Franchisees in Ohio should be aware of a number of recent changes that provide both increased rights and remedies.
Ohio Revised Code Chapter 1334, Ohio’s Business Opportunity Plan Law (the “Act”), went into effect in October 1979. The Act is designed to regulate the sale or lease of business opportunity plans, including written disclosures, and provides significant remedies to those who have been misled by dishonest or negligent franchisors. The Supreme Court of Ohio’s decision in Peltier v. Spaghetti Tree, Inc., 6 Ohio St. 3d 194, 197 (1983), makes it clear that sales of franchise agreements subject to Ohio law are governed by Ohio Revised Code Chapter 1334.1 On June 26, 2012, Governor Kasich signed Substitute Senate Bill 196 (the “2012 Amendment”) into law. The 2012 Amendment, which became effective on September 28, 2012, amends the Act in several significant ways, certain of which are set forth below.
- The 2012 Amendment changes the definition of “business opportunity plan.” A business opportunity plan is an agreement in which a purchaser obtains the right to offer, sell or distribute goods or services under certain conditions.2 Under the former Act, a purchaser was required to make an initial payment greater than $500, but less than $50,000 to the seller or an affiliated person to begin or maintain the plan. The definition of “initial payment” refers to payment of the total sale price in “one or more installments,” and includes the full amount of any promissory note given by a purchaser, or an affiliated person, to the seller, or an affiliated person, prior to or during the first six months after commencing operation of the business opportunity plan. The 2012 Amendment raises the upper threshold for the initial payment to less than $100,000.
- The 2012 Amendment modifies the cancellation provisions of the Act. Under the 2012 Amendment, a purchaser may cancel an agreement any time within twelve months after the day on which the purchaser signs the agreement if the seller has failed to comply with certain specified continuing law provisions, and adds e-mail and fax to the methods for sending notice of cancellation.3 If the seller complies with certain specified continuing law provisions, the purchaser may cancel the agreement before midnight of the fifth business day after the day on which the purchaser signs the agreement.
- The 2012 Amendment includes the following continuing law provisions that a seller must comply with to limit the cancellation period to five days:
- The agreement must contain a notice of the purchaser’s right to cancel the agreement in at least 10-point boldface type, in a form specified in the 2012 Amendment, in close proximity to the space reserved in the agreement for the signature of the purchaser.
- A “Notice of Cancellation,” in a form specified in the 2012 Amendment, must be attached to the agreement in duplicate, signed by the purchaser, and contain certain mandatory language set forth in the 2012 Amendment in 10-point boldface type.
- Before furnishing copies of the notice of cancellation to the purchaser, the seller must complete both copies by entering the name of the seller, the address of the seller’s place of business, the date of the agreement, and the date of the last day on which the purchaser may cancel.
- The 2012 Amendment modifies a purchaser’s remedies for a seller’s violation of the Act. First, to have a business opportunity plan rescinded the purchaser must submit to the seller a written notice of rescission within three years of the date of the agreement. Second, the purchaser may recover all sums paid to the seller, less than the fair market value, at the time of delivery, of any goods supplied by the seller that are not returned to the seller. Third, the purchaser may be awarded up to three times the amount of actual damages incurred, or $10,000, whichever is greater. Fourth, the purchaser may seek relief in either or both an individual action and a class action.4
- The 2012 Amendment modifies the statute of limitations for recovery under the Act. An action may be brought no more than five years after either the occurrence of the violation or the date on which the parties executed the agreement, whichever is earlier.5
- The 2012 Amendment renders any venue or choice of law provision that deprives a purchaser who is an Ohio resident of the benefit of the Act void and unenforceable.6
- The 2012 Amendment voids any provision of an agreement that restricts the jurisdiction or venue of a claim otherwise enforceable under the Act to a forum outside of Ohio. In addition, the 2012 Amendment voids any provision that requires the application of the laws of another state to such a claim.7
- In addition to the exemptions listed in footnote one, the 2012 Amendment exempts a seller who had a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than $15 million or not less than $1 million if the seller was at least 80 percent owned by a corporation that had a net worth on a consolidated basis, according to its most recent audited financial statement, of not less than $15 million.
These are just some of the issues that should be addressed when a franchisee obtains the right to offer, sell or distribute goods or services under a franchise agreement in the State of Ohio. McDonald Hopkins' team of franchise, merger & acquisitions, commercial litigation, business restructuring, intellectual property, and real estate attorneys are prepared to provide counsel to both franchisors and franchisees.
1 The Act, as revised, exempts any transaction that complies in all material respects with the trade regulation rule of the Federal Trade Commission, “Disclosure Requirements and Prohibitions Concerning Franchising,” 16 C.F.R. 436.1 et seq., as the same may be amended from time to time. In addition, the Act, as revised, exempts any transaction that complies in all material respects with the trade regulation rule of the Federal Trade Commission, “Disclosure Requirements and Prohibitions Concerning Business Opportunities,” 16 C.F.R. 437.1 et seq., as the same maybe amended from time to time.
2 O.R.C. § 1334.01(D)
3 O.R.C. § 1334.05(A) and (B)
4 O.R.C. § 1334.09
5 O.R.C. § 1334.10(C)
6 O.R.C. § 1334.15
7 O.R.C. § 1334.06(E). Many franchise agreements contain provisions regarding the arbitration of disputes. It is unclear how the federal arbitration act and federal law preemption doctrines will impact these provisions of the Act, as amended.
For more information, please contact:
Scott N. Opincar 216.348.5753
We represent manufacturers, distributors, dealers, franchisors, franchisees, licensors, licensees, sales representatives, franchisor and franchisee investors, and franchisee associations in all aspects of franchising. We also assist franchise suppliers, such as banks, insurers, brokers and consultants. When appropriate, we work in close contact with a client’s business lawyer as special counsel.