Franchising fraud: the continuing need for reform

I. INTRODUCTION

Franchise systems, which developed between the 1860s and 1950s, today represent the mainstream of American business. Historically, the term franchise did not apply to private contracts because the sovereign had to be a party in order for a franchise to exist

Franchised operations allow the franchisee access to many of the efficiencies of big business, while permitting the owner a substantial degree of independence. (6) In 1992 the International Franchise Association commissioned the Gallup Organization to prepare a national franchise owner study. The results indicated that most franchisees considered their franchise to be successful, and suggested that the franchisees had no regrets concerning their investment. (7) However, a recent study commissioned by the American Franchisee Association concluded that while a majority of the mature franchisees surveyed–that is, those with more than thirty-two months of experience–felt that their franchise was financially successful (72.6%), a significantly smaller percentage of less mature franchisees surveyed–that is, those with less than thirty-two months of experience–felt that their franchise was financially successful (57.2%). (8)

While all potential franchisees must be financially prepared, committed to salesmanship, good management, working long and hard, and investigating the opportunity in which they are interested, (9) such preparedness and commitment does not always translate into success. Commonly cited statistics estimate a ninety-five percent success rate for franchises

Problems with franchising can be divided into relationship problems, or those concerning performance failure by the franchisor after the franchise has begun operating, and inducement problems, or those referring to misrepresentations or material omissions occurring in the sale of the franchise which may have induced franchisees to purchase a franchise that otherwise they would not have purchased. (15) While some scholarly attention has been devoted to relationship problems, which occur given the imbalance of power between the franchisor and franchisee pursuant to the franchise agreement, (16) less attention has been given inducement problems, which continue to be a concern in the franchise arena. (17) This paper examines the critical information, which may be misrepresented or omitted by the franchisor in the sale of the franchise. It then examines the laws that are available at the state or federal level to protect the franchisee, and whether or not they are sufficient.

II. INDUCEMENT CONCERNS

There are three types of information that are critical to the decision to purchase a franchise, which may be withheld or misrepresented during the negotiations between the franchisor and franchisee. First, it is not a uniform requirement that franchisees be provided with information concerning the historical earnings of other franchise owners. (18) While it is a national requirement that franchisors submit audited financial records which purportedly reveal their financial health (19) to the franchisee for inspection, it is not the financial success of the franchisor which is of critical importance to the prospective franchisee, but rather the financial health of the other franchisees in the system. The substantiated operating history of all units, as well as an accurate failure rate for franchises, is essential information for an informed purchase decision, (20) and yet such information may not be forthcoming from the franchisor.

Second, it is essential for the franchisee to know whether or not a franchise has ever failed in the area of interest. Presently, it is common practice for franchisors to “churn” their markets, that is, to sell failed franchise territories over and over again. (21) Franchisors are not necessarily dependent upon royalties for their income

Third, it is a prevalent practice for franchisors to make oral profit projections during negotiations. (23) While there is usually a disclaimer in the offering circular that no such projection has been made, that is not to say that potential earnings claims have not in actuality been made. Many franchisees may be sophisticated businesspersons, even corporations, but, there are many franchise investors who are unsophisticated (24) and likely to fall prey to the lure of undocumented income projections. (25) In fact, most abuses occur in the smaller franchise operations, which sell at less than $100,000. (26)

Unfortunately, many franchisees have an unrealistic expectation that the law will protect them from franchisors who are less than candid, and that justice eventually prevails, although that is not necessarily the case. (27) For example, with respect to oral earnings projections, the Parole Evidence Rule prohibits the introduction into evidence of the parties’ prior negotiations, agreements, or contemporaneous oral statements that contradict or vary the terms of the agreement. (28) Although fraudulent misrepresentations introduced to establish a defense to the contract represent an exception, again, the franchisee must be able to make that presumptive showing, and common law fraud, with its scienter requirement, is not easy to establish. (29) It would be hard to argue, moreover, that a failure to disclose information concerning prior franchise failures in the area of interest or the earnings history of franchisees amounts to fraud by material omission, particularly if neither state nor federal law requires such disclosures to be made, notwithstanding the vital importance of such information to the franchisee’s decision to purchase.

Even if a franchisee could establish a common law cause of action with respect to the aforementioned inducement problems, litigation is most likely not a viable option because of the costs involved in pursuing such a claim. (30) A forum selection clause, which is routinely included in the franchise agreement, may select a distant forum for dispute resolution, which is convenient to the franchisor but costly to the franchisee. (31) Further, if an unsuccessful franchisee owes the franchisor uncollected royalties or a part of the initial franchise fee for which the franchisor has extended credit, a counterclaim can be expected. Ultimately the only option available to many aggrieved franchisees is to write off the lost investment under tax laws

III. FEDERAL REGULATION

A. Current Disclosure Requirements

There are three federal laws which grant rights to franchisees. The Automobile Dealer’s Franchise Act of 1956 protects car dealerships from a bad faith termination of the franchise, while the Petroleum Marketing Practices Act protects retailers of petroleum products from bad faith termination, or failure to renew. (32) On a broader scale, the Federal Trade Commission’s Franchise Rule (“FTC Rule”) requires disclosure of certain information which is material to making an informed decision concerning the purchase of a franchise prior to the signing of the franchise agreement. (33) It specifically requires the franchisor to disclose twenty items of information, including inter alia, the litigation history of the franchisor, the initial and recurring funds required to be paid by the franchisee, any obligations to purchase owed by the franchisee, financing arrangements, restrictions on sales, training programs, conditions for termination, cancellation, and renewal of the franchise, along with statistical information concerning the number of franchises and financial information concerning the franchisor. (34)

The FTC Franchise Rule is not sufficiently comprehensive, (35) although the required disclosure does eliminate some of the evils, which occurred prior to its adoption. While the Rule provides that it is an unfair or deceptive practice for a franchisor to make representations to a prospective franchisee concerning potential sales, income or profit levels without following a separately required disclosure form, (36) less than fifteen percent of all registered franchise offerings make such claims in writing pursuant to the mandated form. (37) Franchisors are more likely to take advantage of the loophole in federal law which makes such written disclosures optional, (38) and instead make undocumented oral earnings claims which are typically inadmissible to establish fraud, even if inaccurate. (39)

Additionally, the FTC Rule requires neither the failure rate of franchises nor the income statements of franchisees to be disclosed. The Rule does require the franchisor to disclose the number of franchises, which in the preceding fiscal year, were 1) terminated or not renewed, 2) reacquired by the franchisor by purchase or otherwise, and 3) cancelled or terminated, along with a general categorization of the reasons for such action. (40) Nevertheless, such information only represents a snapshot and incomplete view of what arguably may be considered failures, and leaves to the franchisee to surmise the interpretation given by the franchisor to those events. While the Rule requires the franchisor to submit a balance sheet and an income statement, (41) it does not mandate that the income generated be broken down into specific categories such as royalties versus franchise fees. It is left to the franchisee to speculate whether or not royalty income is represented in the accounts receivable entry, or possibly, the uncollectible category. Surveys indicate that most potential franchisees experience difficulty enough comprehending the disclosure statement currently required by law, (42) without also being required to read between the lines and interpolate the information.

