F.T.C. Public Comment 27

I regularly uncover lies being told about my client's company to prospective purchasers by competing companies in an effort to get their business. I find myself writing threatening letters demanding that these fabrications stop.

FTC.jpg

U.S. Federal Trade Commission
April 29, 1997

Public Comment
Richard T. Catalano, attorney

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

Comment #27

April 29, 1997

Secretary
Federal Trade Commission
Room 159
Sixth Street & Pennsylvania Avenue N.W.
Washington, D.C. 20580

Re: Comments re 16 CFR Part 436

Dear Secretary,

I am an attorney practicing in Florida in the area of business opportunity law and am a member of The Florida Bar's Franchise Law Committee. I am writing to you in response to your Advance Notice of Proposed Rulemaking regarding proposed changes to the definition of "business opportunity" under 16 CFR Part 436.

I am presently corporate counsel for a nationwide seller of business opportunities. I deal each day with the issues of disclosure required by the States which require a disclosure document for business opportunity sales. I write you to express my strong opposition to the proposed expansion of the definition of "business opportunity" in the manner proposed in the Advance Notice of Proposed Rulemaking. My main areas of opposition follow.

1. State Coverage Already in Place. The States that have chosen to regulate the sale of business opportunities have already done so. The legislatures of these States have looked at the business opportunity laws of other States and have fashioned their own law in this field based on the input from the people of their State through their duly elected representatives. As you know, the Disclosure requirements of State business opportunity laws are quite different from that mandated by The Rule. If the States had wanted the sale of business opportunities in their State to be governed by the requirements of The Rule, they could have simply stated so in their statutes and would not have taken the time to write their own laws. The proposed expansion of the definition of "business opportunity" would render the laws of all of these States a nullity since it is so broad, it would clearly preempt all currently applicable State laws on the matter.

2. Disclosure Requirements of "The Rule" Far More Onerous.

While many of the Disclosure requirements of The Rule are similar if not identical to those required by many of the States for the sale of business opportunities, certain disclosure requirements of The Rule have been deliberately avoided by the States. The most flagrant example is that of 436(a)(16) regarding the franchisor's recent franchising history.

While many States have adopted the requirements of 436(a)(16) (i) requiring the disclosure of the total number of franchises operating at the end of the preceding fiscal year, very few have embraced the sweeping disclosures required by 436(a)(16)(iii). This provision of The Rule mandates that the franchisor disclose the names, addresses and phone numbers of (A) the 10 franchised outlets of the named franchise business nearest the prospective franchisee's intended location; or (B) all franchisees of the franchisor, or (C) all franchisees of the franchisor in the State in which the prospective franchisee lives or where the proposed franchise is to be located. I would submit to you that there is a reason why so many of the States which regulate the sale of business opportunities have not included this requirement in their statutes.

It is my feeling that the legislatures of these States realize that this type of information is extremely sensitive, confidential and proprietary business information of the business opportunity seller. In what other enterprise must a company publish a comprehensive list of the names, addresses and phone numbers of its customers? On what basis is it fair to single out sellers of business opportunities for this requirement? Most every business in America guards its list of customers with all types of safeguards including but not limited to elaborate security systems, computer passwords, written covenants not to compete and non-disclosure agreements.

Under Florida law, the type of customer information which would be required to be revealed by Rule coverage is a protected "trade secret." Florida Statute 688, the Uniform Trade Secrets Act, defines a "trade secret" as "information, including a formula, pattern, compilation, program, device, method, technique, or process that:

(a) Derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and

(b) Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy."

A list of the names, addresses and phone numbers of each and every customer of a business opportunity seller is exactly the type of "compilation with independent economic value" that this statute seeks to protect. The misappropriation by anyone of this type of confidential business information in Florida brings civil liability under Chapter 688 as well as criminal liability under Florida Statute 812.081 dealing with the theft of trade secrets making it a third degree felony. A copy of these statutes are enclosed for your review.

