Secretary
Federal Trade Commission
600 Pennsylvania Avenue, N.W.
Room 159
Washington, D.C.  20580

     Re:  16 CFR Part 436 -- Franchise Rule Comment

Dear Mr. Toporoff:

     We are pleased to respond to the Notice of Proposed Rulemaking of the Federal Trade Commission ("Commission" or "FTC") in its rulemaking proceeding to amend its trade regulation rule entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures" (the "Rule").  We provide our comments on the proposed Rule ("Proposed Rule"), below.  We enclose a hard copy of our comments as well as a 3 ½ inch computer disk labeled with the name of the undersigned in WordPerfect (Version 6.1), so marked on the computer disk.  We have also submitted our comments via e-mail to the address listed in the Notice of Proposed Rulemaking. 

     We provide our comments on selected sections of the Proposed Rule, and selected
specific questions in the Proposed Rule, below.  We have provided our comments in the order presented in the Proposed Rule, with appropriate section references, and where appropriate, cross references to other sections where our comments relate to multiple sections of the Proposed Rule.

COMMENTS

     1.  Section 436.1(g) ("Franchise").  We believe that the definition of "franchise" should be revised to be consistent with the current Interpretive Guides to the Rule so that in order for the control and assistance elements apply only where the control or assistance applies to the franchisee's entire method of operation.

     We also note that the payment element of the "franchise" definition will be met by a
"commitment to pay" a fee.  This language appears to apply to situations where a franchisee executes a negotiable note on which repayment will not commence until after the initial six-month period.  As described by the FTC staff in the Informal Advisory Opinion dated August 9, 1979, where the franchisee retains defenses to the enforcement of the note based on the franchisor's non-performance under the agreement, we believe the franchisee is sufficiently protected to justify exception of such a situation from the applicability of the Rule.  We believe that the rationale behind the Informal Advisory Opinion dated August 9, 1979 remains persuasive and payments made on a negotiable note after the initial six-month period should be
excluded from the definition of a "fee."

2.  Section 436.1 (i) (Definition of "franchisee").  The Proposed Rule defines franchisee as "any person who is granted an interest in a franchise."  We believe that this definition may encompass more entities than intended.   For the purpose of clarifying the definition we suggest that franchisee be defined as "any person who is granted a franchise."  We also suggest clarifying the definition of a franchisee so that there is no requirement that a disclosure document be furnished between affiliated companies.  Because such transactions typically involve affiliated companies that are controlled by the same individuals or entities, the need to provide disclosure is not necessary for the protection of the affiliated company being granted the franchise.  For example,
if a parent company grants one of its subsidiaries a franchise, such a transaction should not require the parent company to provide its subsidiaries with a disclosure document.  If the purpose of the overly broad wording is to prohibit companies trying to evade the Proposed Rule's application, we think the risks are low and would recommend the Proposed Rule explicitly prohibit such activity.

3.  Section 436.1(j).  The phrase "grants an interest in a franchise" is too broad and potentially applies to many situations not contemplated by the Proposed Rule (example:  a franchisee who sells ownership interests in his business).  We suggest that the commission adopt the language used in several state franchise laws -- "grants a franchise" or "grants or offers to grant a franchise" -- to remove this ambiguity.

4.  Section 436.1 (r) (Definition of "predecessor").  The Proposed Rule requires the franchisor to disclose specified litigation history involving predecessors.  For the purpose of disclosure under items 3 and 4, the definition of "predecessors" is overly broad.  As defined, a predecessor includes a person from "whom the franchisor obtained a license to use the trademark or trade secrets in the franchise operation."  We believe this should be limited to a substantial number of the franchisors trademarks or trade secrets, not any trademarks or trade secrets, as franchisors
may acquire trademarks and trade secrets from a number of sources and this disclosure would be overly burdensome.  In particular, the term "predecessor" should not apply to a company that licenses a small portion of the trademarks or trade secrets used in the franchised business.  We believe that the standard for licensed intellectual property used to support the application of the term "predecessor" should include some "substantiality" or "materiality" test so that it applies only to the principal trademark(s) and the principal trade secrets which are the substance of a business format franchise.  This is because some companies may have licensed a variety of
trademarks or trade secrets from a number of sources about whom both (1) the utility of such disclosure would be irrelevant and unwarranted, and (2) burdensome to provide.  (Further, some franchisors may license trade secret information from franchisees; a substantiality test would remove the need for disclosure about franchisees.)  For many companies licensing arrangements are with independent, third-party entities with which the franchisor has no ongoing relationship.

