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 FEDERAL TRADE COMMISSION

 REVIEWING THE FRANCHISE RULE

 TUESDAY, NOVEMBER 10, 2020

 1:00 P.M.

 VIRTUAL EVENT 
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1 FEDERAL TRADE COMMISSION 

2 I N D E X 

3 PAGE: 

4 Welcome and Introductory Remarks 4 

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6 Opening Address 8 

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8 Financial Performance Representations: 14 

9 What Should be Disclosed? And Why? 

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11 A Discussion of Disclaimers, Waivers, and 62 

12 Questionnaires 

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14 The Pros and Cons of the Current FDD Format 105 

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16 Closing Remarks 145 

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1 P R O C E E D I N G S 

2 - - - - -

3 (1:02 p.m.) 

4 MS. TODARO: Good morning, and welcome to 

5 reviewing the Franchise Rule, an FTC Virtual Workshop. 

6 My name is Christine Todaro, and I’m the FTC’s 

7 Franchise Rule Coordinator. 

8 On behalf of the entire FTC Workshop team, 

9 we are delighted that you are joining us here today 

10 via our live webcast. Before we begin, I have a few 

11 administrative details to cover. 

12 First, a video recording and transcript of 

13 these proceedings will be available on our workshop 

14 event page soon. Second, as with any virtual event, 

15 we may experience technical issues. If these occur, 

16 we ask for your patience as we work through them. 

17 Finally, we will be accepting audience 

18 questions via our dedicated email address, 

19 franchiserule@FTC.gov. Due to time constraints, we 

20 may not be able to get through all the questions we 

21 receive, but we will review all of them. 

22 Now, I am pleased to introduce the director 

23 of the FTC’s Bureau of Consumer Protection, Andrew 

24 Smith. 

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1 WELCOME AND INTRODUCTORY REMARKS 

2 MR. SMITH: Thank you, Christine. Welcome 

3 to “Reviewing the Franchise Rule,” An FTC Virtual 

4 Workshop. My name is Andrew Smith. I’m the Director 

5 of the FTC’s Bureau of Consumer Protection. 

6 Today’s workshop features three panels 

7 presenting franchisor, franchisee, and regulator 

8 perspective on key Franchise Rule issues, as well as 

9 opening remarks from Congressman and McDonald’s 

10 franchisee, Kevin Hern. I would like to thank 

11 Congressman Hern and each of the panelists for helping 

12 to make this virtual workshop possible. 

13 Let me start today’s discussion by giving 

14 some background on why we’re here. The franchising 

15 business model is an important one. It enables 

16 individuals to develop small businesses without having 

17 to start from scratch and franchisors to expand their 

18 reach and serve new customers. In fact, the 

19 International Franchise Association estimates that 

20 there are more than 733,000 franchise establishments 

21 that employ more than 7.5 million individuals. 

22 Nevertheless, joining a franchise system isn’t without 

23 risk. 

24 The primary purpose of our Franchise Rule, 

25 which was adopted by the Commission in 1978 and last 

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1 amended in 2007, is to provide prospective franchise 

2 purchasers the material information they need in order 

3 to weigh the risks and benefits of such an investment. 

4 Accordingly, the Rule requires franchisors to provider 

5 prospective purchasers with 23 items of key 

6 information about the franchise in the form of a 

7 franchise disclosure document, also known as an FDD. 

8 The FTC’s Franchise Rule is, thus, a presale 

9 disclosure rule, which was designed to address 

10 deception in the offer and sale of franchises. The 

11 Rule does not regulate the substantive terms of the 

12 franchisor/franchisee relationship, nor does it 

13 require the franchisor to register or file any 

14 documents with the Commission. 

15 The FTC routinely reviews its rules to seek 

16 information about their costs and benefits, as well as 

17 their regulatory and economic impact. We are here 

18 today because of the FTC’s ongoing review of the 

19 Franchise Rule. 

20 Last year, we requested public comment on 

21 the Franchise Rule and received 39 comments in 

22 response. I’d like to thank those who took time to 

23 comment. Your input is critical to the review 

24 process. While all commenters suggested that there is 

25 a continuing need for the Rule, some commenters 

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1 proposed modifications they believe would make the 

2 Rule more effective. And now, after considering those 

3 comments, we are hosting this workshop and seeking 

4 additional public comment until December 17 on the 

5 issues discussed today. 

6 The goal of today’s workshop is to dive more 

7 deeply into three topics that were raised by several 

8 commenters. The first panel, Financial Performance 

9 Representations: What Should be Disclosed? And Why?, 

10 will focus on whether the current Item 19 disclosures 

11 are effective or whether additional or modified 

12 disclosures are necessary to prevent deception in the 

13 marketplace. 

14 The second panel, A Discussion of 

15 Disclaimers, Waivers & Questionnaires, will address 

16 their use by franchisors and whether such use 

17 undermines any of the rule’s protections. 

18 The final panel, The Pros and Cons of the 

19 Current FDD Format, will explore whether the format of 

20 the FDD can be improved to take into account 

21 technological advances or otherwise make the FDD more 

22 readable. 

23 I anticipate a lively and informative 

24 discussion. Each panel includes relevant 

25 stakeholders’ perspectives, and I look forward to 

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1 hearing what each of them has to say. 

2 Now, I’d like to introduce Congressman Kevin 

3 Hern from Oklahoma. Congressman Hern is a franchisee 

4 himself gaining expertise in the industry by owning 

5 several McDonald’s franchises in the Tulsa area and 

6 employing hundreds of people. He has also held 

7 various leadership positions within the McDonald’s 

8 system. 

9 In addition, Congressman Hern serves on the 

10 House Small Business Committee, where he is the 

11 ranking member on the Economic Growth, Tax, and 

12 Capital Access Subcommittee. This subcommittee deals 

13 directly with franchises and franchisors as they seek 

14 to obtain capital. 

15 Please join me in welcoming Congressman 

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1 OPENING ADDRESS 

2 CONGRESSMAN HERN: Thank you, Andrew. 

3 And as mentioned, I’m a U.S. Congressman 

4 from Oklahoma’s First Congressional District here in 

5 the Tulsa area. For over 30 years, I’ve been involved 

6 in the McDonald’s franchisee program. 

7 After spending a year as an aerospace 

8 engineer, a job that was cut short by the Space 

9 Shuttle Challenger disaster, I had the opportunity to 

10 get into the program by working for a longtime 

11 franchisee who owned six restaurants in the Little 

12 Rock, Arkansas area. At the time, he was the chairman 

13 of the Owner-Operator Leadership Group that was for 

14 all the 4,000 U.S. franchisees at that time. His role 

15 -- early on for me in my career at McDonald’s at that 

16 time, his role allowed me to see how the relationship 

17 -- having a good relationship between the franchisors 

18 and the franchisees is extraordinarily important to 

19 the overall success of any franchise brand. 

20 For 10 years, I worked in the various 

21 management roles coming through all the different --

22 from entry-level management all the way to Director of 

23 Operations for a multi-unit organization and worked 10 

24 years to save $100,000 to get my first McDonald’s 

25 restaurant. I became a McDonald’s franchisee in 1997, 

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1 and since that time, in almost 24 years, I’ve owned 24 

2 McDonald’s restaurants. 

3 So now I have five left and my family runs 

4 those here in the Tulsa area. And, you know, prior to 

5 running for Congress in 2017, I served for 13 years on 

6 the McDonald’s National Leadership Council. The first 

7 eight years of that, I was the Chairman of the 

8 Franchise Relationship Team and five as the Chief 

9 Financial Officer for the McDonald’s franchisee 

10 organization. As the chairman of the Franchise 

11 Relations Team, I saw firsthand how a firm but fair 

12 franchise agreement not only protected the 

13 intellectual property of the franchisor, but also the 

14 equity of the franchisees. 

15 My corporate counterparts were the Chief 

16 Financial Officer and the Senior Vice President of 

17 Franchising for McDonald’s in the USA. For a period 

18 of almost 13 years, I was involved in almost every 

19 franchise agreement issue that developed across the 

20 United States among the almost 4,000 franchisees. In 

21 fact, I’ve often said that franchising relationships 

22 are much like the interactions of the states with the 

23 Federal Government. The people are best represented 

24 by our republic when they -- each entity, the state 

25 and federal and the franchisor/franchisee -- stays in 

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1 their appropriate lanes of responsibilities of 

2 oversight and acts within its limitations of good 

3 governance. 

4 I have reviewed literally hundreds of 

5 franchise agreements over the past 20-plus years of 

6 competitors, just to see how they benchmark against 

7 the McDonald’s franchise agreement and also as a 

8 potential investor in other franchise brands. I’ve 

9 looked at these across all industries, and I will tell 

10 you this firsthand, that none are perfect. Most all 

11 are different. 

12 It’s incumbent upon each party to desire a 

13 strong partner. Therefore, an FDD must be restrictive 

14 enough to create a natural selection process of only 

15 the best franchisee candidates for that particular 

16 brand. Once the franchisee agrees to the terms of the 

17 FDD, it is necessary for all parties to work within 

18 that document as the relationship moves forward. 

19 I have spoken a lot over the past three 

20 years about the similarities of the franchising model 

21 as compared to the U.S. Government. The relationship 

22 between states and the Federal Government is bound 

23 together by the framework of the U.S. Constitution. 

24 We have elected politicians that debate the very 

25 merits of these ideas contained in our great doctrine. 

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1 I see that firsthand today. 

2 Also, the relationship between the 

3 franchisees and the franchisor is bound together by 

4 initially the FDD and, ultimately, the franchise 

5 agreement. Most of the brands have elected 

6 representatives that debate the merits of the ideas 

7 contained in their franchise agreement. So as you go 

8 about your work in reviewing possible updates to the 

9 FDD, I would ask that you keep the thought in mind 

10 that there must be a balance in the responsibility as 

11 to each party in the relationship. 

12 Each franchisor needs to represent or sell 

13 its brand to the prospective buyer without 

14 overpromising or misleading the potential franchisee. 

15 The franchisee needs to take necessary steps to do the 

16 proper due diligence in making what will be most 

17 likely the greatest career change they will ever 

18 experience. 

19 There is a natural tendency for those with 

20 very little franchising experience to pick sides. And 

21 I will tell you from years of experience, only the 

22 brands that work together will see long-term 

23 sustainable success. As with life, there will never 

24 be a relationship that doesn’t experience 

25 disagreements. There are remedies for the franchisees 

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1 and the franchisors when those disputes develop, as 

2 both sides seek protections of their assets, the 

3 franchisor, in trying to select the top-notch 

4 franchisees to grow their brands and increase overall 

5 system value for the stakeholders, and the franchisee, 

6 who is looking for incredible rewards in return for 

7 their investment of cash, hard work, and risk taking. 

8 I believe the current FDD has functioned 

9 effectively over the past decade, and I would 

10 encourage you to implement very few changes during 

11 this review. A couple of small changes that I would 

12 suggest that would be for you to look at might be 

13 having brokers to disclose what level of commission 

14 they’re receiving for each brand they’re recommending 

15 to potential franchisees. This would allow the 

16 prospective owner to determine if there was any undue 

17 influence for the recommendations that might be made 

18 by the broker. 

19 And have all the franchisees put their FDDs 

20 online. I think that’s one of the panels today, using 

21 technology. So it would be easier to search for 

22 specific topics that might help the prospective owner 

23 make a more informed decision, and for all, a more 

24 robust updating of the FDD as the mandated period, as 

25 set forth by the FTC. 

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1 Finally, I would say franchising has been a 

2 life changer for so many, including myself. It 

3 allowed a person like me, who grew up very poor, to 

4 work hard, take risk, and become extraordinarily 

5 successful. I want to thank you for allowing me to 

6 share my thoughts on the importance of franchising and 

7 the franchising model. It’s given thousands of 

8 aspiring businesspeople the opportunity to realize the 

9 American dream. 

10 Thank you. 

11 And, Andrew, thanks again for allowing me to 

12 be on here today. 

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1 FINANCIAL PERFORMANCE REPRESENTATIONS: WHAT SHOULD 

2 BE DISCLOSED? AND WHY? 

3 MS. TODARO: Thank you very much, 

4 Congressman Hern, and thank you to everyone joining us 

5 for our first panel of the day, Financial Performance 

6 Representations: What Should be Disclosed? And Why? 

7 My name is Christine Todaro. And I’m an 

8 attorney in the FTC’s Division of Marketing Practices 

9 and also the FTC’s Franchise Rule Program Coordinator. 

10 This panel will explore some of the comments 

11 about financial performance representations that the 

12 FTC received last year. If we have time, I will try 

13 to incorporate questions we receive from viewers. 

14 Please submit those questions to franchiserule@ 

15 FTC.gov. 

16 We have a lot to cover, but I would first 

17 like to briefly introduce our esteemed panelists. I 

18 highly recommend you review each of their bios on our 

19 event page to learn more about their impressive work. 

20 First, Dale Cantone is an Assistant Attorney 

21 General for the State of Maryland and a Deputy 

22 Securities Commissioner, as well as the Chief of the 

23 Franchise and Business Opportunity Unit for the 

24 Maryland Securities Division. Mr. Cantone also served 

25 as the Chair of the Franchise and Business Opportunity 

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1 Committee and Project Group of the North American 

2 Securities Administrators Association. 

3 Susan Grueneberg is a partner at the law 

4 firm of Cozen O’Connor and a certified specialist in 

5 franchise and distribution law by the State Bar of 

6 California. 

7 Justin Klein is a partner at the law firm of 

8 Marks & Klein, where he represents both franchisees 

9 and franchisors. 

10 Keith Miller is the founder of Franchisee 

11 Advocacy Consulting. And he also serves as the 

12 Director of Public Affairs and Engagements for the 

13 American Association of Franchisee Dealers and he is 

14 also the Director of the Legislative Affairs for the 

15 Fair Franchising Initiative. In addition, he’s a 

16 Subway franchisee. 

17 Sandy Wall is of counsel at DLA Piper. She 

18 previously served as in-house counsel for McDonald’s 

19 and Sears Roebuck. 

20 Thank you, panelists, for joining us. 

21 On behalf of myself and the panelists, I 

22 would like to note that the views we express today are 

23 our own and do not necessarily reflect the views of 

24 the Commission or any one particular organization, law 

25 firm, or company. 

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1 I’d like to start today’s discussion by 

2 talking about the issue of mandatory financial 

3 performance representation, also known as FPRs. Many 

4 of you may recall that the FTC previously considered 

5 whether to mandate FPRs and ultimately decided not to 

6 when it amended the Rule in 2007. In reaching this 

7 decision, the Commission considered several different 

8 arguments in favor of and against mandatory FPRs. I 

9 would like to frame today’s discussion on mandatory 

10 FPRs by going through some of those arguments and 

11 asking the panelists what, if anything, has changed 

12 since the Commission chose not to mandate FPRs several 

13 years ago. 

14 First, we often hear that FPR data is the 

15 single most important piece of information to 

16 prospective franchisees. During the last Franchise 

17 Rule review, an estimated 20 percent of franchisors 

18 provided FPRs in their FDDs. That’s a franchise 

19 disclosure document. The Commission noted that 

20 prospects could thus find a franchise that made FPRs 

21 if they wanted to. The FTC also noted that ordinary 

22 market sources might compel more franchisors to 

23 disclose without government regulation. 

24 Now, IFA estimates that 66 percent of 

25 franchisors make FPRs in their FDDs. My first 

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1 question is does the fact that 66 percent of 

2 franchisors, if we assume those numbers are correct, 

3 now disclose FPRs affirm the Commission’s thinking and 

4 weigh against mandating FPRs? 

5 Dale, I’ll ask you to respond first. 

6 MR. CANTONE: Thank you, Christine, and 

7 thanks for the opportunity to participate in this 

8 workshop. There’s no question that 60 percent -- and, 

9 by the way, 60 percent is closer along the statistics 

10 that my State of Maryland and other registration 

11 states are experiencing. Sixty percent is certainly 

12 better than the 20 percent or the 10 percent that we 

13 had seen prior to 2000. So that’s definitely a 

14 positive trend. 

15 But that still leaves around 40 percent or 

16 somewhat close to 40 percent of prospective 

17 franchisees that are left without the disclosure item 

18 that is certainly what most prospective franchisees 

19 desire most and is, arguably, one of the most 

20 important parts of the disclosure document. So we’re 

21 currently left, you know, in a regulatory scheme that 

22 allows a franchisor who, with a failing system in 

23 which franchisees are losing a lot of money, to simply 

24 choose not to disclose financial performance 

25 representations. 

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1 And the FTC did go through an analysis in 

2 2007, and there are reasons why they chose not to 

3 mandate FPRs at that time. Some of those reasons, you 

4 know, exist in this day. There is an additional cost 

5 to a franchise system for compiling financial 

6 performance data. However, 60 percent of franchisors 

7 have managed to figure out a way to absorb those 

8 costs. And that also doesn’t really take into account 

9 the cost to prospective franchisees who have to put 

10 together a business plan of their own, and there’s got 

11 to be increased costs for coming up with a business 

12 plan without that most important data. 

13 Then, also, one of the reasons the FTC 

14 decided not to mandate this disclosure is the 

15 perceived availability of getting financial 

16 performance data elsewhere. And while there are 

17 different avenues for obtaining financial performance 

18 information, noting could compare having an Item 19. 

19 One of the methods is to contact existing and former 

20 franchisees, but that’s easier said than done in many 

21 cases. It sometimes works in some systems, but there 

22 are other systems where it’s very difficult for 

23 prospective franchisees to get financial information 

24 from existing franchisees, who may simply choose not 

25 to disclose that information. 

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1 So the costs are there, but if you do a 

2 cost-benefit analysis, the benefits of requiring this 

3 disclosure -- which, again, everybody agrees is the 

4 single most important piece of information that 

5 prospective franchisees want the most -- far outweighs 

6 the -- the benefits far outweigh the costs that there 

7 might be to franchise systems. And some of those 

8 costs are, quite frankly, a little overstated. A lot 

9 of franchisors collect data directly from their 

10 franchisees and probably even more so now than they 

11 did in 2007. And they could be doing that directly 

12 through POS systems. 

13 So for the vast majority of franchise 

14 systems, they already have the data. And, in fact, 

15 some of them, who choose not to make an FPR to 

16 prospective franchisees, end up making FPR-type 

17 disclosure to banks to facilitate loans. So it’s a 

18 really important disclosure. And on a cost-benefit 

19 analysis, in my own personal opinion, it’s the 

20 disclosure that really should be made to prospective 

21 franchisees, and not requiring it is bad for 

22 prospective franchisees and it’s bad for franchising 

23 in general. 

24 MS. TODARO: Thank you, Dale. And we’re 

25 going to go through some of the other considerations, 

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1 like the costs, liability, and other issues that you 

2 raised. But, right now, I want to stick to this 66 

3 percent disclosing FPRs, and I want to follow up with 

4 Susan. 

5 In your opinion, does the fact that 66 

6 percent currently disclose weigh against the 

7 Commission mandating FPRs? 

8 MS. GRUENEBERG: Well, thanks, Christine. 

9 And, again, thank you for inviting me to be a panelist 

10 today. 

11 I agree with what both and you Dale said 

12 about this information, financial performance 

13 representation probably being the most important 

14 information that a prospective franchisee wants and a 

15 franchisor wants them to have. I disagree with the 

16 conclusion that if a franchisor is not disclosing a 

17 financial performance representation, it’s probably 

18 hiding something and it’s probably hiding the fact 

19 that the system isn’t making money. 

20 I think the anecdotal reasons you see for 

21 franchisors deciding not to make FPRs, in my 

22 experience, is, number one, their brand may be so 

23 strong they don’t need to. Number two, there may be 

24 sufficient information out there in the marketplace 

25 through existing franchisees and other sources. Or in 

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1 many, many cases, it may be an emerging franchise 

2 system, and they feel they don’t have enough data or 

3 reliable enough data to make an FPR going into 

4 franchising, or in the early stages. 

5 If you think about it, it make no sense to 

6 maintain a system of franchises that are not making 

7 money and make the argument that the initial fee is 

8 what you’re after. Because a franchisor is not making 

9 its revenues based on the initial fee. That is 

10 initial fee goes to providing the pre-opening 

11 obligations that the franchisor has and they go to a 

12 broker, in large part. And it’s the ongoing revenues, 

13 it’s the ongoing stream of royalties or other payments 

14 that makes a healthy franchise system, and for that 

15 you need healthy franchisees as well. 

