KnowledgeVision | Open-Welcome-Financial Performance Representations- What

Should be Disclosed- And WhyCHRISTINE

TODARO:

Good morning, and welcome to Reviewing the Franchise Rule, an FTC virtual

workshop. My name is Christine Todaro, and I'm the FTC's Franchise Rule Program

Coordinator. On behalf of the entire FTC Workshop Team, we are delighted that you

are joining us here today via our live webcast.

Before we begin, I have a few administrative details to cover. First, a video recording

and transcript of these proceedings will be available on our workshop event page

soon. Second, as with any virtual event, we may experience technical issues. If

these occur, we ask for your patience as we work through them.

Finally, we will be accepting audience questions via our dedicated email address,

franchiserule@ftc.gov. Due to time constraints, we may not be able to get through

all of the questions we receive, but we will review all of them.

Now, I am pleased to introduce the director of the FTC's Bureau of Consumer

Protection, Andrew Smith.

ANDREW

SMITH:

Thank you, Christine. Welcome to Reviewing the Franchise Rule, an FTC virtual

workshop. My name is Andrew Smith. I'm the director of the FTC's Bureau of

Consumer Protection.

Today's workshop features three panels presenting franchisor, franchisee, and

regulator perspective on key franchise rule issues, as well as opening remarks from

congressmen and McDonald's franchisee, Kevin Hern. I'd like to thank Congressman

Hern and each of the panelists for helping to make this virtual workshop possible.

Let me start today's discussion by giving some background on why we're here. The

franchising business model is an important one. It enables individuals to develop

small businesses without having to start from scratch and franchisors to expand

their reach and serve new customers.

In fact, the International Franchise Association estimates that there are more than

733,000 franchise establishments that employ more than 7.5 million individuals.

Nevertheless, joining a franchise system isn't without risk. The primary purpose of

our franchise rule, which was adopted by the commission in 1978 and last amended
in 2007, is to provide prospective franchise purchasers the material information

they need in order to weigh the risks and benefits of such an investment.

Accordingly, the rule requires franchise owners to provide prospective purchasers

with 23 items of key information about the franchise in the form of a Franchise

Disclosure Document, also known as an FDD. The FTC's franchise rule is thus a presale disclosure rule, which was designed to address deception in the offer and sale

of franchises. The rule does not regulate the substantive terms of the franchisorfranchisee relationship, nor does it require the franchisor to register or file any

documents with the commission.

The FTC routinely reviews its rules to seek information about their costs and

benefits, as well as their regulatory and economic impact. We are here today

because of the FTC's ongoing review of the franchise rule. Last year we requested

public comment on the franchise rule and received 39 comments in response. I'd

like to thank those who took time to comment. Your input is critical to the review

process.

While all commenters suggested that there is a continuing need for the rule, some

commenters proposed modifications they believed would make the rule more

effective. And now, after considering those comments, we are hosting this workshop

and seeking additional public comment until December 17 on the issues discussed

today. The goal of today's workshop is to dive more deeply into three topics that

were raised by several commenters.

The first panel, Financial Performance Representations, What Should Be Disclosed

and Why, will focus on whether the current Item 19 disclosures are effective, or

whether additional or modified disclosures are necessary to prevent deception in

the marketplace. The second panel, A Discussion of Disclaimers, Waivers, and

Questionnaires, will address their use by franchisors and whether such use

undermines any of the rules protections. The final panel, The Pros and Cons of the

Current FDD Format, will explore whether the format of the FDD can be improved to

take into account technological advances or otherwise make the FDD more

readable.

I anticipate a lively and informative discussion. Each panel includes relevant
stakeholders' perspectives, and I look forward to hearing what each of them has to

say.

Now, I'd like to introduce Congressman Kevin Hern from Oklahoma. Congressman

Hern is a franchisee himself, gaining expertise in the industry by owning several

McDonald's franchises in the Tulsa area and employing hundreds of people. He has

also held various leadership positions within the McDonald's system.

In addition, Congressman Hern serves on the House Small Business Committee

where he is the ranking member on the economic growth, tax, and capital access

subcommittee. This subcommittee deals directly with franchisees and franchisors as

they seek to obtain capital. Please join me in welcoming Congressman Hern.

KEVIN HERN: Thank you, Andrew. And thank you, Andrea. And as it was mentioned, I'm the US

Congress from Oklahoma's 1st congressional district here in the Tulsa area. And for

over 30 years, I've been involved in the McDonald's franchisee program.

After spending a year as an aerospace engineer, a job that was cut short by the

space shuttle Challenger disaster, I had the opportunity to get into the program by

working for a long-time franchisee who owns 6 restaurants in the Little Rock,

Arkansas area. At the time, he was the chairman of the owner-operator leadership

group that was for all the 4,000 US franchisees at that time.

His role, early on for me in my career in McDonald's at that time, his role allowed

me to see how the relationship-- having a good relationship between the franchisors

and the franchisees is extraordinarily important to the overall success of any

franchise brand. For 10 years I worked in the various management roles, coming

through all the different-- from entry level management all the way to the director

of operations for a multi-unit organization.

And worked 10 years to save $100,000 to get my first McDonald's restaurant and I

became a McDonald's franchisee in 1997. And since that time, in almost 24 years,

I've owned 24 McDonald's restaurants.

So now, then, I have 5 left, and my family runs those here in the Tulsa area. And

prior to running for Congress in 2017, I served for 13 years on the McDonald's

National Leadership Council. The first eight years of that, I was the chairman of the
Franchise Relationship Team and five as the Chief Financial Officer for the

McDonald's Franchisee Organization.

As the chairman of the Franchise Relations Team, I saw firsthand how a firm but fair

franchise agreement not only protected the intellectual property of the franchisor,

but also the equity of the franchisees. My corporate counterparts were the chief

financial officer and the senior vice president of franchising for McDonald's in the

USA. For a period of almost 13 years, I was involved in almost every franchise

agreement issue that developed across the United States among the almost 4,000

franchisees.

In fact, I've often said that franchising relationships are much like the interactions of

the states with the federal government. The people are best represented by our

public when each entity, the state and federal and the franchisor or franchisee,

stays in their appropriate lanes of responsibilities of oversight and acts within its

limitations of good governance.

I have reviewed literally hundreds of franchise agreements over the past 20 plus

years of competitors just to see how they benchmark against the McDonald's

franchise agreement, and also as a potential investor in other franchise brands. I've

looked at these across all industries, and I will tell you this firsthand that none are

perfect. Most all are different.

It's incumbent upon each party to desire a strong partner. Therefore, an FDD must

be restrictive enough to create a natural selection process of only the best

franchisee candidates for that particular brand. Once the franchisee agrees to the

terms of the FDD, it is necessary for all parties to work within that document as the

relationship moves forward.

