Statement of Robert W. Emerson, University of Florida — Senate Small Business Committee, March 16, 2022

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A written statement by Robert W. Emerson, Huber Hurst Professor of Business Law at the University of Florida's Warrington College of Business, for the U.S. Senate Committee on Small Business and Entrepreneurship hearing on small business franchising, SBA's role and legislative proposals, dated March 16, 2022. It gives an overview of the franchise business model, stating that franchised businesses account for roughly 40% of all retail sales and 5.8% of U.S. GDP, and weighs advantages and disadvantages for franchisees. The statement recommends that franchisors encourage prospective franchisees to consult counsel and lists possible reforms, beginning with a private right of action for violations of the FTC Franchise Rule and a franchisee right of association. It closes by stating support for the SBA Franchise Loan Default Disclosure Act, S. 2162.

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                           Robert W. Emerson
                           Huber Hurst Professor of Business Law
                           Warrington College of Business
                           University of Florida


         Written Statement for Hearing, “Small Business Franchising: An Overview of the
         Industry, SBA’s Role, and Legislative Proposals,” March 16, 2022, U.S. Senate
         Committee on Small Business and Entrepreneurship

        Chairman Cardin, Ranking Member Paul, and distinguished members of the Committee,
thank you for inviting me to testify at this hearing. Franchising has been the focus of most of my
research as a professor of business law for 34 years. My vita and short bio provide more
information about my background as an attorney and educator, including – of greatest relevance
– my work related to U.S. and international franchise law. Besides writing several dozen law
journal articles and some book chapters on a variety of franchise law topics, my work in
franchise law has extended to occasional stints as an expert, to membership in the American Bar
Association’s Forum on Franchising and in a multidisciplinary academic organization, the
International Society of Franchising, and to occasional teaching of franchise and distribution law
at universities both here and abroad.
        I very much appreciate the opportunity to “testify” some with this writing, as I know the
Committee’s time is quite valuable and oral testimony is necessarily limited in both time and
scope. Even for this theoretically unlimited written statement, I will try to overcome the fact that
I am “doubly blessed” (both a lawyer and a professor), and endeavor to keep things relatively
brief.

                           An Overview of the Franchising Business Model

        The franchise business model is a widely used arrangement that permits businesses to
expand quickly and inexpensively into various markets both domestically and internationally.1
For example, in the United States, franchised businesses account for roughly 40% of all retail
sales,2 with over 780,000 operating franchised units directly employing about 8.3 million people

B.A., Sewanee: The University of the South (1978); J.D., Harvard Law School (1982). Member of the Maryland Bar
since 1982. The opinions expressed in this Written Statement are those of the author, and are not necessarily
those of the University of Florida, the Warrington College of Business, my various coauthors, or institutions
with which I am affiliated. My email address is robert.emerson@warrington.ufl.edu.
1
  The American concept of franchising is expanding rapidly throughout the world, with an increasing share of
international commerce. See Robert W. Emerson, Franchise Encroachment, 47 AM. BUS. L.J. 191, 196–97 n.23
(2010) (detailing the numerous statistics indicating the phenomenal growth of franchising worldwide, both throughout
Europe and such diverse and important national economies as those of Australia, Brazil, China, India, and Japan).
That growth has expanded to the developing world. It is believed that this growth, in various markets worldwide, both
mature and developing, is driven both by the attraction of franchising for domestic brands and also for foreign-based
brands seeking to expand outside of their saturated “home” territories.
2
  This is an estimate long touted by various sources. At the very least, franchising’s share of the total retail economy,
since at least the year 2001, has been one-third. ROGER D. BLAIR & FRANCINE LAFONTAINE, THE
ECONOMICS OF FRANCHISING 26-27 n.28 (2005); Emerson, supra note 1, at 196-197. For earlier statistics, see
U.S. DEP’T OF COMMERCE MINORITY BUS. DEV. AGENCY, FRANCHISE OPPORTUNITIES HANDBOOK
vii (1995); Robert W. Emerson, Franchising Covenants Against Competition, 80 IOWA L. REV. 1049, 1050-51 n.4

