Petition — Exxon Corp. v. Federal Trade Commission

Supreme Court brief1981

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| Ottice- Supreme Court, US. |

80-1895; *

MAY 11 1908

No. Aeg e

IN THE 1

Supreme Court of the United States

OCTOBER TERM, 1981

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

J. WALLACE ADAIR

Counsel of Record

RodER C. SIMMONS

ABIGAIL A. SHAINE

Howrey & SIMON

1730 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 783-0800

Counsel for Petitioner

Of Counsel:

LANCE P. OLINDE, Esq.

MARSHALL DEUTSCH, Esq.

D. JOSEPH POTVIN, Esq.

EXXON CORPORATION

P.O. Box 2180

Houston, Texas 77001

Attorneys for

Exxon Corporation

May 11, 1981

WILSON - EPES PRINTING Co., INC, - 789-0096 - WASHINGTON, D.C. 20001

QUESTIONS PRESENTED

1. Whether a Court of Appeals can deny a Petitioner

its right to pre-enforcement judicial review of an illegal

substantive rule promulgated by the Federal Trade Com-

mission in the face of a statutory provision granting

such a right.

2. Whether the conflict between the United States

Court of Appeals for the Ninth Circuit and the United

States Supreme Court, as well as other Courts of Ap-

peals, as to the scope and meaning of the “mootness”

doctrine should be resolved.

PARTIES

Exxon Corporation appeared as a petitioner before the

United States Court of Appeals for the Ninth Circuit.*

The party appearing as respondent was the Federal

Trade Commission.

* (a) In accordance with Rule 28.1 of the Rules of the Supreme

Court of the United States, Exxon Corporation has no parent com-

panies, subsidiaries or affiliates to report.

(b) Additional parties appearing as petitioners before the

United States Court of Appeals for the Ninth Circuit at

the time of the judgment which petitioner seeks to have re-

viewed were: Atlantic Richfield Company; Chevron Chemical

Co., et al.; Chevron U.S.A., Inc.; Getty Refining & Marketing Com-

pany; Gulf Oil Corporation; Kerr-McGee Refining Corporation;

Mobil Oil Corporation; Phillips Petroleum Company; Shell Oil

Company; Sinclair Marketing, Inc.; Standard Oil Company of

California; Standard Oil Company (Indiana); and Union Oil

Company of California. Other parties appearing as petitioners

at the time the litigation was consolidated in the United States

Court of Appeals for the Ninth Circuit: American Motors Cor-

poration; Chrysler Corporation; Farm & Industrial Equipment

Institute; Ford Motor Company; Freightliner Corporation; Gen-

eral Electric Corporation; General Motors Corporation; Interna-

tional Harvester Company; Marathon Oil Company; Motor Vehicle

Manufacturers Association; Paccar, Inc.; Schwinn Bicycle Com-

pany; Snap-on Tools Corporation; Volkswagen of America, Inc.;

White Motor Corporation; and Automobile Importers of America,

Inc.

(i)

QUESTIONS PRESENTED

PARTIES

TABLE OF CONTENTS

„ preciicacepneccesesencscuisinhencicnaneveneines

TABLE OF AUTHORITIES

e ——————————ů——

JURISDICTION

PERTINENT STATUTES AND REGULATIONS.

STATEMENT OF THE CASE

A. The Franchise Rule

B. Proceedings Below

REASONS FOR GRANTING THE WRIT.

II.

CONCLUSION

APPENDIX

The Writ Should be Granted to Determine

Whether a Court Can Deny the Right to Pre-

Enforcement Judicial Review in the Face of a

Statutory Provision Granting Such a Right

The Writ Should Be Granted to Determine

Whether a Partial Exemption From a Chal-

lenged Rule Renders Moot a Challenge to the

NEE TE rr

A. The Court of Appeals’ Decision Is in Con-

flict With the Decisions of This Court

B. The Court of Appeals’ Decision Is in Con-

flict With the Decisions of Other Circuits

(ili)

> - Oo

TABLE OF AUTHORITIES

Cases: Page

Abbott Laboratories v. Gardner, 387 U.S. 136

00/// A A „ 8, 19

American Optometric Association v. FTC, 626

eee LCR ee? Lee 11

Automotive Parts & Accessories Association v.

Boyd, 407 F. 2d 330 (D.C. Cir. 1968) .................. 9

Basso v. Utah Power & Light Co., 495 F.2d 906

(10th Cir. 1974) 14

Bethlehem Steel Corp. v. Train, 544 F.2d 657 (3d

Cir. 1976), cert. denied, 480 U.S. 975 (1977).... 19, 20

Big Rivers Electric Corp. v. EPA, 523 F. ad 16

(6th Cir. 1975), cert. denied, 425 U.S. 934

(1976) 19, 20

Cash v. Commissioner, 580 F.2d 152 (5th Cir.

1978) 9

Citizens to Preserve Overton Park, Inc. v. Volpe,

401 U.S. 402 (1971) 9

County of Los Angeles v. Davis, 440 U.S. 625

(1979) — 16, 17

DeFunis v. Odegaard, 416 U.S. 312 (1974) 16, 17, 18

FTC v. H. N. Singer, Inc., Civ. No. 80 3068 (N. D.

Cal. Mar. 24, 1981) 16

Gray v. Sanders, 372 U.S. 368 (1963) 16

Indiana Employment Security Division v. Burney,

409 U.S. 540 (1973) 17

Katherine Gibbs School v. FTC, 612 F.2d 658 (2d

Cir. 1979) 11

Marathon Oil Co. v. FTC, 1980-1 Trade Cas.

(CCH) J 68,177 (N.D. Ohio 1980) .................... 14

Marbury v. Madison, 5 U.S. (1 Cranch) 187

%%%FTPTTTTTTTTTTT—T—T—T—T———— 8

Morris v. Gressette, 482 U.S. 491 (1977) ............... 8

Nader v. Volpe, 475 F.2d 916 (D.C. Cir. 1973) 20, 21

National Automatic Laundry & Cleaning Council

v. Shultz, 448 F.2d 689 (D.C. Cir. 1971) ............ 9

National Auto. Dealers Association v. FTC, 421 F.

Supp. 31 (M.D. La. 1976) .. 13

TABLE OF AUTHORITIES—Continued

National Metropolitan Bank v. United States, 323

U.S. 454 (1945)

National Petroleum Refiners Association v. FTC,

482 F.2d 672 (D.C. Cir. 1973), cert. denied, 415

U.S. 951 (1974)

Natural Resources Defense Council, Inc. v. EPA,

489 F.2d 390 (5th Cir. 1974), rev’d on other

grounds sub nom. Train v. Natural Resources

Defense Council, Inc., 421 U.S. 60 (1975)

North Carolina v. Rice, 404 U.S. 244 (1971)

Owen Equipment & Frection Co. v. Kroger, 437

U.S. 365 (1978)

Powell v. McCormack, 395 U.S. 486 (1969) ...........

Ralpho v. Bell, 569 F.2d 607 (D.C. Cir. 1977)

Roe v. Wade, 410 U.S. 118 (1973)

Rusk v. Cort, 369 U.S. 367 (1962) ........................

SEC v. Medical Committee for Human Rights, 404

US. 408 (1972)

Sosna v. Iowa, 419 U.S. 393 (1975) --

Southern Pacific Terminal Co. v. ICC, 219 U.S.

498 (1911)

Super Tire Engineering Co. v. McCorkle, 416 U.S.

p+ BE) RAMEN ESERIES EASES OR Sa nO

Thiokol Chemical Corp. v. Burlington Industries,

Inc., 313 F. Supp. 253 (D. Del. 1970), aff’d, 448

F.2d 1828 (3d Cir. 1971), cert. denied, 404 U.S.

1019 (1972) .........

United Gas Pipe Line Co. v. Whitman, 595 F. 2d

323 (5th Cir. 1979)

United States v. Concentrated Phosphate Export

Association, 393 U.S. 199 (1968) .......................-

United States v. Michigan National Corp., 419 U.S.

e eee

United States v. Trans-Missouri Freight Associa-

n, dener, ..

United States v. W. T. Grant Co., 345 U.S. 629

(1953)

Wager v. Pro, 575 F.2d 882 (D. C. Cir. 1976)

Page

15, 16

TABLE OF AUTHORITIES—Continued

Page

Walling v. Helmerich & Payne, Inc., 323 U.S. 37

(1944) 16

Weinstein v. Bradford, 423 U.S. 147 (1975) 18

Statutes:

Administrative Procedure Act

5 U.S.C. 5 701 (1976) 8, 9

5 U.S.C. § 706 (1976) 10

Federal Trade Commission Act

15 U.S.C. §46(g) (1976) 12

15 U.S.C. §57a (1976 & Supp. III 1979).... 2

15 U.S.C. § 57a (e) (1) (A) (1976 & Supp. III

1979) 2, 3, 4, 13, 19

15 U.S.C. 8 57a (e) (3) (1976 & Supp. III

1979) 10

15 U.S.C. 5 57a (e) (5) (B) (1976 & Supp. III

1979) 2, 3, 4

15 U.S.C. 5 57a (e) (5) (C) (1976 & Supp. III

1979) 10

28 U.S.C. 8 1254 (1) (1976) 1

Regulations:

16 C. F. R. § 436 (1980) 2, 8

16 C. F. R. § 488 (1980) 11

Legislative History:

H.R. Rep. No. 93-1107, 98d Cong., 2d Sess.