16 So again, I realize I view all of this 

17 through the prism of a lawyer who primarily represents 

18 franchisors, but we all have our own prisms, and 

19 that’s why we’re here today. For me, I would not look 

20 at it as an argument of market forces, but, rather, is 

21 this information important to mandate? Of course, 

22 your initial reaction is yes. But then you have to 

23 ask yourself, can you do that without resulting in 

24 some FPRs that are misleading or that don’t have a 

25 reasonable basis? And after you start thinking about 

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1 it, the exceptions sometimes tend to be overwhelming. 

2 And are we even thinking of everything we should be 

3 thinking of? 

4 Of course, we’re talking about ramp-up and 

5 all of that. But I’m more of a mind that if you are 

6 going to encourage FPRs, market forces comes in on a 

7 very important basis when you look at what’s being 

8 disclosed because that’s going to vary. What’s 

9 reasonable in different industries is going to be 

10 different. And so it’s very difficult to go into it 

11 and think, oh, we can just mandate gross revenues or 

12 we can tell everybody to do breakeven in Item 19. 

13 That’s just not going to work, in my opinion. 

14 MS. TODARO: Thank you. 

15 Sandy, to follow up on what Susan just said 

16 about market forces, is it your impression or 

17 understanding that the trend will continue, that more 

18 franchisors will continue to disclose, or do you agree 

19 with Susan that there are reasons why some franchisors 

20 just won’t be making FPRs? 

21 MS. WALL: Again, thank you for having me 

22 here today, Christine. It’s a little of both. I 

23 think, again, we’re all in agreement that providing an 

24 FPR and an FDD is good for the franchisor and good for 

25 the franchisee. But there are clear reasons, as Susan 

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1 pointed out, why a franchisor may be unable to do 

2 this. 

3 Another example is, you know, you’ve got an 

4 international company that has been doing business 

5 outside the United States and coming into the U.S., 

6 has no U.S. operating history. If you mandated an 

7 FPR, you would basically be saying that they can’t 

8 franchise in the U.S. without having U.S. operations 

9 here. You know, clearly mandating this would be a 

10 barrier to entry of certain franchise systems. 

11 And as Susan pointed out, the exceptions --

12 you know, there would have to be vast lists of 

13 exceptions. In addition, since exceptions won’t cover 

14 every circumstance, the FTC would have to be prepared 

15 to issue opinions on certain circumstances so that 

16 certain companies could be exempted out of the FPR 

17 requirement. Again, something that’s going to take 

18 valuable time and resources while, again, most 

19 franchisors choose to do this in their -- you know, 

20 for many, many reasons. 

21 And, again, one thing -- and I understand, 

22 Dale, your position on -- you know, that it’s because 

23 people -- you know, franchisors may be hiding 

24 information. And, you know, there are bad actors 

25 everywhere in the world from time to time, and there 

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1 may be a small percentage of franchisors that don’t 

2 provide information for that reason. But franchisees 

3 have choice. A franchisee who does not get an FPR, 

4 does not get the information from a franchisor, can 

5 always elect not to buy the franchise. This is 

6 important information and if they can’t -- they don’t 

7 feel comfortable that they can get this information 

8 through other sources, or they’re not comfortable with 

9 the reason why the franchisor says they cannot provide 

10 this information, they don’t need to proceed. 

11 MS. TODARO: Okay. Well, that’s actually a 

12 great segue into the next topic that I’d like to talk 

13 about. Another factor that was considered was whether 

14 mandatory FPRs would reduce the level of false 

15 earnings claims made to prospective franchisees. 

16 And my next question goes to Keith. Do you 

17 have a sense of how prevalent false claims about 

18 financial performances are, and what evidence would 

19 you use to support your position? 

20 MR. MILLER: Well, again, thanks, Christine, 

21 and thanks for all the staff at the FTC for putting 

22 this together. 

23 When looking at false or unsubstantiated 

24 claims outside of the FDD, I think we first have to 

25 understand that no prospective franchisee is going to 

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1 buy a franchise without some understanding of revenue 

2 and cost information. Knowing that about 34 percent 

3 or 40 percent of franchises put nothing in the Item 19 

4 makes me assume that those franchisees of these brands 

5 are getting information outside of the FDD. Of 

6 course, that doesn’t make that information false, but 

7 it also doesn’t mean that a franchise giving Item 19 

8 data isn’t giving information beyond what’s in the 

9 FDD. 

10 And, you know, the information isn’t always 

11 direct information. For example, one brand I worked 

12 with in this last year that captured a lot of news 

13 stories seemed to float 1.5 million as a revenue 

14 number. Every franchisee I talked to gave that 

15 number. Some of them got it direct, but, for most, it 

16 was actually more subtle. As they were talking about 

17 how they would build out the store and what would be 

18 in the restaurant, they were told, well, you have to 

19 put in a Coke freestyle machine because that was what 

20 was required for a $1.5 million operation. Same with 

21 other build-out and equipment requirements, that they 

22 were told, well, we have to do this to build for a 

23 $1.5 million operation, yet not a single unit ever 

24 reached that number. 

25 You know, I try to tell people that the only 

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1 financial information you should trust and believe is 

2 what is in the FDD. Everything outside of that can 

3 be suspect, especially if it’s verbal or implied. And 

4 I would also argue that franchisors who avoid giving 

5 even basic revenue and cost data -- you know, when we 

6 talk about the fear of giving these numbers, I think 

7 people get more into the weeds and want to talk about 

8 EBITDA type numbers, which would be great. But I 

9 think that’s a big step and I think even some even 

10 basic revenue data and cost data probably needs to be 

11 required. 

12 And the reason someone buys a franchise is 

13 because that brand has supposedly been tested and 

14 proven as a business model. Now, that doesn’t mean or 

15 guarantee any success. But for franchisors who can’t 

16 show the data that the model was proven, I would ask 

17 why they’re franchising. You know, the intent of the 

18 Franchise Rule is to protect the consumer, the 

19 prospective franchisee. Yet, often, discussions on 

20 the rule seem to get steered towards protecting the 

21 franchisor from liability. The franchisor is the one 

22 with all the resources and leverage. 

23 And, you know, I would kind of end this part 

24 of how prevalent it is -- look, most franchisors are 

25 good. I agree with that. But we do rules and 

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1 oversight not to damage the good franchisors, we do it 

2 to protect from the bad franchisors. But with all 

3 these concerns, can someone tell me the last time the 

4 FTC took action against a franchisor for a financial 

5 representation made in the disclosure document? I 

6 think most of the people would answer it’s been a long 

7 time. 

8 MS. TODARO: Thanks, Keith. 

9 I want to follow up on something that you 

10 said earlier. I mean, in terms of the number of 

11 representations that you’re seeing being made outside 

12 of the FDD or inconsistent information that’s being 

13 provided to prospective franchisees outside of the 

14 FDD, have you seen a decrease in the number of times 

15 that’s happening or the number of complaints or 

16 stories you hear from your members and other 

17 franchisees now that more franchisors are disclosing? 

18 MR. MILLER: Well, I’d have to say 

19 personally, I’d be a little biased in this answer. I 

20 would say it’s on the increase, but that’s probably 

21 only because I’ve become more known out in the 

22 industry and I get more calls on it. 

23 Look, I have to understand that the people 

24 who call me are calling me because they have problems 

25 and issues, not -- you know, everyone who’s happy 

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1 isn’t calling me. So I guess as I’ve become more well 

2 known, I’ve probably seen an increase in it. But I 

3 wouldn’t say that’s because there is an increase in 

4 false representations. 

5 And I know we’ll talk about later the 

6 sources, but that’s kind of what gets to be 

7 interesting, is the sources that the representation is 

8 coming from. The false representations tend to be 

9 more at an arm’s length and not from inside the 

10 franchise company, whether it’s brokers or consultants 

11 or loan brokers, for that matter. And I think we’ll 

12 touch on that a little later. 

13 So I think the sources of false 

14 representation have -- most franchisors know what they 

15 can and can’t do and have moved away from that. But 

16 that doesn’t mean that false information isn’t getting 

17 to franchisees. 

18 MS. TODARO: Okay, I’d like to turn to 

19 Justin. Have you seen much litigation over false FPR 

20 data or FPRs that are given to prospects outside of 

21 the FDD? 

22 MR. KLEIN: Yes, I think we’re all using 

23 interesting adjectives; namely, the word “false.” I 

24 think there’s a very big distinction between false and 

25 impermissible. One of the bigger concerns that I have 

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1 is about -- the largest concern is false data. 

2 Impermissible data or impermissible disclosures 

3 outside of the realm of the document is something that 

4 I think is going to be really hard to ever regulate 

5 around. I mean, salespeople are going to be 

6 salespeople. They’re going to say what they’re going 

7 to say. You know, presumably franchisors are doing 

8 the right thing by training their staff the right way, 

9 by training their sales people. Presumably, they’re 

10 talking to their brokers and the folks who they are 

11 engaging to bring into their universe what is 

12 permissible and what is not permissible. 

13 Obviously, nobody on this panel, I would 

14 presume -- and by the way, thank you for having me on 

15 the panel; I’m honored to be amongst all these 

16 distinct colleagues -- but nobody wants false data. 

17 And I think, you know, when you look at -- and I will 

18 answer your question directly -- but when you look at 

19 the concept of mandatory FPRs, my bigger concern is 

20 somebody who represents more franchisees, like Keith, 

21 is garbage in/garbage out. If there is no way to 

22 properly check and balance the information that’s 

23 being provided -- and we’ve heard reasonable basis and 

24 everybody is familiar with kind of the concept around 

25 the FPR -- are folks who range from John Q and Mary Q 

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1 Franchisee up to sophisticated private equity groups 

2 who are all reading the same FDD, are all looking at 

3 and analyzing the same information. 

4 So my bigger concern is what is the 

5 relevance of the data that’s being provided and the 

6 form with which it’s being provided in to ensure that 

7 the prospective investor -- the consumer, if that’s 

8 what we want to call them -- is given the information 

9 that is going to be most relevant to the decision to 

10 make the investment. 

11 From a law firm perspective, we have not 

12 seen an uptick in what I would call impermissible FPR 

13 claims. The claims of “I was promised I was going to 

14 make $1 million and I didn’t make $1 million,” over 

15 the last decade or so have significantly declined, 

16 from our perspective. I don’t know that that’s 

17 directly FPR-related, quite frankly. I think that’s 

18 more probably related to some of the other barriers to 

19 litigation that exist out there, be it the franchise 

20 agreement, be it the cost, be it the time, be it the 

21 nature of the type of claim that’s being brought and 

22 where either the franchisor or the franchisee stands 

23 at the time that claim is being brought in connection 

24 with those factors. 

25 So, you know, I don’t know that -- just to 

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1 round it all back to the topic and the theme, I don’t 

2 know that there’s been an uptick, but I also don’t 

3 know that mandatory FPR positively or negatively 

4 impacts the amount of those types of lawsuits that 

5 ultimately come out of that information. 

6 What I can say is I fear that if 40 percent 

7 of franchisors are not providing the information for 

8 one or more of the reasons that any of the folks on 

9 this panel have already addressed, my bigger concern 

10 is that the lack of accuracy and the lack of 

11 professionalism that is required in the disclosure 

12 process isn’t going to be met. And that’s a negative 

13 impact to prospective investors in terms of my concept 

14 of garbage in/garbage out. 

15 MS. TODARO: Keith, do you have anything in 

16 response to that? 

17 MR. MILLER: No, and I think we have to 

18 remember who’s looking at these FDDs. And I think 

19 Justin brings up, you know, a really good point in 

20 that you have the range of big private equity 

21 franchisees to, you know, a person who has very little 

22 knowledge. The industry always sells itself as be 

23 your own boss, proven business model, no experience 

24 necessary. Yet, then it bashes those people with “no 

25 experience necessary,” when they make a mistake. 

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1 And I think we have to really look at -- and 

2 I know one of the other panels is actually more 

3 talking about the structure. I think you also have to 

4 look at, when you talk about uptick or lack of uptick 

5 in lawsuits on it, I think it’s almost impossible for 

6 a franchisee to have the resources to do that fight. 

7 I mean, that’s what I think franchisees depend on the 

8 FTC to do and especially when there’s no private right 

9 of action on the Franchise Rule. 

10 The average franchisee, when they fail --

11 and it may have been falsely disclosed -- has been 

12 wiped out. All their assets are at risk. So what 

13 resources do they have to fight, you know, what’s 

14 happened to them, whether it’s false or 

15 unsubstantiated claims? It’s very difficult for them 

16 to fight it. They just don’t have the resources. 

17 MS. TODARO: Sandy, do you want to follow up 

18 on that? 

19 MS. WALL: Well, Christine, from the FTC’s 

20 perspective, have you seen in the last ten years, a 

21 lot of complaints from franchisees alleging that 

22 unlawful FPR information has been provided or 

23 information outside of an FDD? 

24 MS. TODARO: I mean, I have to say that this 

25 is something that I haven’t looked at recently. The 

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1 last time that I looked at complaint data, I can tell 

2 you we get far fewer franchise complaints than we do 

3 for other types of business opportunities, at least 

4 from the data set I had looked at. 

5 MS. WALL: And, you know, just to -- go 

6 ahead. 

7 MS. TODARO: No, go ahead. 

8 MS. WALL: And just to the point about 

9 litigation, you know, franchisee litigation continues, 

10 and it may be on other issues, but you don’t -- you 

11 know, my experience is from a franchisor’s 

12 perspective, you’re not seeing a huge amount of 

13 litigation specifically related to FPRs. There is --

14 you know, I don’t agree with the fact that franchisees 

15 are not suing franchisors. It’s just not based on 

16 these types of claims for the most part. 

17 MS. TODARO: Dale, is there something you 

18 want to add? 

19 MR. CANTONE: Yeah, I think when you talk 

20 about, you know, both complaints and litigation, I 

21 just don’t think litigation is a good indicator of 

22 what’s going on in the franchise world because, you 

23 know, there are some systems -- I mean, it depends. 

24 Franchising covers a huge realm, you know, of like 

25 McDonald’s and the Hiltons. And it also covers the 

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1 smaller investments, the people that we hear most from 

2 that maybe Sandy and Susan don’t represent. 

3 And, you know, a lot of those franchisees 

4 simply do not have either the resources to pursue 

5 litigation. There are barriers to filing suit that 

6 franchisors have been brilliant at putting in the 

7 disclosure document. And I know you’re having a panel 

8 on disclaimers and these certifications, which I think 

9 is a good topic to go by. But, you know, even a 

10 mandatory arbitration provision in a franchise 

11 agreement -- and they’re ubiquitous -- really does put 

12 a barrier in place to bringing a lawsuit. 

13 But I will tell you that we also don’t get 

14 that many complaints generally from franchisees. I’m 

15 not quite sure -- it’s funny, when I read some of the 

16 message boards or when I hear from Keith, there are 

17 lots of complaints out there, but for all sorts of 

18 reasons, they’re not necessarily getting to my office 

19 and probably not getting to your office. I don’t 

20 think that’s an indicator there aren’t problems out 

21 there. We’re just not necessarily hearing about them. 

22 MS. TODARO: Justin, was there a followup? 

23 MR. KLEIN: Yeah, I just think as a 

24 followup, I think that’s a fair statement. I will 

25 tell you, as somebody who reviews these documents on 

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1 behalf folks who are looking to make the investment, 

2 you know, one of the initial things that we look at 

3 is, first of all, is there an FPR? That’s number one. 

4 I mean, look, lawyers are notoriously bad at math, so 

5 I can’t really provide much insight into what the FPR 

6 does or says or what it means. But the FDD, from our 

7 perspective, is step one of the process. That’s the 

8 beginning of due diligence. It’s a tool for 

9 prospective franchisees to use in connection with the 

10 rest of the due diligence that they’re going to do. 

11 If the FDD has been approved by Dale’s great 

12 state of Maryland, if it’s been approved by other 

13 states that have registration requirements, then we 

14 look at it through, to use Susan’s word or Sandy’s 

15 word, a different “prism,” if some state regulator has 

16 reviewed it. 

17 So, you know, I think it’s -- again, it’s a 

18 positive step if franchisors are going to make those 

19 FPRs. But I don’t know that FPRs are the point of the 

20 breakdown of the relationship or why even a franchisee 

21 ultimately makes the decision to move forward with a 

22 particular brand. 

23 MS. TODARO: Okay, thank you. I think Keith 

24 wants to add something, and then I’d like to move on 

25 to the next topic to make sure we have enough time 

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1 remaining 

2 MR. MILLER: Yeah, one quick comment. One 

3 of the reasons the FTC doesn’t see a lot of complaints 

4 is if a franchisee -- and I’ve heard this from 

5 multiple lawyers that represent franchisees -- if 

6 they’re considering legislation, they don’t want the 

7 client to file an FTC complaint because the reality is 

8 the FTC is probably not going to act on that complaint 

9 and then that gets used against them in their 

10 lawsuits, that they’re told, well, you filed a 

11 complaint with the FTC, they didn’t act, so, 

12 therefore, nothing must have happened wrong. 

13 So literally, I’ve heard from multiple 

14 franchisee lawyers telling their clients not to file 

15 an FTC complaint. So that reduces complaints. And, 

16 of course, people really don’t know how to file them. 

17 And they’re still in that system, they’re afraid of 

18 retaliation from their franchisor, if they’re still in 

19 the system. 

20 MS. TODARO: Okay. Well, I would just like 

21 to add that we always encourage anyone to file a 

22 complaint with the FTC. You can do that on our 

23 website. We have information to walk you through 

24 specifically how to file a complaint. There’s also a 

25 phone number on our website that you can call in order 

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1 to speak with someone live to file that complaint. 

2 So I just want to add that the FTC’s 

3 position is people should be filing complaints with us 

4 if they feel like they’ve been wronged or unfair 

5 deceptive practices. 

6 MR. MILLER: And I would agree with that, as 

7 you know. 

8 MS. TODARO: That being said, I’d like to 

9 move to another consideration, which some of you have 

10 talked about, which is the potential cost to 

11 franchisors or franchisees if FPRs were to be made 

12 mandatory. In 2007, the Commission noted that 

13 mandating FPRs would impose substantial new 

14 accounting, data collection and review costs in all 

15 franchise systems. You know, as Dale mentioned 

16 earlier, most franchisors now collect financial 

17 information through a POS system. That might have not 

18 been the case when the Commission amended the rule. 

19 Sandy, to that end, what’s your position on 

20 whether mandating FPRs would impose substantial costs 

21 on franchise systems today and what would those costs 

22 be? 

23 MS. WALL: I think you’re right, Christine, 

24 and, Dale, you’re correct. There is -- you know, due 

25 to the emergence of technology over the last 10, 15 

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1 years, you know, more of that information is provided 

2 to many franchisors. But it is not all franchisors. 

3 There are some franchise systems that are not based 

4 on a percentage of sales in terms of royalty and 

5 they don’t collect that information from their 

6 franchisees. 

7 In addition, you know, franchise agreements 

8 have a term to them. And depending on when the 

9 franchise agreement was entered into, there may or may 

10 not be sufficient language in a franchise agreement to 

11 allow the franchisor to collect this data from the 

12 franchisee. So for systems that don’t get this data 

13 through a POS system, it would be expensive. You 

14 would have to go to the franchisees and ask them to 

15 provide this information. You couldn’t mandate it. 

16 You would have -- the franchisor would be required to 

17 devote their resources to collect the data, and then 

18 evaluate and analyze the data to make sure it is 

19 accurate. 

20 And, you know, again, I think when you look 

21 today, if you have that type of system, those are the 

22 types of systems that aren’t providing FPRs, because 

23 they don’t have -- they don’t feel comfortable -- and 

24 that is something we’ll talk about later -- that they 

25 have the reasonable basis to stand behind the 

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1 information in the FPR. And, you know, I think this 

2 is -- again, it’s not all franchisors, but there are a 

3 number of franchisors that fall into that category. 

4 And, again, you know, we’re going to talk 

5 about this later, but -- I’ll leave it at that point. 

6 I’ll leave it at this point right now. We can come 

7 back to this. 

8 MS. TODARO: Susan, do you see other costs 

9 that franchisors would incur beyond those that Sandy 

10 mentioned? 