The Rule also, admittedly, requires the franchisor to disclose either the ten franchised outlets closest to the franchisee’s intended location, or all franchisees of the franchisor, or all franchisees in the state in which the prospective franchisee lives or plans to locate the franchise, provided that there are more than ten. (43) While any potential investor should be expected to make an independent investigation of the potential profitability of a prospective business venture by consulting the owners listed, (44) it might not be an easy task depending upon the location of current franchises with respect to the location of the prospective franchisee. Most business ventures pose some inherent risks

The Rule is deficient for a couple of other reasons as well. First, the veracity of the statements contained in this disclosure document are not verified by the FTC. While that fact is required to be disclosed conspicuously on the cover sheet of the document, (46) the official nature of the disclosure to a novice may imply verification in its absence. (47) Second, the Rule is purely regulatory in nature

B. Proposed Reform Measures

There are several regulatory and legislative initiatives which should be considered by the FTC and Congress which would at least address some of the inducement problems associated with the sale of a franchise. (53)

1. FTC Proposed Revisions to the Franchise Rule

The FTC published a request for public comment on its Franchise Rule in 1995 (54) and subsequently held public workshops to discuss the comments received. (55) Specifically, the FTC sought comments concerning, inter alia, whether or not the disclosure form should be revised, whether or not historical earnings figures should be required in the offering along with substantiated earnings projections, and whether or not information about franchisee success rates should be required. (56) The FTC published an Advanced Notice of Proposed Rulemaking, based upon comments received during the initial franchise rule review, (57) seeking additional requests for comments, concerning in pertinent part, (58) reformation of disclosure requirements and modifications which would require franchisors to disclose earnings information. (59)

Subsequent to that review in 1999, the Commission issued a Notice of Proposed Rulemaking, and sought comment on specific proposed revisions to the Rule which included 1) changing the timing and form for making disclosures

Of key importance in these proposed revisions with respect to inducement problems (62) is requiring the exclusive use of a slightly modified version of the Uniform Franchise Offering Circular (“UFOC”) in lieu of the current FTC disclosure document. The UFOC was developed in the early 1970s by the predecessor to the North American Securities Administrators Association, the Midwest Securities Commissioners Association. (63) The original UFOC was designed to facilitate multi-state offerings in situations wherein state statutes required disclosures. (64) The federal rule even now permits the use of the more comprehensive UFOC, (65) and it is already used in states that require more disclosures to be made than under federal law. There are several advantages to the use of the proposed modified UFOC.

First, Item 20 of the UFOC requires additional and more pertinent information to be disclosed than does its FTC counterpart. For example, it requires that the prospective franchisee be given the names and addresses of more than the minimum of ten franchises currently required under federal law. (66) The UFOC, as well as the proposed revisions to the federal rule, requires franchisors to disclose the names of current franchisees, along with the addresses and phone numbers of their outlets in the state in which the prospective franchisee is interested

Both the UFOC and suggested revisions to the federal rule require the names and last known addresses and telephone numbers of every franchisee who had an outlet terminated, canceled, not renewed, or otherwise ceased to do business within the previous year. (68) Moreover, unlike the current federal rule which requires disclosures of the number of franchises which were either terminated or not renewed, or reacquired, or otherwise canceled or terminated in the preceding fiscal year, (69) both the UFOC and suggested revisions to the rule require more detailed information to be disclosed in tabular form regarding the operating status of franchise outlets by state for the most recent three-year period. (70) While arguably even a three-year period is inadequate to reveal patterns of churning or turnover, (71) it is preferable to the current FTC Rule requirement. Many of the larger franchisors have already provided this information in order to use one form for multi-state offerings which included states that statutorily required disclosures according to the UFOC format

Second, changes with respect to earnings claims are suggested by the proposed revisions to the rule. While noting that all but three of the more than one hundred-fifty Rule cases filed to date have alleged false or unsubstantiated earnings claims, however, the FTC declined to mandate earnings disclosures. (72) Rather, the Commission opted for the voluntary streamlined Item 19 of the UFOC, with some alterations, (73) to be included within the disclosure document itself, instead of as the separate optional form presently provided for under federal law. (74)

The proposed revisions also mandate the use of one of two preambles to this optional financial performance representations (75) section of the disclosure document. In cases in which a franchisor opts to make financial performance representations, the preamble corrects a common misconception that the rule prohibits such disclosures, and mandates a statement to the effect that information about actual or potential performance may be disclosed if there is a reasonable basis for the information. (76) In cases in which a franchisor opts not to make financial performance representations, the preamble must state that fact, as well as alert potential investors that agents are not authorized to make such representations either orally or in writing. (77) Additionally, the statement asks franchisees to report to the franchisor’s management, the FTC and state regulatory agents if such unauthorized information is forthcoming. (78)

Provided it is sufficiently understood and appreciated, hopefully the latter preamble, if adopted, will alert potential investors that performance claims should not be relied upon at all. Unfortunately, if that warning goes unheeded or is misinterpreted, the preamble would seem to solidify the franchise agreement’s merger and integration clauses under the Parole Evidence Rule. (79) The proposed modifications are an improvement, though potential franchisees would be well-advised to hire counsel to review the disclosure document, which, even as amended, requires a substantial level of sophistication to fully comprehend. Nevertheless, the Rule remains regulatory, and if violations are not adequately addressed by the FTC in enforcement actions, franchisees, in effect, will still be wronged without remedy.

2. Congressional Reform Measures Bills have been proposed in Congress, since the early 1990s, to strengthen the protection already afforded under federal law, and to create what the Rule does not provide: a private cause of action. (80) In the 103rd, 104th and 105th Congresses, Representative LaFalce (NY), Chair of the House Committee on Small Business, introduced a total of eight bills designed to establish minimum standards of fairness in franchise sales and business relationships, and to facilitate increased public disclosure. (81) The Congressman’s proposed legislation provided for a private cause of action for violations of certain standards and for violations of the FTC disclosure requirements. (82)

More recently, in the 106th Congress, a similar bill was introduced. In 1999 Representative Coble (NC) sponsored the introduction of the Small Business Franchise Act, (83) legislation which is similar to that previously sponsored by the Congressman in 1998. (84) In addition to addressing some relationship issues, the Act would make it unlawful for any person in connection with a franchise offering to engage in conduct which is intended to operate as a fraud or to make an untrue statement of fact, or fail to state a material fact, in the disclosure document which would render it untrue or misleading. (85) It further would make it unlawful to make any claim or representation to a prospective franchisee whether orally or in writing, which is inconsistent with the disclosure document. (86) The Act would safeguard these provisions with the creation of a private cause of action in federal court in the jurisdiction in which the franchise is located, notwithstanding forum selection clauses in the franchise contract to the contrary. (87) While this type of legislation enjoys bipartisan support, whether or not such pro-franchisee measures will become law is speculative. The adoption of the revisions to the FTC Rule, coupled with at a minimum the creation of a private right of action for violating the Rule, would certainly be a step forward for franchisees.

