Informal Staff Advisory Opinion 03-3

This staff advisory opinion addresses eMaximation'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."(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. eMAXIMATION'S REQUEST

In its request,(8) eMaximation states that it assists franchisors with lead generation and franchise sales recordkeeping. The company would like to extend its services by providing its clients with electronic disclosure capability. To that end, it has developed a system that, we conclude, appears to comply fully with the proposed instructions set forth in the NPR.

The eMaximation system begins when a prospective franchisee sends an initial email inquiry to the franchisor. Franchisors wishing to furnish disclosures electronically through eMaximation then respond by sending the prospective franchisee a reply email, requesting that the prospective franchisee agree to receive disclosures electronically by clicking on a button confirming that option. After completing these steps, the prospective franchisee receives a user name and password for his or her "Web-Disclosure account." When a franchisor wishes to communicate with the prospect, the franchisor accesses the prospective franchisee's information online through the prospect's account. Through this process, the franchisor can verify that the prospective franchisee has opted for electronic disclosure. Indeed, EMaximation states that its system prohibits franchisors from sending edisclosures until the prospect first agrees to receive disclosures electronically. This approach appears to satisfy the NPR's proposed prior-consent requirement.

Upon receiving the prospective franchisee's consent, the franchisor then sends the prospective franchisee a copy of the written summary document. While transmitting the summary document, the franchisor also sends the prospect an email advising the prospect to view the disclosure document by logging into his or her Web-Disclosure account. This step appears to satisfy the NPR's proposed written summary document requirement.

Next, the prospective franchisee can log into his or her account to receive the actual disclosure document. Specifically, the prospective franchisee can select the disclosure document by clicking on a link. The documents are in PDF format, allowing the franchisee to use scroll bars, search features, and other navigational links. At this stage, a confirmation window also appears, advising the prospective franchisee to print or download the state specific disclosure document for their records. At the same time, the prospective franchisee is informed that he or she may receive a paper copy of the disclosure document up until the time of sale. If the prospect agrees to accept an electronic disclosure document, a receipt acknowledgment is recorded and a confirmation email sent to the franchisor's sales team. Further, eMaximation records the transmission of the disclosure document in two files: the franchisor's file for tracking disclosure documents and the file of the individual prospective franchisee. Through this approach, franchisors can readily determine whether a prospective franchisee has in fact received disclosures and which version, in the event updating is required. These steps appear to satisfy the NPR's proposed admonition and recordkeeping requirements.

Finally, eMaximation states that franchisor-clients provide eMaximation with a list of states in which the franchisor is approved for offering franchises. Each disclosure document includes the NPR's proposed cover page statement regarding electronic disclosure.

V. CONCLUSION

Based upon our review, we are satisfied that eMaximation has made a good faith effort to comply with the proposed Internet instructions specified in the NPR. Accordingly, we believe that eMaximation'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

July 24, 2003

Endnotes:

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

2. 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 eMaximation request came in the form of a letter to Steven Toporoff, the Commission's Franchise Program Coordinator.