I've spoken a lot over the past three years about the similarities of the franchising

model as compared to the US government. The relationship between states and the

federal government is bound together by the framework of the US Constitution. We

have elected politicians that debate the very merits of these ideas contained in our

great doctrine. I see that firsthand today.

Also, the relationship between the franchisees and the franchisor is bound together

by initially the FDD and ultimately the franchise agreement. Most of the brands
have elected representatives that debate the merits of the ideas contained in their

franchise agreement. So as you go about your work in reviewing possible updates

to the FDD, I would ask that you keep the thought in mind that there must be a

balance in the responsibility as to each party in the relationship.

Each franchisor needs to represent or sell its brand to the prospective buyer without

over promising or misleading the potential franchisee. The franchisee needs to take

necessary steps to do the proper due diligence in making what will be most likely

the greatest career change they will ever experience. There is a natural tendency

for those with very little franchising experience to pick sides, and I will tell you from

years of experience, only the brands that work together will see long term

sustainable success.

As with life, there will never be a relationship that doesn't experience

disagreements. There are remedies for the franchisees and the franchisors when

those disputes develop. As both sides seek protections of their assets, the franchisor

in trying to select the top notch franchisees to grow their brands and increase

overall system value for stakeholders and the franchisee, who is looking for

incredible rewards in return for their investment of cash, hard work, and risk taking.

I believe the current FDD has functioned effectively over the past decade and would

encourage you to implement very few changes during this review. A couple of small

changes that I would suggest would be for you look at-- might be having brokers to

disclose what level of commission they're receiving for each brand they're

recommending to potential franchisees. This would allow the prospective owner to

determine if there was any undue influence for the recommendations that might be

made by the broker.

And have all the franchisees put their FDDs online. I think that's one of the panels

today, using technology so it would be easier to search for specific topics that might

help the prospective owner make a more informed decision, and for all a more

robust updating of the FDD as the mandated period as set forth by the FTC.

Finally, I would say franchising has been a life changer for so many, including

myself. It allowed a person like me, who grew up very poor, to work hard, take risks,

and become extraordinarily successful. I want to thank you for allowing me to share
my thoughts on the importance of franchising and the franchising model. It's given

thousands of aspiring business people the opportunity to realize the American

dream. Thank you. And Andrew, thanks again for allowing me to be on here today.

CHRISTINE

TODARO:

Thank you very much, Congressman Hern, and thank you to everyone joining us for

our first panel of the day, Financial Performance Representations, What Should Be

Disclosed and Why. My name is Christine Todaro, and I'm an attorney in the FTC's

division of marketing practices and also the FTC's franchise rule program

Coordinator.

This panel will explore some of the comments about financial performance

representations that the FTC received last year. If we have time, I will try to

incorporate questions we receive from viewers. Please submit those questions to

franchiserule@ftc.gov.

We have a lot to cover, but I'd first like to briefly introduce our esteemed panelists. I

highly recommend you review each of their bios on our event page to learn more

about their impressive work.

First, Dale Cantone is an assistant attorney general for the state of Maryland and the

deputy securities commissioner, as well as the chief of the franchise and business

opportunity unit for the Maryland securities division. Mr. Cantone also serves as the

chair of the Franchise and Business Opportunity Committee and Project Group of

the North American Securities Administrators Association.

Susan Grueneberg is a partner at the law firm of Cozen O'Connor and is a certified

specialist in franchise and distribution law by the state bar of California. Justin Klein

is a partner at the law firm of Marks and Klein where he represents both franchisees

and franchisors. Keith Miller is the founder of the franchise advocacy consulting, and

he also serves as the director of Public Affairs and Engagements for the American

Association of Franchisee Dealers. And he is also the director of Legislative Affairs

for the fair franchising initiative. In addition, he's a Subway franchisee.

Sandy Wall is of council at DLA Piper. She previously served as in-house counsel for

McDonald's and Sears Roebuck. Thank you, panelists, for joining us.

On behalf of myself and the panelists, I'd like to note that the views we express
today are our own and do not necessarily reflect the views of the Commission or

any one particular organization, law firm, or company.

I'd like to start today's discussion by talking about the issue of mandatory Financial

Performance Representations, also known as FPRs. Many of you may recall that the

FTC previously considered whether to mandate FPRs, and ultimately decided not to

when it amended the rule in 2007. In reaching this decision, the commission

considered several different arguments in favor of and against mandatory FPRs. I'd

like to frame today's discussion on mandatory FPRs by going through some of those

arguments and asking the panelists what, if anything, has changed since the

commission chose not to mandate FPRs several years ago.

First, we often hear that FPR data is the single most important piece of information

to prospective franchisees. During the last franchise rule review, an estimated 20%

of franchisors provided FPRs in their FDDs. That's a Franchise Disclosure Document.

The commission noted that prospects could thus find a franchise that made FPRs if

they wanted to.

The FTC also noted that ordinary market forces might compel more franchisors to

disclose without government regulation. Now, IFA estimates that 66% of franchisors

make FPRs in their FDDs. My first question to the panel is, does the fact that 66% of

franchisors, if we assume those numbers are correct, now disclose FPRs affirm the

commission's thinking and weigh against the commission mandating FPRs? Dale, I'll

ask you to respond first.

DALE

CANTONE:

Thanks, Christine, and thanks for the opportunity to participate in this workshop.

There's no question that 60%-- by the way, 60% is closer along the statistics that my

state of Maryland and other registration states are experiencing. 60% is certainly

better than the 20% or the 10% that we'd seen prior to 2000, so that's definitely a

positive trend.

But that still leaves around 40% or somewhere close to 40% of prospective

franchisees that are left without the disclosure item that is certainly what most

prospective franchisees desire most and is arguably one of the most important

parts of the disclosure document. So we're currently left in a regulatory scheme

that allows a franchisor who, with a failing system, franchisees are losing a lot of
money, to simply choose not to disclose financial performance representations.

And the FTC did go through an analysis in 2007, and there are reasons why they

chose not to mandate FPRs at that time. Some of those reasons exist in this day.

There is an additional cost to a franchise system for a compiling of financial

performance data. However, 60% of franchisors have managed to figure out a way

to absorb those costs.

And that also doesn't really take into account cost to prospective franchisees who

have to put together a business plan of their own. And there's got to be increased

costs for coming up with a business plan without that most important data.

There's also-- one of the reasons the FTC decided not to mandate this disclosure is

the perceived availability of getting financial performance data elsewhere. And

while there are different avenues for obtaining financial performance information,

nothing could compare to having an item 19.

One of the methods is to contact existing and former franchisees. Well, that's easier

said than done in many cases. It sometimes works in some systems, but there are

other systems where it's very difficult for prospective franchisees to get financial

information from existing franchisees who may simply choose not to disclose that

information.

