While the Federal Trade Commission continues to ponder possible changes in coverage and applicability of the Federal Trade Commission Rule on Franchising ("the Rule"), "Little FTC Acts" have stolen the act among franchisors in 1997. Little FTC Acts constitute state legislation that has been passed to fill a void in enforcement of the Rule. Although the Rule governs pre-sale franchise disclosure in all states, except the dozen or so that have passed more stringent state registration and disclosure laws, the federal courts have determined that there is no private right of action allowing franchisees to sue under the Rule. Since the FTC is insufficiently staffed to pursue any except the most egregious wrongdoers, the Rule itself cannot be enforced in the majority of cases. To address this problem, a number of states have enacted legislation that essentially mirrors the FTC Act, as it is applied to franchising by the Rule, and provides remedies for violations. These remedies are enforceable through private civil litigation under state law.

In Broussard v. Meineke, a multi-million dollar class action lawsuit by current and former franchisees, an auto muffler shop franchisor and key corporate officers were found liable for having mishandled franchisee advertising fees. The jury verdict was upheld on appeal. This case alarmed franchisor counsel because most cases dealing with advertising funds throughout the United States have held that the franchisor is not a fiduciary and that the broad discretion granted to the franchisor by the typical franchise agreement insulates the franchisor from liability for errors in managing an advertising fund. In fact, the court in this case held that a number of common law claims sounding in both tort and contract were barred by general releases of claims that had been signed by some franchisees.

However, the general releases did not apply to claims that the franchisor had misappropriated commissions from the fund after the releases were signed. Evidence indicated that the franchisor told franchisees that a franchisee advertising fund was a trust fund from which the franchisor took no revenue, that the franchisor subsequently paid large commissions to its own subsidiary and used the fund for its own benefit, and that the defendant companies and officers concealed the misappropriation through false and misleading representations. The appellate court believed that this evidence supported jury findings of fraud, breach of fiduciary duty, tortious interference with contract, and deceptive trade practices. Under North Carolina law, the jury was permitted to include more than $75 million in interest damages as part of its overall damage award, since the interest damages were a natural and foreseeable consequence of the wrongful actions by the defendants. Failure to allocate damages among defendants or claims did not preclude the entry of a final judgment confirming the compensatory damages award and trebling it under the North Carolina "little FTC Act".

Attorneys for franchisors have long complained that a United States franchisor's disclosure duties in regard to extraterritorial franchise sales are difficult to ascertain, as they do not fit within the general disclosure formula. Recently, the FTC has indicated that it thinks the Rule should not be applied to extraterritorial franchise transactions that do not involve domestic franchisees or franchised businesses within the United States. The FTC's policy statements were apparently ignored, however, by a district court in Florida in Nieman v. DryClean U.S.A. Franchise Co., Inc. A dry cleaning franchisor's acceptance of a non-refundable $50,000 deposit from a prospective Argentine franchisee without having made mandatory presale disclosures constituted a violation of the FTC's franchise disclosure Rule and, therefore, of the Florida "little FTC Act," a federal district court in Florida decided. The franchisee was therefore permitted to rescind the transaction. The court rejected contentions that the FTC rule did not apply to the sale of franchises in Argentina to non-United States citizens. Congress has the power to prevent unfair trade practices in foreign commerce by United States citizens, the court opined, although the wrongful acts are done outside the territorial limits of the United States.

The Nieman case is expected to hasten a more definitive statement by the FTC regarding the applicability of the Rule to franchise sales outside the United States.