April 30, 1997
RE: 16 CFR Part 436
The National Consumers League respectfully submits these comments in response to the Federal Trade Commission's notice on February 26, 1997 requesting public comment on whether it should revise its Franchise Rule. NCL is a private, nonprofit, membership organization representing consumers in the marketplace and the workplace since its founding in 1899.
NCL's Role in Fighting Franchise and Business Opportunity Abuses
For the last several years, NCL has taken an active role in educating consumers and advocating for appropriate consumer protections concerning fraud and deception perpetrated by telephone, including franchise and business opportunity fraud. In 1992, the League created the National Fraud Information Center, a unique hotline service through which consumers can get advice about telephone solicitations and report fraudulent or deceptive practices. The toll-free number is 1-800-876-7060.
In 1996, the NFIC expanded its services to cover scams in cyberspace. Through the NFIC web site at http://www.fraud.org, consumers can get general advice about both telephone and Internet solicitations, pose specific questions via e-mail, and report possible fraud and deception via an online complaint form.
Consumers' reports to the NFIC about suspect telephone and Internet promotions are uploaded daily to the data base maintained by the Federal Trade Commission and the National Association of Attorneys General. Reports are also distributed to over 160 individual federal, state and local law enforcement agencies. This information alerts agencies to matters which they may wish to investigate. It also aids law enforcement authorities in prosecuting fraud or deceptive practices and identifying victims.
In addition to operating the fraud center, NCL coordinates the Alliance Against Fraud in Telemarketing, a coalition that brings representatives from consumer protection and law enforcement agencies, consumer advocacy organizations, consumer helplines, businesses and trade associations together to learn about telemarketing and Internet abuses and share strategies for educating the public about them. NCL also conducts consumer education and advocates for consumer protection by working with the media, distributing publications of its own and from other sources, making speeches, participating in conferences, meeting with members of the relevant industries, and submitting regulatory and legislative testimony.
A. The Franchise Rule
1. There is clearly a need for the disclosures and other provisions of the Franchise Rule. Franchises and business opportunities were the 9th most frequent complaints (344) reported to the NFIC in 1996, an increase from 12th place in 1995. Furthermore, this category ranked 4th in Internet complaints (45) made to the NFIC last year. Problems that consumers reported with franchises and business opportunities included:
In 1996, the NFIC received complaints of losses from business opportunities and franchises ranging from $10 to $100,000. Since the consumers who have contacted the NFIC probably represent only a small number of those who have been victimized, it is fair to speculate that millions of dollars are lost each year to fraudulent or deceptive money-making schemes.
B. The UFOC Guidelines
2. Consumers need clear, comprehensive information about franchises and business opportunities, and the companies that offer them, in order to make informed decisions about investing in them. This information could be provided through a document that combines the strongest elements of the FTC and UFOC disclosure forms.
5. Because the experience of others who have purchased a franchise or business opportunity is the best indicator of potential earnings and other factors for prospective buyers, "gag orders" that prohibit people from sharing their experiences with others should be prohibited.
C. Business Opportunities
9. The most common types of business opportunities about which the NFIC received reports of suspected fraud and abuse in 1996 were: vending machines/display racks; pay phones; 900# businesses; real estate buying/reselling; coupon sales; travel services; and medical billing services.
10. Other types of business opportunities about which the NFIC received complaints in 1996 were: ATM machines; exotic animals raised for pets, food or other products; photo equipment and services; pre-paid phone cards and other phone services; off-shore money brokering; baseball cards and other collectibles; scholarship services; web site design services or advertising; janitorial services; game machines. The range of money-making possibilities continues to expand as technology and other factors lead to new types of products and services. For instance, the NFIC recently received a report of suspected fraud from a woman who invested in coin-operated Internet access machines, but never received them. Since abuse can occur with the promotion of any type of business opportunity, it would be unwise to categorize some as more prone to fraud and deception than others.
11. The $500 minimum investment that triggers the Franchise Rule for business opportunities leaves many consumers without the disclosures and other protections they need. Nearly one-third of the consumers who reported to the NFIC last year that they had lost money to fraudulent or deceptive business opportunities paid less than $500. Some losses were as low as $10 for COD delivery of an unsolicited business opportunity packet; others ranged from $50 to $300 to just under $500. Whatever minimum amount might be set, fraudulent operators will price their services below it, and consumers will still be victimized. As long as a solicitation meets the definition of a franchise or a business opportunity, it should be covered by the Franchise Rule, regardless of the amount involved.
14. The proposed FTC definition for "business opportunity" appears to adequately describe those types of solicitations.
16. While there may be clear distinctions with those involved in the trade for franchises and business opportunities, the consumers who contact the NFIC are unaware of the differences. Moreover, a review of the NFIC complaints received in 1996 reveals that more involve business opportunities than franchises. This indicates that the same pres-sale disclosures are needed for business opportunities as for franchises.
D. Trade Shows
18. Complaints to the NFIC indicate that consumers are solicited for franchises and business opportunities through the mail, by telephone, in print advertising, by television and radio, via the Internet and online services, and in person at trade shows and seminars. Trade shows lend an air of legitimacy to vendors who exhibit at them. We know of no reason why trade show operators should not continue to assume some liability for the actions of the companies to whom they sell space. They can easily obtain the same disclosure documents that consumers are entitled to. They can also check the companies' references with previous buyers, other trade show operators, and trade associations. These cautionary steps are not overly burdensome and protect the trade show operators as well as the people they invite to attend their events.
19. Disclosure documents should not only be displayed at trade show exhibits, but copies should be freely available for consumers to take with them. This would reduce the high-pressure tactics that are sometimes used to solicit consumers and enable them to thoroughly check out franchises and business opportunities before making any commitment.
E. Earnings Disclosures
22. The proposed statement that, while earnings representations may be made, they must be substantiated, would be very helpful in alerting consumers to the fact that they must not take such information at face value. Unsubstantiated earnings claims are one of the most common abuses that consumers report to the NFIC.
24. For the same reason cited above, consumers should be told that no representations about possible earnings should be made by the salespeople, if that is the case. In addition, it might be helpful to add that if any such claims are made, the consumer should report the matter to the franchise or business opportunity vendor, and to provide the name, address and phone number to which reports are to be made.
25. The Franchise Rule should clearly state that the notices about earnings referenced above do not create a safe harbor that would enable franchisors or business opportunity sellers to avoid responsibility for their salespeoples' actions.
F. New Marketing Approaches and New Technologies
30. The term "personal meeting" is irrelevant in an era where complicated and large investments may be made by telephone or even via the Internet. Even the term "substantive discussion" may not be adequately descriptive, since there may be no personal discussion involved. The most important requirement is for the disclosure document to be provided at least ten days before the consumer has committed to a franchise or business opportunity agreement.
31. While a franchise or business opportunity should be free to display the required disclosures on its web site, this should not meet the requirement for providing the consumer with a written disclosure document. A document posted in cyberspace can be quickly and easily changed or substituted.
No matter how the solicitation takes place, receipt of the disclosure document should be documented by asking the consumer to sign an acknowledgment if the document is provided in person, or sending it by registered mail, return receipt requested.
G. Self Regulation and Alternatives to Law Enforcement
33. In light of the fact that franchises and business opportunities rank so high in complaints made to the NFIC, reducing or waiving penalties for violations of the Franchise Rule seem inappropriate. Stronger civil penalties would hit con artists in the place they care about most; their wallets. Legitimate franchisors and business opportunity vendors are not usually the subject of complaints made to the NFIC or to law enforcement agencies.
Linda F. Golodner, President
Susan Grant, Vice President Public Policy