Informal Staff Advisory Opinion 97-7

This staff advisory opinion is issued in response to your request for advice, dated July 8, 1997, on when significant control or assistance pertains to a franchisee's "entire method of operation."

I. INTRODUCTION

In your letter, you state that your client, Passport Health, Inc., offers licenses to various hospital systems and ambulatory care clinics ("Hospitals") to operate health travel businesses. These health travel businesses offer travel immunizations and information to persons traveling to foreign countries, as well as sell travel related products and supplies. You refer to these products and services collectively as the "Health Travel Program."

The Hospitals that will operate the Health Travel Program offer a variety of traditional health care programs such as industrial care, back to school physicals, weight control, wellness, and other programs in addition to their primary care, surgical, internal, and other in-patient and out-patient medical services. While all of the Hospitals offer certain immunization services, many do not offer travel immunizations, and most do not package these services with travel educational materials and travel products.

You now ask whether the relationship that will be established between Passport Health and the Hospitals constitutes a franchise under the Commission's Franchise Rule, 16 C.F.R. Part 436. 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 of 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 the proposed business constitutes a franchise.

II. MEANING OF "ENTIRE METHOD OF OPERATION"

In your letter, you state that the relationship between Passport Health and the Hospitals appears to satisfy the three definitional elements of a franchise, as set out in 16 C.F.R. § 436.2(a). For example, you note that Passport Health will license the use of its trade name, and other proprietary marks to the Hospitals. You add that Passport Health also intends to exercise sufficient controls over the use of its marks to protect their value. In addition, Passport Health will provide certain standards and specifications, as well as marketing and management methods and procedures, including training, which will be related to the Health Travel Program. For these services, Passport Health will charge a fee, which we understand will be more than $500.

Nonetheless, you contend that the controls and assistance offered by Passport Health would not be "significant" to the Hospitals' "entire method of operation," and, therefore, their relationship should not be covered by the Rule. Specifically, you note that the Health Travel Program: (1) will constitute only a small portion of the programs and services offered by the Hospitals; and (2) will generate only a small portion of the Hospital's overall income. Similarly, you add that the training and assistance provided by Passport Health pertain only to the Health Travel Program and do not relate to any of the "myriad of other services, health related or otherwise, offered, provided, or managed" by the Hospitals, "nor does the assistance or control relate to the overall management or operation of the [Hospitals] as a whole." In short, you contend that the Hospitals' participation in the Health Travel Program would be akin to a department acquiring another product line.

We disagree. There is no question that to be deemed "significant," a franchisor's offer of controls and assistance must pertain to a franchisee's entire method of operation of a business, not just to the sale of one product or service. Final Interpretive Guides, 44 Fed. Reg. 49966, 49967 (August 24, 1979). Apparently there is some confusion over what the Commission means by "entire method of operation." See Advisory 97-4, Bus. Franchise Guide (CCH) ¶ _____ (1997). Accordingly, we will explain this concept in greater detail.

The "entire method of operation" must be viewed in the context of the business relationship entered into between the parties. The relevant business is not what the franchisees will ultimately sell to the public, but the business that is the subject of the relationship between the franchisor and the franchisee. A simple example will illustrate this point:

A department store owner may decide that certain space on the ground floor level of its four-story building is underutilized. To make better use of that space and to boost overall sales, the store owner decides to offer fast food items to the public. With that in mind, the store owner approaches a popular and nationally recognized fast food franchise system and purchases the rights to operate one of their franchised kiosks. Now, in addition to selling a myriad of appliances, clothing, jewelry and other items, the department store owner sells hamburgers, sodas, and french fries under the franchisor's trade name. It cannot reasonably be said that the relationship created between the department store owner and the franchisor is not a franchise merely because the food items sold constitute a small portion of the department store owner's goods or represent only a small portion of the department store's revenue. While it is true that the department store owner has added to its product line, it is equally true that the owner has chosen to do so by acquiring and operating a franchised outlet.

This interpretation of the term "entire method of operation" is entirely consistent with the Rule's exemption for fractional franchises. Under the Rule, a fractional franchise relationship typically develops when a store owner adds to its existing product line. Even though the store owner sells perhaps hundreds of products, it nonetheless may become a franchise with respect to a single additional product or service line. Such a franchise will be exempt from Rule coverage as a fractional franchise only under narrow circumstances: (1) the store owner has been in the business represented by the franchise for more than two years; and (2) the parties anticipate that additional revenue generated from the addition of the franchised product or service line will not exceed 20 percent of the store owners' anticipated revenues. See 16 C.F.R. § 436.2(a)(3)(i).(1)

Thus, the plain language of the Rule makes clear that store owners who add to their existing product line may be a franchise and their relationship with the franchisor may be covered by the Rule.

III. THE CONTROLS AND ASSISTANCE APPEAR TO BE SIGNIFICANT

Based upon your description, the relationship between Passport Health and the Hospitals concerns the sale of travel information and related products. While Passport Health's controls, training, and other assistance do not relate to the overall management of the Hospitals or the sale of the Hospital's traditional medical services and products, they do appear to relate to the "entire method" of operating one of Passport Health's travel programs. Under the circumstances, the offers of control and assistance appear to be significant.(2)

See Advisory 97-4.

IV. CONCLUSION

For the reasons stated above, we conclude that the relationship between Passport Health and the Hospitals for the sale of travel information and products appears to constitute a franchise.

Please be advised that our opinion is based on all the information furnished in your 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: August 18, 1997

Franchise Rule Staff

1. It is unclear whether Passport Health would qualify for the fractional franchise exemption. In your letter, you state that the Health Travel Program will generate perhaps between 2% and 15% of the Hospital's total revenues. Assuming there is a reasonable basis from such projections, it would satisfy only the second prong of the exemption. There is no indication in your letter, however, that the Hospitals have been in the business of offering travel information or products or that they would be expected to understand from their past experience the risks in entering into such a business.

2. In your letter, you imply that the relationship between Passport Health and the Hospitals should not constitute a franchise because the hospitals are sophisticated investors. We note that there is no sophisticated investor exemption to the Rule. Rather, 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, franchisors may 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). See Advisory 97-1, Bus. Franchise Guide (CCH), ¶ 6482 at 9681 (1977); Advisory 96-4, id., ¶ 6479 at 9677 ; Advisory 96-2, id., ¶6477 at 9674.