Policy and Regulatory Outlook: 2007 ' Franchise Industry Eyes New Congress

With the recent Congressional elections returning leadership of the U.S. Senate and House to Democrats for the first time in more than a decade, the business community is keenly interested in the priorities of the new Congress. While it is apparent that Congress will initially focus on issues outside the direct domain of franchising (Iraq, Congressional ethics, etc.), numerous matters of importance to franchisors and franchisees are on the table, too.

In this Q&A, experts in the political-regulatory environment facing the franchise industry take a look ahead at the issues that may arise. The panelists are: Frank Capaldo, executive director/CEO of the National Franchisee Association, Inc. ('NFA') David French, vice president, government relations, International Franchise Association ('IFA'); Susan Kezios, president, American Franchisee Association ('AFA'); Ronnie Volken-ing, director, government affairs, 7-Eleven; and Erik Wulff, partner, DLA Piper US LLP and executive editor, LJN's Franchising Business & Law Alert.

FBLA: What are the legislative and regulatory priorities of the franchise industry?

French: The franchise business community and IFA have been working to reform the immigration system, pass important small-business health plan legislation, promote SBA programs, and enact pro-growth tax policies. We have also been engaged in efforts regarding the minimum wage, tort reform, and union organizing campaigns among other issues.

Wulff: Taxes, small business health care, immigration reform, and the minimum wage are of particular concern, and I would add food regulations/labeling as an additional concern for the restaurant industry. With the changes in Washington, vigorous efforts will need to be made to avoid or minimize legislative and regulatory initiatives that will create more layers of costs or governmental intrusion into small businesses that often face very competitive environments.

Volkening: Among those issues that most concern franchising businesses would be tax increases, minimum wage increases, small business health plans, frivolous lawsuit reform, and a review of the interchange fee charged to retailers by credit card companies.

Kezios: Franchisees care about the things that have an economic impact, since most that survive run on razor-thin margins (a typical franchisee loses 10% to 20% of his/her revenues right off the top to franchise and other fees paid to the franchisor, and has to cover all of his/her costs and taxes from what's left). Therefore, the key legislative concerns are regulatory costs such as mandated wage and benefit costs that exceed the value of work provided by entry-level employees; confiscatory estate taxes; and the erosion of equity in their businesses from the failure of most states and the federal government to pass meaningful fair franchising laws.

Capaldo: The legislative/regulatory priorities for NFA are: potential minimum wage increases without offsetting considerations; estate tax repeal; reduction in depreciation period from 39.5 to 15 years; litigation reform (especially obesity); restrictions on advertising; immigration reform (ie, employer mandates); card check authorization; Americans with Disabil-ities Act reform to allow 90-day correction period prior to legal action; and health care reform, including potential paid parental leave.

FBLA: Tell me more about one of those priorities you mentioned. What do you want to occur, and how are you working to make it occur?

French: We have been leaders in a coalition of small-business groups working to promote a bill (H.R. 525, S. 1955) that would allow small businesses to purchase health insurance through national trade associations. This legislation would give small businesses the ability to purchase health insurance through larger groups, capturing important savings through economies of scale. Another big benefit of the legislation is that it would allow these plans to avoid costly state health care mandates. The bill has particular appeal for franchised businesses thanks to a provision included through lobbying by the IFA: Not only would a national trade group like the IFA be able to offer health insurance, but also franchise systems and even franchisee associations. This provision effectively gives franchised firms at least three different choices for health insurance coverage, which should help franchisees find the lowest possible price for insurance.

Grassroots messages have been the key in our efforts to pass this bill, and it has been the focus of personal lobbying efforts by IFA members at our annual Washington fly-in. When the Senate was considering this issue in the spring of 2006, IFA members wrote thousands of letters to the Senate. In the end, we came close with a majority of the Senate supporting the bill, but fell five votes short of the 60-vote margin necessary for passage.