11 Susan, we can’t hear you right now. 

12 MS. GRUENEBERG: Sorry, I’ve been having 

13 trouble with my audio today. I was going to say, in 

14 terms of pure out-of-pocket costs, of course, you’re 

15 going to have more costs to prepare an FPR. You’re 

16 going to have additional legal fees, accounting fees. 

17 But I agree with Dale on the cost-benefit analysis. I 

18 don’t think this is the factor that should really 

19 weigh in favor of not mandating FPRs. 

20 I think more -- it’s more of what Sandy is 

21 talking about, the practical difficulties in systems 

22 that weren’t born yesterday and don’t have the POS 

23 systems in place or don’t have the contractual 

24 provisions to mandate use of them. If you look back 

25 at the original statement of basis and purpose, when 

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1 the Rule was first enacted, the purpose was to level 

2 the playing field of information. Prospective 

3 franchisees were found not to have the same level of 

4 information that franchisors had. So this seems to 

5 me, the particular factor, cost, is something where, 

6 you know, it shouldn’t mandate in favor of, you know, 

7 not mandating FPRs. 

8 But when you get into the practicality of 

9 gathering this information and making sure it’s 

10 reliable, that’s where the unspoken costs are, and 

11 those are really difficult to deal with. In fact, if 

12 you look at the FPR commentary that NASAA released a 

13 couple of years ago, you can see by the answers that 

14 the concept of reliability of cost data for 

15 franchisees was something that NASAA considered in 

16 agreeing that franchisors, who didn’t have access to 

17 that kind of data, could use their own company or 

18 affiliate’s own unit data and make adjustments to it 

19 to account for what a franchisee would experience. 

20 So that’s kind of a validation of the fact 

21 that this is difficult information to access, in many 

22 cases. 

23 MS. TODARO: Dale, did you have a followup 

24 on what Susan just said? 

25 MR. CANTONE: Well, there’s discussion 

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1 about, you know, the difficulties in developing a 

2 mandate for FPRs and that, in fact, there are some 

3 systems that everybody would recognize probably 

4 couldn’t and shouldn’t make an FPR. But that doesn’t 

5 mean you don’t try. Because what we’re left with now 

6 is a system where a franchisor can choose purely, for 

7 whatever reason it wants, not to provide the data. 

8 And there are some franchisors that probably should 

9 not and could not provide an FPR, new and emerging 

10 systems, what have you. 

11 But that doesn’t mean you don’t come up with 

12 an idea where you can move the ball forward because it 

13 is such an important disclosure. I mean, the one 

14 thing that the Rule has consistently agreed upon is 

15 this is the number one thing the franchisees want and 

16 they really deserve it. So leaving it entirely up to 

17 franchisors, some of whom are absolutely doing the 

18 right thing, but not all of them may. If you do 

19 mandate -- if you do provide a mandate that is a 

20 common sense mandate, that takes into account the 

21 practicalities and the realities of the situation, I 

22 think it would benefit everybody. And it’s just 

23 something that we could trial. 

24 MS. TODARO: Sandy, do you have a followup 

25 to Dale on that? 

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1 MS. WALL: Look, Dale, you know, again, 

2 prospective franchisees have the choice. If they ask 

3 for the information and they do not get a legitimate 

4 reason as to why the information can’t be provided, 

5 they don’t proceed with the franchise purchase. It’s 

6 like every decision that a consumer makes day to day. 

7 And I think trying to craft the rules, as we’ve 

8 discussed, and come up with the exceptions about who 

9 would have to produce it is going to make a lot more 

10 -- create more impediments to franchising than it’s 

11 going to help prospective franchisees. 

12 MS. TODARO: Okay. Justin, is there 

13 something you want to add? And as a followup to 

14 whatever you’re going to say, I was wondering if you 

15 could address whether you think that there will be 

16 increased costs to franchisees if FPRs were mandated. 

17 MR. KLEIN: So I don’t hate Dale’s idea in 

18 theory. From a regulatory perspective, I’m not sure 

19 how you come up with that common sense structure. And 

20 the scale of franchisors that are out there and the 

21 sophistication level of franchisors and who is 

22 advising them and guiding them is from top to bottom 

23 in terms of who’s out there. 

24 I guess my bigger concern, as somebody who 

25 reviews these on behalf of somebody else as an 

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1 adviser, is I’m more concerned about bad info than 

2 mandated info. And, again, if it’s mandated, I’d be 

3 more concerned about the cost associated with what 

4 folks have -- and, listen, we’ve seen some really bad 

5 FDDs. We’ve seen FDDs with other brand’s names in 

6 them. We’ve seen FDDs written on spiral notebooks. 

7 We have seen FDDs that don’t comply with any 

8 regulations that are out there whatsoever and there 

9 just is a cover sheet that says “FDD” on it and that 

10 doesn’t stop our clients from necessarily wanting to 

11 invest in the franchise and/or, quite frankly, even 

12 being successful with that brand. It just means that 

13 they’re not necessarily getting the best guidance from 

14 their professionals. 

15 So, you know, my bigger concern is who’s 

16 preparing the information and the reliability is 

17 critical. And if it’s mandated, unless there is some 

18 regulatory component to figuring out how reliable that 

19 information is for a prospective franchisee, that’s my 

20 bigger concern. 

21 From a cost perspective for franchisees, I 

22 mean, most franchisees, no matter how sophisticated 

23 they are, that come to us, whether they own one unit 

24 or they’re involved in many, many businesses, they ask 

25 basically two questions of the franchisor. How much 

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1 does it cost and how much can I make? That’s all they 

2 care about. I don’t know that the FPR, again, is the 

3 be-all/end-all of the mindset of a prospective 

4 investor in terms of how much they can make. I think, 

5 again, the FDD, at least the way we counsel our 

6 clients, is that is only a piece of the puzzle to 

7 gather that information and determine its reliability 

8 to use it in terms of talking to other franchisees, 

9 talking to competitors and talking to figure out 

10 whether or not it’s relevant to your particular 

11 market. So I think reliability is the big question. 

12 I fear, again, if we are just lawyers that 

13 they are bringing it to and they’re not bringing it to 

14 accountants or other business advisers to check the 

15 veracity of the numbers, now there’s another 

16 component, which, footnote, prospective investors 

17 should be having on their team in any event to help 

18 them analyze the data and everything else. But I do 

19 think there is an increased cost to franchisees to do 

20 their own reliability test with their own 

21 professionals to determine the veracity of any 

22 information that’s being provided to them. 

23 MS. TODARO: Justin, do you have --

24 MR. KLEIN: And just to caveat that, I don’t 

25 think that’s necessarily a negative thing. I think 

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1 that’s probably a positive thing that they should be 

2 doing in any event, but I do think it’s an added cost. 

3 MS. TODARO: Do you have a sense whether 

4 prospective franchisees compare offerings based on 

5 FPRs? One hundred percent. You know, a lot of folks 

6 go on and look at -- go on the internet, and they say 

7 what does this FPR say versus what does this FPR say, 

8 and they make their initial decision to pursue a 

9 prospective investment based on the information that 

10 the franchisor is providing in the document. 

11 Again, from our perspective, the FDD and the 

12 FPR is step one or step negative one of the process, 

13 and I do think that’s information that prospective 

14 franchisees are looking at. And, oftentimes, they’re 

15 looking at the quality of the product or the service 

16 that’s being provided, and sometimes they mistake the 

17 quality of the product for the ability to be 

18 successful selling that product or service. And I 

19 think a component of that is the information that’s 

20 being provided in the FDD creates an initial mindset 

21 as to whether or not they think it’s an appropriate 

22 investment for them. How much does it cost and how 

23 much can I make? 

24 Line up five FDDs across the board because 

25 this is the industry that I’m interested in and let me 

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1 see what the information says. 

2 MS. TODARO: Dale, is there something you 

3 want to respond to on that? 

4 MR. CANTONE: I just wanted to point out 

5 that Justin is talking about a category of prospective 

6 franchisee that is coming to somebody like Justin to 

7 help them review the disclosure document. I can tell 

8 you the people that -- a lot of people we hear from at 

9 the state level who have had issues do not go to a 

10 lawyer, they can’t afford to go to a lawyer, or they 

11 choose not to go to a lawyer. From the number of 

12 filings that we see, we can tell that there’s a 

13 significant number of franchise systems out there, 

14 that are targeting people that probably are not going 

15 to a lawyer, much less an accountant, much less fully 

16 reviewing the disclosure document to make this 

17 determined choice whether or not to buy something 

18 based on the disclosure. 

19 So I just wanted to point out, I’m glad, 

20 Justin, you do what you do, but I wish every 

21 franchisee had a lawyer to counsel him or her before 

22 they purchase. But the reality is a lot of them 

23 simply don’t do that and they’re relying on that 

24 disclosure document on their own. 

25 MS. TODARO: Okay. Susan, I think you have 

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1 a followup and then I would like to go on to the next 

2 topic just being cognizant of time. 

3 MS. GRUENEBERG: Yeah, I just wanted to add 

4 that in terms of market forces, franchisors will look 

5 and compare different FPRs with their competitors in 

6 their industry. And they know they are being 

7 compared, so they are going to logically try to get a 

8 better representation in their FDD in terms of what 

9 they’re disclosing. So it does encourage the use of 

10 FPRs when you have this comparison going on. So I 

11 think it’s very healthy. 

12 MS. TODARO: Okay, thank you. 

13 I would like to move to the next 

14 consideration which was potential liability. Another 

15 factor that the FTC considered was whether mandatory 

16 FPRs might subject franchisees to potential liability 

17 for providing inaccurate data to franchisors who then 

18 use that information in their FPR. And I’d like to 

19 direct this question to Sandy. Since 2007, have you 

20 seen an increase in litigation between franchisees and 

21 franchisor on this issue? 

22 MS. WALL: Christine, not at all. I mean, I 

23 think you could ask really any litigator and they will 

24 tell you that up to this point -- you know, I’m not 

25 aware of any franchisor that has ever tried to bring 

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1 an action against a franchisee on the basis of 

2 information provided that became the basis for an FPR. 

3 However, I think that the reason for that is that FPRs 

4 are not mandated and franchisors that provide FPRs 

5 need to have a reasonable basis for putting the 

6 information together. If the information they get 

7 from prospective franchisees is, in their judgment, 

8 not reliable, they are not going to put an FPR 

9 together. 

10 In addition, if you go forward and you 

11 mandated an FPR, you know, today, in many franchise 

12 agreements, there are provisions that require 

13 franchisees to provide reports and records and 

14 information to the franchisor. And in the default 

15 section, the franchisor may often have a right to 

16 terminate the franchisee if the franchisee 

17 misrepresents the information in the FDD. And, again, 

18 if there was a mandate going forward and a franchisee 

19 provides inaccurate information that becomes the basis 

20 for an FPR, the franchisors may have recourse against 

21 the franchisees for this. 

22 In addition, most franchise agreements have 

23 identification provisions that state that the 

24 franchisee has to indemnify the franchisor for issues 

25 related to the operation of the business and, again, 

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1 you could see that those types of provisions could be 

2 used. Again, it’s unprecedented. You haven’t seen it 

3 today because if the franchisor is not comfortable 

4 with the information, they don’t prepare the FPR. 

5 MS. TODARO: Susan, do you have a followup 

6 on that? 

7 MS. GRUENEBERG: Well, I would just say that 

8 my experience has been anecdotally the same as Sandy. 

9 I have not seen those kind of claims. To try to 

10 protect against being in that situation to begin with, 

11 however, what I think what you’re seeing more of in 

12 FPRs is an explanation of where this data came from, 

13 why it could be different from a prospective 

14 franchisee’s experience, and those explanations are 

15 really crucial to explaining how there is a reasonable 

16 basis for the information being presented. 

17 I know that later on in this workshop you’re 

18 going to be talking about disclaimers and I assume 

19 that a lot of that discussion is going to center 

20 around disclaimers in Item 19. But what you’ll have 

21 to be very careful about is not wiping out these 

22 explanations along with the disclaimers because it’s 

23 crucial for a prospective franchisee to understand 

24 that their experience is not necessarily going to be 

25 the same as the franchisee on whose data that this FPR 

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1 was made. 

2 MS. TODARO: Dale, from a regulator’s 

3 perspective, do you have any thoughts on this 

4 consideration? 

5 MR. CANTONE: Sorry. As a regulator, I 

6 don’t know that we would be in a position to have that 

7 information. So honestly, I wouldn’t know. 

8 MS. TODARO: I would like to move now to the 

9 final consideration that we’re going to discuss today 

10 which was the Commission’s view that the FDD is not 

11 the only way for a prospective franchisee to get 

12 financial performance information. Some of you have 

13 touched on that already, that FPR is our one piece of 

14 the puzzle when a prospective franchisee is deciding 

15 what they want to participate in. 

16 So I guess at the outset, Justin, I’m 

17 wondering if you could give us a sense of what are all 

18 those sources aside from just talking to existing or 

19 former franchisees. Are there others? 

20 MR. KLEIN: Yeah, and I’m sensitive to 

21 Dale’s comment that most, if not many, if not the 

22 majority of franchisees don’t hire lawyers or business 

23 advisors or counselors to help them with this very 

24 important decision. You know, as a lawyer, I highly 

25 recommend that to the extent you’re going to make a 

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1 large investment like that, you get the right people 

2 around you to help you make that investment decision. 

3 One of the things that we suggest to folks 

4 who are looking to get into franchising who have never 

5 done it before is to also look at market conditions. 

6 You know, is the business that you’re looking to buy, 

7 is it appropriate for the area that you’re looking to 

8 operate in and have you spoken to people in the area, 

9 have you spoken to competitors, have you spoken to --

10 you know, to the extent that the franchisor has 

11 multiple brands, have you spoken to franchisees of 

12 other brands that they operate in. You know, how are 

13 the training programs? Talking about, you know, what 

14 the franchisor has to offer separate and apart from 

15 what is actually in the document. 

16 Christine, I’m big on trust but verify as a 

17 lawyer, I guess. So I presume that everybody is good 

18 at heart and the information that’s being included in 

19 the FDD is accurate. But when I say the FDD is really 

20 step one, you know, the FDD is really step one because 

21 it’s giving you information to then go out and verify, 

22 whether it’s with other franchisees, whether it’s with 

23 competitors in the market, whether it’s with other 

24 systems that they have, whether it’s with, you know, 

25 folks who may be in independent businesses that are 

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1 not necessarily operating under a franchisee system 

2 but are in a similar type of a business. 

3 Again, I guess because I’m a lawyer, I am 

4 way risk adverse, so I’m not a prime candidate to buy 

5 a franchise anyway. There’s never enough information 

6 that you could gather from an investment perspective. 

7 And I think the real value of the FDD is it gives you 

8 a starting point to start from to use that information 

9 to begin the journey of your due diligence. 

10 MS. TODARO: Okay. I want to now turn to 

11 Keith, and say, what are your thoughts on these other 

12 sources for a prospective franchisee to use? 

13 MR. MILLER: Of course, looking at what are 

14 the other sources, I mean, sometimes it’s someone 

15 internal improperly giving data outside the disclosure 

16 document. But I think that’s not the big problem. I 

17 think one of the biggest problems is from the third 

18 party, what I would call unlicensed, unregulated 

19 franchise brokers and consultants who have no 

20 fiduciary responsibility to that prospective 

21 franchisee. I mean, they get paid by the franchisor 

22 when the sale happens. 

23 One of the things I’m often quoted in saying 

24 is one of the problems in the industry is far too many 

25 people profit from the sale of a franchise, far too 

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1 few are held accountable for the success of the sale. 

2 Another one that I found quite often is loan 

3 brokers, when people start working on their financing 

4 even in advance of signing the franchise agreement. 

5 These loan brokers often know what needs to put on the 

6 loan applications to qualify for loans, especially the 

7 government guaranteed SBA 7a loans, and they know how 

8 to fill out those forms to get someone qualified to 

9 buy that business, and they are reverse engineering 

10 the numbers to get up to revenue. Again, they have no 

11 accountability to that person. 

12 So I worry there are these people outside of 

13 a franchise company that are throwing around numbers 

14 that people too often take as being gospel and they’re 

15 not. You know, people always say, well, do your due 

16 diligence by contacting franchisees, and I would say 

17 to that, well, if the franchisor gives you that, 

18 obviously, the list is in the disclosure document of 

19 existing franchisees, but often a franchisor will give 

20 people a list that’s basically the top performers, 

21 which is skewing the information. 

22 Then if you try to go out and look for past 

23 franchisees, if you look within the disclosure 

24 document, often the contact information is wrong and 

25 you can’t get a hold of that franchisee, and then if 

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1 there was a bad exit by the franchisee, there’s often 

2 a nondisclosure agreement that’s been signed. So you 

3 won’t hear the downside of the stories, you tend to be 

4 -- when you try to contact franchisees current or 

5 past, tend to get skewed to the better franchisees. 

6 Even with existing franchisees, if it’s a troubled 

7 franchisee, you know, there’s cases right now where 

8 existing franchisees are being sued in violation of 

9 the nondisparagement agreements that are within the 

10 franchise agreement. 

11 So I really don’t see franchisees often as 

12 being a reliable source and that’s why, of course, I 

13 push hard for more data in the disclosure document 

14 because there is some liability and responsibility in 

15 that, and I believe that information in general can be 

16 trusted. 

17 MS. TODARO: Sandy, do you have a followup 

18 to what Keith said? 

19 MS. WALL: Yeah, I mean, Keith, again, I 

20 think you’re focused on the bad actor here. I mean, 

21 what you’re talking about here is if a franchisor 

22 gives a prospective franchisee -- steers them to 

23 specific existing franchisees, that’s a violation of 

24 the disclosure requirements. And, again, there is a 

25 list of franchisees given, there is a list of 

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1 franchisees who have left the system in the last 12 

2 months and the prospective franchisee needs to do 

3 their homework and make the calls. 

4 What you’re referring to about the 

5 confidentiality agreements is addressed in Item 20 of 

6 the FDD. If the franchisor restricts the ability of 

7 franchisees to talk about their experience with the 

8 system, that has to be disclosed in Item 20 of the 

9 FDD, also. Again, this is -- the purpose of 

10 disclosure is to help prospective franchisees make 

11 informed decision-making. The information is there 

12 and if you see all these things in there, if you’re 

13 getting information that’s inconsistent with what’s in 

14 the FDD or you see that all franchisees are required 

15 to sign these types of confidentiality agreements, 

16 these are red flags. Again, the prospective 

17 franchisee has the choice to proceed or not to 

18 proceed. 

19 MS. TODARO: Okay. I would like to jump to 

20 a new topic outside of mandatory FPRs, because the 

21 NASAA commentary which Susan mentioned earlier --

22 Dale, NASAA noted in its 2019 comment that the FTC 

23 should consider incorporating the NASAA FPR commentary 

24 into the Franchise Rule. Why would this be helpful? 

25 MR. CANTONE: The FPR commentary -- well, 

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1 actually, the FPR commentary that NASAA did, the 

2 original impetus was to correct a misconception about 

3 the use of affiliate data and that stemmed from an 

4 unfortunate footnote in the Compliance Guide of 2008 

5 that suggested that franchisors, if they have adequate 

6 operating experience of their own, should not use 

7 affiliate data, that, in fact, affiliates often are 

8 the owners of company-owned outlets. So the original 

9 impetus was clarify the use of company-owned outlet 

10 data. 

11 I may be biased, but I have -- in the last 

12 couple of years, it seems that the NASAA FPR 

13 commentary has been very well accepted in the 

14 industry. It’s used extensively. It has not been a 

15 very controversial, for the most part, guidance issued 

16 by NASAA, and it does address a lot of issues that 

17 needed to be addressed that were open, the use of 

18 affiliate data, subsets. And it’s been working 

19 extremely well in the state regulatory environment. 

20 That’s my perception. The people on the panel can, 

21 you know, share their opinions of it as well. It 

22 really would be a benefit to have the guidance that is 

23 at the state level incorporated at the federal level. 

24 MS. TODARO: Susan, do you have a sense how 

25 likely franchisors are to comply with the commentary 

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1 in nonregistration states? 

