Letter to Honorable Joseph J. Simons, Chairman of the Federal Trade Commission - CORTEZ MASTO, MURPHY, FEINSTEIN CALL ON FTC TO STRENGTHEN PROTECTIONS FOR FRANCHISE OWNERS

Letter

Dear Chairman Simons:
We write to urge the Federal Trade Commission (FTC) to retain and strengthen the Franchise
Rule to protect investors who seek to buy a franchise business. Most franchise agreements are
very one sided in favor of the franchisor leaving franchise owners facing loss of assets, failed
businesses and bankruptcy. The FTC's approach to only require voluntary disclosure of financial
representation data and its lack of enforcement has failed to protect franchise owners.
We recommend that the FTC updated Franchise Rule include the following elements:
1. Overview/Summary. Provide an overview or summary on the first page of the Franchise
Disclosure Document (FDD) that has the basics any franchisee should know, including
franchise financial performance, store openings, store closings and sales and
revenue information as well as what support is provided and responsibilities
required. The FTC should convene a working group to develop this summary. The
summary/overview should be available in addition to the FDD, not a replacement.
2. Require Financial Performance (Item 19) be mandatory. All FDDs must
include historic financial revenue information for all franchise businesses in Item 19 in
accordance with the North American Securities Administrators Association (NASAA)
Financial Performance Representations Commentary. Item 19 should include disclosures
on revenues, costs, and other data for both first-year stores and mature stores. Item 20
should include the number of outlets that closed during the first 12 months as this data
would not be contained in Item 19. Any franchise corporation requesting a franchisee
engaged in a decades-long agreement should be able to share historic revenue
performance. Franchisors must provide a Financial Performance Representation and must
expressly assume the burden of proving that it has a reasonable basis founded on historic
performance. No part of the FDD and any documents required to be signed by the
prospective franchisee, shall contain any limitation of the franchisee's right to rely on
said Financial Performance Representation(s).
3. Require FDDs be made available online and searchable. FDDs must be available on
the FTC or the franchisor website. Basic data regarding revenue, expenses and rules
should be easily searchable from within the document. The Securities and Exchange
Commission's in-line XBRL provides a model.i
Inline XBRL is a format that allows
franchisers to embed XBRL data directly into a HyperText Markup Language (HTML)
document.
4. Protect Limited English Proficient investors. If a franchise markets to people in a
language other than English, the franchise company must provide the Franchise
Disclosure Document in the language of the people to whom they are marketing. For
example, some bubble tea, nail salons, and cleaning services market to potential franchise
owners in languages other than English. The FTC should work with state governments to
establish an oversight capacity for FDDs in languages that are not in English.
5. Require fair contract terms. Ban the inclusion of non-disparagement clauses and
mandatory arbitration clauses in the Franchise Agreement and clauses that
prohibit franchisee associations. Franchisees should not lose their free speech rights, their
right to litigate a dispute or their right to free association with other franchise owners as
part of their franchise agreement. In addition, franchisees should be given the private
right of action, so that they can litigate violations of the Franchise Rule.
6. Ban Some Disclaimers and Questionnaires. The FTC should prohibit FDDs from
including disclaimers that allow franchisors to amend their policies outside the specific
language of the franchise agreement that has been disclosed in the FDD, such as by
making changes to the Operations Manual that are contractual, not operational. Any
disclaimer or questionnaire must be provided with the initial FDD. The FDD should also
ban questionnaires and disclaimers that are used by franchisors to avoid responsibility for
contract disputes. Any questionnaire or disclaimer should not be used to avoid a claim of
deceptive practices of fraud.
7. Prohibit disclosures outside of the FDD, made both informally or by certified third
parties. Franchise corporations should not be able to share information related to the
franchise with lenders, consultants or others that are not available to the franchise
owners. The FTC should also look at third-party franchise brokers, consultants, and
salespeople that engage in the sale of franchises and whether there should be a licensing
requirement and fiduciary responsibility to follow the requirements of the Franchise Rule
when it comes to financial disclosures.
8. Increase franchise staff and increase franchise enforcement actions. The FTC should
not only improve the Franchise Rule but enforce it. There have been hardly any
enforcement actions taken against numerous franchises that have engaged in unfair and
deceptive practices. Specifically related to COVID-19, the FTC should remind
franchisors of their obligation to update the FDD quarterly as to any material changes and
to notify the prospective franchisee at the time of delivering the FDD of any material
change in any Financial Performance Information contained in the FDD. Of course, the
Rule's updating requirements apply to the entire FDD, specifically including Item 21. We
recommend that the FTC include a provision finding that it would be an unfair act or
practice and thus a violation of Section 5 of the FTC Act (15 U.S.C. §45) for any
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franchisor to condition any form of relief (including, but not limited to, fee reduction, fee
deferrals, reduction in hours of operation, or deferrals for required store upgrades)
granted to a franchisee on account of the COVID-19 pandemic or any declared national
emergency, and the related economic downturn on the franchisee agreeing to material
changes in the franchise agreement, operating contract, or on a general release of claims.
Thank you for considering our request for the FTC to proactively protect current and future
franchise owners from inaccurate and outdated information as well as coerced acceptance of
contract changes. The Franchise Rule should be modified quickly and enforced rigorously to
improve investor protection.
Sincerely,

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