Transparency in Franchising

Abstract

Prospective franchisees often enter into the franchisor-franchisee relationship without truly knowing what they are getting into, leading to franchisee confusion, disappointment, and frustration. As a countermeasure, the FTC’s Franchise Rule compels pre-contract disclosures intended to foster a prospective franchisee’s understanding of the franchisor, its network, and the proposed franchise arrangement. The Rule should create stronger franchises and deter misconduct. Securing legal assistance during the negotiation phase can very much help aspiring franchisees; legal counsel can explain the disclosure document, clarify and perhaps improve the franchise contract, and ensure that the potential franchisee’s interests are understood, represented, and, in some cases, advanced.

Franchise parties require more transparency. The Franchise Rule itself is not so much the problem as is how the Rule is interpreted and enforced. Prospective franchisees may not understand the laws and guidance the FTC has set forth. Furthermore, third-party legal websites may lead franchisees astray and muddy the franchising waters. A survey conducted for this Article seems to indicate there is a psychological deterrent to procuring the “traditional” legal services offered by lawyers. Approximately 2,700 survey respondents, provided with numerous types of hypothetical situations, ultimately determined the threshold amounts at stake before they would hire a lawyer. Results of these and other surveys indicate the centrality of franchisee access to and control of legal information; unfortunately, economic irrationality often takes hold, as, for example, respondents often think in terms of percentages when the rational approach is to evaluate a monetary expense by looking at real dollar value.

Filling the gap for unrepresented franchisees may be Internet-based companies, such as LegalZoom and Rocket Lawyer, offering information and forms to would-be franchisees. While their services and products usually are less expensive, these websites are inadequate substitutes for the guidance of traditional lawyers. Indeed, these and other legal information companies distinguish what they do from the personal, professional representation offered by traditional lawyers; implicitly, we see how the traditional lawyer’s counsel may be what potential and current franchisees need most. The wide availability of online law forms and information sites only exacerbates transparency concerns, especially as many potential franchisees forego traditional counsel in favor of a “do it yourself” approach. Clearly, increased regulation for online legal self-help companies may be appropriate. Many franchisees rely on insufficient information, have an overconfidence bias, fail to undergo an adequate cost-benefit analysis, and overlook the franchise relationship’s information asymmetry. Legal counsel can be a vital asset for franchisees, particularly since the FTC is an infrequent enforcer and has left the regulation of franchising substance to state law.

In summary, this Article presents some possibilities for promoting greater transparency through regulatory reform. There could, for instance, be required earnings claims, heightened agency review of franchisor statements, and expanded agency pursuit of franchisor deception or other violations of statutes or rules. Franchisee protection may also occur through the active involvement of franchisee associations in negotiating and forming the franchise relationship. Finally, an expanded set of claims enabling franchisees to bring a private right of action could help furnish them a fair, ultimate recourse to preserve and protect their statutory rights. Equally important, such an expansion of the litigation target zone (franchisee suits including a cause of action based on a serious Franchise Rule infraction) may make franchisors more careful to obey the law and to respect the needs of franchisees.