Q&A with Steven Toporoff, Franchise Program Coordinator, FTC

FBLA: Everyone in the franchise industry knows that a prospective franchisee wants to know ' bottom line ' how much can he earn. Does the New Rule give the franchisee any more information that can make him confident on that score?

Toporoff: You have to look at the earnings disclosure issue in the context of the entire Rule. The [disclosures in the] amended Rule allow prospects to contact current franchisees, former franchisees, and franchisee associations. It's up to the franchisee to go to those sources and ask questions.

Disclosure allows people to comparison-shop for a franchise business. If you went to a car dealership and the dealer refused to let you take a test drive in a car, you would go to another dealer. Same thing with franchises. If the franchisor is not forthcoming with information, and if the current franchisees are not forthcoming, maybe that is a company you do not want to do business with.

It's not that we think people don't want earnings information, but it's a question of whether it is necessarily deceptive for a franchisor to fail to provide it. Further, is the burden of earnings disclosure fair, given the other avenues available to franchisees to find out comparable information? Not only can a prospective franchisee call franchisees and the franchise association (if one exists), but there may be studies and research readily available in the marketplace that will enable prospects to assess potential earnings in various industries.

The mandated disclosures already provide a great deal of information for prospective franchisees to assess the status of the franchise system. Is the franchisor being sued? What is the background and experience of its management? What is its financial status?

Under the amended Rule, franchisors must also state whether the franchisor is suing its franchisees. For example, are franchisors suing for royalty payments? If so, that might suggest that franchisees are withholding royalties or cannot make their royalty payments. That should tell you something about franchisee success.

Finally, people tend to [justify the need for earnings disclosure] by saying that many of the FTC's legal challenges of franchisors are for false earnings claims, and that this shows that franchisors are not telling the truth to franchisees. This is accurate, but it misses the point. The point is that even when some franchisors are disclosing, they are not doing it well. A mandate that they disclose will not necessarily stop those bad actors.

FBLA: What are you doing, and what is the FTC doing, to educate the industry about the amended Rule?

Toporoff: I will probably be on the road to discuss the Rule, though the dates and locations have not yet been decided. And I will be speaking at industry conferences, for organizations such as the IFA and the ABA. There will also be training sessions for franchise examiners at the state level.

The big task right now is to develop a Compliance Guide, which we hope to release in time for the new Rule's implementation on July 1. This will explain the rationale for certain provisions in the Rule and also will provide sample responses on how to comply with various rule provisions.

Much of this guide will lift material from the current Interpretive Guide, which was issued with the Franchise Rule in the 1970s. There's no reason to reinvent the wheel for the parts that are relevant. Also, the Compliance Guide will use model answers from the UFOC Guidelines, as well as commentaries that state regulators have issued. We will take the best of all of these sources, as well as address the new provisions set forth in the Rule. Again, this is why I encourage people to contact me with interpretive questions. When possible, we will include responses
in the initial publication of the Compliance Guide, and we anticipate issuing updates to the Compliance Guides, as well as advisory opinions.

To assist practitioners, we are posting responses to frequently asked questions on the FTC's Web site. These can be found at www.ftc.gov/bcp/franchise/amended-rule-faqs.htm.

FBLA: What comes after the Compliance Guide?

Toporoff: We have to look at the flip side of the new Rule: helping franchisees understand it. Thus, we will be updating our 'Consumer Guide to Buying a Franchise.'

Also, we will work with franchisors to ensure compliance with the new Rule. Of course we will enforce the amended Rule where warranted, but at times we would rather work with franchisors informally to resolve compliance issues, especially technical violations of new provisions of the amended Rule.

Part Two of Two-Part Series

This is the conclusion of an interview with Steven Toporoff, Franchise Program Coordinator, Federal Trade Commission ('FTC') about the revisions to the Franchise Rule. Toporoff continues his remarks about earnings information contained in the New Rule, and he discusses how the FTC is reaching out to the franchise community and consumers in order to explain the provisions of the New Rule.

Editor's Note: The views expressed in the following Q&A are those of Steven Toporoff and do not necessarily reflect those of the Federal Trade Commission or any individual Commissioner.

FBLA: Everyone in the franchise industry knows that a prospective franchisee wants to know ' bottom line ' how much can he earn. Does the New Rule give the franchisee any more information that can make him confident on that score?

Toporoff: You have to look at the earnings disclosure issue in the context of the entire Rule. The [disclosures in the] amended Rule allow prospects to contact current franchisees, former franchisees, and franchisee associations. It's up to the franchisee to go to those sources and ask questions.

Disclosure allows people to comparison-shop for a franchise business. If you went to a car dealership and the dealer refused to let you take a test drive in a car, you would go to another dealer. Same thing with franchises. If the franchisor is not forthcoming with information, and if the current franchisees are not forthcoming, maybe that is a company you do not want to do business with.

It's not that we think people don't want earnings information, but it's a question of whether it is necessarily deceptive for a franchisor to fail to provide it. Further, is the burden of earnings disclosure fair, given the other avenues available to franchisees to find out comparable information? Not only can a prospective franchisee call franchisees and the franchise association (if one exists), but there may be studies and research readily available in the marketplace that will enable prospects to assess potential earnings in various industries.

The mandated disclosures already provide a great deal of information for prospective franchisees to assess the status of the franchise system. Is the franchisor being sued? What is the background and experience of its management? What is its financial status?

Under the amended Rule, franchisors must also state whether the franchisor is suing its franchisees. For example, are franchisors suing for royalty payments? If so, that might suggest that franchisees are withholding royalties or cannot make their royalty payments. That should tell you something about franchisee success.

Finally, people tend to [justify the need for earnings disclosure] by saying that many of the FTC's legal challenges of franchisors are for false earnings claims, and that this shows that franchisors are not telling the truth to franchisees. This is accurate, but it misses the point. The point is that even when some franchisors are disclosing, they are not doing it well. A mandate that they disclose will not necessarily stop those bad actors.

FBLA: What are you doing, and what is the FTC doing, to educate the industry about the amended Rule?

Toporoff: I will probably be on the road to discuss the Rule, though the dates and locations have not yet been decided. And I will be speaking at industry conferences, for organizations such as the IFA and the ABA. There will also be training sessions for franchise examiners at the state level.

The big task right now is to develop a Compliance Guide, which we hope to release in time for the new Rule's implementation on July 1. This will explain the rationale for certain provisions in the Rule and also will provide sample responses on how to comply with various rule provisions.

Much of this guide will lift material from the current Interpretive Guide, which was issued with the Franchise Rule in the 1970s. There's no reason to reinvent the wheel for the parts that are relevant. Also, the Compliance Guide will use model answers from the UFOC Guidelines, as well as commentaries that state regulators have issued. We will take the best of all of these sources, as well as address the new provisions set forth in the Rule. Again, this is why I encourage people to contact me with interpretive questions. When possible, we will include responses
in the initial publication of the Compliance Guide, and we anticipate issuing updates to the Compliance Guides, as well as advisory opinions.

To assist practitioners, we are posting responses to frequently asked questions on the FTC's Web site. These can be found at www.ftc.gov/bcp/franchise/amended-rule-faqs.htm.

FBLA: What comes after the Compliance Guide?

Toporoff: We have to look at the flip side of the new Rule: helping franchisees understand it. Thus, we will be updating our 'Consumer Guide to Buying a Franchise.'

Also, we will work with franchisors to ensure compliance with the new Rule. Of course we will enforce the amended Rule where warranted, but at times we would rather work with franchisors informally to resolve compliance issues, especially technical violations of new provisions of the amended Rule.