With the new majority, this bill is probably on the back burner for a while. Health care is certainly a priority for Democrats, but their policies will likely take them in a different direction. It remains to be seen exactly how they will approach health care reform, but the Democrats' policy palette has typically included proposals ranging from a single-payer national health care program to a decentralized program modeled after the federal employees' health benefits program. Under both of these proposals, the big departure from a small business health plan is that bureaucrats, not employers and individuals, will be making the final determination on health care decisions. Our challenge over the next 2 years will be finding ways to influence the debate and build bipartisan support for small business health plans.

Wulff: The restaurant industry, and the quick-serve restaurant segment in particular, is taking the brunt in America's fight against obesity. Clearly it is a problem that has long-term health care implications, but there must be a balanced approach that takes into account personal responsibility.

Volkening: I believe the highest priority concern for most small businesses is the challenge of making affordable health care coverage available for their employees. There are currently 47 million Americans without health insurance, 60% of whom are employed by small business. The Association Health Plan ('AHP') Coalition, consisting of more than 180 member organizations, continues to work for legislation to allow these small employers to band together to purchase insurance on terms similar to those available today to only very large employers and labor unions. This legislation has passed the House many times, but the 60-vote Cloture Rule has, to date, proven our stumbling block.

A rapidly emerging concern for small business relates to credit card fees. Credit card companies are abusing their market power by charging U.S. merchants, and therefore American consumers, among the highest interchange rates in the world. For example, interchange rates in the U.S. are nearly four times higher than the rates charged in Australia. The Merchants Payments Coalition, consisting of more than 20 trade associations, is urging Congress to enact legislation to create a more transparent and open credit card system and cost-based interchange fees.

Capaldo: On litigation reform, for example, we would like to see a limitation on specious lawsuits that put the franchise/restaurant industry at risk for claims of obesity. A bill was introduced in the last Congress (and repeatedly passed the House) that would have reduced this risk, and we will be making visits to the Hill to garner support for its re-introduction, focusing on the freshman members to educate them as to the cost of failing to act, including the loss of jobs for their constituents.

FBLA: Republicans are more commonly associated with pro-business legislation, and Democrats are more commonly associated with pro-consumer and pro-labor legislation. Given the turnover in the U.S. Congress, what does that mean for franchising in
the future?

French: Business groups in Washington will have to adapt. Democrats owe some of their success to allies like labor unions and personal injury attorneys. As a result, business groups can expect to play defense on issues like union organizing and new causes of action. Also, key issues like small business health plans, tort reform, and estate tax relief will not be on the Democrats' agenda at the start of the Congress. In their place, we can expect to see things like an increase in the federal minimum wage and new restrictions for fast food advertising.

One potential bright spot for the IFA is that the prospects for a comprehensive immigration reform plan have improved. Many incumbent Repub-licans campaigned against the Senate bill that IFA endorsed, and their opposition to immigration reform did not translate into votes. By comparison, Democrats in both the House and Senate leadership have been among the strongest supporters of a comprehensive bill. Since this is one of President Bush's top issues as well, immigration reform may be an early bipartisan victory for the IFA.

In retrospect, 2006 was an election about the minimum wage. Democrats used the issue as a wedge to appeal to swing voters in many states. To heighten turnout among labor union members, Democrats succeeded in placing initiatives on the minimum wage on the ballot in six states, and all six of them passed.

In 2008, one of the top issues will be health care. I expect that many states will see ballot initiatives on health care, and congressional Democrats will use their legislative agenda to tee this issue up for their presidential nominee.

But though the legislative landscape will change, franchising is a bipartisan business model. What matters most to Democrats and Republicans alike is that franchised small businesses are creating jobs and economic activity in their hometowns all across the country. We will continue working with both parties. If we do a good job of helping lawmakers understand our concerns and priorities, we'll always be able to find some common ground.

Wulff: The industry is more likely to see new legislative initiatives that may have adverse consequences, even if unintentional, to small businesses. The industry needs to be vigilant in the current environment.

Volkening: Franchising will continue to thrive, but obviously there are challenges that could be addressed legislatively. These challenges have been present for some time, and they did not change November 7. Mean-ingful and enduring solutions will come after constructive bipartisan discussions, regardless of which party is in power.

