|December 21, 1999
Secretary, Federal Trade Commission
Re: 16 CFR Part 436-Franchise Rule Comment
The purpose of this letter is to set forth my comments on the proposed changes to the FTC Franchise Disclosure Rule (the "Rule"). In large part, most of the proposed changes set forth in the Notice of Proposed Rule Making published on October 22, 1999 (NPR) are good. I shall discuss a number of them below. In addition, I make other suggestions for further improving the Rule. The goal, of course, is to improve disclosure of material information for prospects while at the same time minimizing to the extent possible, the costs experienced by franchisors in complying with the Rule.
My Background. A brief comment about my background may be in order. I am an attorney who has specialized in franchise law for the last 21 years. I have counseled and represented dealers, franchisees, franchisee groups, associations, franchisors and suppliers both in litigation and transactions. I have considerable experience preparing and registering franchise offering circulars for franchisors and evaluating them for prospective franchisees. I have been a member of the American Bar Association's Forum Committee on Franchising since 1978. Currently, I am a member of its Governing Committee. I have authored a fair number of franchise law articles(1). Also, I am a frequent speaker on the subject for bar groups and industry trade associations. The statements set forth in this letter are solely my own.
In light of the abbreviated comment period, it is not possible to address every change in the NPR. Accordingly, I will address only the matters I find most significant.(2) Except where otherwise stated, I have no hard data to support my comments other than my years of experience as a franchise lawyer.
On the whole, the majority of changes suggested for the Rule make sense. These include switching over to the UFOC format, precluding the Rule's application to "fully outbound" international transactions, removing the regulation of business opportunity ventures from the Rule, changing the timing requirements, electronic disclosure issues, the implementation of gag clause disclosures and revised litigation disclosures, among others. Conversely however, for example, I strongly oppose not providing disclosure to so-called "sophisticated investors". From a macro perspective, these changes will benefit franchising. Costs to franchisors should be reduced. Disclosures to prospective franchisees will be enhanced. Thus, the policy objectives of the Rule to help prospective franchisees make informed investment decisions while minimizing the costs to franchisors to achieve that goal, are served. I shall address some of the most important changes below. In addition, I shall suggest a few of my own which I believe will further enhance the Rule while at the same time reduce franchisor costs and/or risk exposure.
A. Changing to the UFOC format makes sense. Particularly where very few franchisors follow the FTC format now, it makes eminent sense to follow in substance the current UFOC format with most of the additions suggested in the NPR ("UFOC Plus"). At some stage, hopefully the registration law states will adopt the UFOC plus format as well. The goal of real uniformity of franchise disclosure may be realized thereby reducing franchisor compliance costs. The level of consumer protection will be the same or better because the UFOC disclosure format provides more and better information than the old FTC format for prospective franchisees. UFOC Plus will be another improvement. In addition, there should be less confusion among start-up franchisors and their counsel as to what it takes to comply with the disclosure laws. What's more, the new Rule will help existing franchisees. With reduced franchisor compliance costs and potential exposure, franchisor financial stability should be enhanced, allowing for more efficient franchise expansion. The changeover to the UFOC format is an adequate solution to the problem. I can think of no better alternative except perhaps, to set a standard requiring the registration states and NASAA to revise their disclosure requirements accordingly.
B. It makes sense for the Rule not to apply to fully outbound international transactions. This is so primarily because the jurisdiction of our laws should not apply to conduct that takes place completely outside the United States in cases where U. S. interests do not need protection. For such transactions, franchisor costs would decrease, albeit only marginally. Moreover, presumably there would be no ill effects on prospective U. S. franchisees because the conduct (i.e., offer, sale and activity) is taking place outside the United States. Also, existing franchisees would be helped by virtue of their having a stronger franchisor with lower compliance costs and lower exposure. These effects are marginal, however. Conversely, the Rule should apply if there is an offer or sale to a U. S. prospect by a U. S. franchisor even if the activity takes place outside the United States and even if it involves a business to be established outside the United States. Indeed, if the franchisor is franchising in the United States presumably it has prepared a disclosure document anyway. What is the harm in providing disclosure in this situation? On the other hand, our laws were not enacted to protect foreigners who do business outside the United States. Franchisors should not be placed at a competitive disadvantage if they're engaged in purely international transactions which do not penetrate U. S. borders and do not involve U. S. citizens.
