Larry I. Tate Oversight Hearing

I left the ivory tower as executive vice president of Shakey's and from 1978 to 1984 I lived in Burbank, California, where I owned and operated four Shakey's Pizza restaurants in the Los Angeles area… When I was beginning my career in franchising as general counsel for Baskin-Robbins Ice Cream in 1963, I thought my University of Michigan law degree and membership in the California Bar would equip me well to work with our 31 Flavor franchisees.

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U.S.A. House of Representatives
June 24, 1999

Oversight Hearing on the Franchising Relationship
Larry I. Tate

United States of America
House of Representatives
Subcommittee on Commercial and Administrative Law

LARRY I. TATE

My name is Larry Tate. I am vice president of franchising for Golden Corral Corporation headquartered in Raleigh, North Carolina. Golden Corral is a privately owned company with 450 family restaurants in 38 states - 150 units are company owned and 300 are franchised. We are the largest and fastest growing "steak, buffet and bakery" chain in the nation opening a new restaurant on the average of one every nine days, with systemwide sales in 1998 of $861 million, an increase of 12% over 1997 sales.

I am pleased to have this opportunity to testify before the committee because franchising has been my life for the past 36 years. Starting in 1963 as general counsel for Baskin-Robbins Ice Cream, I have worked in senior management positions at Orange Julius International, Manpower, Inc. and Shakey's Pizza, in addition to my present employment for the past 15 years at Golden Corral.

As a franchisor, I helped others realize their dream of becoming business owners, by encouraging them, educating them, and providing them with experience and resources they needed to be successful. It has given me pleasure as a franchisor to see my franchisees leverage our joint efforts to help bring their personal and business goals to fruition.

In 1978 I left corporate life for six years, to fulfill my dream of becoming a franchisee owning and operating my own franchised business. After 15 years of coaching from the sidelines, I decided it was time for me to go on the field and realize that dream myself.

I left the ivory tower as executive vice president of Shakey's and from 1978 to 1984 I lived in Burbank, California, where I owned and operated four Shakey's Pizza restaurants in the Los Angeles area. I followed the franchisor's operating system and was personally deeply involved in the business everyday. I knew my customers and they knew me and I worked hard to meet and exceed their expectations.

I tripled the business and was named Franchisee of the Year. My experience as a franchisee was good, although there were some rubs when the franchisor opened new restaurants near my trading area. I might still be in Burbank with my restaurants were it not for the loss of my wife of twenty-four years to cancer and the need to begin a new life, which brought me to Golden Corral in Raleigh in 1984 where I established the Golden Corral franchising program.

I mention my background as both a franchisor and as a multi-unit franchisee for six years, because it has given me a unique perspective from both sides of the fence on the franchisee/franchisor relationship.

When I was beginning my career in franchising as general counsel for Baskin-Robbins Ice Cream in 1963, I thought my University of Michigan law degree and membership in the California Bar would equip me well to work with our 31 Flavor franchisees. In all candor, my lawyerly thinking was often at odds with the entrepreneurial spirit of small business owners and I quickly changed my mindset to respect and respond to franchisees' business needs and realities.

Today over 40% of all retail goods and services are sold through franchise systems. This percentage will soon be over 50%. Clearly business format franchising has been a resounding success. In 1960 franchising was a new and dynamic strategy for growth of small businesses. There were some abuses and questionable practices in the 1960's and 1970's. There were franchisee failures resulting from franchisor's being under-capitalized, poorly managed, or failure of the concept itself. There were a few dishonest and unscrupulous franchisors who solicited franchise fees from unsuspecting franchisees and disappeared with the money or failed to perform their obligations. Suits were filed based on contract fraud and misrepresentation in federal and state courts. Damages were awarded though not always collectible. Criminal charges were filed in extreme cases of fraud.

As a result, regulations governing the offer and sale of franchises were enacted at the federal level covering all 50 states. In addition certain states adopted their own requirements for the sale of franchises. Over time it became clear that obtaining full information about the franchisor and that company's business opportunity was the key to a prospective franchisee making an informed and intelligent decision. Often the prospective franchisee did not know the right questions to ask or could not rely on the truthfulness of the answer.

In 1979 after several years of debate, the Federal Trade Commission implemented rule 46 requiring franchisors to provide prospective franchisees with a disclosure statement called an offering circular containing specific information about a company's franchise offering. It contained the answers to all the questions a prospective franchise should ask.