Kezios: Turnover in Congress means very little in these matters. The franchisors' trade association, the IFA, was founded specifically to suppress fair franchising mandates from the legislatures, and has been successful, thus far, at that mission. They are definitely 'non-partisan' on that issue. It doesn't matter who is in office, they want nothing standing in terms of legislation that might impede their unfettered domination of the marketplace. The abusive, anticompetitive practices of some franchisors hurt everyone: employees, franchisees, investors,
and suppliers alike. Those issues should not be partisan at all.
While Republicans have supported small-business franchisees in the past, unfortunately, they seem to have come apart at the seams. The Democrats, who have also supported small-business franchisees in the past, will now have the power of the purse and the power of investigation. They will, most likely, use it.

Capaldo: If history is any guide, it means that for the next 2 years, the franchising industry primarily will be in a defensive mode, essentially working to modify, or defeat, legislation that could negatively impact the industry's ability to grow.

FBLA: Are you optimistic about the franchise industry, given the current economic and regulatory environment?

French: I'm very optimistic. We have some challenges ahead of us in working with a Congress that will be decidedly less friendly to business groups, but the overall future for franchising remains bright.

Wulff: The franchising industry
historically has been very resilient to economic fluctuations, drawing from the people who get displaced in economic downturns and floating up with economic prosperity.

Volkening: Franchising currently is responsible for one in seven jobs in America, and there is absolutely no reason not to be enthusiastic and optimistic about franchising. 7-Eleven is bullish on franchising, as evidenced by conversion of existing company-operated stores, business conversion, and White Hen (franchised) acquisition.

Capaldo: Yes, especially considering the fact that many of the newly elected Democrats in the House ran as pro-business moderates in districts that generally vote Republican. Since remaining in office is their goal, they will tend to support policies that promote economic growth.

FBLA: Legislation and regulation are only one element of the legal framework that affects franchisors and
franchisees. What's your perspective about the rest of the legal framework ' ie, Franchise Rule, state tax laws, etc.? Is that where the real issues lie today?

French: We are hopeful that the FTC will conclude work on the Franchise Rule shortly. This will be a very positive development, and allow franchise companies and states to move ahead with some certainty about the regulatory framework. On the other hand, state tax laws are an area of increasing concern for the franchise community. Many states are aggressively taxing royalty payments for out-of-state franchisors, and it is creating a costly and burdensome compliance problem for many franchise systems as they grow. Another area of concern is the spread of anti-chain store legislation at the state and local level. Many jurisdictions, for example, have considered measures aimed at requiring large companies like Wal-Mart to pay their 'fair share' for health care coverage. These bills are frequently poorly drafted and wrap all franchisees up with the franchisor in their definition of an employer. We can expect more of these bills over the next year or two, and the IFA will be aggressive in fighting these efforts.

Wulff: Currently, the industry faces a regulatory scheme on franchise sales that is really unworkable and leads to unnecessary costs. Ideally, there should be one set of disclosure requirements on a national basis, but the FTC is not prepared to pre-empt the patchwork of state laws. In fact, the FTC appears somewhat disinterested in this segment of the economy, as improved franchise disclosure proposals have been languishing for years ' waiting for the Commission to take action to bring them into effect. But, looking beyond our borders, an area of major concern is the proliferation of a hodgepodge of franchise laws throughout the world, some with very difficult requirements, such as the requirement to operate company-owned units in China before one is allowed to franchise in China. The industry is increasingly a global industry and can be significantly affected by laws and regulations beyond our borders.

Volkening: The devolution of government from the federal to the state and local levels continues apace. Small businesses are being increasingly challenged by intrusive governmental regulations such as special use permits, local licensing, zoning, and other restrictions on business operations. On issues such as minimum wage and mandated health benefits, these
governments are responding to the perceived inability of Congress to act. The result can be a patchwork of inconsistent regulation that challenges profitability and expansion.