C. It makes sense to separate the franchise rule from the rule regulating business opportunity ventures. In the past, for most franchisors and their counsel, inclusion in the Rule of matters dealing with business opportunity ventures has done more to increase confusion and compliance difficulties than anything else. The primary benefit to the franchise community in separating out the business opportunity venture aspect of the Rule is that it will make it more understandable. Increased simplicity should make it easier for franchisors to comply, thereby decreasing the risk of non-compliance and the cost of compliance. Certain thorny issues need not have to be researched by counsel whereas before that may not have been the case. Existing franchisees are helped to the extent that the risks and costs for the franchisor are reduced. Similarly, there may be a marginal benefit to prospective franchisees since the lessened cost of compliance and understanding of the Rule may result in lower prices for franchises and franchise related services.
In completing this aspect of the change, there needs to be a better understanding of the universe of opportunities that each rule is intended to address/exclude. Further, perhaps each rule would contain an exemption specifying that for franchisors that give disclosure in compliance with the franchise rule there is an exemption from compliance with the business opportunity ventures rule and vice versa. Finally, the revised definition of business opportunity venture should take into account the various definitions of business opportunities contained in the business opportunity sales statutes of many states. Again, the goal should be to simplify and to reduce confusion that now exists as a result of the panoply of state law definitions which require franchisors to check the law of every state before they offer/sell in that state.
D. The proposed changes to the rules governing timing of disclosure and sale make sense. The interests of prospects, existing franchisees and franchisors all are served by these proposed changes. The change from a ten business day disclosure period to a simple fourteen day period makes sense. Generally speaking, prospects still will receive the same cooling off period they enjoyed in the past. There will be no worry, however, if someone miscounts a "business" day. Accordingly, franchisors should save money because their disclosure burdens will be decreased as will their risk of exposure. Certainty and simplicity in the law are worthy goals. What's more, the first personal meeting rule functioned more as a technicality than a rule of substance so long as franchisors complied with the rule governing the "time for making of disclosures". It makes even less sense in the electronic age.
In addition, the change from business days to calendar days for the "five-day rule" for submission of contracts in final form before execution also makes sense. I would suggest, however, raising it to seven days so that prospective franchisees retain the full week for consideration that they have enjoyed in the past. I see no benefit to them to cut down on the time that they had to assess whether or not to proceed with the franchise transaction and any drawback for franchisors is de minimus.
E. The move toward electronic disclosure makes sense so long as it is implemented with care and caution. There should be great savings in time, paper and money if disclosure takes place on line, by CD-Rom or comparable methods. The key, however, is to put in safeguards so that these benefits are not offset by inadequate disclosure to prospects or confusion over the specific version of documents received and signed by the parties. If these safeguards are implemented, the benefits in terms of decreased costs for franchisors and prospects, increased speed in doing deals and enhanced convenience seem obvious. Please consider the following suggestions in this area, however.
In the event there is a conflict between a hard copy and an electronic copy of a document (e.g. a disclosure document, a franchise agreement or another agreement), there should be a bias in favor of the hard copy until all the safeguards are fully operational. Also, there should be appropriate and effective cautionary statements reasonably calculated to come to a prospective franchisee's attention in any electronic document. I support the suggestion that in addition to electronic disclosure the franchisor be required to furnish the prospect with a summary-type document which contains the cover sheet, table of contents, receipt and described summary.
The FTC should consider testing the electronic disclosure format so that the franchising community can become familiar with it before it becomes fully operational. This may involve workshops or classes where franchisors and their attorneys as well as any other interested parties are trained in the specific requirements and methods which the FTC envisions as necessary for compliance in this area. Franchisors should "know how to do it"before they are subjected to risk of exposure or making unintentional but serious mistakes. Such oversight would also promote the policy of furthering disclosure to prospective franchisees so that there would be greater assurance that they are in fact getting the disclosures that the law mandates and that franchisors intend.
