Informal Staff Advisory Opinion 03-5

This staff advisory opinion addresses a request for guidance on how franchisors may comply with the Franchise Rule electronically, submitted by McGarry Internet Ltd of Dublin, Ireland..

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 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. McGARRY INTERNET'S REQUEST

In its request, McGarry Internet sets forth a plan to enable franchisors to comply with the Franchise Rule electronically and seeks permission to conduct a demonstration project. For the reasons stated below, we conclude that the proposed system appears to comply fully with the proposed instructions set forth in the NPR.

McGarry Internet's system begins with sending prospective franchisees an email that explains the significance of a Uniform Franchise Offering Circular ("UFOC") and offers the choice to receive the UFOC either electronically or by mail. The email also contains a user name and password. Prospective franchisees choosing to receive UFOCs electronically would then click on a link in the email message that would take the prospect to a password-protected area where they could log in. The prospective franchisee's visit to the site, and all subsequent actions during the visit, would be dated through a cookie in the link.

Upon entering the site, the prospective franchisee would find a page detailing the franchisor's summary documents, as outlined in the NPR, together with instructions for downloading the UFOC. This page would include a prominent "Print this page for your records" link. At this stage, the prospective franchisee would provide his or her name and address and select a tick box to request the UFOC electronically. This form and the download would also be dated. These steps appear to confirm the prospective franchisee's consent to receive disclosures electronically and appear to satisfy the NPR's proposed summary document requirement.

Next, the prospective franchisee can download the UFOC to his or her computer in MS Word or PDF format. At this stage, prospective franchisees would see a page requesting that they confirm receipt of the UFOC by entering their name, address, and checking a box confirming receipt. When the prospect confirms receipt, he or she will then see a thank you page including the following message:

You may have elected to receive an electronic version of your disclosure document. If so, you may wish to print or download the disclosure document for future reference. You have the right to receive a paper copy of the disclosure document up until the time of the sale. to obtain a paper copy, contact [name] at [address] and [telephone number].

After the download, prospective franchisees would receive an email thanking them for downloading the information and stating that they have acknowledged receipt. The email would also include the message noted above, and it would ask the prospect to report any difficulties they had with the request process, the download, or access to the file. These steps appear to satisfy the NPR's proposed admonition requirement, as well as the requirement that franchisors offer paper disclosure document up until the time of sale.

Franchisor-clients using this system would supply you with updates to their UFOCs, as they occur. You also will ask the franchisor to maintain a printed and electronic copy of every version of the UFOC. In addition, you will maintain an archive folder with each version of the UFOC that was supplied through the system. These files would be dated on the day that they were archived.

Finally, you state that the system is designed to capture information needed to report back to the Commission, as requested. Specifically, the system tracks outbound communication, as well as potential franchisee's interactions with the franchisor's online information. This allows for gathering information to report on usage. The franchisor will be required to track email and telephone communications concerning any comments, difficulties, or complaints in connection with the UFOC delivery system. In addition, McGarry Internet can track email complaints, as well as noted of any telephone conversations. These steps appear to satisfy the NPR's proposed recordkeeping requirements and facilitate reporting.

V. CONCLUSION

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

December 2, 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.").