Two Topics About The Franchise Disclosure Rule

The Franchise is an arrangement whereby a franchisor, through an agreement with a franchisee, grants the franchisee the right to use business operating resources including trademarks, trade names, business models, etc., and the franchisee shall operate under the uniform franchise system and pay franchise fees to the franchisor. There is an obvious imbalance of information between the parties of the franchise. The franchisor who has control over the information may take advantage of the prospects by alluring them to invest in the franchise blandly. To protect the investors against the franchise fraud, the imbalance of information must be corrected and the prospects must be provided with enough information and reasonable time for them to make sensible investment decisions. For this reason, the disclosure rule is the heart of the franchise law.The Ministry of Commerce of the People's Republic of China promulgated the new Measures for the Regulation of Commercial Franchise in the end of 2004. The disclosure rule was expanded to a whole chapter and the structure of the disclosure obligations became clearer. Much more obligations were imposed on the franchisor. The adoption of the provision of the liability for the violations of the disclosure obligations was even more important a step forward. All these have shown great progress while the new measures still contain many defects which demonstrate our shallow understandings about the franchise both in theory and in practice. As the motherland of the franchise, the United States has established a complete legal system of the franchise from which we can learn a lot. The article discussed the two main aspects of the franchise disclosure rule, i.e.,the obligation to disclose and the liability for violations, through the comparison between the franchise laws of China and the United States.Three kinds of rules about the obligation to disclose were discussed in the first part of the article. The first one was the subject of the disclosure, that is, who has the responsibility to disclose. Through the analysis of the value of the disclosure rule the writer came to the conclusion that the franchisors and some franchising brokers rather than the franchisees should be obligated to disclose. The second one was the object of the disclosure, that is, what should be disclosed. The requirements of The FTC style and the UFOC style in the United States are the most extensive. On the basis of the comparison between the required information in China and in the United States, the writer put forward some advices about adding or amending some items of the disclosure. The third one was the technical rules of the disclosure, such as the standards of disclosure, the time to disclose, the manner of disclosure, etc.The liability for the violations of the disclosure rule was discussed in the second part of the article. Firstly, the article demonstrated the importance of the provisions about the liability and generalized the characteristics of the liability. Secondly, the remedies in the American franchise disclosure rule were introduced. With the special provisions about the liability, the American franchise disclosure rules provide both public and private remedies to the violations. Accordingly, a complete system of the criminal, administrative and civil liability has been established. By comparison, the Measures for the Regulation of Commercial Franchise in China seems to be too simple in the provisions about the liability. Lastly, the discussion was focused on the civil remedies to the violations. In the writer's opinion, the franchise law shall adopt such remedies as voidability and rescission and impose the liability on the individuals who are responsible for the violations.