Finally, in addition to the requirement that hard copy of the documents be available, I suggest that §436.7(g) of the Rule be modified so that each version of a franchisor's disclosure document is retained for more than three years. Indeed, cases involving franchise documents sometime take place five and even ten years after the initial sale. Generally, franchisors hold onto their documents for a substantial period of time anyway. Therefore, there should not be any great increase in costs for them to hold on to hard copy and electronic versions of their disclosure documents for substantially longer than three years. At a minimum, the period should be extended to six years. What's more, this should include retaining documentation used by the franchisor in preparing a disclosure document. For example, if the document contains an earnings claim disclosure, the Rule has not changed that substantiation be made available to the FTC upon request. Indeed, franchisors should not be encouraged to discard offering circulars more than three years old, as this could adversely impact existing franchisees and government agencies that need access to such information to prove fraud and related claims in adversarial proceedings.
F. The proposal calling for disclosure of the use of "gag" clauses is sound but it must be strengthened. First, the Rule should make clear that notwithstanding any gag clause, disclosure of litigation and settlement details must take place if required by the facts of a particular proceeding. Almost always, it is the franchisor that seeks confidentiality in franchise litigation settlements. Franchisors should not be able to contend that disclosure of material litigation is precluded by a confidentiality clause in a settlement agreement. The Rule should make this plain if there is any doubt. Franchisors should understand that if the law requires that certain litigation be disclosed, agreeing otherwise with a settling franchisee is a mistake.
Prospective franchisees will benefit greatly from this disclosure. It would be useful for them to know that a franchisor is engaging in purposeful conduct to deprive them of adverse information from knowledgeable sources. Without this disclosure, franchisors can sell to prospective franchisees who are at a distinct informational disadvantage. The detriment to franchisors, namely, the cost of disclosing pertinent information, is marginal. It pales in comparison to the benefit to prospective franchisees in receiving the disclosure.
The cautionary statement to be put in Item 20 as suggested by Rule 436.5(t)(6)(i) is good as far as it goes but it is not strong enough. I suggest that in addition, there be a cautionary warning so that franchisees are put on notice that important adverse information is being held back from them wilfully. While a franchisee subject to a gag clause may not be permitted to speak to a prospect about a case, the prospect should be informed and encouraged to quiz the franchisor about it. The franchisor should not be able to hide behind the gag clause that was included for its benefit. Put another way, prospects should be empowered to question franchisors on the facts which are the subject of the gag clauses.
Some additional suggestions. The gag clause should not be limited to the franchisor. It should include litigation and similar matters for any person identified in Item 2 as well as the franchisor's affiliates and predecessors. The gag clause should not extend merely to contractual prohibitions. Rather, it should extend to any practice or policy undertaken by the franchisor to accomplish what a gag clause would accomplish. Also, the definition in §436.1(k) should refer to contractual provisions which prohibit a franchisee from "communicating" and not just "discussing" his or her personal experience as a franchisee within the franchisor's system. Fourth, I see no reason to limit to three years the period of time when the franchisor has used gag clauses. Again, the goal of the FTC Rule is to enhance disclosure and to enlighten prospects with all material information on the franchisor and the franchise opportunity. Realistically speaking, few things could be more important than to give prospective franchisees input from those who are not "singing the franchisor's song". I suggest going back ten years for this purpose. What's more, I suggest that franchisors be required to give the name, address and phone number of each person who is subjected to a gag clause. Merely mandating the number and/or percentage of franchisees so "hushed" will not accomplish the goal of disclosure. Moreover, I would suggest that the franchisor be required to identify an official with whom prospects can talk about gag clause matters and whether the franchisor may consent to a franchisee being released from a gag clause.
