Informal Staff Advisory Opinion 02-2

This staff advisory opinion is issued in response to your request for our views on whether a not-for profit 501(c)(3) organization satisfies the definition of a franchise under the Franchise Rule.

I. INTRODUCTION

You represent Project GRAD, a not-for-profit 501(c)(3) organization. Project GRAD's mission is to improve the academic performance, graduation rates, and college attendance of inner-city students throughout the United States. Among other things, Project GRAD develops curricula and engages in ongoing teacher training to improve students' math and reading abilities.

You state that Project GRAD will enter into licensing agreements of the Project GRAD name, curriculum, and related materials with local school districts ("Licensees"). Through its local non-for profit affiliates or governmental agencies, Project GRAD will train and assist its Licensees, who will carry out the Project GRAD program on the local level. Licensees will pay Project GRAD certain fees for the right to operate the Project GRAD program, use of the Project GRAD name, and to cover a portion of Project GRAD's costs for, among other things, materials and training. The Licensees will also purchase Project GRAD materials, including software. Licensees, however, will be prohibited from selling or distributing Project GRAD materials for value: families will not be charged for participating in the Project GRAD program, and Licensees will not derive revenue from the operation of the program.

You now ask whether the relationship between Project GRAD and its Licensees constitutes a "continuing commercial relationship" as envisioned 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 relationship between Program GRAD and its Licensees is clearly continuing. However, there does not appear to be any expectation of profit on the Licensees' part.(1) The Licensees apparently do not charge families for their services, nor do they derive income from the operation of the Project GRAD program. Further, the hallmark of a franchise is reliance on the franchisor's expertise in order to reduce the franchisee's business risks and enhance the chances of business success. See Final Interpretive Guides, 44 Fed. Reg. 44965, 49967 (August 24, 1979). The Licensees in this instance, however, have no expectation of business success. The Commission, therefore, did not intend to cover this type of relationship in promulgating the Franchise Rule.

III. CONCLUSION

Based upon the information you have provided, it does not appear that the relationship between Project GRAD and its Licensees constitute a "continuing commercial relationship," as that term is used at 16 C.F.R. Section 436.2(a). 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 26, 2002

Franchise Rule Staff

1. Although you state that Project GRAD is a not-for-profit, 501(c)(3) organization, it is possible that its directors and other officials may earn income from the sale of Project GRAD materials.