Informal Staff Advisory Opinion 98-1

This staff advisory opinion is issued in response to your request for advice concerning the applicability of the Franchise Rule, 16 C.F.R. Part 436, to a vending machine locator.

I. INTRODUCTION

In your letter, you state that you represent a vending machine locating company ("Locator"). The Locator provides lists of qualified leads to vending machine operators ("Operators") who are seeking to place their machines in high traffic areas. To obtain these leads, the Locator contacts owners of industrial and commercial properties to determine their willingness to lease a portion of their properties, for which they will receive a rental fee from the Operator. You state that the Operator negotiates the terms of the lease directly with the property owner. If a contract is executed, the Operator pays your client a flat fee.

You state further that the Locator also has the ability to sell various types of vending equipment to Operators. You add, however, that there would be no required "tie-in" between the provision of locations and the sale of equipment to the Operator. Rather, the Operator could choose to pay for locations only, without purchasing any equipment: purchases of any equipment would be entirely voluntary on the Operator's part. You now ask whether your client will trigger the Rule's disclosure requirements if it sells vending equipment to Operators along with providing the locations.

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 arrangement constitutes a franchise.

II. THE FRANCHISE RULE COVERS THE SALE OF CERTAIN BUSINESS OPPORTUNITIES

As an initial matter, a business opportunity will be covered by the Rule if the following three definitional elements are present:

  1. The investor sells goods or services supplied by the seller or its affiliates, or by suppliers with whom the seller is advised to do business;
  2. The seller promises to secure retail outlets or accounts for the goods or services, or to secure locations for vending machines or racks, or provides the services of someone who can perform either of these functions; and
  3. (3) The investor makes a required payment, or a commitment to pay, to the seller or its affiliate of $500 or more from any time before to within six months after the business becomes fully operational.

See 16 C.F.R. Sections 436.2(a)(1)(ii) and (a)(2).

In a previous advisory opinion, we emphasized that each of these required definitional elements must be present for Rule coverage. Advisory 95-10, Bus. Franchise Guide (CCH), ¶ 6475 at 9666 (1995). For example, a vending machine manufacturer which sells machines only, without offering to provide the purchaser with any locations or accounts, will not be covered by the Rule. Id. at 9663. Similarly, the Rule would not apply to a locator who merely provides operators with leads, without offering to sell or arrange for the sale of vending equipment.

III. THE SALE OF VENDING MACHINES WITH LOCATION SERVICES MAY TRIGGER THE RULE

Typically, the Rule is triggered when a party sells vending equipment and represents that he or she will secure or will arrange for locations for the purchaser's machines.(1) Your letter raises a variation on this theme: rather than an equipment seller promising to provide locations, the locator offers to provide equipment. We see no practical distinction between the two. In numerous previous advisory opinions we stated that the name parties may assign to their relationship -- such as dealership or license --is not determinative. See, e.g, Advisory 97-6, Bus. Franchise Guide (CCH), ¶ 6486 at 9688 (1997); Advisory 97-4, Bus. Franchise Guide (CCH), ¶ 6484 at 9685 (1997). Rather, we will focus on whether the relationship satisfies the definition of a franchise under the Rule. Similarly, the name that the seller wishes to call himself -- manufacturer, supplier, or locator -- is irrelevant. A party will be deemed to sell business opportunities if it engages in the conduct set out in the Rule: the sale of vending equipment and the representation of location assistance.(2)

Further, in many instances, business opportunity purchasers rely on the sellers for their expertise in obtaining locations. Indeed, a seller's ability to find good locations is often the critical difference between a successful and unsuccessful vending operation. From your letter, it would appear that the Locator may also induce reliance on the client's part: not only does the Locator promise to find high traffic locations, but offers machines at reduced prices. In that regard, you state: "The vending machines and equipment which our client has available for sale to Operators is offered not only at competitive prices but also at a substantial savings over what the Operator can purchase similar or like vending machine or equipment from its business opportunity distributor." Thus, by representing that it will provide Operators with machines in addition to location services, the Locator has become a business opportunity seller.(3) See 16 C.F.R. § 436.2(a)(5).

IV. A TIE-IN ARRANGEMENT IS NOT A PREREQUISITE TO RULE COVERAGE

In your letter you seem to imply that the Rule is inapplicable to your client because there is no "tie-in" requiring Operators to purchase machines with the location services. You also add that the sale of the machines is at arms length. In short, you contend that the sale of any equipment is entirely optional on the Operator's part.

A tie-in arrangement is not a prerequisite to Rule coverage. The Rule, for example, applies to a vending machine seller who represents that it will provide location assistance, even if such assistance is of no use to the Operator. It is the representation of such assistance that triggers the Rule, not the actual provision or value of such assistance to the Operator. See Advisory 95-10, Bus. Franchise Guide (CCH) at 9663 n.1; see also 16 C.F.R. § 436.2(a)(5). Again, we see no practical difference between a vending machine seller who offers location assistance, who is covered by the Rule, and a locator who offers to sell vending machines. As long as the purchaser is led to understand that the seller is offering the machines and providing assistance to locate them, that is sufficient to trigger Rule coverage.

V. THE FRACTIONAL FRANCHISE EXEMPTION

Although we conclude that a Locator who sells vending equipment to an Operator may be covered by the Franchise Rule, it is possible that the relationship created between the parties may fall within the Rule's fractional franchise exemption. The fractional franchise exemption is one of four exemptions provided by the Franchise Rule. See 16 C.F.R. § 436.2(d). The exemption is available to a company offering a business relationship that meets each of the three elements for Rule coverage if it can prove the following two conditions are met: (1) the franchisee with whom it enters a relationship has been "in the business represented by the franchise more than 2 years;" and (2) the "sales arising from the relationship . . . represent no more than 20 percent of the sales in dollar volume of the franchisee." Id. at § 436.2(h).

In your letter, you do not state when the Locator intends to offer the vending machines to the Operator. If the Locator offers machines to an Operator who has purchased and operated vending machines for at least 2 years, then the fractional franchise exemption may apply. In such a scenario, the Locator may be deemed to be assisting the Operator to expand its existing line of business, rather than offering a new business opportunity that would be covered by the Rule. Of course, the fractional franchise exemption would apply only if the parties could anticipate at the time of the sale that the sales generated from the additional machines would represent no more than 20 percent of the sales in the following year. See Final Interpretive Guides, 44 FR at 49968; Advisory 97-1, Bus. Franchise Guide (CCH), ¶ 6481 at 9680 (1995). Without more information on the likely purchasers of the Locator's machines, however, we cannot conclude that the fractional franchise exemption applies to your client.

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: January 6, 1998
Franchise Rule Staff

1. For purposes of this advisory opinion, we will assume that the $500 minimum payment requirement is satisfied.

2. We have previously stated that a seller will satisfy the "locations" requirement not only where the seller literally secures locations, but where the seller provides the Operator with leads or arranges for a third party to develop leads. Advisory 95-10, Bus. Franchise Guide (CCH) at 9667-68.

3. Our conclusion comports with the Commission's long-held view that most business opportunity ventures -- distributorship, rack jobbing, and vending machines routes --will be covered by the Rule. Final Interpretive Guides, 44 FR 49966, 49968 (August 24, 1979).