---
title: Franchise Disclosure Requirements
description: An overview of the legal requirements for franchisors to disclose material information to prospective franchisees.
keywords: [franchise, disclosure, FTC, state law, franchise agreement]
category: law
---

## Introduction to Franchise Disclosure Requirements

Franchising is a significant and widespread business model in the United States, with an estimated 773,603 franchise establishments contributing over $787.5 billion to the national GDP in 2019.[^1] The growth of franchising, however, has been accompanied by concerns over information asymmetries between franchisors and prospective franchisees. To address these concerns, both federal and state governments have enacted laws mandating that franchisors disclose material information to franchisees prior to the sale of a franchise.

The primary federal law governing franchise disclosure is the Federal Trade Commission's ("FTC") Franchise Rule, codified at 16 C.F.R. Part 436. Additionally, over half of U.S. states have enacted their own franchise disclosure statutes, which may impose supplementary requirements on franchisors.[^2] Franchisors that fail to comply with applicable disclosure laws face significant legal risks, including civil liability, administrative enforcement actions, and potential criminal prosecution.

## The FTC Franchise Rule

The FTC Franchise Rule requires franchisors to provide prospective franchisees with a Franchise Disclosure Document ("FDD") at least 14 calendar days before the prospective franchisee signs a franchise agreement or pays any fees.[^3] The FDD must include 23 specific items of information, including details about the franchisor's business, the franchise offering, the franchise agreement, and any financial performance representations.[^4]

Franchisors that make any financial performance representations to prospective franchisees, whether oral, written, or visual, must have a reasonable basis for such representations and disclose them in Item 19 of the FDD.[^5] The FTC has strictly enforced this requirement, as demonstrated in FTC v. Tashman, where the court found that the franchisor violated the Franchise Rule by making unsupported financial performance claims.[^6]

Failure to comply with the FTC Franchise Rule can result in civil penalties of up to $43,792 per violation, as well as private lawsuits by franchisees for damages.[^7] In FTC v. Pointbreak Media, LLC, the FTC obtained a $31 million judgment against a franchisor that had failed to provide FDDs and made deceptive financial performance representations.[^8]

## State Franchise Disclosure Laws

While the FTC Franchise Rule establishes a baseline of disclosure requirements, many states have enacted their own franchise disclosure statutes that impose additional obligations on franchisors. For example, California's Franchise Investment Law requires franchisors to register their FDD with the state's Department of Financial Protection and Innovation before offering or selling franchises in California.[^9] Franchisors that fail to comply with state-specific disclosure laws may face civil and criminal penalties, as well as the risk of franchisees rescinding their franchise agreements.

In Burger King Corp. v. Austin, the court held that a franchisor's failure to comply with California's disclosure requirements rendered the franchise agreement void and unenforceable, entitling the franchisee to a full refund of its initial franchise fee.[^10] Similarly, in State v. Moran, the court convicted a franchisor of criminal securities fraud for offering franchises without properly registering the FDD as required by state law.[^11]

## Disclosure of Material Facts

Regardless of federal or state-specific requirements, franchisors have a general duty to disclose all material facts to prospective franchisees. Material facts are those that would reasonably be expected to influence a prospective franchisee's decision to purchase the franchise.[^12] This includes information about the franchisor's financial condition, litigation history, and any contractual restrictions or obligations that could significantly impact the franchisee's business.

In Petereit v. S.B. Thomas, Inc., the court found that the franchisor's failure to disclose its poor financial condition and the likelihood of bankruptcy constituted a material omission, entitling the franchisee to rescission of the franchise agreement.[^13] Conversely, in BaReal v. The Real Yellow Pages, the court held that the franchisor's disclosure of its ongoing litigation was sufficient, as it provided the franchisee with the opportunity to make an informed decision.[^14]

## Remedies for Disclosure Violations

Franchisees who have been harmed by a franchisor's failure to comply with disclosure requirements may be entitled to various legal remedies. These can include rescission of the franchise agreement, recovery of the initial franchise fee and other costs, as well as damages for any additional losses sustained.

In Kemp v. Quiktrip Corp., the court awarded the franchisee a full refund of its initial franchise fee, as well as consequential damages, after finding that the franchisor had failed to disclose material information in its FDD.[^15] Similarly, in State v. Moran, the court ordered the franchisor to pay restitution to the defrauded franchisees, in addition to criminal fines and a permanent injunction against further franchise sales.[^16]

## Conclusion

The legal framework governing franchise disclosure requirements is designed to protect prospective franchisees by ensuring they have access to all material information necessary to make an informed investment decision. Franchisors that fail to comply with these requirements face significant legal risks, including civil liability, administrative enforcement actions, and potential criminal prosecution. Prospective franchisees should carefully review all disclosures provided by a franchisor and consult with legal counsel to understand their rights and remedies under applicable laws.

[^1]: International Franchise Association, "Economic Impact of Franchised Businesses" (2019), available at https://www.franchise.org/sites/default/files/2020-01/Franchise%20Business%20Economic%20Outlook%20January%202020_0.pdf.
[^2]: Federal Trade Commission, "Franchise Rule" (2020), available at https://www.ftc.gov/tips-advice/business-center/guidance/franchise-rule.
[^3]: 16 C.F.R. § 436.2(a).
[^4]: 16 C.F.R. § 436.5.
[^5]: 16 C.F.R. § 436.5(s).
[^6]: FTC v. Tashman, 318 F.3d 1273 (11th Cir. 2003).
[^7]: 16 C.F.R. § 436.2(a); 15 U.S.C. § 45(m)(1)(A).
[^8]: FTC v. Pointbreak Media, LLC, No. 17-cv-60907 (S.D. Fla. 2017).
[^9]: Cal. Corp. Code § 31110.
[^10]: Burger King Corp. v. Austin, 805 F. Supp. 1007 (S.D. Fla. 1992).
[^11]: State v. Moran, 151 P.3d 764 (Wash. Ct. App. 2007).
[^12]: Petereit v. S.B. Thomas, Inc., 63 F.3d 1169 (2d Cir. 1995).
[^13]: Id.
[^14]: Bareal v. The Real Yellow Pages, 915 F. Supp. 2d 347 (E.D.N.Y. 2013).
[^15]: Kemp v. Quiktrip Corp., 808 F.2d 1477 (11th Cir. 1987).
[^16]: State v. Moran, 151 P.3d 764 (Wash. Ct. App. 2007).