What are a Franchisor’s Disclosure Obligations When a Franchisee Assigns Its Franchise Agreement?

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As you may know, generally, a franchisor violates the Federal Trade Commission Act and the Federal Trade Commission’s (“FTC”) “Franchise Rule” if it fails to timely furnish a prospective franchisee with a current disclosure document “in connection with the offer or sale of a franchise.”  See 16 C.F.R. § 436.2(a).  If a franchisee is assigning its franchise agreement to a new franchisee, however, does the franchisor have a disclosure obligation to the assignee?

The answer is that “it depends.”  On the one hand, a franchisor is under no disclosure obligation with regard to the assignment of a franchise by an existing franchisee if the franchisor has “no significant involvement with the prospective franchisee.”  16 C.F.R. § 436.1(t).  “A franchisor’s approval or disapproval of a transfer alone is not deemed to be significant involvement.”  See id.  On the other hand, the franchisor is likely to have “significant involvement” if it locates and refers the prospective franchisee, furnishes financial performance information to the prospective franchisee or requires the prospective franchisee to agree to materially different terms than those contained in the franchise agreement of the assignor.

If you have questions about the FTC’s Franchise Rule or need assistance with ensuring compliance, please contact Dan Davis of Ichter Davis LLC at 404-869-5261 or ddavis@ichterdavis.com.

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