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The FACT Act and its effect on franchising.

Franchisors and franchisees, like those engaged in other industries, now routinely employ technology solutions in many of their business practices. Franchisors often use methods such as electronic-fund transfers to collect payments. Franchisees use integrated point-of--sale systems and other electronic record-keeping methods to process sales and customer-related information. Some franchise systems even maintain a real-time integrated sales system, enabling parties such as the franchisor and multi-unit operators to monitor sales and other quantitative variables in the units operating under the system. Franchisors have found that their effective use of technology helps to distinguish them from their competition, and can help carve out small but significant advantages in a competitive marketplace.

Along with increased use of technology by franchisors for information exchange and system management, however, comes the danger that potentially-sensitive franchisee and customer-related information can fall into the wrong hands. Of course, the increasing problem of identity theft throughout the United States is made that much more acute by the electronic availability of financial information and the greater sophistication of individuals who misappropriate such information.

Amending the Fair Credit Act

As a measure to help prevent identity theft and to improve the procedures used to manage consumer credit information, the president recently signed into law the Fair and Accurate Credit Transactions Act of 2003. The FACT Act took effect on December 4, 2003 and is designed to make significant changes and additions to the federal Fair Credit Reporting Act. In general, the FACT Act amends the FCRA to provide, among other things, measures to protect and restore the credit history of identity theft victims, to increase the accuracy of consumer reports, to provide consumers with greater control over the use of theft' credit information, and to protect the use and disclosure of sensitive medical information's.

Several of the measures adopted by the FACT Act are relevant to franchisors and franchisees. For example, the FACT Act requires under its identity theft provisions that credit card and debit card numbers be truncated on printed receipts. There is a three-year phase-in effective date for cash registers or machines or other devices that electronically print receipts for credit- and debit-card transactions if this machine or device is in use before January 1, 2005. There is a one-year phase-in effective date for those machines or devices that are first put into use on or after that date. By "truncated," the FACT Act requires that any person who or company that accepts credit cards or debit cards for business transactions may not print more than the last five digits of the card number or the expiration date on any receipt provided to the cardholder at the point of the sale or transaction. Franchisors therefore must ensure that the cash registers and other credit-card processing machines used under their system comply with these provisions. A new act to amend federal lair credit reporting is designed to help prevent identity theft and improve consumer credit information management.

The FACT Act also has a similar provision dealing with the truncation of Social Security numbers collected and used by businesses.

Allowing Opt Out

The FACT Act also restricts the use of consumers' information among a company's affiliates and allows consumers to opt out of sharing their information for marketing purposes. For example, a franchisor that obtains certain information from a consumer would have to first ask the consumer before sharing such information with an affiliate that intends to solicit business (perhaps in another service or industry) from the consumer. Under the FACT Act, a consumer has the right to refuse such an exchange.

Another provision of the FACT Act potentially affecting franchisors and franchisees concerns the disposal of records. The Act provides that the Federal Trade Commission, among other entities, must promulgate regulations requiring any person who maintains or otherwise possesses consumer information, or any compilation of consumer information derived from consumer reports for a business purpose, to "properly dispose of any such information or compilation." The Act does not go further in describing what constitutes "proper disposal" and leaves it to the FTC to determine the proper methods.

State Regulation

Some states also have begun to regulate the use and dissemination of potentially sensitive information, such as Social Security numbers. California, for example, passed a law that among other things addresses the confidentiality of SSNs. Under this law, companies may not, among other things: post or publicly display SSNs, print SSNs on identification cards or badges, require people to transmit an SSN over the Internet unless the connection is secure or the number is encrypted, require people to log onto a website using an SSN without a password, or print SSNs on anything mailed to a consumer unless required by law or unless the document is a certain type of form or application. Arizona and Texas also recently passed similar laws, others may soon follow suit, and similar legislative proposals are being considered in the U.S. Congress.

The increasing use of technology by all businesses to process and transfer information has sparked the recent interest in federal regulation of privacy and consumer information. For instance, the customer identification program provisions of the USA Patriot Act laid the groundwork for language inserted into the FACT Act regarding identity theft. The FACT Act is merely the most recent federal legislation to address the increasingly complex field of protection of consumer information and privacy. One thing is for certain--it will not be the last.

Lee Plave and Michael Laidhold are lawyers in the Franchise and Distribution Law Practice Group of Piper Rudnick LLP in Washington, D.C. They can be reached at 703-773-4243 and 703-773-4247, respectively.
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Title Annotation:Legal/Legislative; Fair and Accurate Credit Transactions Act of 2003
Author:Plave, Lee; Laidhold, Michael
Publication:Franchising World
Geographic Code:1USA
Date:Jun 1, 2004
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