Informal Staff Advisory Opinion 00-4

This staff advisory opinion addresses whether a non-profit, tax exempt corporation qualifies as a "franchisor" under the Franchise Rule.

I. INTRODUCTION

You represent All Kinds of Minds ("AKOM"), a not-for-profit, tax exempt, corporation affiliated with the University of North Carolina. AKOM has developed the "School's Attuned Program"("Program"), an educational program that addresses the needs of children with learning differences. The Program offers elementary and middle school educators training in new methods of recognizing, understanding, and managing students with learning differences.

Under the Program, AKOM will enter into a written license agreement with various entities ("Licensees"), who will operate regional training centers. The Licensees typically will be private schools, colleges, hospitals, or non-profit professional development organizations. AKOM will provide its trademark and training program and materials to the Licensees, and will assist the Licensees in conducting the Program.

Under the agreement, Licensees will pay AKOM various fees in exchange for being designated a regional training center. AKOM will also provide on-site support and supervision, marketing services, and facilitator training. AKOM will collect a royalty on the tuition received by the Licensee from each trainee. AKOM will also sell course materials to the Licensees at cost. In your letter, you state that AKOM's objective "is to charge sufficient fees so as to enable the Program to operate without subsidy." You state further that AKOM intends to earn no profit from the Program, but to use the funds to further its educational goals. "AKOM devotes any realized 'profits' exclusively to its charitable purposes. As a non-profit, it does not have shareholders to distribute profits to."

Finally, you add that the Licensees will collect tuition from the trainees. According to your letter, the Licensees also intend to operate the Program at the centers with sufficient cash flow "so as not to require subsidy." You add that a Licensee may or may not be a non-profit entity.

You now ask whether the AKOM's licensing of the Program is exempt from the Franchise Rule's disclosure requirements because the parties do not have a "continuing commercial relationship" under the definition of a "franchise," set out at Section 436.2(a) of 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 your company's arrangement constitutes a franchise.

II. DEFINITION OF THE TERM "FRANCHISE"

You correctly note that the definition of the term "franchise" refers to certain "continuing commercial relationships." 16 C.F.R. § 436.2(a). In the Statement of Basis and Purpose accompanying the Rule, the Commission elaborated on the "continuing commercial relationship" requirement as follows:

There is general agreement that central to the definition of the term "franchise" is the concept that the relationship must be both "continuing" and "commercial." . . . The rule does not apply to relationships which are not entered into with the expectation of profit, or to commercial relationships which do not involve a course of dealing over a period of time.

43 Fed. Reg. 59613, 59700 (December 21, 1979).

The Rule's "commercial relationship" limitation is consistent with Section 4 of the FTC Act, which limits the Act's applicability to "any company . . . which is organized to carry on business for its own profit or that of its members . . ." 15 U.S.C. § 44 (emphasis added). In determining whether a corporation carries on "business for its own profit or that of its members," the Commission will look beyond the technical form of a corporation's charter. Rather, the Commission will examine the corporation's actual activities on a case-by-case basis. It will assert jurisdiction where a corporation carries on its business for "its own profit or that of its members," notwithstanding any attempt to hide for-profit activities under the cloak of a nonprofit entity.(1) In determining whether the Commission has jurisdiction over a purported nonprofit corporation, the Commission may consider a number of factors including whether the corporation: (1) is organized as a nonprofit; (2) has been granted tax-exempt status by the IRS; (3) distributes funds to its members or shareholders; and (4) devotes realized profits exclusively to charitable purposes.(2) In franchise matters, the Commission may also consider whether franchisees are required to purchase goods or services from for-profit entities owned or controlled by directors or officers of the nonprofit franchisor.(3)

III. APPLICABILITY OF THE FRANCHISE RULE TO AKOM

We begin our analysis by noting that the relationship between AKOM and the Licensees appears to be continuing. You state that AKOM will provide training materials and other assistance to the Licensees, and it will collect royalty payments from each Licensee. This is sufficient to satisfy the Rule's "continuing relationship" prerequisite.

We next must determine whether the relationship between AKOM and its Licensees is commercial. That AKOM has been granted tax-exempt status creates a presumption that it has been organized for nonprofit purposes. Moreover, you state that AKOM has no expectation of profiting from the Program. It does not distribute profits to its directors, but devotes all revenues it may receive from Licensees exclusively to charitable, educational purposes.(4) This is supported by your assertion that AKOM provides training materials to the Licensees at cost. AKOM imposes such fees, therefore, not to realize a profit, but to enable the Program to operate self-sufficiently without resort to outside subsidies.

That AKOM may be organized for non-profit purposes does not end the inquiry, however, because AKOM is only one party in the business relationship. Therefore, we must also consider whether a commercial relationship exists from the prospective Licensees' point of view. In your letter, you state that some of AKOM's Licensees are non-profits. If properly organized for non-profit purposes, then the Licensees' relationship with AKOM would be non-commercial and fall outside of the Rule. However, there is a question of coverage regarding any for-profit Licensees. Where a Licensee expects to earn a profit by becoming a center, the Licensee's relationship with AKOM may be "commercial" if the Licensee relies upon AKOM's business acumen and experience in order to reduce its business risks and enhance the chances of business success. See Final Interpretive Guides, 44 Fed. Reg. 49966, 49967 (August 24, 1979).

Based upon the representations set forth in your letter, we cannot make this determination. According to your letter, AKOM will provide marketing assistance as well as on-site support and supervision. It is not clear whether such support and supervision is limited solely to the substantive aspects of the educational training program or whether it is broader, extending to the actual operation of the center as an ongoing, for-profit business. If AKOM induces prospective Licensees to enter into a for-profit business relationship, such as by promising to provide a business plan, or by making income representations (as opposed to assistance limited to conducting the training program), then the relationship between the parties may be commercial.

IV. CONCLUSION

Based upon the information you have provided, it appears that the relationship between AKOM and its non-profit Licensees does not constitute a "continuing commercial relationship," as that term is used at 16 C.F.R. Section 436.2(a). However, it is possible that the relationship between AKOM and a for-profit Licensee may constitute a continuing commercial relationship if AKOM's assistance extends to the actual operation and development of the training center as a for-profit business and the for-profit Licensee relies on such assistance to reduce his or her investment risk.

Please be advised that our opinion is based on all the information furnished in the 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: April 7, 2000

Franchise Rule Staff

Endnotes:

1. E.g., FTC v National Commission on Egg Nutrition, 517 F.2d 485 , 488 (7th Cir. 1975), cert. denied, 426 U.S. 919 (1976); Community Blood Bank of Kansas City Area v. FTC, 405 F.2d 1011, 1018 (8th Cir. 1969).

2. E.g., Community Blood Bank, 405 F.2d at 1019; Ohio Christian College, 80 F.T.C. 815, 849 (1972); College Football Ass'n, 117 F.T.C. 971, 989 (1994). See also Advisory 95-3, Bus. Franchise Guide (CCH) ¶ 6468 (1995). Cf. The Association of Logos Bookstores, Bus. Franchise Guide (CCH) ¶ 6419 (1980) (nonprofit cooperative association provides services to members at cost).

3. See Advisory 99-4, Bus. Franchise Guide (CCH), ¶ 6501, at 9715 (May 13, 1999).

4. Cf. Advisory 95.3, Bus. Franchise Guide (CCH), ¶ 6468, at 9654 (April 4, 1995).