Brown & Stadfeld
June 25, 1997
Attention Staff Contact: Steven Toporoff or Myra Howard
Re: Possible Pre-Sale Rule Amendments
I strongly believe that the Pre-Sale Disclosure Rule should remain applicable to the sale of a franchise by a domestic franchiser or its foreign agent, for location in a foreign country.
Please add my enclosed comments to your record.
Application of FTC Pre-Sale Disclosure Rule to Sale of Foreign Franchises
[a] Statutory Power Related to Foreign Activity
The application of the FTC Disclosure Rule to the sale of foreign franchises, starts with examination of the statute. The Robinson-Patman Act expressly limited its prohibition of discrimination to sales of products in the United States. That contrasts with the language of section 5 of the FTCA that applies to acts or practices "in commerce." Without question, the statute is therefore applicable to all commerce as distinguished from noncommercial conduct. When Congress intended to limit the coverage to domestic activities, it did so in clear language.
For antitrust restrictions, also covered by the FTCA, it has been affirmed that American jurisdiction covers pricing violations that occurred in a foreign jurisdiction, this time Japan, because they were intended and did have substantial anticompetitive effects within the United States. In a case of first impression, it was ruled that any other result would encourage price fixers to do their nefarious conspiring in foreign territory in order to influence competition in U.S. markets. The defense of comity was rejected in this age of international commerce where there are immediate competitive reverberations around the globe. The assertion of American power is of historical importance because cartels have long flourished in foreign countries. Those entities often consisted of groups of competing enterprises that horizontally controlled production and prices for products sold in the United States.
The authority of the FTC over foreign conduct has been confirmed in many other references. The decision of the First circuit on horizontal pricing conspiracies in Japan, appears applicable to section 5 of the FTCA primarily addresses the same antitrust concerns. It must be assumed that the same considerations affect the remainder of section 5.
[b] Rise of Foreign Activities in Many Franchise Contexts
For franchising, the coverage of foreign activity can be a significant factor due to the surge of acquisition of American franchisor systems by foreign purchasers. It may also be difficult for such foreign parents to shield themselves from antitrust liability like tying or pricing through the use of layers of corporate entities. The same principles would appear to apply to other federal and state laws in general and to franchise protection laws in particular.
Another issue of foreign ownership is involved where an American franchiser has been acquired by a foreign parent. That issue would also be important in the ultimate resolution of recovery against a major American franchiser for a variety of common law violations, including breach of fiduciary duties and especially a state "little" FTC Act.5 The FTCA counterpart to the antitrust laws has been uniformly applied to include the prohibition of anticompetitive practices that have an impact on domestic markets.
[c] Applicability of FTC Franchise Rule to Foreign Transactions
Some have questioned whether the FTC Franchise (Pre-Sale Disclosure) Rule applies to the sale by a U.S. franchiser of a franchise that will be located in a foreign country. The question is accentuated by the fact that foreign countries generally provide little or any protection for local franchisees either in pre-sale disclosure or conduct control.
Three categories of sale may be involved, namely, (1) sale in the U. S. of a franchise to be located abroad; (2) sale of franchise made in a foreign country for operation abroad; and (3) sale of a franchise in a foreign country that may be or eventually is located in the U. S. It is also possible to make a distinction based on whether or not the buyer is an American citizen or resident.
There is little doubt that U. S. law can constitutionally apply to all of those cases because of the weighty amount of U.S. contacts that each of the foreign franchisees will have with their United States franchisor from the first contact and throughout the life-time of the franchise. Those relationships far exceed the constitutional requirement of "minimum contacts." More significantly, they demonstrate that the heart of the franchisor franchisee relationship involves joint activities of the franchisor and all of its franchisees in the U. S. Every aspect of the franchise is created, monitored, instructed, modified, and operated by the franchisor within the U.S. or by its agents acting abroad with constant interaction between all of its foreign and domestic franchises. All of the franchisees, both domestic and foreign, operate as a single family with intra-performing synergistic accomplishments.
In many franchise systems, the surge of international franchising has challenged or exceeded U.S. operations. The operations of foreign franchisees will directly impact domestic dealers, both in marketing and in physical participation. For example, a domestic franchisor appropriately complained that the poor operations of its multi-unit foreign franchisee seriously damaged its U.S. goodwill.
It is obvious that prospective foreign franchise locations are equally in need of pre-sale disclosure. As with possible state law conflict, the regulations can be made effective unless there are equal or superior foreign local requirements. All of these elements should be considered where the FTC reviews the foreign application of its controls.