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.

Franchise regulatory officials in seven of our nine selected states told us their states did not maintain data on franchise relationship problems. Officials in the other two states told us that while their states had some data on post-sale complaints, the data were either not representative of all such complaints or were not readily available.

More specifically, one of the two officials told us that since the state's franchise disclosure law generally does not regulate relationship issues, the complaints received are not representative of all post-sale complaints. The other official told us that the number of post-sale complaints is not readily available because such complaints are not differentiated from pre-sale complaints.

The same officials had mixed views on the need for a federal statute that would regulate franchise relationships. Of the nine officials, three reported that federal legislation is needed, two reported that legislation is not needed, three did not specifically comment on the need for legislation, and one noted that it is a "philosophical" question that depends on the relative bargaining position and strength of the parties involved.

Of the three officials who responded that federal legislation is needed, two noted the need to deter franchisor abuses or to provide additional franchisee protections in several areas. The third official noted the need to level the playing field between franchisees and franchisors.

Of the two officials who responded that federal legislation is not needed, one noted that franchise relationships are contractual issues under which franchisees currently have a private right of action: They can file a lawsuit directly in state court. The other official did not provide reasons.

Our work revealed that empirical data on the extent and nature of franchise relationship problems could be gathered through a study of franchisors and franchisees. While there could be barriers or limitations to obtaining such data, as well as cost and time considerations, such a study could provide valuable insights on the need for a federal statute that covers franchise relationships.

In addition to gathering empirical data on the extent and nature of franchise relationship problems, a study could be used to obtain data on franchisor and franchisee experiences with existing remedies for resolving disputes, such as judicial remedies or other dispute resolution processes.

When designing a study of this nature, one would have to consider that the results may not be generalizable to the universe of current franchisors and franchisees because of the difficulty in identifying and locating them, especially those in states that do not require franchisors to file their disclosure documents with a state agency.

According to FTC staff and industry trade association officials, there is no comprehensive information on the number and location of franchisors and franchisees. Furthermore, FTC staff suggested that in doing such a study, it may be important to consider the views and experiences of former franchisees-a group that, according to FTC staff, may be difficult to locate.

We also explored which federal agency or agencies have the expertise and would be willing to conduct or oversee a future study on franchise relationship issues. FTC staff told us that FTC lacks the expertise and resources to perform this type of research. They suggested that we contact the Department of Commerce and the Small Business Administration (SBA).

An official with the Department of Commerce's International Trade Administration (ITA) told us that in the 1980s ITA had prepared an annual report on franchising in the economy. However, the official said that ITA no longer does research on domestic franchise issues and is no longer positioned to conduct this type of research.

The official added that a study of domestic franchise relationship issues generally would not be within ITA's core mission. The official further noted that ITA does not have the in-house expertise, structure or resources to conduct or oversee such a study.

In contrast, SBA's Acting Chief Counsel for Advocacy said that SBA's Office of Economic Research within the Office of Advocacy would be able to contract out and oversee a study of franchise relationship issues, if it were properly funded.

According to SBA, the Office of Advocacy's mission is to study the role of small business in the American economy and to work for policies and programs that will create an environment to foster small business growth and development.

SBA's Acting Chief Counsel for Advocacy and the Acting Director of the Office of Economic Research said that SBA has the capability and expertise to develop a Request for Proposal, solicit and evaluate proposals, award and oversee a contract, and review and publish results. The officials added that the Office of Advocacy had contracted for other studies on franchising during the 1990s.

During our review, we found that FTC did not require its staff to document the reasons for closing franchise and business opportunity investigations that resulted in no further legal action.

Our review of all 79 files for investigations FTC closed from 1997 through 1999 and for which it took no further legal action showed that while supervisory approval had been obtained for closing each investigation, only two of the 79 files documented the reasons why the investigations were closed.

FTC's failure to document the reasons for closing investigations represented an internal control weakness as defined by the Comptroller General. Given the number of hours FTC staff billed, on average, for investigations that FTC later closed without taking any further action, closing an investigation is a significant event. As such, federal internal control standards require that the reasons for such decisions be documented and readily available for examination.

Based on our work and subsequent discussions with FTC staff, FTC revised its procedures to require staff to document the reason(s) for closing franchise and business opportunity investigations that result in no further legal action.

Over the past several years, Congress and others have debated the need for a federal statute to regulate franchises and to address problems that can arise after the sale of a franchise. Our work revealed no available, statistically reliable data on the extent and nature of these problems.

The absence of such data makes it difficult to determine the nature of any problems and the extent to which they occur, or whether a federal statute is warranted to resolve such problems.

Although Congress can consider franchise relationship legislation without this information, a study on the extent and nature of franchise relationship problems-as well as an examination of franchisor and franchisee experiences with existing remedies for resolving disputes, such as judicial remedies or other dispute-resolution processes-could provide lawmakers with a better framework or basis for considering whether there is a real need for a federal statute to regulate franchise relationships.

Such a study could be led by SBA's Office of Advocacy, FTC or another federal entity, with work performed by an independent research organization. However, potential data limitations, as well as cost and time considerations, are factors that should be considered when weighing the pros and cons of conducting such a study.