Secretary
Federal Trade Commission
600 Pennsylvania Avenue, Room 159
Washington, DC 20580

Re: 16 CFR Part 436 Franchise Rule Comment

Dear Secretary:

This comment is being submitted on behalf of TRICON Global Restaurants, Inc., in
response to the Notice of Proposed Rulemaking dated October 22, 1999. That Notice of
Proposed Rulemaking relates to the trade regulation rule concerning the sale of
franchises (currently titled, on a formal basis, the "Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures", but referred to informally in the remainder of this letter as the "Franchising Rule"). TRICON is the parent company of the KFC, Pizza Hut, and Taco Bell restaurants chains, which (altogether) operate, license, or franchise over 30,000 restaurants worldwide.

This comment is divided into two main sections. The first section is a discussion of some individual points in the proposed Franchise Rule. The other section is a response to some of the questions posed in the Notice of Proposed Rulemaking concerning the revised Franchise Rule.

Preliminary Matters

We believe that the Commission has done an excellent job of revising the Franchise
Rule. When the Franchise Rule was in its infancy, the world of franchising was very
different from the current situation. Now, many franchisees (or potential franchisees) are large, sophisticated business operators, some as large or larger than the average
franchisor and some larger than their own franchisor. Furthermore, franchising has
been sufficiently prominent as a means of doing business for a long enough period that there is quite a bit of literature on the subject available, as well as many experienced practitioners of franchise law, who can assist a potential franchisee. The changes in the Franchise Rule seem to have begun the process of recognizing this new reality. TRICON commends the Commission and its staff for this progress.

In particular, we commend the Commission's resistance to calls to broaden the Franchise Rule to encompass substantive franchise relationship issues. While franchisees and their advocates may be able to assert isolated instances of problems within the broad area of franchising, we concur with the Commission's conclusion that the record does not (and, we submit, cannot) support the notion that there are wide-spread and substantial problems within franchising that can be regulated in a fashion that will not outweigh the countervailing detriments from the regulation. Franchising thrives because of its many benefits to consumers and to competition. As in any thriving enterprise, however, there are inevitable, but isolated, problems. It is risky to over-regulate in response to these problems, when there is so much potential for adverse impact from the regulation.

Comments on Franchise Rule

Definitions (Section 436.1)

Fractional Franchise: To a greater or lesser extent, each of TRICON's subsidiaries relies on the "Fractional Franchise" exemption to the Franchise Rule, typically in connection with the sale of "Licenses", which we define as rights to use a portion of our trademarks, recipes, etc., within a larger facility (over which we typically exercise no control). In that regard, it would be helpful if the Commission would more clearly define the base ("the franchisee's total dollar volume in sales") over which the 20 percent figure is to be measured.

For example, hearkening back to the Commission's Statement of Basis and
Purpose (the "SBP") when the Franchise Rule was first promulgated, one of the
examples used was a service-station dealer who added a line of tires, batteries, and
accessories (or "TBA"). For purposes of predicting whether "the sales arising from the
relationship" will exceed 20% of the franchisee's total dollar volume in sales, is the base figure to be, for example: (a) the franchisee's total sales of TBA at this service station, (b) the franchisee's total sales of TBA at this and all other service stations that the same franchisee owns, (c) the franchisee's total sales of all goods and services (including gasoline, oil, TBA, repair work, and convenience foods) at this service station, or even (d) the franchisee's aggregate gross sales of goods and services from all businesses owned and operated by the franchisee at any location and from any source? Because of uncertainty in the definition, TRICON's businesses have followed the disclosure rules (including distributing disclosure documents and waiting the required periods) in instances where disclosure is probably not necessary. Clarification of the definition could allow savings in costs to produce and distribute disclosure documents and also increase efficiency by eliminating waiting periods where none is necessary.

On that basis, TRICON would suggest that the proper base figure is the final
figure the franchisee's aggregate gross sales of goods and services from all businesses owned and operated by the franchisee at any location and from any source. One of the major concerns expressed in the SBP was the protection of neophyte investors, who were risking their entire livelihoods on a single business; the fractional franchise business exemption recognized this by requiring both two years of experience in the same type of business (emphasis added) as well as the 20% limitation. By clarifying that the other business need not necessarily be from the same location or from the same type of activity, the Commission will still protect neophytes as well as those who do not have substantial other business to rely upon, while not holding back activities that are not in need of the same level of protection.

Franchise Seller: On its face, the definition of "franchise seller" seems to include all
employees of a franchisor, even if not involved in any way in the sale of franchises.
Since the Franchise Rule makes all franchise sellers responsible for complying with the disclosure requirements, it seems wise to limit the definition of "franchise seller" to those involved in franchise sales. Perhaps the second sentence of the definition could be revised to read, "It consists of the franchisor, the franchisor's third-party brokers, and those of the franchisors' employees, representatives, and agents who are involved in franchise sales activities.

