Advertising Tips for Franchisors: Knowing the Laws and Regulations

06/01/2001 / Charles Modell and Joseph Fittante

In the present economic climate, many large companies are slashing their budgets by laying off employees and curtailing marketing activities. With the increased pool of potential prospects resulting from these layoffs, many franchise companies have recently increased their advertising efforts to attract new franchisees. Prior to mounting an advertising campaign it is important that a franchisor be aware of the basic laws related to advertising for prospective franchisees.

Franchise advertising is, indeed, heavily regulated. Franchisors must comply with general consumer laws applicable to all businesses when soliciting prospective franchisees. In addition, most franchise registration states and the Federal Trade Commission also regulate the substantive terms of a franchise advertisement. To comply with the franchise laws, franchisors must understand the types of promotions that are regulated by these laws.

Most franchise registration states define advertising to include any communication that is published in connection with an offer to sell a franchise. Newspaper, magazine, television and radio advertising are commonly cited examples. However, the definition of advertising is not limited to traditional media advertising. Brochures, videotapes, form letters, CDROMs, web sites, and email packets describing the franchised business also fall into the definition of an advertisement under franchise disclosure laws. Articles written about a franchise system, or polls indicating that a particular system is highly rated among other franchise systems, also become advertisements when they are reproduced by a franchisor for distribution to prospective franchisees. These less traditional forms of advertising are subject to the same rules and regulations as traditional media advertising. (On a separate note, franchisors who reproduce articles published in the media should obtain the consent of the publication that initially printed the article prior to reproducing the article. This material is copyrighted and if the franchisor reproduces the material without the consent of the publisher, the franchisor may be infringing upon the rights of the publisher.)

The substantive regulation of these advertisements begins with prohibitions against "blind ads." California, Maryland, Minnesota and Washington require the franchisor’s name and address be printed on each piece of advertising. See Cal. Code Regs. Tit. 10, §310.156.1; MD. Regs. Code Tit. §02.02.08.09; Minn. R. §2860.4100; WA. Admin. Code §460-80-500. Minnesota also requires the franchisor’s Minnesota franchise registration number be printed on the advertising. Minn. R. §2860.4100. If a franchisor uses an advertising packet containing separate pieces of advertising in these states, it is generally sufficient to place this information on the outside of the packet as opposed to on each piece of advertising contained in the packet.

Most states also regulate earnings claims in advertisements and seek to prohibit advertising that promises more than the franchisor can deliver. For example, state and federal laws prohibit an earnings claim in an advertisement unless it is consistent with the Item 19 earnings claim in the franchisor’s uniform franchise offering circular. ( Minnesota prohibits all earnings claims in advertising.) Id. Franchisors who do not publish an earnings claim in their offering circular therefore may not make an earnings claim in their advertising. Additionally, an advertisement should not contain any statements or inference that the purchase of the franchise is a safe investment, that failure, loss, or default is impossible or unlikely, or that earnings or profits are assured. Indeed, any inclusion of the word “success” in an advertisement is likely to elicit comments from a number of state franchise regulators. Finally, the advertisement should not make promises or representations contrary to the information contained in the franchisor’s uniform franchise offering circular.

Under New York law, at the time of filing an advertisement, the franchisor is required to file a verification stating that the advertisement does not contain any information inconsistent with the franchisor’s offering circular on file with the State. N.Y. Comp. Codes R. & Regs. Tit. 13, § 200.09. Additionally, all sales literature used in New York must contain a disclaimer that “[t]he advertisement is not an offering. An offering can only be made by a prospectus filed first with the Department of Law of the State of New York. Such filing does not constitute approval by the Department of Law.” Id. However, for certain types of advertising, such as classified advertising or broadcast advertising, in lieu of the statement set forth above, the advertising may contain the following statement, “[t]his offering is made by prospectus only.” Id.

Under the laws of the States of California and Washington, if an advertisement contains an endorsement from a public figure, the advertising must also disclose the compensation, if any, paid or promised to the public figure for the endorsement. If the advertisement is presented on radio or television, the disclosure must be made as a part of the same commercial message, without any intermission or other intervening material. See Cal. Code Regs. Tit. 10, §310.156.1; WA. Admin. Code §460-80-500.

