In This Issue

Timothy J. Lockhart 

The U.S. Federal Trade Commission ("FTC") recently made major changes to its "Franchise Rule," which gives guidance to states on the disclosures that franchisors must make to receive a state’s permission to offer franchises there. States' compliance with the FTC’s amended Franchise Rule became optional on July 1, 2007, and will become mandatory on July 1, 2008.

The FTC’s amended Franchise Rule makes significant changes in the format and content of the Franchise Offering Circular ("FOC") that the SCC requires from every franchisor. Virginia’s FOCs, like those in many other states, are based on the Uniform FOC ("UFOC") Guidelines developed and administered by the North American Securities Administrators Association.

FOCs require a number of specific items of information about the franchise, its officers, and its franchisees. Those items include the franchise’s litigation history, past and current franchisees and their contact information, any exclusive territory that comes with the franchise, assistance that the franchisor provides to franchisees, and the cost of purchasing and starting up a franchise. If a franchisor makes representations about the financial performance of the franchise, that topic must also be covered in the FOC and information provided to back up those representations.

New Requirements for Franchisors

Although it closely tracks the UFOC Guidelines (and therefore Virginia’s FOC requirements), the FTC’s amended Franchise Rule requires, in some cases, more extensive disclosures, primarily with respect to certain aspects of the franchisee-franchisor relationship. The amended rule requires more detailed information on any lawsuits that the franchisor has filed against franchisees, the franchisor’s use of confidentiality clauses in lawsuit settlements, a warning when a franchisee will not have an exclusive territory, an explanation of what the term "renewal" means for each franchise system, and trademark-specific franchisee associations.

In a few instances the amended Franchise Rule requires less disclosure than do the UFOC Guidelines. For example, the FTC is not requiring disclosure of so-called "risk factors," franchise broker information, or extensive information about every component of any computer system that a franchisee must purchase.

Another change is that franchisors will now be allowed to use electronic means to deliver disclosure documents. However, financial performance representations (i.e., earnings claims) remain optional, not mandatory.

New Exemptions and Relaxed Requirements

The FTC has newly designated several situations as exempt from franchising requirements, including:

• Investments by wealthy, knowledgeable franchisees, i.e., those with five years of business experience and a net worth of at least $5 million;
• Franchises involving investments of at least $1 million (excluding the value raw land and any franchisor financing);
• Sales to certain officers, owners, and managers of franchisors; and
• The sale of franchises to be located outside the United States.

In addition, the FTC has dropped the requirement for a franchisor to provide a disclosure document to a potential franchisee at their "first personal meeting." Disclosures must now be provided 14 calendar days before the franchisee pays any money to the franchisor or signs a franchise-related agreement. If, however, a prospective franchisee "reasonably requests" a disclosure document more than 14 days before paying any money or signing an agreement, the franchisor must provide it then.

The changes to the franchise rules of Virginia and other states as a result of the FTC’s action are certain to cause a scramble as the compliance deadline approaches. According to Tim O’Brien, Senior Franchise Examiner in the SCC’s Division of Securities and Retail Franchising, "Most of [Virginia’s] 1,300 registered franchisors have not yet moved over to the new FTC disclosure format. Many will likely make the switch during the next renewal season in late spring, which is always a very busy time for us. So franchisors should act to amend their disclosure documents as quickly as they can, since the new FTC format is mandatory after July 1, 2008, and the documents must first be reviewed by Division examiners."

Current and potential franchisors and franchisees should consult their franchising lawyers for details about the many ways in which the changes will affect them. In particular, each franchisor should review its FOC with counsel to ensure that the FOC complies with the new requirements.

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Kevin W. Grierson 

On August 21, 2007, the U.S. Patent and Trademark Office ("PTO") announced several changes in the rules for filing and prosecuting patent applications. Intended to reduce "pendency," or the amount of time required to process patent applications, the new rules will have a greater effect on the preparation and prosecution of U.S. patent applications than any other rule changes in the past 12 years.

The changes will go into effect on November 1, 2007, but will affect previously filed applications still pending on that date. Among other things, the new rules will limit patent applicants to 5 independent claims and 25 total claims (the "5/25" rule).

If more claims are necessary, the applicant must submit an "examination support document" that provides the results of a patentability search and explains, in light of the search results, how the claims are patentable. This new rule-which will result in substantially increased costs for longer and more complex applications-applies retroactively to any application that has already been filed if the PTO has not issued an Office Action for the application by November 1.