So the costs are there. But if you do a cost benefit analysis, the benefits of requiring

this disclosure, which, again, everybody agrees is the single most important piece

of information that prospective franchisees want the most, far outweighs the

benefits far outweigh the costs that there might be to franchise systems. And some

of those costs are, quite frankly, a little overstated.

A lot of franchisors collect data directly from their franchisees, and probably even

more so now than they did in 2007. And they could be doing that directly through

POS systems. So for the vast majority of franchise systems, they already have the

data. And, in fact, some of them who choose not to make an FPR to prospective

franchisees end up making FPR-type disclosure to banks to facilitate loans.

So it's a really important disclosure. And on a cost-benefit analysis, in my own

personal opinion, it's the disclosure that really should be made to prospective
franchisees. And not requiring it is bad for prospective franchisees, and it's bad for

franchising in general.

CHRISTINE

TODARO:

Thank you, Dale. And we're going to go through some of the other considerations,

like the costs, liability, and other issues that you raised. But right now I want to stick

to this 66% disclosing FPRs.

And I want to follow up with Susan. In your opinion, does the fact that 66% currently

disclose weigh against the commission mandating FPRs?

SUSAN

GRUENEBERG:

Well, thanks, Christine. And, again, thank you for inviting me to be a panelist today. I

agree with what both you and Dale said about this information, Financial

Performance Representation, probably being the most important information that a

prospective franchisee wants and a franchisor wants them to have.

I disagree with the conclusion that if a franchisor is not disclosing a financial

performance representation, it's probably hiding something. And it's probably

hiding the fact that the system isn't making money.

I think the anecdotal reasons you see for franchisors deciding not to make FPRs, in

my experience, is, number 1, their brand may be so strong they don't need to.

Number 2, there may be sufficient information out there in the marketplace through

existing franchisees and other sources. Or, in many, many cases, it may be an

emerging franchise system and they feel they don't have enough data or reliable

enough data to make an FPR going into franchising or in the early stages.

If you think about it, it makes no sense to maintain a system of franchises that are

not making money and make the argument that the initial fee is what you're after.

Because a franchisor is not making its revenues based on the initial fee. That initial

fee goes to providing the pre-opening obligations that the franchisor has. It may go

to a broker in large part.

And it's the ongoing revenue. It's the ongoing stream of royalties or other payments

and that makes a healthy franchise system. And for that you need healthy

franchisees as well.

Now, again, I realize I view all of this through the prism of a lawyer who primarily

represents franchisors, but we all have our own prisms and that's why we're here
today. For me, I would not look at it as an argument of market forces, but rather, is

this information important to mandate? Of course, your initial reaction is, yes.

But then you have to ask yourself, can you do that without resulting in some FPRs

that are misleading or that don't have a reasonable basis? And after you start

thinking about it, the exception sometimes tend to be overwhelming. And are we

even thinking of everything we should be thinking of?

Of course, we're talking about ramp up and all of that. But I'm more of a mind that

if you're going to encourage FPRs, market forces comes in very-- on a very

important basis when you look at what's being disclosed. Because that's going to

vary. What's reasonable in different industries is going to be different.

And so it's very difficult to go into that and think, oh, we can just mandate gross

revenues. Or, we can tell everybody to do a break even in Item 19. That's just not

going to work in my opinion.

CHRISTINE

TODARO:

Thank you. Sandy, to follow up on what Susan just said about market forces, is it

your impression or understanding that the trend will continue, that more franchisors

will continue to disclose? Or do you agree with Susan that there are reasons why

some franchisors just won't be making FPRs?

SANDY WALL: Well, again, thank you for having me again here today, Christine. And I-- it's a little

of both. I think, again, we're all in agreement that providing an FPR in an FDD is

good for the franchisor and good for the franchisee. But there are clear reasons, as

Susan pointed out, why a franchisor may be unable to do this.

Another example is you've got an international company that has been doing

business outside the United States and coming into the US, has no US operating

history. If you mandated an FPR, you'd basically be saying that they can't franchise

in the US without having US operations here. Clearly mandating this would be a

barrier to entry of certain franchise systems.

And as Susan pointed out, the exceptions would-- there would have to be vast list of

exceptions. In addition, since exceptions won't cover every circumstance, the FTC

would have to be prepared to issue opinions on certain circumstances so that

certain companies could be exempted out of the FPR requirement. Again,
something that's going to take valuable time and resources while, again, most

franchisors choose to do this in their-- for many, many reasons.

And, again, one thing I-- and I understand, Dale, your position on that it's because

people-- our franchisors may be hiding information. And there are bad actors

everywhere in the world from time to time, and there may be a small percentage of

franchisors that don't provide information for that reason.

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

the information from a prospective franchise-- from a franchisor, can always elect

not to buy the franchise. This is important information, and if they can't-- they don't

feel comfortable that they can get this information through other sources, or they're

not comfortable with the reason why the franchisor says they cannot provide this

information, they don't need to proceed.

CHRISTINE

TODARO:

OK. Well, that's actually a great segue into the next topic that I'd like to talk about.

Another factor that was considered was whether mandatory FPRs would reduce the

level of false earnings claims made to prospective franchisees.

And my next question goes to Keith. Do you have a sense of how prevalent false

claims about financial performances are, and what evidence would you use to

support your position?

KEITH MILLER: Well, again, thanks, Christine and thanks for all the staff at the FTC for putting this

together. When looking at false or unsubstantiated claims outside of the FDD, I think

we first have to understand that no prospective franchisee is going to buy a

franchise without some understanding of revenue and cost information. Knowing

that about 34% or 40% of franchises put nothing in the Item 19 makes me assume

that those franchisees of these brands are getting information outside of the FDD.

Of course, that doesn't make that information false, but it also doesn't mean that a

franchise giving Item 19 data isn't giving information beyond what's in the FDD. And

the information isn't always direct information.

For example, one brand I worked with in this last year that captured a lot of news

stories seemed to float $1.5 million as a revenue number. Every franchisee I talked

to gave that number. Some of them got it direct, but for most it was actually more
subtle as they were talking about how they would build out the store and what

would be in the restaurant.

They were told, well, you have to put it in a Coke Freestyle machine, because that

was what was required for a $1.5 million operation. Same with other build out and

equipment requirements that they were told, well, we have to do this to build for a

$1.5 million operation. Yet not a single unit ever reached that number.

I try to tell people that the only financial information you should trust and believe is

what is in the FDD. Everything outside of it can be suspect, especially if it's verbal or

implied. And I would also argue that franchisors who avoid giving even basic

revenue and cost data-- look.

When we talk about the fear of giving these numbers, I think people get more into

the weeds and want to talk about EBITDA, EBITDA-type numbers, which would be

great. But I think that's a big step. And I think even some even basic revenue data

and cost data probably needs to be required.

