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Discussion of legislation and political advocacy regarding franchising.
Forbes warns that lack of legal recourse for franchisees and shameful neglect of FTC who investigates only 6% of the complaints that they get doesn't bode well for franchisees who can't defeat contract terms, etc...
The regulatory scheme is demonstrated by the fact that the Rule only provides that violations of the Rule can incur federal sanctions but provides no private right of action for violation of the rule.
Apparently, the failure rate or the success rate of the franchise being offered for sale is of no interest to the FTC or the SBA or the State Regulators as long as the franchisors are in compliance with disclosure under the provisions of the Rule and the state UFOC's.
The courts, therefore, are only charged with interpreting the contract terms and not involved in determining whether or not the contract was falsely induced, etc.. or whether or not the franchise is a dud.
You ask a very good question.
I read on Hugh MacLeod's gapingvoid today about a very well-known blogger Kathy Sierra who canceled all her public exposure because of death threats and intimidation.
I'd hate to see this happen within the Blue Maumau community but see no logical barriers to it.
Les Stewart, MBAIndustry Investment AnalystFranchiseFool.com :: the Wise learn to say No
I'm not sure the Lead to this article concerning the Rule in the Chicago Tribune really tells the truth. I'm almost sure that the new Rule doesn't require the franchisors to better explain the risks and rewards. What does Blue Mau Mau think?
I don't think the Rule does that much for franchisees at all but it is all in your point of view.
While those in franchising and those who surround franchising know that the Rule and the UFOC's are just part of the sales process in franchising, the public and prospective franchisees really believes that government is trying to help them to make an educated purchase of a franchise by requiring the franchisors to disclose all pertinent information that will help them access the risk and the rewards of buying the franchise.
Apparently, this is not true and the government knows that this is not true and I think they should do a better job of explaining to franchisees that the Disclosure Process is just a part of the sales process and that the UFOC does not reveal all of the risks involved ----to include the failure rate of the business plan they are selling to the public.
This was a carefully devised article for the purpose of both pushing franchising and warning of the risks. The Illionois Attorney General appears to be trying to help franchisees by exposing "churning" and this is certainly a step in the right direction.
Churning is possible, of course, out of view of the public and the government because the failure rate of the business plan can be hidden in Item 20 of the UFOC.
Maybe other states will follow the lead of the Illinois Attorney General and "churning" will not be obscured from the view of prospective franchisees.
I still believe that the invasion of the privacy of selected franchisees to act as references is a poor replacement for statistics regarding the failure rate of the franchised business plan.
Government should regulate franchised business plans at least as closely as securities are regulated.
Just wanted to let everyone know all's well in TinkerLand and peace has once again returned to the kingdom.
But seriously, although such tactics are something to be taken seriously, I don't believe there's any call for alarm. However, I do want to thank those that voiced concern. I stopped posting yesterday to allow myself a cooling off period as well as out of respect for our host here at Blue MauMau. You all can probably guess that I'll continue to voice my opinion like everyone else, however I hope we can all try to be more considerate of our host's hospitality.
I know first hand that MD, CA and IL regulators will ask for clarification of UFOC submissions and require changes in order to offer franchises in their states. What do you know Z-Rube?
The Private Justice in Arbitration is open to corruption when the Arbitrators have more power than a judge and their decisions are NOT reviewed by the courts. This, as demonstrated in your case, denies the justice citizens are promised in the Constitution. Arbitration goes on out of view of the public and this in itself is not what the framers of the Constitution and our Bill of Rights had in mind.
Your case is a good example of the legal trap that has been set for franchisees who are tricked into buying really bad franchise investments and whose recourse is removed even when there is a Rescission from Hell negotiated by the state.
I congratulate you and your attorney for trying to expose this to the public and to help other franchisees.
I hope Richard Solomon is wrong and that the 6th Court of Appeals will use their discretion to hear this case and take a good look at what happened. I will call my legislators on Monday and every franchise association should call and write the Committee ---but will they?
