Date: 9/12/97 4:34pm
Subject: 16 CFR Part 436
MARKS & KRANTZ
E-Mail Transmittal Memorandum
To: Secretary, Federal Trade Commission
From: Gerald A. Marks, Esq.
Date: September 11, 1997
E-Mail No.: FRANPR@ftc.gov
Re: 16 CFR Part 436
Dear Mr./Ms. Secretary:
I am an attorney admitted to practice in the states of New Jersey and New York and am a member of the AFA, the American Franchisee Association.
My practice concentrates in the area of franchise law and I predominately represent franchisees.
The clients I generally represent seek my services after they have lost all, or nearly all, of their life savings. In many cases, the legal obstacles they face in order to redress their grievances against their former franchisors are daunting because of unfair and "adhesive" contractual provisions contained in their franchise agreements.
In the spirit of trying to level the playing field, I suggest that the FTC consider adopting the following regulations:
1. REQUIRING ALL LITIGATION OR ARBITRATION PROCEEDINGS TO BE CONDUCTED IN THE STATE IN WHICH THE FRANCHISEE IS LOCATED. The reason for this is simply that the economic burden imposed on a franchisee to litigate or arbitrate in a state other than the one in which the franchise is located frequently causes a franchisee to forego redressing franchisor wrongs. Simply stated, the franchisee cannot afford to travel to the forum state designated by the franchisor, retain local counsel in that state or pay for witnesses to travel and appear at the out-of-state hearing. Doesn't it seem fair that if a franchisor does business in a particular state it should be required to resolve any disputes with its franchisees in the state in which it decided to grant a franchise?
2. REQUIRING ARBITRATION OF ALL DISPUTES ONLY IF THE FRANCHISOR PAYS FOR ALL ARBITRATION COSTS AND FEES. While arbitration is generally a quicker way of resolving disputes it is extremely costly, especially to franchisees who have sustained significant economic losses. Arbitration is not necessarily less expensive than conventional litigation. As a franchise agreement is "adhesive" in nature, that is, its terms are not negotiable and the franchisees must accept the agreement on a "take it or leave it" basis, the franchisor who requires arbitration of disputes, should be required to pay for all arbitration costs.
3. DECLARING VOID ANY CONTRACTUAL PROVISIONS WHICH LESSEN OR ELIMINATE RIGHTS AND PROTECTIONS GRANTED BY STATE LAW. Frequently, franchise agreements lessen or eliminate legal rights or protections. A common example of this is to shorten the usual period of time to bring a breach of contract or fraud action from six (6) years to only one (1) year. Franchisees should not have to give up any substantive or procedural rights that are given to them by the laws of the state in which their franchise is located. Any provision in the franchise agreement which lessens state protections should be declared void on the basis that it violates established state public policy.
4. ELIMINATING ALL CONFIDENTIALLY AND GAG ORDERS. The purpose of franchise disclosure is to enable a prospective franchisee to intelligently decide whether or not to purchase a particular franchise. Isn't it therefore contrary to the aims of full disclosure to have the litigation and arbitration section of the disclosure document contain "non-information" in the form of "confidential settlements". Prospective franchisees want to buy a business not a lawsuit. They should have full knowledge of former franchisee disputes and what amounts were paid to settle the disputes by the franchisor or what awards were rendered against the franchisor in any arbitration proceeding. Such disclosures would truly constitute full and complete disclosure and would also encourage a franchisor to eliminate those practices which give rise to franchisee abuse.
5. PROHIBITING FRANCHISOR ENCROACHMENT IN A FRANCHISEE'S MARKET AREA UNLESS THE FRANCHISOR COMPENSATES A FRANCHISEE FOR THE LOSS IN INCOME SUSTAINED BY SUCH ENCROACHMENT. It is unfair, as well as a breach of the contractual covenant of "good faith and fair dealing", for a franchisor to sell a franchise and then invade the same market or trade area by selling the identical product or service in that area. Why should a franchisor be allowed to discount the value of a franchise after it has been sold by opening up alternative channels of distribution in the very trade area that was sold to a franchisee? If a franchisor truly believes that its entire franchise system will benefit by opening alternative channels of distribution in supermarkets or through kiosks in schools or hospitals, let it compensate the franchisee in whose trade area the supermarket or kiosk is located for any demonstrable loss of income.
6. CREATE A PRIVATE RIGHT OF ACTION FOR VIOLATIONS OF FTC RULE 436. Perhaps the most hypocritical aspect of FTC Rule 436 is that it does not permit a private right of action by aggrieved franchisees. In this time of corporate reorganization, downsizing and a general increase in the number of individuals trying to go into business for themselves, FTC regulations should not be promulgated that are virtually "toothless". The FTC should instead empower individuals to be private attorneys general to redress franchise sale and disclosure wrongs.
I believe that implementation of the above outlined proposals will go a long way to both equalize franchisor-franchisee relations but will also repair some of the unfavorable publicity that has affected the franchise community -- franchisors and franchisees alike -- in the past several years.
Thank you for your consideration.
Gerald A Marks