|Received:||11/12/2004 3:07:53 PM|
|Organization:||Law Office of Marc N. Blumenthal|
|Agency:||Federal Trade Commission|
|Rule:||Notice Announcing Publication of Staff Report on the Franchise Rule|
Comments:1. Franchisors are not capable of policing their activities in a manner that both protects their interests, and at the same time considers the interests of both prospective franchisees, and existing franchisees in their systems. Whereas, the intent is to create a mutually beneficial business, the reality, as I have seen in my franchise practice, which now spans over 23 years is a different result. Consequently, the prospective franchisee and the existing franchisee need legislative protection, especially in states that do not have registration and relationship laws. To write this off to private contract law, and voluntary purchase, as stated in the Revised FTC Franchise Rule Staff Report is a disservice to those who pay their hard earned dollars to franchisors. The legislation necessary exceeds that which exists today. 2. Earnings claims can be very informative to prospective franchisees, but are not required by the current or the proposed rule. Failure to provide an earnings claim creates the impression that something is being hidden, or that the business offered and the business operated are two different things. Franchise agreements for the most part are not swinging doors. If you purchase one and it turns out not to be what you were sold, for any number of reasons, exiting is not simple, and can be very costly, frustrating. Providing crucial financial information about costs, sales, expenses, profits, losses, etc., with the appropriate caveats should be mandated. Without that information, franchisors should be required to provide an exit option for a certain period of time. 3. With regard to the proposed trademark-specific franchisee association recommendation, I disagree with the negative language and conotation "We do not endorse these organizations." This opens the door for the franchisor to respond to a question from a prospective franchisee about its general feeling. Worse, if the organization has created a problem, a franchisor could go so far as to malign the organization, even before the prospective franchisee signe the franchise agreement. Once that party becomes a franchisee they may be curious and seek out the organization, or they may write them off as rabblerousers. In either case, the comments that were made were prejudicial. Instead, I would propose a general statement about franchisee associations. My language would be as follows after the word document: "Franchisee associations are organizations created for the benefit of franchisees. While it is our understanding that there are franchisees in this system that have chosen to become affiliated, we do not believe al l of our franchisees are members of a franchisee organization. Joining this type of organization is voluntarily. We do not make a recommendation one way or another. " I think the problem with stating that the franchisor does not endorse a certain franchisee association, is negative, plants a seed unnecessarily, and may not be true in all systems. There are franchisors that endorse franchisee associations.To require a disclosure that may not apply to all franchisors and may place a franchisor in a peculiar position is counterproductive. 4. In my reading of item 17, in the Staff Report, all I saw were comments about the word renewal or relicensing. Noone discussed transfer provisions. My recommedations are twofold. Whenever a transfer occurs, there should be a mutual genreral release, as I have often negotiated for my clients. This makes practical snes, and is very fair. Most release are one-sided and hold the franchisee on the hook, while the franchisor is completely off the hook. My second proposal is to prohibit franchise agreements from requiring as a condition of transfer that the transferor franchisee is responsible for and basically a guarantor for the transferee franchisee's obligations. I have seen these provisions go out three years. They are patently unfair.