2 MS. GRUENEBERG: I’m actually a little bit 

3 surprised at the question because I think there is a 

4 view to comply with the commentary and also with the 

5 more recent guidance that’s provided about FPR 

6 disclosure in the middle of the COVID-19 pandemic. In 

7 fact, I would also echo Dale’s suggestion that it be 

8 incorporated. In fact, I think there’s an appetite 

9 for more commentary and more guidance about Item 19 

10 out there on all levels because the commentary is 

11 great as far as the goes, but it certainly doesn’t 

12 address every issue that comes up, and there are 

13 constantly new ones. And this kind of guidance is 

14 very helpful to us in preparing FPRs with the 

15 assurance that we’re more likely to achieve that 

16 illusive reasonable basis which nobody seems to be 

17 able to define exactly. 

18 So I would definitely support it, and I do 

19 think there’s widespread or there should be widespread 

20 compliance with it in states that don’t have their own 

21 state franchise laws regulating the offer and sale of 

22 franchises. 

23 MS. TODARO: Dale, is there a followup that 

24 you want to add? 

25 MR. CANTONE: Yeah. I just wanted to add 

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1 that if there’s a concern about the fact that the 

2 commentary might be impacting negatively FPRs, I have 

3 data from my state. The year before the FPR 

4 commentary was adopted, our records show 60.87 of 

5 franchisors registered in my state made some type of 

6 FPR. The year after the NASAA FPR commentary was 

7 adopted, the number actually increased. So it did not 

8 negatively impact franchisors from making FPRs. Just 

9 thought I would add that. 

10 MS. TODARO: Okay. And, Justin, just to 

11 follow up on what Susan said, in your practice, do you 

12 see that franchisors in nonregistration states are 

13 following the NASAA commentary? 

14 MR. KLEIN: Yeah, no, I agree with both Dale 

15 and Susan on their ultimate conclusions. Again, my 

16 fear goes back to not only the franchisees who can’t 

17 hire lawyers who are qualified, but franchisors who 

18 can’t hire lawyers who are qualified. My bigger 

19 concern is whether or not folks are actually complying 

20 with the regulations that are out there. So I think 

21 the more information that can be -- the more guidance 

22 that can be given, the better it is. But again, our 

23 biggest fear is garbage in/garbage out. And I think 

24 unless there’s some enforcement prospective to what 

25 the requirements are, then I’m not really sure what 

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1 the value of any of it is. 

2 MS. TODARO: And, Sandy, do you have a 

3 followup on that? 

4 MS. WALL: Again, I think the FPR commentary 

5 has provided terrific guidance in many areas. The 

6 only caution I would mention at this point is the 

7 whole issue of disclaimers and providing factual 

8 information that explains what the FPRs cover and what 

9 it doesn’t cover. That’s still an ongoing discussion 

10 that franchisors and state regulators have. And I 

11 just would want there to be caution here that, again, 

12 while some of the language in the commentary is 

13 absolutely clear what you can and cannot do, there are 

14 certain sections in here which are open to 

15 interpretation. 

16 Therefore, I guess I would be more for sort 

17 of presumption that if you comply with the commentary, 

18 you’re in compliance with the FTC Rule rather than 

19 saying absolutely comply. Because I’m not sure in 

20 some instances it is 100 percent clear you need to do 

21 to comply with the commentary. 

22 MS. TODARO: Okay, thank you. 

23 Just on the final point I want to note, 

24 Susan, you touched on this, which is reasonable basis 

25 and I think, Dale, you did as well. Is there 

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1 confusion in the industry about what a reasonable 

2 basis is? And this will be our final point because we 

3 are at the end of the panel. 

4 So I’ll turn it over to Dale. 

5 MR. CANTONE: I think there is. I mean, 

6 first of all, it’s not defined anywhere. Under the 

7 Rule, franchisors have the burden to show they have a 

8 reasonable basis. So in some ways, that’s kind of 

9 unfair to the franchisors. But I can tell you from 

10 our experience -- somebody mention the NASAA Franchise 

11 Project Group’s guidance on making an FPR during the 

12 pandemic. I cannot tell you how many franchisors in 

13 response to questions to state regulators were under 

14 the impression that all you need to have is 

15 historically accurate information. I don’t think that 

16 is entirely the reasonable basis. 

17 So the fact that that many legitimately 

18 represented franchisors have that impression, I think 

19 leads me to believe there is confusion about what 

20 exactly is a reasonable basis, at least in the 

21 historic -- context of historical FPRs. 

22 MS. TODARO: All right. Sandy, do you agree 

23 with that? 

24 MS. WALL: Again, I think taking the view 

25 that it’s historical isn’t really the full analysis 

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1 that you have to engage in here. If you look at the 

2 FTC Rule and Section 436.7(d), a franchisor is 

3 obligated to notify the prospective franchisee of 

4 material changes that the seller knows or should have 

5 known occurred in the information contained in the 

6 FPR, I think that clearly addresses an obligation to 

7 be looking at your FPRs constantly to make sure that 

8 the reasonable basis that you had when it was prepared 

9 still exists today. 

10 Again, also, prospective franchisees have 

11 the right to request substantiation of the information 

12 in the FPR. And, again, I think that’s something 

13 that’s not used as much as you would think in the 

14 industry. 

15 So while reasonable basis isn’t defined, I’m 

16 not sure you could ever properly define it. I think 

17 it’s based on -- it’s a question of fact that the 

18 franchisor is responsible for determining, who would 

19 have to prove in a court of law, if necessary. 

20 MS. TODARO: Okay. And with that, I want to 

21 thank each of the panelists for participating today. 

22 We’ve just run slightly over time. Thanks for bearing 

23 with us. I think this is a very interesting and 

24 informative discussion. So thank you very much. 

25 

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1 

2 A DISCUSSION OF DISCLAIMERS, WAIVERS & QUESTIONNAIRES 

3 MR. DOAN: Good afternoon or good morning as 

4 the case may be. My name is Josh Doan and I’m an 

5 attorney in the FTC’s Division of Marketing Practices. 

6 This panel will explore some of the comments 

7 the FTC received last year about the use of 

8 disclaimers, waivers of reliance, and questionnaires 

9 in connection with franchise disclosure documents and 

10 franchise agreements. If we have time, I will try to 

11 incorporate questions we receive from our virtual 

12 audience. Please submit those questions to franchise 

13 rule@FTC.gov. 

14 We have a lot to cover, but first I would 

15 like to briefly introduce our distinguished panelists. 

16 Their bios are available on the event page if you 

17 would like to learn more about their impressive work. 

18 Howard Bundy is a Seattle, Washington attorney who 

19 represents franchisors in dispute resolution and also 

20 works -- or, I’m sorry, represents franchisees in 

21 dispute resolution and also works with franchisors in 

22 preparing contracts and disclosures. 

23 Amy Cheng is a partner at Chicago’s Cheng 

24 Cohen LLC, where she represents franchisors on the 

25 structuring and operation of their franchise programs 

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1 through all phases in domestic and international 

2 development. 

3 Theresa Leets in the Assistant Chief Counsel 

4 of the Securities Regulation Unit of the California 

5 Department of Financial Protection and Innovation’s 

6 Legal Division, where she supervises programs under 

7 the State’s Corporate Securities Law of 1968 and 

8 Franchise Investment Law. 

9 Brandon Moore is a resident of Northern 

10 Virginia and a former franchisor who will bring a 

11 nonlawyer’s perspective to today’s panel. 

12 And Lee Plave is a partner at Reston, 

13 Virginia’s Plave Koch, PLC, where he counsels 

14 franchisors and distributors, drafts and negotiates 

15 agreements for international and domestic transactions 

16 and advises clients on all aspects of franchise and 

17 distribution law. 

18 So as we get started, I would like to say on 

19 behalf of myself and the panelists, the views we 

20 express today are our own and do not necessarily 

21 reflect the views of the Federal Trade Commission or 

22 any other organization, law firm, or company. 

23 So with that, let’s get started by talking 

24 about disclaimers. The Franchise Rule prohibits 

25 disclaimers and representations made in franchise 

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1 disclosure documents or in its exhibits or amendments. 

2 So I’d like to start by asking Howard Bundy, are 

3 franchisors still making disclaimers in their 

4 disclosure documents despite that prohibition, and if 

5 so, in which items? 

6 MR. BUNDY: Josh, yes, they are. They 

7 continue to make them. If anything, we’ve seen an 

8 increase in the use of what I would generally 

9 characterize as disclaimers since 2007. Disclaimers 

10 come in three forms. There are outright disclaimers, 

11 there are waivers of reliance or statements of 

12 nonreliance; or there are acknowledgments, 

13 acknowledgments that appear to be benign but are not 

14 at the end of the day. 

15 So yes, we see an increase. I think it is 

16 approaching the point now where for an attorney doing 

17 compliance work for a franchisor, if you do not 

18 include all of those, you probably are exposed to 

19 legal malpractice concerns. It is that always -- that 

20 much always present that we see those. 

21 You also hear back from franchisor clients, 

22 who are going through the process, that everybody else 

23 has these disclaimers, they have read on the internet 

24 or heard in seminars how valuable the disclaimers are, 

25 and they want them, too. 

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1 So, in my view, this is the most important 

2 of the issues before the FTC today, because unless the 

3 Commission or the states get a handle on the 

4 disclaimer issues, the remainder of the disclosure is 

5 basically wasted. Everything else contained in the 

6 Rule, all of the other issues the FTC is looking at, 

7 get superseded and rendered essentially meaningless if 

8 the franchisor can go outside of the document, outside 

9 of the FDD, and say whatever they want to say in order 

10 to make a sale and then hide behind a waiver and 

11 disclaimer to avoid liability in the end. 

12 And, yes, I wish it were not true, but 

13 particularly federal courts and arbitrators broadly 

14 enforce waivers and disclaimers against franchisees. 

15 Maybe we can talk later about what the franchisee 

16 thinks he or she is signing when they sign the waivers 

17 and disclosures. But I’ll leave that for later. 

18 In terms of where these are found, they are 

19 found, number one, in Item 19, they are found in Item 

20 11, and they are found in a separate section of the 

21 FDD that has become omnipresent that usually follows 

22 just ahead of the receipt pages, but it flows around 

23 in there somewhere in the exhibits portion. It’s 

24 usually a one-to three-page document with a series of 

25 questions that the franchisee is required to answer 

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1 yes or no. 

2 Those get presented by the transactional 

3 lawyers and by the franchisors, as necessary to police 

4 potentially problematic salespeople, the rogue 

5 salesperson defense. But the minute the franchisee 

6 makes a claim later they were lied to or misled, that 

7 disclaimer, that questionnaire comes in as Exhibit A 

8 from the defense side, and it’s very --

9 MR. DOAN: Well, thank you, Howard. And we 

10 are -- sorry. We are going to get into questionnaires 

11 and acknowledgments a bit. There’s a lot of in your 

12 response that I just want to follow up on that a bit. 

13 One of the items that you mentioned where you report 

14 continuing to see disclaimers is in Item 19, and Item 

15 19 was the subject of the first panel today. And as 

16 we left off, I believe Sandy Wall, one of the 

17 panelists, was touching on attention that maybe we can 

18 explore a bit here between adequately explaining, from 

19 a franchisor’s perspective, the reasonable basis for a 

20 financial performance representation and an 

21 impermissible disclaimer. 

22 So, Lee Plave, do you want to take that up? 

23 MR. PLAVE: I’m happy to. Thank you for 

24 having us on this discussion. It’s very interesting 

25 and very useful. 

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1 There’s a big difference between explaining 

2 and disclaiming, and a disclaimer is flat out 

3 prohibited under 436.9(h) in any case. So a 

4 disclaimer that’s made in the context of the FDD is, 

5 by definition of the rule, ineffective. So I leave it 

6 at that. 

7 I think it would be very hopeful, though, 

8 and to pick up on a point that the first panel 

9 discussed, if your goal is to see more FPRs and more 

10 fulsome information, then allow people to give some 

11 explanation and some context, particularly in a year 

12 like this one where there’s so much context that’s 

13 needed. It is a difficult year in which to try to 

14 provide details without providing some explanation. 

15 Now, that’s not to say that it’s a disclaimer. It’s 

16 an explanation. 

17 I don’t think anyone would have an objection 

18 if the Commission would take the rule that currently 

19 exists which says no disclaimers and just make it more 

20 obvious as to what they mean by that and to make it 

21 clear that no disclaimers mean that anything that’s a 

22 disclaimer is ineffective. I think most franchise 

23 lawyers -- most franchisor side lawyers work from that 

24 presumption to begin with. 

25 So I’ll answer your specific question with 

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1 that specific answer. I don’t think we need to 

2 overturn things. We already have a clause in the Rule 

3 that says disclaimers are ineffective. You don’t have 

4 to go any further. 

5 MR. DOAN: Amy Cheng, I see you nodding 

6 along. Is there anything you would like to say to 

7 supplement or complement Lee’s response? 

8 MS. CHENG: Yes. Well, I absolutely agree 

9 with Lee in that Item 19, there is also already a 

10 required disclaimer, right? The FTC says you’ve got 

11 to include an admonition, right, that a new 

12 franchisee’s results may differ from the information 

13 that’s contained in the FDD. I think that’s 

14 sufficient in terms of the disclaimer. 

15 But as Lee said, especially during these 

16 times -- unprecedented times, we’re including 

17 information in Item 19 to provide as up-to-date 

18 information as possible to prospective franchisees. 

19 But that does require some unusual explanation, and if 

20 not only because of 2020 and the pandemic, but as 

21 franchisors provide up-to-date information and provide 

22 more detailed information, it’s important to allow 

23 franchisors to include as much information as possible 

24 so they are disclosing the material basis on which 

25 they are including the information. 

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1 So to conclude that that explanation is a 

2 disclaimer I think would be inaccurate conclusion. 

3 MR. DOAN: Teresa Leets, would you like to 

4 jump in and provide the perspective of a state 

5 regulator from a registration state? 

6 MS. LEETS: I would. I want to thank you 

7 for inviting me here today and for joining this 

8 fantastic panel. 

9 My first comment on disclaimers is that I 

10 think it would be helpful if the FTC added a 

11 definition of disclaimer to the Rule to create 

12 clarity. So I think if everyone was working under the 

13 same definition, there would be less uncertainty in 

14 the space. 

15 I understand the term to mean any language 

16 that mitigates, contradicts, or disavows information 

17 presented in an FDD, but to the point about after the 

18 admonition, especially during the uncertain times that 

19 we’re living in today, regulators here all the time, 

20 sometimes franchisors add a helpful explanation and 

21 it’s not a disclaimer. But if the explanation applies 

22 to all businesses generally, most regulators view it 

23 as a disclaimer because, again, it mitigates, 

24 contradicts, or disavows the FPR, meaning it has no 

25 basis. 

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1 However, if a franchisor adds language to 

2 explain a circumstance or a condition specific to a 

3 business model, like the size of territory or seasonal 

4 demand for the product, and explains how that might 

5 cause results to vary, that would be allowed. But 

6 regulators generally find if a franchisor adds a 

7 disclaimer to an FPR, it implies the FPR is not 

8 representative or it’s not accurate and it’s likely to 

9 mislead. 

10 Also, I want to add that if a franchisor 

11 knows key factors that causes results to vary and they 

12 don’t include it, that is likely to be a material 

13 omission, and I would argue, a deceptive sales 

14 practice under both state and federal law. So I’m on 

15 board with explanations when they’re specific and 

16 certainly not when they’re general. 

17 MR. DOAN: Okay. One of the things that you 

18 mentioned, Theresa, was -- and I believe it was 

19 mentioned by others -- is the Item 19 admonition. So 

20 under the Franchise Rule, a franchisor who makes a 

21 financial performance representation under Item 19 

22 must include a clear and conspicuous admonition that a 

23 new franchisee’s individual financial results may 

24 differ from the result stated in that financial 

25 performance representation. 

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1 The North American Security Administrators 

2 Association, which is sometimes referred to as NASAA, 

3 has issued commentary on what those admonitions may 

4 say. So should the FTC consider adopting the NASAA 

5 commentary on those admonitions? 

6 Howard, do you have a perspective on that? 

7 MR. BUNDY: Josh, I’m of two minds on the 

8 issue, and I apologize to everyone in advance for the 

9 fact that I have a split personality on that. On one 

10 level, I would not advocate for adoption because NASAA 

11 is more agile than the FTC can ever be, and one of the 

12 beauties of the commentary process is that it allows 

13 for a living document that changes as the world 

14 changes, that responds as problems are heard. So at 

15 that level, I would not like to see it adopted in a 

16 static form. 

17 If there is a way to adopt it in a nonstat 

18 form, so it can be a living, breathing, developing 

19 document, I would love that. So split personality 

20 today. 

21 MR. DOAN: Amy, you are a franchisor 

22 attorney working in a registration, but non-NASAA 

23 state, so let me ask you. Are franchisors tending to 

24 follow the NASAA guidelines on admonitions in both, I 

25 guess, registration, non-NASAA member states and 

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1 nationally even in nonregistration states? 

2 MS. CHENG: I would say yes. For most of my 

3 clients, I would advise them to follow the NASAA 

4 guidelines in preparing the Item 19 disclaimer 

5 because, one, you don’t know if the franchisor is 

6 going to expand into a registration state or not that 

7 we would need to comply with the NASAA guidelines. 

8 And, second, frankly, I don’t see any issue with the 

9 NASAA guidelines. I think it’s a clear admonition. 

10 Theresa is agreeing with me for once, I think. And it 

11 helps franchisors all have a level playing field for 

12 everyone to say the same thing. 

13 So now, if the question is should the FTC 

14 adopt it, I don’t have concerns with the FTC adopting 

15 it. However, I’m not sure it’s absolutely necessary, 

16 because I think it’s -- complying with the guidelines 

17 are complying with the FTC requirement itself. So I’m 

18 not sure that if we’re going to recommend for the FTC 

19 to revise the Rule, this would be, from my 

20 prospective, an important focus that the FTC would 

21 want to deal with right now. 

22 MR. DOAN: Okay, thank you. 

23 Lee, was there anything you wanted to add? 

24 MR. PLAVE: Only that most franchisors try 

25 to have one FDD that applies throughout the country. 

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1 And to echo Amy’s point, if you’re going to prepare an 

2 FDD, you don’t prepare one for some states and others 

3 for other states in the most part. As a consequence, 

4 you typically prepare it so that you’re satisfying the 

5 requirements in all of the states. 

6 I would add, though, that the NASAA 

7 guidelines, which are perfectly well-intentioned and 

8 are not that difficult to deal with at least on paper, 

9 didn’t go through the same kind of rigorous review, 

10 comments, analysis, and sort of rule-making that the 

11 Federal Trade Commission typically adopts under the 

12 APA and the Magnuson Moss Warranty Act. So it’s a bit 

13 of a different animal in terms of how it’s developed 

14 and how it has become a part of the regulatory 

15 climate. I’m not sure that you would end up in the 

16 same place as you started if you went through that 

17 analysis. 

18 MR. DOAN: And are you speaking to the 

19 admonition provisions of the NASAA guidance in 

20 particular or do you feel the same way about the NASAA 

21 guidance on financial performance representations 

22 generally? 

23 MR. PLAVE: No, the admonitions don’t bother 

24 me. It strikes me that we can all agree on what the 

25 appropriate boilerplate should be and it will end up 

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1 in the right spot. It’s things like an absolute 

2 prohibitional ban on company-owned unit information 

3 being applied if a franchisor has any franchise units 

4 in its network. 

5 I’ll give you an example. We have many 

6 clients that are fairly innovative and they come up 

7 with a different design for the units they’ve already 

8 got. Under those circumstances, we’ve been told that 

9 the examiners will not permanent the use of company10 owned data without franchise data, but the franchise 

11 data is for literally a different concept, different 

12 format of a unit. In the last 15 or 20 years, what 

13 has been previously called nontraditional has actually 

14 become traditional because people are constantly 

15 innovating and trying to fit the needs of the market. 

16 So if a franchisor comes up with a different 

17 form out of a unit, whether it’s a kiosk, a cart, a 

18 small format, a large format, a store within a store, 

19 whatever the innovation is, they may have company20 owned stores where they’ve tried it out and given it 

21 an opportunity to pay out and they’ve got some 

22 results. But they don’t have franchisees who have yet 

23 adopted that new format, that new model, and the like. 

24 Being able to provide information about those units is 

25 really useful, but under the NASAA guidelines it’s 

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1 bad, because if you have any franchise units, you must 

2 give that information as well and that information has 

3 nothing to do with the kind of format of units that 

4 they’re offering at the present time. So there are 

5 tensions that need to be addressed. 

