Responding to a request by Congress, the U.S. General Accounting Office (GAO) examined various issues associated with the regulation of franchises and business opportunity ventures and prepared a report on its findings. The new report builds on the GAO's earlier report addressing enforcement of the Franchise Rule by the Federal Trade Commission (FTC) and discusses various matters pertaining to franchise relationship issues. This special Franchise Handbook Series looks at the findings of the new report.

The FTC staff explained that since the Franchise Rule review process began in 1995, FTC has received comments or statements for the record from a total of 96 individual franchisees or trademark-specific franchisee associations.

FTC staff noted that nearly half of the 96 submitted comments were identical form letters that discussed their general support for broader franchise relationship controls but shed little, if any, light on their specific experiences. FTC staff also told us that more than half of the 96 comments raised issues involving only three franchisors.

Moreover, the FTC staff told us that there was little consistency among the remaining individual comments, which covered a wide range of franchise relationship issues, such as concerns about franchise renewals, lack of performance and lack of disclosure to existing franchisees.

FTC staff said that based on the information compiled during the process for revising the Franchise Rule, it was clear that some existing franchisees experience various franchise relationship problems or are otherwise dissatisfied with their franchise purchase.

However, while FTC staff told us that FTC data suggest that franchise relationship problems are not widespread, they did not know the extent to which franchisees used other avenues-such as mediation, arbitration or litigation-to address their concerns.

As a result, FTC staff stated that the Federal Trade Commission's data are not sufficient to assess the overall extent of franchise relationship problems.

FTC staff also stated that the isolated instances of franchise relationship problems do not justify FTC conducting a more widespread investigation of relationship issues or developing a new rule that addresses the terms and conditions of franchise contracts.

The FTC staff told us that absent evidence of widespread franchise relationship abuses, the prudent approach is to continue to investigate instances of such abuses, where they occur, under FTC's current unfairness authority (which is delineated in section 5 of the FTC Act).

However, FTC noted that FTC's unfairness authority generally does not apply to franchise relationship issues. In fact, to date FTC has conducted only two franchise investigations that were based solely on FTC's unfairness jurisdiction. Both investigations were ultimately closed because FTC determined there was insufficient evidence to satisfy the section 5 unfairness criteria.

FTC staff view pre-sale disclosure as the best available vehicle within FTC's statutory authority to address franchise relationship issues. As such, FTC's Notice of Proposed Rulemaking proposes to enhance the Franchise Rule's disclosure requirements to provide prospective franchisees with additional information regarding the relationship before they commit to buying a franchise.

FTC staff told us that this is consistent with FTC's long-held view that free and informed choice is the best regulator of the market. According to FTC staff, proposed revisions to the Franchise Rule would, among other things:

The proposed revisions to the Rule would not address any issue that arises after franchise agreements have been signed. That is, the changes would relate to pre-sale disclosure but would provide no additional post-sale protections.

Officials from the four franchise trade associations we contacted-the American Franchisee Association (AFA), the American Association of Franchisees and Dealers (AAFD), the International Franchise Association (IFA) and the National Franchise Council (NFC)-told us that they were not aware of any statistically reliable data that quantify the extent and nature of franchise relationship problems.

Absent such data, the officials provided indicators or anecdotal evidence that supports their particular positions about franchise relationship problems.

For example, the president of AFA-a group that supports a federal statute to generally regulate franchises-said that at the organization's annual Franchise Leadership Summit in April 2001, the 25 franchisee leaders of independent associations that attended reached consensus that the top concerns were:

System compliance, including franchisors' ability to arbitrarily make material changes to the franchise system.

However, AFA did not have any data on the extent to which these problems occur. In contrast, the senior vice president for government relations and chief counsel of IFA-a group that opposes a federal statute to generally regulate franchises-told us that all "reliable" indicators, such as FTC enforcement data and complaints brought alleging violations of the IFA Code of Ethics, show that there are relatively few franchise relationship problems.

The official added that if the more than 1,000 franchisees represented by IFA had serious problems, these problems would have surfaced by now. The IFA official told us that while litigation between franchisors and franchisees is relatively infrequent, on balance, termination appears to be the issue more likely to result in litigation than other issues.

The official added that other types of issues that arise during the course of the franchise relationship-such as encroachment, transfer or the general conduct of the parties-are much more likely to be resolved using other dispute resolution processes, such as internal dispute resolution, mediation or arbitration.

IFA did not, however, have any statistically reliable data on the extent to which these types of problems occur.

Some of the franchise trade association officials we contacted told us that one way to assess the extent and nature of franchise relationship problems would be to conduct an extensive review of franchise litigation, such as cases reported in court records, franchisor disclosure documents or in the Commerce Clearinghouse Business Franchise Guide.

However, such a review would be costly and time-consuming. Because each case is unique and based on different facts, issues and circumstances and involves the application of different state laws, the results of such a review would not be generalizable.

Moreover, we were informed that such a review would not provide a sound basis from which to draw conclusions regarding the extent of franchise relationship problems because not all franchise relationship disputes are litigated.