Gag Clause: While TRICON recognizes the motivation underlying the new disclosures
concerning the existence of "gag clauses", we believe the definition to be over-broad.
Just as there is an exclusion to clarify that protections of confidential and proprietary
information (standing alone) are not within the ambit of the definition, we would suggest an exclusion relating to price paid when franchised facilities are purchased. Often, when a franchisor buys back a facility from a franchisee, the franchisor will require that the [former] franchisee not disclose the price paid, but without otherwise "prohibit[ing] or restrict[ing] that franchisee from discussing his or her personal experience as a franchisee within the franchisor's system." It could be misleading to require the franchisor to disclose this type of arrangement as a "gag clause", even if the franchisor is allowed to append an explanation that this is the only matter restricted. Potential franchisees may not thoroughly read the explanation, and may be reluctant to contact any former franchisees out of fear that the effort will be futile.

Officer (and de facto officer): The inclusion within the definition of "Officer" of any
"individual with significant management responsibility" is very troubling. In a large
organization, there can be not only an officer in charge of a function, but many
"director"- and "manager"-level employees (reporting to that officer) who can be said to
have "significant management responsibility" in that function. If each of those persons must be disclosed, the disclosure document will be quite long, and could need frequent revisions (to reflect turn-over). We would suggest that only the highest-level person within a function needs to be included, and that de facto officers need be disclosed only if there is no officer in charge.

Obligation to Furnish Documents (Section 436.2)

We commend the Commission for moving from a disclosure date based on business days to one based on calendar days. This should simplify everyone's life. One further
clarification that would be helpful would be that the portion of the requirement based
upon payment requires payment to the franchisor or its affiliate (as previously defined) this is implicit in the language of the receipt included in Item 23, but is not clear in Section 436.2 itself. Some commentators have declared that a payment to any person (even if totally unrelated to the franchisor) can trigger this requirement, if the payment "relates" in some way to purchase of the franchise. At the extreme of this construction, consider that payment by the franchisee to a lawyer who will review the disclosure document that occurs less than 14 days after the disclosure document is delivered could put the franchisor in violation, despite the desire to encourage potential franchisees to hire such advisors (more common, perhaps, are payments to third-party landlord to reserve a site). Should the franchisor be at risk for delivering the disclosure document too late, if the franchisee makes a payment to someone of this nature less than 14 days after delivery of the disclosure document?

Disclosures Concerning the Franchisor's "Parent" Throughout items 1, 2, 3, and 4, there are required disclosures concerning the franchisor's "parent". We believe that these disclosures will be confusing and are unnecessary. In the context of TRICON, there are currently three subsidiaries selling franchises within the United States. Each of them has separate officers, differing forms of franchise agreements, and differing litigation histories. A potential franchisee is [typically] buying only one type of franchise from one franchisor at a time. To require the breadth of disclosures called for by the proposed revised Franchise Rule will definitely lengthen the disclosure document of each subsidiary/franchisor, as well as increasing the need for revisions (a change at only one company could require revisions of all disclosure documents). The only effect on the potential franchisee is likely to be confusion, as he or she will now be bombarded with irrelevant information about persons having no involvement in the business to be franchised.

Franchisor Assistance (Item 11) The Manual In the section on disclosures concerning the table of contents of the franchisor's operating manual, there is a provision that this disclosure can be omitted "if the prospective franchisee views the manual before purchase of the franchise." At the time the disclosure document is produced, the franchisor cannot know whether the potential franchisee will actually view the manual, although the franchisor can commit that the manual will be made available for review. We would suggest this as a more appropriate alternative.

Franchisee Outlet Information (Item 20)

Outlet Tables: The proposed changes to the tables in Item 20 are a good start. We
believe there are still a few improvements that can be made.

• In the table of franchised outlets, it appears that column (10)'s list of outlets at
  year-end should reflect the effects on column (2) of the items listed in columns (3) through (9); however, there is no column in which to report newly-opened outlets or outlets acquired by a franchisee from the franchisor. Additionally, if a unit opens after the beginning of the year, then closes (in some fashion) before the end of the year, it would appear not to be included at all, unless there is a column added reflecting newly-built or acquired outlets.

• In the table of franchisor-owned outlets, it is not clear that columns (3) and (4)
  should include outlets acquired from or sold to a franchisee during the year. As many franchisors engage in these activities (see, for example, column (5) of the table of franchised outlets), there will be an otherwise-unexplained discrepancy between units at the beginning and end of the year.

Franchisee Identification: As franchising has grown and matured, there are many more multi-unit franchisees as well as corporate franchisees. Nevertheless, the instructions to Item 20 require disclosure about the address of each franchised outlet (when, in fact, a prospective franchisee might get better information about a potential franchise purchase by calling the franchisee's business office), and require information about each former franchisee's "last known home address" (when the ex-franchisee might have been a corporation or other non-individual person). We suggest that the instructions allow disclosure of franchisee's corporate offices, where appropriate.