Such a requirement would place an undue burden on the franchisor to obtain litigation
information from the predecessor.  For example, if company X grants the franchisor a one-time license to use its trademark which the franchisor permits its franchisees to use, the Proposed Rule would require the franchisor to disclose company X's litigation.  In general, it would be difficult for the franchisor to require the predecessor to voluntarily disclose its litigation, especially in situations where the franchisor's relationship with such predecessor is limited.

Furthermore, under this type of situation, disclosure of litigation involving allegations of fraud, securities law or other comparable allegations against such predecessor would be irrelevant to a prospective franchisee.  We suggest limiting the scope of Item 3 to only include litigation relating to the predecessor's trademarks or trade secrets which the franchisor obtained a license to use.  Finally, because (1) many  franchisors may have no existing relationships with their predecessors, (other than a contract executed many years ago) and (2) most such franchisors would have no contractual basis on which to require the furnishing of such information, there should be a phase-in period for requiring such disclosure or an exception provided for some
period of time.

5.  Section 436.1 (t) (Definition of "prospective franchisee"). We are concerned about clearly identifying the person or entity that is required to receive disclosure.  The Proposed Rule should provide that it is sufficient for any representative of the franchisee to receive the disclosure document.

6.  Sections 436.2 (a) (1) and (2) (14 day disclosure review period/five day contract review period).   We agree that the proposed 14-day disclosure period and 5-day contract review period provide much needed clarification by establishing a bright-line test.

7.  Section 436.2 (Geographic Scope).  We support the Commission's proposal to explicitly limit the Proposed Rule's application to the "offer or sale of a franchise to be located in the United States of America, its territories, or possessions . . . ."  As the Commission recognizes, requiring a domestic franchisor engaged in international franchise sales to provide a prospective overseas franchisee with a disclosure document addressing the U.S. market would be unduly burdensome for the franchisor and would likely be misleading to the prospective franchisee.  (See Supplemental Information, Section C.5.a.)  In addition, we believe enforcement of the Proposed
Rule internationally would violate principles of international comity, particularly given that at least twelve foreign jurisdictions have enacted a mandatory pre-sale disclosure law governing the sale of franchises to be located within such jurisdictions.

8.  Section 436.2(b) (Furnishing Disclosure Documents). With regard to a franchisor's mailing of its disclosure document and completed agreements, we note that the term "first-class mail" is not defined.  We assume this term is intended to refer to the use of first-class U.S. Mail.  We suggest that the Commission permit the use of private courier services (such as Federal Express), consider the use of telefax machines, and specify the timing for a franchisor's use of these delivery methods.
 

     A franchisor mailing its documents to a prospective franchisee under this provision will, presumably, want to retain some evidence of the date of mailing to assist in the event of a dispute.  We believe it would be helpful if the Commission would specify any specific documents or types of evidence which would qualify as valid evidence of the mailing date.  Is a dated facsimile machine print-out indicating successful transmission to the franchisee acceptable? Again, we believe the use of private courier services should be permitted and, accordingly, that any receipt or certificate of mailing produced by the use of such a courier should constitute valid evidence of the date of mailing.  Further, we assume a simple cover letter is acceptable, and the franchisor need not obtain an official certificate of mailing from the U.S. Post Office.  Also, if the prospective franchisee receives the mailed documents in one day, must the parties still apply the remaining two days of the three-day period?

     Under section 436.7(b) of the Proposed Rule, a franchisor may transmit its disclosure document and completed agreements to a prospective franchisee electronically, provided the franchisor "simultaneously" furnishes the prospective franchisee with hard copies of the cover page, table of contents and Receipt pages of its disclosure document.  We request that the Commission clarify the intended interaction between sections 436.2(b) and 436.7(b).  For example, if a franchisor e-mails its documents to a prospective franchisee and mails the required cover page, table of contents and Receipt pages on the same day:

     1) has the franchisor furnished the hard copy pages "simultaneously," as required by section 436.7(b)?

     2) must the franchisor apply an additional three days to the required 14-day and five-day time periods, given that part of the required disclosure was forwarded to the prospective franchisee via first-class mail?

