May 2, 2018 - Franchise Articles by |

Franchise Disclosure Documents and Dr. Frankenstein

By: Jeffrey M. Goldstein

An article in the WSJ today provides a glimpse of the interesting results obtained by Professor Uri Benoliel in a new franchise study finding that it takes more than 20 years of education to understand a Franchise Disclosure Document (FDD). The conceptual purpose of disclosure under the FDD is simple – to provide the potential franchisee with all material facts, accurately and concisely, so that he or she may understand and evaluate what he or she is considering buying. Using that simple goal as the benchmark of success, from my perspective, the Federal Trade Commission’s FDD program in practice has been a tremendous failure.

The WSJ article accurately sets forth the rote responses to the study of the two other main players in the omnipresent FDD debate: the FTC and the IFA. The FTC, the Dr. Frankenstein of the FDD program, of course “declined comment.” And, the IFA, the titular spokesman for all franchisors, simply ‘read out loud’ one of the canned responses it gives to every inquiry regarding any pro-franchisee observation or proposal: ‘Buying a franchise is complex; make sure that you do your due diligence before buying.’

However, in the IFA’s defense, there’s really no need for it to do any meaningful work on researching the FDD dispute or providing intellectually honest answers regarding it. The number of national lawyers representing solely franchisees has dwindled literally to under a handful, and the number of academics siding with franchisees is even fewer. And, as I noted in a previous article, many times when a franchisee advocate writes a scholarly article trying to help franchisees, he or she shoots him- or herself in the foot.

The FDD issue is no exception; in a relatively recent article reflecting gobs of research and thought, the pro-franchisee lawyer author reaches the outlandish conclusion that “more is less” – in other words, perhaps there is ‘too much’ franchise disclosure in the FDD since franchisees are essentially presumably mindless. Better yet, the author of that hollow conclusion further suggested that FDD regulations should require not only a new document containing a summary of the FDD, but also the provision of additional unhelpful, populistic and costly disclosures untethered to any accepted scientific or economic benchmarks. The decimating (and justifiable) response that was later penned by the franchisor side was foreseeable after reading only the introduction of the pro-franchisee article.

Professor Benoliel, one of the authors of the new study discussed in the WSJ, is a talented and prolific writer in this industry niche. Although I don’t always agree with the theoretical conclusions reached by the Professor (e.g., his conclusion that encroachment decreases consumer welfare by decreasing the number of franchisees who are relatively lower cost providers seems to rule out the possibility that the number of franchisees in the hypothesized initial ‘equilibrium’ state is at a supra-competitive level), his creativity and ability to theorize are rare on the franchisee side. Hopefully the Professor’s new results will be of interest to legislators and regulatory agencies around the country considering new disclosure requirements.



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