Conversely, it is permissible to permit the franchisor to state why it uses/used gag clauses. Moreover, it is eminently reasonable for gag clauses to be applied to the franchisor's bona fide trade secrets and confidential information.
It is very important for prospective franchisees that the gag clause disclosure have "teeth" and that it come to their attention in a meaningful way. The policy of the Rule will not be furthered by thinking that the informational imbalance created by the use of gag clauses will be meaningfully addressed by a perfunctory disclosure hidden in the fine print of the disclosure document. I've participated in many franchisee/franchisor lawsuits and invariably, gag clauses are included when they are settled. Particularly for some franchisors who focus more on selling franchises than having successful franchisees, their use of gag clauses in settlements is done knowingly to increase the informational imbalance which will allow them to prey further on unsuspecting prospects. What's more, the use of these gag clauses should not result in an increase in litigation nor in a decrease in the willingness of franchisors to resolve lawsuits. This is because they are essentially tangential to the merits of a particular case. Indeed, most of these suits, if pending, would have to be disclosed in the litigation section.
Finally, the gag clause disclosure should appear in Item 3 rather than Item 20. The information that is hidden from prospective franchisees by the use of gag clauses is much more akin to that which appears in Item 3, namely, conflicts between disgruntled franchisees and the franchisor. Prospective franchisees would be better served if all of this "adverse" information is in one place. Again, they would be dis-served if a perfunctory statement disclosing a practice of using gag clauses in settling franchise disputes appears deep in the fine print of Item 20.
G. The sophisticated investor exemption is a bad idea. The reasons advanced by proponents of this exemption cannot withstand scrutiny. Being wealthy should not be a basis for being screwed. According to a well-known Boston stockbroker, John Spooner: "As long as there are people looking to get rich quick, Ponzi schemes will thrive. P. T. Barnum was right. There is a sucker born every minute." Suckers come in all shapes and sizes and from every social class. In the 1970's a group of famous entertainers including Liza Minelli, Andy Williams and Jack Benny lost millions when they invested in a tax shelter plan that purported to invest in oil. It turned out that there were no oil wells. In the 1990's the Foundation for New-Era Philanthropy got a number of financial heavyweights including John Whitehead, the Chairman of Goldman Sachs and former U. S. Treasury Secretary William Simon, to contribute $100 million to a charity that promised that it would double donor donations in 6 months. According to a recent report in The Boston Globe, the money ended up in the pocket of the foundation's creator, John Bennett, Jr. This reasoning holds true for sophisticated investors in franchising. What's more, there is little benefit to be gained in the absence of giving them the same disclosures that other, less wealthy, prospective franchisees may be entitled to. Consider the following:
H. Suggestions regarding merger/integration clauses.
1. Franchisors should not be able to disclaim UFOC representations in their contracts. Section 436.10(e). Invariably, prospective franchisees must sign franchise agreements with merger clauses that exclude everything but the four corners of the contract including the offering circular. Typically and often woodenly, the law insists that a franchisee that relies on such extra- contractual statements, whether written or oral, does so unreasonably and unjustifiably. In negotiations with franchisors, often their wise counsel refuse to add references to the UFOC in the standard merger clause provision. The interests of prospects would be furthered by requiring that franchisors be bound by what is in their offering circulars and that contracts not be permitted to disclaim the statements in these documents. With one exception, the price for franchisors in this area is not high because presumably, they will stand by what is in their offering circulars. Franchisor costs may increase materially only if they are held liable to franchisees for UFOC misrepresentations or omissions. That is as it should be, however. Moreover, in a minority of cases they may be held liable for such conduct under certain state registration laws in any event.