IV. STATE REGULATION

A. State Franchising And Disclosure Laws

On the state level, legislatures have passed laws, which regulate franchise offerings, require disclosure and registration with the state by the franchisor, and often grant to franchisees a private cause of action for losses occasioned by the franchisor’s failure to comply, (88) These statutes may provide greater protection for the franchisee than is provided under federal law. (89)

Most states which have passed franchise laws treat the sale of a franchise like the sale of a security, and require the franchisor to register either the necessary disclosure document, prospectus or offering statement with the appropriate government agency as a precondition to an offer for sale to the public. (90) While no filing is required, presale disclosure to potential purchasers is required in a couple of other states. (91) The more comprehensive UFOC is generally accepted in states that require the registration of franchises, (92) and as a result, the preferred form of franchisors in multi-state offerings for the sake of uniformity and efficiency. In states that regulate franchise offerings, disclosure documents may be reviewed by examiners in an effort to detect fraudulent or abusive proposals, (93) although that review may not protect franchisees. For example, in some cases the information provided may not be verified by the responsible agency unless some action is initiated by the state, franchisee or other interested party. (94) Such post hoc investigation may not preclude franchisees from losing their investment.

The most advantageous state laws for franchisees are the statutes that provide a cause of action to aggrieved franchisees for the failure to provide the required documents or for providing false information or omitting material facts. In general, these private causes of action arise, other than from the termination or nonrenewal of the franchise by the franchisor, (95) from the franchisor’s failure to register, failure to maintain registration, failure to provide true and accurate information, or failure to disclose material information required under disclosure and registration laws. (96) Remedies provided by these statutes can include rescission of the franchise agreement (97), actual (98) or treble damages, (99) attorneys’ fees and costs (100) or injunctive relief. (101) The franchisee is as protected from fraudulent franchising practices as is probably feasible, in states wherein a regulatory agency verifies comprehensive filing requirements and statutes provide a private cause of action for failures to comply. Nevertheless, the overwhelming majority of states have not passed legislation to complement and augment the current rule of the Federal Trade Commission. Are there other laws in those states, then, that could augment the inadequate common law remedies?

B. State Deceptive Trade Practices Acts

All states have passed Deceptive Trade Practices Acts (“DTPAs”), sometimes referred to as “little FTC Acts,” which prohibit deceptive acts or practices in the conduct of trade or commerce. (102) They are patterned after the FTC’s statutory authority to prohibit “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce….” (103) Enacted in response to the 1960s consumer empowerment movement, (104) the acts are further designed to protect consumers from unfair trade practices by providing a private cause of action in the absence of one under the FTC Act. (105), In addition to the prohibition based upon the federal statute, several states also have passed the Uniform Deceptive Trade Practices Act. (106) That Act prohibits a laundry list of deceptive trade practices relating to unfair competition. (107)

Bringing suit under these acts is attractive to plaintiffs for a couple of reasons. First, the amount of damages recoverable and the statutory award of fees (108) make litigation a viable option even if large amounts of money are not at stake. For example, while some state DTPAs only permit the recovery of actual damages in a private action, (109) others permit the recovery of punitive damages depending on the circumstances, (110) treble damages, (111) or both. (112) Additionally, some DTPAs allow the recovery of attorneys’ fees (113) as well as costs. (114) Second, DTPAs are preferable to bringing an action based upon common law fraud, which requires the plaintiff to establish some degree of scienter or proof of intent to defraud. In contrast, the standards under federal law for unfairness (115) and for deception are usually followed under state DTPAs, (116) which focuses upon whether or not a reasonable person would likely be misled by the material representation or omission. (117)

Nevertheless, since they are designed to protect consumers, DTPAs may or may not be applicable to franchisees. The resolution of that issue may depend upon the definition of consumer, consumer transaction, or person entitled to bring suit as provided for by the statute or as interpreted by state courts. (118) Some states, for example, by definition limit the application of their DTPA to individuals who seek or acquire by purchase or lease goods and services for “personal, family, or household purpose,” (119) which probably does not include a business plaintiff. (120) Other DTPAs may define a person entitled to bring suit very broadly, including business entities, corporations, partnerships or companies. (121) Depending on how these statutes are interpreted, they may or may not embrace business plaintiffs. (122) In some circumstances, courts have interpreted these provisions so as to permit businesses to sue as consumers entitled to protection. (123) Some courts, on the other hand, have concluded that business competitors, or businesses who buy for resale for example, may not be entitled to protection under the DTPA, because they must be able to establish that they were acting in a manner similar to that of a regular consumer, rather than engaging in a typical business dispute in order to successfully state a claim. (124) Massachusetts is the only state which specifically provides business plaintiffs with a cause of action under its statute. (125)

Two states expressly cover franchising in their DTPAs. The Alabama statute defines “goods” as including “any franchise,” (126) while the Oregon DPTA defines “real estate, goods or services” as including “franchises, distributorships and other similar business opportunities.” (127) In a few cases, courts have addressed the issue of whether or not the state DPTA is available to franchisees in their suits against franchisors, in the absence of such an express provision. (128) Some courts permit the litigation of claims concerning the franchise relationship under the state DTPA provided the dispute would affect consumers generally (129) or the dispute involves purchasing goods or services, (130) The DTPA is not likely to be applicable to franchise disputes involving the termination of the arrangement or other relationship problems, because the franchisee is not acting in a consumer-oriented manner, (131) For example, in Roberts v. GMC, Corp. (132) the New Hampshire Supreme Court concluded that while its consumer protection act was broad, it was not intended to apply to a potential franchisee’s refusal-to-deal claim. (133)

On the other hand, a cause of action may be stated for failing to make the disclosures required under state or federal law, or making inaccurate or misleading disclosures, and violations of the statutes which regulate franchises in some states can constitute per se unfair trade practices under the state DTPA. (134) In Bailey Employment System, Inc. v. Hahn, (135) a federal district court construing the Connecticut DTPA concluded that allegedly false, misleading or unrepresentative earnings claims made in conjunction with the sale of a franchise, along with the failure to disclose the attrition rate, was covered by the act. (136) The court surmised that the sale of a franchise was within the statutory definitions of “commodity or thing of value” and “trade or commerce,” (137) and noted that the FTC and federal courts had long treated the sale of franchises as being within the scope of the federal act. (138)

