INFORMAL STAFF ADVISORY OPINION 97-6
This staff advisory opinion is issued in response to your recent request for our views concerning the applicability of the Federal Trade Commission's Franchise Rule, 16 C.F.R. Part 436, to your proposed business arrangement.
According to your letter, you are considering establishing a "regional/national" business to sell territories to "independent distributors" who will, in turn, sell print advertising to targeted businesses (realtors, apartments, senior citizen communities) within their territory You ask whether your proposed business would constitute a franchise.
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 of 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 the proposed business constitutes a franchise.
II. A LICENSE ARRANGEMENT OR DISTRIBUTORSHIP MAY BE A FRANCHISE
In your letter you describe your proposed company as a "licensor" and you refer to investors as "independent distributors." Whether your proposed business arrangement constitutes a "franchise" does not depend on what you elect to call the business arrangement. The proposed business will be covered by the Franchise Rule if the business relationship it creates satisfies the definitional elements of a "franchise" set forth in the Franchise Rule, 16 C.F.R. § 436.2(a). As noted in the Commission's Final Interpretive Guides to the Franchise Rule in the context of distributorship arrangements:
The name which the parties give to their relationship is not relevant in determining whether the relationship is within the scope of the rule. Thus, a relationship described by the parties as a "franchise" will not be covered by the rule unless it meets the definitional criteria of the rule; conversely, a self-described "distributorship" will be covered by the rule if the definitional elements are satisfied.
44 Fed. Reg. 49966 (August 24, 1979).
The term "franchise" refers to a continuing commercial relationship. According to your letter, the independent distributors will pay an up-front "territory sales fee" of less than $15,000, and will make ongoing payments to your company. Specifically, the independent distributors will be required to purchase their printing services through your proposed business and at prices your proposed business will establish. Under these facts, it appears that your proposed business and its independent distributors 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 identified by the franchisor's trademark or trade name; (2) significant control over, 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)(i) and 436.2(3)(iii). We will address each of these elements below.
1. Distribution of Goods or Services Identified By the Franchisor's Trademark or Trade Name
You indicate that your proposed business will "establish a trade name that will be licensed to individuals in their assigned territory." Thus, the first definitional element appears to be satisfied.
2. Significant Control or Assistance
You further state that your proposed business will "provide initial and ongoing training and customer support" and additional assistance "as required." In addition, it will "establish and control the design, content, and frequency" of the advertising publication and, as noted above, you will require that all printing be done by your proposed business and at price the proposed business will establish. Thus, it appears that your proposed business will offer assistance to its investors and impose some controls over the investors' method of operation. The question remains, however, whether such assistance and controls are "significant."
In the Final Interpretative Guides, the Commission stated that "significance" is a "function of the degree of reliance which franchisees are reasonably likely to place upon the controls or assistance." See Final Interpretive Guides, 44 Fed. Reg. at 49967. This is especially true of investors who are inexperienced in the particular business. Id. The Commission addresses "significant control and assistance" issues on a case-by-case basis. Among other things, the Commission considers the nature of the particular industry, the level of sophistication of the investors, as well as the meaning of the assistance and control to the investors. Id. See also Statement of Basis and Purpose, 43 Fed. Reg. 59614, 59701 (December 21, 1978).
In your letter, you state that investors "may or may not have previous advertising sales, printing sales experience" and that your company intends to provide "training and basic start up marketing material." This statement implies that you will offer a pre-packaged business arrangement that will enable even inexperienced investors to operate the business. You also state that you will require the investors to sell advertising to "targeted business groups" and to do so on a continuing and reoccurring basis "at a predetermined minimum level." Given the complexity of the advertising industry and the apparent sales quotas that your proposed business will impose, it is reasonable to assume that inexperienced investors would rely extensively on the expertise, training, and promises of ongoing assistance your company will offer in weighing their investment decision. Thus, based upon the information you have provided, it appears that the offers of assistance and controls would be "significant" to the average investor.
3. Minimum Payment
You state that investors will be required to make a minimum initial payment of less than $15,000.00 This appears to satisfy the $500 minimum payment requirement.
Based upon the information you have provided, it appears that your proposed business arrangement may satisfy the three definitional elements of a "franchise" set out above.
Please be advised that our opinion is based on all the information furnished in your request. This opinion applies only to your client and to the extent that actual company practices conform to the material submitted for review. Please be advised further 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.
Franchise Rule Staff
Date: August 15, 1997
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.