In 2007, the Federal Trade Commission (FTC) revised the Uniform Franchise Offering Circular (UFOC) and renamed it the “Franchise Disclosure Document” (FDD). Under the UFOC, item 19 regulated the “Earnings Claims.” However, under the FDD, item 19 is now known as a “Financial Performance Representation.”
What is Item 19?
Item 19 is an item on a Franchise Disclosure Document known as a “Financial Performance Representation.” According to federal law, financial performance representation means: “any representation, including any oral, written, or visual representation, to a prospective franchisee, including a representation in the general media, that states, expressly or by implication, a specific level or range of actual or potential sales, income, gross profits, or net profits.” This definition also includes charts, tables, or mathematical calculations that show possible results based on a combination of variables.[1]
[1] 16 C.F.R. § 436.1 (2019).
What is a Franchise Disclosure Document?
The franchise disclosure document (FDD) is a legal disclosure document that must be given to individuals interested in buying a U.S. franchise according to federal law. The document contains important information that is necessary for a potential franchisee to make a knowledgeable investment.
The law states:
It is an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act: (a) For any franchisor to fail to furnish a prospective franchisee with a copy of the franchisor’s current disclosure document … at least 14 calendar-days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.[1]
[1] 16 C.F.R. § 436.2 (2019).
Although franchisors have an obligation to provide a potential franchisee the FDD, the franchisor is not obligated to provide a financial performance representation. As a result, the FDD could include an item 19 section that does not actually provide a financial performance representation.
Why is Item 19 Important?
Item 19 provides the answer to a potential franchisee’s most common question, “how much can I make with this franchise?” Although companies can not promise how much a franchisee will make, item 19 can show how successful the franchise has been and give a potential franchisee an idea of how successful they can reasonably expect to be with the franchise.
What are the Issues with Item 19 Disclosure?
Unfortunately, an item 19 disclosure is more beneficial to the franchisee than the franchisor. Many franchisors purposefully do not include a financial performance representation in item 19 of their FDD. Some franchisor’s think that including an item 19 statement will increase the franchise’s exposure to litigation from new franchisees if those franchisees’ financial performance does not match the representation made by the franchisor. Additionally, franchisor’s must be careful what representations they choose to make in item 19 of the FDD because they can violate federal and/or state law if the information is found to be inaccurate or misleading.
What Statements are Franchisors Allowed to make in Marketing Materials?
Franchisors also have restrictions on the statements they can make when advertising their franchise to potential franchisees. Not only does the Federal Trade Commission regulate unfair trade practices, Florida law regulates these issues as well.
Florida Statute 501.204 states: “unfair methods of competition, unconscionable acts or practices, and unfair or deceptive acts or practices in the conduct of any trade or commerce are hereby declared unlawful.” Additionally, the Florida Franchise Act specifically regulates false advertising to potential franchisees. Florida Statute 817.416 states: “(a) It is unlawful, when selling or establishing a franchise or distributorship, for any person: 1. Intentionally to misrepresent the prospects or chances for success of a proposed or existing franchise or distributorship…” Therefore, franchisors must be truthful in their marketing materials when advertising franchises to potential franchisees.