     Lastly, we suggest modifying the language of section 436.2(b) to read as follows: "or if a copy has been sent to the address specified by the prospective franchisee by first-class mail at least three days prior to the required date."  We believe substituting the word "required" for the word "specified" would clarify this section, given that "required date" is used in two other places in the section and it is unclear as to what date the phrase "specified date" refers.

9.  Section 436.3 (Reference to the FTC Home Page).   We agree with the FTC's decision to require the reference to its web page.

10.  Section 436.3(e) (Cover Page).  This section currently requires that all "initial franchise fees" in Item 5 be summed and included on the cover page.  We believe that this practice can be misleading, as it impedes an "apples to apples" comparison for prospective franchisees. We recommend that there be required disclosure on the Cover Page only as to initial franchise fees for the right to enter into the franchise agreement or alternatively, (a) such fees and (b) all Item 5 fees.

     Our understanding is that the principal purpose of this requirement is to put the
prospective franchisee on notice of the franchise fee which must be paid for the right to commence business under the franchisor's system and marks.  However, the requirements of Item 5 are much broader.  For example, in cases where a franchisor sells or leases the premises of the franchised business to the franchisee, this payment would need to be included in Item 5, but would severely distort the amount of the initial franchise fee disclosed on the cover page --and would therefore make comparisons of such a franchisor with its competitors (who do not sell or lease the premises) difficult.  Furthermore, payments made for goods and services (including
real estate) provided by a franchisor will be contained in the total Estimated Initial Investment, as disclosed on the Cover Page.  In a situation where a franchisor provides many of the materials necessary to commence operation (for example in a conversion of a company-owned unit to a franchised unit), to include all payments made to the franchisor in both figures on the Cover Page is redundant and potentially misleading.  We also note that there is a typographical error in the first parenthetical, which should be "Initial Franchise Fee", not "Initial Franchisee Fee".

11.  Section 436.5(b) (Item 2).  The Proposed Rule requires disclosure concerning "directors, trustees, general partners, officers, and subfranchisors of the franchisor or any parent . . . ."  (See Proposed Rule, section 436.5(b).)  We note that "subfranchisors" is not a defined term.  We also suggest that the Commission consider limiting the required disclosure to directors, trustees, etc. of the franchisor only, not of any parent entity.  If the franchisor is truly distinct from its parent, the directors, officers, etc. of the parent will have minimal involvement with the franchise and, accordingly, should not be listed in the disclosure document.  In addition, their inclusion in the document blurs the line separating the franchisor and parent, arguably exposing the parent,
unfairly, to liability arising from the franchise activity.  Accordingly, we believe the required disclosure specifically regarding directors, officers, etc. of a parent entity is unnecessary.

     We note that no disclosure is required regarding the directors, trustees, general partners, or officers of any franchise brokers.  The UFOC Guidelines specifically require disclosure of this information (See UFOC Guidelines, Instruction 2.v.)  Because section 436.5(b) of the Proposed Rule does not do so, a franchisor is not required in Item 3 or Item 4 of its disclosure document (sections 436.5(c)(1)) and 436.5 (d)(1) of the Proposed Rule, respectively) to provide any information regarding the litigation and bankruptcy history of these individuals.   We believe such information would clearly be beneficial to prospective franchisees, and we suggest
that the Commission reevaluate the disclosure requirements of section 436.5(b) regarding the directors, officers, etc. of franchise brokers. 

12.  Section 436.5 (d) (Bankruptcy).  Please see our comment to 436.1 (r) above.

13.  Section 436.5(e).  The Commission's Notice of Proposed Rulemaking appears to indicate that where initial franchise fees are negotiated to a level lower than those disclosed in Item 5, no subsequent disclosure of the negotiated fees are required.  Although implied, we do not believe this is clear in the text of the Proposed Rule and suggest that this section be revised to clearly state that where variation in the initial franchise fees are the result of negotiation with the franchisee and are not the result of formula or calculation, a franchisor need not disclose the range of such negotiated initial franchise fees in the prior fiscal year.

     In addition, while we expect that payments made to the franchisor's affiliates are
intended to be considered "Initial Franchise Fees," the Proposed Rule does not state so directly.  We believe that, if payments to the franchisor's affiliates are to be disclosed, the definition of "Initial Franchise Fee" should be modified to clearly require it.

