Informal Staff Advisory Opinion 01-3

This staff advisory opinion addresses Franchise.com's request for guidance in how its franchisor-clients may comply with the Franchise Rule via the Internet.

I. BACKGROUND

In October 1999, the Commission published for comment in the Federal Register a Notice of Proposed Rulemaking ("NPR") in connection with the Franchise Rule, 16 C.F.R. Part 436.(1) The NPR sought comment on a wide range of issues, including proposed instructions enabling franchisors to furnish disclosure documents electronically, including through the Internet.(2) Among other things, the proposed instructions would:

  1. Require prior consent by a prospective franchisee before a franchisor could comply with the Rule electronically;  
  2. Afford a prospective franchisee the right to obtain a paper disclosure document until the time of sale;  
  3. Require franchisors to provide a prospective franchisee with a paper summary document, which includes, among other things, the disclosure document's table of contents, as well as an admonition to download or otherwise preserve the electronic disclosure document;
  4. Specify the general format of an electronic disclosure document to ensure that it can be downloaded or otherwise preserved, that the disclosures are clear and conspicuous, and that the disclosures do not contain extraneous or distracting features (such as animation or pop-up screens); and
  5. Permit the use of navigational tools to review a disclosure document, such as scroll bars, search features, and internal links.


The NPR comment period closed at the end of January 2000. The staff is currently analyzing all NPR comments, including comments on the proposed electronic disclosure instructions, and is preparing a Staff Report on all issues raised in the NPR.

II. DEMONSTRATION PROJECTS

On July 18, 2000, the Commission published in the Federal Register an announcement soliciting demonstration projects for electronic dissemination of disclosure documents.(3) In the announcement, the Commission observed that, to date, few franchisors have sought to use the Internet or other electronic technologies to comply with the Franchise Rule. At the same time, the Commission recognized that it would be in the public interest for franchisors to conduct demonstration projects of the NPR's proposed Internet instructions:

In light of the franchise community's lack of practical experience with Internet disclosures, it is critical to probe the strengths and weaknesses of the NPR proposed instructions before they are incorporated into the final revised Rule. Through demonstration projects, the Commission can be alerted to any technological problems with the proposed instructions, receive feedback on whether franchisors are able to comply with the proposed instructions efficiently, as well as to identify areas where the proposed instructions might need fine-tuning. As a result, the final Rule's Internet instructions are likely to be much more precise, enabling franchisors to comply with the Rule efficiently and with significant cost reductions.

65 Fed. Reg. at 44,485.

To that end, the Commission invited all interested parties to submit petitions to the Commission for permission to implement a demonstration project, consistent with the NPR's proposed Internet instructions. To gain approval, the interested party must be able to demonstrate that its proposal meets the standards specified in proposed Section 436.7 of the NPR. All demonstration projects are on a trial basis only, and the Commission specifically reserves the right to terminate any demonstration project for any reason. To enable the public to benefit from the demonstration project, an approved party must file a written report on at least a quarterly basis describing any problems it has encountered with the proposed Internet instructions, any complaints from franchisors and franchisees, as well as any suggested improvements.(4)

III. E-SIGN

Shortly before the Commission solicited demonstration projects for Internet compliance, Congress passed the Electronic Signatures in Global and National Commerce Act ("E-SIGN").(5) Among other things, E-SIGN seeks to eliminate barriers to e-commerce by giving legal effect to electronic transactions, including pre-sale disclosure, and by permitting electronic signatures.

At the same time, E-SIGN preserves certain consumer rights. Specifically, it provides that consumers must give their informed consent before engaging in electronic transactions, and it requires companies to disclose any rights consumers may have to receive paper records and to withdraw previously-given consent to receive electronic records. These provisions are similar to those set forth in the NPR's proposed Internet instructions.(6) Unlike the NPR's proposed instructions, however, E-SIGN limits such rights to "consumer" transactions. E-SIGN specifically defines "consumer" as an "individual who obtains, through a transaction, products or services which are used primarily for personal, family, or household purposes, and also means the legal representative of such an individual."(7) Thus, by its terms, E-SIGN's preservation of consumer rights may not apply to franchise sales.