2. If the FTC will not consider banning the use of merger/integration clauses, then the Rule should be changed to better protect prospects from their effect by having an appropriate warning on the cover sheet. No NPR change is more important than this one. These clauses are the single greatest tool used by franchisors to evade responsibility for misrepresentations and omissions of material fact that take place is a franchise marketing program. In fact, franchisors do not bring this boilerplate, fine print to the attention of prospective franchisees during the franchise sales process. Rather, they focus on promises of support and service that they may provide which are not reflected in the language of the contract. While franchisors intend not be bound by such promises, the prospective franchisee reasonably believes otherwise. If anything, he's told that the boilerplate is standard and in effect, of no moment. It is not until a dispute develops that the franchisor holds up the contract and says look at this merger clause and do not hold me to anything other than what is in writing. What is more, at legal seminars around the country on an annual basis, frequently great attention is paid to these merger clauses and how they can be used to advance the franchisor's position to defeat what may otherwise be legitimate claims of franchise fraud or deception. Simply put, this longstanding rule of contract law is used knowingly in an effort to avoid responsibility for franchise fraud and disclosure law violations. The policy underlying the Rule ought not be thwarted so easily.
Accordingly, if the use of these clauses is to be fair, prospective franchisees should be put on notice with a disclosure on the cover sheet reasonably calculated to come to their attention which effectively warns that anything that is stated by the franchisor that is not in the contract is not to be relied upon in any way. I would suggest disclosure as follows:
"CAUTION: UNLESS A STATEMENT APPEARS IN THE WRITTEN CONTRACT DO NOT RELY ON IT. WITHOUT THAT, ALL SALES TALK AND EXTRA-CONTRACTUAL REPRESENTATIONS ARE NOT RELIABLE. IF YOU DO RELY ON THEM, YOU DO SO AT YOUR PERIL."(3)
These suggestions would benefit prospective franchisees immeasurably. Moreover, the cost for franchisors to make them would be minimal. Prospects may be enabled to extract more truth and less likely to rely blindly on what they learn later is unreliable as a matter of law. This is certainly fair if it is the franchisor's intent to rely heavily on these clauses. The policies of disclosure and investor protection are enhanced. Also, the franchisor's risk is decreased with this disclosure because prospects should be less likely to rely on extra-contractual representations puffing, and sales talk. In court, increasingly, judges would not be viewed as unfair in upholding these clauses. What is more, this disclosure should result in a greater likelihood that the franchisee and franchisor will have a true meeting of the minds on contract matters. Franchisees would be less able to claim unfair surprise. There should be fewer fraud and deception lawsuits because more franchisees will understand the truth going in. If they do, they should be more likely to accept their situation contractually. Existing franchisees should benefit from having a more financially stable franchisor. Finally, this disclosure may result in increased negotiation of franchise agreements. This is not necessarily bad, however. Indeed, if an agreement is negotiated, it could serve to add credibility to the entire process. See Kubis & Perszyk Assoc., Inc. v. Sun Microsystems, Inc. 680 A.2d 618 (NJ 1996).
I. The enhanced litigation disclosure obligations make sense. Unquestionably, the additional litigation disclosures suggested in the NPR will serve prospects well. They further the Rule's policies of investor protection and disclosure of material information. Prospective franchisees will benefit from getting information on and access to sources of franchisor--adverse information. This will help them to make informed investment decisions. The modest additional cost burden on the franchisor to include the additional information is well worth the price. Indeed, once the initial changes are made, all that must be done is to update the disclosed litigation annually or sooner if material changes take place. This is not markedly different from the current updating obligation. Moreover, with respect to franchisor initiated lawsuits, because most contain counterclaims, it is likely that they are disclosed already. These disclosures will shed useful light on the franchise system. They will indicate a willingness of the franchisor to sue its franchisees. This bears on the nature and extent of harmony in the franchise system or the lack of it. It will help define the history of franchisee/franchisor relations both with the franchisor and its predecessors. Prospects will be better armed to conduct their due diligence investigations. I strongly oppose limiting franchisor disclosures in this area (as discussed below) because sometimes it is the best, and/or only source of unadulterated adverse information. Please consider the following suggestions in this area.
J. The disclosure format for franchisee obligations in Item 9 should be jettisoned because it is inadequate. While the chart on contract terms at Item 17 is useful in informing prospects of material contract obligations, the chart at Item 9 (franchisee obligations) fails miserably. I have reviewed dozens of franchise disclosure documents for prospects. I have prepared many for franchisors. As currently structured, this disclosure is not worth the time and effort largely because it provides no benefit to the prospect.