And the reason someone buys a franchise is because that brand has supposedly

been tested and proven as a business model. Now that doesn't mean or guarantee

any success. But for franchisors who can't show the data that the model is proven, I

would ask why they're franchising.

The intent of the franchise rule is to protect the consumer, the prospective

franchisee. Yet often discussions on the rule seemed to get steered towards

protecting the franchisor from liability. The franchisor is the one with all the

resources and leverage.

And I would end this part of how prevalent it is. Look, most franchise owners are

good. I agree with that. But we do rules and oversight not to damage the good

franchisors. We do it to protect from the bad franchisors.

But with all these concerns, can someone tell me the last time the FTC took action

against a franchisor for a financial representation made in the disclosure

document? I think most of the people would answer it's been a long time.

CHRISTINE

TODARO:

Thanks, Keith. I want to follow up on something that you said earlier. I mean, in

terms of the number of representations that you're seeing being made outside of
the FDD, or inconsistent information that's being provided to prospective

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

that's happening, or the number of complaints or stories you hear from your

members and other franchisees now that more franchisors are disclosing?

KEITH MILLER: Well, I'd have to say personally, I'd be a little biased in this answer. I would say it's on

the increase, but that's probably only because I've become more known out in the

industry and I get more calls on it.

Look, I have to understand that the people who call me are calling me because they

have problems and issues. Not everyone who's happy isn't calling me. So I guess as

I become more well known, I've probably seen an increase in it.

But I wouldn't say that's because there is an increase in false representations. And I

know we'll talk about later the sources, but that's what's gets to be interesting is the

sources that the representation is coming from. The false representations tend to

be more at an arm's length and not from inside the franchise company, whether it's

brokers or consultants or loan brokers, for that matter. And I think we'll touch on

that a little later.

So I think the sources of false representation have-- most franchisors owners know

what they can and can't do and have moved away from that. But that doesn't mean

a false information isn't getting to franchisees.

CHRISTINE

TODARO:

OK. I'd like to turn to Justin. Have you seen much litigation over false FPR data or

FPRs that are given to prospects outside of the FDD?

JUSTIN KLEIN: Yes. I think we're all using interesting adjectives, namely the word false. I think

there's a very big distinction between false and impermissible.

I think one of the bigger concerns that I have is about-- the larger concern is false

data. Impermissible data or impermissible disclosures outside of the realm of the

document is something that I think is going to be really hard to ever regulate

around. I mean, sales people are going to be sales people. They're going to say

what they're going to say.

Presumably franchisors are doing the right thing by training their staff the right way,
by training their sales people. Presumably they're talking to their brokers and the

folks who they are engaging to bring into their universe what is permissible and

what is not permissible. Obviously, nobody on this panel, I would presume-- and by

the way, thank you for having me on the panel and honored to be amongst all these

esteemed colleagues-- but nobody wants false data.

And I think when you look at-- and I will answer your question directly-- but when

you look at the concept of mandatory FPRs, my bigger concern, as somebody who

represents more franchisees like Keith, is garbage in, garbage out. And if there is no

way to properly check and balance the information that's being provided, and we've

heard reasonable basis and we know everybody is familiar with the concept around

the FPR.

Our folks, who range from John Q and Mary Q franchisee up to sophisticated private

equity groups who are all reading the same FDD, are all looking at and analyzing

the same information. So my bigger concern is, what is the relevance of the data

that's being provided and the form with which it's being provided in to ensure that

the prospective investor, the consumer, if that's what we want to call them, is giving

the information that is going to be most relevant to the decision to make the

investment.

From a law firm perspective, we have not seen an uptick in what I would call

impermissible FPR claims. The claims of, I was promised I was going to make $1

million and I didn't make a $1 million over the last decade or so have significantly

declined from our perspective. I don't know that that's directly FPR related.

Quite frankly, I think that's more probably related to some of the other barriers to

litigation that exist out there, be it the franchise agreement, be it the cost, be it the

time, be it the nature of the type of claim that's being brought and where either the

franchisor or the franchisee stands at the time that claim is being brought in

connection with those factors. So I don't know that-- just to round it all back to the

topic in the theme, I don't know that there's been an uptick. But I also don't know

that mandatory FPR positively or negatively impacts the amount of those types of

lawsuits that ultimately come out of that information.

What I can say is I fear that if 40% of franchise owners are not providing the
information for one or more of the reasons that any of the folks on this panel have

already addressed, my bigger concern is that the lack of accuracy and the lack of

professionalism that is required in the disclosure process isn't going to be met. And

that's a negative impact to prospective investors in terms of my concept of garbage

in, garbage out.

CHRISTINE

TODARO:

Keith, do you have anything in response to that?

KEITH MILLER: No. And I think we have to remember who's looking at these FDDs. And I think Justin

brings up a really good point in that you have the range of big private equity

franchisees to a person who has very little knowledge.

The industry always sells itself as, be your own boss, proven business model, no

experience necessary. Yet then it bashes those people with no experience

necessary when they make a mistake.

And I think we have to really look at-- and I know one of the other panels is actually

more talking about the structure. I think you also have to look at, when he talked

about uptick or lack of uptick in lawsuits on it, I think it's almost impossible for a

franchisee to have the resources to do that fight.

I mean, that's what I think franchisees depend on the FTC to do. And especially

when there's no private right of action on the franchise rule. The average

franchisee, when they fail-- and it may have been falsely disclosed, has been wiped

out.

All their assets are at risk, so what resources do they have to fight what's happened

to them, whether it's false or unsubstantiated claims. It's very difficult for them to

fight it. They just don't have the resources.

CHRISTINE

TODARO:

Sandy, do you want to follow up on that?

SANDY WALL: Well, Christine, from the FTC's perspective, have you seen in the last 10 years a lot

of complaints from franchisees, alleging that unlawful FPR information has been

provided? Or information outside of an FDD?
CHRISTINE

TODARO:

I mean, I have to say that this is something that I haven't looked at recently. The last

time that I looked at complaint data, I can tell you we get far fewer franchise

complaints than we do for other types of business opportunities at least from the

data set that I had looked at. And then--

SANDY WALL: And just-- OK. Go ahead.

CHRISTINE

TODARO:

Oh, no. Go ahead.

SANDY WALL: I'm sorry. And just to the point about litigation, franchisee litigation continues. And it

may be on other issues. But my experience is from a franchisor's perspective,

you're not seeing a huge amount of litigation specifically related to FPRs.

I don't agree with the fact that franchisees are not suing franchisors. It's just not

based on these types of claims, for the most part.

CHRISTINE

TODARO:

Dale, is there something you want to add?

DALE

CANTONE:

Yeah. I think when you talk about both complaints and litigation, I just don't think

litigation is a good indicator of what's going on in the franchise world. Because

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

We've got-- franchising covers a huge realm of, like, McDonald's and the Hiltons.