14.  Section 436.5(l) (Item 12).  We suggest that the Commission consider using the term "protected territory" -- as opposed to "exclusive territory" -- throughout section 436.5(l).  We believe "protected territory" is simply more descriptive of a franchisee's typical contractual rights regarding its territory, if any.  Moreover, we believe the term "exclusive" has different meanings depending on the context and, as such, is ambiguous and often misleading. 

     Also, we note that the term "market area" is not defined.  We believe this term is
imprecise and open to differing interpretations, which creates potential for conflict and may unfairly expose a franchisor to claims under anti-fraud provisions of state franchise sales laws.  In addition, the use of both "market area" and "defined area" in section 436.5(l)(1) creates an ambiguity regarding the scope of the required disclosure, producing additional potential for conflict.  We suggest that the Commission consider using the more precise UFOC term "location" instead of the terms "market area" and "defined area."

     Further, if a franchisor does not grant an exclusive territory and includes in its disclosure document the statement to that effect (required under section 436.5(l)(2)(ii)), why must the franchisor make the additional disclosures required under section 436.5(l)(1)(iv)?  The requirements of section 436.5(l)(1)(iv) seem unnecessary in light of the required statement.

     We believe the second sentence in section 436.5(l)(1)(ix) should read as follows: "State further any compensation that the franchisor must pay for soliciting or accepting orders inside the franchisee's defined territory; and . . . ." 

     Also, we note that the phrase "similar goods and services" in section 436.5(l)(3) is not defined, as is the corresponding phrase "similar products and services" in the UFOC Guidelines Instruction 12.C.i.  We believe this phrase should be defined, both for clarity and to avoid confusion.     

     We believe the words "trade names" can be eliminated from the language in section
436.5(l)(3)(ii) of the Proposed Rule, because the definition of "Trademark" in section 436.1(x) encompasses the concept of trade names.

15.  Section 436.5 (t) (6) (Disclosure of "Gag Clauses").   Please see our response to the
Commission's Question on Specific Proposed Changes below.

16.  Section 436.5(t)(7) (Item 20).  Under section 436.5(t)(7)(i) of the Proposed Rule, a
franchisor must disclose the name, address, and telephone number of each trademark-specific franchisee organization associated with the franchise system, if the franchisor has created, supported, or "recognized" the organization.  We note that the undefined term "recognized" is open to interpretation and, thus, creates the potential for disputes.  For example, if a franchisor's representatives met with a franchisee association's representatives, but the franchisor otherwise refused to formally acknowledge the association, has the franchisor "recognized" the association
for purposes of the Proposed Rule?  We request that the Commission provide some guidance as to what would constitute "recognition" by a franchisor of a franchisee organization.

17.  Section 436.5 (w) (3) (Receipt page record keeping requirement).   The Proposed Rule requires the franchisor to retain a copy of the signed receipt for a period of at least three years.  This provision provides useful clarification regarding the minimum time period the Commission expects franchisors to maintain such records.  We note that the three-year minimum time frame appears to create a presumption that the Commission would not expect franchisors to produce receipt pages after such minimum time period has lapsed.

18.  Section 436.6(c).   This section of the Proposed Rule indicates that a franchisor may not include any "materials or information other than that required by [the] Rule . . ."  While the purpose of this section appears to be to limit extraneous materials and simplify the disclosure given to prospective franchisees, it may be overly restrictive.  As currently drafted the Proposed Rule repeatedly directs a franchisor to disclose certain categories of information.  For each such category the information disclosed must be the "material" information relevant to that category. The Proposed Rule, through application of Section 436.6(c), appears to prohibit disclosure of
information which may be material, but is not anticipated by the Proposed Rule.  (Example: In franchise systems with one or very few suppliers, where a supplier of a key product declares bankruptcy, a prospective franchisee should be made aware of such an event, but it would not be "required by [the] Rule".)  We suggest that Section 436.6(c) be revised to permit a franchisor to disclose information which a prospective franchisee is likely to consider in the making of a decision whether or not to purchase the franchise.

19.  Section 436.7(e).  The prohibition regarding multimedia tools, video, animation, or pop-up screens appears to be overly broad.  Although the Proposed Rule should make clear that any features contained in the electronic copy of the offering circular should not obscure the required disclosures, we believe that the Commission should anticipate that there are categories of features which may add to the offering circular in a way that assists a prospective franchisee in reading the document.  We recognize that the Commission does not want to permit sales materials to be incorporated into the offering circular, but we note that under the Proposed Rule there would be nothing to prohibit the franchisor from providing a separate electronic document to a prospect containing such materials.  And, in theory, such an electronic document could be
provided on the same disk, CD-ROM or other device as the offering circular.

