An Interview with the FTC about the New Franchise Rule
Blue MauMau: What is the purpose of the Franchise Rule?
Tregillus: The Franchise Rule is designed to ensure that prospective franchisees receive the information they need to make an informed investment decision, and to make that information available in a uniform format that facilitates comparison shopping among different franchise offerings.
BMM: After years of discussion with franchise attorneys and advocates, beginning July 1 the Federal Trade Commission kicks into effect a new amended franchise rule. What are some changes and how will it benefit franchise investors?
Tregillus: The revised disclosure requirements that will be mandatory on July 1 combine the best features of two prior disclosure formats, one provided by the original franchise rule, and the other created by the North American Securities Adminstrators Association to comply with the requirements of state franchise disclosure laws. The new Franchise Disclosure Document (“FDD”) requirements also include, for example, enhanced litigation disclosures and a new prohibition against any requirement that a prospective franchisee waive or disclaim reliance on any representation made by the franchisor in the FDD.
BMM: A requirement of the new disclosure document is that franchise owner groups, such as independent franchisee associations, must be listed. Why did the FTC think such a rule was so important for buyers?
Tregillus: The Rule requires franchisors to list contact information not only for the franchisee associations they may sponsor, but also for any independent association of their franchisees that asks to be listed. This information, along with required contact information for current and former franchisees, permits potential purchasers to check out the franchisor’s sales claims and learn about any problems or disputes in the franchise system.
BMM: No government employee is assigned to read or monitor the disclosure documents. How would you advise a prospective franchise owner to use the Franchise Disclosure Document if the accuracy of its contents is not known or overseen?
Tregillus: The FDD is designed to be a starting point for a potential purchaser’s evaluation of a franchise opportunity. As previously noted, the FDD includes contact information not only for franchisee associations, but also for current and former franchisees, so that any potential purchaser can confirm with them that what the franchisor says in the FDD is accurate. While the FTC does not review disclosure documents, a number of states with registration and disclosure laws do conduct such reviews.
BMM: Does the FTC plan to set up an online federal database of disclosure documents like California’s CalEasi where franchise investors can easily and freely access them as electronic files?
Tregillus: No. The Rule has never required franchisors to file copies of their disclosure documents with the FTC, and the agency only reviews a franchisor’s disclosures in the context of a specific law enforcement investigation.
BMM: Would you yourself buy a franchise if there were no Item 19 earnings claim ― that is to say you did not know what the profitability of the business concept was? Why did the FTC decide not to require franchisors to declare an average franchise owners income statement or at least what the bottom-line earnings for a store is?
Tregillus: The Rule gives franchisors the option of making financial performance representations, rather than requiring them, because the requirements for preparing an Item 19 claim are rather demanding, and not all franchisors have sufficient reliable data from their franchisees to be able to comply with the substantiation requirements. For that reason, the absence of an Item 19 claim should not be viewed negatively. The FDD provides a broad range of important information that includes alternative means to obtain earnings information. If I were buying a franchise, regardless of whether Item 19 data were provided, I would obtain information about sales, costs, and profits by meeting and talking at length with a number of current franchisees, and would encourage all prospective franchisees to do that.
BMM: There is a perception among a number of franchise owners and buyers that the FTC regulates the franchise relationship, meaning that a franchisee can turn to the FTC on such issues as their franchisor encroaching on their territory, noncompetitive pricing that has been hidden or fraudulent practices. Does the commission take a position on whether regulating the franchise relationship is necessary?
Tregillus: The sole focus of the Rule always has been on pre-sale disclosure. That’s where the rulemaking record and our enforcement experience have shown the most significant problems and financial injury, which the Rule directly seeks to prevent. If there are relationship issues in a particular franchise system, potential purchasers can find out about them before they invest by talking to current and former franchisees, and as of this July 1, to franchisee associations.
BMM: The FTC provides a buying guide to franchise investors, Buying a Franchise: A Consumer Guide. The name of the title begs the question, does the FTC think of the franchise buyer as a consumer buyer? And if so, are franchise buyers protected by consumer regulation? Or as business investors are they given less protection compared with consumer shoppers?
Tregillus: The FTC enforces the Franchise Rule on behalf of all consumers. Consumers who buy franchises receive the same level of protection under the Rule as other consumers. Unlike some state laws known as “little FTC Acts,” the FTC Act and the Rule are not limited in their applicability to purchases made “for personal or household use.”
BMM: There has been change in the FTC’s top franchise position. Steve Toporoff, director of the franchise division, left many months ago during this transition to the new rule. Rumor has it that you are providing temporary leadership. Are you staying?
Tregillus: I enjoy my work and have no plans to leave the FTC or my current position.
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