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and indirectly accounting for close to twice that many jobs.3 Furthermore, these franchised
businesses create an economic output of $1.6 trillion dollars and account for 5.8% of the U.S.
GDP.4

                   Franchising provides a method for businesses to expand quickly
                   and inexpensively into various markets. A business [the franchisor]
                   accomplishes this task by licensing its name and trademark as well
                   as selling its goods or its particular business format to independent
                   franchisees in exchange for payment of a royalty. The franchisee
                   also benefits from such an arrangement. By entering into a
                   franchising relationship, a franchisee can effectively run its own
                   business without having to invest substantial time and money
                   trying to perfect a new good or business method. That is,
                   franchisees benefit from their franchisor’s knowledge, experience,
                   research, development, capital, and reputation.5

        Essentially, franchising allows the franchisee to effectively run its own business without
having to invest substantial time and money trying to perfect a new product or business model.6
Typically, franchisees own and operate a business “in accordance with conditions and
procedures prescribed by the franchisor, who in turn advertises, advises, perhaps lends capital,
and/or otherwise assists the franchisees. The franchise network generally consists of a system-
wide marketing plan and/or a ‘community of interest’ between the franchisor and its
franchisees.”7
        As with many things in life, the experience and perspective of the parties to a franchise
contract can vary tremendously; some franchisees remain quite happy or at least content with
their investment decision, while others in time are filled with regret. Of course, in business
relationships (and a franchise is, in essence, a business relationship), the parties’ level of
satisfaction, or not, is likely to have a strong correlation to the profitability, or not, of their
dealings.




(1995) (citing numerous sources concerning the rapid growth of franchising in both the 1980s and the early 1990s).
3
  David L. Steinberg, Franchise Industry Facts, https://franchiselawyer.com/franchise-legal-resources/franchise-
industry-facts (citing INTERNATIONAL FRANCHISE ASSOCIATION).
4
    A Look at How Franchises Impact the Economy, FRANCHISE DIRECT (January                              28,   2020),
https://www.franchisedirect.com/information/a-look-at-how-franchises-impact-the-economy.
5
  Robert W. Emerson, Franchise Contract Interpretation: A Two-Standard Approach, 2013 MICH. ST. L. REV. 641,
641-642 (2013). See generally Int’l Franchise Ass’n, What Are the Advantages and Disadvantages of Owning a
Franchise?, FRANCHISE.ORG, https://www.franchise.org/faqs/basics/what-are-the-advantages-and-disadvantages
(last visited March 14, 2022); BLAIR & LAFONTAINE, supra note 2, at 9-13; ELIZABETH CRAWFORD
SPENCER, THE REGULATION OF FRANCHISING IN THE NEW GLOBAL ECONOMY, 7-9 (2010). A study of
100 randomly selected fast food franchises found the medial initial franchising fee to be $25,000. In the same study,
the median royalty payment was 5% of revenue. Emerson, supra note 5, at 689.
6
  Robert W Emerson & Uri Benoliel, Are Franchisees Well-Informed? Revisiting the Debate over Franchise
Relationship Laws, 76 ALB. L. REV. 193, 203 (2012/2013).
7
    ROBERT W. EMERSON, BUSINESS LAW 348 (Barron’s Educ. Series, Inc., 6th ed. 2015).

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                   Although many commentators believe there is a higher survival
                   rate for franchised businesses than for new, independent
                   businesses, there are, compared with completely independent
                   operations, many additional costs associated with franchising, such
                   as initial fees and continuing charges (royalties). Thus, a bottom-
                   line question for a prospective franchisee is this: ‘What can the
                   franchisor do for me that I cannot do for myself?’ Only if the
                   services, trademarks, goods, and other items obtained from the
                   franchisor cannot be lawfully produced on one’s own, and only if
                   they are truly of long-term economic worth, should one pay the
                   franchisor to join its network as a franchisee.8