A lower state court in New Jersey, in Morgan v. Air Brook Limousine, Inc, (139) held that its broadly worded statute provided a private cause of action to franchisees in cases in which the franchisor failed to provide the disclosure document required under federal law. (140) The court declared that “the state’s consumer fraud act was “in place prior to Air Brook’s decision to sell franchises in New Jersey without providing anything but misleading data. It should have known that prospective purchasers, particularly those not sophisticated in business matters, would rely upon what was furnished to them.” (141) Nevertheless, a federal court applying the same state act refused to follow the lower court’s lead in a case involving alleged misstatements in the UFOC. In J & R Ice Cream Corp. v. California Smoothie Int’l, Inc. (142) the Third Circuit, in interpreting the term merchandise under the DTPA, held that the act was “intended to protect persons engaging in ‘consumer’ transactions, not those acquiring businesses,” (143) and that the “ordinary meaning of consumer in the marketplace does not include the purchaser of a franchise.” (144)

Nevertheless, under broadly worded DTPAs, there are several reasons why, at a minimum, those disputes relating to inducement problems should be permitted. First, the FTC Act, upon which these statutes are based, is related to federal anti-trust statutes in that conduct, which violates anti-trust law, is by definition unfair and deceptive. (145) Since anti-trust law is concerned with protecting competitors, or businesses, as well as consumers, there is no reason why the state acts should not protect businesses, unless expressly limited. (146) Second, if DTPAs can be interpreted as being applicable to franchisees with respect to the acquisition of goods or services, why not to the acquisition of the franchise itself? Franchisees as entrepreneurs are consistently referred to by the FTC as “consumers.” (147) After all, it was fraudulent marketing practices in the sale of franchises which prompted the passage of the FTC rule in an effort to protect the consumers of those opportunities. Moreover, state DTPAs are remedial measures and should be liberally construed (148) so as to be able to protect entrepreneurs as consumers. Third, the purchase of a franchise can also be viewed as an investment, no less than the purchase of securities is an investment. While transactions in securities may be excluded under state DTPAs because they are separately regulated under state and federal law, (149) some state DTPAs have been interpreted so as to cover securities transactions. (150) Therefore, franchise investments certainly should be covered under the state DTPA, unless like securities, they are subject to a separate regulatory scheme under state law and expressly exempted.

Unfortunately, however, state DTPAs will likely afford little protection to franchisees who have been victims of fraudulent practices in the sale of the franchise. With the exception of Connecticut and those states which provide that a violation of their franchise laws constitutes a violation of the DTPA (Hawaii, Washington), their applicability is unclear at best, and would likely require litigation at the appellate level to establish.

V. CONCLUSION & RECOMMENDATIONS

Currently the maxim caveat emptor still governs the prospective purchase of a franchise because certain critical information, such as the historical earnings of other franchises currently in operation and the existence of outlets which previously failed in the area under consideration, may be withheld during the contract negotiation process between the franchisor and franchisee. (151) Undocumented, and usually over-stated, oral profit projections are frequently made as well. (152) If the franchise subsequently fails as a result of such inducement problems, litigation proves difficult for the franchisee because a forum protection clause may require that suit be brought in an inconvenient forum and a counterclaim may be made by the franchisor for uncollected royalties or unpaid debts due from the insolvent franchise. (153)

FTC regulations fail to protect the franchisee because they require neither the failure rate nor the income statements of existing franchisees to be disclosed, even though the franchisor is clearly in a better position than the prospective franchisee to compile such data. (154) The information that is disclosed in the FTC document is not verified, and federal law provides no private cause of action for false and misleading statements made within the document upon which prospective franchisees may have relied to their detriment. (155)

The proposed revisions to the FTC Rule would provide the franchisee with more information than is currently required

Some states regulate franchise offerings and provide a cause of action for misrepresentations included in their required disclosures, (158) but the majority of states do not. While all states have passed consumer protection legislation, only a few such statutes expressly include the purchase of a franchise, and there is precious little case law in the other states interpreting the acts so as to embrace franchising. (159) Therefore, remedial legislation is still needed.

A private cause of action for the failure to disclose, or for providing false information, is needed at either the state or federal level, coupled with the recovery of attorneys’ fees and costs in addition to damages so that litigation would be possible from an economic standpoint. An alternative suggestion would be for states which have not yet created a private cause of action to provide that a violation of federal disclosure laws constitutes a violation of their DTPA, unless the state act is expressly limited in its definitions. The creation of a federal cause of action, however, is preferable in the interests of uniformity, because state franchise laws and DTPAs vary in the remedies available.

Moreover, in addition to the proposed revisions to the rule, there should be a requirement that franchisees be informed whether or not the area of interest has been sold within the previous ten years, as well as a mandatory requirement that franchisors disclose sales and profit information for their company and franchisee-operated outlets in the disclosure document. Until such reforms are forthcoming (and even if they are), potential franchisees should thoroughly investigate the franchisor, research the proposed market, interview current franchisees, and consult legal counsel prior to making the investment decision, because for reasons previously discussed, the law is not likely to protect unwary purchasers of franchises.

(1) David Gurnick & Steve Vieux, Case History of the American Business Franchise, 24 OKLA. CITY U. L. REV. 37, 38-39 (1999). For a historical perspective of the development of franchising as a form of business arrangement see also ROBERT L. PURVIN, THE FRANCHISE FRAUD: How TO PROTECT YOURSELF BEFORE AND AFTER YOU INVEST 36-51 (1994).

(2) Jefferson I. Rust, Note, Regulating Franchise Encroachment: An Analysis of Current and Proposed Legislative Solutions, 19 OKLA. CITY U.L. REV. 489, 493 (1994). In product name franchising the franchisees are licensed to sell a product, such as a particular make of car, with which consumers readily identify. Id.

(3) Gurnick & Vieux, supra note 1, at 43-44.

(4) Id. The family of Marriott hotels, resorts and suites represents this type of franchising. See generally THOMAS S. DICKE, FRANCHISING IN AMERICA: THE DEVELOPMENT OF THE BUSINESS METHOD 1840-1980 (1992)(for a detailed discussion of the historical development of business format franchising).

(5) Franchising Relationship: Hearing Before the Subcomm. on Commercial and Administrative Law of the House Comm. on the Judiciary, 106th Cong. 107, 159 (1999)[hereinafter 1999 Hearing] (statements of Larry I. Tate, Vice-President of Franchising, Golden Corral Corporation and Steve Lewis, President, National Franchisee Association). As of 1991 the over 542,000 franchised outlets in the United States accounted for nearly $800 billion in sales, and employed eight million people. FTC Franchising Regulation: Hearing Before the Subcomm. on Transportation and Hazardous Materials of the House Comm. on Energy and Commerce, 103rd Cong. 7, 82 (1994)(prepared statements of Christian S. White, Acting Director, Bureau of Consumer Protection, FTC and Lewis G. Rudnick, International Franchise Association) [hereinafter FTC Franchising Regulation Hearing].

(6) DICKE, supra note 4, at 158.

(7) Franchising: Is Self-Regulation Sufficient? Hearing Before the House Comm. on Small Business, 103d Cong. 101-06 (1993) [hereinafter 1993 Hearing].

