Due to advantages such as lower start-up threshold and lesser brand promotion costs, franchising is a very attractive business model among entrepreneurs with lesser means. Yet there exists a great information disparity between franchisors and franchisees due to the franchisor's control of important information such as the operating expense, source and substance of raw materials and equipment, etc. In order to strengthen the protection for franchisees and maintain order in the franchising market, the Fair Trade Commission (hereinafter "FTC") previously provided the "Regulations Governing the Fair Trade Commission's Handling of Cases Involving Franchisor's Operations" (hereinafter "Regulation" or “Regulations”).  This is to require franchisors to disclose important franchise information to franchisees before the parties enter into the franchise agreement.

On August 1, 2018, the FTC passed an amendment to the Regulations. The amendment’s key points include:

I.Added "stipulated time" to the provision regulating time of disclosure

The original Regulations provide that the franchisor shall provide important information "at least 10 days prior to the time of agreement," or "at a time deemed reasonable for the case." This amendment adds "the parties’ stipulated time" to give more flexibility for the parties to decide on a time of disclosure.

II.Lessened required information disclosures by the franchisor

Of the list of items franchisors are previously required to disclose, this amendment deleted: 1) "the number and addresses of franchises in all counties (cities) and the statistics of the percentage of franchisees who have rescinded or terminated their agreements in the last year," and 2) "if financial forecast information such as estimated revenue or estimated profit is disclosed, the method of calculation thereof or proof of actual operation results of existing franchises."  With respect to intellectual property rights, this amendment removed the requirement to disclose the "content and expiration date" of the intellectual property right because they are public and thus readily discoverable.

III. Addition of diversified disclosure methods

The original Regulations provide that the franchisor shall disclose important franchise information in writing. This amendment provides that the franchisor may disclose such information using paper, email, electronic storage, social media, or communication software. However, the franchisor will need to provide evidence to prove it has complied with the disclosure requirement.

IV. Added list of good cause or justifications for information non-disclosure

Article 3 of the Regulations provides that the franchisor shall have good cause or justification for not providing otherwise required franchise information.  But, it did not explain what constitutes good cause or justification. This amendment adds three examples of good cause or justification: 1) where the existing franchise relationship is continued or expanded, 2) where the franchisor does not objectively have such information, and 3) where the information disparity does not exist between the franchisor and the franchisee.

V. Deleted the non-compete provision for post-agreement actions

This provision is deleted based on the Fair Trade Commission's statement that, up until today, there has been no disposition against franchisors for  hindering competition after the parties entered into the franchise agreement.  Further, such hindering competition is in violation of the Fair Trade Act, Article 20, and can thusly be regulated through that section.

Although this amendment moderately relaxes the methods and content of the franchisor’s required disclosure, the franchisor must continue to disclose and provide detailed and accurate franchise information to the franchisee in accordance with the Regulations.  Communications between franchisor and franchisee must also remain effective. Franchisors are advised to pay special attention to maintain evidence of its compliance with the disclosure requirements, this will avoid potential future disagreements with franchisees.  Further, if disagreements occur, such evidence can assist in the determination of liability.

(Author: Amy Sun; currently an associate of Formosan Brothers, Attorneys-at-Law.)

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