Informal Staff Advisory Opinion 04-2

This staff advisory opinion addresses for the first time the application of the Franchise Rule's general media earnings claims provisions to new marketing techniques, such as pop-up screens and banner advertisements on web sites and commercial bulk emails.

I. INTRODUCTION

Your firm represents a franchisor that makes an Item 19 earnings claim in its Uniform Franchise Offering Circular ("UFOC").(1) The Item 19 includes existing franchisees' gross sales (average sales, median sales, and sales of the 25th and 75th percentiles), as well as the number and percentage of franchisees that have achieved each of these sales levels. In addition, there is a disclaimer that a prospective franchisee may not do as well as the reported figures.

Your client wishes to engage in an electronic marketing campaign to attract new franchisees. Your client contemplates that much of the advertising material will appear only on its own Web site, where it will be available to all prospective franchisees for review. Some of the advertising material, however, will be distributed using other electronic media, including banner ads and pop-up ads,(2) as well as commercial bulk email.(3) In some of these advertising materials, the client would like to state its franchisees' average gross sales. You note that all prospective franchisees who express interest in obtaining a franchise ultimately will receive a complete UFOC in accordance with state and federal law.

You now ask the following three questions:

  1. Does the making of an earnings claim in advertising materials on a Web site or in electronically distributed materials (such as bulk email) trigger the Rule's general media earnings claim disclosures, or would the Rule's earnings claim requirements be satisfied by subsequent delivery of a UFOC that includes information supporting the earnings claims?
  2. Will the FTC treat an advertisement on a Web site in the manner contemplated by the terms of the NASAA policy regarding franchise advertising on the Internet, which exempts from state advertisement filings advertisements that are not directed to any person? Does the answer change if a link to a Web site is subsequently distributed via bulk email, banner ads, or pop-up ads?
  3. If materials (whether posted on a Web site or distributed through email, banner ads, or pop-up ads) do not themselves contain an earnings claim, but refer to the fact that the client's UFOC contains an earnings claim, would the FTC require the materials to be accompanied by the general media claim disclaimers or is the presence of the UFOC disclaimers sufficient?

We appreciate the opportunity to provide additional clarification on the relationship between general media claims and new marketing techniques. We will address each question in turn.

II. GENERAL MEDIA CLAIMS

The Franchise Rule provides that it is a deceptive act or practice for any franchisor or franchise broker to make any oral, written, or visual representation to a prospective franchisee that states a specific level of potential sales, income, gross or net profit, or that states other facts which suggest such a specific level, unless the franchisor satisfies the substantiation and disclosure obligations set forth at 16 C.F.R. §1(b)-(e) and provides prospective franchisees with an earnings claim document.

To trigger the Rule's earnings claims provisions, a claim need not be made directly to a specific prospective franchisee.(4) Rather, the Rule states that indirect earnings claims made through the general media are covered by the Rule. Under section 436.1(e), a franchisor who wishes to disseminate earnings information in the general media must have a reasonable basis for the representation; must possess, and make available to the Commission, upon reasonable request, material that constitutes a reasonable basis for the representation; must ensure that the data underlying the representation has been prepared in accordance with generally accepted accounting principles; and must provide certain disclosures detailing the number and percentage of franchisees who have earned the claimed amount in the represented time frame.(5)

In the Final Interpretative Guides to the Rule, the Commission explained what constitutes general media claims in more detail. Specifically, the Commission stated that section 436.1(e):

encompasses earnings claims made "for general dissemination" . . . includ[ing] claims made in advertising (radio, television, magazines, newspapers, billboards, etc), as well as those contained in speeches or press releases. It does not include communications to financial journals or the trade press in connection with bona-fide news stories, or directly to lenders in connection with arranging financing for the franchisee.

44 Fed. Reg. 49966, 49984-85 (August 24, 1979).

A. Internet Advertising

In your request, you ask whether the Franchise Rule's general media claims provisions apply to advertisements in electronic media. Given the broad definition of general media, it is clear that an earnings claim in an advertisement disseminated electronically will be covered by section 436.1(e). We fail to see any practical or policy difference between advertisements placed in traditional media - print, radio, and television - and advertisements placed on a franchisor's Web site or on a third-party's Web site, where they will be seen by the general public. Nor do we see any basis to distinguish among the various forms of electronic advertisements, such static ads, pop-up screens, and banner ads.(6)

B. Email

Your request also raises the question whether bulk email containing earnings information is a general media claim. In your letter, you imply that there are two different types of email recipients: (1) those who have placed their names on third-party lists expressing an interest in receiving franchise information; and (2) those who have not previously expressed an interest in receiving franchise information. You apparently believe that sending email messages with earnings claims to those who have previously expressed an interest in franchising is a direct communication with prospective franchisees that should be governed by sections 436.1(b) or (c), rather than an indirect, "generally disseminated" communication covered by section 436.1(e).