(8) 1999 Hearing, supra note 5, at 29 (American Franchisee Association Franchisee Satisfaction Survey Report-05/08/96 prepared by Dr. Frank H. Wadsworth & Dr. Wayne Jones, Indiana University Southeast). Further, about thirty percent of all franchisees surveyed viewed their franchise operation as being either somewhat unsuccessful or very unsuccessful, while 55.2% of all responding franchisees indicated that they would not advise others to join their franchise system. Id. at 30-31.

(9) Ingrid Sturgis, Keys to Successful Franchise Ownership, BLACK ENTERPRISE, May 1993, at 77-80.

(10) New Developments In Franchising: Hearings Before the House Comm. on Small Business, 102nd Cong. 114 (1992)[hereinafter 1992 Hearings]. Moreover, the risk of franchise failure in some industries is higher than for non-franchised establishments. Id. at 229.

(11) 1999 Hearing, supra note 5, at 88 (prepared statement of Dr. Timothy Bates, College of Urban, Labor and Metropolitan Affairs, Wayne State University).

(12) Taking into account the capitalization differential arguably converts the comparative difference to about fifty, not six percent. Id. at 110. The study also suggested that entering self-employment by purchasing an ongoing franchise operation was riskier than alternative routes to small business ownership. Id. at 91.

(13) PURVIN, supra note 1, at 13. One study found that when the blue chip franchisors were removed from the calculations, sixty-nine percent of the 1,100 franchise companies rated by Entrepreneur magazine in 1987 were no longer listed in the ratings for 1992. Id.

(14) 1999 Hearing, supra note 5, at 89 (citing S. Shane, Hybrid organizational arrangements and their implication for firm growth and survival: A study of new franchisors, 39 ACAD. MGMT. J. 216-34 (1996)).

(15) 1992 Hearings, supra note 10, at 43.

(16) See, e.g., Robert W. Emerson, Franchise Contract Clauses and the Franchisor’s Duty of Care Toward Its Franchisees, 72 N.C.L. REV. 905 (1994)

(17) A 1990 staff report of the Small Business Committee identified deception or impropriety in the presentation, solicitation or sale of a franchise opportunity as one of two major and continuing consumer protection concerns. FTC Franchise Regulation Hearing, supra note 5, at 19.

(18) Only fifteen percent of the members of the International Franchise Association make such information available. 1992 Hearings, supra note 10, at 7.

(19) For a discussion of the disclosure requirements under federal law see infra notes 32-52 and accompanying text.

(20) Franchising in Hard Times, Hearing before the House Comm. on Small Business, 102d Cong. 119 (1991)[hereinafter 1991 Hearing] (statement of Susan P. Kezios, President, American Franchisee Association).

(21) Id. at 60. Often when a franchisor reacquires a failed franchise, that event is not included in the failure rate statistic. Id. Similarly, franchise companies conceal turnover from prospective investors with broad unsubstantiated data suggesting franchisee success. 1992 Hearings, supra note 10, at 65.

(22) PURVIN, supra note 1, at 125-26.

(23) 1993 Hearing, supra note 7, at 73-74.

(24) Self-Regulation of Franchising: The IFA Code of Ethics, Hearing Before the House Comm. on Small Business, 103d Cong. 80 (1994) [hereinafter 1994 Hearing] (statement of W. Michael Garner, attorney). Although it may seem that franchising has replaced historic “mom and pop” establishments, it is more probable that franchised establishments are in fact “mom and pop” businesses. 1999 Hearing, supra note 5, at 159 (prepared statement of Steve Lewis, President National Franchisee Association).

(25) Moreover, the pursuit of a private cause of action may be difficult because state law may not provide a remedy for misrepresentations concerning future projections. Deborah S. Coldwell, Kay Lynn Brumbaugh, Paul Goldean, & Gail Schubot, Franchise Update, 52 SMU L. REV. 1231, 1243 (1999).

(26) 1993 Hearing, supra note 7, at 74.

(27) 1991 Hearing, supra note 20, at 64

(28) The typical contract merger and integration clause, defined as “dangerous contract terms from a franchisee’s perspective” colloquially have been referred to as the “I Didn’t Say That” and the “This Is It” clauses. THE 2000 FRANCHISE ANNUAL H18-H19 (Ted Dixon, ed. 2000). Together the clauses deny the existence of any representations made other than those contained in the agreement, in an attempt to negate any justifiable reliance upon representations made during the sales process, and proclaim the written agreement to be complete and final, whether or not that is reality. As such, if an agreement contains language which outlines the parties’ rights and duties along with an integration clause, then the franchisee would not be justified in relying on representations not contained therein. Hotels of Key Largo, Inc. v. RHI Hotels, Inc., 694 So.2d 74, 76 (Fla. App. 1997).

(29) 1994 Hearing, supra note 24, at 61 (written statement of Prof. Robert W. Emerson).

(30) 1991 Hearing, supra note 20, at 64. Most lawyers are reluctant to take such cases on a contingency fee basis because of the uncertainty of recovery and the up-front costs of discovery. 1993 Hearing, supra note 7, at 82-83.

(31) 1999 Hearing, supra note 5, at 164. Additionally, mandatory arbitration clauses or waiver of jury trial clauses, along with unfavorable choice of law provisions, impede the likelihood of litigation being initiated by the franchisee. 64 Fed. Reg. 57295 (solicited comments for rulemaking review of FTC Franchise Rule).

(32) See PURVIN, supra note 1, at 170.

(33) Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities Ventures, 16 C.F.R. [section] 436 (2000). The FTC Rule was enacted in 1979 in response to evidence that franchises were being marketed through unfair and deceptive practices. Gurnick & Vieux, supra note 1, at 55-56.

(34) 16 C.F.R. [section] 436.1 (2000).

(35) PURVIN, supra note 1, at 28.

(36) 16 C.F.R. [section] 436.1(b)-(e)(2000).

(37) 1992 Hearings, supra note 10, at 27, 261. Recent administrative procedures conducted by the FTC suggest that approximately twenty percent of franchisors choose to make earnings disclosures. Franchise Rule, 64 Fed. Reg. 57,309.

(38) 1992 Hearings, supra note 10, at 9, 64.

(39) See supra text accompanying notes 23-31. Further, in addition to the merger and integration clauses of the franchise agreement, the offering document itself may expressly disclaim the authority of any of the agents of the franchisor to make forecasts concerning profits or earnings.

(40) 16 C.F.R. [section] 436.1(a)(16)(2000).

(41) Id. at [section] 463.1(a)(20)(2000).

(42) 1993 Hearing, supra note 7, at 74. More importantly, it is these investors that the Rule is designed to protect. That fact is evidenced by the recently published proposed revisions to the FTC Rule which suggest the creation of an exemption from the Rule’s disclosure requirements where the investment totals $1.5 million, using the size of the investment as the appropriate “measure of sophistication.” Franchise Rule, 64 Fed. Reg. 57,320-57,321.

(43) 16 C.F.R. [section] 436.1(a)(16)(2000).