20.  Section 436.8(d).  Unlike the UFOC Guidelines, the Proposed Rule does not contain a requirement in Item 21 to provide financial statements which are current to within 90 days of the date of the offering circular.  However, Section 436.8(d) refers to unaudited financial statements for quarterly revisions.  Does this requirement indicate that unaudited financial statements are always material?

21.  Section 436.8 (c) (Material Change disclosure).  The Proposed Rule requires the franchisor to notify the prospective franchisee of any additional material change in the franchisor, the franchise business or the franchise agreement that has occurred since the last quarterly disclosure document revision.  We agree that a formal amendment to the disclosure document in this circumstance would not be cost effective; however, the Commission should clarify the manner in which such additional material changes should be disclosed.  For example, an oral communication regarding a material change may become the basis for a dispute.  As a policy
matter, the Commission should encourage the disclosure of material changes in some recordable form.  Although requiring disclosure in a recordable form does not remove all risks associated with a prospective franchisee's claim that it did not receive disclosure of a material change, it will serve to minimize the risk of such disputes arising.

22.  Section 436.9(g).  We recognize that oral arrangements were exempted from the original Rule.  Exempting purely oral arrangements from the application of the Rule appears to be in conflict with the purpose of the Rule.  It is possible to imagine that unscrupulous companies could utilize this exemption in order to take advantage of investors.

23.  Section 436.10(d).   This Section prohibits certain financial performance statements (if no financial performance representations are contained in the disclosure document) made by agree that financial performance
statements in these media should be generally be subject to the same standards as financial performance statements made directly to prospective franchisees, as this is the principal audience which would be reached through the general media. We do have concerns with regard to the prohibition, as applied to independent media persons who may quote statements made by a franchisor in a media piece, for several reasons.  First, many franchisors have company-owned outlets about which the relative performance is a logical topic of inquiry and discourse for the media -- e.g., restaurant trade journals reporting on the restaurant industry.  Such articles are not
prepared for prospective franchisees.  Second, many franchisors are publicly held and are effectively required by the securities laws to furnish gross revenue information in their securities offering materials.  Proposed Section 436.10(d) would effectively prohibit the dissemination of required securities information to the media.  Moreover, as such information is publicly available, a reporter could easily obtain such information independently.  We further believe this could create some troublesome issues and questions -- for example, if a reporter, on his or her own, obtains and publishes such information, would there be an FTC presumption that the Proposed Rule has been violated?  Is it a violation for public relations officials at a publicly-held
company to provide, or refer, the media to publicly available securities information on the company?  How would the FTC reasonably investigate such alleged violations?

 Finally, such information is also often available in a company's financial statements; this issue remains unaddressed by the proposed changes to 436.10(d).  We believe that comments made by franchisor representatives should only be subject to the restrictions on financial performance representations if they are part of the franchise sales process.  Therefore, we believe that the purpose of the Proposed Rule would be more clearly served by applying this prohibition to only those communications made or directed to prospective franchisees.

24.  Section 436.10(d)(2).   This section requires in all advertising a "conspicuous admonition that a new franchisee's individual financial results may differ," but does not indicate whether specific language must be used.  We therefore assume that a franchisor may choose the text of such an admonition.

RESPONSES TO COMMISSION'S SPECIFIC QUESTIONS ON PROPOSED CHANGES:

Question 2.  We believe that the omission of the references to expenses in the definition of a financial performance representation is a positive development.  The inclusion of expenses in the definition of financial performance representations is unnecessary. We recognize that some franchisors may attempt to characterize disclosure of cost or expense information as information that  "suggests a specific level or range of potential or actual sales, income, gross profits, or net profits."   To the extent any such disclosure has such an effect, it would be subject to the Proposed Rule's requirement with regard to financial performance representations.

Question 5.  As noted below, we believe the use of such "gag clauses" is warranted in a number of cases (e.g., settlement agreements).  In response to question 5 raised by the Commission in section H.2 of the Supplemental Information, however, we believe the term "gag clause" implies the use of "strong arm" tactics by a franchisor and, accordingly, is prejudicial.  We suggest that the Commission consider using either "nondisclosure clause" or "privacy clause", which we believe are both free of prejudicial overtones.