As explained below, we disagree in part. In addressing this question, we believe the primary factor is whether an emailed earnings claim is considered a "point-of-sale" representation. In the Statement of Basis and Purpose, the Commission recognized a distinction between direct earnings representations made in "point-of-sale" materials, and indirect earnings representations made in the general media, where "slightly different treatment is warranted." 43 Fed. Reg. at 59,686. Only after determining whether athe claim is "point-of-sale," can we consider any prior expression of interest on the recipient's part.

1. "Point-Of-Sale" Email Messages

Where a franchisor emails an earnings claim to a potential buyer, we believe the email message constitutes a direct point-of-sale representation governed by section 436.1(b) or (c). "Point-of-sale" implies that there is a buyer and a seller who have entered into the sales process. For example, where a prospective franchisee submits an online application with a franchisor, it is reasonable to conclude that the prospective franchisee solicits email messages from the franchisor in response to advance the franchise sale. If the franchisor were to send the prospect information containing an earnings claim, such a direct communication would be deemed a "point-of-sale" claim governed by section 436.1(b) or (c). The franchisor, of course, must subsequently follow the emailed claim with a complete and accurate UFOC containing a detailed Item 19 in the time frame required by the Rule.

2. Unsolicited Email Messages

On the other hand, we believe that unsolicited bulk email messages sent to the public are a form of general media advertising covered by section 436.1(e). Under the Franchise Rule, a general media advertisement is widely disseminated with the intent of creating interest in the franchisor, possibly leading to franchise sales. This contrasts with "point-of-sale" materials, which are designed to advance a franchise sale between an interested buyer and seller. This distinction holds true even if an advertisement is sent to specific consumers' email addresses. For example, it is clear from the Statement of Basis and Purpose that a franchise advertisement in a magazine or newspaper will constitute a general media claim, even though the magazine or newspaper may be sent to the addresses of individual subscribers. The mere fact that a message is sent to specific individuals alone does not mean those individual recipients are buyers who have expressed interest in a franchise offer. Accordingly, unsolicited advertisements containing an earnings claim will be deemed a general media claim if widely disseminated, even if sent to specific individuals' addresses.(7)

3. Prior Expression of Interest

A more difficult question arises concerning the sending of email messages to those who have previously expressed some interest in franchising. We believe a logical distinction exists between those who have previously expressed interest in a specific franchisor and those who have expressed a general interest in the subject of franchising. Where a member of the public has contacted a franchisor to receive information about that specific franchisor, then that individual has taken an initial step toward becoming a buyer. Under the circumstances, future correspondence from the franchisor to that individual consumer is akin to the "point-of-sale" model described above. Accordingly, if a prospective franchisee contacts your client to express an interest in receiving franchise information, including franchise offerings, then future emails to that prospective franchisee would be deemed a direct communication governed by section 436.1(b) and (c).

If, however, a consumer has contacted a third-party to express interest in receiving franchise information generally, then the contact between that consumer and any specific franchisor is too attenuated to be considered a "point-of-sale" contact. Parties interested in franchising include not only prospective franchisees, but academics, competitors, advertisers, and suppliers. We see no difference between sending email messages to members of the public who happen to have expressed some interest in the area of franchising and sending advertisements in franchise-related magazines or newspapers to subscribers. Accordingly, email messages sent to those who have expressed a general interest in franchising will be deemed to be general media claims governed by section 436.1(e).

III. RELATIONSHIP BETWEEN THE RULE AND NASAA'S ADVERTISEMENT POLICY

Your next question concerns the relationship between the FTC's general media claims provisions and NASAA's recent policy on electronic media advertising. In order to address this question, some additional background on the NASAA policy is warranted.