(1974) 12

120 Cong. Rec. H12,348 (daily ed. Dec. 19, 1974). 13

Miscellaneous Authorities:

48 Fed. Reg. 59,614 (1978) 4

44 Fed. Reg. 49,966 (1979) b

45 Fed. Reg. 51,765 (1980) 1

IN THE

Supreme Court of the United States

OCTOBER TERM, 1981

No.

IN RE: FTC FRANCHISE

DISCLOSURE RULE REVIEW

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioners pray that a writ of certiorari issue to re-

view the judgment of the United States Court of Appeals

for the Ninth Circuit in this case.

OPINIONS BELOW

The opinion of the Court of Appeals dismissing this

litigation, which is reproduced at Appendix A, is unre-

ported.’ The denial of the Petition for Rehearing is re-

produced at Appendix D and is unreported. The Federal

Trade Commission’s July 17, 1980 Exemption Order is

reproduced at Appendix B and is published at 45 Fed.

Reg. 51,765 (1980).

JURISDICTION

The judgment of the United States Court of Appeals

for the Ninth Circuit dismissing this litigation was

entered on November 6, 1980, and an order denying

rehearing was entered on February 9, 1981. The juris-

diction of this Court is invoked under 28 U.S.C. § 1254 (1)

(1976).

1 The Notice of Entry of Judgment is reproduced at Appendix C.

PERTINENT STATUTES AND REGULATIONS

The following statutes and regulations are involved in

this case: Section 18 of the Federal Trade Commission

Act, as amended by the Magnuson-Moss Act, 15 U.S.C.

§57a (1976 & Supp. III 1979); and a Federal Trade

Commission Rule entitled “Disclosure Requirements and

Prohibitions Concerning Franchising and Business Op-

portunity Ventures,” 16 C. F. R. $486 (1980).

Judicial review of substantive FTC trade regulation

rules is provided by Section 18(e) (1) (A) of the Federal

Trade Commission Act, as amended by the Magnuson-

Moss Act, which states:

(e) (1) (A) Not later than 60 days after a rule

is promulgated under subsection (a) (1) (B) of this

section by the Commission, any interested person

(including a consumer or consumer organization)

may file a petition, in the United States Court of

Appeals for the District of Columbia circuit or for

the circuit in which such person resides or has his

principal place of business, for judicial review of

such rule. Copies of the petition shall be forthwith

transmitted by the clerk of the court to the Com-

mission or other officer designated by it for that

purpose. The provisions of section 2112 of title 28,

shall apply to the filing of the rulemaking record of

proceedings on which the Commission based its rule

and to the transfer of proceedings in the courts of

appeals.

15 U.S.C. § 57a (e) (1) (A) (1976 & Supp. III 1979).

Jurisdiction to consider challenges to Federal Trade

Commission trade regulation rules is granted to United

States Courts of Appeals under Section 18 (e) (5) (B) of

the Federal Trade Commission Act which provides:

(B) The United States Courts of Appeal shall

have exclusive jurisdiction of any action to obtain

judicial review (other than in an enforcement pro-

ceeding) of a rule prescribed under subsection (a)

(1) (B) of this section, if any district court of the

United States would have had jurisdiction of such

action but for this subparagraph. Any such action

shall be brought in the United States Court of Ap-

peals for the District of Columbia circuit, or for

any circuit which includes a judicial district in which

the action could have been brought but for this

subparagraph.

15 U.S.C. § 57a (e) (5) (B) (1976 & Supp. III 1979).

The aforementioned statutory provisions and regulation

are printed in their entirety in Appendix E.

STATEMENT OF THE CASE

Petitioner seeks to enforce its Congressionally man-

dated right to obtain pre-enforcement judicial review of

the Federal Trade Commission’s (“FTC” or “the Com-

mission”) illegally promulgated “Disclosure Require-

ments and Prohibitions Concerning Franchising and

Business Opportunities Ventures” (“Franchise Rule” or

“Rule”), 16 C. F. R. § 436 (1980). The Franchise Rule is

one of the few economy-wide rules ever promulgated by

the FTC, affecting the very structure of American busi-

ness.” It was illegally promulgated through highly un-

fair procedures whereby certain businesses were provided

favored treatment by the FTC in numerous secret ex

parte meetings with Commissioners and the rulemaking

staff. Because of the 60-day limit on pre-enforcement

appeals, 15 U.S.C. § 57a (e) (1) (A) (1976 & Supp. III

1979), this litigation may provide the only opportunity

for a full resolution of the serious evidentiary and pro-

2 The FTC has described the Franchise Rule as one of the

Commission’s first attempts to regulate recurring practices on an

industry-wide basis.” An FTC staff memorandum projected that

the Rule would affect more than $248 billion in sales each year.

cedural questions about the validity of the Rule. Yet, the

Order dismissing this litigation, issued by the Court of

Appeals for the Ninth Circuit, has left Petitioner without

any resolution of, or perhaps without any remedy as to

these important issues, which Petitioner raised in the

statutorily prescribed manner.

A. The Franchise Rule

Briefly stated, the Franchise Rule, through the vehicle

of twenty burdensome interrogatories (with numerous

subparts), purports to require certain persons engaged in

what the FTC labels franchising to assemble vast amounts

of information, and to print, disseminate and periodically

update voluminous disclosure prospectuses, much like the

disclosure laws enacted by Congress which govern the issu-

ance and sale of securities. Additional detailed disclosures

must be made, under the second section of the Rule, if

that person makes certain representations concerning

profits, income or sales. The final section of the Rule

contains a number of prohibitions on disclosures which

the FTC considers to be unfair or deceptive practices, as

purportedly demonstrated by the record. The Franchise

Rule and proposed Guides were first published in the Fed-

eral Register on December 21, 1978, 43 Fed. Reg. 59,614,

announcing an effective date for the Rule of July 21,

1979.

B. Proceedings Below

More than a dozen petroleum companies appealed the

Franchise Rule shortly after it was promulgated under

the authority of 15 U.S.C. §57a(e)(1)(A) (1976 &

Supp. III 1979); their appeals were consolidated in the

Ninth Circuit on May 18, 1979.* After the 60-day statu-

tory period for direct appeals had run, the FTC’s strategy

The United States Court of Appeals for the Ninth Circuit had

jurisdiction to consider this appeal under 15 U.S.C. § 57a(e) (5) (B)

(1976 & Supp. III 1979).

for avoiding judicial review of the Franchise Rule began

to crystallize. First, court action on requests to the FTC

for a stay of the Rule’s operation was delayed for

months at the request of the FTC during oral argument

in June, 1979. The Commission accomplished this by

suspending the July 21, 1979, effective date of the Rule

and requesting that the stay motions be suspended until

final Guides to the Rule were completed.

Under the Rule’s original definition of franchising, any

“required payment” by a “franchisee” in excess of $500

during the first six months triggered the Rule’s dis-

closure requirements if the definitional criteria were met.

The draft Guides, as well as the final Rule, had included

inventory purchases in the category of so-called “required

payments.” However, when the final Guides became effec-

tive, along with the Rule, on October 21, 1979, 44 Fed.

Reg. 49,966 (1979), they recognized for the first time an

exclusion from the Rule’s required payments criterion for

reasonable amounts of inventory purchased at bona fide

wholesale prices. This expedient compromise was agreed

upon in ex parte conferences with favored litigants. The

bona fide inventory exception caused numerous petition-

ers to drop out of the litigation.

The FTC undertook systematically to avoid a review

of the validity of the Rule by eliminating the remaining

petitioners in side agreements in which the Commission

offered favorable advisory opinions going to the issue

of coverage and applicability of the Rule to various busi-

nesses of the petitioners in return for stipulations from

those petitioners to drop their appeals. Although very

effective, these tactics were unsuccessful in totally de-

flecting a merits review. Petitioner and certain remaining

additional companies continued to push for a review of

the validity of the Rule with a Ninth Circuit panel

hearing oral argument on the merits of the case in

January, 1980. During the course of oral argument the

FTC switched tactics. With the possibility that the

entire Rule might be declared null and void, the FTC

urged the court to delay ruling on the Rule’s validity

until the Commission could act on a pending petition

for exemption which had been filed by the petroleum

companies many weeks earlier in October, 1979. In

briefs and letters, counsel for the FTC assured the

court and the petroleum company petitioners that the

exemption, if granted, would be complete and uncondi-

tional, thereby obviating the need for further court con-

sideration of this case. On April 8, 1980, the FTC tem-

porarily exempted all of petitioners’ business operations

until the exemption proceeding could be completed. The

Ninth Circuit neither granted nor denied the FTC’s stay

request—it simply did not rule on the case for months.

Following receipt of overwhelmingly favorable com-

ments from the petroleum industry urging a complete

exemption, the FTC issued an exemption order on July

17, 1980. But the Exemption Order did not fulfill the

expectations generated by the FTC’s promises to the

Ninth Circuit. Although the Exemption Order excluded

from the Rule’s coverage motor fuel and all related oper-

ations, it provided no exclusion from the Franchise Rule’s

application for various other businesses engaged in by

Petitioner, such as aviation fuel sales, marina fuel sales

and liquid petroleum gas sales. These operations and

others continue to be subject to the Franchise Rule, ac-

cording to the FTC.

On September 30, 1980, the FTC issued an Advisory

Opinion to Marathon Oil Company, stating that all activi-

ties normally considered to be an “integral part of

service stations” were exempt. As to various non-exempt

operations, the FTC advised Marathon that as presently

conducted these remaining operations were not covered

by the Franchise Rule because they were not presently

being conducted as franchises. The Advisory Opinion

removed one more party to the litigation, narrowing the

field of petitioners seeking a review of the Rule’s validity.