(44) Constantine T. Fournaris & Craig R. Tractenberg, What Franchisees Should Know: Evaluating Franchise Offerings, FRANCHISING BUS. & L. ALERT, Jan. 2001, at 3.

(45) For a testimony to the difficulties faced by franchisees attempting to investigate the existence of former franchisees in the territory of interest see FTC Franchising Regulation Hearing, supra note 5, at 49-52 (prepared statement of Rosemarie B. Deal, former Decorating Den franchisee).

(46) The statement reads in part: “To protect you we’ve required your franchisor to give you this information. We haven’t checked it and don’t know if it’s correct.” 16 C.F.R. [section] 436.1(21)(2000).

(47) That the sentence leads with the phrase “to protect you”, however, may be misleading because it implies greater federal oversight than actually exists. Susan P. Kezios, ‘To Protect You …’–The Franchisee View of Pending Legislation, FRANCHISING & BUS. L. ALERT, Oct. 2000, at 3. The FTC’s 1999 proposed revisions to the rule advocate the deletion of the phrase because some prospective franchisees may misinterpret it. 64 Fed. Reg. 57,302 (1999).

(48) Brill v. Catfish Shaks of America, Inc., 727 F. Supp. 1035, 1041 (E.D. La. 1989).

(49) See 15 U.S.C. [section] 53(b)(2001)

(50) 1999 Hearing, supra note 5, at 77, 102 (testimony of Susan P. Kezios, President, American Franchisee Association and prepared statement of Peter A. Singler, attorney).

(51) An examination of enforcement actions brought during 1995-2000 reveals that most of the cases pursued involved the sale of business opportunities, such as vending machine and display rack businesses, not franchises. Such distributorships are typically less expensive than franchises, and their sale more susceptible to the perpetration of fraud upon the unwary. Only five cases brought by the FTC involved violations of the rule for a failure to disclose identifying information for existing franchisees. Case summaries for the five-year period are available at http://www.ftc.gov/bcp/franchise.htm.

(52) See, e.g., 1991 Hearing supra note 20, at 79

(53) Many of these suggested measures have been explored in part in hearings which have been held before committees of the House of Representatives and previously referenced.

(54) Request for Comments Concerning Trade Regulation Rule on Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, 60 Fed. Reg. 17,656 (1995).

(55) Id. at 34,485

(56) 60 Fed. Reg. 17,656, 17,660 (1995).

(57) The comments generally supported the rule as being a cost-effective way in which to disseminate valuable information to franchisees and to prevent fraud. 62 Fed. Reg. 9115, 9123 (1997).

(58) Other items of interest for which comments were solicited included the need to distinguish disclosure requirements for business opportunities from those of franchises, the desirability of permitting a conditional exemption from liability for trade show promoters, the need for information on new marketing practices and technological developments, and any alternatives to burdensome regulations and enforcement pursuant to a 1995 White House Memorandum on the Regulatory Reinvention Initiative. Id. at 9117-20.

(59) Id. at 9118. The Advanced Notice acknowledged that franchisors typically opposed mandatory disclosure requirements for earnings information because such information may be misleading, not uniform, inaccurate, of little predictive value and overly burdensome to compile. Id. The Commission endorsed the notion that consumers should have access to material information before investing in a franchise but did not believe that the record suggested that a failure to disclose such information was necessarily unfair or deceptive. Id.

(60) 64 Fed. Reg. 57,293-350 (1999).

(61) Leonard D. Vines, The Proposed Amended FTC Rule: What Franchisors Can Expect, FRANCHISING BUS.& L. ALERT, May 2001, at 3. The proposed role in its entirety is published in the federal register. 64 Fed. Reg. 57,331-47. A Chronicle of the rulemaking procedures to date, as well as the information published in the federal register concerning such procedures, is available at the Commission’s website at http://ftc.gov/bcp/franchise/ netfran.htm.

(62) The Commission declined to address substantive franchise relationship issues which it considered to be matters of state contract law. It concluded that, while its statutory grant of power included the regulation of unfair practices, pre-sale disclosure was the best vehicle within the proscribed boundaries to address such issues. 64 Fed. Reg. 57,296 (1999).

(63) Byron E. Fox & Henry C. Su, Franchise Regulation-Solutions in Search of Problems?, 20 OKLA.CITY U.L. REV. 241, 266 (1995). A copy of the UFOC is available at the North American Securities Administrators Association website at http://www.nasaa.org.

(64) Andrew C. Seden, Identifying the UFOC Pitfalls On Renewals and Transfers, FRANCHISING BUS. & L. ALERT, May 2001, at 1. The UFOC was revised in 1993 in an effort to provide more useful information in a more understandable format. FTC Franchising Regulation Hearings, supra note 5, at 23.

(65) 58 Fed. Reg. 69,224 (1993)(revised format). One or the other format must be used

(66) See text accompanying note 43 supra for a discussion of federal law.

(67) 64 Fed. Reg. 57,344 (1999).

(68) Id. Also required to be disclosed is such information for franchisees who have not communicated with the franchisor within ten weeks of the disclosure document issuance date. Id.

(69) 16 C.F.R. [section] 436.1(a)(16)(iv)-(viii)(2000).

(70) 64 Fed. Reg. 57,342-44 (1999). The Commission in this revision is attempting to solve the double counting problem, by making the reported categories more precise, and commensurately, mutually exclusive. Id. at 57,312.

(71) FTC Franchising Regulation Hearing, supra note 5, at 41 (statement of Susan Kezios, President, American Franchisee Association).

(72) 64 Fed. Reg. 57,309 (1999).

(73) For example, unlike the UFOC and the current rule, the proposed revisions do not require franchisors who make financial performance disclosures to state the number and percentage of franchisees who have attained the stated claim

(74) Id. at 57,310.

(75) It also proposed to define such claims as financial performance representations instead of earnings claims, because not all industries measure success by earnings. For example, the hotel industry uses room occupancy rates as a benchmark for success. Id. at 57,297.

(76) Id. at 57,341 (1999).

(77) Id.

(78) Id.

(79) A new proposed section of the disclosure document would prohibit franchisors from disclaiming or requiring prospective franchisees to waive reliance on any representations made in the offering circular or any amendments thereto

(80) See PURVIN, supra note 1, at 168-69.

(81) H.R. 1315, 103rd Cong. (1993)

(82) 1999 Hearing, supra note 5, at 15. The standards proposed were designed to 1) establish a duty of good faith in the franchise agreement, 2) establish a duty of care in the operation of the franchise system, 3) establish a good cause standard for termination, 4) subject franchisors to a fiduciary, obligation, and 5) require franchisors to recognize a right of association for franchisees. Id.

(83) H.R. 3308, 106th Cong. (1999). For a discussion of the Act see Michael J. Lockerby, How SBFA Would Restructure Franchising Relationships, FRANCHISING BUS. & L. ALERT, June 1999, at 1.