        The right match of franchisor and franchisee can produce a long, mutually beneficial
arrangement for both parties: franchisors receive the franchisees’ money and efforts, spread
some of the risk of loss to the franchisees, and obtain – at lower cost and perhaps higher
efficiency – an expanding sales or services network, while franchisees “can start a business
despite limited capital and experience” as well as benefit from the franchisor’s business expertise
and the goodwill of the franchise product or trade name (the brand).9 Some other advantages for
the franchisee are equally well-known:

                   ‘Owning a franchise allows you to go into business for yourself,
                   but not by yourself.’ A franchise provides franchisees (an
                   individual owner/operator) with a certain level of independence
                   where they can operate their business . . . [and perhaps benefit
                   from] a pre-sold customer base which would ordinarily takes years
                   to establish. A franchise increases your chances of business
                   success because you are associating with proven products and
                   methods[, perhaps attracting customers due to a system-wide,
                   contractually-mandated] level of quality and consistency.10

       A prospective franchisee should attend to the sometimes severe, often numerous
disadvantages of franchising that may outweigh the benefits. Due diligence and the counsel of
professionals (lawyers, accountants, etc.) are certainly highly recommended,11 something that

8
    Id.
9
  Id. at 348-349. The franchisor’s “business expertise” may constitute “support” for the franchisee: pre-opening (e.g.,
site selection, design, construction, finance, and training) and ongoing (e.g., training, advertising, operating
procedures, assistance and supervision, increased spending power, and potential bulk purchasing). INT’L FRANCHISE
ASS’N, WHAT ARE THE ADVANTAGES AND DISADVANTAGES OF OWNING A FRANCHISE?
https://www.franchise.org/faqs/basics/what-are-the-advantages-and-disadvantages (last visited March 14, 2022).
10
     INT’L FRANCHISE ASS’N, supra note 9.
11
  Robert W. Emerson, Fortune Favors the Franchisor: Survey and Analysis of the Franchisee’s Decision Whether to
Hire Counsel, 51 SAN DIEGO L. REV. 709, 723–24 (2014) (citing franchisor lawyers and other franchise law
commentators to note the likelihood that unrepresented franchisees will not understand their complex franchise
agreements). See also Robert W. Emerson, Transparency in Franchising, 2021 COLUM. BUS. L. REV. 172, 219-223
(2021) (discussing how potential franchisees sometimes opt for franchise law advice and related guidance from online
services, particularly LegalZoom, including the charges for these services as well as the problems with and litigation
against LegalZoom and other online providers of documents and legal assistance).

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franchisors should encourage, perhaps via a new requirement in the FTC Rule.12 Of course,
retaining a lawyer is not required. And – in fact- many prospective franchisees do not obtain the
professional advice that they need.13
        The disadvantages of franchising need to be as well-understood as the advantages. These
actual or at least potential serious problems with franchising should be contemplated by
franchise applicants, who should receive the advice of counsel, hopefully well before a franchise
applicant might be bound to a “bargain”:

                  The franchisee is not completely independent. Franchisees are
                  required to operate their businesses according to the procedures
                  and restrictions set forth by the franchisor in the franchisee
                  agreement. These restrictions usually include the products or
                  services which can be offered, pricing and geographic territory.
                  For some people, this is the most serious disadvantage to becoming
                  a franchisee. In addition to the initial franchise fee, franchisees
                  must pay ongoing royalties and advertising fees. Franchisees must