And it also covers the smaller investments that the people that we hear most from

that maybe Sandy and Susan don't represent. And a lot of those franchisees simply

do not have either the resources to pursue litigation.

There are barriers to filing suit that franchisors have been brilliant at putting in the

disclosure document. And I know you're having a panel on disclaimers and these

certifications, which I think is a good topic to go by. But even a mandatory

arbitration provision in a franchise agreement-- and they're ubiquitous-- really does

put a barrier in place of to bringing a lawsuit.

But I will tell you that we also don't get that many complaints generally from

franchisees. I'm not quite sure. It's funny when I read some of the message boards

or when I hear from Keith. There are lots of complaints out there, but for all sorts of
reasons they're not necessarily getting to my office and probably not getting to your

office.

I don't think that's an indicator that there aren't problems out there. We're just not

necessarily hearing about them.

CHRISTINE

TODARO:

Justin, was there a follow-up?

JUSTIN KLEIN: Yeah. I just think as a follow-up, I just think that's a fair statement. I will tell you as

somebody who reviews these documents on behalf of folks who are looking to make

the investment, one of the initial things that we look at is, first of all, is there an

FPR? That's number 1.

And then, I mean, look, lawyers are notoriously bad at math, so I can't really provide

much insight into what the FPR does or says or what it means. But the FDD, from

our perspective, is step 1 of the process, right? That's the beginning of the due

diligence. It's a tool to prospective franchisees to use in connection with the rest of

the due diligence that they're going to do.

If the FDD has been approved by Dale's great state of Maryland, if it's been

approved by other states that have registration requirements, then we look at it

through, to use Susan's word or Sandy's word, a different prism, if some state

regulator has reviewed it. So I think, again, it's a positive step if franchisors are

going to make those FPRs.

But I don't know that FPRs are the point of the breakdown of the relationship, or

why even a franchisee ultimately makes the decision to move forward with a

particular brand.

CHRISTINE

TODARO:

OK. Thank you. I think Keith wants to add something, and then I'd like to move on to

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

KEITH MILLER: Yeah. One--

CHRISTINE

TODARO:

--to cover everything.
KEITH MILLER: --quick comment. One of the reasons the FTC doesn't see a lot of complaints is if a

franchisee-- and I've heard this from multiple lawyers that represent franchisees. If

they're considering litigation, they don't want their client to file an FTC complaint.

Because the reality is the FTC is probably not going to act on that complaint, and

then that gets used against them in their lawsuit that they're told, well. You filed a

complaint with the FTC. They didn't act, so, therefore, nothing must have happened.

Wrong. So literally I've heard from multiple franchisee lawyers, telling their clients

not to file an FTC complaint. So that reduces complaints.

And, of course, people really don't know how to file them. And if they're still in that

system, they are afraid of retaliation from their franchisor if they're still in the

system.

CHRISTINE

TODARO:

OK. We'll just-- I would just like to add that we always encourage anyone to file a

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

We have information to walk you through specifically how to file a complaint.

There's also a phone number on our website that you can call in order to speak with

someone live to file that complaint. So I just want to add that the FTC's position is

people should be filing complaints with us if they feel like they've been wronged for

unfair or deceptive practices.

KEITH MILLER: And I would agree with that.

CHRISTINE

TODARO:

That being said, I'd like to move to another consideration, which some of you have

talked about, which is the potential cost to franchisors or franchisees if FPRs were to

be made mandatory. In 2007, the commission noted that mandating FPRs would

impose substantial new accounting, data collection, and review costs in all franchise

systems.

As Dale mentioned earlier, most franchisors now collect financial information

through a POS system. That might have not been the case when the commission

amended the rule. Sandy, to that end, what's your position on whether mandating

FPRs would impose substantial costs on franchise systems today, and what would

those costs be?
SANDY WALL: Well, you know, I think you're right, Christine and Dale. You're correct. There is, due

to the emergence of technology over the last 10, 15 years, more of that information

is provided to many franchisors. But it is not all franchisors. There are some

franchise systems that are not based on a percentage of sales, in terms of royalty,

and they don't collect that information from their franchisees.

In addition, franchise agreements have a term to them. And depending on when the

franchise agreement was entered into, there may or may not be sufficient language

in a franchise agreement to allow the franchisor to collect this data from the

franchisee. So for systems that don't get this data through a POS system, it would

not be-- it would be expensive.

You would have to go to the franchisees and ask them to provide this information.

You couldn't mandate it. You would have-- the franchisor would be required to

devote the resources to collect the data and then evaluate and analyze the data to

make sure it is accurate.

And, again, I think when you look today, if you have that type of system, those are

the types of systems that aren't providing FPRs because they have-- they don't feel

comfortable that-- and this is something we'll talk about later-- that they have the

reasonable basis to stand behind the information in the FPR.

And I think this is, again, it's not all franchisors, but there are a number of

franchisors that fall into that category. And, again, we're going to talk about this

later, but if-- I'll leave it at that point. I'll leave it at this point right now. You can

move on from this.

CHRISTINE

TODARO:

Susan, do you see other costs that franchisors would incur beyond those that Sandy

mentioned? Susan, we can't hear you right now.

SUSAN

GRUENEBERG:

Sorry. I've been having trouble with my audio today. I was going to say in terms of

pure out-of-pocket costs, of course you're going to have more costs to prepare an

FPR. You're going to have additional legal fees, accounting fees. But I agree with

Dale on the cost benefit analysis.

I don't think this is the factor that should really weigh in favor of not mandating

FPRs. I think more-- it's more of what Sandy is talking about, the practical difficulties
in systems that weren't born yesterday and don't have these POS systems in place,

or don't have the contractual provisions to mandate use of them.

If you look back at the original statement of basis and purpose when the rule was

first enacted, the purpose was to level the playing fields of information. Prospective

franchisees were found not to have the same level of information the franchisors

had. And so this seems to me, this particular factor cost, is something where it

shouldn't mandate in favor of not mandating FPR.

But when you get into the practicality of gathering this information and making sure

it's reliable, that's where the unspoken costs are. And those are really difficult to

deal with. In fact, if you look at the FPR commentary that NASAA released a couple

of years ago, you can see by the answers that that concept of reliability of cost data

for franchisees was something that NASAA considered in agreeing that franchisors

who didn't have access to that kind of data could use their own company or

affiliate-owned unit data and make adjustments to it to account for what a

franchisee would experience. So that's a validation of the fact that this is difficult

information to access in many cases.

CHRISTINE

TODARO:

Dale, did you have a follow up on what Susan just said?

DALE

CANTONE:

Well, this discussion about the difficulties in developing a mandate for FPR is that, in

fact, there are some systems that everybody would recognize probably couldn't and

shouldn't make an FPR. But that doesn't mean you don't try. Because what we're

left with now is a system where a franchise owner can choose purely for whatever

reason it wants not to provide the data.