The rule has two objectives: to ensure that prospective franchisees have sufficient information to make an educated investment decision, and to provide them with adequate time to do so with a ten day waiting period before signing.

Golden Corral Corporation strongly supports the current FTC disclosure rule. The rule requires comprehensive and very detailed information be provided. The Golden Corral Uniform Franchise Offering Circular is a 250 page document. We believe that no additional disclosure is needed beyond the all-inclusive 22 categories of information currently required, which are:

1. The Franchisor, Its Predecessors and Affiliates. A description of the business, including its name, place of business, products, affiliations, etc. over the previous 15 years.

2. Business Experience of the Franchisor and Its Executives. A background of the executive and sales people associated with the company.

3. Litigation History with Cases Identified by Court and Number. Any administrative, criminal, or civil action against the company or its executives.

4. Bankruptcy. History of bankruptcy by the company or its officials.

5. Initial Franchise Fee. Any recurring or isolated fees, including leases, royalties, advertising fees, training fees, etc.

6. Other Fees. Any recurring or isolated fees, including leases, royalties, advertising fees, training fees, etc.

7. Initial Investment. Including real property, equipment, inventory, etc.

8. Restrictions on Sources of Products and Services

9. Franchisee's Obligations to Franchisees to Purchase or Lease in Accordance with Specifications or from Approved Suppliers.

10. Financing Arrangements Available. Whether the franchisor or an affiliated company offers financing arrangements for the franchisee.

11. Franchisor's Obligations to Franchisees. Including training, advertising sign placement, store construction, remodeling, etc.

12. Territory Available for Development. Whether the franchisee has the right to develop additional stores in an area or whether the franchisor can open company stores in the area.

13. Trademarks Owned by the Franchisor

14. Patents, Copyrights, and Proprietary Information

15. Obligation to Participate in the Actual Operation of the Business

16. Restrictions on What the Franchisee May Sell. Whether the franchisee is limited in the goods or service it can offer or limited in the customers to whom it may sell its goods or services.

17. Renewal Termination, Transfer and Dispute Resolution. The term of the franchise agreement and terms under which it can be renewed, terminated, etc.

18. Public Figures Involvement if Any. Any public figures that promote or endorse the franchisor's goods or services and the amount of compensation given in return.

19. Actual, Average, Projected or Forecasted Franchisee Sales, Profits or Earnings (Optional). If given, it must have a reasonable basis.

20. List of Outlets With Names of Franchisees, Addresses and Telephone Numbers

21. Financial Statements Showing the Franchisor's Balance sheet and Income

22. Contracts - Copies of Each Document a Franchisee Will Sign

Prospective franchisees study and depend upon these key categories of information required by the Federal Trade Commission Rule, which is further expanded upon by a number of state registration laws.

The most effective way to choose a good business investment is to study the information in the disclosure document and to perform other due diligence contacts with current and former franchisees of that chain to determine their level of satisfaction. Then an intelligent and informed judgement can be made about that franchise business opportunity investment.

Bills have been introduced in Congress several times in this decade to further increase regulation of franchising and legislate changes in franchise agreements. These efforts have been well intended, but upon close review the fact is that existing laws and regulations are adequate to address abuses when they arise.

In recent years, Congressman La Falce of New York has several times introduced bills which contained a number of provisions to address franchisee issues and redefine the franchisor/franchisee relationship, which would have had the effect of substituting federally-mandated provisions for the terms and conditions of franchisee relationships now determined by the parties. These bills were not enacted.

In the second session in 1998, our neighbor Congressman Coble of North Carolina introduced another franchise disclosure and relationship bill, which was not considered. However, Congressman Coble indicated to me last week in a meeting with a group of North Carolina business people who were expressing grave concern about his bill, that he planned to reintroduce his bill this year.

H.R.4841 of the 105th Congress is virtually identical to legislation introduced by Representative La Falce which has been rejected after extensive hearings by every Congress since 1991. I'd like to address very briefly a number of the provisions in past bills that are likely to be reintroduced.

1. Private Right of Action in Federal Court - Create a private right of action in federal court for any "dispute" under the bill with no monetary threshold. For example, a disagreement over a restaurant inspection performed by a franchisor for quality, service and cleanliness could land in federal court claiming the rules were not applied in "good faith." Presently there is access to bring suit on contract issues for franchisor non-performance in federal and state civil courts for damages or specific performance and in criminal courts in extreme cases, in addition to complaints filed with the FTC.