12
  There are certain disclosures or warnings that could be put more starkly, in hopes of really capturing the prospective
franchisee’s attention. I recommended such measures in order to counter the tendency of a large percentage of people
who, whether actively or passively, refrain from hiring counsel before signing a franchise agreement.
       [I]t may be argued that the best method for dealing with uncounseled franchisees, in conformity
       with a regulatory framework suitable to providing additional protections, is to require more from
       the franchisor, such as disclosing more information to prospective franchisees about the importance
       of seeking independent counsel. New disclosures could take the form of an acknowledgement that
       the franchisee is fully aware of the potential issues that could arise from not seeking counsel in the
       franchise negotiation process and the signing of the agreement. The acknowledgement need not
       constitute the waiver of a franchisee’s right to sue the franchisor for misrepresentations or otherwise
       but should emphasize the need to have lawyers review the documents and thereby negate the current
       impact of uncounseled franchisees on franchised networks and the courts. The notice would
       explicitly remind would-be franchisees that what they are about to sign merits the expert guidance
       of a franchise attorney. For example, the warning could say:
             Before agreeing to become a franchisee, you should consult with an experienced
             franchise lawyer. As a practical matter, including a long-term savings of time and money,
             your hiring that lawyer at the outset is almost always a ‘must.’
             Do not trust in your ability, or the ability of others, to decide whether you need a lawyer’s
             assistance for something this important. Just as a new but persistent physical ailment
             should lead you, as a matter of personal health, to do more than just treat it yourself but
             to see a medical doctor, so you, when buying a franchise, should not ‘go it alone.’ To
             proceed without a lawyer, you simply do not know enough about this franchise, the legal
             nature of the franchise documents, and the many relevant laws.
             The nature of professional expertise (medicine, law, etc.) is that even an otherwise very
             smart and experienced individual, if not a professional in that field, needs professional
             assistance. Also, your lack of training and experience in law likely makes you unable to
             assess whether and how a legal expert (a franchise lawyer) could help you. So, no matter
             how smart or experienced you may be generally or even for this particular type of
             business, you probably cannot accurately weigh the costs of ‘going it alone’ versus
             paying for legal counsel. Very often in hindsight, a franchisee who failed to hire a lawyer
             deeply regrets that he or she did not hire a lawyer at the outset.
       If properly formulated and distributed, such a warning could operate quite well. Franchisees would
       not just be better advised; the result would include the beneficial side effects of fairer franchise
       agreements and reduced litigation.
Emerson, Fortune Favors the Franchisor, supra note 11, at 769-770.
13
   See Emerson, Fortune Favors the Franchisor, supra note 11, at 715 & n.29, 718 (noting that franchisors often
recommend that franchisees seek counsel but also that, at closings, counsel represented only 26.07% of franchisees).

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                  be careful to balance restrictions and support provided by the
                  franchisor with their own ability to manage their business. A
                  damaged, system-wide image can result if other franchisees are
                  performing poorly or the franchisor runs into an unforeseen
                  problem. The term (duration) of a franchise agreement is usually
                  limited and the franchisee may have little or no say about the terms
                  of a termination.14

Indeed, other areas of franchise law likewise may be viewed as, in their effects, imploring
franchisors to try to ensure that a little bit of disclosure does not relieve franchisees and their
advisors from reading, retaining and reflecting upon what is in a disclosure. For example, as
noted in Senator Cortez Masto’s April 2021 Report, “seeing a brand listed in the Small Business
Administration Franchise Directory, provides a sense of legitimacy, which can lead to undue
belief in the viability of the brand.”15 There are, of course, many other matters to consider.

                  Many Non-Disclosure Reforms Are Possible in Franchising

       There are a number of reforms, either legislative or in regulations, that would clarify the
franchise law, make it more uniform, or simply rectify an imbalance that disfavors the
franchisee. Among these proposals are the following:

1. There should be a private right of action with respect to violations of the FTC Franchise Rule.

2. As found in about ten states, a franchisee right of association should be guaranteed either
uniformly (in all of the states) or via a national law.16 Note that the proposed law would not
necessarily grant to franchisee groups (e.g., associations or advisory councils) the right to compel
the franchisor to engage in collective bargaining with an association. Instead, the reform would
be a Norris-LaGuardia Act equivalent: franchisees having the right to join an association without
fear of an actual discharge, a constructive discharge, or some other discriminatory behavior.

3. Absent a compelling reason, arbitration clauses should not be enforced against a franchise
party that wants to sue or defend a case in court.