Spurred on by statements made by the Commission

staff that their non-service station operations were not

exempt from the Rule, Petitioner and the other petro-

leum companies continued to pursue their challenge to

the validity of the Rule. In response, the FTC pursued

its effort to avoid judicial review of the validity of the

Franchise Rule. The Commission vigorously argued that

the case was moot because the remaining petitioners had

been primarily concerned about the costly effect of the

Rule on their service station operations when they origi-

nally appealed the Rule, and those operations and all

related businesses were now exempt. The FTC deflected

the issue of the Rule’s validity by offering its counsel’s

opinion that the remaining businesses of petitioners as

presently operated did not appear to be covered by the

Rule.

On November 6, 1980, the Court of Appeals for the

Ninth Circuit dismissed the case. Ignoring both the Peti-

tioners’ substantive right to pre-enforcement review and

the 60-day limit on direct appeal review of the validity of

an FTC rule, the court stated that when an issue arises

“concerning the sale of franchises other than service sta-

tions, then that matter can be litigated anew.” On Febru-

ary 9, 1981, the court denied the petition for rehearing

filed by the petroleum companies. The court also declined

to clarify the rious questions left open by its Order.

Despite two and a half years of costly litigation and an

express statutory right to judicial review, the illegal

Franchise Rule remains unreviewed and in full force.

Under the precedent established by the Ninth Circuit,

any agency concerned about the possible invalidity of a

rule it has promulgated can employ a range of dilatory

and obfuscatory devices, including partial exemptions,

non-binding interpretative guides and non-binding ad-

visory opinions in order to prevent a party from obtain-

ing judicial review of the validity of an illegal rule.

REASONS FOR GRANTING THE WRIT

I, THE WRIT SHOULD BE GRANTED TO DETER-

MINE WHETHER A COURT CAN DENY THE

RIGHT TO PRE-ENFORCEMENT JUDICIAL RE-

VIEW IN THE FACE OF A STATUTORY PROVI-

SION GRANTING SUCH A RIGHT

The dismissal of this litigation by the Court of Ap-

peals for the Ninth Circuit eviscerated the statutorily

granted pre-enforcement review as a control on agency

regulatory action, a role which both the Supreme Court

and Congress have long recognized and carefully pro-

tected as a matter of general administrative law and,

specifically, as a role deemed essential by Congress in

enacting the FTC’s substantive rulemaking power. It

was in recognition of the importance of judicial review

of agency action that the Supreme Court held that such

review should not be precluded in the absence of clear

Congressional intent. Abbott Laboratories v. Gardner,

887 U.S, 136, 140 (1967), cited with approval in Morris

v. Gressette, 482 U.S. 491, 501 (1977); Rusk v. Cort,

869 U.S. 367, 379-80 (1962). Congress codified this

principle in section 701 of the Administrative Procedure

*The Supreme Court’s recognition of the importance of judicial

review can be traced back to Marbury v. Madison, 5 U.S. (1 Cranch)

137, 176 (1803), where Chief Justice Marshall asked:

To what purpose are powers limited, and to what purpose is

that limitation committed to writing, if these limita may, at

any time, be passed by those intended to be restrained?

Act, 5 U.S.C. § 701 (1976), which provides that agency

action is subject to judicial review except where there

is an express statutory prohibition and except where

“agency action is committed to agency discretion by

law.” See also Citizens to Preserve Overton Park, Inc.

v. Volpe, 401 U.S. 402, 410 (1971).

Judicial review of agency action is essential, not only

to protect the rights of private litigants, but to insure

that an agency does not exceed the limits of the regula-

tory authority delegated to it by Congress. National

Automatic Laundry & Cleaning Council v. Shultz, 448

F.2d 689, 695 (D.C. Cir. 1971). The paramount objec-

tive of judicial review of an agency standard is to insure

that the agency has performed its essentially legislative

task in a manner guaranteed to prevent arbitrariness

and irrationality. Automotive Parts & Accessories As-

sociation v. Boyd, 407 F.2d 330, 338 (D.C. Cir. 1968).

Petitioner, if given a full opportunity to demonstrate the

merits of its challenge to the validity of the Franchise

Rule, would clearly demonstrate that the FTC exceeded

its regulatory authority in precisely the manner which

judicial review is designed to prevent. This was shown

at oral argument and in briefs on the validity of the

Rule where it was demonstrated that the FTC compiled

over ten thousand pages of ex parte, non-public record

comments on the Franchise Rule (among other glaring

defects in the Rule’s promulgation). For purposes of this

Petition, the Court should assume that Petitioner can

demonstrate all the abuses set forth in its petition for

review before the Court of Appeals for the Ninth Circuit.

National Metropolitan Bank v. United States, 328 U.S.

454, 457 (1945). See also Cash v. Commissioner, 580

F.2d 152, 154 (5th Cir. 1978); Wager v. Pro., 575 F.2d

882, 884 (D.C, Cir. 1976).

Because the statute here provides for limitations on

the scope of review other than in a direct review pro-

ceeding, the dismissal of Petitioner’s case undoubtedly

hampers and places at risk the ability of Petitioner or

anyone else to raise the full range of questions about

the validity of the illegal Franchise Rule in subsequent

judicial proceedings. 15 U.S.C. § 57a (e) (5) (C) (1976 &

Supp. III 1979). The FTC has contended in this litiga-

tion, as well as in other cases, that the scope of review

in a direct appeal pre-enforcement proceeding, 15 U.S.C.

§ 57a(e) (3) (1976 & Supp. III 1979), is broader than

in an enforcement proceeding, 5 U.S.C. § 706 (1976).

If correct in these assertions, Petitioner may never again

be able to challenge the Franchise Rule on “substantial

evidence” grounds, or on grounds that serious procedural

errors were committed by the FTC during the process

which resulted in the Franchise Rule’s promulgation.

The Ninth Circuit’s Order dismissing this litigation

sanctions the FTC’s thinly disguised efforts to evade

judicial constraints on its rulemaking authority which

the statute incorporated as a check on arbitrary and

overbroad Commission rules. The FTC altered some of

the Franchise Rule’s requirements, used Advisory Opin-

ions and a partial exemption in order to eliminate all of

the parties who filed challenges to the Rule, thereby avoid-

ing a review of the Rule’s validity.

Permitting the Ninth Circuit’s Order to stand unre-

viewed, under these circumstances, seriously undermines

the role of courts as a check on agency action in the

manner mandated by the Magnuson-Moss Act. The

Ninth Circuit’s dismissal of this action provides the FTC

and other agencies with the same type of invitation to

disregard statutory requirements and to exceed the

powers conferred on them by Congress unchecked by the

courts as condemned in Ralpho v. Bell, 569 F.2d 607, 617

(D.C. Cir, 1977).

Recent decisions in other courts of appeals regarding

the FTC’s exercise of its substantive rulemaking powers

illustrate the special need for judicial scrutiny of the

FTC’s substantive rules. In Katherine Gibbs School v.

FTC, 612 F.2d 658 (2d Cir. 1979), the court undertook

direct pre-enforcement review of the first substantive

rule promulgated by the FTC under Section 18 of the

Magnuson-Moss Amendments, which codified the FTC’s

authority to promulgate substantive rules to prohibit

unfair trade practices.’ The rule in question, relating

to “Proprietary Vocational and Home Study Schools,” 16

C.F.R. § 488 (1980), was designed to regulate unfair

and deceptive advertising, sales and enrollment practices

engaged in by some of these schools. The court held that

the FTC had exceeded its authority in promulgating this

rule, in that the agency, inter alia, had failed to define

with sufficient specificity those acts or practices con-

sidered to be unfair. The court specifically rejected an

FTC argument that judicial review of its rules was to

be as lir:/ted under the Magnuson-Moss Act as it had

been previously, stating that Congress obviously intended

that a Commission rule should not receive judicial ap-

proval unless the agency’s action was supported by

substantial evidence on the record. Id. at 663-64.

In American Optometric Association v. FTC, 626 F.2d

896 (D.C. Cir. 1980), another appellate court undertook

direct pre-enforcement review of an FTC rule, determin-

ing that the FTC had exceeded its regulatory authority.

The rule in question was designed to curtail the ability

of states and professional associations to restrict or

5 Like the Franchise Rule, the FTC had started to consider the

need for the Vocational School Rule prior to the passage of the

Magnuson-Moss Amendments. In marked contrast to the FTC’s

determination to ignore the procedural rights conferred by the

new legislation in its promulgation of the Franchise Rule, the Com-

mission altered its hearing procedures for the Vocational School

Rule to conform with the new legislation subsequent to its passage.

burden the advertising of eye examinations or of

opthalmic goods and services. The decision was again

based on the court’s conclusion that, inter alia, the rule

was not supported by sufficient evidence. In reaching

its decision, this court also noted the importance which

Congress had attached to pre-enforcement judicial re-

view as a control on the FTC’s broad rulemaking

authority.

The concern which these courts evidenced about the

need to carefully review the FTC’s exercise of its regula-

tory authority mirrors the fact that the statutorily man-

dated judicial review was central to Congress’ decision

to codify the FTC’s rulemaking authority in the Magnu-

son-Moss Act following the decision in National Petroleum

Refiners Association v. FTC, 482 F.2d 672, 698 (D.C.