And there are some franchise owners that probably should not and could not

provide an FPR, new and emerging systems, what have you. But it doesn't mean

you don't come up with an idea where you can move the ball forwards, because it is

such an important disclosure. I mean, the one thing that the rule has consistently

agreed upon is that this is the number 1 thing that franchisees want, and they really

deserve it.

So leaving it entirely up to franchisors, some of whom are absolutely doing the right

thing, but not all of them may. And if you do mandate-- if you do provide a mandate
that is a common sense mandate that takes into account the practicalities and the

realities of the situation, I think it would benefit everybody. And it's just something

that we could trial.

CHRISTINE

TODARO:

Sandy, do you have a follow-up to Dale's comment?

SANDY WALL: And look, Dale. Again, franchisees, prospective franchisees, have the choice. If they

ask for the information and they do not get a legitimate reason as to why that

information can't be provided, they don't proceed with the franchise purchase. It's

like everything-- every decision that a consumer makes day to day. And I think

trying to craft the rules, as we've discussed and come up with the exceptions about

who wouldn't have to produce it, is going to make a lot more-- create more

impediments to franchising than it's going to help prospective franchisees.

CHRISTINE

TODARO:

OK, and Justin, is there something you want to add? And as a follow up to whatever

you're going to say, I was wondering if you could address whether you think that

there will be increased cost to franchisees if FPRs were mandated.

JUSTIN KLEIN: So I don't hate Dale's idea in theory. From a regulatory perspective, I'm not sure

how you come up with that common sense structure. And the scale of franchisors

that are out there and the sophistication level of franchisors and who's advising

them and guiding them is from top to bottom in terms of who's out there.

I guess my bigger concern, as somebody who reviews these on behalf of somebody

else, as an advisor, is I'm more concerned about bad info than mandated info. And,

again, if it's mandated, I'd be more concerned about the cost associated with what

folks have-- and listen, we've seen some really bad FDDs. We've seen FDDs with

other brand's names in them.

We've seen FDDs written on spiral notebooks. We've seen FDDs that don't comply

with any regulations that are out there whatsoever and they're just is a cover sheet

that says FDD on it. And that doesn't stop our clients from necessarily wanting to

invest in the franchise and/or quite frankly even being successful with that brand. It

just means that they're not necessarily getting the best guidance from their

professionals.
So my bigger concern is, who's preparing the information? And the reliability is

critical. And if it's mandated, unless there is some regulatory component to figuring

out how reliable that information is for a prospective franchisee, that's my bigger--

that's my bigger concern.

From a cost perspective for franchisees, I mean, most franchisees, no matter how

sophisticated they are that come to us, whether they own 1 unit or they're involved

in many, many businesses, they ask basically two questions of the franchisor. How

much does it cost, and how much can I make? That's all they care about.

I don't know that the FPR, again, is the be all, end all of the mindset of a prospective

investor in terms of how much they can make. I think, again, the FDD, at least the

way we counsel our clients, is that is only a piece of the puzzle to gather that

information and determine its reliability to use it in terms of talking to other

franchisees, to talking to competitors, to talking to figure out whether or not it's

relevant to your particular market. So I think reliability is the big question.

I fear, again, if we are just lawyers that they are bringing it to and they're not bring

it to accountants or other business advisors to check the veracity of the numbers,

now there's another component. Which, footnote, they should-- prospective

investors should be having on their team in any event to help them analyze the data

and everything else. But I do think that there is an increased cost to franchisees to

do their own reliability test with their own professionals to determine the veracity of

any information that's being provided to them.

CHRISTINE

TODARO:

Justin, do you--

JUSTIN KLEIN: And just to caveat that. I don't think that's necessarily a negative thing. I think that's

probably a positive thing that they should be doing in any event, but I do think it's

an added cost.

CHRISTINE

TODARO:

Do you have a sense whether prospective franchisees compare offerings based on

FPRs?

JUSTIN KLEIN: 100%. A lot of folks go on and look at-- go on the internet, and they say, what does

this FPR say versus what does this FPR say? And they make their initial decision to
pursue a prospective investment based on the information that the franchisor is

providing in the document.

Again, from our perspective, the FDD and the FPR is step 1 or step negative 1 of the

process. But I do think that's information that prospective franchisees are looking

at. And oftentimes, they're looking at the quality of the product or the service that's

being provided.

And sometimes they mistake the quality of the product for the ability to be

successful selling that product or service. And I think a component of that is the

information that's being provided in the FDD creates an initial mindset as to

whether or not they think it's an appropriate investment for them. How much does it

cost and how much can I make? Line up 5 FDDs across the board because this is the

industry that I'm interested in, and let me see what the information says.

CHRISTINE

TODARO:

Dale, is there something you want to respond to on that?

DALE

CANTONE:

I just wanted to point out that Justin is talking about a category of prospective

franchisee that is coming to somebody like Justin to help them review the disclosure

document. I can tell you the people that-- a lot of the people that we hear from at

the state level who have had issues do not go to a lawyer. They can't afford to go to

a lawyer, or they choose not to go to a lawyer.

And from the number of filings that we see, we can tell that there's a significant

number of franchise systems out there that are targeting people that probably are

not going to a lawyer, much less an accountant, much less fully reviewing disclosure

document to make this choice, this determined choice whether or not to buy

something based on the disclosure.

So I just wanted to point out. I'm glad, Justin, you do what you do, and I wish every

franchisee had a lawyer to counsel him or her before they purchase. But the reality

is a lot of them simply don't do that, and they're relying on that disclosure

document on their own.

CHRISTINE

TODARO:

OK, Susan. I think you have a follow up, and then I'd like to go on to the next topic,

just being cognizant of time.
SUSAN

GRUENEBERG:

Yeah. I just wanted to add that in terms of market forces, franchisors will look and

compare different FPRs with their competitors in their industry. And they know

they're being compared. So they're going to logically try to get a better

representation in their FDD in terms of what they're disclosing. So it does

encourage the use of FPRs when you have this comparison going on, so I think it's

very healthy.

CHRISTINE

TODARO:

OK. Thank you. I'd like to move to next consideration, which was potential liability.

Another factor that the FTC considered was whether mandatory FPRs might subject

franchisees to potential liability for providing inaccurate data to franchisors who

then use that information in their FPR.

I'd like to direct this question to Sandy. Since 2007, have you seen an increase in

litigation between franchisees and franchisors on this issue?

SANDY WALL: Not at all. I mean, I think you could ask really any litigator, and they will tell you that

up to this point, I'm not aware of any franchisor that has ever tried to bring an

action against a franchisee on the basis of information provided that became the

basis for an FPR. However, I think that a big part of the reason for that is that FPRs

are not mandated, and franchisors that provide FPRs need to have a reasonable

basis for putting this information together. And if the information they get from

prospective franchisees is, in their judgment, not reliable, they are not going to put

an FPR together.

