Franchisor buys right to declare victory

“If franchisees are forbidden to discuss the lawsuit, what good is disclosure? Gag clauses are completely contrary to the entire framework of franchisor disclosure laws. That’s the whole point of Item 20 in the UFOC. Otherwise, prospective buyers are kept in the dark.”…Seldom, if ever, are the International Franchise Association’s codes of ethics truly put to a test.

Franchise Times
March 1, 2002

Franchisor buys right to declare victory
IFA Code of Ethics could have teeth
Janet Sparks

What’s wrong with this picture?
In a recent American Franchisee Association Blast Fax, franchisee attorney Robert Zarco presents the scenario of a franchise case settling in the middle of a trial. Part of the confidential settlement agreement allows the franchisor to purchase the franchise at a significant premium in excess of the fair market value. In exchange, the franchisee agrees to concede liability. So, everyone is happy – the franchisee, the franchisor and the attorneys. But what’s wrong with this picture?

According to Zarco, a lot. He says in the article, “In other words, the franchisor buys the right to publicly declare victory.” But by doing so, the information, which then is published in the company’s UFOC disclosure documents, is misleading to prospective buyers. Although the FTC requires franchisors to accurately, clearly and concisely state the information of the case, the franchisor, according to Zarco, can “put their best spin on their litigation experience with the franchisee, which will hurt prospective or renewing franchisees.

Steven Toporoff, FTC franchise program coordinator, says the Rule requires settlement disclosure and at some point you have to go by what the court finds. “You can’t go behind that to see if anything else is going on,” he says.

But Dale Cantone, Maryland’s assistant attorney general, securities division, feels this is the reason it is important for government attorneys to communicate with franchisee attorneys. “These practices may not be apparent,” he says. According to Cantone, it also demonstrates why prospective buyers should speak to as many franchisees as possible who are listed in a lawsuit to find out the details when possible. But “confidential settlements” bring up other issues. As Cantone related, “If franchisees are forbidden to discuss the lawsuit, what good is disclosure? Gag clauses are completely contrary to the entire framework of franchisor disclosure laws. That’s the whole point of Item 20 in the UFOC. Otherwise, prospective buyers are kept in the dark.”

Will IFA ‘code’ be put to the test?
Seldom, if ever, are the International Franchise Association’s codes of ethics truly put to a test. But according to Jerry Wilkinson, founder of Franchise Recruiters LTD, his victory in a long-running dispute over an Internet domain name, “franchiserecruiters.com,” did just that. When the World Intellectual Property Organization Arbitration and Mediation Center handed down its decision last May, finding that Franstaff Inc. had “used the disputed domain name in bad faith,” the name was transferred back to Wilkerson’s company. He could also file a complaint against Franstaff, under the IFA’s Suppliers Code of Ethics.

According to Wilkerson, IFA officials told him that he could bring action against Franstaff, under these conditions. Wilkerson feels that the strong wording in the WIPO decision would be proof that Franstaff had breached the Supplier Code of Ethics.

So, will Wilkerson file a complaint? “No, all I ever wanted was my (domain) name back. It was never my intention to cause him harm or get money from him.” Wilkerson admitted the entire process, including putting his company into a position to fight the case, cost approximately $25,000 to $28,000.

Janet Sparks is the former publisher of Continental Franchise Review, an industry newsletter that covered the franchise community for more than 30 years, before being acquired by Franchise Times Corporation. Janet, an advisor and freelance writer, can be reached at 303-799-7398 or at e-mail address moc.semitesihcnarf|skrapsj#moc.semitesihcnarf|skrapsj.


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