Advisory Opinion 95-8
This staff advisory opinion is issued in response to your request dated July 20, 1995, for our views concerning the applicability of the Commission's Franchise Rule, 16 C.F.R. Part 436, to a revised hotel management contract.
Under an agreement entered into in January 1980, Meridien Hotels, Inc. ("Meridien") has been the management company for the Parker-Meridien Hotel ("Hotel") of New York City. Under this agreement, Meridien was responsible for operating the Hotel. It provided reservation services and included the Hotel in its chain advertising. Meridien also permitted the Hotel to use its trade name, its trademark, and its service marks. In return, the Hotel owner paid Meridien a management fee based, in part, on a percentage of the revenue generated by the Hotel.
The Hotel owner now wishes to modify the existing contract. Under the contemplated revised agreement, the Hotel owner will assume all operational and management functions of the Hotel. It will continue to receive marketing and sales assistance from Meridien, including participation in Meridien's chain advertising plan. The Hotel owner, however, will have final approval authority of all sales and marketing activities. Meridien will also continue to provide reservation services to the Hotel and will allow the Hotel to continue using its trademarks, trade names, and service marks. Finally, Meridien will be able to terminate the agreement if the Hotel is not run in a manner consistent with the quality and image of its trade name, trademarks, and service marks.
You now ask whether the revised agreement as described above creates a franchise relationship requiring the disclosure of information pursuant to the 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 the proposed revised contract between Meridien and the Hotel creates a franchise relationship.
II. Definition of the Term Franchise
The business relationship between Meridien and the Hotel will be covered by the Franchise Rule if the business relationship they have created satisfies the definitional elements of a "franchise" set forth in the Franchise Rule, 16 C.F.R. § 436.2(a).
We begin our analysis by noting that the term "franchise" refers to a continuing commercial relationship. According to your letter, Meridien will provide reservation services and certain sales and marketing assistance to the Hotel.
We assume that the Hotel will continue to pay Meridien for these services. These facts are sufficient to constitute 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) and 436.2(a)(3)(iii).
The first and third of these definitional elements appear to be satisfied. As stated in your letter, Meridien will permit the Hotel to use its trade name, trademarks, and service marks. This is sufficient to satisfy the first element. The third element also appears to be satisfied. We assume that the Hotel will continue to pay Meridien a fee based on a percentage of its revenues. Given the nature of the hotel business, we can reasonably assume that such required payments will exceed $500 in the first six months of operation. We will next turn to the second definitional element.
III. Definition of Significant Assistance
To be covered under the Franchise Rule, a company must also provide significant controls or assistance. In the Final Interpretive Guides to the Franchise Rule, the Commission stated that the term "significant" relates to:
the degree to which the franchisee is dependent upon the franchisor's superior business expertise -- an expertise made available to the franchisee by virtue of its association with the franchisor. The franchisee, in order to reduce its business risks or enhance its chances for business success, relies upon the availability of such expertise to avoid business mistakes that it otherwise might make.
44 Fed. Reg. 49966, 49967 (August 24, 1979).
The Commission also listed the following examples of significant assistance:
Among the significant types of promises of assistance to the franchisee's method of operation are (a) formal sales, repair or business training programs, (b) establishing accounting systems, (c) furnishing management, marketing or personnel advice, (d) selecting site locations, and (e) furnishing a detailed operating manual. . . . [T]he presence of any of [these types of assistance] would suggest the existence of "significant control or assistance."
Further, to be deemed "significant," the franchisor's controls and assistance must relate to the franchisee's entire method of operation. 15 C.F.R. §§ 436.1(a)(1)(i)(B)(1) and (2); 44 Fed. Reg. at 49967. Control and assistance relating to the franchisee's business organization, management, marketing plan, or business affairs, for example, will generally be deemed significant. On the other hand, controls or assistance relating to a small part of the franchisee's business ordinarily will not be deemed significant. 44 Fed. Reg. at 49967.
IV. The "Significance" of Meridien's Assistance
Your letter notes several indicia of control and assistance on Meridien's part. Specifically, you state that Meridien will continue to provide reservation assistance to the Hotel, as well as sales and advertising assistance. You also state that Meridien may terminate the agreement if the Hotel does not operate in a manner consistent with the quality and image of its trade name, trademarks, and service marks.
On the other hand, you also note that such assistance and controls may not be "significant" to the Hotel owner. The Hotel owner, for example, will have final approval over Meridien's sales and marketing activities. Moreover, the Hotel owner is sophisticated, having fully participated in the day-to-day operation and financial decisions affecting the Hotel during the fifteen year period in which Meridien has controlled all operational and management functions of the hotel. The owner understands how the Hotel has been marketed and how the Meridien reservation system works. Further, the Hotel owner contemplates assuming even more control over the operation of the Hotel than it exercised under its previous agreement with Meridien. Accordingly, it does not appear likely that the owner is relying upon Meridien's superior expertise in order to be successful. In these circumstances, we believe that the controls and assistance contemplated by the revised agreement between Meridien and the Hotel owner are not "significant" for purposes of the Franchise Rule.
Based upon the information provided in your letter, including the nature of the Hotel owner, the long involvement of the owner in the operation of the Hotel, and the limited role that Meridien will assume in the future operation of the Hotel, the revised agreement between Meridien and the Hotel owner does not appear to satisfy the Franchise Rule's significant control and assistance requirement.
Please be advised that our opinion is based on all the information furnished in the request. This opinion applies only to your company 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.
Date: August 29, 1995
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.