One Report, Two Views, No Answers

A new federal study of franchising regulations leaves plenty of room for interpretation

Does the franchising industry need more regulation to protect franchisees? Oddly enough, both supporters and opponents of such a move are citing a recent report by the U.S. General Accounting Office as the proof that makes their respective -- and opposing -- cases.

The report, which reviews the enforcement of the Federal Trade Commission's (FTC) franchise rule found relatively few violations by franchisors. Of 3,680 franchise-related complaints received by the FTC from January, 1993, through June, 1999, 92% pertained to so-called "business opportunities" (a specific sub-category that refers to things like buy-in vending-machine routes) and just 8% to franchised businessess. In all, the report said, the agency prosecuted 162 cases -- 12% involving franchises -- obtaining some type of relief, including injunctions, civil penalties, or monetary redress in all of them, the report said.


  According to Don DeBolt, president of the International Franchise Assn., the GAO report confirms that the franchising industry is doing "an effective job of self-regulation" and that the Federal Trade Commission is enforcing its trade regulation effectively. The IFA also cites the GAO statistics, arguing that only 20 cases from 1993 to 1999 (the 12% figure) were deemed serious enough to warrant action by the FTC.

There is, however, more to the story. The report also says there is insufficient FTC data on problems that occur between franchisees and franchisors after the initial sales. And those are precisely the sorts of problems that franchisee advocates say can only be addressed through new legislation. The American Franchisees Assn. sees the report as proof that the FTC lacks both the jurisdiction and the data to dismiss postsale relationships as no big problem.


  The AFA is supporting the Small Business Franchise Act, which would spell out the responsibilities of both franchisees and franchisors. Currently, when a franchisee experiences difficulties -- the franchisor might allow another franchisee to "encroach" on his territory or restrict the suppliers the franchisees can use -- it's often difficult to take the matter to court because many states lack laws regulating such relationships, according to Susan P. Kezios, president of the AFA. "Right now," she says, "if you're a franchisee, the contracts are written in such a manner that the franchisor has absolute discretion."

What advice does the GAO have for the senators who ordered up the study? More study will be needed, the agency says, if legislators want the reliable and comprehensive data needed to craft a new law.

By Robin D. Schatz in New York