6 I suspect with some rational approaches to 

7 handling those things that could done, but that’s just 

8 one of the examples of why I think it would be really 

9 useful to have a more formal vetting of that with 

10 commentary and with responses to the comments and full 

11 analysis that I know is typical of an FTC rule-making. 

12 MR. DOAN: Thank you, Lee. 

13 Unless anybody else has anything else on 

14 disclaimers, I would like to move to a related topic, 

15 which is waivers of reliance. 

16 So under the Franchise Rule, franchisors may 

17 not require franchisees to waive reliance on 

18 representations in the franchise disclosure document 

19 or its exhibits or attachments. The Rule does allow 

20 franchisors to use integration clauses, so long as the 

21 clause does not purport to disclaim liability for 

22 statements authorized by franchisors in their 

23 disclosure documents. 

24 So my first question is, do waivers and 

25 integration clauses remain a problem in 2020? 

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1 Brandon Moore, do you have a perspective on 

2 this? 

3 MR. MOORE: Yes. Absolutely I think these 

4 clauses are a problem. Essentially, they give any 

5 person involved in the sales process a license to 

6 stretch the truth in order to make a sale. Obviously, 

7 FPRs are the most hotly discussed issue when it comes 

8 to this, so I don’t think that we need to discuss them 

9 too heavily. But during the due diligence process, 

10 franchisees are asking dozens of questions and 

11 reviewing marketing materials surrounding the 

12 opportunity. Some of them might relate to the actual 

13 business model, the services that they’ll be able to 

14 offer, what product lines they gain access to, even 

15 what level of support or service they can expect as 

16 part of their royalties, or even the experience 

17 necessary to survive in the franchise. 

18 The answers to these questions and marketing 

19 materials are then used as part of their decision20 making process. They repeat it to their business 

21 partners, their family, their friends, and then 

22 they’re taken to perform competition analysis. They 

23 study the proposed territory, their location. They 

24 build a business plan and even construct a pro forma 

25 based off of these representations. 

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1 In some cases, the time comes when the 

2 franchisee realizes that the opportunity wasn’t 

3 necessarily as described and perhaps a discrepancy 

4 with the representation that was material to their 

5 purchase decision. By this time, it’s frequently too 

6 late and they’ve already signed a franchise agreement 

7 with an integration clause and then they cannot afford 

8 a multi-year legal battle with bills going into the 

9 hundreds of thousands of dollars. 

10 Instead, they likely go on to fail as a 

11 business owner and they file bankruptcy and all of the 

12 negative things that come with that. When this does 

13 happen because the franchisor knew that they could say 

14 whatever was necessary to make the franchisee 

15 comfortable with signing, whether or not it was 

16 accurate, and then hide behind the integration clause, 

17 at that point, there’s really no other options left 

18 for the franchisee except to hope for regulatory 

19 intervention. 

20 MR. DOAN: Thank you, Brandon. 

21 Howard, is your experience representing 

22 clients the same as Brandon’s? 

23 MR. BUNDY: I think Brandon pretty much said 

24 it all, that it’s not even the existence of the 

25 integration clause that’s the big issue, it’s how it’s 

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1 used. An integration clause, in its pure sense, is 

2 nothing but telling the parties that there are no 

3 agreements outside of the document. Where it becomes 

4 a problem is when it’s presented as a defense to fraud 

5 in the inducement or deceit of the inducement. So 

6 there needs to be a way to limit the reach of the 

7 integration clauses and related waivers of reliance to 

8 just the contract issues. I have no problem with 

9 that. 

10 But if we can limit it so it doesn’t reach 

11 out and become a defense to fraud in the inducement, 

12 then I think we can find some common ground, and I 

13 think that would be extremely beneficial to 

14 franchisees who are investing billions of dollars in 

15 the franchises and often losing it with no remedy 

16 available except, as Brandon said, file for 

17 bankruptcy. 

18 Ideally, the franchise industry is not here 

19 to enrich bankruptcy lawyers and to make money out of 

20 the U.S. Treasury, because much of what is financing 

21 for franchises comes directly out of the Small 

22 Business Administration and thus out of taxpayers’ 

23 pockets. It’s billions of dollars a year in losses to 

24 taxpayers that results because of -- and in large part 

25 because of these waivers and integration clauses 

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1 improperly applied. So yes. 

2 MR. DOAN: All right. Lee Plave, do you 

3 have any reaction to that? Is the issue with allowing 

4 the inclusion of integration clauses -- is the problem 

5 the way courts look to them after there’s a contract 

6 dispute? Where do you come down on this? 

7 MR. PLAVE: Well, you just hit the nail on 

8 the head. You referred to a franchise agreement as a 

9 contract. It’s hornbook, black letter law that in a 

10 contract, parties have the right, if not the need, to 

11 say this is the contract. Look at Corbin on 

12 contracts, California Supreme Court, 9th Circuit, 2nd 

13 Circuit, all of the circuits, a contract with an 

14 integration clause is part of American jurisprudence. 

15 It’s not to say that -- again, to go back to the 

16 previous portion of our discussion, it’s not to say 

17 that there is anyone disclaiming what’s in the FDD. 

18 But it is entirely reasonable for parties to say, our 

19 contract is what’s in this document and nothing else. 

20 It’s no different in the world of 

21 franchising than it is in the world of buying a car or 

22 signing a lease for commercial real estate, buying a 

23 home, or any other transaction. An integration is 

24 fully understood and accepted throughout the American 

25 legal jurisprudence. Changing that here wouldn’t make 

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1 any sense at all. 

2 The issue is really being able to read and 

3 understand the contract. And if a franchisee has an 

4 issue with that, and I can certainly understand why 

5 that would be the case, they need to engage counsel, 

6 experienced competent counsel to assist them. If they 

7 choose not to spend the money on counsel when they are 

8 making an investment of this nature, then I feel badly 

9 for them, but that’s not the smart decision to make. 

10 You would no sooner buy a home without some lawyer 

11 involved to help you understand the provisions than 

12 you would sign a contract of this magnitude without 

13 having a qualified and experienced lawyer. I think 

14 that’s the right way to go. 

15 MR. DOAN: Theresa, do you have a 

16 perspective on this as a regulator or do you view this 

17 as more a dispute between the parties to the contract? 

18 MS. LEETS: Oh, no, it goes so much further. 

19 I think -- and I realize, technically, as an attorney, 

20 I agree with what Lee is saying, but I think it’s only 

21 part of the story, and I think Brandon spoke to the 

22 other part. 

23 Integration clauses illustrate the power and 

24 information imbalance in the franchise relationship 

25 that favors the franchisor, and these clauses 

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1 circumvent investor protection. If the public policy 

2 is to prevent false and deceptive sales practices, 

3 then we need to modify these integration clauses, 

4 right, and they need to have language that don’t allow 

5 the franchisor to prevent a franchisee from bringing a 

6 claim for false and deceptive sales practices, right. 

7 And these clauses should also allow franchisees to 

8 rely on representations made by former and existing 

9 franchisees. 

10 The Rule recognizes that existing and former 

11 franchisees offer material information about the 

12 franchisor, the franchise system and the relationship. 

13 But these integration clauses say, look, if it’s not 

14 in the FDD, you can’t rely on it and you’re not 

15 relying on any representations made and, yet, they 

16 don’t have to make FPRs. So a lot of information that 

17 people need to make an informed decision are not in 

18 the contract, they’re not in the FDD, and these 

19 integration clauses circumvent the franchisee’s 

20 ability to bring a lawsuit, if they even have the 

21 money to bring a lawsuit. 

22 So I think fairness requires disputes over 

23 false and deceptive sales practices should be 

24 determined by a trier of fact and not by an 

25 integration clause, because when allegations of fraud 

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1 are proven, it allows the industry to identify, 

2 remove, or rehabilitate bad actors. And it’s 

3 necessary for investor protection. So transparency, 

4 accountability in the sales process, it preserves the 

5 integrity of franchise channel of commerce. 

6 So yes, integration clauses are a normal 

7 part of contract law, but the franchise relationship 

8 is a very different creature, and I think we have to 

9 recognize the power and information imbalance favors 

10 the franchisor. 

11 MR. DOAN: Amy Cheng, I couldn’t tell 

12 whether you were agreeing with Theresa there and 

13 suspected you might not be. Anything you’d like to 

14 add? 

15 MS. CHENG: Not fully in this instance. So 

16 a couple points. I absolutely agree with Lee that you 

17 would be taking away one of the basic principles in 

18 contract law if you take away the integration clause, 

19 and I don’t see why this relationship is any different 

20 than any other relationships, right, that are governed 

21 by a contract. 

22 But, also, if you look at it from a 

23 franchisee’s perspective, if I’m a franchisee, 

24 wouldn’t I want to know the terms of my relationship? 

25 I would want to know as well. So I’m not sure that 

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1 taking away the integration clause protects the 

2 franchisee from that perspective as well. 

3 A franchisee is entitled -- two parties are 

4 entitled to know the terms of their relationship. And 

5 without documenting it on a piece of written 

6 agreement, I don’t know how anybody would ever be able 

7 to guess their obligations, future obligations during 

8 the relationship, right. 

9 And, two, I don’t agree that taking away the 

10 integration clause is the way to go so that 

11 franchisees cannot sue franchisors for fraud. There 

12 are many claims that I think franchisees have 

13 successfully brought under state false and deceptive 

14 trade practice acts and where franchisees have 

15 prevailed, right. And we have gone many years now 

16 with integration clauses in most of these contracts 

17 where franchisees have prevailed, where the 

18 circumstances are correct for them to do so. 

19 So I’m not sure taking the integration 

20 clause really would -- having the integration clause 

21 would prevent the franchisees from bringing those 

22 lawsuits. I think franchisees will be able to bring 

23 those lawsuits and will continue to be able to prevail 

24 if the circumstances are there. 

25 And, third, if you take away from the 

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1 integration clause and now we don’t have the agreement 

2 in writing, right, what happens if a franchisee or a 

3 franchisor transfers the agreement? Franchisees and 

4 franchisors assign franchise agreements all the time. 

5 Franchisees sell their businesses. Some buyers assume 

6 existing contracts while others may sign a new 

7 contract. It takes away the ability, frankly, for a 

8 franchisee to be able to do that and for a franchisor 

9 to be able to assign a contract. Who would spend 

10 money to purchase a contract where they don’t 

11 understand and can’t rely that the terms of the 

12 contract will continue going forward? 

13 MS. LEETS: So can I respond to that, Josh? 

14 MR. DOAN: Sure, and then let me go to 

15 Howard and Lee after that. 

16 MS. LEETS: Really quickly. Yeah, I agree 

17 with what Amy is saying in that certain integration 

18 clauses are okay. It’s that part of the integration 

19 clause that says that the franchisee did not rely on 

20 or have any representations outside the FDD. That’s 

21 the problem part, and that’s the part that has to be 

22 removed or limited, and that’s the part that prevents 

23 franchisees from bringing lawsuits, not the standard 

24 integration clause saying this is the intents of the 

25 parties. Absolutely, that should be in the agreement. 

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1 MR. DOAN: Okay, Howard, do you have 

2 something you would like to add? 

3 MR. BUNDY: Thank you. I wanted to take 

4 issue with something that Lee said and that also came 

5 up in the first workshop this morning, and that is the 

6 statement that franchisees, before they invest, should 

7 consult with someone like me before they invest. The 

8 reality is somewhere different from that. 

9 Prospective franchisees tend to come to the 

10 table with a mixed bag of experience, out of large 

11 corporations, they’re retired teachers, they’re young 

12 couples, almost never having business experience. 

13 Their first thought is not to talk with lawyers. They 

14 are talking with the sales rep or the franchise 

15 executive that’s trying to sell them the franchise. 

16 And throughout that process, they are being told, both 

17 directly and through more subtle means, that they 

18 should not waste their money on lawyers because this 

19 document’s been reviewed and approved by the 

20 Government and it’s a safe investment because of that, 

21 and, besides, we don’t negotiate anything, we won’t 

22 change asking anything. 

23 That results in prospective franchisees 

24 saying, well, if they won’t change anything, if they 

25 won’t negotiate anything, why should I spend a few 

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1 thousands dollars having a lawyer look at it? And, 

2 yes, that is a wrong decision, but that is the 

3 decision that’s being driven by the sales process. 

4 And believe it nor not, even that set of 

5 misrepresentations that leads to those bad decisions 

6 to not hire counsel is wiped out by these clauses that 

7 we’re here to talk about today. 

8 MR. DOAN: Lee Plave, what would your 

9 response be? 

10 MR. PLAVE: Yeah, it will come as virtually 

11 no surprise that I disagree with virtually everything 

12 that Howard just said. But I would -- you know, I’m 

13 not going to refer to him the way that Vincent 

14 Laguardia Gambini might have responded. 

15 But the reality is, what you’ve described, 

16 Howard, and to a degree also what Theresa described, 

17 was an information imbalance. And that’s precisely 

18 what disclosure is intended to address. I’m not aware 

19 of the instances that you’re talking about -- and I’m 

20 sure that when the rule-making record opens up, you’ll 

21 put in copious evidence of that. I’m not aware of 

22 franchisors that discourage prospective franchisees 

23 from talking to lawyers. Precisely the opposite. 

24 But to address that imbalance, the easiest 

25 thing to do would be to have the FTC require 

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1 boilerplate that says, this is a serious investment. 

2 We recommend strongly that you seek out counsel with 

3 experience in this area and an auditor with experience 

4 in this area. I was part of the FTC’s team that 

5 regulated used cars and funerals years ago. As 

6 expensive as those are, they pale in comparison to the 

7 cost of buying a franchise. 

8 Buying a franchise is an investment that 

9 runs somewhere between $50,000 on the low end and well 

10 north of $1 million on the high end. It’s just 

11 inconceivable to me that somebody would make a 

12 judgment of that nature and elect not to hire counsel 

13 because it’s too expensive. If you’re going to spend 

14 that kind of money, you make the choice of hiring 

15 counsel. And if you choose not to, that’s not a 

16 choice that’s attributable to the other side of the 

17 equation. 

18 The FTC, however, can address that imbalance 

19 by adding a disclaimer -- not a disclaimer, a 

20 statement that -- yeah, a disclaimer -- a statement 

21 that would tell the franchisee go out and find a 

22 lawyer, go out and find an accountant. I think that 

23 would be a really useful thing to achieve the public 

24 policy goal of encouraging people to hire folks like 

25 Howard or talking to Brandon or talking to other of 

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1 their colleagues who know what they’re talking about. 

2 And even if they don’t get changes in the 

3 agreements, get an assessment of what the contract is 

4 that you’re signing. It’s a critical thing. And the 

5 notion that you can rely on anything that somebody 

6 said is really interesting. We’ve seen franchisees as 

7 well make statements about their own experience, their 

8 past. It’s got to, at some point or another, say, 

9 okay, we’re done. That’s the parol evidence rule. 

10 Centuries of jurisprudence suggest that that’s the way 

11 to go. I don’t see how the franchise world is much 

12 different. 

13 However, if you do believe that there is an 

14 information imbalance, as Theresa suggests, while I 

15 don’t know specifically what information that is or 

16 how you deal with that, I’d suggest that additional 

17 disclosure or additional mandatory boilerplate 

18 language to explain you cannot rely on things that 

19 were told to you before you sign this contract -- read 

20 this contract; this is the entire ball of wax. If you 

21 have statements to that effect, you put somebody on 

22 notice through the regulatory process that what they 

23 might have heard earlier just doesn’t have any bearing 

24 on what goes forward from here on out. I think that’s 

25 the better way to proceed. 

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1 MR. DOAN: Amy, I couldn’t tell whether 

2 there was something you wanted to add. Did Lee cover 

3 it all? 

4 MS. CHENG: I think Lee covered most of it. 

5 But I think there is a misconception that franchisors 

6 don’t want franchisees to read the FDD and read the 

7 agreement. I can tell you that most of my clients not 

8 only want them to, but they actually spend a lot of 

9 time walking franchisees through these documents to 

10 explain. Because as a franchisor, frankly, you don’t 

11 want to get into a relationship with somebody who has 

12 not read the contract. 

13 I tell my clients all the time, you’d rather 

14 sell a franchise to somebody who has read the contract 

15 and understands the terms of the relationship than 

16 somebody who goes in there with their eyes closed. So 

17 franchisees also, they do have a responsibility to do 

18 so. If they’re going to spend half a million dollars, 

19 it’s amazing how many people will spend half a million 

20 dollars and not spend the money to have an advisor to 

21 advise them regarding the contract, if necessary. 

22 MR. DOAN: Thank you, Amy. 

23 Let’s talk about the questionnaires and 

24 acknowledgments then, if we can move on. My 

25 understanding is that some franchisors use 

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1 questionnaires or acknowledgments during the sales 

2 process. How prevalent is the use of those documents 

3 and how and at what stage of the negotiation or 

4 discussion of a potential franchise relationship are 

5 the questionnaires or acknowledgments presented to 

6 franchisees? 

7 Brandon Moore, do you have a view on that? 

8 MR. MOORE: Yeah. Typically, this 

9 document’s presented on the tail end of signing the 

10 agreement as kind of a followup, oh, one last item, we 

11 just need you to sign this. Typically, franchisors 

12 may say, I need you to answer favorably towards the 

13 franchisor for all of these questions or else you 

14 might not be able to get the franchise. I’ve only 

15 heard of one instance where somebody documented this, 

16 or that they did receive, you know, something -- they 

17 did answer unfavorably towards the franchisor. 

18 But also, too, what’s curious about this is 

19 that if you have any questions about the definitions 

20 of the things that you’re asking to -- about the 

21 question, such as, what is an FPR, you know, in the 

22 same breath that they’re asking you to fill out this 

23 form, they’re also going to tell you, oh, well, don’t 

24 worry about what an FPR is, you’ve never seen one 

25 because we don’t make them. And so there is a little 

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1 bit of an issue with defining things. 

2 And this goes back to what Mr. Plave was 

3 stating. You know, I think an attorney might help in 

4 this scenario, but at the same time, I think it’s an 

5 interesting point of debate. 

6 MR. DOAN: Thank you, Brandon. 

7 Howard, is Brandon’s description also your 

8 experience working with these questionnaires and 

9 acknowledgments on behalf of franchisees? 

10 MR. BUNDY: Yes, it is, Josh. Very much the 

11 same experience. We’ve seen hundreds of prospective 

12 franchisees over time and I don’t think I have ever 

13 seen a questionnaire -- I’m trying to remember here on 

14 the spot -- but I don’t think I have ever seen a 

15 questionnaire filled out by a franchisee where there 

16 was other than the desired answer provided, where the 

17 franchisee actually became a franchisee. 

18 I’ve seen a couple of instances where, under 

19 pressure from certain attorneys, the franchisee told 

20 what I would characterize as the truth. Yes, I did 

21 get FPRs or, yes, I did get these outside statements. 

22 But those people never became franchisees. 

23 Can I tell you why that happened? No. But 

24 there’s an interesting coincidence that of all of the 

25 franchisees that we’ve seen over the years, with the 

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1 almost ubiquitous presence of those questionnaires, 

2 we’ve never seen one where the franchisee had 

3 answered, yes, I got impermissible information, and 

4 here it is. 

5 MR. DOAN: Amy Cheng, let me ask you this. 

6 Is there a benefit to franchisees in having a 

7 franchisor provide them with the questionnaire 

8 acknowledgment document or does it strictly benefit 

9 the franchisor? 

10 MS. CHENG: No, I think it absolutely may 

11 benefit the franchisee as well. So contrary to the 

12 way Howard would describe this document would be a 

13 disclaimer, I don’t think this document is a 

14 disclaimer in any way. It is a questionnaire. It 

15 literally is a set of questions. So if a franchisee 

16 answers a question -- let me give you an example. 

17 One of the many questions probably --

18 typically, is have you received any financial 

19 information from any franchisor representative other 

20 than what is contained in Item 19 of the FDD? Now, a 

21 franchisee may answer yes, and they write down, so22 and-so told me this information. Well, if the 

23 franchisor receives that document, what I have seen, 

24 actually, is that the “so-and-so” is another existing 

25 franchisee who provided this prospective franchisee 

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1 with all kinds of financial information. 

2 And the franchisor was able to sit down with 

3 the prospective franchisee and explain, you obtained 

4 the information from our existing franchisee, but you 

5 have to understand that this information did not come 

6 from us. There is not information that you should be 

7 relying on or information coming from the franchisor. 

