FTC Reviewing Plans to Change Rules for Franchises

The Federal Trade Commission is considering proposals that would change many of the basic rules governing franchises and increase the federal role in regulating businesses like Kentucky Fried Chicken and Jiffy-Lube.

Under review are suggestions to create uniform earnings disclosure requirements and to give the FTC power to supersede some state laws regulating franchise businesses.

The idea is to find ways of providing potential franchise operators more accurate financial and market performance information on a franchiser--the person or company granting the franchise.

Comments on the proposals will be accepted through April 17, after which the FTC will issue a preliminary ruling subject to further debate.

The FTC also hopes to harmonize often-conflicting federal and state rules policing franchise operations.

At the moment, franchisers have to disclose little about their own financial condition when signing up operators for their outlets, said Russell L. Berney, executive director of the American Franchise Assn., which represents 30,000 franchise operators nationwide.

That virtual absence of disclosure requirements often puts franchise applicants at a disadvantage in making intelligent deals, Berney said.

“The problem is that there are no real, strong, uniform regulations over franchise deals the way you have over securities deals. And that’s ironic, because franchise operators often invest more in their businesses than many people invest in stocks,” Berney said.

Currently, 15 states have specific rules governing franchise operations, according to the FTC. But those rules tend to be a maze of requirements, making it difficult and expensive for a franchiser to expand its business from state to state, the FTC said.

If it attempts to create uniform standards, however, the FTC is likely to encounter considerable friction.

“This is going to be a very sensitive and highly politicized area” of inquiry, said agency spokesman Craig Tregillus. “One of the things we will be trying to find out is whether the FTC has the legal authority of go forward at all” in seeking to preempt certain state laws affecting franchises, he said.

Some franchise industry officials, including Berney, criticized the FTC for not addressing the broader problems of abuse and fraud in the franchise industry. “It’s like putting putty in a hole in a dam,” Berney said.