In addition, if you go forward and you mandated an FPR, today, in many franchise

agreements, there are provisions that require franchisees to provide reports and

records and information to the franchisor. And in the default section the franchisor

may often have a right to terminate the franchisee if the franchisee misrepresents

information in the FDD. And, again, if there was a mandate going forward and a

franchisee provides inaccurate information that becomes the basis for an FPR, the

franchisors may have recourse against the franchisees for this.

In addition, most franchise agreements have indemnification provisions that state

that the franchisee has to indemnify the franchisor for issues related to the

operation in the business. And again, you could see that those types of provisions

could be used. Again, it's unprecedented. You haven't seen it today, because if the
franchisor is not comfortable with the information, they don't prepare the FPR.

CHRISTINE

TODARO:

Susan, do you have a follow up on that?

SUSAN

GRUENEBERG:

Well, I'll just say that my experience has been anecdotally the same as Sandy's. I

haven't seen those kind of claims. To protect against being in that situation to begin

with, however, what I think you're seeing more of in FPRs is an explanation of where

this data came from, why it could be different from a franchisee's experience, a

prospective franchisee's experience. And those explanations are really crucial to

explaining how there is a reasonable basis for the information being presented.

I know that later on in this workshop you're going to be talking about disclaimers,

and I assume a lot of that discussion is going to center around disclaimers in Item

19. But what you have to be very careful about is not wiping out these explanations

along with disclaimers. Because if it's crucial for a prospective franchisee to

understand that their experience is not necessarily going to be the same as the

franchisee on his data that this FPR was based.

CHRISTINE

TODARO:

Dale, from a regulator's perspective, do you have any thoughts on this

consideration?

DALE

CANTONE:

Sorry. As a regulator, I don't know that we would be in a position to have that

information. So honestly, I wouldn't know.

CHRISTINE

TODARO:

OK. I'd like to move now to the final consideration that we're going to discuss today,

which is-- which was the commission's view that the FDD was not the only way or is

not the only way for prospective franchisees to get financial performance

information. And some of you have touched on that already, that FPRs are one

piece of the puzzle when a prospective franchisee is deciding what business they

want to participate in.

So I guess at the outset, Justin, I'm wondering if you could give us a sense of what

are all those sources, aside from just talking to existing or former franchisees? Are

there others?

JUSTIN KLEIN: Yeah. And I'm sensitive to Dale's comment that most, if not many, if not the

majority of franchisees don't hire lawyers or business advisors or counselors to help
them with this very important decision. As a lawyer, I highly recommend that to the

extent you're going to make a large investment like that, you get the right people

around you to help you make that investment decision.

One of things that we suggest to folks who are looking to get into franchising who

are-- have never done it before is to also look at market conditions. What-- is the

business that you're looking to buy? Is it appropriate for the area that you're looking

to operate in? And have you spoken to people in the area?

Have you spoken to competitors? Have you spoken to the extent that the franchisor

has multiple brands, have you spoken to franchisees of other brands that they

operate in? How are the training programs, talking about what the franchisor has to

offer separate and apart from what is actually in the document?

Christine, I'm big on trust but verify as a lawyer, I guess. So I presume that

everybody is good at heart and the information that's being included in the FDD is

accurate. But when I say the FDD is really step 1, the FDD is really step 1 because

it's giving you information to then go out and verify. Whether it's with other

franchisees, whether it's with competitors in the market, whether it's with other

systems that they have, whether it's with folks who may be in independent

businesses that are not necessarily operating under a franchise system but are in a

similar type of a business.

Again, I'm-- guess because I'm a lawyer, I'm way risk averse. So I'm not a prime

candidate to buy a franchise anyway. But there is never enough information that

you could gather from an investment perspective, and I think the real value of the

FDD is it gives you a starting point to start from to use that information to begin the

journey of your due diligence.

CHRISTINE

TODARO:

OK. And I want to now turn to Keith and say, what are your thoughts on these other

sources

KEITH MILLER: Well--

CHRISTINE

TODARO:

--for a prospective franchisee to use.
KEITH MILLER: Of course, looking at what are the other sources. I mean, sometimes it's someone

internal giving improperly giving data outside the disclosure document. But I think

that's not the big problem. I think one of the biggest problems is from the third

party what I would call unlicensed, unregulated franchise brokers and consultants

who have no fiduciary responsibility to that prospective franchisee. I mean, they get

paid by the franchisor when the sale happens.

One of the things I'm often quoted in saying is one of the problems in the industry is

far too many people profit from the sale of a franchise. Far too few are held

accountable for the success of that sale.

Another one that I found quite often is loan brokers. When people start working on

their financing, even in advance of signing the franchise agreement, these loan

brokers often know what needs to be put on the loan applications to qualify for

loans, especially the government guaranteed SBA 7(a) loans. And they know how to

fill out those forms to get someone qualified to buy that business, and they're

reverse engineering the numbers to get up to revenue.

Again, they have no accountability of that person. So I worry that there is these

people outside of the franchise company that are throwing around numbers that

people too often take as being gospel and they're not. And people always say, well,

do your due diligence by contacting franchisees.

And I would say to that, well, if the franchisor gives you that-- obviously, the list is in

the disclosure document of existing franchisees. But often a franchise owner will

give people a list that's basically the top performers, which is skewing the

information. And then if you try to go out and look for past franchisees, if you look

within the disclosure documents, often the contact information is wrong and you

can't get a hold of that franchisee.

And then if there was a bad exit by a franchisee, there's often a non-disclosure

agreement that's been signed. So you won't hear the downside of the stories. You

tend to be-- when you try to contact franchisees, current or past, tend to get skewed

to the better franchisees.

And if you're-- even with existing franchisees, if it's a troubled franchisee, there's

cases right now where existing franchisees are being sued in violation of the non
disparagement agreements that are within the franchise agreement. So I really

don't see franchisees often as being a reliable source.

And that's why, of course, I push hard for more data in the disclosure document.

Because there is some liability and responsibility in that, and I believe that

information in general can be trusted.

CHRISTINE

TODARO:

Sandy, do you have a follow up to what Keith just said?

SANDY WALL: I mean, Keith, again, I think we're-- you're focused on the bad actor here. I mean,

what you're talking about here is if a franchisor and gives a prospective franchisee--

steers them to specific existing franchisees, that's a violation of the disclosure

requirements. And, again, there is a list of franchisees given. There is a list of

franchisees who have left the system in the last 12 months. And the franchisee,

perspective franchisee, needs to do their homework and make the calls.