8 Another example is a franchisee may 

9 understand that they’re buying a business and they’re 

10 getting -- a franchisee will fill it out and say, 

11 well, I got information from the seller of an existing 

12 franchise business that I’m buying. Again, as the 

13 franchisor, you can explain -- where they got the 

14 information on and explain that the information is not 

15 from the franchisor. So they have an obligation to do 

16 their own due diligence, right. A franchisor cannot 

17 verify the financial information that they received 

18 and they will tell the prospective franchisee make 

19 sure that you do your due diligence. 

20 So as a prospective franchisee, I do think 

21 you may benefit from getting that information. There 

22 have been many circumstances over the years, where 

23 these examples I’m giving have happened and they’re 

24 real, live examples where the franchisee did go back 

25 to the person from whom they received the information 

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1 and was able to verify the information and do their 

2 own due diligence. 

3 MR. DOAN: Lee, I think you had something 

4 you’d like to add. 

5 MR. PLAVE: I think Amy makes some cogent 

6 points here. And I would simply say this, the 

7 questionnaire that asks did you get any information 

8 about gross revenues, other than what’s in the FDD, 

9 there’s no disclaimer in that. You’re not saying we 

10 don’t stand behind our Item 19 or we say that 

11 everything we said in the Item 19 is not true or we 

12 stand back from it. It’s asking the simple question, 

13 did you get information that was any different than 

14 what you got in the FDD? 

15 I have seen people who answered that yes. 

16 The franchisor then takes it, looks seriously at it, 

17 determines what went on. Amy gave some examples of 

18 that; I’ve seen others. It actually also serves an 

19 additional point and an additional process. The point 

20 of public policy is to get people to comply with the 

21 law. Whatever the law is, that’s the point of public 

22 policy. 

23 If you have the accountability of a sales 

24 team that knows it’s about to be discovered if it made 

25 some sort of an illegal FPR, because as soon as the 

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1 franchise agreement is submitted to be signed, and the 

2 questionnaire is there, the information is going to be 

3 laid bare, why then, at that point, the salesperson is 

4 a whole lot less likely to do something for which they 

5 will be held accountable. 

6 Now, Howard suggests that franchisors 

7 routinely have their sales team telling people to sign 

8 it, no matter what, whether it’s true or not. The 

9 document says -- and usually concludes with -- we’re 

10 relying on your answers, please be honest and truthful 

11 and complete. Again, if somebody can’t answer 

12 questions on an honest basis, then there’s a problem. 

13 I could tell you in my own experience I have 

14 seen that questionnaire used. It is quite prevalently 

15 used, and ironically, it was the instigation of the 

16 Maryland Examiner roughly 20 years ago that suggested 

17 it would be a great way to handle things, other than 

18 using disclaimers. And that suggestion seems to have 

19 led to the use of these questionnaires. 

20 But I have seen the questionnaire used. I 

21 have seen a franchisee who asked its counsel to call 

22 us up and threaten one of our clients with a lawsuit. 

23 And when we sent the franchisee’s questionnaire to his 

24 counsel, it revealed, among other things, the three or 

25 four different things that he had told his counsel 

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1 that were not true. His counsel didn’t take the case. 

2 There were other pieces to it as well. 

3 The point is not everybody remembers 

4 everything with clarity in the years to come. If you 

5 have the opportunity to memorialize what took place 

6 just now, did you get any of this information, do you 

7 understand the information that you got? If not, 

8 would you like some more information, some more 

9 explanation. That serves a useful purpose and it’s 

10 consistent with public policy. 

11 MR. DOAN: Howard, did you want to respond 

12 to that? 

13 MR. BUNDY: Yes. I think it needs to be 

14 clear that I do not oppose and I don’t think most 

15 franchisees oppose a checklist of facts as to what 

16 they did or did not do in the due diligence process. 

17 I think there can be a benefit to both franchisees and 

18 franchisors in having a formalized checklist. Again, 

19 my problem, as I alluded earlier, is not so much in 

20 what the surface of the document says, but in how it 

21 gets you in the defense of claims by franchisees. 

22 All of a sudden, that sentence that says, I did not 

23 receive any inconsistent information about becomes I 

24 waived any claims made because I received information 

25 that I didn’t understand to be inconsistent. 

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1 It simply gets applied on the defense of 

2 claims in a way that is not consistent with the FTC’s 

3 goal in creating a level playing field of information 

4 and of remedies, potential remedies for franchisees 

5 who get misled in the process. 

6 MR. PLAVE: Could I just say one thing on 

7 that? 

8 MR. DOAN: Sure, briefly, and then I know 

9 Amy wants to add something, too. 

10 MR. PLAVE: Oh, sure, I’m sorry. I’ll just 

11 be brief on this. Howard raises a fair point, which 

12 is that if you don’t understand the question, then the 

13 answer is somewhat more murky than it should be. But 

14 if the question is properly posed and the answer is 

15 honestly given, then, at that point, the only thing 

16 that is foreclosed is lying in the future. 

17 But if you ask the wrong question, then 

18 you’re going to get a murky answer, and I think that’s 

19 why people should be asking the questions the right 

20 way. Forgive me. 

21 MR. DOAN: Sure. 

22 Amy, did you have anything you wanted to add 

23 to that? 

24 MS. CHENG: Yeah, a couple of things. One 

25 is the timing of the document, I don’t think it’s 

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1 correct that this document is slipped in at the last 

2 minute to a franchisee when they’re about to sign the 

3 franchise agreement. It does come with the execution 

4 of the agreement. However, it is attached as an 

5 exhibit to the FDD, so the franchisee has had the 

6 opportunity to review this document, along with all 

7 the other documents. 

8 Under Item 22 of the FTC Rule, you’re 

9 required to attach all documents that the franchisee 

10 must execute in connection with the purchase of the 

11 franchise. So if a franchisor is including this 

12 document, it should be attaching it as an exhibit to 

13 the FDD. 

14 And, second, I don’t think that the answer, 

15 no, I did not receive any financial information, 

16 necessarily precludes, in all instances that kind of 

17 Howard alluded to, a franchisee from bringing a claim. 

18 And, in fact, there have been many lawsuits, I think, 

19 over the years -- if you read some of these decisions 

20 -- where a franchisee has executed a questionnaire, 

21 has answered a question that they did not receive. 

22 However, their attorney was able to bring in 

23 sufficient evidence that that was incorrect, and there 

24 was information provided outside of Item 19 where a 

25 franchisee was able to prevail. 

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1 So I don’t think that it is just because the 

2 franchisee answers no it immediately precludes them. 

3 And, again, this is not a waiver. This is not a 

4 waiver of claims. It’s very different. It’s simply a 

5 questionnaire. 

6 MR. DOAN: Theresa, is there something you 

7 would like to add? 

8 MS. LEETS: Yes, I definitely have a 

9 regulatory perspective on this that might be a little 

10 bit different. I question how this questionnaire got 

11 into this document. It definitely didn’t go through a 

12 rule-making process and was less vetted than the NASAA 

13 FPR commentary, for instance. But it is, I think, 

14 very helpful for a regulator to see the questionnaire 

15 flags areas that it appears that the franchisees 

16 commonly failed to understand in the franchise 

17 relationship. 

18 And this goes back to the power imbalance. 

19 And it does have the impact of preventing franchisees 

20 from being able to bring lawsuits. And a lot of the 

21 information in that questionnaire is not in the FDD. 

22 And let me give you a quick example. I’ll give you 

23 three examples. 

24 One of the things a franchisee is commonly 

25 required to agree is that they read and understood the 

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1 FDD, right. But the rule doesn’t say anything about 

2 whether the franchisee is literate, whether they can 

3 read English, whether the FDD was disclosed in 

4 language that was suitable to their education, reading 

5 comprehension level. So we are making a lot of 

6 assumptions that may not be true, that they understood 

7 a very complex and long document. 

8 Second, franchisees are required to do their 

9 due diligence, their independent investigation of 

10 market conditions and competitive factors. Yet, the 

11 franchisor is usually the number one source of that 

12 information and they don’t have to disclose that in 

13 Item 1. So if you’re going to ask that on the tail 

14 end of a questionnaire that’s not expressly 

15 authorized, you’d better be amending the rule to make 

16 sure that they’re disclosing in the FDD information 

17 about competition and market conditions. 

18 Last example, another one that the 

19 franchisees have to agree to is that their business 

20 abilities and efforts are vital to success. Again, 

21 many people are recruited and told they don’t have to 

22 have any business experiences. Yet, in Item 15 of the 

23 FDD, the only thing the franchisor has to disclose is 

24 whether or not the franchisee has to participate in 

25 the business. 

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1 Item 15 has to be amended if we’re going to 

2 include that language in the questionnaire to add a 

3 disclosure about business abilities, skills, 

4 knowledge, and time commitment needed to run the 

5 business being offered. Otherwise, we have a 

6 disconnect between what’s in the FDD and what’s in the 

7 questionnaire and what people need to know to make an 

8 informed business decision. 

9 This is about a relationship and I think you 

10 have to have a better transfer of information if we’re 

11 going to have a better outcome in this channel of 

12 commerce. 

13 MR. DOAN: Howard, is there something you 

14 would like to add to the discussion on that point? 

15 MR. BUNDY: I would second what Theresa 

16 said. The point that I wanted to make -- and I’ll try 

17 to make it quickly -- is that I think part of what the 

18 Commission needs to understand is that not all 

19 franchisors out there are McDonald’s or the big names 

20 that we hear in franchising all the time that have 

21 very sophisticated, qualified counsel guiding them to 

22 make sure that they do a good job. 

23 There are some good franchisors who have 

24 been at it a long time and they’ve figured out how to 

25 hire Lee or Amy to do a good job for them. The 

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1 franchisors that I see, the franchisors that Theresa 

2 sees, to a large extent, are much less sophisticated, 

3 much less experienced, and, frankly, much less honest. 

4 They don’t care as much about being sure that their 

5 franchisees understand. What they care about is that 

6 the franchisee can fog a mirror and sign a check. 

7 And that is not a qualifications that the 

8 franchisors should be looking for, but that’s what 

9 they’re looking for because they’re trying to hit the 

10 bottom line. And that’s very true of a lot of young 

11 franchisors. It’s also true of some of the larger 

12 ones. I recently had a case involving a franchisor 

13 that has 2- or 3,000 franchises worldwide. And they 

14 were having a fire sale of franchises, selling them in 

15 five-packs. And the tales they were telling about how 

16 well these franchisees were going to do, the 

17 spreadsheets that they were putting up on webinars 

18 like what we’re doing today, were very impressive. 

19 I mean, were I not in the role that I am, it would 

20 have been tempting to me to buy a pack of those 

21 franchises. 

22 They failed in droves. So I think the --

23 you know, we create traffic laws for the person who is 

24 careless and runs a stop sign and hits a child. But 

25 that same traffic law also impacts the person who’s 

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1 very, very careful, who has never had an accident. 

2 That doesn’t mean we don’t need the traffic laws. And 

3 we need them to be strong and firm, and in this case, 

4 to make sure that the franchisee, A, has access to 

5 really solid, reliable information, complete and 

6 truthful information, and that at the end their remedy 

7 is not taken away from them through terms hidden in 

8 contracts and then suddenly become the billboard the 

9 minute a claim is made. 

10 MR. DOAN: Thank you, Howard. I did want to 

11 add one point addressing some of the discussion 

12 earlier about the Franchise Rule and recommending that 

13 franchisees have counsel or an accountant to help them 

14 review the franchise disclosure document. And I did 

15 just want to point out that under the Franchise Rule 

16 as currently written, I believe it’s 16 CFR 

17 436.3(e)(3), the franchise disclosure document must 

18 state on the first page that the terms of the contract 

19 will govern your franchise relationship. Don’t rely 

20 on the disclosure document alone to understand your 

21 contract. Read all of your contract carefully. Show 

22 your contract and this disclosure document to an 

23 adviser, like a lawyer or an accountant. 

24 So I did just want to point out that the FTC 

25 already has included language to this effect in the 

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1 Rule and requires it in the document. 

2 I think we only have about -- well, my clock 

3 just actually turned. So I think we’re out of time 

4 for better or worse. I know it’s been a great 

5 discussion. I want to thank you all for being such 

6 lively panelists and thanks for appearing. And I 

7 believe we have a 10-minute break before the next 

8 panel. Thank you, all. 

9 

10 

11 

12 

13 

14 

15 

16 

17 

18 

19 

20 

21 

22 

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24 

25 

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1 THE PROS AND CONS OF THE CURRENT FDD FORMAT 

2 MR. MAXSON: Good afternoon, everyone, and 

3 welcome to the third and final panel of our workshop 

4 today. This panel is titled, Pros and Cons of the 

5 Current FDD format. We’ll be running about 50 minutes 

6 today. 

7 Just a housekeeping matter, on behalf of 

8 myself and all of the panelists, I’d like to note that 

9 the views we express today are our own and don’t 

10 necessarily reflect the views of the Commission or of 

11 any one particular organization, law firm, or company. 

12 Also, if we have time, I’ll try to incorporate 

13 questions that we get from viewers. If you have any 

14 questions, please submit them to franchiserule@ 

15 FTC.gov. 

16 So we have a great panel today. I would 

17 encourage everyone to go online and read everyone’s 

18 full bio. I’m going to give a very quick overview of 

19 everyone that will not do justice to their full bio, 

20 but just so you know who we’ve got here. 

21 So if you’ve watched the whole day, you have 

22 already seen Dale Cantone. He is an Assistant 

23 Attorney General for the State of Maryland and the 

24 Deputies Securities Commissioner for the Maryland 

25 Securities Division. Mr. Cantone is the Chief of the 

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1 Franchise and Business Opportunity Unit. 

2 Kimberly Crowell, along with her husband, 

3 cofounded a company that owns and operates 33 Jersey 

4 Mike’s Subs restaurant franchises, with 13 stores in 

5 development and employs approximately 300 people. 

6 Ronald Gardner is a partner at Dady & 

7 Gardner, P.A., who limits his practice to the 

8 representation of franchisees, franchisee 

9 associations, dealers and distributors, and their 

10 relations with their franchisors, manufacturers, and 

11 suppliers. 

12 Earsa Jackson is a partner in the Dallas 

13 Office of Clark Hill and the team leader for the 

14 firm’s Franchising and Licensing Group. 

15 And Carl Zwisler is senior counsel and a 

16 member of the Lathrop GPM Franchise and Distribution 

17 Practice Group in Washington, DC. 

18 So today, we’re going to talk in this panel 

19 about financial disclosure documents. We’ve talked 

20 some today already on what should be included in 

21 those, whether there are things that should be added 

22 to them, changes that should be made to FDDs as far as 

23 the substance of what might be in them or whether 

24 they’re appropriate the way they are now. What we’re 

25 going to talk about some is really the structure, the 

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1 layout, and the length of FDDs. 

2 And so we’re going to start out talking 

3 about the length of FDDs. So I’m going to start out 

4 with Carl, and ask him, so financial disclosure 

5 documents are often hundreds of pages, very long 

6 documents in many cases. Does the length of the FDDs 

7 deter prospective franchisees from reading them? 

8 MR. ZWISLER: Well, thank you for the 

9 question and for inviting me to participate on this 

10 panel. 

11 Let me start by saying that I agree with 

12 Congressman Hern who kicked off this whole afternoon 

13 by saying that, by and large, I think the Rule is 

14 functioning effectively and that the disclosures, as 

15 required in the current formats, work and they work 

16 reasonably well. 

17 I’d also like to note that, as much as we 

18 all want the FDD to be readable and understandable by 

19 everybody else, the Rule’s mission is to require 

20 franchisors to provide material information to 

21 prospective franchisees. It’s not to require 

22 prospective franchise to read the information, as much 

23 as we would like to have them read it, which is not to 

24 say they should not be readable. 

25 But I think, first of all, the longer the 

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1 document, from my personal perspective, the less 

2 likely I am to be interested in reading all of it. 

3 That’s just me, and I suppose it’s a lot of people. 

4 My wife, who is an English major, she read all kinds 

5 of long books, and I could never put up with all of 

6 that volume. 

7 But I don’t think that’s the only reason 

8 some people don’t read FDDs. First of all, many 

9 prospects today are introduced to a franchise or very 

10 early on in their consideration of a franchise, speak 

11 with trusted referral sources. And if they trust the 

12 referral source who shares a success story with their 

13 franchise operation, that may mean a lot more to them 

14 than details about the franchise and the franchise 

15 relationship that are spelled out in an FDD. 

16 Other prospects probably feel confident from 

17 the reviews that they’ve read online about the 

18 franchisor, and they make up their minds about that 

19 without first looking at an FDD. And as any of us 

20 know who have gone online to search for a franchise, 

21 you can find comparisons of franchises, rankings of 

22 franchises, lists of unhappy franchisees of 

23 franchises, if the franchisor has been in problems, 

24 there are stories about what the problems are on the 

25 franchise relationship. So there’s a wealth of 

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1 information that will steer people either to proceed 

2 or back away that may be more important in some 

3 respects than what’s in the FDD. 

4 Many franchisee prospects already own a 

5 franchise. In fact, the majority of franchisees own 

6 more than one. So it may be less likely that they are 

7 going to read an additional FDD when they make a 

8 second investment. 

9 And, finally, for some people, they’re just 

10 disinclined to read things, like instruction manuals 

11 and assembly manuals. They’d rather do it themselves 

12 and they just don’t want to take the time. 

13 So I don’t know that we can address those 

14 issues with everybody or with an FDD, but I do think 

15 it’s important that when we evaluate the role of FDDs 

16 and whether they are readable and usable right now, we 

17 look at the data. And there is very little data 

18 that’s available about franchisees’ experience with 

19 FDDs. The only one that I have been able to find is a 

20 2015 survey by franchise grade in which 1,122 

21 franchisees were asked whether they had read and 

22 understood the FDDs they received. 

23 Seventy-two percent of them said they had a 

24 clear understanding of the obligations and commitments 

25 within franchise agreements. Eighty-two percent 

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1 reported having read the FDD in the franchise 

2 agreement, and 76 percent said that they had consulted 

3 with an attorney or an accountant. So despite surveys 

4 of so-called franchise experts and those of us who 

5 only get involved in the process when we have 

6 complaining franchisees come to us, the only research 

7 that seems to be credible out there says that 

8 franchisees do read the research. 

9 Now, I think it’s also important to put the 

10 FDD and the research in context. The survey that I 

11 just mentioned, as well as a couple of others of 

12 experts, really focus on existing franchisees. What 

13 it doesn’t focus on is the franchise sales process. 

14 And according to Fran Connect, which regularly reviews 

15 franchise sales and tries to help its clients find 

16 more efficient ways to sell franchises, only about 1 

17 percent of all franchise leads is converted to an 

18 actual franchise sale. That means 99 out of 100 may 

19 or may not get the FDD and read it, and they’re making 

20 their own decisions about whether to buy a franchise. 

21 So if we’re going to look at the validity 

22 and the helpfulness of an FDD, I think we need to look 

23 at research about what these prospects are who never 

24 concluded a franchise arrangement. So I’ll leave it 

25 here at that point. But I think it’s important to 

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1 look at the data and that there should be more data 

2 before any material change is made relating to 

3 readability of a franchise agreement and an FDD. 

4 Thanks, Will. 

5 MR. GARDNER: If I might, Will, I don’t 

6 think you have to go a lot farther in terms of surveys 

7 -- and I’m not sure what the one survey Carl found on 

8 the internet seems to -- deemed it to be credible, 

9 because I’m not sure we have any idea how they 

10 collected that information. I don’t think you have to 

11 go much further, frankly, than looking at the 

12 resources surrounding the litigation that exists with 

13 franchisees and franchisors to get a sense of how many 

14 franchisees feel like they’re not getting the 

15 information that they need, and in part because of the 

16 FDD and its sheer breadth. 

17 I don’t disagree with Carl that people could 

18 have lots of different reasons for not reading it, but 

19 that doesn’t mean that you don’t attack one that 

20 you’re aware of. You know, when you get an FDD that 

21 rolls in at 1,200 pages, I don’t care if you’re 

22 someone who doesn’t like to read or someone who is an 

23 English major, the reality is that is extraordinarily 

24 daunting. And I’ve seen FDDs at 1,200 pages. 

