INFORMAL STAFF ADVISORY OPINION 97-3
This staff advisory opinion is issued in response to your request for advice, dated February 4, 1997, concerning the making of earnings representations in the general media, 16 C.F.R. § 436.1(e).
In your request, you note that the Commission stated in the Final Interpretive Guides to the Franchise Rule that direct communications by franchisors to loan processing officials at lending institutions do not constitute the making of earnings representations in the general media under 16 C.F.R. § 436.1(e). You now ask whether the same policy applies where a franchisor presents a prospective franchisee with written earnings information that includes a statement that the purpose of the information is to obtain financing.
II. THE DEFINITION OF AN EARNINGS REPRESENTATION
The Franchise Rule provides that it is a deceptive act or practice for any franchisor or franchise broker to make any "oral, written, or visual representation to a prospective franchisee which states a specific level of potential sales, income, gross or net profit," or "which states other facts which suggest such a specific level," unless the franchisor satisfies the substantiation and disclosure obligations set forth at 16 C.F.R. §§1(b)-(e) and provides the prospective franchisee with an earnings claim document.
Section 436.1(e) of the Rule sets forth specific requirements for the dissemination of earnings representations in the general media. A franchisor who wishes to disseminate earnings information in the general media must have a reasonable basis for the representation; must possess, and make available to the Commission upon reasonable request, material which constitutes a reasonable basis for the representation; must ensure that the data underlying the representation has been prepared in accordance with generally accepted accounting principles; and must provide certain disclosures detailing the number and percentage of franchisees who have earned the claimed amount.
In the Final Interpretive Guides to the Rule, the Commission explained what constitutes general media claims in more detail. Specifically, the Commission stated that Section 436.1(e):
encompasses earnings claims made "for general dissemination" . . . includ[ing] claims made in advertising (radio, television, magazines, newspapers, billboards, etc), as well as those contained in speeches or press releases. It does not include communications to financial journals or the trade press in connection with bona-fide news stories, or directly to lenders in connection with arranging financing for the franchisee.
44 Fed. Reg. 49966, 49984-85 (August 24, 1979).
III. PROVIDING A PROSPECTIVE FRANCHISEE WITH PRE-SALE EARNINGS INFORMATION FOR PURPOSES OF ARRANGING A LOAN CONSTITUTES THE MAKING OF AN EARNINGS CLAIM
Based upon the Franchise Rule and the Final Interpretive Guides, it is clear that the Commission intended to permit a franchisor to provide earning information directly to loan officials at a specific lending institution in connection with a bona-fide loan application submitted by a prospective franchisee without triggering the Rule's earnings claim disclosure obligations.(1) There is no doubt that earnings information provided to a lender often suggests a specific level of sales or potential income that may be generated from the operation of a franchised outlet. Nonetheless, this exemption from the general media earnings claim disclosure requirements is designed to ensure that the Rule does not prevent franchisors from providing the financial information that is necessary for loan officials to evaluate prospective franchisees' loan applications.
This exemption from the general media claims provisions, however, is very narrow. Where the franchisor provides the information directly to the lending institution, it should also take steps to ensure that the earnings information remains confidential and is not turned over to the franchisee, if it wishes to avoid making earnings claim disclosures. If a franchisor provides earnings information to a prospective franchisee to submit to the lender, or if a franchisor provides earnings information to the lender and to the prospective franchisee simultaneously, then an earnings representation is made that triggers the Rule's substantiation and disclosure requirements.(2)
We will take a dim view of efforts to circumvent the Rule by dressing an earnings claim in the clothes of loan information. A franchisor does not avoid making an earnings representation under the Rule simply because the information disseminated to a prospective franchisee is intended to facilitate the making of a loan. Similarly, a franchisor cannot avoid triggering the Rule's earnings representation provisions merely by providing a prospective franchisee with a written statement purporting to limit the use of such information to facilitating the making of a loan. It is the dissemination of earnings information to a prospective franchisee, not the purported intended use of the information, that triggers the Rule's earnings substantiation and disclosure obligations.
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: March 4, 1997
Franchise Rule Staff
1. Of course a franchisor can provide earnings information, post-sale, to current franchisees or to lending institutions for loan purposes. The Rule's earnings substantiation provisions apply only to pre-sale earnings representations.
2. Indeed, any time a franchisor provides earnings information to a prospective franchisee, it is reasonable to assume that the prospect will use that information in deciding whether to purchase the franchise. Accordingly, such information must be geographically relevant and have a reasonable basis. The franchisor must also provide the prospect with a written earnings disclosure document.