have here is restricted solely to the determination of what damages have accrued under sections 3 and 4, or rather-I think it is 3(a) and 3(b), I am not sure I think that is not the kind of arbitration that is fair.

Mr. COHEN. I think another way to put it is that it is intended to restrict them to the basic problem of moneys expended on behalf of the franchisor and benefits conferred upon the franchisor. That certainly is the intention. Whether the language does that or not is something else. You do not disagree with the principle necessarily, do you?

Mr. RUDNICK. Mr. Cohen, I am sure that you are familiar with the Carling Franchise plan. I was very impressed by it when I read it the first time and I have read it again since. Yet the Carling plan would not come within the terms of this bill. The Carling plan does not provide for monetary awards to a franchisee and yet the Carling plan is as fair and as broad and liberal as an arbitration plan can possibly be, and yet it would not come under the arbitration provisions of this

act.

Mr. COHEN. This is probably not the place to debate the Carling plan with you. It has been suggested, I think by another witness that there are defects in the Carling plan this bill would help to correct. So we meet ourselves coming around the corner. Thank you.

Senator HART. Mr. Chumbris.

Mr. CHUMBRIS. I just want to ask one question. There has been some discussion, I think, and there will be some further discussion on the old bill, S. 2549

Mr. RUDNICK. Is that the Kluczynski bill?

Mr. CHUMBRIS. No. This is the bill of the previous Congress S. 2549, which would in effect, make the rule of reason applicable to territorial exclusive franchises rather than the per se doctrine, and you recall we had some hearings in the previous Congress.

Mr. RUDNICK. Yes.

Mr. CHUMBRIS. In the Schwinn case, and the Sealy case, there was some doubt raised in the minds of some of the legal experts. They thought that S. 2549 might have been redundant, because the law at that time, in the White Motor case, indicated that per se violations were not applicable to exclusive territories. How would you feel about S. 2549 of the previous Congress? The bill has been placed in the record for the viewing of the witnesses although it is not properly before the subcommittee because the bill has not yet been introduced. Mr. RUDNICK. Mr. Chumbris, is that the bill that ties territorial allocations with exclusive dealing?

Mr. CHUMBRIS. Yes.

Mr. RUDNICK. As I recall, the International Franchise Association was opposed to that legislation because generally, exclusive dealing is generally present in the sense that a man is a full and complete representative of the franchisor or has either a single location or is given a territory. I do not recall the bill in its entirety but I think the position of the association is still in opposition to the bill. However, if it comes up again, it will be carefully studied in view of the Schwinn and the Sealy cases and our position will be presented.

Mr. CHUMBRIS. After looking at those two cases, you may want to submit a statement for the record. Mr. Chairman, may he be permitted to do that?

Senator HART. We do recall that statement that you submitted and it is a part of our record of the earlier hearings on the bill that Mr. Chumbris identified?

Mr. RUDNICK. Yes.

Senator HART. Yes. If you care to file additional comments, you may proceed to do so.

Thank you, very much, Mr. Rudnick.

You were accompanied by Mr. Rosenberg and Mr. Lapin both of whom have statements. Who would like to come next?

Mr. ROSENBERG. My name is Robert M. Rosenberg. I am president of Dunkin' Donuts of America, Inc., a company which utilizes the franchise method of distribution and I appear here today on behalf of the International Franchise Association of which I am a director. Elimination of deceptive, fraudulent, and inequitable dealings within the franchise relationship is the very cornerstone upon which our association was founded. As businessmen, we realize that those who practice fraud, deceit, and irresponsible use of power create an unwholesome environment which tarnishes and retards the growth and prosperity of legitimate franchising organizations. The International Franchise Association's code of ethics, in conjunction with its public information and trade education programs, have significantly elevated the standards of this marketing system.

Although I believe the framers of this proposed legislation (Senate bills 2507 and 2321) intend to aid us in our policing task, these bills strike at the very heart of the franchise relationship and again I believe, inadvertently, begin to destroy the very system which they were designed to foster. This dilemma is mainly attributable to the fact that these bills treat franchising as one industry, when, in truth, franchising is not one industry, but rather a method of distribution, which is employed by many different businesses. Each with its own unique technology and marketing opportunities and problems.

It is also important to remember that the vast majority of franchising companies are quite small. Many, is fact, have lesser sales and net worth than a medium sized bottler franchisee or single automobile dealership.