14
     INT’L FRANCHISE ASS’N, supra note 9.
15
 OFFICE OF SENATOR CORTEZ MASTO, STRATEGIES TO IMPROVE THE FRANCHISE MODEL: PREVENTING UNFAIR AND
DECEPTIVE FRANCHISE PRACTICES 11 (April 2021) (hereinafter, “STRATEGIES TO IMPROVE THE FRANCHISE MODEL”).
16
   Even when franchisees may recognize the usefulness of acting collectively and supporting one another, that
recognition is unlikely to produce any action that overturns any strongly pro-franchisor power imbalance. See Robert
W. Emerson, Franchising and the Collective Rights of Franchisees, 43 VAND. L. REV. 1503, 1556-1566 (1990)
(arguing for the need for state right of association laws and federal antitrust law reforms bolstering the franchisees’
right to act collectively); Robert W. Emerson & Uri Benoliel, Can Franchisee Associations Serve as a Substitute for
Franchisee Protection Laws?, 118 PENN ST. L. REV. 99, 104, 119-128 (2013) (concluding that for many reasons of
law, psychology, and economics, franchisees are unlikely to avail themselves of opportunities to form or join
franchisee associations); Warren S Grimes, The Sherman Act’s Unintended Bias Against Lilliputians: Small Players’
Collective Action as a Counter to Relational Market Power, 69 ANTITRUST L.J. 195 (2001) (noting that antitrust law
unfairly disfavors franchisees and other smaller businesses); Warren S. Grimes, Market Definition in Franchise
Antitrust Claims: Relational Market Power and the Franchisor’s Conflict of Interest, 67 ANTITRUST L.J. 243 (1999)
(noting that franchisees and franchisors have differing interests often of great importance when parties turn to, or
defend against, antitrust claims).

                                                          5
4. A number of persons working as brokers17 between a franchisor and the potential franchisee
have been accused of misrepresentation,18 with the commission nature of the brokerage being
viewed as encouraging sales of franchises over advise to prospective purchasers.19 This is an area
where franchisees and franchisors tend to agree that tighter laws could be enacted. As I
understand it, regulatory initiatives have in the past few years been put into place in California
and other states. These initiatives may well serve as a guidepost for a revision to the FTC Rule, a
clarion call to federal regulators, or even action by Congress.20

5. In the loan and guaranty context, there should be more upfront, bold warnings, such as
concerning the SBA’s Franchise Directory. There should be more information about the process
for issuing, or not, a loan or a guaranty of the loan.

6. The parol evidence rule should not serve as a means to strike evidence outside the four-corners
of a franchise contract that was allegedly procured through the franchisor’s or its agent’s
misstatements.21

7. Franchisors should be restricted from making unilateral changes to the Operations Manual or
other documents ancillary to the franchise contract insofar as those changes are instituted without
good cause or, even if undertaken for sufficient reasons, would impose onerous (excessive) costs
upon franchisees, such as for changes to work hours, a remodeling of the store location, or other