Cir. 1973), cert. denied, 415 U.S. 951 (1974). The court

there had held that the FTC had the authority to promul-

gate substantive rules under Section 6(g) of the old

Federal Trade Commission Act, 15 U.S.C. § 46(g), but

left open the question of what procedural safeguards

would be needed and the scope of judicial review. These

doubts were a central concern of Congress in subse-

quently codifying the FTC’s rulemaking authority. As

the House Committee considering the Magnuson-Moss

Amendments wrote:

Because of the potentially pervasive and deep effect

of rules defining what constitutes unfair or decep-

tive acts or practices and the broad standards which

are set by the words “unfair or deceptive acts or

practices,” the committee believes greater procedural

safeguards are necessary. Accordingly it has fash-

ioned the rulemaking procedures and judicial review

provisions described below which we believe to be

more appropriate in this context than merely re-

lying — the provisions of sections 553 and 706

of Title 5.

H.R. Rep. No. 93-1107, 98d Cong., 2d Sess. 45-46 (1974)

(emphasis added).

Congressman Broyhill, a member of the Conference

Committee, stated in floor debates that thorough judicial

review was perceived to be a key check on the exercise of

the FTC’s rulemaking authority:

We are quite frankly relying in this area on two

factors: the commonsense and fairness of the FTC,

and, of course, the review function of the courts,

which are not to affirm rules if, among other things,

the FTC’s handling of rebuttal evidence and cross-

examination has prevented full disclosure of material

issues of fact and this prevented a fair determina-

tion of the entire proceedings.

120 Cong. Rec. H12,348 (daily ed. Dec. 19, 1974) (em-

phasis added). It is these important procedural chal-

lenges specifically highlighted in Congressman Broyhill’s

statement, that may be permanently lost as a result of

the Ninth Circuit’s decision.

Congress’ belief as to the importance of judicial re-

view was fortified by its enactment of comprehensive,

direct appeal procedures for all substantive rules pro-

mulgated by the FTC. 15 U.S.C. § 57a (e) (1) (A) (1976

& Supp. III 1979). Petitioner brought this action in the

statutorily specified manner and is undeniably entitled

to judicial review. The Ninth Circuit’s decision to dis-

miss this litigation has left Petitioner with an exemp-

tion from the illegal Franchise Rule as to only limited

portions of its business operations, and with no assured

method of obtaining the broad procedural and evidentiary

review which Congress considered to be so important,

as to the remainder of its business operations.“

Indeed, this litigation probably provides the only opportunity

for any pre-enforcement judicial review of the Franchise Rule.

One panel of the Court of Appeals refused to permit Ashlard Oil

Company to intervene in this litigation after the 60-day statutory

period had run. In National Auto. Dealers Ass'n v. FTC, 421 F.

Supp. 31, 35 (M.D. La. 1976), plaintiff’s suit for injunctive relief

to restrain the enforcement of a rule promulgated under § 18 (a) (1)

The Court of Appeals’ determination to dismiss this

case “without prejudice to the right of the petitioners to

contest the validity of the Rule” if a controversy arises

as to any business not included within the exemption

is ineffective as a practical matter, since there are no

apparent procedures to reopen appellate cases after the

time for petitioning for rehearing expires, and it may

be incorrect as a legal proposition. See United States v.

Michigan National Corp., 419 U.S. 1 (1974). There exists

a serious question whether the court of appeals has the

power to enlarge its jurisdiction of its own accord by ex-

tending the 60-day statutory period. Thiokol Chemical

Corp. v. Burlington Industries, Inc., 313 F. Supp. 253,

254-55 (D. Del. 1970), affd, 448 F.2d 1328 (3d Cir.

1971), cert. denied, 404 U.S. 1019 (1972). Accord, Owen

Equipment & Erection Co. v. Kroger, 437 U.S. 365, 374

(1978) ; United Gas Pipe Line Co. v. Whitman, 595 F.2d

323, 330 (5th Cir. 1979); Basso v. Utah Power & Light

Co., 495 F.2d 906, 910 (10th Cir. 1974).

The only other way in which Petitioner may be able

to challenge the validity of the illegal Franchise Rule

is to risk $10,000 per day penalties in the context of an

enforcement proceeding. This option is certainly not

“without prejudice” to Petitioner, which would not only

have to risk the substantial penalties of noncompliance

in order to obtain judicial review, but, as discussed

above, may lose the ability to raise crucial challenges

to the validity of the Rule as well.

of the FTC Act, as amended by the Magnuson-Moss Act, was dis-

missed on the ground that such review would only be available in

an action filed in a Court of Appeals within 60 days of the pro-

mulgation of the Rule. See also Marathon Oil Co. v. FTC, 1980-1

Trade Cas. (CCH) {68,177 (N.D. Ohio 1980), where the court

dismissed Marathon’s suit for declaratory relief on the narrow

issue of applicability of the Franchise Rule.

II. THE WRIT SHOULD BE GRANTED TO DETER-

MINE WHETHER A PARTIAL EXEMPTION

FROM A CHALLENGED RULE RENDERS MOOT

A CHALLENGE TO THE VALIDITY OF THAT

RULE

A. The Court of Appeals’ Decision Is in Conflict With

the Decisions of This Court

The Ninth Circuit’s decision to dismiss this litigation

is in direct conflict with this Court’s decisions on the

mootness doctrine, which establish that a case only be-

comes moot “when the issues presented are no longer

‘live’ or the parties lack a legally cognizable interest in

the outcome.” Powell v. McCormack, 395 U.S. 486, 496

(1969). Accord, North Carolina v. Rice, 404 U.S. 244,

246 (1971). As this Court has repeatedly explained, as

long as the challenged activity remains in force, and

continues to impact on the challenging parties, a case is

not moot. The Court illustrated this principle in United

States v. Concentrated Phosphate Export Association,

393 U.S. 199, 202-03 (1968), in which the government

had filed a civil antitrust suit against an association and

its member firms, contending that they had illegally con-

spired on bids for 11 sales of concentrated phosphate to

the government. The Court rejected an argument that

a new Agency for International Development regulation

mooted the case, pointing out that the new regulation

did not apply to all the contracts on which the former

members of the association might bid. This situation

cannot be distinguished from an exemption which does

not apply to all of Petitioner’s business operations as a

basis for declaring a case to be moot.

Petitioner challenged the validity of th» Franchise

Rule. The Rule continues to exist; its validity remains

untested; and the FTC has never varied fro the posi-

tion that the Rule controls any aviation fuel, marine

fuel and similar franchises of Petitioner. As long as

the challenged activity remains in force, as it does here,

Supreme Court precedent dictates that the litigation go

forward. See also Gray v. Sanders, 372 U.S. 368, 376

(1963).

The July 1980 Exemption Order has no effect on the

validity of the Rule, the issue here. The FTC remains

at liberty to enforce the Rule as to non-exempted busi-

nesses. In fact, the Commission has just concluded its

first enforcement action, obtaining a substantial default

judgment. FTC v. H. N. Singer, Inc., Civ. No. 80 3068

(N.D. Cal. Mar. 24, 1981). In this context, it is clear

that the decision of the Court of Appeals to dismiss this

case as moot is not supportable under applicable Supreme

Court precedent.

More specifically, the Ninth Circuit’s dismissal of this

litigation is fundamentally inconsistent with the well

established principle that voluntary cessation of chal-

lenged conduct does not render a controversy moot. Jus-

tice Clark explained the rationale underlying this prin-

ciple nearly thirty years ago in United States v. W.T.

Grant Co., 345 U.S. 629, 682 (1953), stating

[t]he defendant is free to return to his old ways.

This, together with a public interest in having the

legality of the practices settled, militates against a

mootness conclusion .... The courts have rightly

refused to grant defendants such a powerful weapon

against public law enforcement.

(Footnote omitted.) This principle has been repeatedly

reaffirmed and applied by this Court. See, e.g., County

of Los Angeles v. Davis, 440 U.S. 625, 681 (1979);

DeF unis v. Odegaard, 416 U.S. 312, 318 (1974); United

States v. Concentrated Phosphate Export Association,

supra at 203; Gray v. Sanders, supra at 376; Walling

v. Helmerich & Payne, Inc., 323 U.S. 37, 42-48 (1944);

United States v. Trans-Missouri Freight Association, 166

U.S. 290, 308-10 (1897). Yet the decision by the Ninth

Circuit to dismiss this litigation provides the FTC and

all other agencies with the “powerful weapon” of non-

binding advisory opinions and partial exemptions to

evade judicial review.

The Supreme Court, in County of Los Angeles v.

Davis, supra at 631, recently established two conditions

which must be met if voluntary cessation of challenged

conduct is ever to lead to mootness. First, the party

claiming mootness must establish that there is no “rea-

sonable expectation” that the alleged violation will recur.

See also SEC v. Medical Committee For Human Rights,

404 U.S. 403 (1972). The opposite expectation is pres-

ent in this litigation.

The second condition imposed by the Supreme Court

which a party seeking to establish mootness must show

is that “interim relief or events have completely and

irrevocably eradicated the effects of the alleged violation.”

County of Los Angeles v. Davis, swpra at 631. See also

DeFunis v. Odegaard, supra at 317-18; Indiana Em-

ployment Security Division v. Burney, 409 U.S. 540

(1973). The FTC has clearly not satisfied this condition.

The FTC staff contends that the exemption extended only

to service station and related operations.

In Super Tire Engineering Co. v. McCorkle, 416 U.S.