Question 9.   The Proposed Rule would hold franchisor's employees or sales representatives liable for violation of Sections 436.3-436.8 only if they "knew or should have known of the violation."  The "knew or should have known" standard may be inappropriate, if the Commission applies such a standard to all franchisors regardless of their size or experience in the franchise industry.  How does the Commission contemplate applying this standard to the variety of companies, their structure and circumstances surrounding violations of the Proposed Rule? 

Question 13.  The Proposed Rule requires a franchisor to disclose franchisor-initiated lawsuits against the franchisee in Item 3.  We believe that, although the disclosure is limited to pending litigation, the type of actions requiring disclosure needs clarification.  We find troublesome the standard for disclosure of pending actions -- "directly relating to the operation of the franchised business" -- as it is vague and could be overly broad.  We recommend disclosure of pending actions should be subject to a different test related to the franchise agreement (e.g., pending actions (1) substantially related to the franchise agreement or (2) directly arising out of the
franchise agreement), so that disclosure is not required for matters not arising out of the heart of the franchise relationship.  For example, if a franchisor leases property to its franchisee and the franchisor commences an action against the franchisee for non-payment of rent, under the Proposed Rule, disclosure of this action ought not be required.  A franchisor's action against the franchisee for non-payment of a promissory note should also not require disclosure under the Proposed Rule.  Such actions are not substantially related to or arise out of the franchise agreement; if there are specific problems in the franchise relationship, then a franchisee will assert counterclaims to that effect, and disclosure would then be required on other grounds.

 We believe it is advisable to limit the scope of disclosure by providing that a franchisor would not have to make the disclosure unless it had pending litigation against a certain threshold percentage of its franchisees.  We believe that a 5% threshold of franchisees would be appropriate.

Question 14.  We believe that the disclosure requirements relating to electronic cash registers and computers are not unduly burdensome for franchisors, including start-up franchisors.  Start-up franchisors often have not developed concrete plans or requirements for electronic equipment.  In such instances, franchisors simply provide disclosure as to current and possible future requirements.

Question 16.    We assume the term "development plans" used in this question refers to a franchisor's plans to open additional company-owned units.  If that is correct, we do not believe a franchisor should be required to disclose this information in Item 12, because it would not provide a prospective franchisee with any information not already provided in the disclosure document.  For example, in Item 20, a franchisor (pursuant to section 436.5(t)(3)) must already provide estimates of the number of company-owned units it plans to open in each state in the one-year period after the close of its most-recent fiscal year.  In addition, in Item 12, a franchisor (pursuant to section 436.5(l)(3)) must disclose its "present plans to operate or franchise a business under a different trademark" if that business sells goods or services similar to those
offered by a franchisee.  The franchisor must also indicate (under section 436.5(l)(3)(iii)) whether any of these planned outlets will be franchisor-owned.  In light of these existing requirements, we do not believe a disclosure requirement concerning a franchisor's "development plans" is necessary.

Question 18.  We believe that the omission of the geographic relevancy requirement represents the removal of a substantial impediment to franchisors who might wish to provide financial performance data to prospective franchisees, because it will lower the obstacles to, and costs of, compiling the data necessary to produce a meaningful representation.  We believe it is unlikely to have any material effect on the quality of such representations, as geographic relevancy is often quite attenuated.

Questions 22-24.   Item 20 has always been difficult to read.  The combination of numerous columns, data for three years (or more), and rows for each state in which the system operates makes the chart relating to franchised outlet information both difficult to read and prepare.   We believe that many prospective franchisees are overwhelmed by the amount of data in the chart and simply do not attempt to read it.  In fact, many franchisors have indicated to us that prospective franchisees do not read the charts in Item 20 because they are too complicated. Generally, we believe the addition of more categories of information (and consequently more columns) will only make the chart more complex and more daunting to prospective franchisees. 

     As the Commission has recognized, it is sometimes difficult for a franchisor to determine in which column a particular event should be placed or for a prospective franchisee to accurately interpret the disclosure provided.  This is true for two reasons.  First, the facts of a particular circumstance may be more complicated than anticipated by the UFOC Guidelines or the Proposed Rule, and therefore could be properly characterized as falling under more than one classification.  In this case, under the UFOC Guidelines, a franchisor would simply list the same event twice under different categories ("double counting"), but would still identify the total number of franchises operating in the particular state at the end of the appropriate year.  Second, the categories of events contained in each column are not sufficiently clear so that a franchisor or a prospective franchisee would immediately understand the meaning of the name of the category (for example, many franchisors refer to the sale of a company-owned unit to a franchisee as a "transfer").

