Ohio's Revised Franchise Code Now in Effect

Updating the Code

At the simplest level, the amendments updated sections of the 30-plus-year-old code that were outdated. For example, the old code still used the term “Uniform Franchise Offering Circular,” instead of “Franchise Disclosure Document,” so those references were changed. To account for inflation, the new code raised the large-franchisor exemption to $15 million from $5 million. The initial-fee investment threshold also was raised to $100,000 from the former $50,000, meaning that a franchisee that makes an “initial payment” of $100,000 or more is not protected by the Ohio law. An initial payment is defined as the total amount a franchisee is obligated to pay prior to or during the first six months after starting operation.

The other changes in the code sought to address confusion over the law's application that occurred in the wake of court decisions over the years. Because non-compliance with the FTC's Franchise Rule could mean that a franchisor was not exempted from Ohio's rules, franchisors and franchisees would regularly wind up in court arguing over minor violations of federal disclosure rules. “One of the biggest difficulties for franchisors was that they had to 'fully comply' with the FTC Franchise Act to be able to opt-out of Ohio's rules, but we lacked clarity about what 'fully comply' meant,” said Wagoner. “Any little problem with an FDD ' could be argued to be out of compliance. The new rules change it to 'material compliance,' which means that small, technical problems will not trigger big penalties under the Ohio Act.”

With the new rules, franchisees operating under Ohio law instead of federal law retain one strong protection that is not available in the FTC's Franchise Rule: the rights of private action. Those rights, which can include rescission of contracts, triple damages, and attorneys' fees, are powerful, said Stanley Dub, principal, Law Offices of Stanley M. Dub Co., LPA in Cleveland. “When a franchisee would come to me, having lost all of his money, the first thing I would do is look to see if the FTC Rule was violated,” Dub said. “If I found a [federal] violation, it was almost always the case that the franchisor had ignored Ohio's statutes for disclosure. That would allow my client to pursue rescission.”

Those rights have been retained in the new code, but the idea is that they will be applied when a franchisor has chosen to operate under Ohio law or has committed a material violation of the FTC Franchise Rule. The revised code retains the ability for a franchisee to seek both rescission and damages, which Wagoner pointed out are treated as alternatives in most states that have those remedies for franchises.

Clarity Added

Clarity has been added in a franchisee's rights to cancel franchise contracts. About a decade ago, a franchisee sued for cancellation under Ohio law because it said that it did not properly receive federal disclosures from its franchisor. The court allowed the franchisee to void the contract 17 years after it was signed, based on Ohio's five-day right of cancellation. In that case, the court decided that the franchisor did not comply with the FTC Rule at the time the contract was signed, so it was going to be subject to Ohio law. Applying Ohio law, the court decided that the clock for the five-day right to cancel did not start to run until the franchisor completed the provision of the Ohio law that required the franchisee to be informed that there was a five-day right of cancellation ' which it had not done because it had assumed it was operating under federal law. “Under the new amendments, this 'infinite' right to cancel was severely scaled back to 'any time within 12 months after the date on which the purchaser signs the contract,'” said Jim Meaney, partner with Zaino & Humphrey, LPA in Dublin, OH. “Now, buyers only have one year to cancel if the Notice of Cancellation is not supplied.”

Also under the revised code, franchisees have a three-year statute of limitations to seek a rescission of the contract and a five-year statute of limitations to sue for damages when a disclosure violation has occurred. “I'm not happy that rights to seek rescission are only three years,” said Dub, who represents franchisees in disputes with franchisors and was a key member of the Ohio Bar Association committee that drafted the legislative language. “I've seen many situations in which it takes more than three years for a franchisee to realize the extent of a problem and decide to seek a remedy.”

Calling the amendments to the state's law a “mixed bag” for franchisees, Dub said that franchisees will benefit from a clarification of a choice-of-law provision that stipulates that Ohio law will apply when a franchise is operating in the state. “The Sixth Circuit Court of Appeals ruled a number of years ago that the choice of law provisions in the franchise contract would be enforced over conflicting language in the Ohio law,” said Dub, which resulted in Ohio franchisees facing litigation or arbitration in whichever state was named in the franchise contract. “The amended law includes language intended to overrule this court decision. ' As a result, Ohio law will now apply to the sale of franchises located in Ohio, as well as to the sale of franchises located in other states if the franchise agreement specifies that Ohio law applies.”

The actual language of the revised code refers to “a [franchise] purchaser who is an Ohio resident,” but Dub said that the intent is not to restrict the protection to an Ohio resident, but to any franchise operating in Ohio.

Finally, Dub and Meaney observed that the revised code only makes those venue and choice of law provisions clear for litigation, not for arbitration. It's possible that the next battle between franchisors and franchisees in Ohio will be about whether out-of-state mandatory arbitration clauses can be enforced.

'Kevin Adler is associate editor of FBLA.

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Amendments to the Ohio Business Opportunity Law went into effect a few months ago, offering what franchise attorneys are calling a balanced approach that improves pre-sale disclosures to protect franchisees but also gives franchisors greater protection from lawsuits that cite minor, technical violations of the state's rules.

The need for updates to the Ohio Business Opportunity Law can be traced to how Ohio regulates franchisors. Ohio is not a franchise-registration state, but its Business Opportunity Law regulates the industry. That law is, in some respects, more franchisee-friendly than federal law, so franchisors prefer not to be governed by it. A franchisor can qualify for an exemption from Ohio's rule (and be governed solely by the FTC's Franchise Rule) if it meets one of several criteria. The two most common paths are through a large-franchisor exemption or by complying with the FTC's franchise disclosure rules.