115 (1974), the Supreme Court considered a case analo-

gous to this litigation. Super Tire involved a suit for

injunctive and declaratory relief by certain employers to

have a New Jersey state statute granting public assist-

ance to workers engaged in a strike invalidated. The

employers argued that the state legislation undermined

their bargaining position, thus interfering with federal

labor policy of free collective bargaining as expressed in

the Labor Management Relations Act. The specific labor

dispute which had sparked the suit was settled before

the case could be tried. The Court held that, although

the case for an injunction dissolved, the need to deter-

mine the validity of the state legislation remained. The

Court reasoned:

[T]he challenged governmental activity in the pres-

ent case is not contingent, has not evaporated or

disappeared, and, by its continuing or brooding

presence, casts what may well be a substantial ad-

verse effect on the interests of the petitioning

parties.

Id. at 122.

This litigation satisfies all the criteria set forth in the

Super Tire case. The “brooding presence” of the Fran-

chise Rule forces Petitioner either to comply with a Rule

which it contends is invalid, or risk the possibility of a

penalty of $10,000 per day per violation.

Even assuming, arguendo, that this litigation did not

fit squarely within the precedent set forth above estab-

lishing that this case is not moot, the Ninth Circuit’s

decision would be fundamentally inconsistent with the

exception to the mootness doctrine which the Supreme

Court has established in situations where the challenged

conduct would be “capable of repetition, yet evading re-

view.” First set forth in Southern Pacific Terminal Co.

v. ICC, 219 U.S. 498, 515 (1911), this Court has con-

tinued to recognize this exception. See, e.g., Weinstein

v. Bradford, 423 U.S. 147, 149 (1975); Sosna v. Iowa,

419 U.S. 393, 399-400 (1975); DeFunis v. Odegaard,

supra at 318-19; Roe v. Wade, 410 U.S. 118, 125 (1973).

If the Ninth Circuit’s decision is permitted to stand, the

FTC will have shown just how readily judicial review of

an illegal agency rule can be evaded. Further, as for

review of the validity of the Franchise Rule itself, the

Ninth Circuit’s decision may well permit total evasion

of the review which Petitioner seeks to obtain in this

action.

The FTC argued that the mootness doctrine applied

by contending that Petitioner had never admitted that

any of its other business operations are covered by the

Rule; and the Ninth Circuit apparently accepted this

argument. Such a concession, given the potential statu-

tory penalties, is too exacting a price to demand from a

party seeking to obtain judicial review. Abbott Labora-

tories v. Gardner, supra. Such a concession is clearly

greater than that required under the statute which re-

quires only that the party be “interested,” and, in fact,

gives the power to obtain judicial review to mere con-

sumers. 15 U.S.C. § 57a (e) (1) (A) (1976 & Supp. III

1979). It is enough that the FTC, the agency which has

the responsibility of enforcing this litigation, has in-

formed Petitioner’s counsel that certain of its businesses

may fall under the Rule. To deny Petitioner judicial

review in this situation is to ignore well established

Supreme Court precedent on mootness and to contravene

clear statutory language.

B. The Court of Appeals’ Decision Is in Conflict With

the Decisions of Other Circuits

The decision of the Court of Appeals for the Ninth

Circuit stands in marked contrast with the line of cases

in other circuits holding that a challenge to agency au-

thority is not mooted by the disappearance of the im-

mediate controversy as long as a reason remains to

resolve the subsisting challenge to the agency’s conduct.

See Bethlehem Steel Corp. v. Train, 544 F.2d 657 (3d

Cir. 1976), cert. denied, 480 U.S. 975 (1977) ; Big Rivers

Electric Corp. v. EPA, 523 F.2d 16 (6th Cir. 1975),

cert. denied, 425 U.S. 934 (1976); Natural Resources

Defense Council, Inc. v. EPA, 489 F.2d 390, 404 (5th

Cir. 1974), rev’d on other grounds sub nom. Train v.

Natural Resources Defense Council, Inc., 421 U.S. 60

(1975) ; Nader v. Volpe, 475 F.2d 916 (D.C. Cir. 1973).

Bethlehem Steel Corp. v. Train, supra, involved an

attempt to get judicial review of an order issued by the

Administrator of the EPA. The EPA had issued a per-

mit to Bethlehem containing certain effluent limitations

and schedules which required compliance by June, 1977.

The earliest date by which Bethlehem could meet the

prescribed levels was July, 1979. Thereafter, the EPA

indicated that it had no intention of bringing an action

against Bethlehem for its inability to comply. The court

held that the litigation was not moot because the EPA

could not foreclose the possibility of a suit against

Bethlehem in the future. Similarly, in light of the FTC’s

statements that certain of Petitioner’s businesses may

be covered by the Franchise Rule, the Court of Appeals

cannot foreclose the possibility of a later enforcement

suit against Petitioner involving one of its non-service

station related operations such as its aviation fuel

operations.

The Sixth Circuit rejected mootness as a basis for

dismissing a similar case in Big Rivers Electric Corp.

v. EPA, supra. Petitioner in that case sought to chal-

lenge a Clean Air Act regulation granting the Adminis-

trator of the EPA the authority to approve alternate

standards for emission controls proposed by a state. At

the time of the court’s consideration of the mootness

issue, the specific state regulation which had sparked the

litigation was no longer in effect. The court held that

the litigation was not moot because the subsisting chal-

lenge to the authority of the EPA Administrator, as set

forth in the Clean Air Act amendment, remained. In the

case before the Ninth Circuit, the challenge to the validity

of the Franchise Rule survived the partial exemption

granted by the FTC, as did the FTC’s claim that certain

of Petitioner’s businesses may be covered.

A similar question was placed before the Fourth Cir-

cuit in Natural Resources Defense Council, Inc. v. EPA,

supra. That litigation also involved an attempt to ob-

tain judicial review of an order of the Administrator

of the EPA approving, inter alia, the use of tall stack

controls as air quality controls. While this litigation was

pending, EPA wrote a letter to the Governor of Georgia

stating that Georgia’s proposed tall stack controls were

no longer considered to be acceptable. The letter made

it clear, however, that a tall stack control plan more

limited in breadth would be acceptable. The court held

that the letter did not moot the litigation as the EPA

continued to endorse the tall stack control approach to

protecting the air quality. Although the FTC has par-

tially exempted Petitioner from the Franchise Rule in

this litigation, the requirements of the Rule, which the

FTC asserts is applicable to Petitioner’s non-service sta-

tion operations, remain in effect.

In Nader v. Volpe, supra, the District of Columbia Cir-

cuit Court refused to reach a determination of mootness

on similar facts. Plaintiff in that case alleged that Volpe

had exceeded his authority under the National Traffic

and Motor Vehicle Safety Act of 1966 by granting

Checker Motors Corporation a temporary exemption

from the effective date of a Motor Vehicle Safety Stand-

ard. The exemption was withdrawn before the court

could resolve this issue, and Checker Motors proceeded

to comply with the standard. The court determined that

the litigation was not moot, concluding that if with-

drawal of the exemption led to mootness, courts would

be prevented from “ever deciding the important question

of whether or not the Secretary has authority to issue

such exemptions.” Jd. at 917. Similarly, if a partial

exemption can be used to moot a direct appeal of a rule

promulgated by the FTC, the kinds of important proce-

dural and evidentiary challenges raised in this litigation

may never be resolved in any litigation challenging an

FTC Rule.

The Supreme Court should review this issue in order

to resolve the conflict between the Ninth Circuit and the

many other circuits which have addressed this issue.

CONCLUSION

The petition for a writ of certiorari should be

granted.

Respectfuily submitted,

J. WALLACE ADAIR

Counsel of Record

Rocer C. SIMMONS

ABIGAIL A. SHAINE

Howrey & SIMON

1780 Pennsylvania Ave., N.W.

Washington, D.C. 20006

(202) 788-0800

Counsel for Petitioner

May 11, 1981

APPENDIX

TABLE OF CONTENTS

Order of the Court of Appeals, November 6, 1980..

Exemption Order of the Federal Trade Commis-

r A

Notice of Entry of Judgment of the Court of

Appeals, November 6, 1980 . . . . .

Order on Rehearing of the Court of Appeals, Feb-

Statutes and Regulation Involved.

A. Federal Trade Commission Aet

B. Disclosure Requirements and Prohibitions

Concerning Franchising and Business inl

tunity Ventures ay

Page

21a

APPENDIX A

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 78-3680 et al.

IN RE: FTC FRANCHISE DISCLOSURE RULE REVIEW

ORDER

Before: KENNEDY and FERGUSON, Circuit Judges,

and WILLIAMS,“ District Judge.

Upon due consideration, the court makes the follow-

ing orders respecting the consolidated cases:

1. The Commission and Marathon Oil Company hav-

ing so stipulated, the petition in Marathon Oil Company

is dismissed without prejudice, the parties to bear their

own costs.

2. The court grants the motion of the Federal Trade

Commission to dismiss the pending petitions for review

by the Petroleum Company Petitioners. The Commis-

sion has completely and unconditionally exempted from

the operation of the rule the service station franchise

operations of the Petroleum Company Petitioners. If a

case or controversy arises concerning the sale of fran-

chises other than service stations, then that matter can

be litigated anew. The petitions for review by the Pe-

troleum Company Petitioners accordingly are dismissed,

without prejudice to the right of the petitioners to con-

test the validity of the rule or its application in any

appropriate future proceeding. All parties will bear

their own costs.

[Entered on November 6, 1980]

* Honorable David W. Williams, United States District Judge

for the Central District of California, sitting by designation.