Because an advertisement constitutes an offer to sell a franchise, a franchisor must be registered to offer and sell franchises in a registration state before it publishes or uses the advertising in that state. There are two exceptions. First, all registration states that require advertising to be filed prior to use generally exempt from the definition of an offer an advertisement in a newspaper or other publication of general, regular and paid circulation that has had more than two-thirds of its circulation outside the state during the prior 12 month period. Similarly, all registration states that regulate advertising exempt from the definition of an offer, radio and television programs originating outside of the state that are received in the state.

The second exception is for advertising on the Internet. California, Maryland, New York, North Dakota, Rhode Island, South Dakota and Washington have adopted exemptions for such advertising. See Cal. Code Regs. Tit. 10, §310.100.3; MD. Regs. Code Tit. §02.02.18; N.Y. Comp. Codes R. & Regs. Tit. 13, §200.13; Interp. Op. S.D. Dr. of Div. of Secs. CCH Bus. Franchise Guide §5410.20; Policy Statement of the WA. State Sec. Admin. CCH Bus. Franchise Guide §5470.90; N.D. Admin. Order, CCH Bus. Franchise Guide §5340.02. A franchisor can qualify for this exemption as long as its web site contains a disclaimer that the franchise is not being offered to residents of the applicable state, provided the offer is not otherwise directed to a resident of the state, and no franchises are sold in the state until the franchisor’s offering circular is registered in that state. Rhode Island also exempts Internet offers that meet the foregoing criteria, provided the franchisor maintains a technical “firewall” or other policies and procedures reasonably designed to ensure that prior to any subsequent direct communication with the prospect, the franchisor becomes registered in the State of Rhode Island to sell franchises. R.I. Code R. §19-28.1-6.10. Illinois also has an exemption for Internet offers as long as the franchisor limits contacts with prospects to keeping a prospect list and notifying such prospects that until the franchisor is registered in Illinois, no further discussions can occur. Ill. Admin. Code Tit. 14, §200.306. (Other registration states have formally or informally acknowledged their acceptance of the basic Internet exemption.)

If the advertising is not exempt, the advertising must be filed in most registration states prior to use. In the case of a videotape or CD, the piece itself, or a written transcript, can be filed. The process for filing advertising is quite simple: if the state examiner does not comment in a certain number of days, the advertising is deemed to be approved for use in that state. The period of time runs from three days to seven business days, depending on the state. In California, Maryland, New York, South Dakota and Washington a franchisor is required to file two copies of the advertising. The remainder of the registration states that require advertising to be filed prior to use only require that one copy of the advertisement be filed. The filing of advertising does not require submission of a filing fee, except in Rhode Island, which charges a $10 examination fee per item. 

A franchisor planning on producing a large quantity of a specific advertising piece may want to have the original advertising piece approved by the appropriate states before it produces the remainder of the advertising pieces. To allow for comments to be received by mail, a franchisor would be well advised to file the materials at least two weeks before publication in any state requiring prior submission of advertisements. This will alleviate the need to reproduce the piece in the event a state objects to certain of the statements contained in the piece. However, if the pieces are printed prior to having the piece approved and a state subsequently objected to that piece, the franchisor may withdraw the piece from consideration by the state and simply refrain from using the piece in that state. The franchisor could also “blackout” or “sticker” offending language, but these marks obviously detract from the value of the piece.

Franchisors use many different types of advertising in their efforts to attract prospects. Unfortunately, attached as an exhibit to many franchisee lawsuits is an advertisement the franchisee claims induced her to purchase the franchise. Accordingly, the franchisor must ensure that all advertising used is substantively correct and, if applicable, has been filed with the appropriate state agency for review prior to use and contains any state mandated information or disclaimers. 

 

This article was reprinted with permission from Law Journal Newsletters Franchising Business & Law Alert, Vol. 7, Number 9, June 2001.