Kezios: The AFA is concerned that for every step forward by the FTC ' and the pending FTC Rule revisions do have some steps forward ' the FTC takes three steps backwards. Take, for example, the inclusion in Item 20 of the existence of trademark specific franchisee associations. Franchisee advocates viewed this inclusion as recognition of the important role that independent franchisee associations play within a system. Most important of which is providing an unfiltered source of information for prospective franchisees. However, the FTC went on to recommend that the franchisor may have the option to add a disclaimer regarding its lack of endorsement of the franchisee association. The franchisor may also state that the association may not represent the interests of all franchisees. This is not likely to motivate a prospect to contact the independent franchisee association. The fact that there are few organizations that ever achieve 100% representation of their constituents, including the IFA, which claims to represent the interests of all franchisors, doesn't seem to matter to the FTC.

The FTC also seems to be running away from its statutory charter to protect investors in franchises from unfair and deceptive business practices and unfair methods of competition. Another example involves the exemptions in the new Rule, which will allow many franchisors to escape their presale disclosure obligations altogether. This is exacerbated by the FTC's ongoing failure to enforce the Rule, and Congress' failure to allow franchisees harmed by violations of the Rule to sue the franchisors that commit the violations. Instead what we have at the federal level is 'pretend regulation.' Congress would do well to provide a private right of action under the FTC rule as the threat of going to court seems to be the only market force that certain franchisors fear.

Today the legal framework for franchisees is still written for them within the boundaries of their franchise contracts. With arbitration being mandated along with the prevalent use of integration clauses in the majority of
franchise contracts, the spirit and intent of the FTC Rule (and various state franchise laws) are undermined systematically and repeatedly. Case in point ' certain franchisors are still able to sell franchise offerings that they know are unprofitable for franchisees. These franchisors make their money primarily through the sale of equipment, products, and services to their captive franchisee-consumer base. Eventually this will be recognized as something other than free enterprise. And the changes on Capitol Hill may be what are needed to ensure transparency in these areas in the franchisor-franchisee relationship.

Capaldo: In general, the states will serve as the laboratories for more socio-economic policy initiatives. This was evident in the recent election cycle given the vast number of eclectic proposals on state ballots. This was particularly true in those initiatives that sought to regulate the employer-employee relationship in one way or another.

Editor's Note: The opinions expressed in this Q&A are those of the panelists, and are not necessarily the opinions of Law Journal Newsletters or its parent company, ALM.

With the recent Congressional elections returning leadership of the U.S. Senate and House to Democrats for the first time in more than a decade, the business community is keenly interested in the priorities of the new Congress. While it is apparent that Congress will initially focus on issues outside the direct domain of franchising (Iraq, Congressional ethics, etc.), numerous matters of importance to franchisors and franchisees are on the table, too.

In this Q&A, experts in the political-regulatory environment facing the franchise industry take a look ahead at the issues that may arise. The panelists are: Frank Capaldo, executive director/CEO of the National Franchisee Association, Inc. ('NFA') David French, vice president, government relations, International Franchise Association ('IFA'); Susan Kezios, president, American Franchisee Association ('AFA'); Ronnie Volken-ing, director, government affairs, 7-Eleven; and Erik Wulff, partner, DLA Piper US LLP and executive editor, LJN's Franchising Business & Law Alert.

FBLA: What are the legislative and regulatory priorities of the franchise industry?

French: The franchise business community and IFA have been working to reform the immigration system, pass important small-business health plan legislation, promote SBA programs, and enact pro-growth tax policies. We have also been engaged in efforts regarding the minimum wage, tort reform, and union organizing campaigns among other issues.

Wulff: Taxes, small business health care, immigration reform, and the minimum wage are of particular concern, and I would add food regulations/labeling as an additional concern for the restaurant industry. With the changes in Washington, vigorous efforts will need to be made to avoid or minimize legislative and regulatory initiatives that will create more layers of costs or governmental intrusion into small businesses that often face very competitive environments.

Volkening: Among those issues that most concern franchising businesses would be tax increases, minimum wage increases, small business health plans, frivolous lawsuit reform, and a review of the interchange fee charged to retailers by credit card companies.

Kezios: Franchisees care about the things that have an economic impact, since most that survive run on razor-thin margins (a typical franchisee loses 10% to 20% of his/her revenues right off the top to franchise and other fees paid to the franchisor, and has to cover all of his/her costs and taxes from what's left). Therefore, the key legislative concerns are regulatory costs such as mandated wage and benefit costs that exceed the value of work provided by entry-level employees; confiscatory estate taxes; and the erosion of equity in their businesses from the failure of most states and the federal government to pass meaningful fair franchising laws.

