Trade Regulation Rule on Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures

Summary:

The Federal Trade Commission (the “Commission”) solicits proposals to conduct demonstration projects implementing the proposed instructions for electronic dissemination of disclosure documents set forth in § 436.7 of the Commission's October 22, 1999, Notice of Proposed Rulemaking.

Dates:

Proposals to conduct demonstration project start on July 18, 2000.

Addresses:

Petitions for permission to implement a demonstration projects should be addressed to: Federal Trade Commission, Office of the Secretary, Room 159, 600 Pennsylvania Ave., NW., Washington, DC 20580.

For further information contact:

Steven Toporoff, (202) 326-3135, Division of Marketing Practices, Bureau of Consumer Protection, Federal Trade Commission, Washington, DC 20580.

Supplementary information:

On October 22, 1999, the Commission published a Notice of Proposed Rulemaking (“NPR”), soliciting comment on a wide-range of proposed amendments to the Franchise Rule. One proposal would permit franchisors to comply with the Franchise Rule by furnishing prospective franchises with disclosures electronically, including through the Internet. Among other things, the proposal would: (1) Require franchisors to obtain a prospective franchisee's prior consent to receive disclosure electronically; (2) permit a prospective franchisee the right to obtain a paper disclosure document until the time of sale; and (3) require franchisors to provide a prospective franchisee with a paper summarydocument, which among other things, includes the disclosure document's table of contents, as well as an admonition to download or otherwise preserve document's table of contents, as well as an admonition to download or otherwise preserve the electronic disclosure document. The proposed instructions would also specify the general formal for an electronic disclosure document, ensuring that the disclosure document could be downloaded or otherwise preserved, and that the disclosures are clear, conspicuous, and do not contain extraneous or distracting features (such as animation or pop-up screens). The proposal would permit franchisors to insert navigational tools that aid in the reviewing a disclosure document, including scroll bars, search features, and internal links.

The NPR comment period closed at the end of January, 2000. Forty comments, including five rebuttal comments, were submitted, several of which address the Commission's proposed Internet compliance instructions. Commission staff are currently analyzing the various comments and are preparing recommendations to the Commission on Internet compliance and other disclosure issues.

The Commission recognizes that, to date, few franchisors have sought to use the Internet or other electronic technologies to comply with the Franchise Rule. One reason is that the Rule itself requires franchisors to “furnish” a “written” disclosure document. Arguably, these requirements would preclude the use of the Internet until such time as the Commission clarifies the term “furnish” and revises the definition of “written” to include electronic communications. Another reason is fear of liability. Franchisors appear unwilling to incur the costs associated with developing an online disclosure mechanism without some assurances that their mechanism will pass Commission muster. This reluctance is understandable in light of the Commission's evolving policy in this area, as developed through the ongoing Franchise Rule amendment process.

The Commission believes that demonstration projects of the NPR's proposed Internet instructions would be in the public interest. In light of the franchise community's lack of practical experience with Internet disclosure, it is critical to probe the strengths and weaknesses of the NPR proposed instructions before they are incorporated into the final revised Rule. Through demonstration projects, the Commission can be alerted to any technological problems with the proposed instructions, receive feedback on whether franchisors are able to comply with the proposed instructions efficiently, as well as to identify areas where the proposed instructions might need fine-tuning. As a result, the final Rule's Internet instructions are likely to be much more precise, enabling franchisors to comply with the Rule efficiently and with significant cost reductions.

Accordingly, the Commission solicits all interested parties to submit petitions to the Commission for permission to implement a demonstration project, consistent with proposed section 436.7 of the NPR. The Commission will consider all such petitions on a case-by-case basis. To gain approval, the interested party must be able to demonstrate that its proposal meets the standards specified in proposed section 436.7 of the NPR. All demonstration projects will be on a trial basis only, and the Commission specifically reserves its right to terminate any demonstration project for any reason. To enable the Commission and the public to benefit from a demonstration project, an approved party must file written reports to appropriate Commission staff of its progress on at least a quarterly basis, describing any problems it has encountered with the proposed Internet instructions, any complaints from franchisors and franchisees, as well as any suggested improvements. Such reports will be placed on the public record.

List of subjects in 16 cfr part 436

Advertising, Business and industry, Franchising, Trade practices.

Authority:

15 U.S.C. 41-58.

By direction of the Commission.

Benjamin I. Berman,

Acting Secretary.

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