Making the World Safe for Franchising: Nieman v. Dryclean U.S.A.
In the past year, Florida has served as the battleground for determining what rules apply for U.S. franchisors seeking to expand overseas. Fortunately, domestic franchisors can breath a collective sigh of relief, thanks to the 11th Circuit Court’s decision in the case Nieman v. Dryclean U.S.A. Franchise Company, Inc., 178 F.3d 1126 (11th Cir. 1999), and the U.S. Supreme Court’s decision not to review it. This case removed the burden of U.S. franchisors having to comply with U.S. franchise disclosure laws in dealing with overseas franchisees.
The facts underlying the Nieman case are unremarkable. Nieman, an Argentine citizen, entered into negotiations with Dryclean U.S.A. Franchise Company to open drycleaning franchises in Argentina.1 Nieman and a group of Argentine businessmen wanted a master franchise agreement which would give them the right to sell and operate Dryclean USA franchises throughout Argentina. Nieman and Dryclean USA entered into a preliminary agreement pursuant to which Nieman paid Dryclean USA a nonrefundable $50,000 deposit in exchange for Dryclean USA’s agreement not to negotiate with others concerning the Argentine master franchise agreement for 60 days. Nieman signed it in Argentina and mailed it back to Dryclean USA in Florida, where a Dryclean USA representative signed it.2 Under the terms of the agreement, Nieman intended to use the 60-day period to secure financing. When Nieman ultimately failed to secure the necessary capital, Dryclean USA kept the $50,000 deposit. Dryclean USA never furnished Nieman with a franchise offering circular in accordance with the Federal Trade Commission’s Trade Regulation Rule: “Disclosure Requirements and Prohibitions Concerning Franchise and Business Opportunity Venturers.”3
Nieman sued Dryclean USA for the return of the $50,000 deposit.4 Nieman argued that Dry Clean USA violated the Florida Deceptive and Unfair Trade Practices Act (DUTPA) by failing to comply with the FTC rule. A violation of the FTC rule is an automatic violation of DUTPA.5 Dryclean USA defended on the ground that the FTC rule does not apply to foreign transactions since DUTPA and the FTC rule have no extraterritorial application. Both parties moved for summary judgment.
The U.S. District Court for the Southern District of Florida granted summary judgment in favor of Nieman.6 The court held that DUTPA and the FTC rule applied to the transaction because “Congress has the power to prevent unfair trade practices in foreign commerce by citizens of the United States, although some acts are done outside the territorial limits of the United States.”7 Dryclean USA was ordered to refund the $50,000 deposit to Nieman. Dryclean USA appealed to the 11th Circuit.
The 11th Circuit reversed, holding that the FTC Act does not apply extraterritorially. The U.S. Supreme Court denied certiorari on January 18, 2000.
The 11th Circuit based its decision on two primary factors. First, the court looked to a long-standing principle of statutory construction that legislation of Congress, unless a contrary intent is clearly expressed, applies only within the territorial jurisdiction of the United States.8 This presumption is based on the assumption that Congress is primarily concerned with domestic conditions. The court concluded that Congress did not express a clear intent that the FTC rule applies extraterritorially.9
Second, the court concluded that even if Congress intended the unfair trade provisions of the FTC Act to give the FTC the authority to apply regulations extraterritorially, the court found the evidence indicated that the FTC had not exercised such authority and that the FTC “did not intend the Franchise Rule to apply to a U.S. franchisor in its dealings with foreign franchisees with respect to franchises to be located in a foreign country.”10 The court reached this conclusion because the FTC rule has a purely domestic focus and was passed in response to a history of problems regarding unfair franchising practices in the United States. The court noted also that the FTC rule is silent regarding the history or problems of franchising in other countries and foreign laws. In addition, the court considered the FTC’s announcement in an advance notice of proposed rulemaking that it would modify the FTC rule to clarify that it does not apply to the sale of franchises outside the United States.11 The court took this to be evidence that the FTC rule was not intended to apply extraterritorially.