Capaldo: The legislative/regulatory priorities for NFA are: potential minimum wage increases without offsetting considerations; estate tax repeal; reduction in depreciation period from 39.5 to 15 years; litigation reform (especially obesity); restrictions on advertising; immigration reform (ie, employer mandates); card check authorization; Americans with Disabil-ities Act reform to allow 90-day correction period prior to legal action; and health care reform, including potential paid parental leave.

FBLA: Tell me more about one of those priorities you mentioned. What do you want to occur, and how are you working to make it occur?

French: We have been leaders in a coalition of small-business groups working to promote a bill (H.R. 525, S. 1955) that would allow small businesses to purchase health insurance through national trade associations. This legislation would give small businesses the ability to purchase health insurance through larger groups, capturing important savings through economies of scale. Another big benefit of the legislation is that it would allow these plans to avoid costly state health care mandates. The bill has particular appeal for franchised businesses thanks to a provision included through lobbying by the IFA: Not only would a national trade group like the IFA be able to offer health insurance, but also franchise systems and even franchisee associations. This provision effectively gives franchised firms at least three different choices for health insurance coverage, which should help franchisees find the lowest possible price for insurance.

Grassroots messages have been the key in our efforts to pass this bill, and it has been the focus of personal lobbying efforts by IFA members at our annual Washington fly-in. When the Senate was considering this issue in the spring of 2006, IFA members wrote thousands of letters to the Senate. In the end, we came close with a majority of the Senate supporting the bill, but fell five votes short of the 60-vote margin necessary for passage.

With the new majority, this bill is probably on the back burner for a while. Health care is certainly a priority for Democrats, but their policies will likely take them in a different direction. It remains to be seen exactly how they will approach health care reform, but the Democrats' policy palette has typically included proposals ranging from a single-payer national health care program to a decentralized program modeled after the federal employees' health benefits program. Under both of these proposals, the big departure from a small business health plan is that bureaucrats, not employers and individuals, will be making the final determination on health care decisions. Our challenge over the next 2 years will be finding ways to influence the debate and build bipartisan support for small business health plans.

Wulff: The restaurant industry, and the quick-serve restaurant segment in particular, is taking the brunt in America's fight against obesity. Clearly it is a problem that has long-term health care implications, but there must be a balanced approach that takes into account personal responsibility.

Volkening: I believe the highest priority concern for most small businesses is the challenge of making affordable health care coverage available for their employees. There are currently 47 million Americans without health insurance, 60% of whom are employed by small business. The Association Health Plan ('AHP') Coalition, consisting of more than 180 member organizations, continues to work for legislation to allow these small employers to band together to purchase insurance on terms similar to those available today to only very large employers and labor unions. This legislation has passed the House many times, but the 60-vote Cloture Rule has, to date, proven our stumbling block.

A rapidly emerging concern for small business relates to credit card fees. Credit card companies are abusing their market power by charging U.S. merchants, and therefore American consumers, among the highest interchange rates in the world. For example, interchange rates in the U.S. are nearly four times higher than the rates charged in Australia. The Merchants Payments Coalition, consisting of more than 20 trade associations, is urging Congress to enact legislation to create a more transparent and open credit card system and cost-based interchange fees.

Capaldo: On litigation reform, for example, we would like to see a limitation on specious lawsuits that put the franchise/restaurant industry at risk for claims of obesity. A bill was introduced in the last Congress (and repeatedly passed the House) that would have reduced this risk, and we will be making visits to the Hill to garner support for its re-introduction, focusing on the freshman members to educate them as to the cost of failing to act, including the loss of jobs for their constituents.

FBLA: Republicans are more commonly associated with pro-business legislation, and Democrats are more commonly associated with pro-consumer and pro-labor legislation. Given the turnover in the U.S. Congress, what does that mean for franchising in
the future?

