Informal Staff Advisory Opinion 00-1

This staff advisory opinion is issued in response to your request for advice on whether your client's proposed business arrangement constitutes the sale of a franchise or a business opportunity, as contemplated by the Franchise Rule. 16 C.F.R. Part 436.

I. INTRODUCTION

Your client, BigBoard, Inc. ("BigBoard") owns and manages several commercial Internet sites. As part of its business, BigBoard intends to attract various companies to purchase space for classified advertisements on its sites. To promote advertising sales, BigBoard proposes to enlist the assistance of independent marketers ("marketers"), who will earn a commission on each advertisement placed with BigBoard.

Persons interested in being BigBoard marketers sign an "independent marketing agreement." According to this agreement, marketers make no direct payment to, nor purchase anything directly from, BigBoard for the right to become a marketer. Rather, they must purchase from authorized (but unaffiliated) printers various promotional materials, produced according to BigBoard's specifications, including BigBoard's trademark. BigBoard receives no payments from these unaffiliated printers for the marketers' purchases. The marketers then place the promotional materials at various locations where potential advertisers would likely find and take them. Each marketer is solely responsible for identifying locations and obtaining any necessary consents from the location owners to leave marketing materials at the locations. Big Board neither grants protected marketing territories, nor assists marketers in finding locations.

Your letter further states that the marketing materials contain a unique coupon code that identifies the individual marketer. Companies interested in placing advertisements on BigBoard's sites use the coupon code to receive a discount. In turn, BigBoard periodically will pay a marketer one dollar for each paid classified advertisement placed with the marketer's individual coupon code. If the advertiser seeks and receives a refund, however, the marketer will be obligated to forego his or her commission, either by refunding the commission directly to BigBoard or by having his or her commission account debited.

Finally, you add that the contracts for classified advertisements are between BigBoard and the advertiser. The marketers will not have any contact with the advertiser. In short, a marketer simply finds locations, leaves promotional materials, and collects commissions from BigBoard based on the number of advertisements placed with the marketer's unique coupon code.

You now ask three questions:

  1. Whether the marketers' distribution of marketing materials that promote the sale of a service provided by BigBoard constitutes the offering, selling, or distribution of goods or services to someone other than a "franchisor" under the Franchise Rule?  
  2. Whether BigBoard offers the marketers accounts, locations, or sites; and  
  3. Whether the marketers make any required payment to BigBoard.

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 arrangement constitutes a franchise.

II. DISTRIBUTION TO A PERSON OTHER THAN A FRANCHISOR

A business arrangement will be covered by the Franchise Rule if it creates a continuing commercial relationship that satisfies the three definitional elements of a franchise set forth in the Rule. The first definitional element is the distribution of goods, commodities, or services to any person other than a franchisor. The definitional element applies to both the sale of franchises and business opportunity ventures. For a franchise, the distribution of trademarked goods, commodities, or services will suffice. 16 C.F.R. § 436.2(a)(1)(i)(A). For a business opportunity, the goods, commodities, or services must be supplied by the franchisor, by a supplier with whom the franchisee is directly or indirectly required to do business, or by an affiliate-supplier with whom the franchisee is advised to do business. Id. at § 436.2(a)(1)(ii)(A).

The language "to any person other than a franchisor" makes clear that the franchisee will potentially earn income by conducting business primarily with the public, rather than by working for the franchisor. Under the facts presented, the marketers earn income by generating advertising sales through the distribution of promotional information to the public that offers BigBoard's advertising services. Although the marketers do not directly sell advertising or other services on behalf of BigBoard, their distribution of pamphlets, fliers, or other promotional materials on behalf of BigBoard, coupled with commissioned sales in the event a contract between an advertiser and BigBoard is consummated, is sufficient to satisfy the Rule's first definitional element. As noted above, the promotional materials distributed by the marketers bear BigBoard's trademark or other commercial symbol. This is sufficient to satisfy the first definitional element requirement for coverage as a franchise. Further, the marketers are required to obtain the promotional materials from authorized printers. This is sufficient to satisfy the parallel first definitional requirement for coverage as a business opportunity.

III. LOCATIONS AND ACCOUNTS

You next ask us to confirm that BigBoard does not satisfy the Rule's second definitional element requirement for a business opportunity, namely the provision of retail locations or accounts. 16 C.F.R. § 436.2(a)(1)(ii)(B)(1). In your letter, you state that BigBoard provides no such assistance. Rather, the marketer is "completely responsible for finding appropriate locations." You state that, at most, BigBoard might suggest generic types of sites, such as college campuses, but does not arrange for such sites, nor provide a list of specific sites.(1) In fact, you state that securing locations for the promotional materials is a form of assistance that the marketers provide to BigBoard, not the reverse. If this is the only form of location assistance provided, then we agree that BigBoard does not provide the requisite location assistance required for Rule coverage as a business opportunity.

IV. MINIMUM REQUIRED PAYMENT

Finally, you ask whether your client's proposed business arrangement will satisfy the Rule's minimum payment requirement. 16 C.F.R. §§  436.2(a)(2) and (a)(3)(iii). As noted above, you state that the only required payment the marketers must make is for the purchase of promotional materials from an authorized, but unaffiliated, printer. BigBoard receives no payment or consideration for these purchases. Under the circumstances, it appears that the relationship between the marketers and BigBoard is similar to that of a commissioned sales agent, which we have previously determined does not involve a required payment. Highland Petroleum, Inc., Bus. Franchise Guide (CCH) ¶ 6434 (Dec. 8, 1982).

Nonetheless, you raise the concern whether a refund or debit of compensations already received or credited to the marketer might be deemed a required payment. In the event an advertiser cancels an advertisement with BigBoard, then it is reasonable to conclude that the marketer, in fact, has not earned the commission received. Under the circumstances, the refund or debit is simply an adjustment to the marketer's account that reflects commissions for actual sales.(2) Although such commission adjustments are "required," they do not constitute a payment because the marketer foregoes only those moneys that he or she has not actually earned and has no contractual right to keep.

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.

Date: January 20, 2000

Franchise Rule Staff

Endnotes:

1. Staff has discussed the "location assistance" prong of the Franchise Rule in several informal advisory opinions. See, e.g., Advisory 95-10, Bus. Franchise Guide (CCH) ¶ 6475 (December 8, 1995); Advisory 99-3, id. at ¶ 6500 (April 28, 1999).

2. In this instant, apparently the only funds in a marketer's commission account are those for commissions actually or tentatively earned. Our analysis might be different, however, if BigBoard were to establish an account to advance commissions to marketers for potential, but yet unearned, future new advertising contracts.