Improperly Prepared Fdds: What's a Franchisee to Do? Franchisors Must be Aware of the Dangers of Preparing an Inaccurate Or Misleading Disclosure Document (Legal Update‪)‬

Franchise disclosure documents, or FDDs as they are now called, have been an integral part of the offer and sale of franchises in the United States since the Federal Trade Commission's Franchise Rule became effective on Dec. 21, 1979, and even earlier in a number of states whose own pre-sale registration and disclosure laws preceded the FTC Rule. Since that time, franchisors have become well aware of their obligation to provide disclosure and to document a prospective franchisee's receipt of an FDD, as well as the dangers of not doing so. What may be less clear to franchise companies are the consequences, as well as the dangers, of providing an FDD that either contains incorrect or misleading information or that omits information required by law or necessary to make sure other disclosures are not misleading. Franchise systems tend to think that once an FDD is completed and timely disclosed, it becomes a non-issue in the sales process. In fact, with the exception of a few key disclosures (such as estimated initial investment expenses, franchise turnover and contact information, and financial performance representations, if any), many franchise sales personnel believe that prospective franchisees do not consider the FDD to be an important component in a prospective franchisee's decision-making process. While many franchise organizations do not look upon their FDD as either a sales tool or liability shield, and some prospective franchisees might not make full use of it as a due diligence tool, the FDD has found another post-sale use as a litigation tool by some franchisees whose franchise business has not performed as expected and who attribute deficiencies in the FDD as a basis for claims against the franchisor.