WWW.FranchiseDisclosure.Com: Assessing the FTC's Proposed Franchise Rule Provisions Involving Electronic Disclosure

I. INTRODUCTION Ten years ago, few people would expect that they could choose, using a personal computer, which hotel they wanted to stay in when vacationing. Few people believed that they could use a computer to select which rental car they wanted to drive. Today, however, not only is browsing the Internet to find a rental car or hotel chain commonplace, but the ability to electronically search for which hotel or car rental franchise an entrepreneur wants to run will soon be just a click away. The advancement of technology in the past decade has had a profound impact on the way business is conducted in the world today, and its effect on the increasingly popular business method of franchising has recently become the issue of debate among franchisors, franchisees, and the Federal Trade Commission (the "FTC"). Indeed, the FTC is currently considering amendments that account for changes in technology to the rule requiring potential franchise purchasers to receive disclosures about the company providing the franchise. The rule, entitled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures"1 ( "Franchise Rule" or "Rule" ), serves as a safeguard for potential entrepreneurs evaluating franchises ( "franchisees" ). By requiring companies that license their trademarks, business, or marketing systems ( "franchisors" ) to furnish potential franchisees with a disclosure document containing detailed information about the franchisor and its business, the Franchise Rule provides a mechanism for potential franchisees to protect themselves from any fraudulent claims made by the franchisor.2 Prior to this proposed amendment, the franchisor was required, at great expense, to provide the prospective franchisee with a paper copy of the lengthy disclosure document.3 The proposed revisions to the Franchise Rule add an entire section4 that both allows the franchisor to provide the potential franchisee with the franchisor's disclosure document through electronic means, and enumerates certain limitations on the franchisor's use of electronic disclosure.5 At the FTC's request, both franchisors and franchisees submitted comments to the FTC concerning disclosure via electronic means.6 Additionally, the FTC held workshops in several cities to address this issue.7 While the FTC's initiative to allow electronic disclosure has generally been welcomed, franchisors and franchisees are concerned with certain aspects of proposed section 436.7. Although the FTC is considering a myriad of other changes to the Franchise Rule, this Comment addresses only those proposed changes concerning disclosure through electronic means. Part II of this Comment provides background on the Franchise Rule. Part III describes the proposed amendments regarding electronic disclosure documents, discusses concerns raised by franchisors and franchisees, and makes recommendations that attempt to resolve those concerns. Part IV concludes that the proposed amendments regarding electronic disclosures are a step in the right direction, but the FTC should clarify certain subsections to further assist the franchisor in providing quick and accurate disclosure. II. BACKGROUND A. The FTC's Franchise Rule The franchising method of conducting business has flourished since the 1950s.8 Based on information gathered from trade publications and state regulatory agencies, the FTC estimates that there were approximately five thousand franchise systems in the United States as of January 1999.(9) The Franchise Rule was promulgated by the FTC in 1978 in response to the FTC's finding that there was a "serious informational imbalance between prospective franchisees and their franchisors."10 The FTC found that franchisors were defrauding and omitting material disclosures to prospective franchisees, resulting in "serious economic harm to franchisees."11 Consequently, the Franchise Rule was adopted by the FTC to cure the informational imbalance between franchisors and their potential franchisees. …