12 Franchise L.J. 1 (1992-1993)

handle is hein.journals/fchlj12 and id is 1 raw text is: Roundtable on Proposed
Federal Franchise Legislation

Editor's Note: On May 21, 1992, Congressman John La-
Falce (D-N.Y.), chair of the House Small Business Com-
mittee, introduced into the House of Representatives the
Federal Franchise Disclosure and Consumer Protection Act,
H.R. 5232, and the Federal Fair Franchise Practices Act,
H.R. 5233. The Franchise Law Journal asked a number of
practitioners and one economist to comment briefly on the
proposed legislation. The Journal did not request particular
points of view or that the comments focus on one or the
other of the proposed bills. The commentators' observa-
tions are set forth below; a summary of the two Acts appears
on page 22.
Franchise Commentary
by Richard M. Asbill*
Congressman LaFalce focuses
in his two bills on a perceived in-
adequacy of current information
about franchising generally and
the continuing lack of viable legal
recourse for franchisees in re-
sponse to unethical or illegal fran-
chising practices. However, there
appears to be no clear-cut evi-
dence of such abuse, as noted in
published disputes by industry      Richard M. Asbill
analysts, who disagree about the
failure rate of franchised businesses. (See, e.g., WALL ST. J.,
July 3, 1992, at B2).
H.R. 5232 contains a mandatory earnings claim provi-
sion, even though many franchisors do not have the infor-
mation to determine profits because royalties are based on
gross sales. Also, section 3(c) provides that a prohibited
untrue statement of material fact includes any statement of
fact which has the intent or effect of misrepresenting the
potential profitability or chances of success of a franchise
opportunity. Thus, the franchisor must make an earnings
claim, but will violate the Act if such claim has the effect
of misrepresenting the chances of success. How can a fran-
chisor be safe, particularly with respect to the sale of a

franchise in a territory not already represented by a fran-
chise system outlet? At the very least, it is an open invitation
to hindsight litigation by disgruntled franchisees. This seems
especially likely since section 6 adds a private right of action
and authorizes attorneys fees for violation of the Act. Since
the claim will always be that the franchisor violated the Act,
the franchisee can get attorneys fees if he wins, but if he
loses, there is no corresponding provision to enable the fran-
chisor to obtain attorneys fees for frivolous litigation.
Section 8 amends the Federal Arbitration Act to prohibit
arbitration for dispute resolution purposes unless each party
to the agreement accepts arbitration, after the dispute arises,
as a vehicle for settling the controversy. Certainly, this is
contrary to the current trend of expanding alternative dis-
pute resolution efforts, including the use of arbitration.
Finally, section 12 broadens the definition of a franchise
beyond current law by deleting all exemptions and exclu-
sions (except for the bona fide wholesale price exemption),
including the de minimis fee exemption now in the FTC
Rule, and by adding a third potential basis for coverage in
addition to the concepts of significant assistance and/or
significant controls (e.g., communication to the franchisee
(continued on page 8)

I 1 1  i ranchise I w journal
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Volume 12, Number 1  Quarterly Journal of the Forum on Franchising  Summer 1992

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