LOEB & LOEB LLP
Direct Dial No.
April 30, 1997
Donald S. Clark, Secretary
Re: 16 C.F.R. Part 436
Dear Mr. Clark:
Our firm appreciates the Federal Trade Commission's ("FTC") invitation to submit its written comments on the following issues:
A. Application of the FTC Rule to International Transactions.
I had the privilege of being one of the invited participants at the Federal Trade Commission's ("FTC's") March 11, 1996 Public Workshop Conference concerning the applicability of the FTC's franchise trade regulation rule ("FTC Rule") to international franchise transactions. Also, I was one of five co-authors of an extensive two-part article on the topic published in Fall 1995 and Spring 1996 issues of the American Bar Association's ("ABA") Franchise Law Journal, which explored the jurisdictional and practical implications of this issue in great detail.
Rather than to reiterate the many comments that have already been noted at the Workshop, in our ABA article, and elsewhere, I would like to advance one additional reason why the FTC should clarify, one way or the other, whether the FTC Rule applies to international franchise transactions. On March 26, 1997, in the case of Mario Mieman vs. Dryclean U.S.A. Franchise Company, Inc., the United States District Court in the Southern District of Florida, decided that the FTC Rule did indeed extend to the sale of a franchise in Argentina to a non-U.S. citizen, thereby violating both the FTC Rule and, by extension, the Florida "Little FTC Act." With the exponential growth of international franchising over the past several years, it has become ever more critical that the FTC itself offer guidance on this issue. Without such guidance, U.S. franchisors must either take the conservative route and prepare deal-specific disclosure documents for each international transaction, at substantial expense, or elect not to do so, at its peril. There is now also the clear risk of a wave of new litigation in which parties will attempt to apply the decision reached in the Florida case to Little FTC Acts throughout the country. Stated succinctly, if the FTC does not clarify the issue, the courts will do so for it, undoubtedly with conflicting results.
B. Should the Time For Making Disclosures Be Modified.
The FTC believes that the concept of a "personal meeting" may be obsolete in light of the increasing use of the telephone and the internet to market franchises. In my judgment, this would impose an unwarranted impediment to the marketing of franchises.
The FTC's Statement of Basis and Purpose observed that the "central purpose of the triggering mechanisms is to provide the prospective franchisee with sufficient time to thoroughly examine the disclosure statements and contracts, to consult with attorneys, accountants, and other experienced business persons. . . ." One of the stated concerns for triggering disclosure at the first personal meeting was the difficulty a prospective franchisee faces in making an informed evaluation of a franchise opportunity in the face of "high pressure" sales tactics used by some franchise salesmen.
The telephone is not a new innovation, and the FTC itself noted almost 18 years ago in its Interpretive Guides to the FTC Rule, that "By definition, a first 'personal meeting' does not include communication by telephone or mail." The FTC clearly considered that there is a significant difference between the kind of sales pressure that can be brought to bear in a face to face meeting, which cannot be replicated over a telephone, where the call can easily be disconnected, or by mail, where the recipient can simply discard the mailing.
The telephone has not undergone a metamorphosis and if there has been an increase in misleading or fraudulent telephonic marketing practices, they can readily be dealt with without modifying the FTC Rule, under the FTC Act and FTC Rule anti-fraud provisions. The internet, while innovative, involves prospective franchisees taking affirmative action to investigate a franchisor via modem, a connection that is even more readily broken than a telephone call. Likewise, fraudulent internet marketing practices are equally easy to proscribe.
The inherent problem in focusing on accelerating the timing of the disclosure obligation instead of the regulating the content of the communication, is that by triggering the FTC Rule at the "first substantive discussion," whether by telephone, internet, or otherwise, the FTC will be blurring what is now a relatively bright line disclosure threshold. As noted in Interpretive Guides, "The Commission believes that by using common sense precautions, franchisors can defer the first personal meeting until such time as they are prepared to provide the required disclosures."
Further, given the FTC's recent Informal Staff Advisory Opinion 97-2, permitting delivery of an offering circular by computer diskette under certain circumstances, it is quite likely that in the future, a franchisor will be permitted to satisfy its disclosure obligation via the internet itself, making the offering circular available to prospective franchisees at any time, anywhere, and at any hour of the day, at little or no cost to the franchisor. It would appear that, in any event, the FTC's concern about internet communications is premature.
I thank you for the opportunity to provide input on these important questions, and would appreciate the opportunity to participate in any further public workshop hearings you may schedule following close of the comment period.
Kenneth R. Costello