Submitted by lushenejj on
RE: Disclosure of Franchise Fees
Question Presented:
May a franchisor impose fees through its operations manual or otherwise that were not disclosed in the Franchise Disclosure Document?
Statutes and Rules:
Franchisors are required to provide prospective franchisees a Franchise Disclosure Document (“FDD”) containing material information about the franchise opportunity before a prospective franchisee signs a franchise agreement or makes any payment to the franchisor or an affiliate in connection with the proposed franchise sale. 16 CFR 436.2(a); RCW 19.100.080(1). See also WAC 460-80-300.
With respect to fees, the FDD must include disclosure of “all fees and payments, or commitments to pay, for services or goods received from the franchisor or any affiliate before the franchisee’s business opens.” 16 CFR 436.5(e). In addition, franchisors must disclose “all other fees that the franchisee must pay to the franchisor or its affiliates, or that the franchisor or its affiliates impose or collect in whole or in part for a third party.” 16 CFR 436.5(f). “Any formula used to compute the fee must be disclosed as well. If a fee may increase, franchisors must disclose the maximum amount of the increase or the formula used to determine the increase.” FTC Franchise Rule Compliance Guide, at 46 (May 2008).
In addition, it is unlawful to make “any untrue statement of material fact or omit[] to state a material fact necessary in order to make the statements made in light of the circumstances under which they were made not misleading.” RCW 19.100.170(2). “[A] ‘material fact’ is ‘a fact to which a reasonable [person] would attach importance in determining [their] choice of action in the transaction in question.’” Morris v. International Yogurt Co., 107 Wn.2d 314, 322-23, 729 P.2d 33 (1986).
Discussion:
The Division is aware of reports that some franchisors have charged fees to franchisees that were not disclosed in the FDD, including fees that were imposed through their inclusion in an operations manual. An operations manual establishes standards and procedures to be followed by franchisees in the operation of the franchised business. Most franchise agreements require franchisees to follow the standards and procedures set forth in the operations manual. The operations manual is not typically provided to potential franchisees before executing the franchise agreement, although failure to follow the specifications in the manual usually constitutes a breach of the franchise agreement.
As noted above, 16 CFR 436.5(e) and (f) specifically require franchisors to disclose all fees that a franchisor collects or imposes on a franchisee prior to execution of a franchise agreement or any payments are made to the franchisor or its affiliates in connection with the proposed franchise sale. Not only is this information specifically required to be disclosed in the FDD, this information is important to consider in determining whether to pursue a franchise and is therefore material information that must be disclosed under RCW 19.100.170(2). Because the operations manual is typically only provided after the franchise agreement is executed, the imposition of fees in the operations manual that were not disclosed in the FDD prior to the execution of the franchise agreement, or any payment to the franchisor or an affiliate in connection with the proposed franchise sale, violates both state and federal law.
Conclusion
A franchisor must disclose all fees, including prospective fees, to a prospective franchisee in the Franchise Disclosure Document prior to the execution of the franchise agreement or the receipt of any payment by the franchisor or any of its affiliates in connection with the proposed franchise sale. Failure to disclose a fee or payment required by the franchisor constitutes an unlawful omission of fact under RCW 19.100.170(2). A franchisor cannot impose a fee through the operations manual or otherwise, without pre-sale disclosure in the Franchise Disclosure Document as required by 16 CFR 436.5(e) and (f) and RCW 19.100.170(2).
Adopted: November 1, 2023
William M. Beatty, Securities Administrator
Prepared by: Timothy Varney, Financial Legal Examiner