Franchising & Distribution Law Blog

As required every four years, adjustments to the FTC Franchise Rule’s monetary thresholds for certain exemptions are on the way.

The exemptions under the FTC Franchise Rule are intended to exclude franchise transactions in which the prospective franchisee doesn’t need the protection the rule is intended to provide. As several exemptions available under the FTC Franchise Rule are tied to dollar thresholds, they need to be adjusted from time to time to remain relevant. For example, when the current rule was adopted in 2007, a franchise sale was exempt from the FTC Franchise Rule’s disclosure requirements if the payments from the franchisee to the franchisor in the first six months of the franchisee’s operations did not exceed $500. Adjustment of the dollar threshold is necessary for this exemption not to become irrelevant with inflation. 

This post was updated on April 8, 2020.

In recent days, several U.S. states have announced accommodations for franchise filings.

California announced an extension of time for calendar year franchisors to file their  2020 renewals from April 20 to June 20 in light of the COVID-19 pandemic. Although the renewal filing fee of $475 remains in effect if the renewal is filed by June 20, those who do not file  by April 20 must suspend sales until approved. Filers are urged to file electronically and can sign their application forms using an e-sign software program, such as DocuSign, instead of getting their signatures notarized.  Those who file by hard copy are asked to waive the automatic effectiveness, and their filing will not be effective until the actual date designated by order.

On March 18, 2020, the State Corporation Commission of Virginia extended current franchise registrations and exemptions under the Virginia Retail Franchising Act that would have expired between March 16, 2020, and April 6, 2020, by 21 days. The order indicates that if the COVID-19 emergency continues, one or more additional extensions may be granted by order.

March and April mean franchise registration renewal season for franchisors. Updating the franchise disclosure document (FDD) in a timely fashion is often a major challenge. COVID-19 has thrown much of the world, including franchisors, into a new, very uncertain reality. People and businesses are scrambling to respond and adapt. Yet, March and April remain the annual franchise registration renewal season with deadlines set by statute.

Most franchisors will be happy to hear that the NLRB on Dec. 14 nixed the Browning-Ferris expansion of the joint employer doctrine, which has been of concern to the franchise industry for several years. The new case is Hy-Brand Industrial Contractors, Ltd. and Brandt Construction Co, 361 NLRB No. 156 (Dec. 14, 2017). Even though the board held that Hy-Brand and Brandt are collectively joint employers for purposes of the National Labor Relations Act, the joint employer standard applied is a significant departure from the Browning-Ferris standard.

SBA-backed loans have long been an important source of funding for many franchisees, but in the past several years, the system has been in flux. Changes will again be implemented on Jan. 1, 2018, and franchisors should ensure they are ready.

On May 8, 2017, the North American Securities Administrators Association (NASAA) released its final commentary on financial performance representations (FPRs), providing franchisors with additional clarification and guidance on how to prepare one of the most important parts of their franchise disclosure documents (FDDs).

California’s governor recently vetoed legislation that had intended to make it easier for franchisors and franchisees to do business in the state. While the vetoes came as no surprise, they are disappointing from a franchise perspective.

AB 1782 (Limited Trade Show Exception) and AB 2637 (Negotiated Sales) — which the State Bar of California’s Franchise Law Committee, the International Franchise Association and the Coalition of Franchisee Associations each supported — were vetoed Sept. 22, 2016, by California Gov. Jerry Brown.

Several of the exemptions available under the FTC Franchise Rule are tied to dollar thresholds. For example, when the current FTC Franchise Rule was adopted in 2007, a franchise sale was exempt from the disclosure requirements of the rule if the payments from the franchisee to the franchisor in the first six months of the franchisee’s operations did not exceed $500. Wary of inflation, the FTC Franchise Rule requires the FTC to adjust the nominal fee exemption and others every four years. The first such adjustment occurred in 2012, and the fees are being adjusted again effective July 1, 2016. 

The new year is upon us, and franchisors across the U.S. are focusing on updating their franchise disclosure documents and renewing their franchise registrations. In this busy time, it is easy to overlook other filing requirements for franchisors.

Since 2009, franchisors that have at least one franchisee that does business in New York state and is required to be registered as a sales tax vendor are required to file information returns with the New York State Department of Taxation and Finance. The reporting period is from March 1 to February 28 (or 29) of the subsequent year. The return is due on March 20.