The 11th Circuit’s decision is significant for a number of reasons. First, the decision clears up uncertainty regarding whether the FTC rule applies to international franchise transactions. Over the years, there has been vigorous debate concerning this question.12 If it is clarified that the FTC rule does not apply to international franchise transactions, U.S. franchisors will be better able to order and structure their relationships with foreign franchisees.
Second, the decision will level the playing field for U.S. franchisors trying to compete with foreign franchisors in foreign countries. U.S. franchisors who must comply with the FTC disclosure requirements as well as the local requirements of a foreign country are at a competitive disadvantage in relation to foreign franchisors.13 One commentator has stated,
As we enter into an era of increased globalization, export of U.S. franchising programs has become an important contributor to our economy. U.S. franchisors not only need to have a level playing field to sell franchises in the U.S., they must not be competitively disadvantaged vis-a-vis their foreign competitors by being forced to comply with costly U.S. disclosure requirements when engaged in an international transaction. Ideally, application of all U.S. franchise laws should be limited to franchise operations conducted in the U.S.14
This is especially true in light of the fact that many of the disclosures required by the FTC Act would be irrelevant to foreign franchise transactions.15 The FTC rule’s disclosures were designed for the typical domestic franchise transaction. Moreover, foreign franchise transactions usually involve more sophisticated, established business groups able to negotiate on an equal level with U.S. franchisors.16 In addition, economic conditions and market forces may be quite different from the United States in any given foreign country. “Indeed, application of the rule to foreign franchise transactions would result in the U.S. franchisor, the party lacking experience in the foreign country, making disclosures to the more knowledgeable foreign subfranchisee.”17
establishing that the FTC rule does not apply in international franchise transactions, the 11th Circuit helped to clear up confusion and removed an impediment to a U.S. franchisor’s ability to compete with foreign franchisors. This undoubtedly will aid in the continued expansion of U.S. franchisors into the global market. However, some questions remain unanswered.
Nieman involved a U.S. franchisor selling a franchise to a foreign citizen and nonresident of the United States with the franchise to be operated in a foreign country, a pure outbound transaction.18 To what extent will the FTC rule apply to mixed transactions? What if a U.S. franchisor sells a franchise to be operated in a foreign country to a U.S. citizen or a foreign citizen who resides in the United States? What happens when a U.S. franchisor is involved in a pure outbound transaction with substantial events during the negotiations and sale occurring in the United States? In Nieman, many of Dryclean USA’s dealings with Nieman took place in Florida, and the option contract was initially negotiated during several meetings in Coral Gables, Florida, between the parties. The court, however, disregarded these facts and, instead, found the primary focus of the partners was Argentinean. The Nieman court noted that the agreement was signed by Nieman in Argentina, and that he then mailed it to Dryclean USA in Florida where a Dryclean USA representative signed it.19 The FTC has pronounced that the FTC Rule should apply unless the franchise is to be located in the United States. It ignored the citizenry of the parties or the locus of negotiations.
The key may be the extent to which the international activity affects domestic competition. Neiman unsuccessfully raised this issue citing the FTC’s enforcement action in the correspondence school context in Branch v. Federal Trade Commission, 141 F.2d 31 (7th Cir. 1944). Branch ran a Chicago correspondence school that distributed courses of study by mail in Latin American countries. Branch falsely advertised in those Latin American countries that his “university” was fully accredited and was the only officially recognized university under U.S. law for extension courses by correspondence. The FTC sued for an injunction against the false and deceptive advertising. The court ordered Branch to stop making these false representations, but the basis for the court’s order was to protect Branch’s domestic competitors; not to protect foreign consumers. The court stated:
The action of the Federal Trade Commission was aimed at compelling the petitioner to use fair methods in competing with his fellow countrymen. It was an attempt to eliminate the unfair, fraudulent, and deceptive practices of the petitioner from a field already occupied by several firms and potentially open to more.. . . That the persons deceived were all in Latin America is of no consequence. It is the location of the petitioner’s competitors which counts. The Federal Trade Commission does not assume to protect the petitioner’s customers in Latin America. It seeks to protect the petitioner’s competitors [in the United States] from his unfair practices.. . .20
The Nieman court seized on this language in Branch in extraterritorial application of the FTC rule. There was no evidence that Dryclean USA’s nondisclosure affected domestic competition in any way.21 Perhaps a claim by a franchisor against another for alleged unfair and deceptive trade practices in international franchise sales would bring a different result.