APPENDIX B

UNITED STATES OF AMERICA

BEFORE FEDERAL TRADE COMMISSION

COMMISSIONERS:

Michael Pertschuk, Chairman

Paul Rand Dixon

David A. Clanton

Robert Pitofsky

Patricia P. Bailey

IN THE MATTER OF

Petitions for Exemption from Trade Regulation Rule

entitled “Disclosure Requirements and Prohibitions

Concerning Franchising and Business Opportunity

Ventures” filed by Shell Oil Company, Atlantic Rich-

field Company, Exxon Corporation, Mobil Corporation,

Union Oil Company of California, Standard Oil Com-

pany (Indiana), Getty Refining & Marketing Company,

Gulf Oil Corporation, Kerr-McGee Refining Corpora-

tion, Inc., Standard Oil Company of California, Chev-

ron U.S. A., Ine., Chevron Chemical Company, Phillips

Petroleum Company, Crown Central Petroleum Cor-

poration, Ashland Petroleum Company, Standard Oil

Company, Sinclair Marketing, Inc., National Oil Job-

bers Council, Illinois Petroleum Marketers Association

and Texas Oil Marketers Association.

ORDER GRANTING EXEMPTION

On April 18, 1980, the Commission published a notice

in the Federal Register soliciting comments on petitions

filed by the National Oil Jobbers Council, Illinois Pe-

troleum Marketers Association and Texas Oil Marketers

Association, all on behalf of their members, and by Shell

Oil Company, Atlantic Richfield Company, Exxon Cor-

poration, Mobil Corporation, Union Oil Company of Cali-

fornia, Standard Oil Company (Indiana), Getty Refining

& Marketing Company, Gulf Oil Corporation, Kerr-Mc-

Gee Refining Corporation, Standard Oil Company of

California, Chevron U.S.A., Inc., Chevron Chemical Com-

pany, Phillips Petroleum Company, Crown Central Pe-

troleum Corporation, Ashland Petroleum Company, Stand-

ard Oil Company and Sinclair Marketing, Inc. The pe-

titions sought an exemption, pursuant to Section 18(g)

of the Federal Trade Commission Act, from coverage

under the Commission’s trade regulation rule entitled

“Disclosure Requirements and Prohibitions Concerning

Franchising and Business Opportunity Ventures.”

Section 18(g) of the Act provides that an exemption

to a trade regulation rule may be granted if coverage

is “not necessary to prevent the unfair or deceptive act

or practice to which the rule relates.” In accordance

with Section 18(g) the Commission conducted an exemp-

tion proceeding under Section 553 of the Administrative

Procedure Act, 5 U.S.C. § 553. Following the close of

the public comment period on May 19, 1980, the Com-

mission reviewed the petitions, and the public comments

received in response to the Federal Register notice. Ap-

plying the standard for exemption prescribed by Section

18(g) of the Act, the Commission has concluded that an

exemption should be granted as hereinafter described.

The most frequently cited complaint about practices

in the petroleum franchise relationship that are part of

the Commission’s initial rulemaking record involved ter-

mination and non-renewal practices.“ The Commission

1 Of the 11 complaints in the original rulemaking record dealing

with petroleum company abuses, 10 specifically mention insufficient

notice of, and grounds for, termination and non-renewal. E. g.,

chose to remedy these practices by requiring pre-sale

disclosure, on the theory that if prospective franchisees

know the relevant facts, they can make an informed

decision about the potential benefits and risks of their

proposed investment. Thus, the Commission did not dic-

tate specific changes in the relationship to eliminate any

specific practices; rather, the Commission chose to pub-

licize the practices in the belief that the parties, between

themselves and operating on the basis of relevant infor-

mation, could resolve any problems.

Subsequent to the close of the rulemaking record in

1974, Congress passed the Petroleum Marketing Prac-

tices Act (“PMPA”) 15 U.S.C. § 2801 et seg. (Supp. II,

1978), effective in June 1978, which specifically regu-

lates the manner in which a petroleum company may

terminate or fail to renew an existing franchisee. The

PMPA requires pre-sale disclosure to new franchisees of

the franchisor’s rights to terminate the relationship, and

post-termination disclosure of the franchisee’s rights

under the PMPA to contest the termination. In addition,

the PMPA imposes substantive limitations on the termi-

nation of dealership agreements entered into after an

initial trial franchise with new dealers. The PMPA em-

bodies the Congressional response to the same practices

which concerned the Commission. Congress chose to rem-

edy the abuses it found by means of the alternative

strategy of dictating a substantive mechanism to miti-

gate the problem, and by requiring disclosure of termi-

nation rights. The Commission also notes that substan-

Comments of Retail Gasoline Dealers’ Association, Inc., of Massa-

chusetts, R. II, 2793; Independent Oil Men's Association of New

England, Inc., R. II, 2815; Georgia Association of Petroleum Re-

tailers, Inc., R. II, 697; New Jersey Gasoline Retailers Association,

R. II, 684; National Congress of Petroleum Retailers, Inc., R. II,

382, 501, 698; R. IV, 1933. [All citations to the rulemaking record

follow the format adopted in the Statement of Basis and Purpose

for the franchise rule. 43 Fed. Reg. 59622 n. 9 (Dec. 21, 1978).

tive regulations promulgated by the Department of En-

ergy since the elose of the initial rulemaking record regu-

late the allocation of gasoline supplies as well as the

price of gasoline to franchisees. The PMPA and DOE

regulations appear to have reduced the incentive and

means for continued abuses of the kind documented in

the original record.

Some of the comments? opposing the exemption peti-

tion correctly assert that neither the PMPA, the Depart-

ment of Energy regulations, nor any other federal regu-

lations provide prospective franchisees with the disclo-

sure mandated by the rule. However, these other federal

mechanisms cited above are directed at the same goal as

the franchise rule; i.e., mitigating the deceptive or un-

fair practices, but by different means; i. e., direct inter-

vention through substantive regulation (and limited dis-

closure) rather than indirect intervention through dis-

closure. The sum effect of these other mechanisms is to

impose controls over the crucial aspects of the petroleum

marketing business, such as termination and non-renewal

of dealerships, allocation of supplies and price of prod-

uct. Under this circumstance, the disclosures required by

the franchise rule become unnecessary in view of the

substantive regulation of this particular industry.

While the foregoing mechanisms may not operate per-

fectly to eliminate all abuses, the record does support

the conclusion that the potential for abuse has been suf-

ficiently reduced by the PMPA and DOE regulations as

to render coverage by the franchise rule, as drafted,

largely duplicative of other federal regulations. The

Commission concludes, therefore, that the standard pre-

2 F. 9., Comments of California Service Station Association,

Record at 18; Idaho Service Station Association, Record at 57;

Service Station Association of Louisiana, Inc., Record at 59; Vir-

ginia Gasoline Retailers Association, Inc., Record at 61; Service

Station Dealers of America, Inc., Record at 83. [All citations to

the Exemption Record appear in volume 215-84-1-15-1.]

scribed by Section 18(g) for exemption is met because

application of the rule is “not necessary to prevent the

unfair or deceptive act or practice to which the rule

relates.” However, if circumstances change in the fu-

ture and evidence of renewed misrepresentations in the

sale of petroleum franchises reappears on a significant

scale, a new rulemaking proceeding may be undertaken

that is tailored to the specific needs of the industry. In

the interim, if isolated abuses occur, they will be subject

to the adjudicative procedures and remedies provided by

Section 5 of the FTC Act.

Since the record reflects that the PMPA is primarily

responsible for addressing the past practices the fran-

chise rule was designed to prevent, the Commission con-

cludes that an exemption is warranted for those relation-

ships subject to the PMPA’s provisions. Consequently,

the Commission has determined that the provisions of

Part 436 shall not apply to the advertising, offering,

licensing, contracting, sale or other promotion of a “fran-

chise,” as the term “franchise” is defined by the PMPA,

by all of the petitioners. Furthermore, the Commission

finds no principled basis to distinguish the same activi-

ties when performed by non-petitioners from those per-

formed by petitioners; accordingly, the advertising, of-

fering, licensing, contracting, sale or other promotion of

a “franchise,” as the term “franchise” is defined by the

PMPA, by any non-petitioner also shall be exempt from

the rule’s coverage.

IT ISSO ORDERED.

By The Commission.

/s/ Carol Thomas

CAROL THOMAS

Secretary

SEAL

Issued: July 17, 1980

APPENDIX C

OFFICE OF THE CLERK

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

NOTICE OF ENTRY OF JUDGMENT

Judgment was entered in this case as of the file stamp

date on the attached decision of the court.

[Materials Explaining Procedure For Filing

Rehearing Petition Omitted]

[Entered on November 6, 1980]

APPENDIX D

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Nos. 78-8680, et al.

IN RE FTC FRANCHISE DISCLOSURE RULE REVIEW

ORDER

Before: KENNEDY and FERGUSON, Circuit Judges,

and WILLIAMS,” District Judge

The panel as constituted in the above case has voted

to deny the petition for rehearing. Judges Kennedy and

Ferguson voted to reject the suggestion for rehearing

en banc and Judge Williams made no recommendation

concerning the en banc request.

The full court has been advised of the suggestion for

en banc rehearing and no judge of the court has re-

quested a vote on the suggestion for rehearing en banc.

Fed. R. App. P. 36 (b).

The petition for rehearing is denied and the sugges-

tion for a rehearing en banc is rejected.

[Entered on February 9, 1981]

* Honorable David W. Williams, United States District Judge,

Central District of California, sitting by designation.