In order to be of real value, this disclosure should contain a "remarks" section which describes in brief terms the nature of each obligation. The existence of a "remarks" section in Item 17 is what makes it useful. Merely providing a title for the obligation along with references to contract sections and cross references to other UFOC items is of no practical value. What's more, it takes a considerable amount of attorney time to make sure the cross references are correct. Again, this item should be jettisoned or a "remarks" section added to make it useful.
K. Mandated disclosure of trademark-specific franchisee associations makes sense. The disclosure of the existence of these groups as well as councils more closely affiliated with the franchisor is consistent with policies underlying the FTC Rule. Disclosure should apply to any organization that represents a substantial plurality of franchisees in the system and its existence is known to the franchisor. Such an association can be a critical source of information about the franchise opportunity. Where possible, the association's name, address and telephone number and those of its officers, if known, should be provided.
If such a group is known to the franchisor and substantially representative of franchisees, its existence should be disclosed whether or not it is a corporation. Moreover, disclosure of such groups should not be limited to those that are "formally recognized" by the franchisor. It should be enough that a group which represents a significant segment of the franchisee population makes its existence known to the franchisor on an annual basis. In the absence of that, the franchisor should not be required to disclose it. In this area, although arbitrary, it would be helpful for the FTC to establish an objective standard of plurality say, for example, 25% of the franchisees or the franchised units in the system.
L. Under the standard for deception contained in the FTC Act, the Rule should remind franchisors that disclosure encompasses all material facts whether or not they fall within a specific Rule category. It appears that proposed §436.6(c) would specify that franchisors may not include additional information in the disclosure document except for that required by the Rule or non-preemptive state law. This does not make sense if in fact there is other material information the disclosure of which may cause a prospective franchisee not to enter into a transaction even though its disclosure may not specifically be called for under one of the Rule's categories. It may well have the capacity or tendency to deceive. This would appear to comport with the standard for deceptive acts and practices in commerce generally. FTC v. Algoma Lumber Co., 291 U. S. 67(1934); Charles of the Ritz Distributors Corp. v. FTC, 143F.2d 676 (2d Cir. 1944).
For example, such a fact may be a serious health problem of a principal of a small franchisor whose presence in the franchise system is vital. The Rule would only require this person's disclosure in Item 2 along with his five-year employment history. If his doctors have only given him a short time to live, however, non-disclosure of that fact to prospective franchisees would be harmful. I'm sure there are many other examples. That is not the point. Again, franchisors should be reminded in the Rule that any material fact that falls within the definition of "unfair or deceptive acts or practices", whether or not within the specific components of the Rule, should be disclosed. If there are additional material facts the disclosure of which may cause a prospective franchisee not to enter into a transaction, they should be disclosed.
M. Franchisors should be required to disclose a willingness to negotiate initial fees. Merely disclosing refundability and a range of fees is not enough if the franchisor follows a pattern of negotiating. A franchisor who offers a franchise at a price that is not reflected in its disclosure document may violate the Rule because it has not provided the prospect with complete and accurate pre-sale disclosures of price terms. Any franchisor who is willing to negotiate should disclose that fact so that prospects who do not think to negotiate (or believe that they cannot based on UFOC disclosures) are not deceived to their detriment.
N. Use of the term "renewal" in Item 17 is not misleading. When it is used in the context of disclosure of conditions that must be met to continue the franchise relationship at the end of a term, use of the word: "renewal" is not misleading in a material way. It refers to renewing the franchise relationship as opposed to the franchise agreement. So far as the contract is concerned, there is clear and conspicuous disclosure in Item 17 to the effect that the exact contract provisions are not necessarily those contained in the current agreement. More significantly, it would be unwise to move away from the terms "renewal" and "non-renewal" in light of the number of states that have enacted franchise relationship laws which use them. If a different term is used in the upcoming version of the Rule, its use may lead to confusion rather than clarity. Rather, it may suffice to use a cautionary statement to the effect that franchisees should understand that use of the term renewal does not necessarily mean continuation of the franchise relationship under the "old" terms.
