Informal Staff Advisory Opinion 97-5

This staff advisory opinion is issued in response to your request for advice, dated April 24, 1997, concerning the making of earnings representations in the general media, 16 C.F.R. § 436.1(e).

I. INTRODUCTION

In your request, you note that the Commission stated in the Final Interpretative Guides to the Franchise Rule that direct communications to financial journals or the trade press in connection with bona-fide news stories do not constitute the making of earnings representations in the general media under 16 C.F.R. § 436.1(e). You now ask whether the same policy exempts a franchisor from making earnings representations if that franchisor presents a prospective franchisee with copies of news articles resulting from direct communication with financial journals or the trade press.

II. THE DEFINITION OF AN EARNINGS REPRESENTATION

The Franchise Rule provides that it is a deceptive act or practice for any franchisor or franchise broker to make any "oral, written, or visual representation to a prospective franchisee which states a specific level of potential sales, income, gross or net profit," or "which states other facts which suggest such a specific level," unless the franchisor satisfies the substantiation and disclosure obligations set forth at 16 C.F.R. § § 1(b)-(e) and provides the prospective franchisee with an earnings claim document.

Section 436.1(e) of the Rule sets forth specific requirements for the dissemination of earnings representations in the general media. A franchisor who wishes to disseminate earnings information in the general media must have a reasonable basis for the representation; must possess, and make available to the Commission upon reasonable request, material which constitutes a reasonable basis for the representation; must ensure that the data underlying the representation has been prepared in accordance with generally accepted accounting principles; and must provide certain disclosures detailing the number and percentage of franchisees who have earned the claimed amount.

In the Final Interpretative Guides to the Rule, the Commission explained what constitutes general media claims in more detail. Specifically, the Commission stated that Section 436.1(e):

encompasses earnings claims made "for general dissemination" . . . includ[ing] claims made in advertising (radio, television, magazines, newspapers, billboards, etc), as well as those contained in speeches or press releases. It does not include communications to financial journals or the trade press in connection with bona-fide news stories, or directly to lenders in connection with arranging financing for the franchisee.

44 Fed. Reg. 49966, 49984-85 (August 24, 1979).

III. PROVIDING COPIES OF FINANCIAL OR TRADE PRESS NEWS ARTICLES CONTAINING EARNINGS INFORMATION TO PROSPECTIVE FRANCHISEES CONSTITUTES THE MAKING OF AN EARNINGS CLAIM

Based upon the Franchise Rule and the Final Interpretative Guides, it is clear that the Commission does not want to impede a franchisor from communicating information about its franchise, including earnings information, directly to journalists writing bona fide news articles. There is no doubt that earnings information provided by a franchisor during an interview may suggest a specific level of sales or potential income that may be generated from the operation of a franchised outlet. Nonetheless, the benefits from the dissemination of such information may outweigh any potential harm to prospective franchisees. For example, such information may be useful to potential suppliers seeking growing businesses as customers; shopping center or mall developers seeking promising franchised systems as tenants; and financial analysts who follow market or industry trends. Accordingly, the exemption from the general media earnings claims disclosure requirements ensures that the Rule does not chill the free flow of newsworthy information about franchising or particular franchise systems.

This exemption from the general media earnings claim disclosure requirements is very narrow. Although a franchisor originally may have given earnings information directly to journalists in connection with bona fide news articles, it is the subsequent dissemination of the earnings information by the franchisor to a prospective franchisee, not the original intended use of the information, that triggers the Rule's earnings substantiation and disclosure obligations. We recognize that a franchisor who speaks with a journalist may have little or no control over the way any earnings information is presented or over the conclusions the journalist may draw from that information. By disseminating copies of the news article, however, the franchisor effectively ratifies the journalist's words as its own and, in so doing, converts the article into an advertising piece designed to solicit prospective franchisees. Therefore, if a franchisor, or its agent or broker, provides a prospective franchisee with reprints or copies of articles, or encourages a prospective franchisee to read specific news articles, containing earnings claims information then that franchisor has made an earnings representation under the Rule.

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.

Franchise Rule Staff

Date: July 31, 1997