(84) H.R. 4841, 105th Cong. (1998). One notable modification was that the 1999 version deleted prohibitions on discrimination and discriminatory practices based on suspect classifications. See Rochelle B. Spandorf, U.S. Representatives Reintroduce SBFA, But What Does the Future Hold?, FRANCHISING BUS. & L. ALERT, Nov. 1999, at 1.

(85) H.R. 3308, 106th Con. [section] 3 (1999).

(86) Id. Therefore, ifa franchisor opted not to make financial performance disclosures, yet the agent made certain projections or claims, it would seem that those oral statements would be inconsistent with the document, and hence a violation of the Act.

(87) H.R. 3308, 106th Cong. [section] 12 (1999). Available remedies include rescission, restitution, damages, injunctive relief and attorney’s and expert witness’ fees. Id. For a discussion of the Act see David J. Kaufman, Proposed Federal Legislation, N.Y. L.J., Feb. 24, 2000 at 3.

(88) See Robert W. Emerson, Franchising and the Collective Rights of Franchisees, 43 VAND. L. REV. 1503, 1509-13 (1990). See also Shelby D. Hunt & John R. Nevin, Full Discourse Laws in Franchising: An Empirical Investigation, J. MARKETING, Apr. 1976, at 53 (discussing benefits of disclosure laws)

(89) Iowa passed a comprehensive law primarily aimed at relationship problems. The Iowa Franchise Investment Act grants franchisees legal remedies with respect to unfair practices concerning the franchise’s transfer, termination, and nonrenewal, and also protects franchisees from potential encroachment by the franchisor’s subsequent sales. For an overview of the act see Joan Oleck, The Battle of Iowa: How the Biggest Franchise Fight in History Was Won and Lost, RESTAURANT BUS., Aug. 10, 1992, at 78. See also David Hess, Comment, The Iowa Franchise Act: Towards Protecting Reasonable Expectations of Franchisees and Franchisors, 80 IOWA L. REV. 333 (1995)(discussing retrospectively the pros and cons of the legislation).

(90) See ARK. CODE ANN. [subsection] 4-72-201 to -210 (2001)

(91) MICH. COMP. LAWS [section] 19.854(8) (2000)

(92) FTC Franchise Regulation Hearing, supra note 5, at 20 (prepared statement of Steve Maxey, Virginia State Corporation Commission). See, e.g., 815 ILL. COMP. STAT. ANN. 705/10 (2001)

(93) FTC Franchise Regulation HearinG, supra note 5, at 20 (prepared statement of Steve Maxey, Virginia State Corporation Commission). For example, under New York’s Franchise Sales Act, a franchisor must submit a prospectus to the Attorney General’s office for review before it can be used in the public offer and sale of the franchise. 1991 Hearing, supra note 20, at 106.

(94) OR. REV. STAT. [section] 650.055 (1999).

(95) Several of the states, which regulate franchises, also provide a cause of action for such relationship problems, such as wrongful termination. See Robert W. Emerson, Franchise Termination: Legal Rights and Practical Effects When Franchisees Claim the Franchisor Discriminates, 35 AM. BUS. L.J. 559, 573-88 (1998)(discussing franchise termination under state law).

(96) See, e.g., ARK. CODE ANN. [section] 4-72-208 (2001)

(97) CAL. CORP. CODE [section] 31300 (2001)

(98) ARK. CODE ANN. [section] 4-72-208 (2001)

(99) ARK. CODE ANN. [section] 4-72-208 (2001)

(100) ARK. CODE ANN. [section] 4-72-208 (2001)

(101) ARK. CODE ANN. [section] 4-72-208 (2001)

(102) See generally William A. Lovett, State Deceptive Trade Practice Legislation, 46 TULL. REV. 724 (1971)

(103) 15 U.S.C. [section] 45(a)(1)(2000). This section of the federal act after which the state acts are patterned is the authority by which the FTC promulgated its Franchise Rule.

(104) For a discussion of the history of the consumer movement and early development of DTPAs, see William A. Lovett, Private Actions for Deceptive Trade Practices, 23 ADMIN. L. REV. 271 (1971).

(105) In addition to creating a private cause of action, most of these statutes provide for enforcement either by the state attorney general’s office or an administrative agency in charge of consumer protection. Debra D. Burke & Max Bishop, A Survey of the Potential Liability of Accountants under State Deceptive Trade Practices Acts, 23 U. MEM. L. REV. 805,809-10 (1993)(citing state statutory provisions). Iowa does not provide a private cause of action under its DPTA. See IOWA CODE [section] 714.16 (1999). The Arizona statute creates a private cause of action by inference. Sellinger v. Freeway Mobile Home Sales, Inc., 521 P.2d 1119 (Ariz. 1974).

(106) Twelve states have passed either the 1964 or 1966 version of the Uniform Act. See COLO REV. STAT. [section] 6-1-105 (2000)

(107) These practices include, for example, false advertising, misleading product identification or sponsorship, and disparagement. Uniform Deceptive Trade Practices Act [subsection] 1-9, 7A U.L.A. 274 (1985 & Supp. 1991). For a discussion of the uniform act’s provisions see Richard F. Dole, Merchant and Consumer Protection: the Uniform Deceptive Trade Practices Act, 76 YALE L.J. 485 (1967).

(108) See generally Debra E. Wax, Annotation, Award of Attorneys’ Fees In Actions Under State Deceptive Trade Practice and Consumer Protection Acts, 35 A.L.R. 4th 12 (1985).

(109) ARIZ. REV. STAT. [section] 44.1522 (2000)

(110) CAL. CIV. CODE [section] 1780 (2001)

(111) ALASKA STAT. [section] 45.50.531 (2000)

(112) MASS. ANN. LAWS ch. 93A, [section] 11 (2000)

(113) ARK. STAT. ANN. [section] 4-88-113 (1999)

(114) ALA. CODE [section] 8-19-10 (2000)

(115) In determining unfairness the FTC considers whether or not the practice I) offends public policy as established by statutes, the common law, or otherwise

(116) Some state statutes mandate that federal law be followed when interpreting the state statute, or that the state statute be construed consistently with its federal counterpart. Burke & Bishop, supra note 105, at 807-08 (citing state statutory provisions).

(117) In Re Cliffdale Assocs., Inc., 46 Antitrust & Trade Reg. Rep. (BNA) 703 (1984)

(118) See Michelle L. Evans, Annotation, Who Is a “Consumer” Entitled to Protection of State Deceptive Trade Practice and Consumer Protection Acts, 63 A.L.R. 5th 1 (1998)

(119) See, e.g., CAL. CIV. CODE [section] 1761(d)(2000)

(120) See, e.g., Paulson, Inc. v. Bromar, Inc., 775 F. Supp. 1329, 1338-39 (D. Haw. 1991)

(121) See, e.g., ALASKA STAT. [section] 45.50.331 (2000)

(122) Case law and attorney general opinions vary on whether or not businesses should be permitted to sue under such statutes wherein person is broadly defined. Michael C. Gilleran & L. Seth Stadfeld, Little FTC Acts Emerge in Business Litigation, A.B.A.J., May 1, 1986, at 60. See also Joseph Thomas Moldovan, Note, New YOrk Creates a Private Right of Action to Combat Consumer Fraud: Caveat Venditor, 48 BROOK. L. REV. 509, 526-27 (1982)(suits can be maintained by businesses under New York statute).