17
    Bibby Group, Is Your Guide a Franchise Broker or Franchise Consultant? (June 1, 2021),
https://www.bibbygroup.com/franchise-brokers-vs-franchise-consultants/ (“The franchise broker (by any other name)
represents franchisors, not buyers, and is paid a fee (or commission) if a franchise buyer chooses one of the franchises
with whom they have contracted for their services.”). Bibby goes on to contend that a franchise consultant, on the
other hand, “charges buyers a fee to advise and protect them and their best interests. The most important aspect of this
protection is serious franchise due diligence that breaks down and analyzes a franchise offering.” Id. Bibby says, “You
will not find a commissioned broker breaking down a franchise they represent and pointing out its flaws. They’re paid
to sell a concept, not critique it.” Id.
18
     See The Franchise Maker, Franchise Legal Problems Due to Sales Misrepresentations,
“https://www.thefranchisemaker.com/learningcenter/franchise-legal-problems-due-to-sales-misrepresentations/ (last
visited March 14, 2022) (contending that over 60% of all franchise litigation stems from franchise sales
misrepresentation, and in effect placing much of the blame on franchise brokers who have duped both the franchisor
and the franchisee).
19
  As stated by the Bibby Group:
         The broker will introduce prospects to franchises they might otherwise not see. But there are at least
         three negatives. One, there will be a barrage of introductions that can create more confusion than
         clarity. Two, the broker will only make introductions to franchises with whom they have a fee
         arrangement. And three, there will be no due diligence performed. Prospective buyers will be
         presented with blue sky and happiness as opposed to the investigative steps that should be part of
         buying a franchise.
Bibby Group, supra note 17.
20
  For a rosy view of the work of franchise brokers, see Franchise Brokers Ass’n, Franchise Broker or Consultant?
(July            22,            2020),              https://www.franchiseba.com/franchise-consultant-vs-franchise-
broker/#:~:text=Franchise%20brokers%20are%20hired%20by,their%20valued%20services%20for%20free.
21
     Robert W. Emerson, Franchising and the Parol Evidence Rule, 50 AMERICAN BUS. L.J. 659 (2013).

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modifications to the franchise system “rules.“ Many factors would need to be considered in
terms of proportionality, time, revenues and expenses.22

8. Non-disparagement clauses should be prohibited inasmuch as they (1) harm the exchange of
information between current franchisees, (2) impede the efforts of prospective franchisees
seeking to learn about the business from current franchise owners, and (3) violate the
fundamental norms of open, robust speech, necessary for a free society, and is extremely useful
for smart business planning and the effective execution of those plans.

9. All Franchise Disclosure Documents (FDDs) should be maintained on an easily accessible
website, perhaps maintained by the FTC or through a government contractor.

  There are other substantive areas of law that could be clarified, but – over time – common law
jurisprudence may have the nuance and depth that legislation may not accomplish. In other
words, a statute could set a basic standard, but – importantly – leave the courts and regulators to
deal with specific fact patterns.
Here are three important examples:
  Statutes on termination (good faith and fair dealing, good cause, etc.) likely could be drafted
simply as an attempt to ensure due process for franchisees who have been terminated or who
have voluntarily left a franchise network.23
  Statutes on ownership of goodwill could, again, be enacted to deal with a procedural issue -
providing for a transfer of rights process for some recognition of the equity to which a franchisee
is entitled. As with termination, the precise delineation of how to resolve the substance may be
best left to commentators, courts, accountants, and others.24
   Statutes on non-competes could be crafted to include rules covering extreme examples of
poaching and encroachment, but the delineation of principles for a court to follow with respect to
the usual substantive law issues would likely either be too basic (just a repetition of standards
found in the case law) or too involved to legislate without extensive groundwork undertaken
beforehand.25



22
  See Robert W. Emerson, Franchising Lessons in the Age of Incivility: Operations Manuals and Trade Secrets, 29
Texas Intell. Property L.J. 305 (2021).
23
  A few of my articles touching upon these matters are: Robert W. Emerson, The Faithless Franchisor: Rethinking
Good Faith in Franchising,” 24 U. PENN. J. BUS. L. ___ (issue 2, 2022); Robert W. Emerson & Steven A. Hollis Bound
by Bias? Franchisees' Cognitive Biases, 13 OHIO STATE BUS. L.J. 1 (2019); Robert W. Emerson, Franchise
Terminations: ‘Good Cause Decoded’,” 51 WAKE FOREST LAW REVIEW 103 (2016); Robert W. Emerson, Franchising
Constructive Termination: Quirk, Quagmire or a French Solution? 18 U. Penn. J. Business L. 163 (2015).
24
  A sampling of articles on goodwill and related topics include: Robert W. Emerson & Charlie C. Carrington, Devising
a Royalty Structure that Fairly Compensates a Franchisee for its Contribution to Franchise Goodwill, 14 VIRGINIA
LAW & BUS. REV. 279 (2020); Robert W. Emerson, Thanks for the Memories: Compensating Franchisee Goodwill
after Franchise Termination, 20 U. PENN. J. BUS. L. 286 (2017); Robert W. Emerson, Franchise Savoir-Faire, 90
TULANE L. REV. 589 (2016); Robert W. Emerson, Franchise Goodwill: “Take a Sad Song and Make It Better”, 46 U.
MICH. J. LAW REFORM 349 (2013); W. Michael Garner & Elliot R. Ginsburg, Nailing the Blob of Mercury: Goodwill
in Franchising, 33 FRANCHISE L.J. 149 (2013).
25
  See generally COVENANTS AGAINST COMPETITION IN FRANCHISE AGREEMENTS (eds. Michael R. Gray &
Natalma M. McKnew, 3d ed., ABA Forum on Franchising 2012); Robert W. Emerson, Franchising Covenants
Against Competition, 80 IOWA LAW REV. 1049 (1995).

