Informal Staff Advisory Opinion 98-7

This staff advisory opinion is issued in response to your request for advice on whether your client's proposed sale of business assets constitutes the sale of a franchise under the Franchise Rule. 16 C.F.R. Part 436. Depending upon how your client structures the sale of its business assets, it is possible that your client will create a franchise relationship covered by the Rule.

I. INTRODUCTION

In your letter, you state that your client, a corporation owned by a husband and wife, owns and operates a dry cleaning and laundry business. The business is comprised of a main facility (dry cleaning and laundry plant and customer service center) and 13 satellite facilities. Your client would like to sell the entire business to a single purchaser. However, that appears to be impossible. As an alternative, your client is considering selling portions of the assets to multiple purchasers. For example, you state that each purchaser may acquire the assets relating to three or more locations. Most likely, the purchasers will not be existing employees of your client.

In an effort to promote the sale of assets, your client may be willing to give the prospective purchasers various accommodations, including the following. First, your client may allow a purchaser to make a down payment with the balance secured by a promissory note requiring interest and principal payments. Second, your client may assign, sublease, or lease the particular location, depending upon your client's current interest in the property. Third, you state that your client, at the sole option of the purchaser, may license the use of your client's tradename and service marks for a period of time. You add that your client would require a purchaser to "honor the price structure for services established by my client at its remaining locations during the time that a purchaser may use, if at all, the license for the name and marks." Finally, you note that your client would impose no franchise, advertising, or royalty fee, nor would it "impose any restrictions or requirements with respect to quality control or supplier and/or vendor purchasers."

You now ask whether the sale of your client's assets under the circumstances described above would constitute a franchise. 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. SALE OF ASSETS MAY CONSTITUTE A FRANCHISE

In determining whether a business arrangement is covered by the Franchise Rule, it is irrelevant what the seller's motivation may be for engaging in the sale. Thus, the sale of the assets of a business to various purchasers may be covered by the Franchise Rule if it creates an ongoing business relationship that satisfies the three definitional elements of a franchise set forth in the Rule: (1) the distribution of goods or services associated with the franchisor's trademark or trade name; (2) significant control over, or significant assistance to, the franchisee; and (3) a required payment of at least $500 within 6 months of signing of an agreement. 16 C.F.R. § 436.2(a)(1)(i). From your letter, it appears that in some instances your client will maintain an ongoing relationship with the purchasers of the dry cleaning and laundry business facilities. As described in your letter, purchasers may enter into lease agreements with your client and may use your client's marks for a period of time. This is sufficient to constitute an ongoing relationship. We now turn to whether the three definitional elements of a franchise described above are also satisfied.

III. TRADEMARK

In your letter, you state that your client may permit the purchasers of the dry cleaning and laundry facilities to use your client's trademark and/or service marks for a period of time. Since your client apparently is willing to offer the use of its trademark as part of the sale, any representations about the availability of the trademark by your client to prospective purchasers will satisfy the Rule's trademark element. Your letter seems to suggest that the trademark element should be deemed satisfied only where the franchisor requires the use of the trademark, not where the purchaser exercises an option or otherwise seeks to obtain a license to use the seller's trademark. The Franchise Rule's trademark requirement, however, is not so limited. As noted in the Statement of Basis and Purpose accompanying the Rule, part of the benefit gained by investing in a franchise system is the right to associate with the franchisor's reputation through its trademark. Statement of Basis and Purpose, 43 Fed. Reg. at 59697. Accordingly, an association with the seller's trademark is all that is required for Rule coverage.

IV. SIGNIFICANT CONTROL OR ASSISTANCE

In your letter, you state that your client will not impose any restrictions or requirements with respect to quality control or supplier and/or vendor purchases. However, you add that your client may require purchasers to honor the price structure for services established at the remaining locations during the time that a purchaser may use, if at all, the license for the name and marks. You apparently believe that uniform pricing is necessary to "avoid public confusion."

We note that your client's proposed price controls may constitute price fixing that is prohibited by U.S. antitrust laws. Moreover, it would appear that the contemplated price controls are a form of control over the purchasers' business operation. However, the question remains whether such controls are significant. In numerous advisory opinions, Commission staff has made clear that to be "significant," the controls and assistance must relate to the franchisee's entire method of operation:

[I]t should be emphasized that in order to be deemed "significant" the controls or assistance must be related to the franchisee's entire method of operation -- not its method of selling a specific product or products which represent a small part of the franchisee's business. Controls or assistance directed to the sale of a specific product which have, at most, a marginal effect on a franchisee's method of operating the entire business will not be considered in determining whether control or assistance is "significant."

Final Interpretive Guides, 44 Fed. Reg. at 49966, 49967 (August 24, 1979).

Further, "significance" is a "function of the degree of reliance which franchisees are reasonably likely to place upon the controls or assistance." Id. This is especially true of investors who are inexperienced in the particular business. The Commission addresses "significant control and assistance" issues on a case-by-case basis. Among other things, the Commission considers the nature of the particular industry, the level of sophistication of the investors, as well as the meaning of the assistance and control to the investors. Id. See also Statement of Basis and Purpose, 43 Fed. Reg. at 59701.

In our opinion, price controls are likely to have a direct and immediate affect on the purchasers' entire business operations, affecting the purchasers' ability to cover its basic expenses, purchase inventory, and meet payroll obligations. Price controls may also cause serious economic harm by impeding the franchisees' independence and, ultimately, profitability. Accordingly, we conclude that your client would satisfy the Rule's significant control requirement if it sought to impose price controls on the purchasers.(1)

V. MINIMUM REQUIRED PAYMENT

Finally, we note that your letter does not directly address the Rule's minimum payment requirement. In your letter, you state that your client may allow a purchaser to make a down payment on the purchase price, with the balance secured by a promissory note requiring interest and principal payments. In addition, some purchasers may pay rent for leased property. Based upon the facts presented, it would appear that the prospective purchasers of your client's assets would satisfy the minimum payment requirement. It is reasonably to assume that the purchaser of one or more dry cleaning and laundry establishments would pay your client at least $500 within the first six months of operation through a combination of assets purchases, interest payments, and rent.

VI. CONCLUSION

For the reasons noted above, it is possible that the sale of your client's dry cleaning and laundry establishments may constitute the sale of a franchise in at least some instances. If your client grants purchasers a license to use your client's tradename, exerts control over the business operations through price or other controls or significant assistance, and collects at least $500 within the first sixth months of operation, then a franchise relationship will be created.

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: December 10, 1998
Franchise Rule Staff

1. We also note that your letter is silent regarding any assistance your client may offer potential purchasers. It is also devoid of any information concerning the likely purchasers. If the purchasers are experienced in the dry cleaning and laundry business, it is likely that they can succeed without much assistance or controls from your client. If, however, the purchasers are unsophisticated or lack any prior experience in the dry cleaning business, it is likely that such purchasers may rely on any representations of assistance made to them to induce the sale. Regardless of the purchasers' experience, if your client sells the 13 satellite facilities, but retains control of the cleaning and laundry plant, any subsequent dry cleaning or laundry services your client may render for the purchasers will be deemed significant assistance in the operation of the purchasers' business.