April 16, 1997
Federal Trade Commission
Via Email firstname.lastname@example.org
RE: 16 CFR Part 436; Comment to Proposed Rule Making
To Whom It May Concern:
The following are my comments to certain questions posed in the advanced notice of proposed rule making seeking public comment on proposed revisions to the FTC franchise rule (published February 28, 1997):
1. Should the Commission modify the litigation disclosures to require franchisors to disclose lawsuits filed by franchisors against franchisees? As a practical matter, any material litigation initiated by a franchisor against a franchisee may well result in a counter-claim by the franchisee (as a defensive measure if nothing else). Therefore, I believe most material litigation between franchisors and franchisees are currently disclosed regardless of who initiates the lawsuit. Thus, I do not believe the proposed modification would significantly alter the practical response to Item 3. However, if the Commission eliminated the materiality threshold, disclosure could become significantly more burdensome in that arguably even minor operational defaults should be disclosed. Therefore, I suggest that in any event the materiality standard be maintained.
2. Should the Commission modify the Rule to require all franchisors to make the following prescribed statement....? While I agree that mandatory earning claims are extremely problematic for the reasons set forth in the advanced notice, I generally agree with the proposed prescribed statement with one exception. The statement refers in two places to written substantiation. I question specifically what kind of written substantiation would suffice. For example, many franchisors disclose at least average unit volumes (which is based simply on gross sales and therefore more easily calculated than actual net earnings from each franchisee). A public company may disclose as much in its annual report to shareholders in addition to same store sales increases or decreases. Would documents filed in accordance with applicable securities regulations suffice as "written substantiation"? What about a private company? Would franchisors be required to open otherwise confidential books and records to potential franchisees in order to comply with the standard? It seems to me that these questions, while not perhaps easily answered, raise a concern that franchisors would choose to eliminate even limited earnings claims data such as average unit volumes in order to avoid the issues raised by requiring written substantiation, thus leading to less rather than more information being supplied to prospective franchisees. At the least, an interpretive guideline of what written substantiation would suffice would be necessary if the language were adopted. The UFOC guidelines already provide that the franchisor must have reasonable basis for any earnings claims. Moreover, the guidelines currently provide that a statement must be made that "substantiation of the data used in preparing the earnings claim will be made available to the prospective franchisee on reasonable request. "We have modified this statement to provide that substantiation is available at our offices if the franchisee requests, provided it does not require the disclosure of the identity of any restaurant owner. Approval of that statement or a similar one by the Commission might suffice to allow franchisors to continue to provide some earnings claims while addressing the confidential nature of some franchisee information.
3. To what extend do franchisors offer for sale multi trademarked franchises ("Co-branded franchises") in the United States (and follow up questions)? One question raised is whether franchisors have sufficient guidance under the Rule to determine their disclosure obligations with respect to the sale of co-branded franchises. I do not believe sufficient guidance exists. One assumption apparently made in the question is that the franchisee may be signing two forms of franchise agreement and entering into a relationship with two separate franchisors. Although I do not know of any statistical information, I believe that the majority of co-branded relationships are instead some form of master franchise or license agreement between two franchisors allowing one franchisor to sell both brands to a franchisee. In other words, the franchisee enters into a relationship with a single franchisor to sell both products. However, this does not answer the disclosure questions. One alternative is to "dual disclose" the franchisee; that is provide both the franchisor's and the third party licensor's UFOC's for disclosure purposes even though the franchisee is not being asked to sign a franchise agreement with the third party licensor. At lease this provides disclosure to the franchisee with respect to the business operations and viability of the third party licensor. The cost of such dual disclosure would not be significant unless the third party licensor was not itself in the franchise business (an unusual situation) and therefore did not have a currently effective UFOC to provide. Some attention should also be given to whether a third party licensor's UFOC, provided to a prospective franchisee for informational purposes with respect to the co-brand unit only, must comply with the relevant state's registration guidelines. Requiring such disclosure even though the franchisee is not going to sign a franchise agreement with the third party licensor would significantly increase the cost associated with disclosure and may motivate franchisors not to provide the licensor's UFOC in order to avoid registration compliance issues.
I hope these comments are helpful. Please feel free to contact me for any follow up.
Very truly yours,
THE QUIZNO'S CORPORATION
Patrick E. Meyers