French: Business groups in Washington will have to adapt. Democrats owe some of their success to allies like labor unions and personal injury attorneys. As a result, business groups can expect to play defense on issues like union organizing and new causes of action. Also, key issues like small business health plans, tort reform, and estate tax relief will not be on the Democrats' agenda at the start of the Congress. In their place, we can expect to see things like an increase in the federal minimum wage and new restrictions for fast food advertising.

One potential bright spot for the IFA is that the prospects for a comprehensive immigration reform plan have improved. Many incumbent Repub-licans campaigned against the Senate bill that IFA endorsed, and their opposition to immigration reform did not translate into votes. By comparison, Democrats in both the House and Senate leadership have been among the strongest supporters of a comprehensive bill. Since this is one of President Bush's top issues as well, immigration reform may be an early bipartisan victory for the IFA.

In retrospect, 2006 was an election about the minimum wage. Democrats used the issue as a wedge to appeal to swing voters in many states. To heighten turnout among labor union members, Democrats succeeded in placing initiatives on the minimum wage on the ballot in six states, and all six of them passed.

In 2008, one of the top issues will be health care. I expect that many states will see ballot initiatives on health care, and congressional Democrats will use their legislative agenda to tee this issue up for their presidential nominee.

But though the legislative landscape will change, franchising is a bipartisan business model. What matters most to Democrats and Republicans alike is that franchised small businesses are creating jobs and economic activity in their hometowns all across the country. We will continue working with both parties. If we do a good job of helping lawmakers understand our concerns and priorities, we'll always be able to find some common ground.

Wulff: The industry is more likely to see new legislative initiatives that may have adverse consequences, even if unintentional, to small businesses. The industry needs to be vigilant in the current environment.

Volkening: Franchising will continue to thrive, but obviously there are challenges that could be addressed legislatively. These challenges have been present for some time, and they did not change November 7. Mean-ingful and enduring solutions will come after constructive bipartisan discussions, regardless of which party is in power.

Kezios: Turnover in Congress means very little in these matters. The franchisors' trade association, the IFA, was founded specifically to suppress fair franchising mandates from the legislatures, and has been successful, thus far, at that mission. They are definitely 'non-partisan' on that issue. It doesn't matter who is in office, they want nothing standing in terms of legislation that might impede their unfettered domination of the marketplace. The abusive, anticompetitive practices of some franchisors hurt everyone: employees, franchisees, investors,
and suppliers alike. Those issues should not be partisan at all.
While Republicans have supported small-business franchisees in the past, unfortunately, they seem to have come apart at the seams. The Democrats, who have also supported small-business franchisees in the past, will now have the power of the purse and the power of investigation. They will, most likely, use it.

Capaldo: If history is any guide, it means that for the next 2 years, the franchising industry primarily will be in a defensive mode, essentially working to modify, or defeat, legislation that could negatively impact the industry's ability to grow.

FBLA: Are you optimistic about the franchise industry, given the current economic and regulatory environment?

French: I'm very optimistic. We have some challenges ahead of us in working with a Congress that will be decidedly less friendly to business groups, but the overall future for franchising remains bright.

Wulff: The franchising industry
historically has been very resilient to economic fluctuations, drawing from the people who get displaced in economic downturns and floating up with economic prosperity.

Volkening: Franchising currently is responsible for one in seven jobs in America, and there is absolutely no reason not to be enthusiastic and optimistic about franchising. 7-Eleven is bullish on franchising, as evidenced by conversion of existing company-operated stores, business conversion, and White Hen (franchised) acquisition.

Capaldo: Yes, especially considering the fact that many of the newly elected Democrats in the House ran as pro-business moderates in districts that generally vote Republican. Since remaining in office is their goal, they will tend to support policies that promote economic growth.

FBLA: Legislation and regulation are only one element of the legal framework that affects franchisors and
franchisees. What's your perspective about the rest of the legal framework ' ie, Franchise Rule, state tax laws, etc.? Is that where the real issues lie today?

