INFORMAL STAFF ADVISORY OPINION 96-3
This staff advisory opinion is issued in response to your request dated June 10, 1996, for our views concerning the applicability of the Federal Trade Commission's Franchise Rule to your client's business arrangement.
According to your letter, Stewart's Restaurants is developing a mobile food trailer which will carry the "Stewart's" mark. The trailer will be fitted with special soft drink dispensing equipment built to Stewart's specifications. Stewart's intends to offer its mobile food trailers for sale. Financing for a trailer can be obtained either through Stewart's or a third party, at the purchaser's option.
Purchasers of a trailer will also enter into an agreement that restricts food sales. According to the agreement, purchasers can sell only food products approved by Stewart's, which can be purchased from any approved supplier. Purchasers will also be required to purchase the base for soft drinks from Stewart's. You note that the soft drink base will be sold at normal wholesale prices. You further state that there would be no royalty or initial or subsequent franchise fee.
According to your letter, purchasers would also have the right at any time to "de-identify" the trailer by removing all references to Stewart's from the trailer and soft drink dispensing equipment. In some circumstances, Stewart's would buy back the soda dispensing equipment at its fair market value. Similarly, if the purchaser no long wanted the trailer, Stewart's would consider repurchasing the trailer at its fair market value.
You now ask whether the sale of the trailer and the accompanying agreement constitutes the sale of a franchise under the Commission's Franchise Rule.
You should know that, as a matter of policy, the Commission's Franchise Rule enforcement staff will not issue any staff opinion on the ultimate issue whether, under a specific set of facts, a business relationship is covered by the Franchise Rule. We will, however, provide general guidance on the Franchise Rule that you may wish to consider in determining whether your business arrangement constitutes a franchise.
II. DEFINITION OF THE TERM "FRANCHISE"
We begin our analysis by noting that the term "franchise" refers to a continuing commercial relationship. According to your client's proposed agreement, purchasers of a trailer are required to purchase the base for the soft drinks from Stewart's. Under these facts, it appears that Stewart's and the trailer purchasers will have a continuing commercial relationship.
To be covered by the Franchise Rule, a business arrangement must also satisfy the three definitional elements of a "franchise"(1) set forth in the Rule: (1) the distribution of goods or services associated with the franchisor's trademark or trade name; (2) significant control of, or significant assistance to, the franchisee; and (3) a required payment of at least $500 within 6 months of signing of an agreement. 16 C.F.R. § 436.2(a)(1)(i). We address each of these elements below.
1. Distribution of Goods or Services Associated with the Franchisor's Trademark or Trade Name
The first definitional element is clearly satisfied. As noted above, the trailers and soda dispensing equipment will carry Stewart's mark. The fact that purchasers have the option to "de-identify" with Stewart's at some future point does not negate the fact that the purchasers acquire the right to associate with the Stewart's name.
2. Significant Control
As described in your letter, Stewart's appears to satisfy the second definition element by exercising control over how the purchasers of the trailer may operate their business. For instance, Stewart's apparently requires purchasers to buy the trailer from Stewart's. In addition, Stewart's requires that food be purchased from an approved supplier or meet Stewart's quality standards. in addition, purchasers must buy their soft drink base from Stewart's. These types of controls over the investor's business operation appear to be "significant."
3. Minimum Payment
Finally, it appears that the minimum payment requirement is satisfied as well. We first observe that Stewart's does not intend to charge any royalties or franchise fee. Nonetheless, it appears from your letter that Stewart's will charge for its mobile food trailer. The Commission has long held that all potential sources of revenue going to the franchisor as a result of the sale of a franchise will be construed as a required payment. This includes required purchases of equipment needed to commence the business. See Statement of Basis and Purpose, 43 Fed. Reg. 59614, 59703 (December 21, 1978). Although you do not disclose the sales price of the trailer in your letter, we can reasonably assume that the price exceeds $500.
Based upon the information you have provided, it appears that Stewart's may satisfy the three definitional elements of a "franchise" set out above. Please be advised that the views expressed in this letter are those of the FTC staff. They have not been reviewed, approved, or adopted by the Commission, and they are not binding upon the Commission. However, they do reflect the opinions of the staff members charged with enforcement of the Franchise Rule.
Date: July 19, 1996
Franchise Rule Staff
1. Another type of continuing commercial relationship covered by the Franchise Rule is the business opportunity venture. See 16 C.F.R. § 436.2(a)(1)(ii). Unlike a franchise, a business opportunity venture does not necessarily involve the use of the promoters' trademark or trade name. The most common types of business opportunity ventures are rack displays and vending machines routes.