Informal Staff Advisory Opinion 04-4

This staff advisory opinion is issued in response to your recent request for our views on the applicability of the Federal Trade Commission's Franchise Rule to your client’s proposed business arrangement.

I. INTRODUCTION

Your client is “The glass network, llc” (“glass network” or “network”). Its parent companies are two non-profit entities – the Minnesota Glass Association (“MGA”) and the Minnesota Independent Insurance Agents and Brokers Association (MIIABA”). The MGA is a trade association whose members include auto glass retailers, flat glass retailers, glass manufacturers, and glass wholesalers.

MGA and MIIABA have formed the glass network to compete with established regional and national auto glass networks, which, according to your letter, dominate the insurance segment of the auto glass replacement market. Auto glass retailer members of the MGA that wish to join the network will pay membership and other fees and must abide by certain system standards imposed by the network. In return, they will receive benefits, including the ability to expand their market by getting recommendations from MILABA members, as well as the ability to perform work for consumers whose insurance claims are processed through the glass network. You ask whether the proposed business arrangement with auto glass retailers constitutes a franchise under the Franchise Rule.

II. THE DEFINITION OF FRANCHISE

We begin our analysis by noting that the term "franchise" refers to a continuing commercial relationship. According to your letter, auto glass retailers seeking membership in the glass network will pay annual membership fees ranging from $1,250 to $1,850 per year. In addition, they will pay the glass network a one-time membership fee of $150 for each location participating in the network, and a one-time additional fee of $150 for each county the members ask to serve. Network members also must submit certain insurance claims billings to the glass network for processing, for which they will pay administrative fees. At the same time, members receive the benefit of recommendations from MIIABA members, as well as marketing materials, on an ongoing basis. Accordingly, it is clear that your client’s relationship with the glass network is both continuing and commercial.

To be covered by the Franchise Rule, a business arrangement must also satisfy the three definitional elements of a "franchise" set forth in the Rule: (1) the distribution of goods or services associated with the franchisor's trademark or trade name; (2) significant control over, or significant assistance to, the franchisee; and (3) a required payment of at least $500 within six months of signing of an agreement. 16 C.F.R. § 436.2(a)(1)(i).

As noted above, it is clear that auto glass retailers seeking membership in the glass network will pay a fee of at least $1,250 (plus additional administrative fees to process insurance claims). Accordingly, the proposed arrangement would satisfy the Rule’s minimum required payment prerequisite and, therefore, we need not address that issue. Below, we turn to the trademark and control and assistance elements, and conclude that the proposed business relationship satisfies each definitional element required for Franchise Rule coverage.

1. Distribution of Goods or Services Associated with the Franchisor's Trademark or Trade Name

The first definitional element of a franchise is trademark or trade name. The Rule specifies that this element will be satisfied if the franchisee offers, sells, or distributes goods, commodities or services which are identified by the franchisor’s mark. 16 C.F.R. § 436.2(a)(1)(i)(A)(1). In this instance, each location that joins the glass network will continue to operate under its own name and will not use the glass network name as a part of its business name, or as an alternative to its business name. You add that, at the present time, glass network members are not permitted to use the name “The glass network” in any way. Accordingly, they may not promote either the glass network or their participation in the glass network to insurance agents belonging to the MIIABA, or to any insurance company. Nor may they suggest that insurance agents consider recommending the glass network to their insureds for auto glass claims services.

If the policy barring the use of the network’s name were to remain in effect, then we would conclude that the trademark prerequisite is absent. However, you state in your letter that the glass network would like its members to be able to promote their participation in the network to insurance agents, for example, by furnishing agents with pre-printed marketing materials created and distributed by, and using the name of, the glass network. The glass network would also distribute promotional materials directly to insurance agents and insureds for the benefit of its members.

