Informal Staff Advisory Opinion 05-4

This staff advisory opinion addresses VaultraNet'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 4361. The NPR sought comment on a wide range of issues, including proposed instructions enabling franchisors to furnish disclosure documents electronically, including through the Internet2. 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.

II. DEMONSTRATION PROJECTS

On July 18, 2000, the Commission published in the Federal Register an announcement soliciting demonstration projects for electronic dissemination of disclosure documents3. 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 improvements4.

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 instructions6. 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, and also means the legal representative of such an individual.”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 rethink the proposed Rule's electronic disclosure instructions. Indeed, the 2004 Staff Report on the Franchise Rule recommended several revisions that would streamline those instructions8. While the Commission considers the Rule amendment record and the Staff Report's recommendations, we recognize that the franchise community continues to need guidance on electronic disclosure. We still 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. VAULTRANET'S REQUEST

VaultraNet is a file delivery and electronic signature capture company. In its letter, VaultraNet states that it has developed an Internet-based file delivery and signature system called “PrivaSign.” VaultraNet now seeks our opinion whether the PrivaSign system may be used to furnish disclosure documents to prospective franchisees. For the reasons stated below, we conclude that the PrivaSign system appears to comply fully with the proposed instructions set forth in the NPR.

According to VaultraNet's letter, the disclosure process begins by verifying each prospective franchisee's phone number and email address. To receive disclosures electronically, a prospect must then give his or her prior consent. Once consent is given, the prospect receives an email notice acknowledging his or her prior consent, with a notice permitting the prospect to reverse this choice at any time.

The next step in the disclosure process is the receipt of a license granting the prospect the ability to review the disclosure document assigned to the prospect. To access the disclosure document, prospects login to a secure, password-protected website, where they may receive the disclosure document in various standard formats, including Microsoft Word and Adobe PDF. Prospects may then click on a “View File” button and download the disclosure document directly to their desktop. At that point, the prospect may review the document on the screen or print the document as a hardcopy. If the electronic document is opened by the prospect, the PrivaSign system captures the date for confirmation and for auditing and tracking purposes.

A franchisor using PrivaSign also may wish to have a prospective franchisee electronically sign the document. To do so, the prospect clicks on the “Accept” button located next to his or her name. By clicking this button, the prospect confirms receipt of the document and obtains a message stating that the prospect is agreeing to receive disclosures electronically.

VaultraNet states that throughout its online disclosure system, notices inform prospective franchisees that they may receive a paper copy of any materials. If a prospect elects to receive a paper copy, a notice is sent to the franchisor and paper copies are furnished accordingly.

VaultraNet further states that it furnishes prospective franchisees with a summary paper document in three ways. First, the franchisor may send the summary to a prospective franchisee via email with instructions on how to print the file and the proper steps to follow in order to receive the information in a paper format. Second, the franchisor may include the summary in the email notice granting a prospect a license to obtain an electronic disclosure document. Finally, the franchisor may send the summary to a prospect with the license, along with other state specific materials or information.

V. CONCLUSION

Based upon our review, we are satisfied that VaultraNet has made a good faith effort to comply with the proposed Internet instructions specified in the NPR. Accordingly, we believe that VaultraNet's proposed system for electronic disclosure is consistent with the Franchise Rule, until such time as the Commission may adopt revised instructions for electronic 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: August 30, 2005

164 Fed. Reg. 57,294 (October 22, 1999).

2See NPR, proposed Internet instructions at section 436.7. 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.

365 Fed. Reg. 44,484 (July 18, 2000).

4Id. at 44,485.

5 15 U.S.C. § 7001.

6See NPR, proposed Internet instructions at section 436.7(a).

715 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”).

8Bureau of Consumer Protection, Staff Report to the Federal Trade Commission and Proposed Revised Trade Regulation Rule on the Proposed Revised FTC Franchise Rule (Aug. 2004).