The dynamic growth of franchising during the last two decades is ample testimony to its legitimacy. The unyielding crucible of the marketplace has always and, I hope, will continue to sift out and discard the unacceptable and unneeded from that which is of value. Not only has franchising proved to be a superior method to distribute goods and services, it has also proven to be the last frontier of the small businessman. In today's highly sophisticated business society, one out of every two independent businesses started each year fail. Out of every 10 new independent restaurants that open their doors for business today, 5 will close within 1 year and 8 out of the 10 will be out of business within 5 years. Compare these facts, if you will, with a fatality rate of just under 5 percent for businessmen operating under a franchise banner. This system which weds the know-how and brand recognition of a parent company to the drive and enthusiasm of a local merchant with a vested interest, clearly is the most riskless course of action for anyone who wishes to invest his time, money and future in a business of his own.

Gentlemen, I submit the attempt to legislate these controls on this great system will prove injurious to not only the franchisor, but also to the franchisee and the economy as a whole. The use of an all encompassing shotgun to zero in on what I suspect are a few isolated ills, will place an intolerable burden upon all franchisers whether they be big or small, guilty or innocent. Because of the broad objectives and failure to differentiate by size and marketing considerations, the terminology of this legislation is somewhat vague and confusing and certainly open to the widest range of interpretation. As I shall point out later, these bills easily can be utilized as a legal bludgeon by the irresponsible and/or inept franchisee to intimidate, coerce, and, yes, even destroy a franchisor.

The following issues are intended to illustrate just a few of the court cases my own company could be subjected to if these bills were to pass.

1. We do not sell merchandise to our franchisees. We receive our income in the form of a weekly fee of 5 percent of the gross sales from each store. Are we covered under the 25-percent rule of S. 2321? Is nonpayment of the weekly fee by the franchisee cause for termination by the franchisor?

2. If a franchisee operates a substandard store due to his own physical deformity, mental depression, or a host of other personal problems, does that constitute conscious malfeasance or willful failure to perform?

3. My franchise agreement has a 20-year life. It is paralleled by a 20-year sublease issued by us to the franchisee. The franchisee invests $13,000 in his franchise and the average return, including his salary, is $25,000 per year. Does this bill make it mandatory for me to renew at the end of 20 years? What if I do not possess options on the real estate? And, if I do have options, does this bill preclude me from requiring the franchisee to remodel and reequip at the end of 20 years to protect my system's trademark and the franchisee's very own future? Is this subcommittee prepared to suggest legislation which requires all landlords to renew every tenant's lease, regardless of whether or not the landowner wishes to change tenants, tear down his building, or remodel?

4. Under section 9 of bill 2507, can a franchisor obtain a right of first refusal in his agreement in the event of a sale by an existing operator? Can a franchisor reject a sale whereby his franchisee sells the business to a third party who may have a history of bankruptcy, criminal record, or undesirable personal characteristics?

5. Under the same section of bill S. 2507, can strong pressure tactics on the part of the franchisor with the sole purpose of attempting to save a failing operator be construed as coercion, intimidation, or restraint on the part of the franchisor? It would seem that the more pressure we put on the poor franchisee to put him on his feet, the guiltier

we are.

6. We sell our initial equipment package for a lower price on the west coast than we do in the East. This occurs from the fact that our franchise is more desirable and our average sales are higher in our older, more developed marketing areas. It would seem that section 7 under S. 2507 would preclude me from doing this. It also would prohibit a franchisor from charging additional freight due to geographic distances. It also sets no time limit as to how long similar prices to

franchisees must be maintained. Does the bill mean at the same price at the same time?

7. Our company has been successful because of a marketing or strategy plan which calls for the saturation of many stores in one geographic marketing area at the same time. In order to do this, we take many real estate locations within a community regardless of whether we have a prospective franchisee for that location. We have found that, even through the entrance of a new store into the market may take from 1 to 5 percent of the customers away from existing shops, the total impact which results from greater brand identification, advertising, and supervision increases the sales volume and profitability of all stores. Does this marketing concept constitute unfair competition under section 6 if we initially fail to find a franchisee and temporarily operate the new location ourselves?