JD wrote: So, the SEC doesn't read the company's filings prior to them being publicized either, just like the FTC doesn't read a UFOC
JD wrote: So, the SEC doesn't read the company's filings prior to them being publicized either, just like the FTC doesn't read a UFOC
Based on my limited experience with IPOs a few years back, the SEC not only went over the red herring with a fine-toothed comb, but (while the SEC didn't publicly admit this) where the offering was of dubious value, the SEC would just keep delaying and making the issuer jump thru hoops. So while it is true that as a legal matter the SEC did not pass on the merits of the offering, as a practical matter it was much easier to get a legit company thru the registration process than if you were pitching some scam.
I'm not suggesting that regulators should do the same with UFOCs, but it would be interesting to know which states (if any) give a harder time to franchises of questionable merit.
bankrupt makes one a bad credit. But don't feel sorry for that SBA Loans offers programs for you to cope up and somehow get out from it.
Your statement below is not true! There are franchisors that own and operate units. You need to stop lying Item 20 Ranter.
"the franchisor has no ownership in the physical units that wear the brand name,"
The Truth Shall Set You Free!
You are on a jihad against franchising. You have no objectivity whatsoever. What is your problem?
Quizno's is a poor economic model for franchise investment and I would recommed folks avoid it. However you damn all all of franchising with your rhetoric and will not admit that franchisees often fail because they are poor businesspeople and operators. You cannot even bring yourself to say that franchisees cheat franchisors by under reporting royalties, are not compliant with their obligations and are a detriment and risk to their fellow franchisees.
Regarding dealing one on one with franchisees what is wrong with it? The relationship is franchisee to franchisor.
You flatter me and yourself and Blue Mau Mau that we would have any success in bringing down the $l trillion franchise industy, or bringing about any change to the status quo. Do you really believe franchisees could have more votes and more influence with the regulators?
Or, are you suggesting that they could have more influence if they were organized as one body when they approached the Congress and the State Regulators? But, you know that this will never happen because of the nature of franchising that tends to divide franchisees within the networks into different interest groups with different financial prospectives and interests. It is the selfish nature of the human being -- if he is doing well, not to pay fees to protect others who are not doing well and who are victime. It is all about money and, of course, the AFFD can't get $100.00 a year from franchisees across the entire landscape of franchising and the franchisors have the influence and the ear of the regulators because of the money they spend to lobby government.
We know that it takes money to lobby our elected officials and that money talks. We see that there is a revolving door between the Regulators and the Congress and the Corporations that has become a way of life and there are not many franchisees at the "cocktail party" budget meetings in Washington.
I personally don't think there is that much difference between the two political parties where big business is concerned but, of course, the Democrats represent themselves as the party of the people and most of the "People's" legislation has been passed by the Democrats.
I realize that my postings and yours will do little to change the status quo but I think we have to try. There is always the possibility that big media would get interested and pick up a story if they thought it was "product" that would profit them or if their corporate owners were altruistic and thought it would be good for the American people to know the truth about franchising.
You suggest that I write to my Congressmen and Senators, etc.. and that I try to get others to do so. If you people in the Associations can't bring about change, you know that a few letters to Congress from interested citizens are not going to be enough because these letters cannot counter the lobbying influence of big money and big money runs our govenment, to the detriment of middle class Americans who have lost their voice with government.
Individual letters to your representatives that request help with individual problems often receive attention but letters that involve systemic abuses by government are often ignored, in spite of the FOIA. I have been down this road and even tested the integrity of The President's Integrity Committee that got low marks from my point of view.
I have indicated two or three times that I post on Blue Mau Mau to warn new prospects of churning organizations like UPS and Quiznos. I feel I have standing to post my truth because of our painful experience with The UPS Store. Also, hopefully, my comments will be noticed by government who knows the truth or the fallacy of my arguments and will do nothing because they know that sooner or later, I will fade away. Government doesn't like to be criticized and I'm sure they watch the Internet where free speech is abundant and not yet fettered by corporate interests.
Thanks for the comment and for not disputing the truth of my comments.
It would be nice if American Media did some exposing of "churning" and the lives that are ruined by those networks who use the capital and labor of franchisees to over seed their networks.
Churning is not exposed because franchisors don't have to disclose statistics about the failure or success of the first owners to new buyers of their franchises.
Hopefully, Australian legislation will be better than it is here in the States and maybe franchisors will be required to disclose past performance history of the franchises they sell to the public.
