[Congressional Record Volume 141, Number 89 (Friday, May 26, 1995)]
[Extensions of Remarks]
[Pages E1146-E1147]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]


                LEGISLATION TO PROMOTE FAIR FRANCHISING

                                 ______


                          HON. JOHN J. LaFALCE

                              of new york

                    in the house of representatives

                         Thursday, May 25, 1995
  Mr. LaFALCE. Mr. Speaker, I am today introducing legislation, H.R. 
1717, to address serious problems in the promotion and sale of 
franchise businesses and in the conduct of franchise business 
relationships. The legislation incorporates key proposals from bills I 
introduced in the 103d Congress.
  We have heard a great deal this year about the problems and burdens 
confronting small business owners and about the many shortcomings of 
our legal system. Nowhere are these two problems more pronounced than 
in business franchising.
  The large majority of franchise owners have invested much of their 
life savings to acquire and build their business. They work hard, play 
by the many rules imposed on them by franchisors, and contribute 
significantly to the success of national franchise systems. And yet, 
these owners lack the same basic rights and legal remedies enjoyed by 
all other business persons to assure they will not be victimized by 
unfair or fraudulent practices and have equal opportunity to share in 
the rewards of the American dream of business ownership.
  Business franchising has become a major force driving the expansion 
of our service economy and the growth of new small business. The 
growing franchising sector of the economy encompasses more than a half 
million businesses, employs more than 7 million workers and accounts 
for more than $900 billion in annual U.S. retail sales. Thousands of 
American families invest in franchises each year to pursue dreams of 
business ownership and economic independence.
  I find it unbelievable that a sector of our economy this large and 
with annual sales nearly equal to our Nation's annual expenditures for 
health care--a topic which dominated much of our debate in the last 
Congress--could continue to be almost devoid of governmental regulation 
and congressional oversight. We have no Federal laws governing the sale 
or operation of franchise businesses and the only regulatory procedure 
at the Federal level, the FTC's franchise disclosure rule, is outdated 
and inadequately enforced. Only a handful of States have laws or 
regulations governing franchise sales and practices, and most of these 
now defer to the Federal Government for enforcement.
  Unfortunately, the result is that increasing numbers of franchise 
investors are finding their dreams of business ownership shattered by 
franchise promoters who never fulfill their promises to help build 
successful business or by large corporations more intent on saturating 
the market with new franchises than on assuring that these franchises 
are profitable. Rather than owning a business, many find they have 
merely purchased low-paying management jobs with few of the protections 
and benefits they had as employees. Others lose their savings, 
retirement, and even their homes in fraudulent franchise ventures.
  These problems stem, in large part, from the fact that Federal and 
State law have failed to keep pace with the rapid development of 
franchising and offer franchisees little, if any, viable legal recourse 
against fraudulent and abusive conduct by franchisors. Franchise 
contracts are written to preempt every legal remedy available to 
franchisees. As the chair of the American Bar Association's Franchise 
Forum told the Small Business Committee, indemnification provisions are 
drafted so broadly as to protect franchisors even ``for the 
franchisor's gross negligence, wanton recklessness and intentional 
misconduct.''
  Procedural devices also are routinely employed to bar legal actions, 
to deny coverage of protections in State laws and to make litigation 
inconvenient and costly. Even basic principles of common law applicable 
to all other business relationships--concepts such as good faith, good 
cause, duty of competence and due care, and fiduciary responsibility--
continue to be debated and denied within franchise relationships.
  In short, a growing segment of the American population is routinely 
required to forego basic rights and legal remedies just because they 
choose to become franchisees.
  Equally serious problems in franchising also result from inadequacies 
in Federal and State standards for disclosure of material information 
about franchise opportunities. Each year thousands of prospective 
franchisees are induced to make one of the most important investments 
of their lives with information that is incomplete and misleading. 
Documented information on franchise sales and profits is rarely 
[[Page E1147]] provided to prospective investors and critical 
information on past litigation, business failures and ownership 
turnover is often withheld or misrepresented.
  Federal and State officials report that fraud in franchise sales is 
widespread and far exceeds their enforcement capabilities. The Federal 
Trade Commission has reported on several occasions that it receives far 
more complaints regarding franchise violations than it can pursue and 
acknowledged that ``there are many victims with meritorious complaints, 
against franchisors, whom State and Federal agencies simply cannot 
help.'' And individuals have no right of action under Federal law to 
protect themselves against even blatant violations of disclosure rules.
  In addition, there is a surprising dearth of objective and accurate 
statistics on franchise business performance that has permitted the 
franchising industry to promote itself and individual franchise 
opportunities with inflated and unsubstantiated claims of franchise 
success intended to make franchises appear uniformly successful and 
virtually risk free.
  The bill I am introducing today, the Federal Fair Franchise Practices 
Act, addresses all these problems and does so in a manner intended to 
avoid Government regulation of franchising practices and to enhance 
private remedies to allow individual franchise owners to protect their 
legitimate financial interests in a court of law.
  H.R. 1717 would promote greater fairness and equity in franchise 
relationships by establishing minimal standards of conduct for 
franchise practices, prohibiting the most abusive acts by franchisors, 
clarifying the legal rights of franchise owners and nullifying 
procedural devices intended to block available legal remedies.
  In addition, H.R. 1717 incorporates basic prohibitions against fraud, 
misrepresentation, and discrimination elsewhere in Federal law and 
applies them to franchise sales and business practices. It provides a 
private right of action for violations of FTC disclosure requirements--
something the FTC has requested for 15 years. In addition, the bill 
provides for the collection of data on franchising, beginning in the 
1997 Business Census, to provide the public with comprehensive and more 
accurate statistical information about franchising and franchise 
business performance.
  A number of important changes have been made in the legislation from 
the bills I have introduced in prior Congresses. On the critical issue 
of encroachment by a franchisor on the business of existing franchises, 
the bill has been modified to provide franchisors with a number of 
nonjudicial procedures to address franchisee complaints equitably and 
without costly litigation. The bill clarifies the obligations of 
franchisors and franchisees following the acquisition of a franchise 
system by third parties and it provides State attorneys general with 
the option of filing suits to protect residents of their State from 
violations of the act.
  Mr. Speaker, franchising has undergone tremendous growth in the past 
two decades and now dominates our Nation's retail and services sectors. 
Unfortunately, Federal and State law and regulation have failed to keep 
pace. Federal guidelines intended to protect the public from false or 
misleading franchise promotions are sadly out of date and only 
marginally enforced. Legal rights and standards taken for granted in 
other business relationships continue to be debated and denied in 
franchising arrangements.
  It is time Congress acted to provide basic protections in Federal law 
to discourage fraudulent and abusive franchising practices and to help 
strengthen the American dream of small business ownership. I believe 
the proposals I am introducing will constitute landmark legislation. In 
much the same way that the Wagner Act helped revolutionize labor-
management relations in the industrial economy of the 1930's, this 
legislation can help restore fairness and balance in the growing 
franchising sector of the services-based economy of the 1990's.
  I recommend this legislation to the consideration of my colleagues 
and I urge its adoption by the Congress.


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