As noted in the Statement of Basis and Purpose accompanying the Rule, the franchisee’s association with the franchisor’s trademark “permits him to attract customers familiar with the franchisor’s goods or services, rather than solely relying on his own reputation to build up recognition.” 43 Fed. Reg. 59,614, 59,698 (Dec. 21, 1978). As proposed in your letter, network members will deal with auto glass customers directly and indirectly through customers’ insurance agents. It is reasonable to assume that glass network members will associate with the glass network in these dealings – even if they do not use the glass network name in their business title – precisely in order to expand their market by aligning themselves with the glass network’s standards and reputation. Indeed, you state that association with the glass network “will hopefully provide the network member better access to the insurance market that is otherwise quite limited because of the influence of the large national and regional networks and one dominant national auto glass retailer.” Under these facts, we conclude that members’ association with the glass network name would be sufficient to satisfy the Rule’s trademark prerequisite.

2. Significant Control or Assistance

The proposed business relationship described in your letter also satisfies the Rule’s significant control or assistance prerequisite. As an initial matter, you assert that the glass network does not exercise control over its members’ business operations. Rather, the network will impose certain quality standards “designed to assure insurance agents that they will be recommending their customers to retailers that comply with minimum service standards.”

We disagree. To become a glass network member, an auto glass retailer must agree to abide by certain minimum standards. Specifically, they must be accredited by the Automotive Glass Replacement Safety Standard Council (an independent agency that has no affiliation with the MGA, MIIABA, or the glass network). Members also must meet all procedures concerning adhesives set by the adhesive manufacturer. More important, they must agree to provide a materials and workmanship warranty to their customers; to use only new glass in replacing windshields; and to repair, rather than replace, windshields whenever possible. They must also have a fixed location and agree to carry certain minimum insurance. Finally, they must agree to comply with all laws and regulations in connection with the performance of their work, to be open certain minimum hours, and to retain certain records.

Further, you concede that the glass network will provide its members with assistance. Specifically, it will promote the network among members of the insurance industry. This promotional assistance is intended to supplement the individual retailer’s normal advertising or marketing activities. You add that the glass network will also process insurance claims for its members. For its services, the glass network will subtract an administration fee (currently $35 for glass replacement and $15 for glass repairs) from each payment, and remit the balance to the glass retailer.

The question then becomes whether these controls and offers of assistance rise to the level of being “significant.” In the Final Interpretative Guides, the Commission stated that "significance" is a "function of the degree of reliance which franchisees are reasonably likely to place upon the controls or assistance." See Final Interpretive Guides, 44 Fed. Reg. 49,966, 49,967 (Aug. 24, 1979). This is especially true of purchasers who are inexperienced in the particular business. Id. The Commission examines "significant control and assistance" on a case-by-case basis. Among other things, the Commission considers the nature of the particular industry, the level of sophistication of the investors, as well as the meaning of the assistance and control to the purchasers. Id. See also Statement of Basis and Purpose, 43 Fed. Reg. at 59,701.

From your letter, we can assume that glass network members are established auto glass retailers who are familiar with the industry. Accordingly, it would appear that these retailers are not likely to place great reliance on your client in order to provide the public with auto glass services. Nonetheless, we find that prospective members are likely to place great reliance on your client in order to expand the market for their services.

As noted above, the principal benefit of association with the network is to gain access to the insurance market, which, you state, is otherwise limited. Indeed, you concede that members wish to associate with the glass network to get “access to one segment of the market that would otherwise be unavailable to them without actually joining a franchise system and giving up their independence, or worse, selling out to a multi-unit competitor that is able to reach this increasingly important segment of the market.” In short, the auto glass retailers will rely on the glass network’s expertise and reputation in order to expand their businesses. Coupled with the business controls and promotional assistance outlined above, including both the warranty and insurance claim processing programs, each of which induces and creates member reliance on the glass network, we believe the offer of access to an important segment of the auto glass repair industry is sufficient to satisfy the Rule’s significant control and assistance prerequisite.

III. CONCLUSION

For the reasons noted above, we conclude that your client’s proposed business relationship satisfies the three definitional elements of the term “franchise.” Please be advised that our opinion is based on all the information furnished in your request. This opinion applies only to you and to the extent that actual 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: November 8, 2004
Franchise Rule Staff