What you're referring to about the confidentiality agreements is addressed in Item

20 the of the FDD. If the franchisor restricts the ability of franchisees to talk about

their experience with the system, that has to be disclosed in Item 20 of the FDD

also.

Again, this is the purpose of disclosure is to help prospective franchisees make

informed decision making. The information is there. And if you see all these things

in there, if you're getting information that's inconsistent with what's in the FDD, or

you see that all franchisees are required to sign these types of confidentiality

agreements, these are red flags. And, again, the prospective franchisee has the

choice to proceed or not to proceed.

CHRISTINE

TODARO:

OK. I would like to jump to a new topic outside of mandatory FPRs, because the

NASAA FPR commentary, which Susan had mentioned earlier-- Dale, NASAA noted in

its 2019 comment that the FTC should consider incorporating the NASAA FPR

commentary into the franchise rule. Why would this be helpful?

DALE

CANTONE:

The FPR commentary-- well, actually the FPR commentary that NASAA did, the

original impetus was to correct a misconception about the use of affiliate data. And

that stemmed from an unfortunate footnote in the clients' guide of 2008 that
suggested that franchisors, if they have adequate operating experience of their

own, should not use affiliate data. But, in fact, affiliate often are the owners of

company-owned outlets.

So the original impetus was clarify the use of company-owned outlet data. I may be

biased, but I have, in the last couple of years, it seems to me that the NASAA FPR

commentary has been very well accepted in the industry. It's used extensively. It has

not been a very controversial, for the most part, guidance issued by NASAA.

And it does address a lot of issues that needed to be addressed that were open. The

use of affiliate data, subsets, and it's been working extremely well in the state

regulatory environment. That's my perception, but people on the panel can share

their opinions of it as well. There really would be a benefit to have the guidance

that is at the state level incorporated at the federal level.

CHRISTINE

TODARO:

Susan, do you have a sense of how likely franchisors are to comply with the

commentary in non-registration states?

SUSAN

GRUENEBERG:

Yeah. I'm actually a little bit surprised at the question, because I think there is a view

to comply with the commentary. And also, with the more recent guidance that

NASAA provided about FPR disclosure in the middle of the COVID-19 pandemic.

In fact, I would also echo Dale's suggestion that it be incorporated. In fact, I think

there's an appetite for more commentary and more guidance about Item 19 out

there on all levels. Because the commentary is great as far as it goes, but it

certainly doesn't address every issue that comes up.

And there are constantly new ones. And this kind of guidance is very helpful to us in

preparing FPRs with the assurance that we're more likely to achieve that elusive,

reasonable basis, which nobody seems to be able to define exactly. So I would

definitely support it. And I do think there's widespread, or there should be

widespread compliance with it in states that don't have their own state franchise

laws regulating the offer and sale of franchises.

CHRISTINE

TODARO:

Dale, is there a follow up that you want to add?

DALE Yeah. I just wanted to add that if there is a concern about the fact that the
CANTONE: commentary might be impacting negatively the FPRs, I have data from my state.

The year before the FPR commentary was adopted our records show that 60.87 of

franchisors registered in my state made some type of FPR. The year after the

NASAA FPR commentary was adopted, the number actually increased. So it did not

negatively impact franchisors making FPRs. Just not how [INAUDIBLE].

CHRISTINE

TODARO:

OK. And Justin, just a follow-up on what Susan said. In your practice, do you see that

franchisors in non-registration states are following NASAA commentary?

JUSTIN KLEIN: Yeah. No, I agree with both Dale and Susan on their ultimate conclusions. Again, my

fear goes back to not only the franchisees who can't hire lawyers who are qualified,

but franchisors who can't hire lawyers who are qualified. And my bigger concern is

whether or not folks are actually complying with the regulations that are out there.

So I think the more information that can be-- the more guidance that can be given,

the better it is. But, again, our biggest fear is garbage in, garbage out. And I think I

must there's some enforcement perspective to what the requirements are, then I'm

not really sure what the value of any of it is.

CHRISTINE

TODARO:

And Sandy, do you have a follow-up on that?

SANDY WALL: Yeah. Again, I think the FPR commentary has provided terrific guidance in many

areas. The only caution I would mention at this point is the whole issue of

disclaimers and providing factual information that explains what the FPRs covers

and what it doesn't cover. that's still an ongoing discussion that franchisors and

state regulators have.

And I just would want there to be caution there that, again, while some of the

language in commentary is absolutely clear, what you can and cannot do, there are

certain sections in there which are open to interpretation. And therefore, I guess I'd

be more for presumption that the FPR-- if you don't comply with the commentary,

you're in compliance with the FTC rule, rather than just saying, absolutely comply.

Because I'm not sure in some instances it is 100% clear what you need to do to

comply with the commentary.

CHRISTINE OK. Thank you. Just on the final point, I want to note, Susan, you touched on this
TODARO: which is reasonable basis. And I think, Dale, you did as well. Is there confusion in the

industry about what a reasonable basis is?

And this will be our final point because we are at the end of our panel. So I'll turn it

over to Dale.

DALE

CANTONE:

I think there is. I mean, first of all, it's not defined anywhere. Under the rule,

franchisors have the burden to show they have a reasonable basis. So in some ways,

that's kind of unfair to franchisors.

But I can tell you from our experience-- somebody mentioned the NASAA franchise

project group's guidance on making an FPR during the pandemic. I cannot tell you

how many franchisors, in response to questions from state regulators, who are

under the impression that all you need to have is historically accurate information. I

don't think that is entirely the reasonable basis. So the fact that many legitimately

represented franchisors had that impression, I think, leads me to believe there is

some confusion about what exactly is a reasonable basis, at least in the context of

historical FPRs.

CHRISTINE

TODARO:

[INAUDIBLE]. Sandy, do you agree with that?

SANDY WALL: Again, I think taking the view that it's historical isn't really the full analysis that you

have to engage in here. You look at the FTC rule and Section 436.7(d), a franchisor's

obligated to notify the prospective franchisee of material changes that the seller

knows or should have known occurred in the information contained in the FPR. And I

think that clearly addresses an obligation to be looking at your FPRs constantly to

make sure that the reasonable basis that you had when it was prepared still exists

today.

Again, also franchisees, prospective franchisees, have the right to request

substantiation of the information in the FPR. And, again, I think that's something

that's not used as much as you would think in the industry. So while a reasonable

basis isn't defined, I'm not sure you could ever properly define it. I think it's a

question of fact that the franchisor is responsible for determining and would have to

prove in a court of law if necessary.
CHRISTINE

TODARO:

OK. And with that, I want to thank each of the panelists for participating today. We've

just run slightly over time, but thanks for bearing with us. I think this is a very

interesting and informative discussion, so thank you very much.

JUSTIN KLEIN: Thank you.

KEITH MILLER: Thank you, Christine

SUSAN

GRUENEBERG:

Thank you.