FTC’s Guide to Janitorial Franchises

Comments

1. Carol Cross says:

   October 14, 2009 at 1:46 pm

   Not surprising that the FTC speaks from both sides of its mouth and that Maryland would help them in preparing this Guide to “warn” the public about the “complexity” of franchising and the necessity to perform due diligence with the franchisees of the franchisor.

   Of course, the original sin of the FTC Rule and the state UFOC’s and FDD’s that permits the seller of the franchise, who profits, to avoid disclosure of the unit financial performance statistics of the franchise system, MATERIAL facts, in his possession to the new buyer and to commit fraud with impunity under cover of the FTC Rule and state disclosure documents is not discussed.

   Ask yourself a new buyer of a franchise should have to perform due diligence by consulting with other buyers of the franchise instead of with the seller of the franchise, who will profit from the sale and who will profit from withholding or omitting material facts that might prevent the sale of the franchise.

   Obviously, by 2001, the FTC and the states (NASSA org.) realized how the subsidy of the ineffective FTC Rule (the subsidy of the franchisors) was enabling the exploitive franchisors to use law, process and procedure and and their boilerplate, unbargained contracts to sell unviable franchises to the public — upon which franchisors realized profits from the franchise fees and well as the royalties and commissions for all the time that the franchisees survived and/or could be churned in the service of the franchisor.

   Common law fraud and fraud through churning of founding franchisees and territories was increasing in franchising. The little FTC statutes weren’t effective for franchisees because the main thrust of the Federal FTC Rule that denies a private right of action for a violation of the FTC Rule preempts state statutes that appear to provide a private right of action for franchisees when the franchisors violate the state statutes in the sale of franchises to the public.

   However, the FTC Rule and policy presumnes that there is no fraud if there is no violation of the FTC Rule governing disclosure, AND, even if there is a substantive violation of the FTC Rule, this is not fraud but instead an administrative violation for which only the federal and the state governments have the standing to sue the franchisor.

   Case law was made in the federal courts to substantiate this public policy. It appears that a violation of the FTC Rule or the State FDD cannot be used to substantiate fraudulent concealment/omission, etc.. in a private lawsuit in the state courts unless there is a manifest disregard of the law recognized by the higher courts? (Read the Coffee Beanery Arbitration and Litigation scenario on Franchise Pick)

   While the federal government, with the FTC Rule in 1979, had preempted state law concerning the sale of franchises to the public, the franchises are operating intrastate and are still subject to state and local laws concerning the operation of their businesses that are generally not involved in interstate commerce. Franchisees, within the states, expect that their states will protect them from fraudulent inducement/omissions in the sales process, etc.. and think that the risk is minimal and there is oversight of franchising by both the federal government and the state governments. There is tension between state and federal law that hasn’t been resolved.

   Of course, the FTC has to provide the appearance that there is some regulation of franchisors since they lied about the purpose of the Rule to begin with back in 1979. The Guide they provided on “janitorial services” fraud provides the appearance that there is some oversight of franchising.

   Oh what a tangled web we weave when first we practice to deceive! See The Great Franchising Robbery –When Push comes to Shove, in a Google Search.

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