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AFA's Kezios on Federal Initiatives for Franchisees in '08

Says FTC's Franchise Rule Revisions Akin To Giving Birth to a Mouse, Franchisees Should be Supporting Arbitration Fairness Act and More

Ms. Susan Kezios is the president of the American Franchisee Association, an organization that works to help franchisees, assists with the formation of independent franchisee associations, and organizes franchisees for legislative action. Ms. Kezios gives an interview with the Blue MauMau franchisee community about important issues in 2008 that should concern franchise owners and investors.

BMM: What major legislation do you see in 2008 that franchise owners should be rallying behind and what will be your role?

Kezios: The Arbitration Fairness Act of 2007 is something that franchisees could have jumped on en masse but didn’t. The IFA was a bit surprised by the speed with which it was moving through the Judiciary Committee. We’ll have to see what happens with that (and other) legislation in 2008 before we can tell you how active we will become.

BMM: Why is the Arbitration Fairness Act high on your radar screen and so important to franchise owners?

Kezios: Because the vast majority of franchise contracts nowadays mandate arbitration. And many, if not most of those contracts go so far as to ask the franchisee to waive his/her rights to a jury trial as well.

Almost all franchisors prefer arbitration to litigation. The word, “arbitration,” sounds friendlier and less antagonistic than the word, “litigation.” However, franchisees who sign contracts mandating arbitration eventually find a number of disadvantages. The list of disadvantages starts with the fact that having a dispute resolved by a jury of your peers is a valuable constitutional right which should not be routinely signed away simply because you want to purchase a franchise.

Another disadvantage is that most arbitrators are lawyers [who are] based in the home state of your franchisor, [and the franchisor's home state is] where arbitration is typically mandated by the contract.

And, arbitration is expensive. No matter what the franchise salesperson tells you. Federal and state courts are compensated by taxpayer dollars. In arbitration the arbitrators get paid by the hour (try $250 to $500 per hour). Filing and administrative fees to begin the arbitration process are also expensive to the tune of tens of thousands of dollars. The process by which each side gathers evidence in an arbitration (i.e., discovery) is very limited. This almost always hurts franchisees because the burden of proof lies with the franchisee.

Have you (as a franchisee) ever tried to ask a franchisor for facts or documents to prepare for an arbitration?

Lots of luck.

Finally, the arbitrators have a great deal of flexibility in conducting the arbitration hearing. The same rules of a federal or state court room do not apply in an arbitration. I’m sure I’ve forgotten a few disadvantages, but, bottom-line, if you’re going to agree to sign away your constitutional right to a jury trial, ask for some consideration in return from the franchisor, i.e. money, because you’re going to need it when you end up in a dispute. The bottom, bottom-line is not to agree to arbitration if you have a choice. AFA members and Coffee Beanery franchisees Deborah Williams and Richard Welshans testified before Congress last fall about the tremendous disadvantage and hardship mandatory arbitration places on franchisees. Had franchisees (and their attorneys) been better organized when the Arbitration Fairness Act moved through the Judiciary Committee we could have gotten some serious traction on an issue that has irreparably harmed many, many franchisees over the years.

BMM: What do you think of the final amended franchise rule by the Federal Trade Commission in which franchise buyers use to help determine the worthiness of the franchise concept for investment? Did the FTC make meaningful changes that will help franchise buyers?

Kezios: The Federal Trade Commission (“FTC”) labored a dozen years to revise its Franchise Rule — only to give birth to a mouse.

The Rule itself, regardless of its content (or omissions), is toothless. Teeth come in the form of a private right of action. Incredibly, investors who are harmed by franchisor violations of the Rule cannot sue to obtain normal legal redress. Because the FTC has a consistent record of rarely (if ever) enforcing its own Rule, a private right of action would allow franchisees their only remedy for franchisor fraud and material omissions in the 38 states without state franchise registration/disclosure laws. A private right of action would also level the playing field by taking away the unfair advantage of regional franchisors who offer franchises for sale only in non-registration states. Without it, there is no level playing field for franchisees, no checks and balances for franchisors, and no opportunity for the mouse that is the FTC’s revised Franchise Rule to roar.

The most important change in the revised Rule is a new item of required information. Item 20 of the revised Rule requires franchisors to identify any organized independent franchisee association within the system. The burden to inform the franchisor of the existence of the association lies with the association leadership and must be renewed on an annual basis. Providing a prospective purchaser with the ability to speak with an independent association of franchisees is likely the most valuable unfiltered source of information available to a prospect. Information on the nature of the relationship between the franchisor and its franchisees, never revealed in its disclosure document, is conveyed via the collective memory of an independent association. Prospective purchasers will most likely learn information from the association that could either persuade or dissuade them from buying the franchise. Upon purchase, the association has at the ready an invigorated, new potential member to ensure the association’s longevity. This is a major step forward for franchisees and their independent associations.

BMM: How active was the AFA in sparking the new franchise rule amendments that will kick into full swing in July of this year?

Kezios: The AFA and its members went toe-to-toe with the FTC, the IFA and the IFA’s franchisors attorneys during the entire 13-year process it took to revise the Rule. No other organization entered the picture on franchisees’ behalf until the 11th hour. No [other] franchisee organization was around for all the debating, arguing and mud-slinging that it took to get that one remedial addition in Item 20 into disclosure documents.

The approval and release of the revised FTC Franchise Rule on Jan. 22, 2007, was, in many respects, heavily influenced by the input of the AFA, its member franchisees, and Affiliate Member attorneys. Many more of the AFA’s suggestions, however, were rejected.

The AFA has never been in favor of more disclosure merely for the sake of disclosure, but instead, has been interested in increasing the level of honesty and reducing the opportunity for deception during the disclosure process. Toward that end, we were pleased to see that FTC staff concluded on many occasions that confusion and misunderstanding about the franchise relationship are prevalent and that many individuals have, in fact, been deceived about the nature of the franchise relationship during the presale process.

BMM: Your organization has been involved in such issues impacting franchise owners for a considerable time. Is the AFA nowadays still active? For example, will you have any conferences this year?

Kezios: Right now the AFA does not have any plans for a conference or symposium in 2008, but, that can always change depending upon need. We are working diligently with individual franchisee associations, both start-up and existing, on issues of concern to them which typically include food prices, cost of goods, cost of labor, equity enhancement, supply chain issues, etc.

Writer's Note: A few excerpts on the subject of the franchise rule were pulled with the author's permission from an article she wrote for May 2007's Leader’s Franchise & Business Law Alert, Too Little, Too Late: The Franchisee’s Perspective on the Revised FTC Franchise Rule.

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