Critically, neither the Nieman court nor the FTC take the position that the FTC does not have jurisdiction over international franchise sales at all. The FTC recently reiterated its jurisdiction over fraudulent, unfair, or deceptive franchise sales abroad,22 even if U.S. franchisors don’t have to comply with the FTC rule itself. Therefore, U.S. franchisors cannot operate with impunity internationally free from FTC law enforcement. Furthermore, overseas franchisees may still be able to assert claims under state deceptive and unfair trade practices acts (like Nieman did with DUTPA) for fraudulent franchise sales activity. They simply will not have an alleged FTC rule violation as part of their arsenal.
In conclusion, the Nieman case has great significance for U.S. franchisors and paves the way for the continued growth of international franchising. U.S. franchisors will no longer have to struggle with the potential disclosure conflicts between U.S. law and that of the host country. Nonetheless, the FTC will still be watching.
1 See Nieman, 178 F.3d at 1128.
2 Id.
3 See 16 C.F.R. § 436.1 et seq. (1996).
4 See Nieman v. Dryclean U.S.A. Franchise Co., Inc., Bus. Fran. Guide (CCH) & 11,166 (S.D. Fla. 1997).
5 Fla. Stat. §501.204.
6 See Nieman, 178 F.3d at 1128.
7 Id.
8 See id. at 1129, citing EEOC v. Arabian American Oil Co., 499 U.S. 244, 248 (1991) (quoting Foley Bros. Inc. v. Filardo, 336 U.S. 281, 285 (1949)).
9 See Nieman, 178 F.3d at 1130.
10 See id. at 1131.
11 See id. at 1131; The FTC subsequently issued its notice of proposed rulemaking on October 22, 1999. 64 Fed. Reg. 204 (Oct. 22, 1999). The proposed rules explicitly limit the scope of the FTC rule to the sale of franchises to be located in the United States.
12 See John R.F. Baer et al., Application of U.S. Franchise Laws to International Franchise Sales, 15 Franchise L.J. 1 (Fall 1995).
13 Currently, 13 other countries require disclosure in the context of the sale of franchises: Australia, Brazil, Canada (province of Alberta only), China, France, Indonesia, Italy, Japan, Malaysia, Mexico, South Africa, and Spain. See Disclosure Requirements in International Transactions (CCH) 1998. See John R.F. Baer et al., Application of U.S. Franchise Laws to International Franchise Sales, 15 Franchise L.J. 107, 114 (Spring 1996). See also Terry W. Schackmann & Clayton L. Barker, The FTC Act and the Franchise Disclosure Rule in Nieman v. Dryclean U.S.A. Franchise Company, 18 Franchise L.J. 108, 113 (Winter 1998).
14 Baer, supra note 12, at 118.
15 See Schackmann, supra note 13, at 113.
16 See id.
17 Id.
18 See Baer, supra note 12, at 61.
19 See Nieman, 178 F.3d at 1128.
20 See Branch, 141 F.2d at 34–35.
21 See Nieman, 178 F.3d at 1130.
22 See Note 11, at p. 19.
David A. Beyer and Andrew L. McIntosh are partners in the Tampa office of Piper Marbury Rudnick & Wolfe LLP. The firm represented the International Franchise Association as amicus curiae in the case.
This column is submitted on behalf of the Business Law Section, Hal K. Litchford, chair, and Steven Fender, editor.
