Informal Staff Advisory Opinion 96-4

This staff advisory opinion is issued in response to your request dated July 16, 1996, for our views concerning the applicability of the Franchise Rule to your client's business arrangement.

I. INTRODUCTION

Your client proposes to enter into a joint venture agreement and a license agreement, which arguably might be covered by the Franchise Rule. You pose two questions. The first question concerns the trademark requirement. You ask whether a franchise seller could avoid Rule coverage by transferring its rights in a trademark to a third party it controls so that the mark does not identify the seller? The second question concerns the validity of waivers of the Franchise Rule. You ask whether the parties may avoid Franchise Rule coverage by either:

(a) agreeing in writing that their relationship does not constitute a franchise; or (b) by a contractual waiver of all rights to receive any benefits or protections of federal franchise law.

II. TRADEMARK

A package or product franchise will be covered by the Franchise Rule if the relationship satisfies the three definitional elements of a franchise set out at 16 C.F.R. § 436.2(a). The first element, the trademark requirement, will be satisfied if a franchisee offers, sells, or distributes to any person other than a franchisor, goods, commodities, or services which are:

  1. Identified by a trademark, service mark, trade name, advertising or other commercial symbol designating another person (hereinafter "franchisor"); or
  2. Indirectly or directly required or advised to meet the quality standards prescribed by another person (hereinafter "franchisor") where the franchisee operates under a name using the trademark, service mark, trade name, advertising or other commercial symbol designating the franchisor.

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

In your letter, you evidently focus narrowly on the use of the phrase "designating the franchisor." You apparently interpret that language as an exclusion, meaning that, for Rule coverage, the mark must specifically identify the franchise seller. We conclude that the trademark element will be satisfied as long as the franchise seller owns or has the right to use or control the use of the mark.

For Rule coverage, a mark need not specifically identify the franchise seller per se, but must be associated with the franchise seller so that consumers would recognize an outlet as belonging to the franchisor's chain. Our previous advisory, U.S. Marble, Inc. Bus. Franchise Guide (CCH) ¶ 6424 (October 9, 1980), is instructive on this point. In that opinion, we first noted that an advertising or commercial symbol will satisfy the mark element. We also observed that the term "commercial symbol" is a term of art that would include "distinctive shape, size, and other features." We concluded that "[t]he determinative issue is whether such a feature is brought to the attention of the licensee's customers to such an extent that they would regard the licensee's establishment as one in a chain identified with the licensor." Id. at 9593. Accordingly, for Rule purposes, a trademark or other symbol need not specifically identify the franchisor by name. Indeed, a name need not be used at all. However, the mark or commercial symbol must be associated with the franchisor's business so that customers would identify an individual outlet as belonging to that franchisor's system.

You also seem to assume that if a franchise seller does not actually own the marks it uses in the franchise business, it would not have to comply with the Franchise Rule. You acknowledge, however, that your franchisor-client has the right to license the use a trademark and prospective franchisees, in turn, will acquire the right to use that trademark.

For Rule purposes, it does not matter who owns the trademark. We can discern no policy difference whether the trademark is actually owned by the franchisor or is licensed from another entity. Rather, the issue is whether the mark is used to designate the franchisor and its franchise system to the consuming public. Thus, Rule coverage exists as long as a franchisee is permitted to use a mark that is associated with the franchisor's business. If this were not true, every franchisor could avoid Rule coverage by simply establishing a separate entity to own the mark and then licensing it back.

III. WAIVER

In your letter you also ask whether the parties can avoid Rule coverage by agreeing that their business arrangement is not a franchise, or by waiving the right to receive a disclosure document. The Commission long ago determined that the name the parties give to their business arrangement is irrelevant for Rule coverage. If a business relationship falls within the Rule's definition of the term "franchise," it will be covered by the Rule. See Final Interpretive Guides, 44 Fed. Reg. 49966 (August 24, 1979). For that reason, an attempt to avoid the Rule by agreeing that a covered business relationship is not a franchise must fail. Further, we note that the Commission prescribed permissible exemptions and exclusions when it promulgated the Rule, which are set out at 16 C.F.R. § 436. There is no exemption from coverage for an agreement between the parties or by a waiver.

Moreover, agreement or waiver would be inappropriate on policy grounds. The very reason that the Commission promulgated the Franchise Rule was that the rulemaking record established that franchisors and business opportunity sellers engaged in widespread misrepresentations in order to sell franchises and business opportunities. In addition, prospective franchisees were often denied material information necessary to make an informed investment decision. Accordingly, the Commission will continue to ignore any purported effort to circumvent the Rule by agreement between the parties or by waiver. See Advisory 94-5, Bus. Franchise Guide (CCH) ¶ 6461 (July 8, 1994); Advisory 94-4, Bus. Franchise Guide (CCH) ¶ 6460 (May 12, 1994.) Where compliance with the Rule is unnecessary either because the prospective franchisee will be able to gain information needed to make an informed investment decision, or because the prospective franchisee is not likely to be deceived, then the proper course of action is to file a petition with the Commission for a statutory exemption from the Rule under Section 18(g) of the FTC Act.15 U.S.C. 18(g).

Please be advised 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 15, 1996
Franchise Rule Staff