In light of E-SIGN, the Commission may re-think its proposed Rule instructions governing electronic disclosure. Most likely, any proposed revisions would first appear in the form of staff recommendations in the upcoming release of the Staff Report on the Franchise Rule. In the meantime, the staff recognizes the importance of providing the franchise community with some guidance on Internet compliance. We continue to believe that the best advice we can offer at this time is for franchisors interested in Internet disclosure to follow the procedures outlined in the NPR until such time as the Commission adopts final Rule amendments.

IV. FRANCHISE.COM'S REQUEST

In its request,(8) Franchise.com states that it has a long history as a franchise sales lead generator. The company now would like to provide electronic disclosure services to its franchisor advertisers. To that end, it has developed a sophisticated system that, we conclude, appears to comply fully with the proposed instructions set forth in the NPR.

Franchisors wishing to furnish disclosures electronically through Franchise.com must provide Franchise.com with a list of states where the franchisor is approved for offering franchises, as well as copies of their disclosure documents. Each disclosure document must contain the NPR's proposed section 436.3(g) cover page statement regarding electronic disclosures.

Prospective franchisees who come to Franchise.com's web site find various materials about franchising, as well as profiles on specific franchise systems. If interested in purchasing a franchise, a prospective franchisee can elect to proceed through the pre-sale disclosure process electronically. First, the prospect completes and transmits an online request for information form, which is made available to the franchisor. The prospect must also agree to receive disclosures electronically by clicking a button to that effect. After completing these initial steps, the prospective franchisee then receives an account and protected password, which enables him or her to proceed further.

If the franchisor decides to pursue the lead, it can access the prospective franchisee's information online through its account at Franchise.com. The franchisor can then send the prospect an electronic copy of the written summary document, as well as a state-specific disclosure document.(9) When transmitting these documents, the franchisor also sends the prospect an email message that advises the prospect to log into his or her Franchise.com account to view the disclosure document. The electronic transmission of disclosure documents to a prospect is recorded in two files at Franchise.com: the franchisor's file for tracking disclosure documents and the file for the individual prospective franchisee.

When the prospective franchisee accesses his or her account, the prospect then can select two disclosure document hyperlinks, one for the written summary document and the other for the disclosure document (or Uniform Franchise Offering Circular). Upon clicking either link, an acknowledgment window appears that, among other things, advises the prospect to print or download the disclosure document for future reference. It also states that the prospect may receive a paper copy of the disclosure document up until the time of sale, with instructions on how to obtain the paper copy. If the prospect agrees to receive the document, then an acknowledgment of receipt is emailed to Franchise.com and recorded. Franchisors using the system can easily determine who received disclosures and which version(s) the prospect received, in the event that updating is necessary.

V. CONCLUSION

Based upon our review, we are satisfied that Franchise.com has made a good faith effort to comply with the proposed Internet instructions specified in the NPR. Accordingly, we believe that Franchise.com's proposed system for Internet compliance is consistent with the Franchise Rule, until such time as the Commission may adopt revised instructions for Internet compliance.

Please be advised that our opinion is based on all the information furnished in your 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.

Franchise Rule Staff

November 29, 2001

Endnotes:

1. 64 Fed. Reg. 57,294 (October 22, 1999).

2. See Proposed Rule at section 436.7. For a discussion of the proposal concerning electronic compliance with the Rule's pre-sale disclosure requirements, see 64 Fed. Reg. at 57,316-319.

3. 65 Fed. Reg. 44,484 (July 18, 2000).

4. Id. at 44,485.

5. 15 U.S.C. 7001.

6. See proposed Internet instructions at § 436.7(a).

7. 15 U.S.C. § 7006(1). The narrow definition of "consumer" is not unique. See Magnuson-Moss Warranty Act, 15 U.S.C 2301(1)(defining "consumer product" as "tangible personal property . . . which is normally used for personal, family, or household purposes.").

8. The Franchise.com request came in the form of two letters to Steven Toporoff, the Commission's Franchise Program Coordinator. In June 2000, Mr. Toporoff met with Franchise.com's director, Nancy Ghanem, to review the request and to view a trial run of the Franchise.com's proposed disclosure system.

9. If the prospect did not first agree to receive the disclosure document electronically, then Franchise.com's system will not allow the electronic document to be sent to the prospect.