F.T.C. Public Comment 40

I do not believe that franchisors should use ""gag orders"" to inhibit former or existing franchisors from speaking with prospects.


U.S. Federal Trade Commission
April 1, 1997

Public Comment
Harold L. Kestenbaum, Attorney

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

Comment #40

Attorney At Law
MINEOLA, NEW YORK 11501-4366
(516) 873-6161
FAX (516) 873-6163

Federal Trade Commission
6th Street and Pennsylvania Avenue, N.W.
Washington, D.C. 20580

Re: 16 CFR Part 436


My name is Harold L. Kestenbaum. I am a practicing attorney who specializes in franchise law. I have responded to Federal Trade Commission ("FTC") requests for documents before (see Attachment 3, Comment 14).

I have chosen to present my comments and suggestions to many of the questions posed by the Commission. I will respond to the questions in order. I will only present my views on questions that I believe are relevant.

A. The Franchise Rule

1. In my opinion, there is a continuing need for the Rule, although it is my opinion, and has been for many years, that there should be a federal filing requirement much like that of the Securities and Exchange Commission. This would create uniformity that clearly does not exist now. Each state arbitrarily determines what it deems important, thereby totally disregarding the "uniformity" that was intended by the new UFOC guidelines.

B. The UFOC Guidelines

2. It is obvious that the FTC should revise the Rule to conform to the UFOC guidelines, just to be uniform. I am not certain that there would be any cost to franchisors since the majority of the franchisors use the UFOC format.

3. I am not certain that revising Item 3 to require franchisors to disclose lawsuits it brings against its franchisees would have a great impact upon prospective franchisees. Litigious franchisors simply show that they are willing to enforce their agreement. It does not necessarily mean that they are bad franchisors. Again, I see no cost factor either way.

4. No comment.

5. I do not believe that franchisors should use "gag orders" to inhibit former or existing franchisors from speaking with prospects.

6. I think the FTC should retain the three year phase in of financial statements for new entrants.

7. One item of disclosure that needs to be addressed, particularly as applies to new franchisors, is the computer disclosure. At the time of preparation, many newly formed franchisors are not certain which computer system or software they expect to have the franchisees use. Provision should be made for these new franchisors. The existing guidelines were written with existing franchisors in mind, not start-ups.

E. Earnings Disclosures 20. The answer to this is simple. The rule is clear as are the UFOC guidelines. Earnings claims can be made if the franchisor wants to.

F. 26. This is an issue that I have strongly advocated that the Rule not apply to sales made to franchises to be operated outside of the United States. The language can be simply stated as follows: "The FTC rule does not have application on sales made to persons or entities whose franchises will be located outside of the United States, its possessions or territories. " It is my opinion that this exclusion will decrease the enormous expense involved in rewriting UFOC's to be relevant to an international transaction.

27. In light of the current technological advances that have been made and that are continuing to be made, the suggestion being made, i.e., replacing "personal meeting" with "first substantive discussion" is a viable one. However, the need to specifically define just what this is crucial. A suggestion is to define it as follows:

"The first serious discussion between a franchisor and franchisee during which time the franchisor presents the relevant terms of the offering, to the franchisee. "

Excluded from this definition would be the simple dissemination of sales materials containing such relevant information.

29. With respect to what are called co-branded franchises, it is my opinion that a franchisee of one concept, e.g., Subway, that is offered an opportunity to take on a TCBY yogurt brand franchise should receive a TCBY UFOC, which document should include information regarding this "co-branding" concept. Each franchisor who offers this type of arrangement should include language in its UFOC document which reflects this concept. It is not necessary for a franchiser to have to prepare a different or separate UFOC document for this type of relationship.

The costs involved in requiring a franchiser to prepare a separate document that recognizes this association would be very costly to a franchisor, particularly as it relates to legal fees and filing costs.

30. The only suggestion that I could make regarding this issue would be to provide for mitigating circumstances. For example a company may not know what a franchise is or that the Rule exists.
When a franchiser can prove this, then a reduction or waiver of civil penalties should be considered.

Very truly yours,

Harold L. Kestenbaum



For Review, see FTC “Table of Commenters”

Brought to you by WikidFranchise.org

Risks: F.T.C. Public Comments, United States, 1997, Ban gag orders, United States, 19970401 Comment 40

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License