Jenkens & Gilchrist
2000 K STREET NW
WRITER'S DIRECT DIAL NUMBER
July 28, 1997
16 CFR 436
Donald S. Clark, Secretary
Re: Advanced Notice of Proposed Rule Making ("ANPR") Concerning FTC Rule Written Comments in Support of Oral Testimony Provided at July 28, 1997 Hearing Related to Trade Show Promoters
Dear Mr. Clark:
I work for the law firm of Jenkins & Gilchrist in their Franchise and Distribution Law Practice Group. Jenkins & Gilchrist is a full service firm with approximately 325 lawyers. Jenkins & Gilchrist, and in particular, its Franchise and Distribution Practice Group has significant experience in representing franchisors, franchisees, dealers, distributors, manufacturers, and suppliers in legal matters affecting their franchise and distribution relationships, including both national and international expansion. I have practiced exclusively in franchise and distribution law for the past seven year,.. Prior to that, I was Senior Franchise Examiner with the Maryland Division of Securities from 1985 to 1990. I am offering testimony and these written comments on behalf of CII Enterprises who is responsible for The American Franchise Exhibition, a trade show established for the promotion of franchisors, and a number of franchisors (American Fastsigns, Inc., Frullati Franchise Systems, Inc., Keller Williams Realty, Inc., and Schlotzsky's, Inc.)
The Federal Trade Commission ("Commission") in its ANPR has requested public comment on whether trade show promoters should be treated the same as "franchise brokers" under the Federal Trade Commission Trade Regulation Rule Concerning Franchise and Business Opportunity Ventures, 16 CFR 436 (the "FTC Rule"). In connection with the issuance of the FTC Rule, the Commission published interpretive guides to provide further description and assist franchisors in understanding the FTC Rule and complying with its obligations (the "Interpretive Guides"). According to the Interpretive Guides, an organizer or promoter of a trade show in which franchises and business opportunities are offered is a "franchise broker" within the meaning of the FTC Rule, because the promoter "arranges for the sale of franchises' (C.H. Bus. Franchise Guide 16219). Under the FTC Rule, franchisors and franchise brokers (including trade show promoters) are jointly and severally liable for violations of the FTC Rule. Thus, under the current definition, if a franchisor exhibiting in a trade show fails to timely provide a disclosure document, the trade show promoter could be held liable for such violation. While the FTC has not actively pursued such actions, many state consumer protection laws expressly provide for a private right of action where a breach of the FTC Rule has occurred.
We strongly recommend that trade show promoters be expressly exempted from liability under the FTC Rule. Promoters of franchise and business opportunity shows have little or no control over the actions and compliance of the franchisors and business opportunity sellers exhibiting at their shows. Further, unlike a broker who is directly participating in the sale of the franchise, the trade show promoter exercises no influence over the prospective investor in its decision to purchase any particular franchise. Therefore, the relationship of the promoter to the actual sale of the franchise is too tenuous to impose liability for noncompliance with the FTC Rule on the part of a franchisor. Moreover, in the event that trade show promoters are deemed liable for franchisor-exhibitors' violations of the FTC Rule, in order to protect themselves from such liability, promoters would, as a practical matter, be forced to police its exhibitors franchise sales activities. The cost of which would be exorbitant in relation to the incremental benefit, if any, resulting from their enforcement efforts. These incremental costs would have to be passed on to the franchisors exhibiting and the prospective franchisees attending the trade show.
The ANPR also questions whether the Commission should amend the FTC Rule to contain a separate trade show provision or amend the definition of "first personal meeting" to require franchisor-exhibitors and their agents to have a specimen copy of their disclosure document or a letter explaining why they fall within an exemption or exclusion from the FTC Rule available for public inspection at the trade show. This suggestion is impractical in a number of respects: 1) making the offering document available to prospective franchisees at the booth for review will likely trigger substantive discussions concerning the sale of a franchise resulting a first personal meeting requiring the franchisor-exhibitor to provide the offering circular to the prospective franchisee on the trade show floor and have the receipt signed, when such in depth conversations would not have otherwise occurred; 2) given the size of the booths and traffic patterns at trade shows there is very limited space for persons to sit down or to stand to the side and take the time to review the documentation in any meaningful manner to derive any benefit from the opportunity; and 3) it would be a distraction and may be a significant waste of time to require a franchisor's sales personnel to supervise the review of the offering documents by every person who may wish to review the document, particularly since many people attending such trade shows have no present intention to purchase any franchise at all and may not qualify to purchase the particular franchise, thus taking time away that could- be better spent with qualified prospects. Thus, requiring such documents be available for review on the trade show floor would create formal legal events, requiring delivery of the offering documents and execution of receipts, thereby changing the character of what would generally be an informal non-substantive discussion. This would be contrary to the legitimate interests expressed in the Interpretive Guides to permit franchisors "by using common sense precautions... [to] defer the first personal meeting until such time as they are prepared to provide the required disclosures."
The FTC Rule currently requires the delivery of the offering circular at the earlier of the first personal meeting for the discussion of the sale of the franchise or ten business days prior to payment of any consideration or execution of any binding agreement. There would be little benefit for prospects to have such information in advance of any substantive discussions, particularly since the prospect should ultimately receive the same information in a timely fashion for compliance with the FTC Rule. The purpose of the FTC Rule's disclosure requirement is to ensure that prospective purchasers of a franchise have the required information with sufficient time to afford them the opportunity to make an informed investment decision. We do not believe that either creating a new provision to the FTC Rule requiring such documents be made available for inspection at trade shows, or changing the definition of "personal meeting" to require the same, would provide any substantial benefit to prospective franchisees. Therefore, we respectfully suggest that no such changes be made.
For the most part, discussions on a trade show floor are very preliminary and are limited to the general description of the concept and the costs involved. Such conversations may rise to the level of the first personal meeting when the parties have discussions concerning the specific sale of the franchise to that particular person. However, typically such conversations take place off of the trade show floor. Further, there are usually numerous subsequent conversations that would trigger delivery of the disclosure document and provide the prospective franchisee sufficient time to analyze the investment before the actual sale takes place (at a minimum ten business days from receipt of the offering documents). Therefore, even if the conversations do become rather detailed on the showroom floor there is little risk to the prospective franchisee that the later disclosure would not remedy. Therefore, we also respectfully request that the FTC give further guidance that discussions on the trade show floor generally would not be considered a first personal meeting for the discussion of the sale of the franchise, unless the specific terms with regard to the sale of that franchise to that particular person are being discussed, and that until such occurs, there is no duty to deliver the disclosure document.
Mark B. Forseth