Florida's Sale of Business Opportunities Act, Chapter 559.80 et. seq., does not mandate the revelation of the names, addresses and phone numbers of the customers of any business opportunity seller. If it did, it would fly in the face of Chapter 688, the Uniform Trade Secrets Act as well as Florida Statute Section 812.081 dealing with theft of trade secrets. The proposed expansion of the definition of business opportunity would force all sellers of business opportunities in Florida to give up the protections currently afforded them under Florida law and reveal these trade secrets nationwide.

The proposed new definition of business opportunity would subject all sellers of business opportunities to disclose this sensitive information to each and every person throughout the country who simply requests a package of information on their business opportunity.

Rule coverage due to the new definition would allow unscrupulous competitors access to the customer base of legitimate business opportunity sellers. These individuals would have a "field day" contacting customers of other sellers attempting to sell them competing products and services. Worse yet, the mandatory disclosure of names, addresses and phone numbers would invite these same individuals to engage in campaigns of misinformation about the targeted business opportunity seller, spreading lies and distortions about an otherwise legitimate seller.

While it may seem that the probability of these kinds of things happening is remote, I would respectfully take issue. I regularly uncover lies being told about my client's company to prospective purchasers by competing companies in an effort to get their business. I find myself writing threatening letters demanding that these fabrications stop. I am not exaggerating when I tell you that the prospect of the names, addresses and phone numbers of all of my client's customers falling into the hands of competitors horrifies me. The proposed expansion of the definition of "business opportunity" would make this nightmare into a reality.

I understand that the competing concern is to allow prospective purchasers the opportunity to speak to current operators before they purchase a business opportunity so that they may a fully informed decision. However, legitimate companies furnish references to prospective purchasers to enable them to ask any questions they desire. If a seller of business opportunities is unwilling to furnish references to a prospective purchaser, the prospective purchaser can walk away and choose not to do business with them. Competition and the marketplace take care of these matters without the need for more government regulation.

3. Infringement on Right to Privacy of Prior Purchasers. If the proposed new definition of "business opportunity" is put into law and the names, addresses and phone numbers of all prior purchasers disclosed, this would be a serious infringement on the privacy rights of those prior purchasers. These prior purchasers bought a business opportunity. No one told them that by purchasing their business they would be deemed to have consented to having their name, address and phone number included on a list given out across the country every day for interested parties to contact. For every person who inquires into a business opportunity, only a small percentage actually purchase a given opportunity. However, a large portion of these interested parties call the references given by the seller as part of a due diligence period to see if the opportunity is something they want to pursue.

The proposed change would subject all prior purchasers to an unknown number of phone calls each and every day seeking information on the business opportunity. Granted, many would be happy to discuss it with them. However, I would submit that many of these persons would be extremely annoyed and upset with the party who sold them the opportunity thinking that they were selling their name as part of a mailing list. These purchasers did not volunteer to act as references. They are busy trying to run their own business. The proposed change in the definition of "business opportunity" would "draft" them into the position of acting as a reference whether they like it or not.

4. Difficulties With Compliance. Rule compliance will significantly increase administrative burdens on sellers nationwide. Providing the lists of existing licensees as required by 436(a)(16)(iii) would work a hardship on all sellers. One must understand the magnitude of what is being proposed. Many business opportunity sellers get well over five hundred (500) inquiries each and every week, some over one thousand (1,000). Most sellers would choose to give out as little information on their customers as possible and would most likely opt to provide the names, addresses and phone numbers of the 10 closest licensees to the prospective purchaser's location. Imagine having to research and produce this information for between 500 and 1,000 inquiries each week! The only alternatives would be to provide their most sensitive, confidential business information in the form of a complete customer list for the whole country or for an entire State. This is a "no-win situation."

In summary, I think my position is best summarized in the phrase that "enough is enough." The States have chosen to regulate the sale of business opportunities as they see fit. It is up to the enforcement agencies of the States to police these matters, assure compliance and take appropriate action. There is simply no need for preemptive federal legislation that would render moot the existing business opportunity laws of the States which would mandate the disclosure of trade secrets and confidential and proprietary business information. I urge you to reject the proposed new definition of "business opportunity" and let the law stand as is. Thank you for your consideration of my concerns.

Very truly yours,

Richard T. Catalano

encl.

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, Lawyers issue threatening letters, Talk to former franchisees, United States, 19970429 Comment 27

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