     Although "first-in-time" or "order of priority" approaches each have some appeal, we
believe each may be flawed, for several reasons.  Each approach may result in information that does not accurately reflect specific circumstances.  In addition, it may be more difficult to prepare using an order of priority approach.  If such an approach were explained, we believe it could prove confusing -- or just overly complicated -- to the prospective franchisee.   Although double counting is an issue, our experience is that it occurs in a relatively small number of cases.

     We believe that although brevity and clarity are the goals of this disclosure, they tend to work at cross purposes.  We believe that there are two approaches the Commission could adopt which would more closely reach these goals.  First, in addition to a simplified chart containing a list of franchised outlets open at the end of each year, franchisors could be required to state briefly -- in prose -- the precise circumstance surrounding the event leading to the closure (or transfer) of a franchised unit.  If this approach were adopted, franchisors and prospective
franchisees would not need to interpret the meaning of a particular category description.  This rule would also avoid the "double counting" problem without resorting to an arbitrary mechanism such as a first-in-time rule.  Alternatively, where "double counting" or potential confusion would occur, a franchisor could be permitted to clarify the disclosure through the use of footnotes.

Question 26.   The Proposed Rule requires the disclosure of the existence of so-called "gag" clauses if franchisees have signed gag clauses in a "franchise agreement, settlement, or any other contract." However, we believe that if a franchisor uses "gag" clauses in certain isolated situations (i.e., settlement agreements), the disclosure of such gag clauses would not be required information to the franchisee.   We suggest limiting the franchisor's obligation to disclose the existence of gag clauses in the franchise agreement and other contracts signed in connection with the grant of a franchise, excluding settlement agreements.  We believe the disclosure of "gag"
clauses would provide prospective franchisees with useful information only if there is pervasive use by the franchisor of "gag" clauses in the franchise agreement or related agreements.  We believe that disclosure of gag clauses in settlement agreements will affect future settlements, because franchisors will be reluctant to settle if they will be required to disclose the existence of gag clauses, especially where there is an acrimonious matter with a particularly vocal franchisee.

Question 27.   Under section 436.5(t)(7)(ii) of the Proposed Rule, a franchisor must disclose contact information for each franchisee organization associated with the franchise system, if the organization is incorporated and requests inclusion in the franchisor's disclosure document.  As it is currently worded, this section would require a franchisor to provide contact information for every incorporated franchisee association requesting it, no matter how many such associations exist and have requested inclusion, and no matter how few franchisees may actually be members
of any such association.  Thus, a large franchisor may be required to include information on numerous associations and, in theory, associations that represent only a very small percentage of franchisees.  We suggest that the Commission consider placing a numerical limit on the number of franchisee organizations that must be listed and/or a requirement that each organization listed represent a certain minimum percentage of franchisees in the franchise system.  This would prove less burdensome to franchisors, but would serve disclosure goals by providing franchisees
with contact information for several of the more representative franchisee associations.  

Question 35.  We believe that the reason for providing an exemption for sales to sophisticated franchisees is that they are likely to receive counsel from professional advisors prior to entering into a contract.  If this is correct, we believe that the threshold investment level could be reduced to at least $1 million and still serve the purpose of the exemption.  We do not understand the purpose or the importance of the acknowledgment by the prospective franchisee of the application of the exemption.  The acknowledgment does not protect the prospective franchisee,
except, perhaps, to put the prospect on notice that it may be entitled to receive a disclosure document.

Question 36.   We note that the sophisticated franchisee exemption provided by this section applies only to corporations.  We believe that it should be expanded to apply to other business entities (including limited liability companies and partnerships) and individuals.  Moreover, the Commission may wish to consider extending the exemption to individuals with a certain amount of experience in a particular industry -- e.g., 5 years experience -- as such individuals have sufficient experience in the relevant business.

*         *         *

     We hope that our comments are helpful to the Commission in its public comment
process.  If you or any staff members of the Commission have any need for clarification as to any of our comments, please feel free to contact us. 

                              Very truly yours,

                              Andrew P. Loewinger

Enclosure: 3 ½ inch computer disk