Q: A franchise-type network to which our agency belongs is requiring all its member agencies to sign a new, largely rewritten franchise agreement. One clause in the agreement strikes me as really odd; it requires the agency to "make the following disclosure on its website and in its terms and conditions prior to the booking: '...We want you to be aware that certain suppliers pay us or [the franchise-type company] commissions and other incentives for reaching sales targets or other goals, and may also provide incentives to our travel counselors. For more information, please visit (insert Web address for terms and conditions).' [Agency] will also require its travel counselors to expressly state to all individuals who are provided travel services by [Agency] that such individuals should review [Agency's] terms and conditions prior to booking." Is such an extraordinary statement about commissions and incentives legally necessary, and if not, why is it being required?
A: The statement about "commissions and incentives" is certainly not required by any statute or regulation. Nor has there ever been any court precedent requiring such disclosure.
Even in analogous industries that are much more heavily regulated, such as real estate brokerage, there is no such disclosure requirement. In some states, a real estate agent or broker must disclose the fact that he is a dual agent if he represents the seller as well as the buyer, but he is still not specifically required to tell the buyer upfront that he gets a commission from the seller, or vice versa.
Although the U.S. Department of Transportation (DOT) is now considering whether and how to require agencies to disclose the existence of incentive payments, the DOT has cited no particular rationale for considering such a rule. Given the complexity of the many issues in the larger consumer-protection rulemaking proceeding of which this issue is a tiny part, it is unlikely that the DOT will ever require such disclosure.
Even the pro-consumer author of the legal treatise covering the grounds for suing travel agencies, Judge Thomas A. Dickerson, does not suggest that agencies have such a duty of disclosure. He does state that agencies have a duty to disclose "material information in their possession," and he gives examples of the kinds of information he has in mind, but he nowhere mentions commissions or incentives as being "material information."
Finally, although the franchise disclosure prospectus mentions all the "material" lawsuits that have been brought against the organization, not a single one involves failure to disclose the existence of incentives.
So I am at a loss as to why your franchise-type organization is requiring such a statement. If I had to guess, I would say that an in-house lawyer decided to require the disclosure simply as a preventive measure, in order to deter frivolous claims that the franchisor-type company or an agency somehow defrauded the client by failing to disclose bias when offering travel services.
In that case, the required statements would be nothing more than a solution looking for a problem. They can create major impediments to a sale, such as when a client wants to know the specifics of your incentive programs.
Every commission and override agreement expressly prohibits agencies from disclosing its terms to third parties, including clients, and some agreements even prohibit disclosure of their existence.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at [email protected].