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The Rule rules

Changes to FTC regulations brings lawyers to symposium


Understanding federal regulations is never easy. The industries that emerge simply to advise people or companies on U.S. guidelines often equal the economic output of many small nations.

So perhaps it’s not surprising that this year’s International Franchise Association Legal Symposium drew a crowd of nearly 600 people. The two-day conference took place in May—less than two months before U.S. franchises begin complying with the Federal Trade Commission’s newly updated Franchise Rule. Many of those in attendance sought help in understanding how to comply with the changed regulations.

First written in 1978, the FTC’s franchise rule requires franchises to disclose a list of 23 pieces of information to prospective franchisees, such as litigation history and the cost of purchasing and starting a franchise. The FTC recently finished the first major revisions in the regulations—changes 12 years in the making—to take into account new technology and to mesh better with a bevy of state regulations that have been passed in the nearly 30 years since.

Franchises must comply with the new regulations by July 2008, but they can begin following the guidelines this July, though few are likely to do so that quickly, legal experts said. “Nobody wants to be the first settler to get all the arrows, they’d rather others be the pioneers,” Joel Buckberg, an attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz, said during one session about the rule at the conference.

Steve Toporoff, finance program coordinator for the FTC’s Bureau of Consumer Protection, assured attendees that penalties for not complying would not come quickly after the July 2008 date. “There’s no sense in bringing in law enforcement or civil penalties in the first years when franchises are getting up to speed,” he said. “I would expect a more relaxed, work-together, conciliatory approach.”

Still, compliance discussions were among the most heavily attended events at the symposium.

The new regulations will have little, if any, impact on franchisees, said Rupert Barkoff, a partner with Atlanta-based Kilpatrick Stockton, LLP.

The new rule in some cases will require more extensive disclosures than current regulations, according to the FTC, such as more details on lawsuits filed against franchisees, the use of confidentiality clauses in lawsuit settlements and trademark-specific franchise associations.

Other disclosure rules will be eased under the changed regulations. For example, the rule does not require disclosure of “risk factors,” franchise broker information or extensive information about every component of any computer system a franchisee must purchase.

Scheduling luck

Preparation for the annual conference begins several months in advance, which organizer Lane Fisher of the Philadelphia law firm of FisherZucker noted sometimes results in general sessions that are behind current trends. This was not the case with the roundtable discussion on private equity takeovers of franchise companies.

The discussion centered on the $55 million takeover of Texas-based franchise holding company The Dwyer Group by The Riverside Company, a private equity firm, in 2003. The panel’s moderator: Mike Isakson, current chair of the IFA and chief operating officer of ServiceMaster Clean, which in March accepted a $5.5 billion buyout from the New York private equity firm Clayton Dubilier & Rice.

Flush with cash, private equity firms have been taking over larger and larger companies spanning numerous industries, including many franchise businesses. The trend isn’t expected to end soon. Some analysts believe, for instance, that Wendy’s could be targeted by a private equity fund.

Preventing problems

Franchises must consider numerous factors when making changes to its supply chain, such as the quantity and uniqueness of its product, manufacturing requirements and whether the company will earn revenue from selling supplies to franchises.

Perhaps the most important factor, at least in eliminating disputes, is communication, according to the speakers at one session. Keeping franchises informed of changes to the supply chain can alleviate such disputes.

“The key to resolving all disputes is communication,” said Stephane Teasdale, chair of the franchise law group at Canadian firm Miller Thomson. “The system can work really well if there is good communication.”

Mediate…or else

The list of recent allegations against Joe Francis, the late-night TV-retailer of “Girls Gone Wild” videos, reads like Tony Soprano’s rap sheet: Tax evasion, bribery and sexual battery.

So what gets him put in jail? Mediation.

This was the lesson Bradley S. Block of McDonald’s Corp. talked about during a session on ethics in arbitration and mediation.

Francis had allegedly been disruptive during a mediation session to settle a lawsuit brought against Francis and “Girls Gone Wild” by seven minors who were filmed at a Florida beach in 2003. A Florida judge ordered Francis to settle the suit or face jail. When Francis ignored the order, the judge sentenced him to 35 days in jail. “He ended up in jail for failing to mediate,” Block said.

Let that be a lesson to franchisors and franchisees.

Budding relationships

During a session titled, “Turning Defiant Franchisees into Compliant Franchisees,” John Kujawa, vice president of franchising for McDonald’s Corporation, said a company’s ombudsman needs financial wherewithal, plus credibility with both the franchisee community and the field people. “If you have an ombudsman and no one calls you, you’ve got an ombudsman who’s playing a lot of solitaire on the computer,” he told the packed session.

The legal symposium culminated on May 8, but a portion of the attendees were sticking around an extra day for the joint IFA and International Bar Association conference, that covered international law issues. It touted interactive session providing a “roundup of developments in franchising from some of the hottest jurisdictions from around the world.

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