In addition, the PTO will now limit applicants to two "continuation applications" (applications based on previously filed applications but making new claims) per original application. Exceptions are permitted only under strictly limited circumstances and require petitions presenting specific information. This limit will also apply to applications that were filed before November 1.

Moreover, U.S. patent applicants are now required to disclose all applications deemed "related" (i.e., having at least one inventor in common) that are filed within two months of each other, even if the subject matter of the applications is not at all similar.

The patent community’s response to these rules changes has been mostly negative. In some fields, particularly the areas of biotechnology and pharmaceuticals, most applications have substantially more than 25 claims, and continuations are often filed as new uses are discovered for compounds that are the subject of prior applications.

The rule changes could have a drastic effect on how such applications are filed as well as on the cost of filing. For example, an application with more claims than the 5/25 rule allows will be subject to a surcharge for excess claims, which can run into the thousands of dollars. Also, the applicant will also have to pay for the examination support document, which could easily double or triple the cost of preparing the application.

At least one inventor has already filed suit against the PTO to prevent the rule changes from going into effect. Thus, it is conceivable that the new rules will be delayed or modified.

Unless and until the PTO modifies its announced approach, however, U.S. patent applicants with applications pending should review their applications with patent counsel to determine whether any adjustments are necessary to comply with the rule changes. Patent counsel can also advise about limiting the impact of the new rules and thereby possibly reduce the cost of complying with them.

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Kevin A. White 

A panel of the U.S. Court of Appeals for the Ninth Circuit recently held, in Fair Housing Council of San Fernando Valley v. Roommates.com, LLC, 489 F.3d 921 (9th Cir. 2007), that Roommates.com is not immune from a claim that it violated the federal Fair Housing Act ("FHA"). Roommates.com is an online service that helps individuals find others with whom to share apartments or other places to live.

At the time of the alleged FHA violation Roommates.com required its users to respond to a series of online questions about themselves and their roommate preferences. Users had to select from drop-down and check-box menus that included self-descriptive criteria such as "Straight male(s), "Gay male(s)," "Straight female(s)," "Lesbian(s)," "Children present," and "Children not present." Users who failed to answer the questions were not allowed to complete the service’s registration process.

After gathering this information, Roommates.com channeled registered users to "compatible" prospects by screening out "incompatible" persons on the basis of age, sex, sexual orientation, and whether or not children would live in the household. The plaintiffs alleged that these actions constituted FHA violations.

The Ninth Circuit heard this case on appeal from the U.S. District Court for the Central District of California, which had granted summary judgment in favor of Roommates.com. The basis for that decision was that Roommates.com was immune from liability by virtue of the Communications Decency Act ("CDA").

According to the CDA, "no provider . . . of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider." Congress passed the CDA to protect free speech on the Internet. The law’s safe harbor for an "interactive computer service provider" like Roommates.com applies to the extent that the provider merely passes along information supplied by third parties and does not actually originate the offending content.

On appeal, the Court of Appeals for the Ninth Circuit reversed the District Court’s decision. The Ninth Circuit reasoned that because Roommates.com had originated the offending content by creating or developing the answer choices provided in the drop-down and check-box menus, CDA immunity did not apply.

In other words, Roommates.com did more than merely publish information solicited from users. Instead, it posed specific questions to users and then employed their answers to channel people to "compatible" renters. Accordingly, Roommates.com could not rely on CDA immunity. (However, the court did permit immunity solely to the extent that Roommates.com redistributed the open-ended "Additional Comments" portion of users’ profiles).

The Ninth Circuit remanded the case to the District Court to decide whether the content of the specific drop-down and check-box questions violated the FHA by "causing users to make statements with respect to the sale or rental of a dwelling that indicates any preference, limitation or discrimination."

It must be noted that the Ninth Circuit’s decision was a panel opinion, meaning that not all the court’s members participated in it. The court is likely to grant a rehearing with all of its members present, which could lead to a different result. Also, the Ninth Circuit is known to be generally more liberal than most other circuits.

Still, the Roommates.com case is instructive to operators of interactive websites. The lesson of the case is that to the extent they create any functionality "content" for use on their websites that encourages or actively facilitates discrimination or some other wrong (such as defamation or invasion of privacy), website operators may not be able to rely on CDA-based immunity.

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