December 21, 1999

Mr. Donald S. Clark
Secretary
Federal Trade Commission
600 Pennsylvania Avenue, N.W., Room 159
Washington, DC 20580

Re: 16 CFR Part 436 - Comment on Franchise Rule

Dear Mr. Clark

A number of individuals, companies and law firms have submitted comments in response to the Federal Trade Commission Notice of Proposed Rulemaking regarding the trade regulation rule of Franchising and Business Opportunity Ventures. In particular, the law firm of Piper, Marbury, Rudnick & Wolfe has provided comments to you in a letter dated December 17, 1999. We endorse the comments made by that law firm in response to the NPR. In addition, we would like to provide specific comments on a few of the points raised. References in this letter correspond to the references in that December 17, 1999 letter.

5. INTERPLAY OF FEDERAL AND STATE LAW

3. Preemption Issues (Section 436.11(c))

Although not every state currently has its own specific franchise disclosure rules and regulations, there are a number of states that do have those requirements. From the perspective of a franchisee, it is important that full and adequate disclosure be provided to franchisees prior to purchase of the franchise. That goal is met by the rules and regulations promulgated by the Federal Trade Commission. From a franchisor's perspective, the myriad of state regulations that apply to franchise disclosure add a great deal of extra effort to the Offering Circular process and serve no real purpose beyond what has already been served by compliance with the Federal Trade Commission Rule on Franchising. As such, complete preemption of state law in this area, which would make the franchise regulations truly uniform, is sought.

6. SUBSTANTIVE DISCLOSURE REQUIREMENTS

1. Definition of Predecessor (Section 436.1(r))

Very little benefit, if any is conferred upon prospective franchisees by including as predecessors those entities "from whom the franchisor obtained a license to use the trademark or trade secrets in the franchise operation." The current UFOC definition is sufficient in its scope to disclose material information to franchise purchasers, and mere licensing of a trade secret from one entity to another should not trigger the requirements related to disclosures involving predecessors.

2. DeFacto Officers (Sections 435.1(o) and 436.5(b))

We would submit that the current requirement for disclosure is adequate. It makes it even more difficult for franchisors to administer this requirement when the nebulous concept of "whose title does not reflect the nature of the position" is added to the mix.

4. Disclosure of Franchisor-Initiated Litigation (Section 436.5(c) (1) (ii)

Requiring litigation by way of action or counter-claim by franchisees arguably offers prospective franchisees additional insight into their franchisor. Requiring franchisor initiated litigation to be disclosed does not add materially to the information needed by the prospect to make an investment decision. The point is well made in the December 17, 1999 letter to the effect that such a disclosure requirement could very well dissuade a franchisor from filing litigation to protect the system and its brand image. The franchisor would certainly like to avoid having litigation disclosed in the Offering Circular. When a franchisee reviews an Offering Circular litigation disclosure, it is unclear whether a franchisee will read all of the specific litigation summaries contained in the Offering Circular or is influenced merely by the number of entries made. They may not be focusing on whether or not the litigation is against the franchisor or is litigation that the franchisor has brought that does not involve a discloseable claim by a franchisee. Requiring franchisor initiated litigation not otherwise currently discloseable could impact a franchisee prospect who conducts him or herself according to the latter course of action. Also, the combination could prove confusing and diminish the impact of disclosure of franchisee initiated litigation. This requirement could impact a franchisor's decision to file litigation to protect the system and its brand image which not only is a benefit to the franchisor, but a very real benefit to franchisees in the system as well. That outcome should be avoided and the provision requiring disclosure of franchisor initiated litigation should not be followed.

5. Settlement of Litigation (Section 436.5(c )(1)(iv))

We would emphasize the need to either revise the NPR or make provision in the interpretative guides to allow omission of litigation in the event of a non-material settlement.

6. "Initial Phase" of Operation -- Calculation of Initial Investment
(Section 436.5(g))

There is a reference to the fact that the NPR implies that the initial phase should cover the period of time until the franchisee "can break even." If that is the case, then that puts a significant burden on the franchisor in terms of making such a representation to the franchisee. Many franchisors are uncomfortable in making that representation to the franchisee, given all the variables involved with running a franchise business. To protect itself the franchisor will either have to severely qualify the expenditures or present them as a wide range of possible outcomes. In either case severely limiting their utility. Assuming that the NPR is not requiring that a franchisor represent to the franchisee when they can expect to break even, (outside of the context of perhaps putting such a claim in Item 19) we would submit that the definition of "Initial Phase" should be further clarified.