(123) See e.g., Olivetti v. Ames Bus. Sys., 344 S.E.2d 82 (N.C. App. 1986), aff’d in part and rev’d in part on other grounds, 319 S.E.2d 578 (1987)

(124) Clinton, supra note 118, at 400-01.

(125) MASS. ANN. LAWS ch. 93A, [section] 11 (2000). For a discussion of the Massachusetts DTPA see Jack R. Pirozzolo & Richard L. Binder, Chapter 93A, 3g 11: the Massachusetts Little FTC Act-A Potent and Partially, Clarified Remedy in Certain Budness Disputes, 70 MASS. L.Q. 14 (1984)

(126) ALA. CODE [section] 8-19-3(3) (2000).

(127) OR. REV. STAT. [section] 646.605(6) (1999).

(128) For example, the Illinois DTPA contains no definition of who may bring a suit. 815 ILL. COMP. STAT. [section] 505/2 (2000). Nevertheless, courts have permitted businesses to sue provided the suit implicates consumer protection concerns. Peter J. Hartmann Co. v. Capital Bank & Trust, 694 N.E.2d 1108 (Ill. App. 3d 1998). A couple of federal court decisions seemingly have accepted the applicability of the DTPA to franchise disputes, provided the statutory requirements for a violation are established. See Perez v. McDonald’s Corp., 60 F. Supp. 2d 1030, 1040 (E.D. Ca. 1998)(presumably Illinois DTPA could apply to franchisee suit if franchisor conduct was in fact deceptive under the statute)

(129) Some states, such as Illinois, impose a requirement that the conduct which forms the basis of the complaint have an effect on the public or consumers in general in cases brought by non-consumers or businesses. Therefore, actions by franchisees must satisfy that requirement as well. Perez v. McDonald’s Corp., 60 F. Supp. 2(t 1030, 1040 (E.D. Ca. 1998)

(130) Clinton, supra note 118, at 394. The Texas DTPA has been applied to franchise situations where goods or services provided to the franchisee formed the basis of the complaint. Meineke Discount Muffler v. Jaynes, 999 F. 2d 120, 125 (5th Cir. 1993).(131) Clinton, supra note 118, at 394.

(132) 643 A.2d 956 (N.H. 1994).

(133) Id. at 960. See also Broussard v. Meineke Discount Muffler Shops, Inc., 155 F. 3d 331, 347 (4th Cir. 1998), rev’g 948 F. Supp. 1087 (W.D. N.C. 1997)(North Carolina DTPA does not apply to dispute which centered on franchise contract). But see Diesel Injection Service v. Jacobs Vehicle Equipment, No. CV980582400S, 1998 Conn. Super LEXIS 3710, at *23*26 (Conn. Super. Dec. 4, 1998)(wrongful termination of franchise may violate Connecticut DTPA)

(134) HAW. REV. STAT. [section] 482E-9(a) (2000)(commission of unfair or deceptive acts in violation of Franchise Investment Law constitutes a violation of the Hawaii DTPA)

(135) 545 F. Supp. 62 (D. Conn. 1982), aff’d, 723 F. 2d 895 (2d Cir. 1983).

(136) See also Aurigemma v. Arco Petroleum Products Co., 734 F. Supp. 1025 (D. Conn. 1990)(material omissions and the failure to disclose accurately the information required by the UFOC violated Connecticut DTPA.) A federal court in Massachusetts also concluded that the sale of a franchise falls within the definition of “trade or commerce” under the state DTPA. Brennan v. Carvel Corp., No. 810595-N, 1989 U.S. Dist. LEXIS 16104, at*25 (D. Mass. July 25, 1989). See also Zapatha v. Dairy Mart, Inc., 408 N.E.2d 1370 (Mass. 1980). Although the Supreme Court of Massachusetts concluded in Zapatha that the termination of an at-will franchise agreement was neither unfair nor deceptive, it specified in a footnote that the plaintiffs were not relying on the FTC Rule in arguing that statements in the introductory brochure, which arguably misstated the franchisee’s status as owner, were misleading. Id. at 1380. Perhaps if plaintiffs had so relied, the DTPA’s provisions would have been applicable to the dispute.

(137) Bailey Employment System, Inc. v. Hahn, 545 F. Supp. 62, 66 (D. Conn. 1982).

(138) Id.

(139) 510 A.2d 1197 (N.J. Super. Ct. Law Div. 1986).

(140) Id. at 1206-09. But see LeBlanc v. Belt Center Corp., 509 So.2d 134, 137 (La. App. 1987)(a failure to comply with the FTC disclosure regulations does not constitute an unfair trade practice absent a finding of fraud, deception or unethical conduct).

(141) Id. at 1210. See also Kugler v. Koscot Interplanetary, Inc., 293 A.2d 682 (N.J. Super. Ct. Ch. Div. 1972)(Consumer Fraud Act applies to the sale and acquisition of cosmetics distributorships).

(142) 31 F.3d 1259 (3rd Cir. 1994).

(143) Id. at 1272.

(144) Id. at 1273.

(145) Richard E. Day, The South Carolina Unfair Trade Practices Act: Sleeping Giant or Illusive Panacea?, 33 S.C. L. REV. 479, 493 (1982)

(146) The Uniform Deceptive Trade Practices Act by its own terms protects competitors. See supra notes 106-07 and accompanying text.

(147) See Federal Rule, 64 Fed. Reg. 57,322 (1999).

(148) Burke & Bishop, supra note 105, at 808-09 (citing statutory provisions).

(149) Day, supra note 145, at 499-503 (discussing statutory exemptions). See also Donald M. Zupanec, Annot., Scope and Exemptions of State Deceptive Trace Practice and Consumer Protection Acts, 89 A.L.R. 3d 399 (1979 & Supp. 2001).

(150) See, e.g., A.G. Edwards & Sons v. McCullough, 764 F. Supp. 1365 (D. Ariz. 1991), rev’d on other grounds, 967 F.2d 1401 (9th Cir. 1992), cert. denied, 506 U.S. 1050 (1993)

(151) See supra notes 18-22 and accompanying text.

(152) See supra notes 23-26 and accompanying text.

(153) See supra notes 30-31 and accompanying text.

(154) See supra notes 33-45 and accompanying text.

(155) See supra notes 46-49 and accompanying text.

(156) See supra notes 54-79 and accompanying text.

(157) See supra notes 80-87 and accompanying text.

(158) See supra notes 88-101 and accompanying text.

(159) See supra notes 102-150 and accompanying text.

Debra Burke, Professor of Business Law, Western Carolina University

E. Malcolm Abel II, Assistant Professor of Business Administration and Law, Western Carolina University