Informal Staff Advisory Opinion 03-1

This advisory opinion addresses whether a corporate officer must disclose a guilty plea under section 436.1(a)(4) of the Franchise Rule.

I. INTRODUCTION

In your request for advisory opinion,(1) you state that Dennis Schooley is a corporate officer of Schooley Mitchell U.S. Franchise Corp. ("SMFC"), a Delaware corporation with its headquarters in Canada.(2) Mr. Schooley became an officer and director of SMFC in May 2001.(3)

In 1998, Mr. Schooley was charged in Canada with misappropriating monies from certain fundraising ventures. All criminal charges, however, where subsequently dropped by Canadian authorities. Nonetheless, Mr. Schooley was charged under the Ontario Provincial Offenses Act with allegedly violating provisions of the Ontario Gaming Control Act for knowingly furnishing inaccurate reporting forms in connection with certain fundraising operations, at most a misdemeanor in Canada. As a result, he was fined $5,000, and, as part of the plea agreement, contributed several thousand dollars to local Canadian charities. You now ask whether SMFC must disclose Mr. Schooley's guilty plea under the Rule's prior litigation disclosure, 16 C.F.R. § 436.1(a)(4). For the following reasons, we conclude that the Franchise Rule does not compel the disclosure of the guilty plea at issue.

II. PRIOR LITIGATION DISCLOSURES

As an initial matter, it appears from your letter that the franchisor in question uses the Uniform Franchise Offering Circular ("UFOC") disclosure format. The UFOC format is required by some states in lieu of the FTC's disclosure document format. Thus, the enforcement of UFOC requirements is generally a matter of state law. Nonetheless, we will answer your question as it relates to the Commission's Franchise Rule disclosure format.

Section 436.1(a)(4) of the Franchise Rule requires franchisors to disclose some, but not all, legal matters in which a director or officer of the franchisor was involved. Specifically, the franchisor must disclose whether any such individual:

Has, at any time during the previous seven fiscal years, been convicted of a felony or pleaded nolo contendere to a felony charge if the felony involved fraud (including violation of any franchise law, or unfair or deceptive practices law), embezzlement, fraudulent conversion, misappropriation of property, or restraint of trade.

In short, the Rule requires the disclosure of certain enumerated felonies only.

According to documentation attached to your letter, Mr. Schooley was neither convicted of, nor pled nolo contendere to, any criminal felony charges. Indeed, all criminal allegations against Mr. Schooley were dropped and are not at issue. Rather, we must determine whether a guilty plea to a violation of the Ontario Gaming Control Act brought under the Ontario Provincial Offenses Act must be disclosed under the criteria set out above.

It appears from your letter that Mr. Schooley pled guilty to what is at most a misdemeanor charge.(4) In addition, our review of the transcript and statement of facts in the court proceeding accompanying your letter convinces us that this alleged violation of the Gaming Control Act - submitting reporting forms that contained an inaccurate statement of application of funds received - does not rise to the requisite level of "fraud." Indeed, the transcript makes clear that all fraud charges were withdrawn. Further, Mr. Schooley apparently did not benefit personally from the erroneous reporting. Under the circumstances, it does not appear that the Gaming Control Act charge rises to the level of embezzlement, fraudulent conversion, or misappropriation of property. In short, because the plea does not concern a felony involving one of the enumerated categories, it need not be disclosed in SMFC's disclosure document.(5)

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.

Franchise Rule Staff

Date: February 7, 2003

Endnotes:

1. A second request for advisory opinion arising out of the same facts was withdrawn.

2. SMFC sold its first franchise in the United Sates in January 2001.

3. We assume that SMFC discloses Mr. Schooley prior business experience under section 436.1(a)(2) of the Franchise Rule.

4. A copy of the introductory sections of the Provincial Offenses Act makes clear that matters brought under that Act are "non-criminal" offenses.

5. For similar reasons, SMFC need not disclose this matter under the Rule's second provision (civil actions or settlements) or third provision (injunctive or restrictive orders) involving allegations of the same enumerated categories. 16 C.F.R. §§ 436.1(a)(4)(ii) and (a)(4)(iii).