RUDNICK, WOLFE, EPSTIEN, & ZEIDMAN
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
June 30, 1997
Donald S. Clark
Re: 16 CFR Part 436. Comment on Behalf of Coverall North America, Inc.
Dear Mr. Clark:
This comment is submitted on behalf of Coverall North America, Inc. Coverall offers franchises in the United States and internationally for businesses that offer commercial janitorial and building cleaning services.
The FTC's Advance Notice of Proposed Rulemaking, dated February 28, 1997, requested comments about a possible Franchise Rule amendment to make it "explicit that the offer of a stream of revenue franchise is the making of an earnings representation that would trigger the Rule's earning substantiation requirements." Although the FTC did not define a "stream of revenue franchise," we assume that the FTC is referring to franchisors, such as Coverall, who contractually commit to supply their franchisees with a specified gross dollar volume of initial business within a specified timeframe. Coverall does not oppose a Rule amendment of this nature, subject to the caveats described below.
Nature of Proposed Earnings Disclosure
No Franchise Rule amendment is required to ensure that prospective franchisees receive detailed information about the franchisor's contractual commitment to furnish a stream of revenue, since the Uniform Franchise Offering Circular ("UFOC") Guidelines for Item 5 (Initial Fee) and Item 11 (Franchisor's Obligations) currently require a franchisor to elaborate on contractual obligations such as those applicable to any franchisor commitment to provide a steam of revenue to franchisees. Therefore, Coverall believes that the most useful "earnings" disclosure in UFOC Item 19 (Earnings Claims) would consist of information that would enable a prospective franchisee to determine whether the franchisor actually fulfilled its contractual commitment. Coverall currently provides disclosures of this nature. Coverall believes that a performance disclosure will benefit both prospective franchisees (through the receipt of important information) as well as those franchisors who conscientiously live up to their contractual commitments (through comparison with other franchisors who do not do so).
It is important, however, to ensure that any disclosure accomplish two basic objectives:
1. Provide a standardized tabular presentation format to prospective franchisees so they can easily compare the same categories and performance results from franchisor to franchisor. An added benefit of a standardized presentation format is that it will relieve a franchisor from the burden of having to customize its disclosures from registration state to registration state to accommodate each individual state franchise examiner's preferences. We would note that Coverall's proposed standardized tabular presentation format is consistent in concept with the standardized disclosure format presentation now required by the current UFOC Guidelines to provide information on Initial Investment (Item 7), Franchisee's Obligations (Item 9), Renewal, Termination, Transfer and Dispute Resolution (Item 17), and List of Outlets (Item 20).
2. Disclosure should be limited to information needed to assess the franchisor's fulfillment of its contractual commitments, and which is within the franchisor's own knowledge without having to rely on franchisee-supplied data (where the franchisees' willingness to supply the required information, as well as its accuracy, may be an issue) or which would require the franchisor to prepare or maintain detailed records (which, obviously, would increase franchisors' compliance burdens and expenses).
Coverall recommends that the presentation format set forth below be the sole disclosure required with respect to any stream of revenue contractual commitment. Of course, if a franchisor chooses to make other types of claims which would constitute an "earnings claim" under the Franchise Rule, then additional disclosures concerning such claims also would be required, in accordance with existing UFOC Item 19 instructions.
The suggested disclosure format is as follows:
The following table summarizes our performance during our most recently completed fiscal year in satisfying our contractual obligation to provide [specify contractual obligation]. During our most recently completed fiscal year, we entered into [number] franchise agreements in which we had an obligation to provide _____________ to a newly established franchisee. Of these ___ franchise agreements:
In summary, Coverall supports a Franchise Rule amendment that would provide information on the subjects and in the format described in this comment, concerning any contractual commitment to provide a stream of revenue to franchisees.
RUDNICK, WOLFE, EPSTIEN & ZEIDMAN
John M. Tifford