cbareport_May13 - page 9

May 2013 CBA REPORT
l
9
feature article
B. The 2012 Amendments
The Ohio State Bar Association
drafted many of the 2012 amendments.
Senator Wagoner who sponsored the
legislation added certain amendments.
Many of the 2012 amendments address
problems that have arisen since 1979
with the private party enforcement of
the Act.
As noted, Section 1334.13 exempted
from the OBOPL any transaction that
“fully complies with the trade regulation
rule of the federal trade commission…
’concerning franchising,’ 16 C.F.R.
436.1
et seq
.” Most franchisors selling
franchises in Ohio have relied on this
exemption and have not complied with
the different disclosure requirements
of the OBOPL. The “fully complies”
language has proven to be problematic.
It has allowed unsuccessful or unhappy
franchisees opportunistically to claim
that their purchase of a franchise was
not exempt because of minor or immate-
rial failures by the franchisor to comply
with the FTC rule. Having relied on the
exemption, the franchisor would not
have complied with the OBOPL disclo-
sure requirements and would be subject
to claims for rescission, treble damages,
attorney fees, and other relief.
Effectively, the “fully complies”
language could be used as a “gotcha”.
Likewise, in certain circumstances, it
created in Ohio a private right of action
for noncompliance with the FTC rule
that the FTC itself did not create. The
2012 amendments lessen the risk of the
described opportunistic behavior by
replacing the “fully complies” language
with “complies in all material respects”
with the FTC rule. The 2012 amend-
ments also update the language of
Section 1334.13 to conform to the 2007
amendments to the FTC rule.
2.
Court decisions have exacer-
bated the franchisor’s exposure where
the franchisee claims that the transac-
tion was not exempt pursuant to Section
1334.13 because the franchisor did not
fully comply with the FTC rule. A fran-
chisor that is relying on the exemption
of Section 1334.13 typically will not have
provided the franchisee with written
notice of the five-day cooling off period
described above. Courts have ruled that
where the seller does not provide written
notice of the five-day right to cancel, the
statute of limitation never begins to run.
RY/EH, Inc. v. Arthur Treachers, Inc.
,
685 N.E.2d 316 (Ohio App. 1996);
6100
Cleveland, Inc., supra
. The
RY/EH, Inc
.
decision further rules that the five-day
right to cancel never begins to run where
the seller does not provide the written
notice of the purchaser’s right to can-
cel. These decisions effectively allow the
franchisee to sue in perpetuity or to have
a perpetual cooling off period where the
franchisor does not give written notice
of the right to cancel. The 2012 amend-
ments correct this by (i) limiting the
right to cancel, where the franchisor does
not give notice of the right to cancel, to
one year after execution of the franchise
agreement and (ii) limiting the right
to sue for damages to five years after
execution of the franchise agreement.
Ohio Revised Code §§ 1334.05(A) and
1334.10(C).
3.
In addition to clarifying the ap-
plication of the statute of limitations and
the right to cancel, the 2012 amendments
make other changes to the franchisees’
private right of action for violations of
the OBOPL. Franchisors will benefit
from the amendment to Section 1334.09
(A). Prior to the amendments, this
section allowed the franchisee the full
period of the statute of limitations to
sue for rescission where the franchisor
violated the OBOPL. The amendments
limit the period for seeking rescission by
requiring the franchisee to give writ-
ten notice of the claim of rescission
within three (3) years after the date of
the franchise agreement. This modifica-
tion recognizes both that (i) rescission
becomes increasing impractical with the
passage of time, and (ii) the franchisee
has other powerful remedies in addi-
tion to rescission. Section 1334.09 (C)
is modified to provide that exercise of
the right to rescind does not entitle the
franchisee to unjust enrichment.
4.
Franchisees will benefit from
the changes to Sections 1334.08 and
1334.15. With respect to claims arising
under the OBOPL, the 2012 amend-
ments to Section 1334.08 declare void
any provision in an agreement restricting
jurisdiction or venue to a forum outside
of Ohio or requiring the application of
laws of a state other than Ohio.
Id
. at §
1334.08 (E). Section 1334.15 reinforces
the above including by making void and
unenforceable “any venue or choice of
law provision that deprives a purchaser
who is an Ohio resident of the benefit of
the OBOPL.” Thus, standard provisions
in franchise agreements on choice of law
and choice of forum cannot defeat the
rights of Ohio franchisees under OBOPL.
The 2012 amendments both clarify
and modestly expand the coverage of
the OBOPL. The amendments modify
the definition of “initial payment” in
Section 1334.01 (G) to make clear that
the statute does not apply to traditional
wholesale distributorships or retail deal-
erships. This is accomplished by adding
language that initial payment “does not
include purchases at bona fide wholesale
prices of reasonable quantities of goods
or services for resale or lease.”
Id.
The
amendments expand the number of
franchisees entitled to the protection of
the OBOPL. Previously, a franchisee did
not have the protection of the OBOPL
where the franchisee’s initial payment
exceeded $50,000. The amendments in-
crease this amount to $100,000 allowing
more franchisees to receive the benefit
of the statute. Likewise, the exemption
at Section 1334.12 (M) for “experienced
franchisees” was narrowed so that fran-
chisees having no prior experience with
the franchisor or its trademark now fall
outside that exemption and have the ben-
efit of the statute. The amendments also
update the large franchisor exemption.
When adopted in 1979, the large franchi-
sor exemption required,
inter alia
, a net
worth of only $5 million or more. The
amendments increase this amount to $15
million to keep pace with the Consumer
Price Index increases since 1979. Id. at §
1334.12 (L)(1). This change makes more
franchisors subject to the statute.
Overall, the 2012 amendments clarify
and improve the OBOPL in numerous
respects and in a balanced manner that
provides needed protection to both fran-
chisees and franchisors.
Donson and Lawson practice franchise law at Taft
Stettinius &Hollister, LLP. Donson chaired the Ohio
State Bar Association Committee that drafted most of
the 2012 amendments.
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