The Suspension of Coordinated Review: A Giant Step Backward on the Road to Uniformity

From the state officials' perspective, the process probably accomplished little. Each state continued to do reviews of the applications it received and had to report any perceived deficiencies to the coordinating state's officials, rather than to the applicant itself. Thus, little efficiency was gained, and for the lead state in the review process, the burdens of the registration process were increased.

However, the process typically saved a franchisor registering in many states several thousands of dollars in legal fees, for the burden of dealing with each state was no longer placed on the applicant; this burden was transferred to the lead state's officials. The other major advantage of Coordinated Review is that one's disclosure document could truly be nationally uniform since all the comments on the document were received at the same time and would all be incorporated into the final disclosure document. The fact that the registration became effective at the same time in all the states in which applications were filed also made life easier on the franchisor on a going-forward basis.

Notwithstanding the benefits of the program, it was not without critics. First, the program could only be used by new franchisors, who often don't find it necessary or appropriate to try to sell franchises during their incipiency in more than a couple of jurisdictions. Also, the program was not designed to handle renewals. And finally, the registrations would not be effective until the applicant had made peace with all the states for which applications were submitted, often delaying sales in some jurisdictions where the registration application might have gone effective earlier had individual applications been submitted.

Global Step Back

From a global perspective, the decision by the state franchise officials represents a step backward on the road to uniformity. The states' insistence that the registration application be reviewed by each state results in a commitment of excessive manpower, with, I contend, minimal additional benefits. Is there a need for 11 reviews? How much do these multiple reviews add to the quality of disclosure that prospective franchisees receive? These are questions that I and many of my colleagues have been asking for decades (yes, decades) and have never been given satisfying answers. Quite frankly, I sense that many of the state officials are sympathetic to this argument, but their hands are tied; it is not up to them to surrender the authority to review franchise registration applications to other states' authorities.

However, the real source of this inefficiency stems from the failure of the federal government to invoke its rights to pre-empt completely the states' authorities to regulate franchise disclosure. The decision not to take this authority away from the states, in lieu of a review process administered at the federal level, is understandable in that it was the states, not the federal government, that birthed the concept of franchise sales regulation, and the states are likely not to give up the baby without a fight. Moreover, the FTC is not staffed to take on the registration process, and it is not likely that Congress would fund this function when the states have already decided to do so. From the franchise community viewpoint, this decision is costly, and keeps an inefficient regulatory scheme in the saddle. In at least one other country with a multi-level government (Australia), the franchise community has managed to avoid this entanglement altogether by having only national disclosure requirements and not requiring franchise sales registration at any level. The Australians, with their less intrusive and more efficient regulatory system, have beaten us at our own game.

The states' decision is not surprising, nor is it what I would call monumental. There have only been 118 applications for coordinated review submitted since the program became effective in 1999. However, it does symbolize a return to provincialism.

In a paper I presented at the American Bar Association's Annual Forum on Franchising 18 years ago, I noted that without federal pre-emption the concept of uniformity in franchise regulation was an impossible dream, and we were all Don Quixotes if we thought we could overcome the challenge. Now with the elimination of Coordinated Review, little has changed over a quarter of a century.

Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Stockton LLP, where he chairs his firm's Franchise Practice Team. He is also a former chair of the American Bar Association's Forum on Franchising, and co-editor-in-chief of the book, Fundamentals of Franchising. He can be reached at [email protected] or 404-815-6366.

In a disappointing announcement released on Aug. 6, 2007, Dale Cantone, chairman of the Franchise and Business Opportunity Project Group of the North American Securities Administrators Association, informed the franchise bar that the state authorities that participate in the coordinated review program ('Coordinated Review') have suspended the program until further notice. The announcement also stated the franchise administrators would re-evaluate whether to reintroduce the program after July 1, 2008.