APPENDIX E

Federal Trade Commission Act

15 U.S.C. §57a (1976 & Supp. III 1979) provides:

Unfair or deceptive acts or practices rulemaking pro-

ceedings—Authority of Commission to prescribe rules

and general statements of policy

(a) (1) Except as provided in subsection (i) of this

section, the Commission may prescribe—

(A) interpretive rules and general statements of

policy with respect to unfair or deceptive acts or

practices in or affecting commerce (within the mean-

ing of section 45 (a) (1) of this title), and

(B) rules which define with specificity acts or

practices which are unfair or deceptive acts or prac-

tices in or affecting commerce (within the meaning

of section 45 (a) (1) of this title), except that the

Commission shall not develop or promulgate any

trade rule or regulation with regard to the regula-

tion of the development and utilization of the stand-

ards and certification activities pursuant to this sec-

tion. Rules under this subparagraph may include

requirements prescribed for the purpose of prevent-

ing such acts or practices.

(2) The Commission shall have no authority under

this chapter, other than its authority under this section,

to prescribe any rule with respect to unfair or deceptive

acts or practices in or affecting commerce (within the

meaning of section 45(a)(1) of this title). The pre-

ceding sentence shall not affect any authority of the

10a

Commission to prescribe rules (including interpretive

rules), and general statements of policy, with respect to

unfair methods of competition in or affecting commerce.

Procedure applicable

(b) (1) When prescribing a rule under subsection (a)

(1) G) of this section, the Commission shall proceed in

accordance with section 553 of Title 5 (without regard

to any reference in such section to sections 556 and 557

of such title), and shall also (A) publish a notice of

proposed rulemaking stating with particularity the text

of the rule, including any alternatives, which the Com-

mission proposes to promulgate, and the reason for the

proposed rule; (B) allow interested persons to submit

written data, views, and arguments, and make all such

submissions publicly available; (C) provide an oppor-

tunity for an informal hearing in accordance with sub-

section (c) of this section; and (D) promulgate, if ap-

propriate, a final rule based on the matter in the rule-

making record (as defined in subsection (e) (1) (B) of

this section), together with a statement of basis and

purpose.

(2) (A) Prior to the publication of any notice of pro-

posed rulemaking pursuant to paragraph (1)(A), the

Commission shall publish an advance notice of proposed

rulemaking in the Federal Register. Such advance no-

tice shall—

(i) contain a brief description of the area of in-

quiry under consideration, the objectives which the

Commission seeks to achieve, and possible regulatory

alternatives under consideration by the Commission;

and

(ii) invite the response of interested parties with

respect to such proposed rulemaking, including any

suggestions or alternative methods for achieving

such objectives.

lla

(B) The Commission shall submit such advance no-

tice of proposed rulemaking to the Committee on Com-

merce, Science, and Transportation of the Senate and

to the Committee on Interstate and Foreign Commerce

of the House of Representatives. The Commission may

use such additional mechanisms as the Commission con-

siders useful to obtain suggestions regarding the content

of the area of inquiry before the publication of a general

notice of proposed rulemaking under paragraph (1) (A).

cation of a notice of proposed rulemaking pursuant to

paragraph (1) (A), submit such notice to the Committee

on Commerce, Science, and Transportation of the Senate

and to the Committee on Interstate and Foreign Com-

merce of the House of Representatives.

Informal hearing procedure

(e) The Commission shall conduct any informal hear-

ings required by subsections (b) (1) (C) of this section

in accordance with the following procedure:

(1)(A) The Commission shall provide for the

conduct of proceedings under this subsection by hear-

ing officers who shall perform their functions in ac-

cordance with the requirements of this subsection.

(B) The officer who presides over the rulemaking

proceedings shall be responsible to a chief presiding

officer who shall not be responsible to any other offi-

cer or employee of the Commission. The officer who

presides over the rulemaking proceeding shall make

a recommended decision based upon the findings and

conclusions of such officer as to all relevant and

material evidence, except that such recommended

decision may be made by another officer if the officer

who presided over the proceeding is no longer avail-

able to the Commission.

12a

parte matters as authorized by law, no presiding

officer shall consult any person or party with respect

to any fact in issue unless such officer gives notice

and opportunity for all parties to participate.

(2) Subject to paragraph (3) of this subsection,

an interested person is entitled—

(A) to present his position orally or by docu-

mentary submissions (or both), and

(B) if the Commission determines that there

are disputed issues of material fact it is neces-

sary to resolve, to present such rebuttal sub-

missions and to conduct (or have conducted un-

der paragraph (3) (B)) such cross-examination

of persons as the Commission determines (i) to

be appropriate, and (ii) to be required for a

full and true disclosure with respect to such

issues.

(3) The Commission may prescribe such rules

and make such rulings concerning proceedings in

such hearings as may tend to avoid unnecessary costs

or delay. Such rules or rulings may include (A)

imposition of reasonable time limits on each inter-

ested person’s oral presentations, and (B) require-

ments that any cross-examination to which a person

may be entitled under paragraph (2) be conducted

by the Commission on behalf of that person in such

manner as the Commission determines (i) to be

appropriate, and (ii) to be required for a full and

true disclosure with respect to disputed issues of

material fact.

(4) (A) Except as provided in subparagraph (B),

if a group of persons each of whom under para-

graphs (2) and (3) would be entitled to conduct

(or have conducted) cross-examination and who are

determined by the Commission to have the same or

18a

similar interests in the proceeding cannot agree upon

a single representative of such interests for pur-

poses of cross-examination, the Commission may

make rules and rulings (i) limiting the representa-

tion of such interest, for such purposes, and (ii)

governing the manner in which such cross-examina-

tion shall be limited.

(B) When any person who is a member of a

group with respect to which the Commission has

made a determination under subparagraph (A) is

unable to agree upon group representation with the

other members of the group, then such person shall

not be denied under the authority of subparagraph

(A) the opportunity to conduct (or have conducted)

cross-examination as to issues affecting his particu-

lar interests if (i) he satisfies the Commission that

he has made a reasonable and good faith effort to

reach agreement upon group representation with the

other members of the group and (ii) the Commis-

sion determines that there are substantial and rele-

vant issues which are not adequately presented by

the group representative.

(5) A verbatim transcript shall be taken of any

oral presentation, and cross-examination, in an in-

formal hearing to which this subsection applies.

Such transcript shall be available to the public.

Statement of basis and purpose accompanying rule;

“Commission” defined; judicial review of amendment

or repeal of rule; violation of rules

(d) (1) The Commission’s statement of basis and

purpose to accompany a rule promulgated under subsec-

tion (a) (1) (B) of this section shall include (A) a state-

ment as to the prevalence of the acts or practices treated

by the rule; (B) a statement as to the manner and con-

text in which such acts or practices are unfair or decep-

tive; and (C) a statement as to the economic effect of

14a

the rule, taking into account the effect on small business

and consumers.

(2) (A) The term Commission“ as used in this sub-

section and subsections (b) and (e) of this seetion in-

cludes any person authorized to act in behalf of the Com-

mission in any part of the rulemaking proceeding.

(B) A substantive amendment to, or repeal of, a rule

promulgated under subsection (a) (1) (B) of this section

shall be prescribed, and subject to judicial review, in the

same manner as a rule prescribed under such subsection.

An exemption under subsection (g) of this section shall

not be treated as an amendment or repeal of a rule.

(3) When any rule under subsection (a) (1) (B) of

this section takes effect a subsequent violation thereof

shall constitute an unfair or deceptive act or practice in

violation of section 45(a)(1) of this title, unless the

Commission otherwise expressly provides in such rule.

Judicial review: petition; jurisdiction and venue;

rulemaking record; additional submissions and pres-

entations; scope of review and relief; review by

Supreme Court; additional remedies

(e) (1) (A) Not later than 60 days after a rule is

promulgated under subsection (a) (1) (B) of this section

by the Commission, any interested person (including a

consumer or consumer organization) may file a petition,

in the United States Court of Appeals for the District of

Columbia circuit or for the circuit in which such person

resides or has his principle place of business, for judicial

review of such rule. Copies of the petition shall be forth-

with transmitted by the clerk of the court to the Commis-

sion or other officer designated by it for that purpose.

The provisions of section 2112 of Title 28 shall apply to

the filing of the rulemaking record of proceedings on

which the Commission based its rule and to the transfer

of proceedings in the courts of appeals.

15a

(B) For the purposes of this section, the term “rule-

making record” means the rule, its statement of basis

and purpose, the transcript required by subsection (c) (5)

of this section, any written submission, and any other

information which the Commission considers relevant to

such rule.

(2) If the petitioner or the Commission applies to the

court for leave to make additional oral submissions or

written presentations and shows to the satisfaction of the

court that such submissions and presentations would be

material and that there were reasonable grounds for the

submissions and failure to make such submissions and

presentations in the proceeding before the Commission,

the court may order the Commission to provide additional

opportunity to make such submissions and presentations.

The Commission may modify or set aside its rule or make

a new rule by reason of the additional submissions and

presentations and shall file such modified or new rule,

and the rule’s statement of basis of purpose, with the

return of such submissions and presentations. The court

shall thereafter review such new or modified rule.

(3) Upon the filing of the petition under paragraph

(1) of this subsection, the court shall have jurisdiction to

review the rule in accordance with chapter 7 of Title 5

and to grant appropriate relief, including interim relief,

as provided in such chapter. The court shall hold unlaw-

ful and set aside the rule on any ground specified in sub-

paragraphs (A), (B), (C), or (D) of section 706(2) of

Title 5 (taking due account of the rule of prejudicial

error), or if—

(A) the court finds that the Commission’s action

is not supported by substantial evidence in the rule-

making record (as defined in paragraph (1) (B) of

this subsection) taken as a whole, or

(B) the court finds that—

16a

(i) a Commission determination under sub-

section (c) of this section that the petitioner is

not entitled to conduct cross-examination or

make rebuttal submissions, or

(ii) a Commission rule or ruling under sub-

section (c) of this section limiting the petition-

er’s cross-examination or rebuttal submissions,

has precluded disclosure of disputed material facts

which was necessary for fair determination by the

Commission of the rulemaking proceeding taken as a

whole.