French: We are hopeful that the FTC will conclude work on the Franchise Rule shortly. This will be a very positive development, and allow franchise companies and states to move ahead with some certainty about the regulatory framework. On the other hand, state tax laws are an area of increasing concern for the franchise community. Many states are aggressively taxing royalty payments for out-of-state franchisors, and it is creating a costly and burdensome compliance problem for many franchise systems as they grow. Another area of concern is the spread of anti-chain store legislation at the state and local level. Many jurisdictions, for example, have considered measures aimed at requiring large companies like Wal-Mart to pay their 'fair share' for health care coverage. These bills are frequently poorly drafted and wrap all franchisees up with the franchisor in their definition of an employer. We can expect more of these bills over the next year or two, and the IFA will be aggressive in fighting these efforts.

Wulff: Currently, the industry faces a regulatory scheme on franchise sales that is really unworkable and leads to unnecessary costs. Ideally, there should be one set of disclosure requirements on a national basis, but the FTC is not prepared to pre-empt the patchwork of state laws. In fact, the FTC appears somewhat disinterested in this segment of the economy, as improved franchise disclosure proposals have been languishing for years ' waiting for the Commission to take action to bring them into effect. But, looking beyond our borders, an area of major concern is the proliferation of a hodgepodge of franchise laws throughout the world, some with very difficult requirements, such as the requirement to operate company-owned units in China before one is allowed to franchise in China. The industry is increasingly a global industry and can be significantly affected by laws and regulations beyond our borders.

Volkening: The devolution of government from the federal to the state and local levels continues apace. Small businesses are being increasingly challenged by intrusive governmental regulations such as special use permits, local licensing, zoning, and other restrictions on business operations. On issues such as minimum wage and mandated health benefits, these
governments are responding to the perceived inability of Congress to act. The result can be a patchwork of inconsistent regulation that challenges profitability and expansion.

Kezios: The AFA is concerned that for every step forward by the FTC ' and the pending FTC Rule revisions do have some steps forward ' the FTC takes three steps backwards. Take, for example, the inclusion in Item 20 of the existence of trademark specific franchisee associations. Franchisee advocates viewed this inclusion as recognition of the important role that independent franchisee associations play within a system. Most important of which is providing an unfiltered source of information for prospective franchisees. However, the FTC went on to recommend that the franchisor may have the option to add a disclaimer regarding its lack of endorsement of the franchisee association. The franchisor may also state that the association may not represent the interests of all franchisees. This is not likely to motivate a prospect to contact the independent franchisee association. The fact that there are few organizations that ever achieve 100% representation of their constituents, including the IFA, which claims to represent the interests of all franchisors, doesn't seem to matter to the FTC.

The FTC also seems to be running away from its statutory charter to protect investors in franchises from unfair and deceptive business practices and unfair methods of competition. Another example involves the exemptions in the new Rule, which will allow many franchisors to escape their presale disclosure obligations altogether. This is exacerbated by the FTC's ongoing failure to enforce the Rule, and Congress' failure to allow franchisees harmed by violations of the Rule to sue the franchisors that commit the violations. Instead what we have at the federal level is 'pretend regulation.' Congress would do well to provide a private right of action under the FTC rule as the threat of going to court seems to be the only market force that certain franchisors fear.

Today the legal framework for franchisees is still written for them within the boundaries of their franchise contracts. With arbitration being mandated along with the prevalent use of integration clauses in the majority of
franchise contracts, the spirit and intent of the FTC Rule (and various state franchise laws) are undermined systematically and repeatedly. Case in point ' certain franchisors are still able to sell franchise offerings that they know are unprofitable for franchisees. These franchisors make their money primarily through the sale of equipment, products, and services to their captive franchisee-consumer base. Eventually this will be recognized as something other than free enterprise. And the changes on Capitol Hill may be what are needed to ensure transparency in these areas in the franchisor-franchisee relationship.

Capaldo: In general, the states will serve as the laboratories for more socio-economic policy initiatives. This was evident in the recent election cycle given the vast number of eclectic proposals on state ballots. This was particularly true in those initiatives that sought to regulate the employer-employee relationship in one way or another.

Editor's Note: The opinions expressed in this Q&A are those of the panelists, and are not necessarily the opinions of Law Journal Newsletters or its parent company, ALM.