I'm sure you read where the Chairman of the AAFD said ten years ago that American Regulation was really about protecting the franchisors from charges of fraudulent inducement and not really about protecting the American franchisee consumers from risk. The franchisors know the failure/success rate of their first owners and should be required to disclose this material information under law but under American regulation, this information can be obscured.
It is good that Australian Media has picked up on these stories and is putting pressure on your government, and maybe Australia will be among the first to require disclosure of success or failure rates of the franchises under law.
I am not against franchising if the true and known-statistical risk, as demonstrated by the success or failure of the investment for ex-franchisees, is disclosed by the franchisor to new buyers of rhe franchise.
What was wrong with my post. I was simply trying to explain how due diligence is a big part of my life. What was wrong?
Aren't those who read the UFOC and turn down bad systems supposed to go forth and multiply?
Michael Webster PhD LLBFranchise News
There are not multiple truths! There is only the truth. What you post are your unsubstaniated opinions based on your faulty assumptions and limited experience as a failed UPS Store franchisee.
Your quote below is specious and lacks basis.
"But, we, perhaps, introduced an exploitive and immoral business practice that can be improved upon. It is obvious that under our regulatory policy, our government has assisted the franchisors in their abuses because they have not required the franchisors to disclose past performance statistics on the franchises that are sold to the public. Our government has assisted the franchisors in obscuring the risk of the investment and the government UFOC is not an efficient disclosure document but rather a red herring that obscures the risk and protects the franchisors 100% from any charges of fraudulent inducement to contract once the franchisee puts his/her signature to the contract."
"It is tiring to have you ask, answer and conclude in all of your posts what you believe to be evil about franchising especially since you've stated you have no direct experience in franchising or on other occasions you have led people to believe you failed at owning UPS Store. Which is it?
Your theories on franchisng are bankrupt and specious.
The following is the quote by Elizabeth C. Spencer, Assistant Professor of Law, Bond University Faculty of Law, Gold Coast QLD 4229, Australia, 7 September 2006, page 10:
"It is interesting to note the point of view of the American Association of Franchisees and Dealers(AAFD); its chairman has alleged that disclosure was originally intended to protect the industry and not the consumer. His claim is that mandated disclosure was negotiated by franchisors to avoid accusations of fraud, and that the Federal Trade Commission agreed to allow franchisors to povide a disclosure statement to distance themselves from their oral representations. 20"
Foolish, still unsubstantiated, unfounded and specious drivel posted again by the Item 20 Ranter.
The Truth shall set you free!!!
P.S. What about your five franchise picks worthy of consideration by franchise buyers?
You saved me from investing in a franchise. Now that I know that the true risks are not being disclosed I will keep my job instead of starting a franchise. I could hardly stand to read some of your messages about all the frnachise compannies out there that churn poor misbegotten unvestors.
You are doing God's work and I will pray for you.
God Bless you kind sir!
You seem to have found the smoking gun and maybe you should contact the FTC to point these very important findings out!
What are your thoughts on how to balance damaging the brand further, impacting the existing franchisees, as against providing adequate due diligence for prospective franchisees?
How do you know when you overstepped that balance?
BMM discussions will promote more franchising and I believe that BMM exists because of the increasing popularity of franchising.
Prospective franchisees are not going to abandon their pursuits of a franchised businesses because they read posts by Carman the Item 20 Ranter. In fact they may be encouraged to pursue it with more vigor and just maybe perform sufficient due diligence in the process.
Oh and thankfully BMM is a forum for franchisors as well as franchisees and those aligned to franchising.
Thanks for all the encouragement.--
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
both spouses or throw out the UFOC.
Les Stewart MBA
The FTC does not prohibit false and misleading acts or practices in commerce. The FTC Act prohibits false and misleading acts or practices in commerce. I have a whole docket full of enforcement suggestions if the FTC ever decides that it wants to enforce the FTC Act.
If the FTC did bring enforcement against what the FTC Act prohibits, we wouldn't even need to be here talking about this.
Back when the FTC was an activist agency - in the 1960s, fleecing the ignorant was fraught with enforcement risks for the wrongdoers. I doubt we shall ever see those days again.