However, details in the Business Opportunity Law and its interpretation by courts over the years created uncertainty for franchisors and franchisees about when a franchise was covered by Ohio law, according to Mark Wagoner, attorney with Shumaker, Loop & Kendrick, LLP in Toledo. Wagoner, a member of the Ohio Senate for eight years (his fourth term ended on Dec. 31, 2012) and a franchise attorney, introduced Senate Bill No. 196, worked with the Ohio Bar committee that drafted language for the bill, and actually signed the document in a ceremony with Gov. John R. Kasich (R) last year.

Updating the Code

At the simplest level, the amendments updated sections of the 30-plus-year-old code that were outdated. For example, the old code still used the term “Uniform Franchise Offering Circular,” instead of “Franchise Disclosure Document,” so those references were changed. To account for inflation, the new code raised the large-franchisor exemption to $15 million from $5 million. The initial-fee investment threshold also was raised to $100,000 from the former $50,000, meaning that a franchisee that makes an “initial payment” of $100,000 or more is not protected by the Ohio law. An initial payment is defined as the total amount a franchisee is obligated to pay prior to or during the first six months after starting operation.

The other changes in the code sought to address confusion over the law's application that occurred in the wake of court decisions over the years. Because non-compliance with the FTC's Franchise Rule could mean that a franchisor was not exempted from Ohio's rules, franchisors and franchisees would regularly wind up in court arguing over minor violations of federal disclosure rules. “One of the biggest difficulties for franchisors was that they had to 'fully comply' with the FTC Franchise Act to be able to opt-out of Ohio's rules, but we lacked clarity about what 'fully comply' meant,” said Wagoner. “Any little problem with an FDD ' could be argued to be out of compliance. The new rules change it to 'material compliance,' which means that small, technical problems will not trigger big penalties under the Ohio Act.”

With the new rules, franchisees operating under Ohio law instead of federal law retain one strong protection that is not available in the FTC's Franchise Rule: the rights of private action. Those rights, which can include rescission of contracts, triple damages, and attorneys' fees, are powerful, said Stanley Dub, principal, Law Offices of Stanley M. Dub Co., LPA in Cleveland. “When a franchisee would come to me, having lost all of his money, the first thing I would do is look to see if the FTC Rule was violated,” Dub said. “If I found a [federal] violation, it was almost always the case that the franchisor had ignored Ohio's statutes for disclosure. That would allow my client to pursue rescission.”

Those rights have been retained in the new code, but the idea is that they will be applied when a franchisor has chosen to operate under Ohio law or has committed a material violation of the FTC Franchise Rule. The revised code retains the ability for a franchisee to seek both rescission and damages, which Wagoner pointed out are treated as alternatives in most states that have those remedies for franchises.

Clarity Added

Clarity has been added in a franchisee's rights to cancel franchise contracts. About a decade ago, a franchisee sued for cancellation under Ohio law because it said that it did not properly receive federal disclosures from its franchisor. The court allowed the franchisee to void the contract 17 years after it was signed, based on Ohio's five-day right of cancellation. In that case, the court decided that the franchisor did not comply with the FTC Rule at the time the contract was signed, so it was going to be subject to Ohio law. Applying Ohio law, the court decided that the clock for the five-day right to cancel did not start to run until the franchisor completed the provision of the Ohio law that required the franchisee to be informed that there was a five-day right of cancellation ' which it had not done because it had assumed it was operating under federal law. “Under the new amendments, this 'infinite' right to cancel was severely scaled back to 'any time within 12 months after the date on which the purchaser signs the contract,'” said Jim Meaney, partner with Zaino & Humphrey, LPA in Dublin, OH. “Now, buyers only have one year to cancel if the Notice of Cancellation is not supplied.”

Also under the revised code, franchisees have a three-year statute of limitations to seek a rescission of the contract and a five-year statute of limitations to sue for damages when a disclosure violation has occurred. “I'm not happy that rights to seek rescission are only three years,” said Dub, who represents franchisees in disputes with franchisors and was a key member of the Ohio Bar Association committee that drafted the legislative language. “I've seen many situations in which it takes more than three years for a franchisee to realize the extent of a problem and decide to seek a remedy.”

Calling the amendments to the state's law a “mixed bag” for franchisees, Dub said that franchisees will benefit from a clarification of a choice-of-law provision that stipulates that Ohio law will apply when a franchise is operating in the state. “The Sixth Circuit Court of Appeals ruled a number of years ago that the choice of law provisions in the franchise contract would be enforced over conflicting language in the Ohio law,” said Dub, which resulted in Ohio franchisees facing litigation or arbitration in whichever state was named in the franchise contract. “The amended law includes language intended to overrule this court decision. ' As a result, Ohio law will now apply to the sale of franchises located in Ohio, as well as to the sale of franchises located in other states if the franchise agreement specifies that Ohio law applies.”

The actual language of the revised code refers to “a [franchise] purchaser who is an Ohio resident,” but Dub said that the intent is not to restrict the protection to an Ohio resident, but to any franchise operating in Ohio.

Finally, Dub and Meaney observed that the revised code only makes those venue and choice of law provisions clear for litigation, not for arbitration. It's possible that the next battle between franchisors and franchisees in Ohio will be about whether out-of-state mandatory arbitration clauses can be enforced.

'Kevin Adler is associate editor of FBLA.

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