examiners. Given the changes to applicable franchising law and regulatory guidance at both the federal and state levels in recent years, even the most experienced drafters have encountered new criticism or unique interpretations of disclosure requirements from state agencies in comment letters. Recently, a particularly high-mileage target of examiner comments has been the contractual language and disclosures surrounding a franchisor’s integration clause.
The amended FTC Franchise Rule prohibits franchise sellers from “disclaiming or requiring a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” According to the FTC Compliance Guide, this prohibition is designed to combat potential deception by a franchisor who might otherwise use its integration clause to disclaim representations made to prospects via FDD Items. This prohibition has been the subject of many state examiner comments, whether in the context of an Item 17 disclosure or in the specific language found in the franchise agreement or other FDD-related contract. By way of example, some Item 17 disclosures have been deemed insufficient when they do not match exactly the sample wording provided in the FTC Compliance Guide (including striking additional “franchisee-friendly” text that went beyond the sample wording). In other instances, the non-waiver proviso built into a franchise agreement’s integration clause did not reference “any related agreements” beyond the franchise agreement, and a related contract’s incorporation by reference of the franchise agreement’s integration clause was unacceptable. Accordingly, the following wording is recommended for use in franchise program documents to avoid comments or delays in the FDD registration process:
Section in Franchise Program Document:
Language Generally Approved by State Examiners:
Item 17(t) disclosure in FDD
Only the terms of the [agreement] are binding (subject to state law). Any representations or promises outside of the disclosure document and [agreement] may not be enforceable.
Franchise Agreement’s integration clause
“. . . nothing in this Agreement or in any related agreement shall disclaim or require Franchisee to waive reliance. . .”
Additional contract’s integration clause
[Copy wording of Franchise Agreement’s integration clause in each related contract included in FDD.]
Based on these experiences, hopefully you can reduce the volume of comments you receive during the upcoming FDD renewal season and expedite the registration process.