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                                     The Two SBA Bills

       The ‘‘Small Business Administration Franchise Loan Transparency Act of 2021’’ (S.
1120) provides in part:
              Sec. 4 REQUIRED DISCLOSURES.
              (a) IN GENERAL.—Subject to subsection (b), a franchisor, except
              for a franchisor of a franchise in the lodging industry, that qualifies
              for guaranteed lending from the Small Business Administration for
              the franchises of the franchisor shall, at a minimum, disclose in the
              disclosure document required to be furnished by the franchisor to
              any prospective franchisee the following in formation for each of
              the 3 years preceding the date of the disclosure document: (1) The
              average and median first-year revenues for all businesses operated
              under franchises granted by the franchisor, in accordance with the
              Financial Performance Representation Commentary. (2) The total
              number of businesses operated under franchises granted by the
              franchisor that, during the first year of operation, either— (A)
              ceased operations; or (B) were transferred to a new franchisee. (3)
              The average and median revenues for all businesses operated under
              franchises granted by the franchisor, in accordance with the
              Financial Performance Representation Commentary.
              (b) LIMITATION.—A franchisor may not disclose to a
              prospective or current franchisee, directly or through a third party,
              any information relating to revenue that conflicts with the
              information relating to revenue provided under subsection (a) in a
              disclosure document unless the relevant franchise purchase
              includes 1 or more businesses under the relevant franchise that are
              in existence on the date on which the disclosure is made, in which
              case the franchisor shall disclose to the prospective or current
              franchisee the relevant information relating to revenue as of the
              date on which the disclosure is made with respect to those
              businesses.
              SEC. 5. ENFORCEMENT.
              The Administrator of the Small Business Administration— (1)
              shall enforce the requirements under this Act; and (2) may hold a
              franchisor liable for the balance 19 of any loan obtained through a
              violation of this Act.

        I very much understand the concern motivating this bill. There are indeed outrageous
examples of franchisees misled, defrauded, or otherwise caused great suffering and financial
harm due to, at the very least, franchisor incompetence (and often malfeasance). However, at
this point in time, I am reluctant to support a mandated Financial Performance Representation
(“FPR”) for, inter alia, these reasons:

      1. The FPR, if it is to be mandated, should come from the Federal Trade Commission
(“FTC”), not the Small Business Administration. The FTC is the agency with the experience, and

                                               8
the ties to the franchise law community, to make it the logical administrative “location” for a
FPR. While certainly the agencies could coordinate with respect to enforcement and regulations,
if the SBA put forth a FPR, I do wonder whether housing a mandated FPR, with penalties, in the
SBA opens it up to more challenges on procedural and administrative grounds that would be
avoided if emanating from the FTC. But this is not the main reason for my reluctance to endorse
S. 1120.

         2. The problems that drive the outrage over the suffering of franchisees who bought into a
bad system may not have been avoided by a mandated FPR. Incompetent or malfeasant
franchisors may not provide the required information, at least in the comprehensive, timely,
accurate manner in which it should have been provided. Again, though, this is not what
principally motivates my reluctance to endorse S. 1120 (and I am not happy with any argument
that, in effect, says a rule should not be passed if the main objection is simply that bad actors
likely will not follow the rule).