What that leave us is that we must protect ourselves. Since there are resources to enable us to do that, the FTC seems to me to be little more than a vestigial remnant of some long passed era. Wallowing in policy and promulgating revised rules that were not enforced anyway do no one any good. We would be better served to revoke the FTC Act and just leave people to fend for themselves - as that is exactly where people are anyway. --
I know many former zee's that are in desperation. The truth they feel like they got scammed. Because the government is allowing this to happen they have no hope. Life goes on allowing the bad zors to lie to the zee's. At first they are on a high about opening and having their own business. (Which is another lie!!) All the zor's have to say it is your fault you didn't do you due diligence. It doesn't matter the bad zor gave them a pack a lies. It is always the zee's fault. Right????
I think that if any intelligent folks come in here they will be somewhat put off by people who claimed in their applications to buy a franchise that they were people of education and business experience, made poor choices because they did things (like due diligence) that they hadn't the slightest idea how to do, committed investment suicide - - AND NOW --- whine and cry because they now claim they are in truth just a bunch of morons of whom evil businesspeople take unfair advantage.
When folks come in here, I think they have the notion that if you sign contracts you intend to be bound by the terms of the contracts. Hey - that's what they teach in business admin 101. But the folks whining their iddy biddy hearts out in here claim that it's unfair (whatever that means) for anyone to assume that they do intend to be bound to agreements they sign.
I suppose it is really rude of me to suggest that we get on with discussing things that are real, so that visitors to this site can get something of value by having meaningful discussions with people here who know what they are talking about and are willing to point folks in positive and helpful directions.
Why don't Richard/Debby come back when their little tempest is done and tell us how well/badly they did. In the interim, it would be nice to hear a lot less whining from people who sign anything with no clue about what they are doing, and people who sign contracts with covenants not to compete in them and then whine about the contract clauses being insisted upon by the opposite parties to the agreement. Get a lawyer - take your case to a court or arbitrator - then come back and tell us the result. We really don't need the songs and dances.
SAVE THE DRAMA FO YO MAMA!
Your rhetoric is bankrupt, unimaginative and pointless.
The advent of the new FTC Rule is for all practical purposes a non-event. Due diligence and carefull consideration are still de rigeur.
Thanks, Dale, for providing me with that wonderful quote from the Onion Article: You are so kind to make my point for me. I quote:
"the consumer vigilance foregone owing to the false sense of security the promise of government protection induces."
Why is it that the Minister of Industry of the United Kingdom realizes this and the UK does not regulate franchising, and the USA does.
It must be that this was a deliberate subsidy of the franchise industrial complex that was disguised as government protection of prospective buyers of franchises.
This special treatment, THE PATRIOT EXPRESS LOAN, of course, presents an even stronger appearance of government protection to Veterans and their families who will become victims of the failure to reveal the true and real failure rate of the business opportunity being sold to them, by either the government regulators or the franchisors.
UGLY PUBLIC POLICY! To put those at risk and to sacrifice those who have already sacrificed so much for the policies of their country. A leg or an arm isn't enough, now they should put their houses at risk as colateral to get these SBA Loans that are available on vehicles for fraud that are registered on the SBA Registry.
How can you defend the indefensible?
When I was a little kid, some free enterprise criminal talked me into eating Merita Bread because, so he said, The Lone Ranger ate it.
By the time I was 30, I could figure out that the Lone ranger ate fried chicken, drank beer and chased women.
I don't understand where you are coming from, Frankman! If government is pretending to regulate, then they should regulate fairly in both the interests of the franchisors and the franchisees.
Instead the UFOC is a license to steal for many franchisors who hide their failure rate from the public.
Isn't your comment just a red herring ----? Stick to the issues.
Thank you, Paul Steinberg, for this excellent article covering the history of franchise regulation. As always, you use this site to educate the readers and your intelligence and insight are evident and appreciated.
Hopefully, the Congress may again address the matter of effective regulation of franchising and this time, perhaps the franchisees will see some success.
The law has historically used a Rational Actor model for human behavior.
Man is largely seen as:
In franchising investment decisions, all 3 of these assumptions are incorrect. Should we expect the law, which is based on fictional & faulty assumptions, serve the franchise investor well, in the real world?
Cross-Discipline InsightsBehavioral finance, neuroeconomics, economics & law and other fields are increasing showing how overly simplistic the Rational Actor model has become.
