Franchise Sales: New Guidelines Prohibit the Use of Franchisee Questionnaires in the Sales Process
Franchisors can no longer use franchisee questionnaires during the franchise sales process, according to a new Statement of Policy effective January 1, 2023, issued by the North American Securities Administrators Association (“NASAA”), whose guidelines are followed in the 13 franchise registration states.
Federal and applicable state franchise laws require franchisors to make certain pre-sale disclosures to prospective franchisees, in a Franchise Disclosure Document (“FDD”), which provides information about the system, the franchisee’s rights and obligations, and the franchisor’s obligations.
Over at least the last 30 years, it has become commonplace for franchisors to ask prospective franchisees to sign a series of acknowledgements, by answering “yes” or “no” to a series of questions, about what occurred during the sales process. For example, the questionnaires often ask prospective franchisees whether the franchisor’s salespersons made any promises or statements about the earning potential of a franchise.
Some franchisors have successfully used the franchisee’s answers to these questionnaires as a legal defense to fraud claims, where the franchisee acknowledged in a questionnaire that the franchisee had not received any promises from the franchisor’s salespersons.
For example, in Governara v. 7-Eleven, a New York federal court dismissed a franchisee’s fraud claims, because the franchisee had signed an acknowledgement that it had not relied on any information outside of the FDD. The court reasoned that such disclaimers were useful in combating fraud because they help franchisors root out dishonest sales personnel by requesting franchisees to disclose whether a franchisor’s representatives made illegal statements during the sales process.
In its recent policy statement, NASAA found that such questionnaires should not be permitted, because they can “allow unscrupulous franchisors to avoid the consequences of franchise fraud. . . . It should be the franchisor’s burden to police its own sales personnel and agents; franchisees should not have to confirm that no violations of law have occurred during their own sales process.”
NASAA found that the questionnaires are contrary to the legislative policies behind state franchise laws, designed to protect prospective franchisees by requiring presale disclosure.
Specifically, NASAA prohibited franchisors from using the most commonly used acknowledgments, such as:
- the prospect read and understands the FDD, the franchise agreement, and understands the risks associated with the purchase;
- the prospect has not relied on any information, representations or statements other than the information in the FDD, including any financial performance representations;
- the prospect is responsible for its own success or failure; and
- the prospect had the opportunity to consult with professional advisors or consultants.
The new policy also requires franchisors to include a statement in its FDD that no questionnaire or acknowledgement shall have effect to waive any fraud claims or disclaim reliance on any statement made by the franchisor.