F.T.C. Public Comment 96

I strongly believe that the Pre-Sale Disclosure Rule should remain applicable to the sale of a
franchise by a domestic franchiser or its foreign agent, for location in a foreign country.


U.S. Federal Trade Commission
June 25, 1997

Public Comment
Harold Brown, attorney

Request for public comment on possible revisions to The Franchise Rule.

Comment #96

Law Offices

Brown & Stadfeld
Harold Brown
L. Seth Stadfeld
L. Michael Hankes
Linda J. Keogh
Catherine M. Keenan
Susan J. Assad

Tel: 617-720-4200
Fax: 617-720-0240

June 25, 1997

Federal Trade Commission
Room 159
6th St. & Pennsylvania Ave., NW
Washington, DC 20580

Attention Staff Contact: Steven Toporoff or Myra Howard

Re: Possible Pre-Sale Rule Amendments


I strongly believe that the Pre-Sale Disclosure Rule should remain applicable to the sale of a
franchise by a domestic franchiser or its foreign agent, for location in a foreign country.

Please add my enclosed comments to your record.




Harold Brown

Application of FTC Pre-Sale Disclosure Rule to Sale of Foreign Franchises

[a] Statutory Power Related to Foreign Activity

The application of the FTC Disclosure Rule to the sale of foreign franchises, starts with
examination of the statute. The Robinson-Patman Act expressly limited its prohibition of
discrimination to sales of products in the United States. That contrasts with the language of
section 5 of the FTCA that applies to acts or practices "in commerce." Without question, the
statute is therefore applicable to all commerce as distinguished from noncommercial conduct.
When Congress intended to limit the coverage to domestic activities, it did so in clear language.

For antitrust restrictions, also covered by the FTCA, it has been affirmed that American
jurisdiction covers pricing violations that occurred in a foreign jurisdiction, this time Japan,
because they were intended and did have substantial anticompetitive effects within the United
States. In a case of first impression, it was ruled that any other result would encourage price
fixers to do their nefarious conspiring in foreign territory in order to influence competition in
U.S. markets. The defense of comity was rejected in this age of international commerce where
there are immediate competitive reverberations around the globe. The assertion of American
power is of historical importance because cartels have long flourished in foreign countries.
Those entities often consisted of groups of competing enterprises that horizontally controlled
production and prices for products sold in the United States.

The authority of the FTC over foreign conduct has been confirmed in many other references.
The decision of the First circuit on horizontal pricing conspiracies in Japan, appears applicable
to section 5 of the FTCA primarily addresses the same antitrust concerns. It must be assumed
that the same considerations affect the remainder of section 5.

[b] Rise of Foreign Activities in Many Franchise Contexts

For franchising, the coverage of foreign activity can be a significant factor due to the surge of
acquisition of American franchisor systems by foreign purchasers. It may also be difficult for
such foreign parents to shield themselves from antitrust liability like tying or pricing through the
use of layers of corporate entities. The same principles would appear to apply to other federal
and state laws in general and to franchise protection laws in particular.

Another issue of foreign ownership is involved where an American franchiser has been acquired
by a foreign parent. That issue would also be important in the ultimate resolution of recovery
against a major American franchiser for a variety of common law violations, including breach of
fiduciary duties and especially a state "little" FTC Act.5 The FTCA counterpart to the antitrust
laws has been uniformly applied to include the prohibition of anticompetitive practices that have
an impact on domestic markets.

[c] Applicability of FTC Franchise Rule to Foreign Transactions

Some have questioned whether the FTC Franchise (Pre-Sale Disclosure) Rule applies to the
sale by a U.S. franchiser of a franchise that will be located in a foreign country. The question is
accentuated by the fact that foreign countries generally provide little or any protection for local
franchisees either in pre-sale disclosure or conduct control.

Three categories of sale may be involved, namely, (1) sale in the U. S. of a franchise to be
located abroad; (2) sale of franchise made in a foreign country for operation abroad; and (3)
sale of a franchise in a foreign country that may be or eventually is located in the U. S. It is also
possible to make a distinction based on whether or not the buyer is an American citizen or

There is little doubt that U. S. law can constitutionally apply to all of those cases because of the
weighty amount of U.S. contacts that each of the foreign franchisees will have with their United
States franchisor from the first contact and throughout the life-time of the franchise. Those
relationships far exceed the constitutional requirement of "minimum contacts." More
significantly, they demonstrate that the heart of the franchisor franchisee relationship involves
joint activities of the franchisor and all of its franchisees in the U. S. Every aspect of the
franchise is created, monitored, instructed, modified, and operated by the franchisor within the
U.S. or by its agents acting abroad with constant interaction between all of its foreign and
domestic franchises. All of the franchisees, both domestic and foreign, operate as a single family
with intra-performing synergistic accomplishments.

In many franchise systems, the surge of international franchising has challenged or exceeded
U.S. operations. The operations of foreign franchisees will directly impact domestic dealers,
both in marketing and in physical participation. For example, a domestic franchisor
appropriately complained that the poor operations of its multi-unit foreign franchisee seriously
damaged its U.S. goodwill.

It is obvious that prospective foreign franchise locations are equally in need of pre-sale
disclosure. As with possible state law conflict, the regulations can be made effective unless there
are equal or superior foreign local requirements. All of these elements should be considered
where the FTC reviews the foreign application of its controls.

For Review, see FTC “Table of Commenters”

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Risks: F.T.C. Public Comments, United States, 1997, Harold Brown, United States, 19970625 Comment 96

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