P. Selected comments on new earnings claim initiatives. While uniformity is enhanced by adopting the UFOC disclosure format with respect to earnings claims (now satisfactorily called "financial performance representations"), I respectfully submit that the Commission is making a mistake by declining to enact some type of mandatory disclosure in this area. There are a number of reasons for this. First, realistically, prospective franchisees are not able to obtain useful information in this area either from existing franchisees or from so-called "industry sources". The information that may be garnered from industry sources is of very limited value because it would not be specifically related to the particular franchise in question. Moreover, generally speaking, most existing franchisees either don't want to provide this private information or if they do, tend to be less than truthful about any negative aspects in their own performance. There is little doubt that the franchisor remains the only source of current, useful and plausibly reliable information in this area. This information is acutely important to a prospective franchisee in deciding whether or not to purchase a franchise.
With respect, I think the Commission is wrong if it thinks that existing franchisees would be unduly burdened by a change in the law in this area. Existing franchisees are governed by their franchise agreements. Practically all franchise agreements require that franchisees furnish franchisors with a great deal of financial information including weekly, monthly or periodic royalty reports, year-end financial statements, tax returns and the like. Accordingly, existing franchisees will not have to do any more than they are already required to do so far as providing this kind of information is concerned. Prospective franchisees would benefit greatly from disclosure of reliable information in this area whether it relates strictly to gross sales, expenses, profits or losses. Admittedly, there will be a cost to the franchisor in compiling this information. Most responsible franchisors have a vested interest in doing so however, to be knowledgeable about their businesses and their franchisees' businesses. Moreover, that cost can be spread by the franchisor among all its customers and franchisees. This is a better solution than to have prospective franchisees absorb disproportionately huge losses by being relegated to purchasing a franchise without the benefit of useful available information.
What's more, the reality is that prospects do rely on unauthorized financial performance representations from franchisors far more often than not. This information is made available in almost every franchise sale. Indeed, at a minimum, franchisors should be required to disclose adverse material financial performance information if they know it. And, if they don't know it, they should so state. Put another way, while it may be permissible to make the disclosure of favorable financial performance information voluntary, that should not be the case with adverse information.
Finally, I agree that franchisors should be required to disclose that it is legal to make financial performance representations. They should be held to violate the law if they make a representation to the contrary.
There are many other important proposed changes contained in the NPR. Due to the short comment period, however, it is not possible to address them all properly. Hopefully, they'll be covered in the comments of others. I look forward to continuing consideration of the NPR. I would be pleased to amplify my thoughts at a public hearing if the FTC deems it appropriate.
Thank you for your consideration.
L. Seth Stadfeld
1. See e.g., Stadfeld, L. S., "The FTC Franchise Disclosure Rule and Its Impact on Chapter 93A of the Massachusetts General Laws--a Source of Protection for Consumer Entrepreneurs", Vol. 2, No. 4, W. N. Eng. L. Rev. 681 (Spring 1980).
2. Also, as a preliminary aside, I take issue with some of the Commission's estimates of the time it will take franchisors to comply with changes contemplated by the NPR. They are too low. For example, to suggest that it will take franchisors only one hour to revise their documents to accommodate the changes in litigation disclosure is far off the mark. Lawyers must discuss different lawsuits with their clients. They must review paperwork. They must fashion the language of the disclosure and review it with the client. Still, notwithstanding what I perceive to be a significant underestimate of the time it will take to comply with the changes, that does not change the overall macro conclusion that the time is comparatively small relative to the benefits to be achieved.
3. Ideally, it also would be useful to extend the Section 436.10(E) prohibition, to prohibit franchisors from disclaiming facts and statements made in their marketing materials and brochures and/or to mandate that a conspicuous cautionary legend appear on them to the effect that the statements in them are not reliable as well.