2. Implied Covenant of Good Faith - A fundamental legal right in our democratic system of free enterprise is freedom to contract. When parties negotiate and agree upon and execute a contract, that contract determines and defines their relationship. The courts have consistently upheld this rule of law, declining to imply any term or provision as an addition to the agreement, where the agreement completely and specifically addresses an issue in the agreement itself.

Introducing the question of what is good faith in the inspection of restaurants, the collection of royalty fees and other financial obligations, the approval of franchisees to enter the system, the conditions under which a default is declared or an agreement is terminated will cause a proliferation of litigation and as many definitions of these issues as there are judges and juries. Application of "good faith" provisions of the Uniform Commercial Code regarding the sale of goods in interstate commerce are inappropriate in a complex franchise relationship.

3. Prohibits Locating a Future Unit Within Unreasonable proximity to Any Existing Units - No standard to follow here. Judge and jury must decide. Agreements in effect today either provide a specific protected area or clearly state the franchisor awards a license to a franchise at a specific site and reserves the right to locate future units at their discretion. The actual practice of a company in exercising this discretion is what the prospective franchisee must investigate before signing up.

4. Prohibits Franchisor From "Discriminating" Against Similarly Situated Franchisees - Franchisors need the flexibility to address franchisees needs on a case by case basis. A franchisor may agree to delay royalty payment in certain circumstance or allow a franchisee to sign a one year promissory note for royalties because of a temporary cash flow problem. In one instance at Golden Corral we loaned money to a franchisee whose business suffered a major downturn after a food borne illness incident over which he had no control.

Special arrangements of this kind may be curtailed or completely eliminated to our franchisee's disadvantage because of the risk of the franchisor being taken to federal court by other franchisees demanding special financial terms of loans claiming lack of good faith or discriminatory treatment.

There are many other provisions which are of concern but in the interest of time and space I will not address them today. There are tragic examples of franchisor abuse of the relationship and those companies should be held to answer for their wrong doing, but adequate remedies exist today in civil contract actions or class actions for damages in state or federal courts.

To sum up, my experience on both sides of the franchisor and franchisee relationship has shown me that additional government regulation of franchising is not needed. The changes proposed would instead become disruptive of existing franchise contracts, destabilize 40 years of franchise case law precedent and flood the federal courts with suits, further burdening existing small businesses and inhibiting the future growth of franchised small businesses which will limit opportunities for women and minorities to achieve their dreams of owning their own business. In short, if it ain't broke, don't fix it. Thank you.

Larry I. Tate
Biography

Larry I. Tate, Vice President of Franchising worldwide for Golden Corral Corporation, has responsibility for increasing franchisees' capital investment in the Raleigh, N.C. based family steakhouse system by more than $1 billion.

"Franchising is the major driver in achieving Golden Corral's vision of becoming the world's leading family restaurant system," Mr. Tate said. "We have awarded franchises for development of more than 500 new restaurants representing over $1 billion in land and facilities and an additional 700 markets have been earmarked for development by franchisees.:

Mr. Tate has more than 30 years experience in franchising and the foodservice industry and has been on both sides of the franchisor-franchisee partnership.

He was successively General Counsel, Vice President, and Chief Operating Officer of Baskin-Robbins Ice Cream in 1963-70 and a key factor in that company's early franchise expansion. Subsequently, he was a senior corporate officer with franchising, real estate, legal and other responsibilities at Orange Julius International, Manpower, Inc. and Shakey's Pizza.

From 1978 to 1984 he was the franchisee and operator of four Shakey's Pizza restaurants.

He joined Investors Management Corporation, the parent of Golden Corral, in 1984 and held a series of senior posts with it and GCC in development, financing, property management and franchising. During this period he established and launched the franchising program for Golden Corral and in April, 1990, was named to his present position.

Mr. Tate was born in Upland, California in 1935 and received a law degree from the University of Michigan. He is a Director of the International Franchise Association and a member of the California Bar, the American Bar Association and the International Bar Association. In addition, he is a past Distinguished President of Kiwanis, a director of the North Carolina Theater and past Chairman of the Raleigh Artsplosure Festival. He and his wife, Marilyn Maynard, who also is an attorney, make their home in
Raleigh, North Carolina.

http://judiciary.house.gov/legacy/tate0624.htm


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