It is a common practice for franchisors to require franchisees to complete a questionnaire that asks the franchisee to answer certain questions when they sign a franchise agreement. These questionnaires ask the franchisee to affirm or deny statements such as they have read and understand the Franchise Disclosure Document (“FDD”) and they are not relying on representations made by the franchisor or its agents not included in the FDD or the franchise agreement.
In September 2022, the North American Securities Administrators Association, Inc. (“NASAA”) adopted a Statement of Policy Regarding the Use of Franchise Questionnaires and Acknowledgements (“Statement of Policy”), which went into effect on January 1, 2023. The NASAA Statement of Policy prohibits questionnaires which ask yes or no questions regarding representations made during the franchise sales process and acknowledgements which are used as contractual disclaimers releasing the franchisor or waiving a franchisee’s rights under state franchise laws.
The Statement of Policy has no legal effect unless it is adopted by a state that regulates the sale of franchises. As of the date of this post, the Statement of Policy has been adopted in Maryland and California. The Securities Division of the Department of Financial Institutions in Washington recently announced that it is considering proposing a change to the Washington franchise law by adopting the Statement of Policy.
Maryland's Adoption of Statement of Policy
On January 23, 2023, the Securities Division of the Office of the Attorney General of the State of Maryland issued an interpretive opinion (the “Maryland Opinion”), adopting the Statement of Policy as of January 30, 2023. Although the Statement of Policy is now effective in Maryland, the Maryland Opinion includes a no action clause, meaning that franchise regulators will not require registered franchisors to immediately file an amendment to conform with the Statement of Policy. If a franchisor sells a franchise in Maryland before its next renewal or amendment filing, however, the franchisor must include the legend described in the Statement of Policy, delete its questionnaires and acknowledgements that contravene the Statement of Policy or include a statement that those do not apply to prospective Maryland franchisees, and update its materials in the next renewal or amendment of franchise registration filed in Maryland. For many franchisors, this means that no action needs to be taken immediately to comply with the Maryland Opinion, provided that changes are made to the FDD in the next renewal or amendment filed.
California Franchise Law Update
In response to the Statement of Policy, the state of California changed its franchise law effective January 1, 2023, with the passage of Assembly Bill no. 676 (the “California Bill”). The California Bill changes the California franchise law by prohibiting any provision in a franchise agreement, FDD, or other writing, disclaiming (i) representations made by the franchisor or its agents to a prospective franchisee; (ii) reliance by a franchisee on any representations made by the franchisor or its agents; and (iii) reliance by a franchisee on the FDD and any FDD exhibits. Any such disclaimers are deemed contrary to public policy and void and unenforceable. Franchisors that are registered to sell franchises in California should note that this new prohibition applies to sales of franchises made after January 1, 2023, to residents of California or to non-residents that intend to operate a franchise business in California.
The California Bill also puts new restrictions on the approval process for transferring a franchise. The new law requires prospective franchisees who wish to purchase an existing franchise or the assets of an existing franchise business, to provide specified information, including their name, address, agreements related to the purchase of the franchise business, and an application, to the franchisor, after which the franchisor must notify the prospective franchisee, within 15 days of any additional information or documentation needed. The franchisor must notify a prospective franchisee of the approval or disapproval of an application to purchase an existing franchise business within 60 days and if the application is not approved, notify the applicant of the reason for disapproval. These new requirements will undoubtedly result in changes to the transfer provisions in franchise agreements and FDDs registered in California this year.
Additionally, the California Bill adds a new provision that prohibits a franchisor from refusing to grant a franchise or provide financial assistance to a prospective franchisee or an existing franchisee based on discriminatory criteria (including the franchisee’s sex, race, color, religion, ancestry, national origin, disability, medical condition, genetic information, marital status, sexual orientation, citizenship, immigration status) or any characteristic of the composition of the neighborhood or geographic area where the franchise would be located. Further, under the California Bill, a franchisor is prohibited from requiring a franchisee to sign a general release in exchange for the franchisee to be eligible for assistance related to a declared state or federal emergency.
Next Steps for Franchisors
Franchisors who are registered to sell franchises in Maryland, California and Washington, (assuming that Washington adopts the Statement of Policy) should review their FDD and franchise agreement, paying close attention to questionnaires and acknowledgements which may violate the new laws in these states. Many franchise litigators continue to recommend the use of questionnaires at the closing of franchise sales where such questionnaires are permitted. Franchisors who sell franchises in states without franchise regulations, i.e., the non-registration states, should consult with franchise counsel on whether to use different forms of FDDs in the states that have adopted the Statement of Policy and in the non-registration states.
Lynne Hanson is a franchise attorney whose practice focuses on franchising and distribution regulatory law. She has represented franchisors in business, trademark, regulatory, and transactional matters for more than 20 years.
What is written here is for general informational purposes only and does not constitute legal advice. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.