• The e-Franchise is Coming!
  • May 7, 2003
  • Law Firm: Dinsmore & Shohl LLP - Cincinnati Office
  • Electronic sales of franchises soon will become a reality. Current technology, the recent adoption of the federal electronic signature law1, and a pending Federal Trade Commission rule change all are converging to make the offer and sale of franchises on the internet and by e-mail an accepted method of doing business. Once the FTC acts, the states that regulate franchise sales inevitably will follow.

    But that's tomorrow, not today. Today, the law still requires the delivery of a paper disclosure document or, at least, a copy of it on a computer disk. The FTC staff has issued an informal advisory opinion specifically allowing the use of computer disks.2 The states that regulate franchising have not issued any formal rules or opinions but, as a matter of practice, allow the use of disks that comply with the FTC rule.

    A franchisor that takes the first step of putting its franchise offering circular on disk will move one step closer to perfecting the delivery of its circular via e-mail or the internet once the law allows it. In addition, putting its circular on disk now provides a franchisor a significantly less expensive method of delivering the required disclosure document. Copying and mailing a computer disk costs substantially less than copying and mailing a 200-plus page offering circular.3

    Staff Advisory Opinion

    The FTC disclosure rule requires franchisors to furnish a disclosure document to prospective franchisees. The document must furnish the disclosures "accurately, clearly and concisely stated, in a legible, written document."4 The rule further provides that the required disclosures must appear in a single disclosure statement, containing a cover sheet that distinctively and conspicuously shows the name of the franchisor, the date of issuance of the disclosure statement, and a prescribed cautionary notice from the FTC.5

    In its advisory opinion, the FTC staff cited the following reasons why it made sense to allow the required disclosure document to take the form of a computer disk:

    • A computer disk containing a word processing form of the required disclosures may be as clear, concise and legible as a typical hard-copy document.
    • Providing prospective franchisees with a disclosure document on disk may save franchisors significant duplication and postage expenses.
    • Some prospective franchisees may prefer to receive a disclosure document in electronic form.

    However, the staff recognized that, for various reasons, prospective franchisees may need a hard-copy document and, therefore, stated that prospective franchisees must have the option to decline receiving a disclosure document via computer disk. Those various reasons included the following:

    • Many prospective franchisees may not own or have access to a computer.
    • Those who own computers may use a computer system incompatible with that used by the franchisor.
    • The franchisor may use a word processing format not easily convertible to that used by the franchisee.
    • Some franchisees may have difficulty using the computer disk and, even if they succeed, have no guarantee that the computer system or specific word processing format used would match that used by the franchisee's advisors.
    • Some franchisees simply may find it easier to read and review a disclosure document in a hard-copy format.

    Rules to Follow

    Given the purpose of the disclosure rule and the concerns stated above, the FTC staff set forth the following rules that franchisors must follow when making the required disclosures by computer disk:

    • A franchisor must make the receipt of disclosure by computer disk an option of the prospective franchisee.

    • If the prospective franchisee declines a disk, then the franchisor must provide the prospective franchisee with a hard-copy disclosure document.

    • When presenting the prospective franchisee with the option of receiving disclosures via disk, the franchisor must disclose the computer system and word processing format used in creating the electronic version.

    • If, within a reasonable time, the prospective franchisee determines that he or she cannot readily review the disclosures contained in the disk, then the prospective franchisee must have the opportunity to obtain a hard-copy version.

    • The face of the computer disk must identify the franchisor, the subject matter contained in the disk, the issuance date of the disclosure document, and the following notice:
      INFORMATION FOR PROSPECTIVE FRANCHISEES REQUIRED BY THE FEDERAL TRADE COMMISSION

    • If the disclosure document consists of more than one disk, each disk must state its chronological number and the total number of disks.

    Proposed FTC Rule - From Disk to Internet

    In its Notice of Proposed Rulemaking6 regarding the FTC disclosure rule, the FTC issued its roadmap to the Internet sales of franchises. That map details several instructions for electronic disclosure documents, summarized as follows:

    1. The prospective franchisee must expressly consent to accept the disclosures in the electronic medium offered by the franchisor and the franchisee must reserve the right to obtain a paper disclosure document at any time prior to the actual sale.

    2. The franchisor simultaneously must furnish the prospective franchisee with a paper summary document containing the following three items from the franchisor's disclosure document:
      • a. The cover page;
      • b. The table of contents; and
      • c. Two copies of the franchisor's Item 23 receipt, with instructions to acknowledge receipt through a signature.7

    3. The electronic version of the disclosure document must allow the prospective franchisee to print it on paper, download it onto a computer disk, or otherwise preserve it as one single document.

    4. The electronic version of the disclosure document must comprise a self-contained document that is the functional equivalent of a paper disclosure document. A prospective franchisee must have the ability to reach each part of the disclosure document without having to take any affirmative action other than scrolling through the document.

    5. The franchisor, however, may include scroll bars, internal links, and search features. The proposed rule prohibits all other features like audio, video, animation or pop-up screens.

    6. The electronic version of the disclosure document must remain accessible at least until the time of the sale. Franchisors furnishing disclosure documents electronically must retain and make available to the FTC a specimen copy of each materially different version of their electronic disclosure documents for a period of three years.

    7. By putting their franchise offering circulars on computer disk, franchisors can accomplish the most important and, perhaps, most difficult step in getting ready for electronic delivery of their franchise offering circular when the time comes. That time is coming and may come as soon as next year. Franchisors that want to take advantage of existing technology should start that process now or at least consider it during the next annual update of the their franchise offering circular.

    1Electronic Signatures in Global and National Commerce Act, 15 U.S.C. §§ 7001 et seq. ("E-Sign").
    2Informal Staff Advisory Opinion 97-2, Commerce Clearing House Business Franchise Guide ¶ 6482.
    3 However, some also may argue that an intangible cost of using an electronic document involves the loss of a thick, weighty exhibit for use at trial should a dispute with the franchisee ever reach that point.
    416 C.F.R. § 436.1(a).
    5Id. at § 436.1(a)(21).
    664 Fed. Reg. 57,294 (October 22, 1999).
    7The requirement for a written signature, of course, contradicts the provisions of E-Sign, which Congress enacted after the issuance of the proposed rule. The FTC's staff informally have indicated that the rule as finally issued will allow for electronic signatures.