In September 2001, NASAA promulgated a policy with respect to franchise advertising on the Internet. This policy was needed because certain states regulate the advertising of franchise offerings. Specifically, these states require filing of franchise advertising, separately from the registration of UFOCs. In essence, the policy states that a franchisor advertising on a Web site need not file the advertisement in advance of its use if two conditions are met: (1) the franchisor discloses the address of the Internet advertisement on the cover page of its UFOC or its registration application; and (2) the advertisement is not directed to any person in the state's jurisdiction. In other words, a franchisor need not file an Internet advertisement if the advertisement is in the general media.(8)

We note that the Franchise Rule does not require the filing of franchise advertisements. Accordingly, the NASAA policy is inapplicable to the Franchise Rule. It would appear that you may be asking a slightly different question: since NASAA exempts from filing Internet advertisements not directed at individuals, would the Commission exempt from its general media claims provisions Internet advertisements not directed at individuals. The answer is no. Indeed, such a position would essentially eviscerate the Rule's general media claims requirements. As explained above, the Rule addresses earnings projections and historical earnings claims made in point-of-sale materials through sections 436.1(b)-(c), as well as such claims made to the general public indirectly through general media advertisements. We believe there are sound policy reasons for ensuring that consumers reading franchise advertisements are not misled, especially about the number or percentage of franchisees who have actually attained the claimed level of earnings. This is true even if the prospective franchisee ultimately receives a UFOC with a full Item 19. For these reasons, the Commission will continue to enforce the Rule's general media claims provisions, even if the claim appears on a Web site.

IV. INDIRECT REFERENCES TO EARNINGS

Finally, you ask about indirect references to earnings claims. Specifically, you ask whether materials posted on a Web site or distributed through email, banner ads, or pop-up ads will trigger section 436.1(e) if the ads do not themselves contain an earnings claim, but refer to the fact that the client's UFOC contains an earnings claim.

In determining whether any particular message is considered an earnings claim, we must look at the contents of the specific message. Under section 436.1(e), a general media earnings claim consists of a representation for general dissemination "which states a specific level of sales, income, gross, or net profits, either actual or potential, of existing or prospective outlets . . . or which states other facts which suggest such a specific level." Thus, by its terms, the Rule's general media earnings claim provision requires a representation from which a reader is likely to draw an inference about his or her likelihood of success. Merely stating in an advertisement - whether in a traditional paper advertisement or in an electronic advertisement - that earnings information is made available in the franchisor's UFOC alone is insufficient to trigger the Rule's general media claim provisions.(9)

Please be advised that our opinion is based on all the information furnished in your 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: January 29, 2004

Franchise Rule Staff

Endnotes:

1. You add that the franchisor is registered in all states with pre-sale franchise registration requirements.

2. In your letter, you explain that banner and pop-up ads "would appear on third-party Web sites, primarily of companies that are likely to attract potential franchisees."

3. You define "bulk email" as messages that "would be distributed to 'opt-in' address lists maintained by companies that the client contracts with - the client would not control the specific addresses to which the emails are sent."

4. Two Rule provisions address earnings claims made directly to prospective franchisees: section 436.1(b) addresses earnings projections made to a prospective franchisee, and section 436.1(c) addresses historical franchisee earnings data presented to a prospective franchisee.

5. The general media claims requirements are grounded in sound policy concerns. In the Statement of Basis and Purpose accompanying the Rule, the Commission recognized the potential "serious economic injury to prospective franchisees who are attracted by claims of high income potential." The Commission noted that a good deal of time could pass between the initial media representation and the furnishing of earnings claims disclosures required by the Rule. In order to counter any negative impact of such an ad, disclosures in the ad itself are necessary "since once the prospective franchisee has been 'hooked,' it is difficult, if not impossible, to extricate himself." 43 Fed. Reg. 59,614, 59,693 (Dec. 21, 1978).

6. It also does not matter who created the advertising materials. For example, in a previous advisory we determined that a franchisor disseminating copies of news articles created by journalists will be deemed to be making a general media claim. In so doing, the franchisor "effectively ratifies the journalist's words as its own, . . . convert[ing] the article into an advertising piece designed to solicit prospective franchisees." Accordingly, a franchisor will be covered by section 436.1(e) whether it posts its own materials or those created by others, on its Web site or on a third-party's Web site, whether through a static ad, pop-up screen ad, or banner ad.

7. This is distinguishable from a franchisor e-newsletter, for example, generated for the benefit of prospective franchisees already in the sales process. In such instance, the target audience is not the public at large, but a more narrow universe of individuals who already maintain a relationship with the franchisor.

8. The NASAA policy addresses the filing of advertisements only, not content. Accordingly, even if a state exempts an ad from filing, it may nonetheless challenge the content of the ad under its general anti-fraud authority or under any provisions regulating earnings claims in advertisements.

9. Our analysis might be different, however, if an electronic advertisement contained an actual link to the franchisor's UFOC or to other sources containing earnings information.