25 So I don’t think that there’s any legitimate 

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1 dispute that the sheer breadth of what the FDD is at 

2 now discourages people from reading it, discourages 

3 them from understanding it. You’ve got to factor into 

4 this the time frame that’s being -- and the pressure 

5 that’s being put on a lot of these people to hurry up 

6 and purchase. We’ve got somebody else looking at the 

7 territory or even, frankly, we don’t have anybody else 

8 looking at the territory but we need your answer 

9 within the next 14 days. You know, you just can’t 

10 digest everything you need to digest in the time 

11 period in which you’re expected to digest it and make 

12 a reasonable decision. 

13 So, you know, Carl and I will snipe at each 

14 other, I’m sure, on the next hour, as we’ve spoken on 

15 other panels together. We’re good friends. So don’t 

16 take it the wrong way. Neither one of us do, that’s 

17 for sure. But the reality is is that my office is in 

18 business, frankly, with hundreds of clients because 

19 people were overwhelmed by the FDD or didn’t get it. 

20 And there’s certainly a better way to do it than the 

21 one that we have now that goes back to the ‘70s, when 

22 we needed to know that Kenny Rogers somehow endorsed 

23 Kenny Rogers roast beef. I mean, the fact that Item 

24 18 exists is ridiculous. 

25 So this does deserve a hard look at how you 

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1 can shorten it, make it more succinct, get the 

2 important information up-front. It all ought to be 

3 done as part of this review. 

4 MR. ZWISLER: Ron, if I could respond very 

5 briefly. I don’t want to monopolize the time. But 

6 you did mention the number of disputes that arise 

7 because of problems with FDDs. We did some research 

8 with Westlaw, and over the last three years, we’ve 

9 found that there are 42 franchise cases alleging 

10 disclosure fraud and/or misrepresentation. That’s 42 

11 over three years. 

12 And we did some further research and we 

13 found that there were -- that’s an average of 14 cases 

14 a year. There were 27,000 new franchises opened in 

15 2017; 26,000 opened in 2016. I’m sure there are 

16 disputes, but they don’t seem like a tidal wave by any 

17 means. 

18 MR. MAXSON: Kimberly, I’d like to turn to 

19 you now. Ron mentioned these 1,200-page FDDs. Do you 

20 have any suggestions for what could be done to 

21 potentially shorten FDDs or make them more readable? 

22 MS. CROWELL: Sure. And thanks again for 

23 having me. 

24 I think that if we look at the FDD as yet 

25 another tool that prospective franchisees can use to 

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1 do their due diligence, I don’t know that the length 

2 of the FDD would necessarily matter. I think it’s 

3 really important that, you know, prospective 

4 franchisees understand that this is a potential 

5 playbook; this is a potential opportunity for you to 

6 learn more about a potential business that you’re 

7 going to invest in. And I don’t necessarily think 

8 that just saying, oh, it’s too long, I don’t want to 

9 read it, is a good enough excuse. I think, if 

10 anything, it’s providing you with the information to 

11 then go and do additional research. 

12 So, for example, if, you know, in the very 

13 beginning of the FDDs it lays out estimated 

14 investments and it provides you with additional 

15 notices of where to go, be it to the FTC website or to 

16 speak with counsel on that, I don’t necessarily 

17 believe that the length is necessarily the problem. 

18 It’s understanding that there’s a plethora of 

19 information in there that you need to seek out and 

20 find and be able to make an educated business decision 

21 on that investment. 

22 MR. MAXSON: Earsa, I’d like to turn to you 

23 now. Do you support the use or the addition of a 

24 summary document for FDDs, and if so, why or why not? 

25 MS. JACKSON: Thanks, Will. Thanks for 

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1 having me. 

2 Now, I can appreciate Ron’s comment about 

3 the length of the FDD, and the fact that they are very 

4 lengthy documents. Having prepared and reviewed many 

5 of those over the years, they are very long documents. 

6 And a summary document might, on its face, seem like 

7 it’s a great idea. But I would caution that there are 

8 likely some unintended consequences. 

9 If we are encouraging folks to do their due 

10 diligence, do their homework, a summary might actually 

11 discourage people from looking at valuable 

12 information. I think Kim referred to it as a 

13 “playbook.” I think that there’s valuable information 

14 that the prospect might not get if there is a summary. 

15 They might take the summary as the gospel and not do 

16 full due diligence and make an informed decision. 

17 I think that a summary document might turn 

18 into a summary kind of sales pitch-type document. 

19 Now, there is, obviously, some checks and balances if 

20 you’re in a franchise registration state where 

21 someone’s going to look at that. But for those brands 

22 where no one’s going to look at that, I see that as a 

23 huge danger not being policed. 

24 And if we are looking at this from a 

25 consumer protection standpoint, I do think that 

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1 there’s a possibility that the most vulnerable folks 

2 might be in further peril with just relying on a 

3 summary document and thinking that that’s all the 

4 information they need to make an informed decision. 

5 So I think we might fall short on the consumer 

6 protection side. So I would not be in favor of a 

7 summary document. 

8 MR. GARDNER: I actually am. But I will 

9 tell you, I’ve been slow to embrace this because of 

10 exactly the point that Earsa has made. I kind of got 

11 drug kicking and screaming to the idea that a summary 

12 is a good idea, for the fear that people might skip 

13 the more important stuff. But, frankly, as I thought 

14 about it and looked at the experiences that we’ve had 

15 in our office and my franchisee-represented brethren 

16 working with some regulators, the reality is that lots 

17 of people aren’t reading the whole thing anyway and 

18 some it’s probably better than none. 

19 The other thing I would say is that I don’t 

20 think that the FTC should be frightened away from the 

21 idea that Earsa has raised here that there might be 

22 some nefarious people that use this the wrong way. 

23 Again, that would be happening with the FDD as it 

24 exists in nonregulated states as it is and probably 

25 is. So I don’t know that the risk is any higher with 

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1 a summary document than it is with some sort of 

2 shorter -- or longer document or shorter document. 

3 The other note that I would make about a 

4 summary is that -- and, again, back to what the FTC 

5 should be thinking about, in my opinion -- is it’s not 

6 like this is unchartered territory. When you buy 

7 securities today, you get a document that has lots and 

8 lots and lots of important information, but you get a 

9 summary. It can be crafted in such a way that people 

10 get the most important information, they get it right 

11 up-front, they have a sense of what’s going on, and it 

12 prompts them, if you will, to follow up on one of 

13 Kimberly’s comments, to do more research and to look 

14 further in. 

15 You know, at this point, people open up that 

16 FDD and they get to page, you know, 7 and they give up 

17 because where the information they actually want, 

18 there’s no way to know where it is. There’s no 

19 directory. There’s nothing that says, you know what 

20 you really ought to start with is Item 19. You got to 

21 get three-quarters of the way through the document 

22 and, oh, by the way, all the people you need to call, 

23 they’re in the back. I mean, a summary document would 

24 do so much to bring front and center the stuff that 

25 needs to be done, that needs to be used for consumer 

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1 protection, the same way it works in our sister 

2 industry with respect to securities. 

3 And so, again, I’ve been slow to get there. 

4 But I do embrace the idea of a summary document at 

5 this point. 

6 MR. MAXSON: Ron, are there any specific 

7 things you would suggest putting in a summary 

8 document? 

9 MR. GARDNER: You know, I think we’d have to 

10 think hard about that. I think that the key 

11 information from Items 5, 6 and 7, you know, what’s 

12 your up-front and how is it going to run, the key 

13 information from Item 19, what do people, when they 

14 spend this money, what kind of return are they seeing 

15 as a generalized statement. 

16 I certainly think you’d want to know the 

17 description of the business, the key sort of passage, 

18 if you will, out of Item Number 1, so people know what 

19 it is they’re buying. You know, I don’t have a 

20 specific this is for sure. I’ve never mapped it out. 

21 But those of us that work in the regulatory area, the 

22 NASAA folks are well equipped to, I think, take this 

23 up, or some group that the FTC appoints -- and, Dale, 

24 I’m sorry that I might be volunteering you for 

25 something -- that take things up to craft something 

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1 that I think the industry would probably widely accept 

2 if they could actually see what it is. 

3 Part, I think, of the hesitation that people 

4 have is we don’t know what we don’t know about what 

5 that might look like. I do think we could get to 

6 something that we would all likely embrace as, yeah, 

7 this is a pretty good idea. 

8 MS. CROWELL: Will, if I could jump in, too, 

9 and add a couple points from the franchisee’s 

10 perspective. And I’ve gone back and forth with the 

11 idea of the summary document. And I agree with Earsa 

12 that I don’t necessarily agree that the summary 

13 document would be the way to go for the reasons that 

14 she stated, that, you know, it might deter prospective 

15 franchisees from actually diving down deeper. 

16 However, if there was some sort of way to 

17 direct some of the high-level areas that a prospective 

18 franchisee would want to know about, some of the ones 

19 that Ron mentioned -- other things come to mind, you 

20 know, like retrofit requirements, terminations, 

21 defaults, transfer -- you know, I think if there was a 

22 way to pull not just some of the legalese, but also, 

23 from a practical standpoint, what would a brand new 

24 franchisee or someone looking at investing in a 

25 franchise, what are the 25 top items that they mostly 

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1 care about, and finding a way to incorporate that, or 

2 at least making sure that they have access to it 

3 fairly quickly so that they can get the answers that 

4 they need and then be able to make a choice on whether 

5 they want to invest. 

6 MR. ZWISLER: Will, if I could comment? 

7 MR. MAXSON: Sure. 

8 MR. ZWISLER: First of all, I think Dale and 

9 his NASAA Committee should be commended for the new 

10 state cover page requirement that went into effect 

11 last year. And it does exactly, I think, what Ron was 

12 suggesting, which is explaining frequent questions and 

13 where to find the information in an FDD and why it’s 

14 important. And I think that is a much better 

15 approach, frankly, than a summary. 

16 And the principal reason for a summary --

17 and there are different ways to do it, and I have 

18 criticized some of them in a “law review” article 

19 where there was a summary FDD proposal by another 

20 lawyer -- but I think it’s deciding which thing is 

21 most important. And we’ve heard Ron describe a series 

22 of things that he thought should be in a summary. 

23 We’ve heard Kimberly describe a series of things that 

24 she thought should be in the summary. And they don’t 

25 overlap, as far as I could tell. And pretty soon 

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1 you’re getting into the full-blown 23 items of the 

2 FDD. 

3 So in my opinion -- and it is my opinion and 

4 I share Earsa’s and Kim’s perspective -- if you have a 

5 summary, an executive summary, this is the important 

6 stuff. If these are the risk factors, well, that’s 

7 what I need to focus on. God forbid I have to read 

8 the other 400 pages in this thing. That doesn’t make 

9 any sense. Nobody is going to do it. They don’t have 

10 the patience. So I think a summary, as good as it 

11 sounds, probably isn’t going to get everybody where we 

12 want to be in this disclosure process. 

13 MR. CANTONE: I think the fact that we’re 

14 talking about a summary document illustrates the fact 

15 that there’s a real concern about prospective 

16 franchisees reading the entire franchise disclosure 

17 document. I think that is a real concern. The length 

18 of them have increased a lot since I started doing 

19 this 30 years ago. 

20 Carl, you have been around longer than I 

21 have. Probably Ron, you and I are about the same. 

22 They’ve gotten bigger over the years for all 

23 sorts of reasons. Having said that, I’m not quite 

24 there with the summary document. I also have 

25 concerns. This might be one of the few times I agree 

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1 with Carl over Ron, although I understand exactly 

2 where Ron is coming from in some ways. Yet, if we 

3 could identify -- if we’re ready to say clearly 

4 they’re not going to review the entire disclosure 

5 document, certainly a summary document is better than 

6 nothing. I’m not ready to give up on the entire 

7 disclosure document or some variation on the 

8 disclosure document that I suspect could be improved. 

9 And the reason for that is because in our 

10 law enforcement experience, you can never tell what 

11 part of the disclosures, you know, are a material 

12 piece of information that affect the franchisee’s 

13 decision or prospective franchisee’s decision. What 

14 part of the disclosure document would you want to cut 

15 out? 

16 I mean, we’ve had people say that they 

17 really relied on the territory disclosures or the 

18 trademark disclosures or, you know, the required 

19 purchases or complain about the fact that they didn’t 

20 read the disclosure document but it was clear about 

21 the amount of rebates and kickbacks, they call them, 

22 that the franchisor was getting. So I don’t know that 

23 it would be possible to distill all the information 

24 that’s in that franchise disclosure document into a 

25 summary document. 

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1 Although, I have to also say, as much as I 

2 appreciate Carl’s shout-out to the state cover pages, 

3 the state cover pages really are not a replacement for 

4 the type of summary disclosure document that I think 

5 Ron was referring to. I think the fact that we 

6 adopted these new state cover pages is a reflection of 

7 the state regulator’s concern that people are not 

8 reading the disclosure document and that many 

9 prospective franchisees find that document 

10 intimidating. 

11 So the state cover sheets are kind of a way 

12 to assist a prospective franchise to maneuver through 

13 the document by including a page “how to use the 

14 disclosure document” and a page that has, you know, 

15 realistic, practical information about the one-sided 

16 nature of the franchise relationship that a lot of 

17 franchisees don’t understand until it’s too late. And 

18 then there’s a page on risk factors that, of course, 

19 are imposed by state regulators. 

20 But I don’t think that anybody should 

21 conclude that that is a replacement for the type of 

22 summary disclosure document that I think we’re talking 

23 about. Again, I’m not quite there. I see the 

24 utility, but I think that if we can get franchisees to 

25 read the entire disclosure document, that would be the 

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1 ideal. It doesn’t happen currently. 

2 MR. GARDNER: Well, I just --

3 MS. JACKSON: I’m a little concerned -- I 

4 think the real concern is how we kind of demystify 

5 that document. There’s a resource that’s been around 

6 for quite some time, and that’s “The Consumer’s Guide 

7 to Buying a Franchise.” It’s referenced in the cover 

8 of the FDD. Most people don’t know that -- prospects 

9 don’t know they can easily get a PDF of that document. 

10 That is, by far, kind of the most kind of detailed 

11 road map as to what is in that FDD. It’s not specific 

12 to a system, but that’s a resource that’s out there, 

13 and we might consider whether there are some tweaks to 

14 that that might be more beneficial to address this, 

15 because I think the real issue is how to kind of 

16 demystify that document. 

17 Ron referred to 1,200 pages. It is a lot of 

18 information. But giving the prospect the resources to 

19 digest it might be the way to focus here, because I 

20 think, as we’ve pointed out, you know, once you start 

21 trying to figure out what are the most important 

22 things for the summary, some things are going to be 

23 more important for prospects than others, depending on 

24 the system or depending on the region. So giving them 

25 the resource and equipping them with how to dissect 

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1 that document may be a better focus. 

2 MR. GARDNER: Well, and I want to make one 

3 thing clear, I’m not actually advocating for a 

4 jettison of any parts of the FDD. What I was really 

5 talking about is the type of executive summary that 

6 you get in a securities prospectus. You know, you 

7 still get the whole prospectus. You just get a 

8 summary up front of what they see is the key 

9 information. So I didn’t mean to suggest that -- and 

10 I kind of heard Dale answering like that was what I 

11 was suggesting. 

12 I don’t mean to suggest that we get rid of 

13 the FDD and all of the information that’s in there. I 

14 am suggesting we might consider an executive-type 

15 summary up front with the most key information so 

16 people can get that quickly. 

17 MR. CANTONE: And, I guess, Ron, my concern 

18 is it’s hard enough for us to get prospective 

19 franchisees to read the disclosure document now. And 

20 I’m sure if we had a summary document, it would be 

21 that much more difficult to get them to focus on the 

22 entire disclosure document, if they did have an 

23 executive summary. 

24 MR. GARDNER: Exactly why I told you I was 

25 very slow to come to this opinion. I don’t disagree 

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1 that that’s a risk. 

2 MR. MAXSON: So we’ve heard both sides of 

3 this summary debate, and, obviously, different mind 

4 can have different opinions on this issue. But, Ron, 

5 let’s say you don’t have a summary document. Would 

6 there be any utility in reorganizing the FDD to put 

7 the most important items up front so that if someone 

8 wasn’t going to read all the way through a 1,200-page 

9 document, if they read at least a certain portion at 

10 the beginning, the things that they hit first maybe 

11 are going to have the most utility to them in making 

12 their decision about buying a franchise? 

13 MR. GARDNER: I think so. And, frankly, my 

14 view -- or my belief here is it could be reorganized 

15 in such a way that not only will they get the 

16 information they’re probably looking for up front, but 

17 it would encourage them to keep going, because then 

18 the other issues come to bear. 

19 I mean, right now, you get to Item 3, and 

20 suddenly, depending on what system you’re in, you have 

21 nothing there or literally 100 pages in one system 

22 that I’m thinking of, of lists of their litigation. I 

23 mean, you’re into Item 3 and you’re already 100 pages 

24 in and you’re reading stuff that has really nothing to 

25 do with the things that you are wondering about. 

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1 So to me, I think I would reorder. I think 

2 I’d go, just off the top of my head, 1, 2, 5, 6, 7, 

3 because people want to know how much it’s going to 

4 cost them to get in. 19, how much am I going to make? 

5 I then would, I think, spring board from there, what 

6 do I get. I would talk about territory. I would put 

7 in 12. How does purchasing work, 8. I mean, I think 

8 you could come up with a logical flow about the way 

9 people think about getting in the business. You know, 

10 you get interest in how much it costs and then how 

11 much could I make, but how does it really work. 

12 I think you can take the items that we have 

13 now and organize them in a fashion that not only gives 

14 people who aren’t going to read as much, the more 

15 critical information up front. But like I say, if you 

16 model it about the way people approach buying a 

17 business would logically lend itself to, okay, now 

18 I’ll read the next section because I’m now wondering 

19 about that. I could see how much it costs. I’m still 

20 interested. I could see how much I can make. Okay, 

21 now I’m interested in that. But how about what does 

22 the business look like? What kind of territory do I 

23 have? Who do I have to buy products from? 

24 I mean, there’s lots of great information, 

25 but it’s like someone took a shotgun and threw it up 

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1 on the wall and you have to go pick it out. And 

2 particularly when you get into the longer documents, 

3 finding it is just -- it’s brutal. So I do think a 

4 reorganization, at a minimum, is in order here. 

5 MR. MAXSON: So you mentioned getting 100 

6 pages in and maybe some of the stuff you read in the 

7 first few items maybe isn’t as useful to you or isn’t 

8 all that useful to a prospective franchisee. I guess 

9 the followup question would be then, are there things 

10 that should be cut that just aren’t useful and are 

11 just adding pages and make it less likely that a 

12 prospective franchisee is going to read the whole 

13 document because it’s just too long? 

14 MR. GARDNER: You know, my struggle in this 

15 one is -- you know, I’ve already said I think Item 18 

16 ought to go away. But, right now, if there’s stuff 

17 that doesn’t need to be said or is minimal, it doesn’t 

18 take up a lot of space. I think the challenge here is 

19 the ancillary documents. I mean, people do need to --

20 when you get into a system where they have three 

21 different versions of their lease rider and five 

22 different versions of their asset, what do the 

23 building plans look like, and then they just append 

24 all of them, I mean, not all of them are relevant to 

25 every franchisee, but every franchisee gets a copy of 

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1 every one of those. That’s, to me, where the real 

2 problem is. 

3 In the current regime of saying convenience 

4 for the franchisors, just append anything they might 

5 ever sign compared to what is it this franchisee is 

6 likely to have to sign, there’s an enormous imbalance. 

7 And I think some examination of how do you fix that 

8 fixes -- gets to some of the issue, taking care of 

9 this issue in a way. Because it’s those agreements 

10 that have three different unit types and they have 

11 their area development agreement as part of their FDD, 

12 and they have their multi-unit agreement, as well as 

13 their single-unit agreement, and all -- you know, the 

14 lease arrangements that are different for each one of 

15 those sections. And, suddenly, you get this behemoth 

16 of a document. That’s where the real challenge with 

17 the breadth of the document comes in terms of sheer 

18 page numbers, from where I sit. 

19 MR. CANTONE: Well, I agree with Ron that --

20 MR. ZWISLER: One of -- go ahead, Dale. 

21 MR. CANTONE: I was going to say, just 

22 quickly, I totally agree with Ron that for those 

23 1,200-page documents -- and there are quite a few of 

24 them -- the bulk of that text is not the 23 items of 

25 the FDD, the bulk of those are the ancillary 

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1 documents. 

