Informal Staff Advisory Opinion 95-3

This staff advisory opinion is issued in response to your request dated February 27, 1995, for our views concerning the definition of the term "continuing commercial relationship."

I. Introduction

You represent Home Instruction Program For Preschool Youngsters U.S.A ("HIPPY USA"), a not-for-profit New York education corporation. HIPPY U.S.A. is the national coordinator for the HIPPY program in the United States. The original HIPPY program was developed at the School of Education, Hebrew University of Jerusalem. The HIPPY program is designed to help poor and under-educated parents provide educational enrichment to their preschool children.

As national coordinator of the HIPPY program, HIPPY USA licenses its name, trains, and assists organizations, such as local school districts, hospitals, Y.M.C.A's, and state agencies, who carry out the HIPPY program on a local basis. You further state that the licensees pay HIPPY USA a fee for the right to operate the HIPPY Program, to use the HIPPY trademark, and to cover HIPPY's costs for training and assistance. The licensees are also required to purchase from designated suppliers certain educational materials that have been developed specifically as part of the HIPPY program, including story books, activity packets for children, and instruction manuals for local program coordinators. HIPPY USA derives revenue from royalties related to the sale of the story books and other materials. You further state that HIPPY USA has developed operating requirements, including staffing and training requirements.

You state further that the HIPPY licensees, without exception, are public or quasi-public education entities or charitable organizations. None of the HIPPY licensees sells any goods or services. Families are not charged for participating in the HIPPY program, nor do HIPPY licensees derive any revenue from the operation of the HIPPY program.

You now ask whether the relationship between HIPPY USA and its licensees constitutes a "continuing commercial relationship" as envisioned under the definition of a "franchise" set out at Section 436.2(a) of the Franchise Rule.

You should know that, as a matter of policy, the Commission's Franchise Rule enforcement staff will not issue any staff opinion on the ultimate issue whether, under a specific set of facts, a business relationship is covered by the Franchise Rule. We will, however, provide general guidance on the Franchise Rule that you may wish to consider in determining whether your company's arrangement constitutes a franchise.

II. Definition of the Term "Franchise"

You correctly note that the definition of the term "franchise" refers to certain "continuing commercial relationships." 16 C.F.R. § 436.2(a).(1) In the Statement of Basis and Purpose accompanying the Rule, the Commission elaborated on the "continuing commercial relationship" requirement as follows:

There is general agreement that central to the definition of the term "franchise" is the concept that the relationship must be both "continuing" and "commercial." . . . The rule does not apply to relationships which are not entered into with the expectation of profit, or to commercial relationships which do not involve a course of dealing over a period of time.

43 Fed. Reg. 59613, 59700 (December 21, 1979).

The relationship between HIPPY and its licensees is clearly continuing. However, there does not appear to be any expectation of profit on the licensees' part.(2) The licensees apparently do not charge families for their services, nor do they derive income from the operation of the HIPPY program. Further, the hallmark of a franchise is reliance on the franchisor's expertise in order to reduce the franchisee's business risks and enhance the chances of business success. See Final Interpretive Guides, 44 Fed. Reg. 44965, 49967 (August 24, 1979). The licensees in this instance, however, have no expectation of business success. The Commission, therefore, did not intend to cover this type of relationship in promulgating the Franchise Rule.

III. Conclusion

Based upon the information you have provided, it does not appear that the relationship between HIPPY USA and its licensees constitute a "continuing commercial relationship," as that term is used at 16 C.F.R. Section 436.2(a). Please be advised that our opinion is based on all the information furnished in the 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: April 4, 1995
Franchise Rule Staff

(1) To be covered by the Franchise Rule, a business arrangement must also satisfy the three definitional elements of a "franchise" set forth at 16 C.F.R. § 436.2(a). You state in your letter that HIPPY USA was complied with the franchise disclosure laws to date. Accordingly, you acknowledge that HIPPY USA is a "franchise" under the Rule if its relationship with its licensees constitutes a continuing commercial relationship.

(2) Although you state that HIPPY USA is a not-for-profit educational corporation, it is possible its directors and other officials earn income from the sale of HIPPY materials and/or receipt of royalty payments from HIPPY licensees