IV. NEGOTIATED CHANGES

If a franchisor permits its franchise salespeople to negotiate certain terms in the standard franchise agreement, the franchisor should be aware of its regulatory compliance obligations in connection with any negotiated change.

Franchisors should carefully consider all of the implications of any negotiated change, including any changes that could affect other franchisees in the system to ensure that negotiated changes are carefully documented. Moreover, there are legal and practical limitations on the freedom of the parties to negotiate the franchise agreement. In a perfect world, no changes should be made to the franchise agreement absent a compelling business justification.

In Hawaii, Illinois, Indiana, Washington, Minnesota and California, it is unlawful for franchisors to discriminate unfairly among franchisees in connection with the sale of a franchise. In such states, the franchisor must be prepared either to offer the same terms to all franchisees or be prepared to explain why neighboring franchisees are not similarly situated. While these statutes generally prohibit discriminatory practices, there are some enumerated exceptions.

For example, the Washington Franchise Investment Protection Act permits such conduct if it is: (1) reasonable; (2) based on franchises granted at materially different times and the negotiated terms are related to the difference in time, or based on other proper and justifiable distinctions; and (3) not arbitrary. Wash. Rev. Code § 19.100.180(c).

Virginia, on the other hand, requires a franchisor to negotiate all terms of the franchise agreement with the exception of terms relating to uniform image and quality standards, and makes the franchise agreement voidable at the franchisee's option if the franchisor refuses to do so. Va. Code Title § 13.1-565.

Negotiated changes may require amendment of state registrations and re-disclosure to the prospective franchisee. For instance, as previously discussed, the FTC Rule requires the franchisor to provide the prospect with a copy of the franchise agreement and all contracts to be signed, with all blanks filled in, at least 5 business days before the franchisee signs. As a result, certain negotiated changes could potentially reset the 5-day clock. While the 5-day clock will not be reset for correcting typographical errors or minor changes at the prospective franchisee's request which substantially benefit the franchisee and provide no more than de minimus benefits to the franchisor, other material changes will reset the 5-day clock.

Moreover, California requires the franchisor to re-register any negotiated changes. California also requires franchisors to file a Notice of Negotiated Change of Sale of Franchise within 15 days after the negotiated sale. Thereafter, all California prospective franchisees must be given the following disclosures:

The terms of Items ___ of this Offering Circular have been negotiated with other franchisees. A copy of all Negotiated Sales Notices filed in California in the last 12 months are attached as Exhibit "__".

Other states, such as Illinois, only require registration of an amendment if the franchisor consistently negotiates the same material change(s) in subsequent sales.