March 31, 1997
Attention Staff Contact: Steven Toporoff or Myra Howard
Re: 16 C.F.R. Part 436 FTC File No. 954402
I hasten to bring to your attention the March 17, 1997 decision of the First Circuit Court of Appeals in U.S. v. Nippon Paper Industries Co., Ltd. The court reversed the district court's grant of a motion to dismiss because "all of the events" took place in Japan. It relied on the alleged facts that the conduct was intended to, and did in fact, have an effect on competitive conditions in the United States. I believe that this confirms the FTC's statutory authority not only over antitrust matters, but also the entire spectrum of sec. 5(a) of the Act.
The issue is whether the FTC should reform its Franchise Rule to exclude from its coverage prospective franchisees that intend to do business solely in a foreign jurisdiction. I contend that such a self-restriction would be unwise and unfair. The matter calls for serious examination rather than any predilection as to the result.
As for "doing business" in the franchisor's jurisdiction, the Supreme Court enforced a contractual choice of venue in the franchisor's state because of the extensive activities in that geographic area by an out-of-state franchisee.(1) Relying in part on the then edition of my book, "Franchising: Realities and Remedies," (Law Journ. Sem. Press), the court required Ohio franchisees to litigate in Florida. It found far more than the "minimum contacts" constitutionally required.
The identical relationship exists between a U.S. located franchisor and its franchisees all over the world. Just for basics, the typical contractual choice of U.S. venue in the franchisor's state would be enforceable. Beyond that, the court would likely enforce some aspects of a contractual choice of law in the franchisor's location. Every franchisor would vigorously seek the enforcement of such covenants. In effect, the entire franchise agreement could be enforceable under such a choice of local law.
To the extent that the franchisor engaged in breach of contract or tortious conduct under applicable federal or state common or statutory law, the franchisee's claims would probably be governed by the "law of the place where the conduct occurred." Much, if not all, of the pre-sale conduct may have occurred in the franchisor's location, as would a wide range of its ensuing relationship and support activities. This would include both pre- and post-opening events like training, supervision, advertising, purchases, administrative matters, and even dispute resolution. It would assuredly include regular payments for royalties and other fees, for products, for services, and for other specified contractual events like renewal, etc.
It would be incongruous to relieve franchisors of responsibilities under the Franchise Rule while continuing to subject the foreign franchisee to conduct enforceable in the U.S. under local laws. Further, the FTC should not summarily deprive itself of jurisdiction over such matters.
In addition to these universally applicable circumstances, there are many examples of equal or greater consequence. Of immediate concern would be the purchase of such franchises by a U.S. resident for operation beyond its borders. The franchisee's foreign activities could readily have both anticompetitive as well as tortious impact in the U.S. under sec. 5(a) of the Act. There could also be "combined" franchises involving the sale of franchise rights to a U.S. resident for operation both in the U.S. and abroad.
An important aspect involves the needs of the "foreign" franchisee both in acquiring and operating the franchise. Some of these questions were intimately involved in McDonald's Illinois state court litigation against its nationwide franchisee operating in France, with extensive discussion and application of Illinois law. If a foreign franchisee is subjected to "violations" of the Franchise Rule, the FTC would clearly have jurisdiction over the franchisor's conduct in the U.S. and probably elsewhere. The adoption of the NAFTA treaty, plus similar counterparts, lends policy support for universal protection against U.S. franchisors.
We do not perceive any special burden on the FTC in the enforcement of the Franchise Rule against U.S. franchisors based on their extraterritorial activities. It would be quite simple for the Commission to obtain discovery, trial, and enforcement of both administrative and judicial orders involving the U.S. franchisor. We do not know of any statutory or legislative history that would curtail such FTC jurisdiction.
1. See, Burger King Corp. v. Rudzewicz, 471 U.S. 462, 85 L.Ed.2d 528, 105 S.Ct. 2174, 2187 (1985); Vons Companies, Inc. v. Seabest Foods, Inc., Cal. Sup. Ct. No. S049039 dec. Dec. 12, 1996.