For example, 80% of drivers consistently rate themselves above average in their driving skills. Logically, this is an impossibility as only 50% could ever be above the mean. This is an example of overoptimism bias, a widely understood human characteristic that has been largely ignored in franchise investment decision making.
Imperfect Decision-makersHumans process information in a non-logical way. Disclosing more of the same type of information will not work. It hasn't worked, substantially, in the last 40 years.
A new type of law is neededI suggest the law should simply support better information sharing [protection of free speech, libel shields, reputation systems, tombstone registration, tying database searches & independent legal advice to SBA loans & VetFran, etc.) to determine the likelihood of a reasonable return on a franchisee's investment.
Public law should be passed to authorize private law [industry sanctioned].
It is the imbalance of information that is the source of most opportunistic behavior in the first place. Let the investor have the complete picture before they sign up.
Who could argue with that?
Hell, if they could read, they could get real jobs.
Hell the first page of every UFOC states
"TO PROTECT YOU, WE'VE REQUIRED YOUR FRANCHISOR TO GIVE YOU THIS INFORMATION.
WE HAVEN'T CHECKED IT, AND DON'T KNOW IF IT'S CORRECT.
While I agree that the FTC should do more to protect prospective franchisees, they
simply do not. I wrote the FTC a letter about concerns with the UPS franchisee ammendment offered in March 2003 with a deadline of March 21, 2003. Four years later they have not even acknowledged my letter.
I do think a company that franchises should be held accountable for willfully
giving incomplete or misleading information especially with the propensity of the franchisors asking the victims to take a leap of faith.
Paul Steinberg's comments, above, indicate clearly that there is NO TRUTH IN ADVERTISING required from franchises because they can lie, and hype, and puff and fluff, to their heart's content and all of the lies and hype can be disclaimed in the government disclosure document and the contract the franchisee is brought to sign because he thinks there is some government oversight of franchising and that the contract can't be negotiated.
The franchisors know this and this emboldens them. The FTC controls the advertising on the Internet and they have declared open season, with the changes to the rule, on the public who will be induced into purchasing bad investmernt vehicles directly from the inducers out on the Internet. Franchisors are the only business men/women in the country who are not held accountable to Truth in Advertising Laws and who can misrepresent and mislead as much as they want to as long as they get the signature of the innocent franchisee on the binding contract.
The FTC has a lot of nerve to call a franchise an investment and to pretend that they are regulating the investment in the interests of the franchisees. The UFOC or FDD is really just a malicious legal trap that leads innocents into bad relationships with predator franchisors, and that provides cheap labor and cheap venture capital for franchisors to try and prove their concepts -- over and over again.
The government ought to do their "due diligence" investigations on the franchisors and clean up franchising in the interests of representative democracy and the American Public and American business.
Government understands that the naive franchisee depends upon the integrity of their government and relies on their government to protect them.
I think Paul Steinberg is wrong! The inexperienced potential franchisee doesn't understand the implications of the "no reliance" clauses and relies on the visibility of the franchise in the FDD and the community, and the knowledge that all of these "standing" brand units have signed the same franchise agreement.
The FDD is, in my opinion, just a red herring that permits the "risk factor" of failed and successful first-owners to be ignored and not disclosed. Item 19 and 20 were a DEAL made with the IFA by the FTC.
What is the purpose of the FDD if not to protect the potential franchisee from purchasing as pig in a poke? Obviously, the purpose of the FDD is to permit franchisors to sell franchises at any rate of failure of first-owners to the unsuspecting public to reduce THEIR RISK and to maximise THEIR profits by growing chains rapidly with the resources of franchisees instead of the resources of corporate.
I was afraid you might be a Republican, but I understand now that I have no worries with that possibility. Not that I would have wanted you to leave the party, its a big tent, but I would simply have had a hard time reconciling it in my mind. Although I do suggest you join the Democrats.
If I might draw your attention to Elizabeth Spencer's 2006 article (posted on Blue MauMau Latest Weblinks) called The Efficacy of Disclosure in the Regulation of the Franchise Sector in Australia.
Professor Spencer seems to be hinting that disclosure laws are irrelevant because of the nature of franchising itself. I seem to remember the AFA saying something exactly the same.
Getting better disclosure laws is as effective as administering better medicine to a dead person. Nice process: outcomes?...the same.
