[Congressional Record Volume 144, Number 146 (Wednesday, October 14, 1998)]
[Extensions of Remarks]
[Pages E2162-E2163]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                THE SMALL BUSINESS FRANCHISE ACT OF 1998

                                 ______
                                 

                           HON. HOWARD COBLE

                           of north carolina

                    in the house of representatives

                      Wednesday, October 14, 1998

  Mr. COBLE. Mr. Speaker, I rise today to introduce the Small Business 
Franchise Act of 1998.
  Franchise businesses represent a large and growing segment of our 
nation's retail and service businesses and are rapidly replacing more 
traditional forms of small business ownership in our economy. As a 
result, franchise owners have become the heart and soul of America's 
economic engine and the backbone of local commerce. In fact, according 
to the International Franchise Association, a new franchised outlet 
opens every eight minutes and the industry gave birth to tens of 
thousands of new jobs in the last year alone.
  The franchisor/franchisee relationship is fundamentally an economic 
one where the objective of each party is to make money. By purchasing a 
franchise, a franchisee can sell goods and services that have instant 
name recognition, while the franchisor can increase market access with 
little or no risk. However, buyers should beware--like any investment, 
purchasing a well-known franchise is no guarantee for success. As I 
have studied this issue, I have come to realize that there is an uneven 
playing field for the small business person looking to become a 
franchise owner.
  For instance, while pre-sale disclosure information must be made 
available to the buyer by the corporate franchisor, post-sale 
opportunities to pursue recourse for presentation of misleading or 
false information in the pre-sale negotiations are inadequate. I am 
introducing this legislation because I believe this gross inequity 
needs to be addressed.
  Under present regulations, small business franchise operations are 
subject to the Federal Trade Commission's (FTC) trade regulation rule. 
The FTC issued this rule, entitled the ``Disclosure Requirements and 
Prohibitions Concerning Franchising and Business Opportunity Ventures'' 
on December 21, 1978, and under the Federal Trade Commission Act. The 
FTC rule requires franchisors to give prospective franchise purchasers 
financial details about the business and explain the arrangements in 
the franchise agreement. Well intentioned as this prospectus 
requirement is, as the old saying goes, ``the devil is in the 
details,'' and I am afraid that much of this pre-sale information, 
while detailed, may be very misleading. After hearing many horror 
stories from franchise owners about the inaccuracy of pre-sale 
disclosure, I must question the reliability of this information. In 
fact, there are no current protections to ensure that this information 
is relevant and accurate. The FTC, the regulatory body with oversight 
responsibility, does not even review this material for accuracy as say 
the Securities and Exchange Commission must when a private company 
readies itself for a public stock offering.
  The FTC enforces the franchise rule as part of its consumer 
protection mission. However, FTC enforcement is definitely lacking. 
Under current rules, franchisees do not have the right to sue 
franchisors for violations of the franchise rule. The FTC brings suit 
only on behalf of the federal government, not as a representative of 
individuals who may have been adversely affected. In July 1993, an 
audit by the General Accounting Office found that the FTC acted on less 
than six percent of all franchise complaints brought to its attention.
  Because of the FTC's inability to review more franchise complaints, 
the FTC recently approved a plan to allow the largest corporate 
franchisors to self-regulate their own industries. Under this program, 
violators of franchise disclosure laws could avoid federal enforcement 
proceedings by attending what amounts to an industry-run reform school 
that it intended to teach franchisers how to comply with disclosure 
rules. And adding insult to injury, if the corporate violator completes 
this program, they do not have to report the infraction on disclosure 
documents available to prospective small business franchisees. Mr. 
Chairman, I venture to say that this FTC ruling threw full disclosure 
and due diligence for future franchise owners right out the window.

[[Page E2163]]

  In the past 20 years, there has been tremendous change in the 
franchising industry, and as a result, I believe it is time for 
Congress to review the franchise rule and level the playing field for 
the thousands of small business owners who invest in franchise 
operations. The legislation that I introduce today, along with my 
distinguished colleague from Michigan, Congressman John Conyers, 
addresses the fundamental and necessary safeguards that this industry 
so desperately needs. I believe that the safeguards provided by this 
legislation level the playing field for small business franchisees 
across our nation. This legislation, like the Automobile Dealers Day in 
Court Act and the Petroleum Marketing Practices Act, rights the 
imbalance that has existed for too long in the franchisor/franchisee 
relationship.
  Recognizing that it is too late to act on this legislation during the 
105th Congress, I am hopeful that the 106th Congress will address this 
matter and ensure that this important segment of the small business 
world will remain viable for future generations.

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