        3. My main objection to S. 1120 is that there is evidence that the non-mandatory nature of
the FPR may actually work better as a signaling device to prospective franchisees. As time goes
by, the FPR is increasingly being provided – with recent figures indicating that about two-thirds
of all Franchise Disclosure Documents (FDDs) now provide an Item 19 FPR (up from about
20% of FDDs when the modified FTC Rule first went into force about a dozen years ago. There
is much in the academic literature, by business professors, noting these possible signaling effects.

         4. Many of the problems associated with profit representations are the statements apart
from an FDD, and often occur regardless of whether an FPR is included in the FDD.
                 The franchise representative or a sales representative ‘may tell a
                 prospective franchise directly and through subtle means that the
                 FDD has been reviewed and approved by the government and it’s a
                 safe investment.’ FTC’s regulation of FDDs contribute to this
                 problem. For example, the FTC allows – but does not require –
                 franchisors to include financial information in Item 19 of the FDD.
                 Franchisors are also permitted to include in Item 19 a disclaimer to
                 the effect that any other financial information provided outside
                 Item 19 is illegal and should not be relied upon as factual.48 In
                 practice, this is a problematic provision; it allows franchisors to
                 connect investors with buyer development agents or brokers,
                 franchise owners, newsletters, or other projections or data without
                 the requirement of accuracy as franchise investors do not
                 understand that financial material provided outside the FDD may
                 not be reliable.26
I very much recognize that this is an extremely serious problem, but I think there are, at least
initially, better ways to confront the problem, such as improved administrative enforcement,
removal of parol evidence rule or other evidentiary barriers to proof of cases for
misrepresentation, and heightened oversight of brokers or other third parties who may engage in
bad acts.

26
     STRATEGIES TO IMPROVE THE FRANCHISE MODEL, supra note 15, at 10 (citations omitted).

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        5. I do think there may be ways, with respect to the numbers and reporting requirements,
to improve Item 20 disclosures about outlet numbers and thereby meet some of the concerns
about Item 19 FPRs.

        6. If any statements are being made by franchisors or their representatives to lenders or to
the SBA in connection to a franchisee’s obtaining a loan or loan guaranty, it is difficult for me to
comprehend why such statements should be shielded from the franchisee, who will be on the
hook for the loan.27 I certainly understand and respect the need for confidentiality, but if banks
and the SBA need documents to evaluate a franchise system into which a franchisee will become
a dependent party, with its money on the line, I think there should be a very high barrier to
overcome in terms of shielding those franchise network related documents from someone whose
risks are so much tied to that very network. This, however, is not an area in which I have
undertaken research.

         As for “SBA Franchise Loan Default Disclosure Act,” (S. 2162), I favor that bill. As I
understand it, this is not – or at least it should not be – a controversial Act for franchisors,
franchisees, or those who represent them. It is an attempt to provide more information –
important information – and (just as important) an attempt to afford to prospective franchisees
greater accessibility to this information. That is a good thing. Whether people read the
disclosures, and what they do with the information, is now often the real issue.




27
  Id. at 55 n.228 (“In 2014, SBA’s Chief Franchise Counsel, Stephen Olear, recommended that franchisors consider
providing a projection directly to the lender by passing the franchise investor (the ultimate borrower). “. . . Most
importantly in the financing context, the requirements in Item 19 for the preparation of financial performance
representations do not apply to information provided directly by the franchisor to lenders of prospective franchisees.
Franchisors who do not provide financial performance representations to prospective franchisees but want to provide
information to prospective lenders, or who wish to provide additional information to these lenders, are free to do so.
This provides franchisors the opportunity to give valuable information to facilitate the financing of its franchisees
without being bound by the requirements of Item 19. However, this can introduce a new set of risks the franchisor
must be prepared to manage…First, any information provided to lenders should only be provide after obtaining a
confidentiality and non-disclosure agreement from the lender...”).



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