Everyone wants Rain but no ThunderOnly the most deeply cynical industry observer would suggest that a disclosure fixation enables and, indeed, positively supports the current dominant stakeholders.
Change only happens when power is ripped out of someone else's hands.
Paul, I disagree with your conclusion that "this odd fixation that people have on the Franchise Rule as the be-all-end-all is too narrow a view."
More importantly, I am willing to make a wager on the matter: in the next seven years, we will see more franchisee friendly decisions in Ontario - decisions that for procedural reasons would not be arrived at in the US.
Ontario has, what I call, a superplus FTC Rule - a private cause of action, an enumerated list of mandatory disclosures, and a basket clause requiring the disclosure of all material facts.
In my opinion, this is the minimum regulatory regieme that is needed to prevent franchise fraud. And if I am right, then you can indeed "Blame it on Canada".
Michael Webster PhD LLB
Misleading Advertising Law
More I learn the more I get angry. The zor and lawyers benefit. And the zee dies financially. The only hope is the zees will fight and stand up. In the mean time the zee is forced to go back to a job. After all those years of building themselves up financially only to be robbed of bad zors. Then work a meanial job. All I hear is the UFOC and dd. The only protection is not to sign.
Your tribute to Vonnegut tells us a little bit about you, Les.
In all honesty, I have not always understood his humor or appreciated his point of view but he had his moments. I do tend to agree with him that the mainstream press at times "are nonsense". We've seen that in franchising in which the press favors the establishment - franchisor advertisers - at the expense of the real story.
Vonnegut reached his height during the 60s and 70s. Students loved his strong counterculture, anti-war viewpoint. I wasn't a hippie. I was one of those short-haired types who was not quite as cynical about the world and the government - but I'm catching up.
Anyhow, here's an article on how he loved giving it to the "man" in AlterNet. The NY Times ends with a requiem he wrote (below) from his last book, A Man Without A Country. Fitting.
When the last living thinghas died on account of us,how poetical it would beif Earth could say,in a voice floating upperhapsfrom the floorof the Grand Canyon,
“It is done.”
People did not like it here.
“It is done.”
People did not like it here.
I recommend the Penn State Law Review, Beguiling Heresy, Regulating the Franchise Relationship, by Paul Steinberg as well as the essays of Richard Solomon of Franchise Remedies, as well as Michael Websters WebSite, for study of the franchise relationship on a more grownup level.
FranData has a new tool that they indicate will help both the franchisor and the franchisee. Finally, they are going to provide some real help for prospective franchisees, I think.
Now that the UFOC is going to be named the FDD, maybe this means that franchisors are going to be pushed into disclosing past and present performance statistics in terms of the individual units who compose their networks and "franchise disclosure" won't be an oxymoron.
I'm not sure whether or not the Unit Performance Data will be a voluntary action of the Franchisor but those who would not agree to provide the information for the Unit Performance Data to Fran Data would then stick out like sore thunbs.
Why don't the experts on Blue Mau Mau get out here and talk about this?
Carman (Item 20 Ranter) you were a single unit UPS Store failed franchisee having little or no valuable insight into franchising other than your own sad circumstance and to suggest that the ABA Forum on Franchising is all about perpetuating your wild franchsing conspiracy theory is absurd.
You may have a new name but you are same old Item 20 Ranter with the same old tired and pathetic rhetoric.
Having a franchise registered with the SBA merely means that the SBA has a centralized review process for expedited loan processing for that particular franchise system. Attaching a sinister motive to this is misleading. The SBA neither approves the viability of the franchise system nor does registration provide any real legitimacy to the franchise system. All it does is enable the loan to be processed faster.
The SBA likely has little interaction with regulatory policy for franchising. If you were unable to vet the franchise system, the SBA is not there to do it for you. They fulfill a purpose, nothing more, nothing less.
But Les tell me what concepts do you think are strong franchise investments?
and the economy.
It is an abomination that so many people have become wealthy from their franchise investments and created so many jobs for others.
You even go so far as to malign attorneys that are fimly on the side of franchisee advocacy. Dady and Garner and Mr. Purvin are well respected attorneys that represent their clients without reservation or qualification. And while I disagree with them often I do respect them.
i don't think it is fair of you to punish Do with all those pesky little realities.
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