Exemptions and Prohibitions (Sections 436.9 and 436.10)

Large Franchisee Exemption: TRICON appreciates the new "large franchisee"
exemptions contained in Section 436.9(e), and intends to take advantage of them once the revised Franchise Rule becomes effective. We have noted, however, a potential problem that we do not believe the Commission intended. Specifically, although many of the transactions in which TRICON's subsidiaries will be engaging will be exempt from the disclosure requirements, we anticipate that many of those potential franchisees will still request a copy of the applicable disclosure document as background information. If the disclosure document is provided, there may be a problem because of the interplay of Section 436.10, which contains a variety of prohibitions that apply to the franchise sale process. Although the Commission has determined that certain "large franchisees" are not in need of the protection of the Franchise Rule, Section 436.10 would seem to bring those franchisees back within the Franchise Rule if a disclosure document is "voluntarily" provided. An example of this phenomenon is where a franchisor chooses to provide financial performance data only to exempt buyers (believing that they are more able to use the information wisely); current Section 436.10(d) would seem to suggest that the same information must then be provided to non-exempt buyers. To address this problem, we recommend that Section 436.10 be divided into a portion applicable to all franchise transactions (current subsections (b), (c), and (f)) and a portion applicable only to franchise transactions not otherwise exempt from the Franchise Rule (current subsections (a), (d), and (e)).

Integration Clauses: Despite the fact that "integration clauses" have a long and noble
history in contract law, the Commission has proposed limits on their use in franchising (see proposed Section 436.10(e)). While the motivation behind this proposal (as expressed in the explanatory provisions of the proposed Franchise Rule) may be good, we are concerned about the impact. The rules for the disclosure documents mandate the use of "plain English" and various summaries, which (depending especially upon whether the franchisor follows all of the plain English "mandates" of the North American Securities Administrators Association) may vary from the language used in the franchise agreement itself. Any time differing words are used (no matter how minor the differences), there is a risk of inconsistent interpretation. We suggest that the problems the Commission are concerned about could be more directly addressed by stating that it is an unfair or deceptive practice to include false or deceptive statements in the disclosure document or otherwise to use integration clauses in a manner intended to deceive. This directly addresses the Commission's concerns, without unduly restricting these clauses.

Response to Questions

Question 2 Expense Disclosures: The biggest problem we see with the required
disclosures concerning expenses has to do with the definition of the "reasonable initial phase". Is there an implication that the "initial phase" is the period before the units reach a "break-even" point? If so, that seems to be an implicit earnings claim. We suggest that it would be preferable for the Commission to dictate a specific number of months over which expenses should be disclosed, to avoid this problem.

Question 5 Gag Clauses, and Question 7 Officers: See comments above.

Question 9 Liability: As noted above, the new, broad definition of "franchise sellers"
potentially includes all employees of the franchisor, even if those persons are not
involved in any fashion in franchise sales. In addition to narrowing the definition of
franchise seller, we recommend that the liability provisions should be narrowed, such
that an employee would not be liable for a violation, even if that person had actual
knowledge of the underlying facts, unless that person also (a) knew (or should have
known) the legal significance of those facts, and (b) was in a position to influence the
outcome of the matter. For example, a secretary could "know" that financial
performance data was routinely provided to buyers, but neither know the significance of doing so nor be in a position to stop the practice; in that instance, liability should not be imposed.

Question 13 Franchisor-Initiated Litigation: In a large franchise system (even one with
few problems), the likelihood that there will be 100% compliance by all franchisees is
relatively low. The use of a threshold (such as the 5% proposed) would seem to ease
paperwork burdens (especially the need for updates), while still assuring potential
franchisees that they will be informed of systemic problems.

Question 17 Renewal: The fundamental disagreement in discussions over "renewal" or
"extension" has to do with the question of what is being renewed (or extended) is it the
franchise agreement or the franchise itself (where the "franchise" is defined as the right to use the franchisor's trademarks, system, etc.)? Franchisors typically consider that they are giving a renewal right if they offer the continuing ability to operate under the franchisor's trademarks and system (albeit pursuant to the franchisor's then-current form of franchise agreement), while franchisees seem to argue that they are being denied the ability to renew unless the terms and conditions (i.e., the franchise agreement) remain unchanged. Perhaps the solution would be to avoid use of the term "renewal" entirely, and pose the questions of whether and under what circumstances the franchisee will be allowed to obtain an agreement to continue operating the franchised outlet using the franchisor's trademarks and system after expiration of the term of the franchise agreement.

Question 33 Exemptions: As noted above, we would suggest splitting Section 436.9
into two portions, one applicable to all franchise sales, and one applicable to only non-
exempt sales. In addition to the benefits described above, this would seem to add clarity, which seems the point of this question.

Question 36 Large Corporate Franchisee Exemption: The only problem that we see
with the large corporate franchisee exemption is the limitation to corporations. There are other forms of entities (such as limited liability companies, limited partnerships, and real estate investment trusts) that would seem to be just as entitled to this exemption, but that are limited from taking advantage of it due to their corporate form. There seem to be no reason draw this distinction.

Thank you for allowing us to submit these comments.

Sincerely yours,

TRICON Global Restaurants, Inc.

Brian H. Cole
Corporate Counsel