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26 Franchise L.J. 117 (2006-2007)
Regulation FD: Roadmap to Better Relations between Franchisors and Franchisees

handle is hein.journals/fchlj26 and id is 117 raw text is: Regulation FD: Roadmap to Better Relations Between Franchisors and Franchisees DAVID J. MERETTA AND ERIC H. KARP he free and open exchange of material information between a franchisor and both prospec- tive and existing franchisees is the hallmark of a franchise system that is equipped to adapt to change and successfully meet the competitive challenges of the market. For public franchisors such as Wendy's International, Inc., Cendant Corp., and others,' however, the disclosure of material confidential information David J. Meretta is an increasingly delicate issue in a post-Enron regulatory and political environment.2 Many public franchisors believe that a business climate in which market integrity receives heightened attention creates an even higher bar- rier to the private disclosure of con- fidential information to franchisees. Many nonpublic franchisors also withhold similar information, sensi- Eric H. Karp tive strategies, and marketing plans from franchisees due to confidentiality concerns? In reality, no such barrier exists. In the wake of Securities and Exchange Commission Regulation FD (Regulation FD),4 the open communication and active collaboration that is critical to system success is readily achievable for public and nonpublic franchisors alike. Regulation FD is a fair disclosure regulation that prohibits public companies from disclosing material confi- dential information to certain categories of market participants and the holders of the company's securities. But Regulation FD exempts such disclosure for anyone who expressly agrees, either orally or in writing, not to use or trade on the information until the company releases it publicly. This confidentiality agreement exemption of Regulation FD provides a way for all franchisors, both publicly and privately held, to achieve unrestricted com- munication with their franchisees. Benefits of Open Communication and Collaboration Open communication and collaboration among franchisors and their franchisees are important ingredients for system success and extremely beneficial for everyone concerned.' In fact, David J. Meretta is an associate and Eric H. Karp is a partner with Witmer, Karp, Warner & Ryan LLP in Boston. They represent fran- chisees throughout the country and serve as counsel to numerous fran- chisee associations. Mr. Karp serves on the Franchise Project Group of the NASSA Franchise and Business Opportunities Committee. beyond merely being desirable, a structure that delivers effi- cient, effective, and formal franchisee participation in system governance is essential for franchise-based business organiza- tions to flourish in the long term.6 Andrew C. Selden notes in Organization Design for Successful Franchising that innovation and change are necessary for the continued success of any business organization.7 In a franchise system, the anticipation of change, or the appropriate response to it, must stem from active collaboration between the franchisor and the system's franchisees-not from the fran- chisor's unilateral decisions.' Research demonstrates a direct link between franchisee satisfaction and success for both the system and the franchisor, and a very strong correlation between satis- faction and the franchisee's perception of mutual cooperation and coordination, role integrity, and commitment.' Franchisee satisfaction requires active coordination of both goal setting and effort between franchisor and franchisee in a collaborative and participatory system of governance.'0 If both parties to the fran- chise relationship are committed to communicate openly and believe there is equity in the relationship, they can make appro- priate adjustments to react to constantly changing market forces and sustain the system's competitive advantage.I Highly successful franchise organizations combine franchisor leadership with participatory governance and have the ability to implement franchisee-driven innovation combined with selective adoption of corporate initiatives.2 This fusion of leadership and participatory governance promotes system success and is fully consistent with the best practices in organizational design, which are moving strongly toward flat, collaborative, cooperative, and participatory management systems. In contrast, a franchisor's failure to seriously consider fran- chisee input in system decision-making may alienate fran- chisees, create systemwide dissension, stifle change, and deprive the franchisor of the enthusiastic participation by fran- chisees in system improvements that are based on their opera- tions experience and knowledge of the market.4 Not surpris- ingly, a franchise system can implement change, particularly if it requires new investment by franchisees, much more readily if franchisees embrace rather than resist the change.' Indeed, one franchisor acknowledges that a franchised busi- ness can fail if the franchisor does not provide sufficient, effec- tive two-way communication that establishes mutual trust and trustworthiness.'6 Similarly, another franchisor states that open, frank and frequent communication between franchisors and franchisees can eliminate many of the potential distractions which otherwise devour both parties' time and resources.7 The International Franchise Association (IFA) specifically endorses the principle that successful franchise systems thrive on continual and effective communication, acknowledging Winter 2007 U Franchise Law Journal 117

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