Dear Sir or Madam:
This letter is in response to the Federal Trade Commission's request for public comment on its proposed revisions to its Trade Regulation Rule titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" - (Franchise Rule), 16 CFR Part 436. The National Franchise Association ("NFA") wishes to submit the following comments to the Federal Trade Commission ("FTC") for consideration before the proposed revisions are made final.
The NFA is the officially recognized trade association and public voice of more than 1,200 Burger KingŪ restaurant franchise owners, which in turn operate more than 8,000 Burger KingŪ restaurants in virtually every community in the United States, and employ more than 250,000 teenagers and adults from every walk of life. The NFA wishes to address several areas of theproposed Franchise Rule.
First, the NFA would like to note its support for the provisions dealing with "gag clauses." The NFA supports the proposed rule which would require that franchisors disclose the names of franchisees who are required to sign gag clauses. Such gag clauses restrict or prohibit existing and former franchisees from sharing their experiences (positive or negative) with prospective franchisees. The NFA supports such a rule which would allow franchisees to be aware that such clauses have been included in past franchisor/franchisee agreements. The disclosure of such clauses would allow potential franchisees to conduct investigations with due diligence, and would also allow for inquiries to the franchisor as to why such clauses exist. The required disclosure of such clauses would also improve the ability of franchisees, particularly smaller ones, to be fully informed of the scope of the agreement which they may choose to enter. Without such disclosures, franchisees may be unaware of a particularly important element in potential franchise agreements. The NFA believes it is important to allow potential franchisees access to such information in order for completely informed decisions to be made. The NFA supports the proposed revision insofar as it protects against disclosure of trade secrets and other forms of proprietary information.
Second, the NFA supports the proposed revisions regarding disclosure of litigation. The proposed rules would require franchisors to disclose litigation involving predecessor corporations, civil actions other than ordinary routine litigation, and pending franchisor-initiated lawsuits against franchisees involving the franchise relationship. Such disclosures would be beneficial to potential franchisees, as it would allow such franchisees to be aware of any difficulties current or prior franchisees have encountered with the franchisor. In addition, the required disclosure of franchisor-initiated litigation would further aid potential franchisees by serving as an indicator of how franchisors resolve their disputes, and whether or not such franchisors are quick to resort to litigation in order to resolve disputes. The possibility of extensive litigation is important to a potential franchisee, as it may affect the calculation of costs involved in acquiring such a franchise. In addition, the continued threat of litigation from the franchisor may well affect later dealings between the parties, and as such is critical information of which the franchisee should be aware. The expansion of disclosures beyond simply requiring a listing of franchisee-initiated litigation would allow franchisees to be fully aware of any potential concerns when deciding whether or not to enter into a franchise relationship.
Third, the NFA supports the FTC proposal which would require franchisors to disclose in their offering circulars the existence of trademark-specific franchisee associations. This revision would require franchisors to disclose franchisee associations it sponsors or formally recognizes, as well as any organizations of which it is aware. The disclosure of such information would allow franchisees to be fully informed of information regarding franchisors, particularly in regards to other franchisees experiences with the franchisor. The proposed rule would also allow potential franchisees to gather information about franchisors that may otherwise be unavailable due to gag clauses. The franchisees would also benefit in that they would have access to organizations which are likely to communicate with potential franchisees. Access to such organizations would allow the potential franchisee to gather information about any ongoing franchisor/franchisee relationship, and as such would place the franchisee in a more equalized position for negotiations.
Fourth, the NFA supports the FTC proposal which would allow franchisors to no longer disclaim liability for, or cause franchisees to waive their reliance on, statements made in the disclosure statements of franchisors. Such "integration" clauses have often proved to be an exception that swallowed the rule, as the very purpose of franchisor disclosure statements is to provide franchisees material, complete, and accurate information upon which a franchisee can rely when making pertinent decisions. The requirements of the revised rule would provide franchisees certainty in relying upon statements by franchisors, and would provide tangible material to point to should a dispute over such representations ever arise. By preventing franchisors from relying on such integration clauses, the franchisee would be placed on more equal footing with the franchisor.
Finally, the NFA would like to express concern regarding the "sophisticated investor exemption." Under the proposed rule, disclosures would be exempted for investments of over $1.5 million. The FTC feels that such a threshold is appropriate, as an investor who is placing $1.5 million or more into a franchise will likely be a "sophisticated investor" in that they will be aware of the need for the information listed in mandatory disclosures. Such sophisticated investors may often in fact demand information which well exceeds that required in the disclosures. Apparently there is some concern that the current disclosure requisite may be too burdensome and may unnecessarily delay the acquisition of a franchise.
The NFA, while favoring a regulatory environment which lessens costs and increases the ability of investors to enter the franchise market, is concerned about the proposed sophisticated investor exemption. The threshold for the proposed exemption seems too low, and as a result may paint too many potential franchisees as "sophisticated investors", thus denying them valuable information with which to make investment decisions. The NFA believes that FTC disclosure requirements should "go the extra mile" to ensure that small, potential franchisees receive adequate information. While such investors should engage in necessary due diligence when investigating franchise opportunities, the disclosure exemption as currently drafted may unnecessarily limit the opportunity to gather such information. Franchisees, whether large or small, depend on disclosures to provide them with information upon which to base their decisions. Even the largest of potential franchisees use the mandatory disclosures as a baseline to measure business issues, costs and other intrinsic data. The NFA fears that without extraordinary cooperation from franchisors, this critical baseline data will be unavailable to franchisees. Simply because information is demanded, it does not follow that the information will be made available. The NFA therefore believes that the FTC should reconsider the sophisticated investor exemption, with particular regard to the concern that simply because a potential franchisee may invest more than $1.5 million, it does not follow that their efforts at due diligence will be successful without the aid of mandatory disclosure requirements. The NFA is concerned that the "sophisticated investor" exemption may swing the pendulum too far in favor of franchisors and undermine needed protections for franchisees, particularly first time investors. By retaining mandatory disclosure requirements, the FTC will ensure that critical information will reach potential franchisees both large and small.
In summary, the NFA supports the vast majority of the proposed Revised Franchise Rule. Overall, the revisions will allow a franchisee to have greater access to information, and therefore allow for fairer business dealings. The NFA does express concern, however, regarding the "Sophisticated Investor Exemption." Such an exemption may unfairly prejudice small franchisees, and may inhibit their ability to get the information necessary to make informed investment decisions. The NFA believes that healthy franchisor-franchisee relations and good public policy are advanced by requiring that more information is provided to franchisees, particularly smaller franchisees who may not retain the resources or experience in dealing with franchisors to obtain such information without adequate assistance from FTC franchise guidelines.