Under the now-suspended Coor- dinated Review program, franchisors would submit franchise registration applications for multiple states, up to 11, in one package, and one of those registration states would be assigned the task of coordinating the registration process. The comments of the regulatory officials for each state in which registration applications had been made were consolidated, and the franchisor or its counsel would receive one letter describing the deficiencies noted by all the state examiners. In curing the deficiencies, the franchisor or its counsel would deal only with the one designated representative of the state regulatory authorities as the franchise registration applications moved forward.

The decision by the states is disappointing, but understandable. With the advent of the Amended FTC Disclosure Rule, state officials are going to have their hands full for the foreseeable future, and rumor has it that Coordinated Review had not been well received either by the state officials or by the franchise community.

From the state officials' perspective, the process probably accomplished little. Each state continued to do reviews of the applications it received and had to report any perceived deficiencies to the coordinating state's officials, rather than to the applicant itself. Thus, little efficiency was gained, and for the lead state in the review process, the burdens of the registration process were increased.

However, the process typically saved a franchisor registering in many states several thousands of dollars in legal fees, for the burden of dealing with each state was no longer placed on the applicant; this burden was transferred to the lead state's officials. The other major advantage of Coordinated Review is that one's disclosure document could truly be nationally uniform since all the comments on the document were received at the same time and would all be incorporated into the final disclosure document. The fact that the registration became effective at the same time in all the states in which applications were filed also made life easier on the franchisor on a going-forward basis.

Notwithstanding the benefits of the program, it was not without critics. First, the program could only be used by new franchisors, who often don't find it necessary or appropriate to try to sell franchises during their incipiency in more than a couple of jurisdictions. Also, the program was not designed to handle renewals. And finally, the registrations would not be effective until the applicant had made peace with all the states for which applications were submitted, often delaying sales in some jurisdictions where the registration application might have gone effective earlier had individual applications been submitted.

Global Step Back

From a global perspective, the decision by the state franchise officials represents a step backward on the road to uniformity. The states' insistence that the registration application be reviewed by each state results in a commitment of excessive manpower, with, I contend, minimal additional benefits. Is there a need for 11 reviews? How much do these multiple reviews add to the quality of disclosure that prospective franchisees receive? These are questions that I and many of my colleagues have been asking for decades (yes, decades) and have never been given satisfying answers. Quite frankly, I sense that many of the state officials are sympathetic to this argument, but their hands are tied; it is not up to them to surrender the authority to review franchise registration applications to other states' authorities.

However, the real source of this inefficiency stems from the failure of the federal government to invoke its rights to pre-empt completely the states' authorities to regulate franchise disclosure. The decision not to take this authority away from the states, in lieu of a review process administered at the federal level, is understandable in that it was the states, not the federal government, that birthed the concept of franchise sales regulation, and the states are likely not to give up the baby without a fight. Moreover, the FTC is not staffed to take on the registration process, and it is not likely that Congress would fund this function when the states have already decided to do so. From the franchise community viewpoint, this decision is costly, and keeps an inefficient regulatory scheme in the saddle. In at least one other country with a multi-level government (Australia), the franchise community has managed to avoid this entanglement altogether by having only national disclosure requirements and not requiring franchise sales registration at any level. The Australians, with their less intrusive and more efficient regulatory system, have beaten us at our own game.

The states' decision is not surprising, nor is it what I would call monumental. There have only been 118 applications for coordinated review submitted since the program became effective in 1999. However, it does symbolize a return to provincialism.

In a paper I presented at the American Bar Association's Annual Forum on Franchising 18 years ago, I noted that without federal pre-emption the concept of uniformity in franchise regulation was an impossible dream, and we were all Don Quixotes if we thought we could overcome the challenge. Now with the elimination of Coordinated Review, little has changed over a quarter of a century.

Rupert M. Barkoff is a partner in the Atlanta office of Kilpatrick Stockton LLP, where he chairs his firm's Franchise Practice Team. He is also a former chair of the American Bar Association's Forum on Franchising, and co-editor-in-chief of the book, Fundamentals of Franchising. He can be reached at [email protected] or 404-815-6366.