Informal Staff Advisory Opinion 05-2

This staff advisory opinion is issued in response to your recent request for our views concerning the applicability of the Federal Trade Commission's Franchise Rule (“the Rule”) to your proposed business arrangement.

I. INTRODUCTION

You ask whether the following proposed business arrangement constitutes a franchise under the Franchise Rule. Your company has developed a patent-pending method designed to increase sales of staffing companies. You would like to license your method to staffing companies to use in their local areas. According to your letter, the staffing companies selected as licensees are already established companies in the staffing industry, generally with greater than five years of experience.

You intend to provide the licensees with limited support, including a one-day training program, accompanied by printed materials. In addition, you will offer advice, encouragement, and specialized instruction through the telephone, email, or web-based announcements. You emphasize, however, that the training and ongoing support will not affect how the licensees operate their day-to-day businesses. The licensees may implement the various sales techniques, as they choose. The only control exercised over the licensees is the requirement that the licensees report and make a payment on any newly-generated business resulting from using the licensed sales techniques.

II. THE DEFINITION OF FRANCHISE

We begin our analysis by noting that the term "franchise" refers to a continuing commercial relationship. In your letter, you state that you will provide licensees with ongoing support in the use of licensed sales techniques. In addition, licensees are required to report and pay for business generated as a result of using your system. This is sufficient to constitute a “continuing commercial relationship.”

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) the exercise of significant control over, or the provision of significant assistance to, the franchisee; and (3) the required payment of at least $500 within six months of signing of an agreement. 16 C.F.R. § 436.2(a)(1)(i).

Based upon your letter it appears that licensees will pay more than $500 to use your company’s sales techniques. The question remains, however, whether they will sell trademarked services or use your company’s trademark in the operation of their business and whether your company provides significant control or assistance over the licensees’ business operations. We discuss these two issues below.

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

The first definitional element of a franchise is the use of a trademark. The Rule provides that the trademark element will be satisfied under one of two conditions:

  1. The franchisee offers, sells, or distributes goods, commodities or services that are identified by a trademark; or
  2. The franchisee indirectly or directly is required or advised to meet prescribed quality standards where the franchisee operates under a name using the trademark.

16 C.F.R. § 436.2(a)(1)(i)(A)(1) and (2).

Based upon the information you have presented, it appears that neither trademark standard is satisfied in this instance. As you note in your letter, the licensees are established businesses that apparently use their own name and will be using your system simply as an incidental means to grow their businesses. The licensees will not be training others in the use of your company’s system or otherwise providing services to the public that are identified with your company’s trademark. In that regard, your proposed arrangement is similar to a fast-food restaurant that happens to use a licensed tax preparation system in maintaining its financial records. Where a business licenses various support services in the operation of its business, but does not offer those services to the public, the trademark element required for Rule coverage is not present. For this reason alone, your proposed business arrangement would not constitute a franchise.

2. Significant Control or Assistance

As noted above, you also state that your client imposes no significant controls over the staffing company’s business operations. At most, the licensees must report and pay for increases in sales generated from the use of your company’s sales techniques. While your company also promises various support services, these are incidental to the operation of the licensees’ businesses and have no bearing on the licensees’ business of providing staffing services to the public.

We note that the Commission stated in its Final Interpretative Guides that "significance" is a "function of the degree of reliance that franchisees are reasonably likely to place upon the controls or assistance." See Final Interpretive Guides, 44 Fed. Reg. at 49,967. This is especially relevant where purchasers 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 importance of the assistance and control offered by the seller to the purchasers. Id. See also Statement of Basis and Purpose, 43 Fed. Reg. 59,614, 59,701 (Dec. 21, 1978).

In your letter, you state that the licensees will be well-established businesses in the staff field. Accordingly, they are not likely to place great reliance on your company in the operation of their businesses. Moreover, the Commission has stated that controls and assistance must be over the franchisee’s “entire method of operation – not its method of selling a specific product or products which represent a small part of the franchisee’s business.” The Commission reasoned:

Controls or assistance directed to the sale of a specific product which have, at most, a marginal effect on a franchisee’s method of operating the entire business will not be considered in determining whether control or assistance is “significant.”

44 Fed. Reg. at 49,967.

As previously noted, your company does not seek to control or assist licensees in operating a staffing services business. At most, your company provides support services that happen to be tailored to the staffing industry. Under the circumstances, it does not appear that your company’s relationship with licensees satisfies the second definitional element required for Franchise Rule coverage.

III. CONCLUSION

For the foregoing reasons, it does not appear that your propose license arrangement is a franchise, within the meaning of the Franchise Rule. 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.

Date: March 2, 2005
Franchise Rule Staff