8. Warning Legend Regarding Territorial Rights (Section 436.5(1))

We do not feel the exclusive territory warning is necessary, however, if the NPR will require such a warning legend, then the term exclusive territory should be further defined to give better guidance and assistance to franchisors drafting Offering Circulars with those inclusions.

9. GAAP Requirements for Financial performance Representations
(Section 436.5(s))

It is represented that the NPR requires that Item 19 Representations be prepared in accordance with generally accepted accounting principals ("GAAP"). That is not the current requirement under Item 19 of the UFOC Guidelines. Imposing that requirement will raise the threshold and increase the burden as to franchisors making Item 19 earnings claims. Many on the franchisee side have expressed concern that not enough franchisors make earnings claims. Imposing this requirement will decrease the number of such earnings claims being made. Better to provide system wide information with appropriate disclaimers as to sources of information than to require that earnings claims be prepared in accordance with generally accepted accounting principals. We currently provide an earnings claim in our Offering Circular and if GAAP must be adhered to, it is highly probable that we will no longer be able to do so.

Currently, few franchisors, we believe, use the FTC format over the UFOC format in drafting Offering Circulars. In this NPR we hope that the FTC is considering how the proposes changes will impact current practices under the UFOC guidelines as opposed to the FTC Rule which few franchisors use. Reading the proposed Rule makes it appear that impact on current UFOC guidelines is not being considered. The discussion in this section of the GAAP requirement is one example, and is significant change from current requirements.

11. Status of Outlets - Date Reconciliation and Formatting (Section 436.5(t))

The main point that we would like to make here is that regardless of whatever rules or definitions are established, changes should be made to ensure that no double counting will occur. Providing clear guidance to franchisors on providing Item 20 information is needed from the FTC to avoid that outcome. Avoidance of double counting, with perhaps appropriate definitions and explanations, will be much more meaningful to franchise prospects.

12. Gag Clauses (Section 436.5(t)(6))

We can understand the FTC's concern about prospects being unable to raise questions with current or former franchisees who are subject to confidentiality requirements, however, that concern should be balanced with the desirability of having matters between franchisors and franchisees resolved and settled as early as possible. In some instances it is highly desirable by both parties to have the terms of such settlements be confidential. Moreover, most franchisors have legitimate concerns about and a legitimate interest in prohibiting franchisees from using or disclosing any confidential information of the franchisor without the prior written consent of the franchisor. Hence, in order to foster early and amicable settlement and resolution of controversies between franchisors and franchisees and to allow franchisors to protect a legitimate interest in maintaining confidentiality of franchisor system information, the Gag Clause provision should either be not adopted or revised in a manner to accommodate those legitimate interests.

14. Parent Financial Statements (Section 436.5(u)(1)(iii)(C)

The franchise opportunity should be a function of the financial position and support mechanism of the franchisor itself. If that is not sufficient, then there are adequate existing vehicles to ensure that the franchisor is financially viable or adequately supported, including requiring guarantees of another entity, posting bonds, etc. In many cases the parent company, (whether a holding company or parent of a conglomerate or multinational corporation) is not necessarily ultimately responsible for the actions of the subsidiary, and inclusion of the parent's financials could lead a franchisee to incorrectly believe that it is. Misplaced reliance on the financial position of the parent could result. The requirement also adds to the burden on the franchisor in preparing an Offering Circular, as well as the length of the Offering Circular where it is not needed.

7. PROHIBITED PRACTICES

2. Integration Clauses (Section 436.10(e))

If the concern of the Federal Trade Commission is that somehow specific representations made in the disclosure document would be deemed null and void and of no effect due to an integration clause in a franchise agreement, then that is what the rule, if integration clauses are affected at all, should cover. Integration clauses have a valid purpose and their use in a franchise agreements should be generally allowed.

We appreciate the opportunity to provide these comments to you.

Very truly yours,

John W. Regnery
Corporate Counsel
Snap-on Incorporated

JWR/rmb