In Nieman v. DryClean U.S.A. Franchise Co., Inc. the 11th Circuit Court of Appeal has reversed a district court decision in which an Argentinean master franchisee was permitted by the lower court to rescind his agreement with a Florida franchisor and extract a refund of his $50,000 franchise fee under the Federal Trade Commission's Franchise Rule. The franchisor had not provided a Uniform Franchise Offering Circular to the franchisee, but took the position that no disclosure document was required in regard to a non-United States franchise. The FTC Rule does not carry with it a private right of action, but the district court granted relief to the foreign master franchisee under Florida's "Little FTC Act" which imposes penalties under state law for violations of the FTC Rule.

The earlier district court decision, a case of first impression in any federal court, had created quite a stir within the franchising community, as reported in our December 1997 Newsletter (N.S. 189). It held that, under some circumstances at least, the FTC Rule governs the sale by a United States franchisor of a master franchise for a foreign country. Although the FTC in 1997 issued an Advance Notice of Proposed Rulemaking to clarify that the Rule does not apply to overseas franchises, no such clarification has in fact been forthcoming. Whether United States franchisors should provide disclosure documents to franchisees in other countries has been the subject of concern. If there is a disclosure obligation, no clear guidance exists on how to fulfill it. Providing the domestic version of the offering circular to a foreign franchisee would probably be misleading, while preparation of a special version or versions for other countries would be burdensome.

In overturning the trial court's decision, the appellate court unequivocally held that the FTC Franchise Rule is not meant to apply outside the United States. The court said that, even though Congress has the power to regulate extraterritorial acts of United States citizens, in construing a federal statute it should be assumed that it is meant to apply only within this country unless a contrary intent clearly appears. The administrative history of the Rule and its provisions themselves have a purely domestic focus. Therefore, the court found no intent to regulate the conduct of United States franchisors in their dealings with foreign franchisees.