2 So one idea is to separate those 23 items, 

3 some of which are pretty lengthy. But, really, when 

4 you see these intimidating thick documents, most of it 

5 is the ancillary documents. Ron is absolutely right. 

6 MR. ZWISLER: But, Dale, let me ask you this 

7 question. I prepare FDDs. And so we have clients who 

8 want to register in Maryland or have one universal FDD 

9 that they could use to disclose any prospect. When 

10 we’re preparing those, we don’t know who the 

11 prospect’s going to be usually. We don’t know which 

12 of those contracts they’re going to sign. 

13 MR. CANTONE: I’m not saying you don’t give 

14 them to them, but maybe not, you know, separate from 

15 the rest of the disclosures. 

16 MR. MAXSON: Kimberly, we’ve talked about 

17 these sometimes very long, sometimes complicated and 

18 hard-to-follow FDDs. In your real-world experience as 

19 a franchisee, do most prospective franchisees hire an 

20 attorney or an accountant to help them understand 

21 these documents? 

22 MS. CROWELL: Well, in my experience, the 

23 first-time franchisee, prospective franchisee, more 

24 than likely is probably very apprehensive about hiring 

25 an attorney because they’re worried about the cost. 

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1 And so what I have found is they will reach out to 

2 another franchisee or some business associate to try 

3 to get some initial help on just understanding the 

4 operational side of the business. And then, you know, 

5 if I’m speaking to them as a multi-unit operator now, 

6 I would say, you know, go and speak to an attorney 

7 about more of the legal issues that you might face, 

8 but really understand how the business operates first. 

9 If cost is an issue, get a handle on how to operate 

10 the business, and then go to the attorney for 

11 additional consultation. 

12 MR. MAXSON: So, obviously, this workshop is 

13 in English and most FDDs are in English. Dale, I’m 

14 curious if, in your experience, franchisors are 

15 marketing their franchises in languages other than 

16 English? 

17 MR. CANTONE: There are franchisors that 

18 market their -- well, they market their franchise to 

19 predominantly or, you know, a significant percentage 

20 of people who do not have English as their primary 

21 language. And I think part of that is reflecting a 

22 reality of franchising that we’re kind of glossing 

23 over, which is franchising covers such a huge variety 

24 of businesses from the multi-unit operators, you know 

25 the big conglomerate franchise systems to, you know, 

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1 very low-cost franchise systems, where, by the way, no 

2 one ever has an attorney help them. So there are 

3 systems that market directly to people who may not 

4 have English as their first language, and I can give 

5 you several examples. 

6 We have seen that happen in nail salon 

7 franchises. Bubble Tea, which is -- there are not 

8 that many of them, but often they are targeted towards 

9 the Asian community franchisee. As a matter of fact, 

10 on my desk today that I was looking at, a Bubble Tea 

11 agreement that was written in Chinese. And then 

12 probably, maybe the largest segment of this industry 

13 that targets to a lot of non-English-speaking people 

14 is the janitorial cleaning franchise system. And if 

15 you look at the list of franchisees in those systems, 

16 there are a lot of recent immigrants, people who do 

17 not have English as their first language. 

18 And so I do not believe -- I don’t know. 

19 I’ve never seen a disclosure document in anything 

20 other than English. So I do not know how those are 

21 being disclosed and how the disclosures are getting to 

22 the prospects. And I fear, based on some of my 

23 experience, that a lot of the people who buy into 

24 those systems simply do not read the disclosure 

25 document at all. 

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1 MR. MAXSON: So do you think if franchisors 

2 are required to produce their FDD in the language in 

3 which they marketed their franchises, that would incur 

4 much additional cost for those franchisors? 

5 MR. CANTONE: I’m afraid it would. It would 

6 incur some additional cost. And, you know, just the 

7 cost to translate a document -- you know, many years 

8 ago my office and yours worked together on a consumer 

9 publication about the janitorial cleaning franchise 

10 industry, and it was costly to translate that into 

11 Spanish. And we had hoped, at that point, to 

12 translate it into other languages, but it never went 

13 forward for all sorts of reasons, one of which was the 

14 cost to translate it into different languages. So 

15 there’s clearly a cost. 

16 But I don’t know what you do if you are 

17 primarily targeting or selling to people who don’t 

18 speak English. The disclosure document doesn’t work 

19 for a lot of those and so I don’t know what you do. 

20 But it definitely is a cost. And part of our concern 

21 is that cost might be passed on to franchisees in the 

22 system anyway. 

23 MR. ZWISLER: Dale, I can also foresee 

24 problems -- I don’t know how many people in your 

25 office or your examiners speak multiple languages, and 

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1 I know we have very few, relatively speaking, within 

2 our office. If we had to preparer franchise 

3 agreements in Spanish, the most common additional 

4 language, who is going to review them? 

5 MR. CANTONE: I’ll read that one for you. 

6 MR. ZWISLER: You’ll do that one? 

7 MR. CANTONE: Actually, I think the other 

8 way to work it is to have maybe some type of 

9 certification that a professional translation service 

10 translated the document from English. Because you’re 

11 right, we wouldn’t be able to do that. That’s the 

12 only way I would see that would be workable, but, of 

13 course, that comes at a cost. 

14 MR. ZWISLER: Yeah. I can share an 

15 experience. I do quite a bit of international 

16 franchising work. And I remember particularly in 

17 South Korea, which does have a franchise disclosure 

18 and registration requirement, but their FDD is not 

19 nearly as complicated as ours -- although they keep 

20 moving in that direction -- the translation cost there 

21 exceed all of our legal costs every time we prepare a 

22 filing. And that may be a very substantial additional 

23 expense that might deprive a lot of these non-native 

24 English speakers of a franchise opportunity. 

25 MR. MAXSON: If there were a requirement 

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1 that they produce the FDD in the language in which 

2 they market these franchises, would that have any 

3 impact on state franchise registration requirements? 

4 MR. CANTONE: I think that they certainly 

5 would because we have to review a document, and as 

6 Carl pointed out, most of us only speak one language. 

7 And so the only way I can see that happening is if we 

8 get a certification that a Spanish or some other 

9 language is being -- if the disclosure document is in 

10 a different language, we have the comfort to know that 

11 it is actually an accurate representation of what was 

12 registered in English in the States. 

13 MR. MAXSON: Kimberly, are there 

14 technological features that might make the FDD more 

15 readable or more accessible to franchisees? 

16 MS. CROWELL: Sure. I mean, I think it’s 

17 important that we, you know, adopt newer technologies 

18 in terms of having the ability to look at it on your 

19 mobile device. I think having a search feature with 

20 either potentially, you know, having the ability to 

21 write specific questions that will lead you directly 

22 to different items within the FDD, I think would be 

23 helpful as well. For the FDDs that I’ve looked at, I 

24 haven’t seen any -- even something as simple as a 

25 hyperlink from the table of contents, to be able to go 

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1 directly to that particular area. You know, as Ron 

2 mentioned, the 1,200-page FDD, certainly you don’t 

3 want to have to scroll and try to figure out what page 

4 that is at. 

5 So I think those would be some very simple 

6 adjustments to allow for better readability of the 

7 document from a technology standpoint. 

8 MR. GARDNER: If I could link that back to 

9 something you asked about early, Will, and that’s the 

10 review by attorneys or why people don’t go to 

11 attorneys. I do think what Kimberly is suggesting is 

12 absolutely, I think, the next step in the evolution of 

13 how the FDD should be delivered. I mean, there’s no 

14 question that it should come electronically. There’s 

15 no question that it should have hyperlinks. All of 

16 that should exist because that’s the way people digest 

17 their information these days. 

18 I will say that I do think one of the 

19 reasons that people don’t go to lawyers is because 

20 they get that document that is this big. They’re 

21 terrified of the cost, which is ironic in a way 

22 because most franchisee lawyers do that on a very low23 cost basis, relative to what these people are looking 

24 at potentially investing in their franchise. But that 

25 is what it is. 

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1 I do think that having it more 

2 technologically navigable will -- I think it would 

3 have two benefits. One is the obvious one, which is 

4 people can maybe find what they’re looking for. And I 

5 think the other one is that it would cause them to ask 

6 more questions. You know, the other thing Kim talked 

7 about earlier was getting people to do more due 

8 diligence, to dig in. And being able to find stuff, 

9 whether it’s because you have an attorney that’s 

10 pointing you to it or because you stumble on it by 

11 yourself, is something I think that is probably in 

12 everybody’s best interest. 

13 This might be something we can all agree on. 

14 To get people to digest more information is a good 

15 thing. 

16 MR. ZWISLER: I agree with Ron. 

17 MR. GARDNER: I knew it would happen. 

18 MS. JACKSON: I second that, Carl. 

19 MR. MAXSON: So in your experience, are 

20 franchisors not doing these things, hyperlinks and 

21 things like that, because they think that they’re not 

22 permitted to do it by the regulations or because 

23 they’re intentionally trying to make it difficult to 

24 manage the document and to increase time or cost or 

25 whatever it is to review an FDD? 

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1 MR. GARDNER: I’ll let Carl and Earsa who 

2 worked for the franchisors answer. I would say my 

3 guess is because you’ve heard them say it a couple of 

4 times already, things that increase costs. Increasing 

5 the technological application to your FDD does 

6 increase costs, at least on the front end in the short 

7 term. 

8 I don’t think anybody -- I shouldn’t say 

9 “anybody.” I don’t think most franchisors are trying 

10 to discourage people from reading. I don’t. But I do 

11 think the structure and the breadth does discourage 

12 it, and we ought to work on fixing that. I’ll let 

13 Carl and Earsa speak from the real franchisor 

14 perspective on this one. 

15 MR. ZWISLER: And I would consult with Dale, 

16 but my understanding of the Rule is that you’re not 

17 allowed to have hyperlinks inside the FDD. 

18 MR. CANTONE: I think the FTC Rule in 2007 

19 prohibited external hyperlinks. When I review these 

20 documents, I like to see certainly a hyperlink from 

21 the item numbers. I think there’s nothing more 

22 helpful than that to have on the side of the document 

23 where each item number is to be able to go to it. 

24 That’s a simple -- I don’t think that type of 

25 hyperlink is prohibited by the Rule. But I don’t see 

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1 that a lot. 

2 MR. GARDNER: Like an internal hyperlink. 

3 MR. CANTONE: Internal, yeah. It’s the 

4 external hyperlink that isn’t allowed. 

5 MR. MAXSON: That leads me to a question 

6 that we got from the audience. Do locked PDFs inhibit 

7 the review of FDDs? 

8 MR. CANTONE: Oh, I think that’s a good 

9 question. Frequently, when I review a -- I mean, 

10 talking about searching terms, I mean, I’ve had FDDs 

11 where I’m trying to search on terms to find something, 

12 and you cannot do that. And I find that really a 

13 problem. I think it’s certainly easier if you’re 

14 searching particular terms to be able to find it in 

15 the FDD. That’s interesting. In my experience, you 

16 know, about half of them are locked. But, you know, I 

17 don’t know why. 

18 MR. MAXSON: Carl, do you have any 

19 suggestions for how an FDD might be accessed more 

20 easily through less-traditional formats? There was 

21 mention earlier today about on iPhones or cellular 

22 phones or iPads or different documents like that. Are 

23 there any changes we can do as we’re thinking about 

24 updating this Rule that was drafted a while ago, as 

25 the technology improves, that would make it easier for 

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1 people to navigate an FDD? 

2 MR. ZWISLER: Well, I think mostly the 

3 things that we’ve already talked about, using 

4 hyperlinks, allowing or encouraging franchisors to 

5 post their FDDs online and make them accessible to 

6 franchisees early on, if they want to do that. 

7 I don’t know of any particular thing that 

8 makes reading an FDD on a phone any easier. I know I 

9 can’t do it, but if that’s what people choose to do. 

10 So I don’t know the answer to that. 

11 But I think I do have an answer to Dale’s 

12 question about why we have locked PDFs, and I think 

13 that’s really a protection that the franchisor wants. 

14 It doesn’t want to have the document manipulated once 

15 it’s been delivered. I mean, that would be the case 

16 when it’s delivered to a prospective franchisee. They 

17 don’t want to show up in somebody’s office and have a 

18 version of a document that’s not what they authorized. 

19 And that may be the reason that you’re seeing them 

20 that way, too, Dale. 

21 MR. CANTONE: Well, I certainly appreciate 

22 that. That’s a legitimate concern. I just didn’t 

23 realize that that prevented it from being searchable. 

24 MR. ZWISLER: I think that’s what we really 

25 need. It’s not whether it’s locked; it’s whether it’s 

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1 searchable. Yeah, I suffer from that, too. 

2 MR. GARDNER: I think the idea of a 

3 hyperlink could really address not only navigation of 

4 the FDD itself, but it may help with the issue that I 

5 raised earlier about finding the relevant and 

6 appropriate ancillary documents in this 1,200-page 

7 morass that showed up. 

8 I mean, one of the things that, you know, 

9 Earsa -- I think it was Earsa that said, we don’t know 

10 which prospect is going to get our FDD -- if it was 

11 Carl that said, I apologize, but I think it was Earsa 

12 -- and to which I say, well, it seems to me you can do 

13 one of two things. You could break the process into 

14 two steps. Here is the FDD. If you’re interested in 

15 going forward, here are the documents you’re going to 

16 need to sign, this is a copy of your lease and your 

17 lease rider and all of the other things. 

18 Alternatively, if you want to avoid that 

19 second step, then you give them a cover letter that 

20 says, okay, here’s the whole document; it’s all 

21 together; we’re not breaking it up for cost reasons. 

22 But given your situation, if you’re going to be a 

23 single-unit operator, you should go to these links. 

24 If you’re thinking about a multi-unit, go to these 

25 links. If you’re going to rent, you need these links. 

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1 If you’re going to own, you need these links. And you 

2 could use that hyperlink technology as a way to direct 

3 people to the stuff that they actually need to read, 

4 rather than, again, wading through this 1,200-page, 

5 unsearchable monster. 

6 MR. ZWISLER: Sure. I think we could think 

7 about how that might work and, particularly, if the 

8 FDD is delivered online or accessible online. You 

9 know, it’s there if anybody wants to read it. But 

10 only as you get closer, whether it’s the seven days 

11 before signing or at some earlier time, the parties 

12 could agree on which documents would have to be 

13 signed, and they would certainly be made available to 

14 the prospect. 

15 MR. MAXSON: And so what you were talking 

16 about, Ron, I think you were talking about internal 

17 hyperlinks, right? 

18 MR. GARDNER: Yeah. Well, probably. I 

19 mean, the question is if you still include all those 

20 documents in this single document then, yes, they’re 

21 internal. But you could do it -- I’m not sure I’m 

22 there on Carl’s idea that you just post it somewhere 

23 on the internet. But if you do, then they don’t 

24 necessarily have to be internal. You can direct from 

25 the FDD itself to somewhere else on the franchise 

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1 owner’s website where they have the relevant leases or 

2 documents for single-unit operators or for multi-unit 

3 operators. So that really sort of depends on how it 

4 gets structured. 

5 But I’m not talking about linking to 

6 anything that’s outside of what would normally be in 

7 these 1,200 pages. So I think, Will, yes, internal in 

8 terms of what they’re getting now, not extraneous 

9 information beyond that. 

10 MR. ZWISLER: Will, I know you want to 

11 conclude this, but I would just like to bring up one 

12 point to kind of refute something that Theresa Leets 

13 was suggesting earlier, which is that the franchisors 

14 are all-powerful, they drive the bargains, et cetera. 

15 Last time I looked at the statistics, most franchisors 

16 had 50 or fewer units. I saw a recent survey that 

17 said most franchises started over the last four years 

18 had one or zero units. 

19 We’re talking about -- most of the people 

20 who are going to be subject to these rules and any 

21 changes we’re talking about are truly small businesses 

22 that are trying to comply with the Rule in good faith, 

23 and we better be very careful about any changes that 

24 we make that might unnecessarily add costs to doing 

25 business and their ability to create jobs for 

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1 prospective franchisees and their employees. 

2 MR. CANTONE: But by the same token you 

3 can’t refute that most franchise agreements are very 

4 one-sided in favor of the franchisor. 

5 MR. MAXSON: With that, I am going to end it 

6 because we have reached our time at 4:30. 

7 MR. CANTONE: Thank you. 

8 MR. MAXSON: And we’re not going to have 

9 cross-panel debating. That would get a little tricky. 

10 But thank you all very much for being here and for 

11 helping educate everyone about these franchise issues. 

12 We really appreciate it and appreciate your time. 

13 This has been very useful. I hope everyone sitting at 

14 home or in their offices will be quietly clapping for 

15 you right now. I know you won’t hear it, but 

16 cosmically, maybe you’ll feel the good vibes. 

17 So with that, we’re going to turn it over to 

18 Lois Greisman, who’s the Associate Director of the 

19 FTC’s Division of Marketing Practices, and in just a 

20 moment, she will be delivering the closing wrap-up for 

21 this workshop. Thanks very much. 

22 

23 

24 

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1 CLOSING REMARKS 

2 MS. GREISMAN: Good afternoon, everybody. 

3 My name is Lois Greisman. As Will said, I head the 

4 Division of Marketing Practices at the FTC. That 

5 division has the primary responsibility for enforcing 

6 and promulgating the Franchise Rule. 

7 And it’s my honor to close out today’s 

8 workshop, and I’m going to begin to do that by 

9 extending thanks, of course, to the speakers and my 

10 FTC colleagues who made this possible. Many of them 

11 you have seen but not all. So I want to give a shout12 out to Crystal Peters, Larissa Henderson, James 

13 Murray, Bruce Jennings from the FTC’s event planning 

14 and media team; paralegals Leah Hebron and Kate Moody; 

15 Collin Hansen from our Bureau of Economics; Kenny 

16 Wright from our General Counsel’s Office; June Chang 

17 and Lesley Fair from our Division of Consumer and 

18 Business Education; and both Nicole Drayton and 

19 Juliana Gruenwald in our Office of Public Affairs. 

20 So this is not really a close-out since, of 

21 course, the record stays open. I just want to make a 

22 couple of comments on the engaging panels that we’ve 

23 had today and what I will refer to as very diplomatic 

24 disagreement on some of the issues. And as 

25 Representative Hern opened with, no FDD is perfect. 

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1 So whether or not to mandate financial 

2 performance representations has been an issue since 

3 the get-go. Interesting change since 2007, when about 

4 20 percent were providing FPRs to some 66 percent 

5 these days. Discussion that the FPR is the most 

6 important item and, also, a slightly different view 

7 expressing concern about whether or not the FPR really 

8 is a breaking point; and some agreement that shifts in 

9 cost-benefit analysis have changed given changes in 

10 technology. 

11 But then we moved over to discuss 

12 disclaimers, waivers, integration clause, questions 

13 about is there a bright line, is there a way to 

14 distinguish between explanations and disclaimers; and 

15 what is that line; who do integration clauses favor; 

16 who do the questionnaires benefit; is the main purpose 

17 of these kinds of provisions for the franchisors to 

18 defend against a lawsuit; and at what point do they 

19 become problematic? 

20 Then finally, the last panel, Pros and Cons 

21 of the FDD Format. A good discussion of a summary 

22 document that arises out of concerns about whether the 

23 FDD is a playbook or is it a 1,200-page monster that 

24 perhaps may or may not be tamable by using hyperlinks. 

25 So to sum up, there’s absolutely no shortage 

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1 of challenging, interesting issues and ongoing 

2 provocative discussion. 

3 Please keep in mind that the record is open 

4 until December 17. 

5 So again, thank you all for joining us this 

6 afternoon. We look forward to hearing more from you 

7 and please stay safe and healthy. Thank you very 

8 much. And take good care. We are adjourned. 

9 (Hearing concluded at 4:40 p.m.) 

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1 CERTIFICATE OF COURT REPORTER 

2 

3 I, Elizabeth M. Farrell, do hereby certify 

4 that the foregoing transcription was reduced to 

5 typewriting via audio recorded by me; that I am 

6 neither counsel for, nor related to, nor employed by 

7 any of the parties to the case in which these 

8 proceedings were transcribed; that I am not a relative 

9 or employee of any attorney or counsel employed by the 

10 parties hereto, nor financially or otherwise 

11 interested in the outcome of the action. 

12 

13 

14 

15 

16 ELIZABETH M. FARRELL, CERT 

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