F.T.C. Public Comment 19

We do not favor mandatory earnings claims, because, among other reasons, many franchisors do not have enough reliable data to provided such information in any form. This is often because reports from franchisees are unavailable or unreliable.

FTC.jpg

U.S. Federal Trade Commission
April 19, 1997

Public Comment
Gary R. Duvall, attorney

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

Comment #19

From: Duvall, Gary R. GD1!SEATTLE!moc.liamtta.nnudmrg|DRG#moc.liamtta.nnudmrg|DRG

To: HQ.HQ02(franpr)

Date: 4/26/97 12:45pm

Subject: Comment on FTC Franchise Rule Revisions

TO: Federal Trade Commission

FROM: Gary R. Duvall

REGARDING: Request for Comment on FTC Rule, dated February 26, 1997

I am an attorney with 19 years' experience representing franchisors and franchisees. I am an active member of both the American Bar Association Forum on Franchising and the International Franchise Association's Legal-Legislative Committee. I have solicited comments as well from about 30 of our clients, primarily franchisors.

Eliminate the FTC Rule Format in Favor of UFOC Format.

We agree with the suggestion that the FTC adopt the UFOC format, but only if internal inconsistencies and other flaws in the UFOC format are corrected. The changes to the UFOC format that should be adopted are:

A. Phase-in requirement of audited financial statement similar to existing FTC Rule. Unlike a securities investor, a prospective franchisee does not consider financial statements the centerpiece of the investment decision. The franchisee is purchasing training, ongoing support, marketing and a use of a trademark, not equity in the franchisor. Money first-year franchisors spend on auditors' fees would be better spent on franchisee training and support.

B. Updating required currently in the UFOC as of the end of the "fiscal year", in items 5, 8, 11, and 20, should be required 90 days after the end of the fiscal year. Authors of the UFOC Guidelines have told us that this was what was intended. It is impractical to update these items on the first day of the fiscal year just ended.

C. Eliminate internal inconsistencies:

  • Item 3 B is inconsistent with instruction 3 ii, last sentence. May a franchisor disclose cases that are resolved favorably? (Franchisors should be able to disclose these, as it is too difficult to define dismissal without any liability and distinguish it from a settlement where both parties received some benefit.)
  • Item 8, first sentence, is inconsistent with 8 E. Are the percentages to include only required purchases or also approved purchases? (Since nearly all purchases are approved, required

purchases is a more meaningful number.)

  • Item 21A reference to interim unaudited statements are only to "submit" to state, but other references are to financial statements to be attached to the offering circular. (Interim unaudited statements should not need to be attached unless they are materially different than the latest attached audited statements.)

D. Allow franchisors to opt out of the lengthy and redundant charts for items 9 and 17, if they provide a detailed table of contents or index to their franchise agreement.

E. Eliminate redundant and duplicative statistics required in Item 20, by simplifying categories.

2. Business Opportunities. No comment.

3. Conditional Exemption for Trade Show Promoters.

We favor continuation of the conditional exemption, and no further change to the Rule.

4. Earnings Disclosure.

We favor the Commissions minor proposed modifications to the earnings disclosures. We do not favor mandatory earnings claims, because, among other reasons, many franchisors do not have enough reliable data to provided such information in any form. This is often because reports from franchisees are unavailable or unreliable.

5. International Sales.

We support clarification that pure outbound franchise sales are not with the FTC Rule. Pure international sales are not currently and should not in the future be within the FTC Rule. See
article, co-authored by the undersigned, in the ABA Franchise Law Journal, Vol. 15, No. 2, Fall 1995, and Vol. 15, No. 4, Spring 1996. Appropriate language for such a clarification, to be added to the FTC Interpretive Guides, or as an Informal Advisory opinion, is:

"The FTC Rule's intention is to protect U.S. franchisees. It is not the FTC Rule's intention to put U.S. franchisors at a competitive disadvantage in their international franchising efforts in so doing. Therefore, the FTC Rule does not apply to an offer or sale of a franchise to a foreign prospective franchisee for a franchise to be located entirely outside the U.S. In mixed transactions, such as the offer to a U.S. citizen of a franchise to be located outside the U.S., the Rule will govern only if the
franchisor's franchising activities result in a substantial and continuing impact on U.S. commerce." (This is the test under the FTC Act cases.)

"Personal Meeting":

It is not advisable to change this term to "substantive discussion". The occurrence of a "personal
meeting" is only one of three events that give rise to disclosure (the others being 10 days prior
to signing an agreement and 10 days prior to paying money). No state franchise disclosure law
has such a requirement. In fact, eliminating the requirement of delivery at a personal meeting
altogether is a possible solution.

The most important protection is that a franchisee has 10 business days to read the offering
circular before buying. To require delivery at a "substantive discussion" requires franchisor
employees and agents to carry multiple offering circulars and receipts with them at all times in all
places, in case a casual, social or unrelated business discussion turns "substantive".

A better solution is to use the term "offer", and define the term (as under most state disclosure
laws), as a formal written or oral offer to sell a particular franchise to a specific franchisee,
available for immediate acceptance by the franchisee. This is what we propose. This alleviates
concern about an online or internet offer, because the offeree would receive the offering circular
at the time of an electronic "offer" (as defined above), and 10 business days prior to a
sale or payment.

"Earnings Stream" and "CoBranded" franchise issues. No comment.

6. Waiver of Civil Penalties. No comment.

Respectfully submitted,

Gary R. Duvall
Graham & Dunn
Seattle, WA
moc.nnudmaharg|llavudg#moc.nnudmaharg|llavudg
(206) 340-9668

CC: FTC.SMTP("grmdunn.attmail.com!GD1!SEATTLE!grmdunn!…

For Review, see FTC “Table of Commenters”
http://www.ftc.gov/bcp/franchise/comments/tabcomm.htm


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Risks: F.T.C. Public Comments, United States, 1997, American Bar Association, Forum on Franchising, International Franchise Association, IFA, False earnings claims, United States, 19970426 Comment 19

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