The above is just a partial list of legal problems that I foresee as a businessman. I feel we have legitimate and defensible clauses within our franchise agreement. However, I am just as sure that a competent attorney could find enough legal loopholes in this legislation to provide a comfortable haven for any and every inept, failing, or dissident franchisee who wishes his money back plus a handsome profit. Even though my company may not in the first analysis violate any of the tenets of these bills, how long can we as well as many other small and medium-sized franchisors stand up to the burdens of litigation that would be placed upon us?

The passage of these bills, as I see it, will result in prolonged and unnecessary litigation. They will severely jeopardize a franchisor's control over his trademark and, in turn, the goodwill which accrues to his franchisees from this same trademark.

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I would like to interrupt here a minute and make a point, if I may.} In almost all instances, the goodwill that we are discussing that accrues to the franchisee is, in my own experience, necessarily a contrast from the trademark and the investment the franchisor has made in that trademark, and that system of distributing products.

As a result, many fine companies will be discouraged from the franchise field. Many who are currently in it will stop franchising in favor of vertical integration, thereby depriving both the prospective small businessman and the economy from one of the most positive and beneficial economic developments in decades.

My alternatives to this dilemma are quite simple. Either develop legislation that clearly differentiates each business and industry with its Prop attendant requirements and standards or allow the existing legal, trade, administrative, and market remedies in existence to do the job? The courts currently provide injunctive, as well as legal relief, for contractual wrongs, whether they result from unilaterial and arbitrary action or from deceit and fraud. The Federal Trade Commission already has developed standards for each industry and is quite knowledgeable in the area of franchising. I do not quarrel with the intent of these two bills. I just believe, because of their scope and generality, they will do more to harm the franchise system than to help it.

Senator HART. The committee, Mr. Rosenberg, did get into the franchise field several years ago in the belief, as you put it, that it is a means whereby a smaller person with limited capital, but with energy, imag

ination, and integrity, can prosper and society along with him. And it apparently is increasingly a factor in our economy.

The bill that I introduced was an attempt to develop a record to enable us to see if there is some way that, without harming a very desirable device, we can safeguard against injustice.

Mr. ROSENBERG. Senator, my only point is not all franchisors are large, powerful companies with unendless resources. Many of us are quite small and do serve a beneficial purpose, for the economy, for the small businessmen, for many different segments of our communities. By imposing legislation that places what I consider to be very severe burdens on us, since we are guilty pretty much until we prove ourselves innocent, could, in effect, destroy the very system we are all here trying to foster. I am not privy to the testimony that took place that found the necessity for these bills, but by virtue of taking such a broad brush approach to the problem, you also encompass some of us little guys and it could be very hard on us. As a matter of fact, from my vantage point, we suffer from the exact opposite problem.

What happens to us in the event we go out and take a lease and sell our franchise, and we do fairly effective screening, we have a good training program, and the franchisee abandons this location and leaves us with $20,000 equipment we guarantee and $250,000 lease obligation and no organization to take it over, there is no remedy under the law to protect or help us. I think probably most important is the fact that a good part of protecting our trademark comes from the fact that, I will not say it is unrestrained fair but there are times when you must coerce, you must coddle a franchisee in order to protect him, not with the intent of acquiring him. This is sometimes the only method of protecting him. It seems this avenue would be lost to us and, therefore, seriously affect our trade market. We have 300 franchises, many grouped in one city, for instance, in the city of Boston we have 52 Dunkin Donuts. If one franchise might sell a product that might endanger the health of his patrons it could affect the health of all the other 52 stores.

Senator HART. Very early in those first hearings I acknowledged if I had a trademark, I would want to be very sure that the fellow permitted to use it did not make me look like a five-headed monster.

Mr. ROSENBERG. Not only me, but it is the thousands of dollars and legitimate time and effort provided by many other franchisees who are in the same boat. They suffer because of the actions of one of their

peers.

Senator HART. Mr. Cohen?

Mr. COHEN. That is one reason why this bill does not follow the good faith approach. The good-faith approach says you cannot terminate unless there are some good reasons for it. There may be a lot of reasons you want to terminate to protect your good trademark. Of course, Senator Hart's bill, as drafted, has nothing in it that says you cannot terminate. You would not have to show he did not act in good faith or anything else. If you want to terminate, you terminate. We are just talking about whether or not if he has conferred benefits on you, you ought to compensate him for it.

Why do you not vertically integrate now?

Mr. ROSENBERG. Why do we not? Because the nature of our business requires a great deal of handcraftsmanship, long hours, manpower, it happens that conditions at this time and probably for a good number