FRANCHISE MEDIATION PROGRAM
April 28, 1997
VIA AIRBORNE EXPRESS
Re: 16 CFR Part 436 -- Response to Advance Notice of Proposed Rulemaking
As members of the National Franchise Mediation Program ("NFMP") Steering Committee, we wish to respond to the recent Advance Notice of Proposed Rulemaking ("ANPR") regarding 16 CFR Part 436 (the "FTC Franchise Rule"). Specifically, we wish to respond to ANPR Item 6 of said ANPR ("Alternatives to Burdensome Regulations and Enforcement").
First, a few words about NFMP. Founded in 1993, NFMP is dedicated to resolving franchisee/franchisor disputes through mediation. With more than 50 franchisor members, NFMP has mediated over 90 disputes with a success rate in excess of 85%. NFMP's members are frequently described as a "Who's Who" in franchising. NFMP's membership is identified in the background materials about NFMP submitted herewith for your review.
Our proposal is in response to the ANPR's inquiry as to "...whether (the Commission) should develop a program to reduce or waive civil penalties for violations of the Franchise Rule under limited circumstances" (ANPR at 21) and also relates to the Commission's administration and enforcement of the Rule.
Simply stated, the FTC Franchise Rule is subject to technical violations which we believe can be rectified by NFMP without burdening FTC resources. "Technical" FTC Franchise Rule infractions include a franchisor's failure to properly denominate all of the officers, directors and management personnel required to be identified in Item 3 of the Uniform Franchise Offering Circular ("UFOC") (or in the applicable section of the FTC Franchise Rule Disclosure Document); a franchisor's failure to timely amend its franchise disclosure document following a "material change" to the facts set forth therein (when such failure to so amend is relatively minor and does not materially impact the disclosure received by prospective franchisees receiving the "stale" document); failure to make proper disclosure under UFOC Item 20 (identifying all current and prior franchisees of the network in question, along with other related information); and, similar "minor" or "technical" FTC Franchise Rule infractions committed by a franchisor otherwise in substantial compliance with the Rule.
In lieu of the Commission commencing enforcement actions or obtaining consent decrees relating to such technical violations of the FTC Franchise Rule, our proposal is that the Commission instead refer such matters to NFMP, which will administer a compliance retraining program for the franchisor in question and, in addition, refer to mediation any disputes regarding claims by franchisees that they suffered proximate harm as a result of a technical Rule infraction.
The "compliance retraining" segment of our proposal would call upon NFMP -- or another entity composed of some or all of NFMP's members -- working with recognized franchise counsel to administer an "on site" program of compliance training to the franchisor in question and distributing a comprehensive "Franchise Registration and Disclosure Manual" designed to insure future compliance both with the FTC Franchise Rule and applicable state franchise laws.
The compliance training program would embrace an overview of the law governing franchising and franchise sales activity; an analysis of the FTC Franchise Rule, its applicability and mandates; a review of state franchise laws and their scope, requirements and mandates; the requirements and restrictions pertaining to franchise-related advertising and "earnings claims"; the permissibility of negotiating with franchisees (and how such activity must be memorialized and disclosed); the registration/exemption/amendment requirements of state franchise laws; permissible/prohibited representations in the course of offering and selling franchises; timing requirements regarding the delivery of franchise disclosure documents; the need to promptly amend and/or renew franchise disclosure documents (including specific events triggering the need to so amend such documents); the impact of disclosure document amendment upon franchise sales activity; how multistate transactions must be handled; the law governing termination, non-renewal and/or transfer of franchises; and, the scope of liability to franchisors violating the FTC Franchise Rule and applicable state franchise laws.
Finally, in addition to providing the franchisor with the above-referenced "on site" training and a comprehensive Franchise Registration and Disclosure Compliance Manual, the NFMP compliance program will call upon selected counsel to review all proposed disclosure document changes for a period of time and to periodically communicate with the franchisor in question to insure that such changes are timely made and registered when legally required.
To resolve the franchisee's issues with the franchisor's "technical infractions" of the FTC Franchise Rule, the franchisor in question would voluntarily mediate under NFMP rules. Under our proposal, franchisees who claim to have suffered harm proximately and causally related to a technical FTC Franchise Rule infraction would be granted the opportunity to mediate their claims. Legitimate claims would be subjected to mediation-driven settlements. Claims advanced by franchisees who suffered no harm proximately and causally connected to the FTC Franchise Rule infraction would be rejected, with NFMP mediators affirmatively directed to reject such claims. We suggest that any franchisee who has gone through the mediation process but has not resolved his issue should be permitted to petition the FTC to review the alleged FTC Franchise Rule infraction.
This proposal, while saving FTC resources, would insure FTC Franchise Rule compliance on a "going forward" basis; insure that prospective franchisees of the franchisor in question receive comprehensive disclosure documents; and, similarly insure that current franchisees of the affected franchisor who are deleteriously affected by their franchisor's technical noncompliance are granted a forum to have their claims heard and settled. The benefit for the affected franchisor is similarly clear -- under our proposal, this franchisor will not have to confront the Commission in an adversarial enforcement proceeding and/or through the entry into one or more consent decrees, thus saving time; significant liabilities (we note that the FTC Franchise Rule imposes a fine of $10,000.00 per violation); significant legal fees; and, increased disclosure obligations. Franchisees benefit through swift access to the NFMP's procedures for recapturing any losses directly attributable to their franchisor's technical FTC Franchise Rule violations.
As you know, the within proposal mirrors the Commission's approved limited "self-policing" program advanced by the National Funeral Directors Association, as announced by your agency in January, 1996. Finally, if NFMP's current name or organizational structure are issues, appropriate changes can be implemented.
We are excited at the possibility of harmoniously working with the Commission and its staff toward implementing this proposal. Accordingly, we look forward to hearing from and meeting with the Commission and its staff, as is appropriate, at its very earliest convenience.
Very truly yours,
NATIONAL FRANCHISE MEDIATION
By: Clay G. Small
By: Lowell Dixon
bcc: Eileen Harrington, Esq.
Steven Toporoff, Esq.