FTC Releases Final Version of Business Opportunities Rule

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The Federal Trade Commission has approved changes to and released the final version of its business opportunity rule that will be effective on March 1, 2012.

The rule (16 CFR Part 437, "Disclosure Requirements and Prohibitions Concerning Business Opportunities") is intended to ensure that consumers have the information they need when considering buying a work-at-home program or any other business opportunity. The Commission vote approving the final amendments to the Business Opportunity Rule was a unanimous 4-0.

Simplified Disclosures

The changes made to the rule simplify the disclosures that business opportunity sellers must provide to prospective buyers. The simplified disclosures will help prospective purchasers assess the risks of buying a business opportunity, while minimizing compliance burdens on businesses, according to the FTC.

The final rule applies to business opportunities previously covered under the rule, as well as work-at-home offers such as envelope stuffing and craft assembly opportunities. The final rule requires business opportunity sellers to give consumers specific information to help them evaluate a business opportunity.

Sellers must disclose five key items of information in a simple, one-page document:

(1)The seller's identifying information;

(2) Whether the seller makes a claim about the purchaser's likely earnings (and, if the seller checks the "yes" box, the seller must provide information supporting any such claims);

(3) Whether the seller, its affiliates or key personnel have been involved in certain legal actions (and, if yes, a separate list of those actions);

(4) Whether the seller has a cancellation or refund policy (and, if yes, a separate document stating the material terms of such policies); and

(5) A list of persons who bought the business opportunity within the previous three years.

Misrepresentations and omissions are prohibited under the rule, and for sales conducted in languages other than English, all disclosures must be provided in the language in which the sale is conducted.

Furthermore, the rule permits earnings claims to be made by sellers of business opportunities only if the seller:

(1) Has a reasonable basis for its claim at the time the claim is made;

(2) Has in its possession written materials that substantiate its claim at the
time the claim is made;

(3) Makes the written substantiation available upon request to the prospective
purchaser and to the Commission; and

(4) Furnishes to the prospective purchaser an earnings claim statement in a required format.

The announcement of a final business opportunity rule completes the process that started on April 12, 2006, when the Commission published an Initial Notice of Proposed Rulemaking and proposed creating a business opportunity rule separate from the franchise rule.

A press release on the action appears here on the FTC website. Text of the Federal Register notice appears here.

The final version of the rule, along with its extensive Statement of Basis and Purpose, will appear in the CCH Business Franchise Guide.

Failure to Disclose Earnings of Franchised Store Was Not Fraud, Franchise Law Violation

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A convenience store franchisor did not commit common law fraud or violate either the Illinois Franchise Disclosure Act (IFDA) or Illinois “little FTC Act” by failing to provide material information on the historical performance of a store to a prospective franchisee that had requested such information in connection with her consideration and purchase of the franchise for the store, according to a federal district court in Chicago.

After terminating the franchisee for failing to meet the franchise’s minimum net worth requirement, the franchisor brought suit seeking a preliminary injunction forcing the franchisee to surrender the store premises and meet her other post-termination obligations.

The franchisee counterclaimed, alleging that the franchisor was required to disclose financial information concerning the particular store she was considering and eventually purchased because the store’s financial performance was supposedly “below average” for the region. The franchisor had refused to provide the franchisee with sales figures for the store, which had been operating for less than one year.

The franchisor was not required by either the FTC Franchise Rule or the North American Securities Administrators Association’s Uniform Franchise Offering Circular (UFOC) Guidelines to disclose earnings information for any of its stores, let alone the store that the franchisee decided to purchase, the court determined.

Earnings Claim

Although the franchisor elected to include an earnings claim in its UFOC, that was a specific disclosure of “the most recently available annual averages of the actual sales, earnings and other financial performance” in each market area in the state, the court noted.

The franchisor specifically disclosed in its UFOC that it was not providing information related to stores that had been opened for less than 12 months, such as the store in question, and informed the franchisee that it would not provide such information, the court noted.

The franchisee argued that she should have been provided with information on the store’s “historical poor performance” in order to correct a misimpression created by the earnings claim. However, a logical fallacy of the franchisee’s argument was that the earnings claim was not offered as indicative of the actual performance of the store, the court reasoned.

Duty to Make Further Representations

While admitting that the information provided by the franchisor might not have been false, the franchisee maintained that the franchisor was under a duty to make further representations in order to prevent the provided information from being misleading. However, the earnings claim made by the franchisor was only “misleading” if the franchisee ignored the express terms of the earnings claim and made projections based upon her own assumptions concerning historical information of other stores, the court decided. The franchisee could not have done so consistent with the disclaimers in her franchise agreement and in the UFOC.

The franchisee contended that the disclaimers in the franchise agreement and UFOC were somehow inoperative because the information, or lack thereof, was material to her investment decision. However, the franchisor was not under an obligation to disclose every piece of information that could have been material to the franchisee’s investment decision, the court held.

Because the franchisor had no duty to disclose the historical financial performance of the store, the franchisee’s common law fraudulent omission claim, as well as her IFDA and “little FTC Act” claims, failed.

The decision in 7-Eleven, Inc. v. Spear appears at CCH Business Franchise Guide ¶14,644.