The judges in our courtrooms have become much better educated about the requirements of the Federal Trade Commission’s Amended Franchise Rule (“Disclosure Requirements and Prohibitions Concerning Franchising”) and are often very aware that a Franchise Disclosure Document (“FDD”) must be provided to a prospective franchisee prior to purchasing a franchise. The requirements for Item 11 of the Amended Franchise Rule supports the supposition that prospective franchisees are entitled to rely on the information within the Operations Manual, particularly those areas identified in the manual’s Table of Contents set out in Item 11 of a franchisor’s FDD. Yet the most important document that acts as a road map of a franchisor’s entire system, houses a franchisor’s trade secrets, and governs much of the working relationship with franchisees, receives very little, if any, review from a company’s franchise counsel.
To avoid being trapped, franchisors and counsel must conduct a legal review of the franchisor’s Operations Manual. It is suggested that a review encompass, at a minimum, the following areas:
- Joint Employer Liability
- Avoid any employment related advice involving hiring, firing, wages, or discipline of franchisee’s employees.
- Discrimination Clauses
- Title VII of the Civil Rights Act of 1964 prohibits discrimination in any aspect of employment. The power of a franchisor to control operations should be reviewed as a potential liability issue.
- Good Faith Standard
- Any Operations Manual may fuel claims that a breach of the covenant of good faith and fair dealing occurs where the Franchise Agreement and Operations Manual conflict.
- Safety and Security
- A franchisor may be held liable for any harm suffered by third parties based upon both policies set forth in the Operations Manuals, and for the lack of policies.
- Environmental Laws
- Franchisors may be found liable for negligent advice contained in the Operations Manual covering environmental issues.
- Anti-Trust Liability
- Pricing information in the Operations Manual can create legal issues and has been used by courts to find anti-trust liability.
- Deficient Manuals
- Courts have found liability where manuals were not delivered at all or not delivered timely. I believe it is only a matter of time until an educated plaintiff’s attorney is able to take an Item 11 disclosure in the FDD and the section of a franchisor’s Franchise Agreement dealing with the Operations Manual and convince a court that the Operations Manual given its franchisee is deficient or that it is not properly updated, supplemented, or revised.
- For the small Franchisor that outsources the Operations Manual, be careful. The company you hired may own the copyright. The owner of the copyright has exclusive authority to authorize reproduction and distribution of the manual, not the franchisor.
Operations Manuals are an integral part of a franchise system. Franchisors who fail to include their franchising counsel in the development of all manuals may be easy prey for the hungry plaintiff lawyers.