INFORMAL STAFF ADVISORY OPINION 04-3
This staff advisory opinion is issued in response to your recent request for our views concerning the applicability of the Franchise Rule to the offer of online services to travel agencies and travel professionals.
Your client, Vacation.com, Inc. (“VCI”), intends to enter into a relationship with existing travel agencies and experienced travel professionals (Participants), offering the right to use an Internet-based travel booking service (“Web Site”). Through the Web Site, consumers will be able to obtain travel services, such as purchasing airline tickets, obtaining travel information, and requesting the assistance of a participating travel agency. Participants, in turn, will earn commissions on travel bookings, including those made by consumers located within the Participant’s designed area.
According to your letter, VCI will offer its services only to existing, well-established travel agencies and travel agency managers that VCI “deems to be among the highest sales volume producers in their respective geographic markets.” Business obtained through the Web Site will be only one component of a Participant’s travel business. Nothing prevents Participants from continuing to solicit and offer travel services separately from the Web Site, including services “substantially similar to and competitive with the travel services offered through the Web Site. Indeed, your client anticipates that the portion of a Participant’s overall sales attributable to the Web Site will be relatively small, “typically, but not always, less than 20%” of overall sales.
VCI intends to exert some control and offer some assistance to Participants using the Web Site. Specifically, each Participant will be granted an exclusive geographic area in which to offer the Web Site’s services. Participants, however, will remain free to use competitors’ Internet services or their own Internet services, or to conduct business under marks other than VCI’s mark. Participants must also use computer hardware and software that enables them to access the Web Site and to report sales information to VCI, but they are not obligated to purchase hardware or software through VCI. VCI will also provide training, including sales and technology training, relating to the services offered through the Web Site. Finally, Participants must maintain certain minimum standards relating to the use of VCI’s mark, must expend a set minimum dollar amount on local marketing, and must meet certain minimum Web Site “sales thresholds,” or pay “a portion of third party technology fees if they fail to do so.”
You now ask whether the proposed business arrangement will satisfy the Franchise Rule’s significant control or assistance requirement. For the following reasons, we conclude that it will not.
II. THE DEFINITION OF “FRANCHISE”
We begin our analysis by noting that the term "franchise" refers to a continuing commercial relationship. From your letter, it is clear that VCI’s relationship with Participants will be ongoing. Accordingly, it is both continuing and commercial.
To be covered by the Franchise Rule, a business arrangement must also satisfy the three definitional elements of a "franchise" set forth in the Rule: (1) the distribution of goods or services associated with 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 six months of signing an agreement. 16 C.F.R. § 436.2(a)(1)(i). You ask us to focus solely on the second element – significant control or assistance. Accordingly, we will assume that both the trademark and minimum payment requirements are present.
III. SIGNIFICANT CONTROL OR ASSISTANCE
As noted in your letter, VCI will offer exclusive territories and training in the use of the Web Site, as well as impose sales reporting, marketing, and sales threshold requirements. The question then becomes whether such controls and assistance 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. 49,966, 49,967 (Aug. 24, 1979). This is especially true of purchasers who are inexperienced in the particular business. Id. The Commission examines "significant control and assistance" 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 purchasers. Id. See also Statement of Basis and Purpose, 43 Fed. Reg. 59,614, 59,701 (Dec. 21, 1978).
As noted above, your letter states that Participants are well-established travel agencies and travel professionals that VCI “deems to be among the highest sales volume producers in their respective geographic markets.” Moreover, they use competitive products, as well as engage in a variety of other travel services unrelated to VCI’s Web Site. Accordingly, it would appear that Participants are not likely to place great reliance on VCI in the operation of their established travel businesses.
In addition, the Commission has noted that reliance is proportionate with financial risk. It is clear from your letter that VCI’s Web Site is only one online service available to a Participant in the operation of a travel business. Where a businessperson has several means available to perform services in the ordinary course of his or her business, then the addition of an alternative means is not likely to pose a financial risk. Indeed, if the portion of a Participant’s overall sales attributable to the Web Site is small, as you assert, then reliance on VCI might be lacking.
Moreover, the assistance and controls imposed by your client appear to be narrowly tailored to ensure the proper operation of the Web Site, rather than the operation of the Participant’s travel business. The Commission has stated that controls and assistance must be over the franchisee’s “entire method of operation – not its method of selling a specific product or products which represent a small part of the franchisee’s business.” 44 Fed. Reg. at 49,967. The Commission reasoned:
Controls or assistance directed to the sale of a specific product which have, at most, a marginal effect on a franchisee’s method of operating the entire business will not be considered in determining whether control or assistance is “significant.”
For these reasons, we conclude that VCI’s proposed controls and assistance offered to experienced travel agencies and professionals who can select among competing services in operating their travel businesses do not appear to rise to the level of significance contemplated by the Rule.
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 enforcing the Franchise Rule.
Date: June 7, 2004
Franchise Rule Staff