The term “evidence”, as used in this paragraph, means

any matter in the rulemaking record.

(4) The judgment of the court affirming or setting

aside, in whole or in part, any such rule shall be final,

subject to review by the Supreme Court of the United

States upon certiorari or certification, as provided in sec-

tion 1254 of Title 28.

(5) (A) Remedies under the preceding paragraphs of

this subsection are in addition to and not in lieu of any

other remedies provided by law.

(B) The United States Court of Appeals shall have

exclusive jurisdiction of any action to obtain judicial re-

view (other than in an enforcement proceeding) of a rule

prescribed under subsection (a) (1) (B) of this section,

if any district court of the United States would have

had jurisdiction of such action but for this subparagraph.

Any such action shall be brought in the United States

Court of Appeals for the District of Columbia circuit, or

for any circuit which includes a judicial district in which

the action could have been brought but for this sub-

paragraph.

sion described in paragraph (3) (B) (i) or (ii) may be

17a

reviewed only in a proceeding under this subsection and

only in accordance with paragraph (3) (B). Section 706

(2) (E) of Title 5 shall not apply to any rule promulgated

under subsection (a) (1) (B) of this section. The contents

and adequacy of any statement required by subsection

(b) (1) (D) of this section shall not be subject to judicial

review in any respect.

Exemptions and stays from applications

of rules; procedures

(g) (1) Any person to whom a rule under subsection

(a) (1) (B) of this section applies may petition the Com-

mission for an exemption from such rule.

(2) If, on its own motion or on the basis of a petition

under paragraph (1), the Commission finds that the ap-

plication of a rule prescribed under subsection (a) (1)

(B) of this section to any person or class of persons is

not necessary to prevent the unfair or deceptive act or

practice to which the rule relates, the Commission may

exempt such person or class from all or part of such

rule. Section 553 of Title 5 shall apply to action under

this paragraph.

(3) Neither the pendency of a proceeding under this

subsection respecting an exemption from a rule, nor the

pendency of judicial proceedings to review the Commis-

sion’s action or failure to act under this subsection, shall

stay the applicability of such rule under subsection (a)

(1) ) of this section.

Compensation for attorney fees, expert witness fees, etc.,

incurred by persons in rulemaking proceedings;

limitation on amount; establishment of small

business outreach program

(h) (1) The Commission may, pursuant to rules pre-

scribed by it, provide compensation for reasonable at-

18a

torneys fees, expert witness fees, and other costs of par-

ticipating in a rulemaking proceeding under this section

to any person (A) who has, or represents, an interest

(i) which would not otherwise be adequately represented

in such proceeding, and (ii) representation of which is

necessary for a fair determination of the rulemaking pro-

ceeding taken as a whole, and (B) who is unable ef-

fectively to participate in such proceeding because such

person cannot afford to pay costs of making oral presenta-

tions, conducting cross-examination, and making rebuttal

submissions in such proceeding.

(2) The Commission shall reserve an amount equal to

25 percent of the amount appropriated for the payment

of compensation under this subsection for any fiscal year

for use in accordance with this paragraph. Such reserved

amount shall be available solely for the payment of com-

pensation to persons who either (A) would be regulated

by the proposed rule involved; or (B) represent persons

who would be so regulated. Any portion of such reserved

amount which is not used for the payment of compensa-

tion to such persons under this paragraph shall revert to

the Treasury of the United States.

(3) The amount of compensation which may be paid

to any person under this subsection in connection with

the participation by such person in any particular rule-

making proceeding under this section may not exceed

$75,000. The aggregate amount of compensation paid un-

der this subsection in any fiscal years to any person for

all rulemaking proceedings in which such person par-

ticipates during such fiscal year may not exceed $50,000.

(4) The aggregate amount of compensation paid to all

persons in any fiscal year under this subsection may not

exceed $750,000.

(5) The Commission, in connection with the adminis-

tration of this subsection pursuant to rule prescribed by

19a

the Commission under paragraph (1), shall establish a

small business outreach program. Such program shall—

(A) solicit public comment from small businesses

whose views otherwise would not be adequately repre-

sented, in order to ensure a fair determination in

rulemaking proceedings under this section; and

(B) encourage the participation of small busi-

nesses in the compensation program administered by

the Commission under this subsection by dissemin-

ating to small businesses information which explains

the procedures and requirements applicable to the

receipt of compensation under such program.

Restriction on rulemaking authority of Commission

respecting children’s advertising proceedings

pending on May 28, 1980

(i) The Commission shall not have any authority to

promulgate any rule in the children’s advertising proceed-

ing pending on May 28, 1980, or in any substantially sim-

ilar proceeding on the basis of a determination by the

Commission that such advertising constitutes an unfair

act or practice in or affecting commerce.

Meetings with outside parties

(j) (1) For purposes of this subsection, the term out-

side party” means any person other than (A) a Commis-

sioner; (B) an officer or employee of the Commission; or

other agreement or arrangement with the Commission to

provide any goods or services (including consulting serv-

ices) to the Commission.

(2) Not later than 60 days after May 28, 1980, the

Commission shall publish a proposed rule, and not later

than 180 days after May 28, 1980, the Commission shall

promulgate a final rule, which shall authorize the Com-

20a

mission or any Commissioner to meet with any outside

party concerning any rulemaking proceeding of the Com-

mission. Such rule shall provide that—

(A) notice of any such meeting shall be included

in any weekly calendar prepared by the Commission;

and

(B) a verbatim record or a summary of any such

meeting, shall be kept, made available to the public

and included in the rulemaking record.

Communications by investigative personnel with

staff of Commission concerning matters outside

rulemaking record prohibited

(k) Not later than 60 days after May 28, 1980, the

Commission shall publish a proposed rule, and not later

than 180 days after May 28, 1980, the Commission shall

promulgate a final rule, which shall prohibit any officer,

employee, or agent of the Commission with any investi-

gative responsibility or other responsibility relating to

any rulemaking pi “eeding within any operating bureau

of the Commission, 110m communicating or causing to be

communicated to any Commissioner or to the

staff of any Commissioner any fact which is relevant to

the merits of such proceeding, unless such communication

is made available to the public and is included in the

rulemaking record. The provisions of this subsection

shall not apply to any communication to the extent such

communication is required for the disposition of ex

parte matters as authorized by law.

Disclosure Requirements and Prohibitions Concerning

Franchising and Business Opportunity Ventures

16 C. F. R. Part 436 (1980) provides:

§ 436.1 The Rule.

In connection with the advertising, offering, licensing,

contracting, sale, or other promotion in or affecting com-

merce, as “commerce” is defined in the Federal Trade

Commission Act, of any franchise, or any relationship

which is represented either orally or in writing to be a

franchise, it is an unfair or deceptive act or practice

within the meaning of section 5 of that Act for any

franchisor or franchise broker:

(a) To fail to furnish any prospective purchasee

with the following information accurately, clearly, and

concisely stated, in a legible, written document at the

earlier of the “time for making of disclosures” or the

first “personal meeting“:

(1) (i) The official name and address and principal

place of business of the franchisor, and of the parent

firm or holding company of the franchisor, if any;

(ii) The name under which the franchisor is doing

or intends to do business; and

(iii) The trademarks, trade names, service marks, ad-

vertising or other commercial symbols (hereinafter col-

lectively referred to as marks“) which identify the

goods, commodities, or services to be offered, sold, or dis-

tributed by the prospective franchisee, or under which

the prospective franchisee will be operating.

(2) The business experience during the past 5 years,

stated individually, of each of the franchisor’s current

directors and executive officers (including, and herein-

after to include, the chief executive and chief operating of-

ficer, financial, franchise marketing, training and service

officers). With regard to each person listed, those per-

sons’ principal occupations and employers must be in-

cluded.

(3) The business experience of the franchisor and the

franchisor’s parent firm (if any), including the length of

time each: (i) has conducted a business of the type to be

operated by the franchisee; (ii) has offered or sold a

franchise for such business; (iii) has conducted a busi-

ness or offered or sold a franchise for a business (A)

operating under a name using any mark set forth under

paragraph (a) (1) (iii), or (B) involving the sale, offer-

ing, or distribution of goods, commodities, or services

which are identified by any mark set forth under para-

graph (a) (1) (iii); and (iv) has offered for sale or sold

franchises in other lines of business, together with a de-

scription of such other lines of business.

(4) A statement disclosing who, if any, of the persons

listed in paragraphs (a) (2) and (a) (3) of this section:

(i) Has, at any time during the previous seven fiscal

years, been convicted of a felony or pleaded nolo con-

tendere to a felony charge if the felony involved fraud

(including violation of any franchise law, or unfair or

deceptive practices law), embezzlement, fraudulent con-

version, misappropriation of property, or restraint of

trade;

(ii) Has, at any time during the previous seven fiscal

years, been held liable in a civil action resulting in a

final judgment or has settled out of court any civil action

or is a party to any civil action (A) involving allegations

of fraud (including violation of any franchise law, or

unfair or deceptive practices law), embezzlement, fraudu-

lent conversion, misappropriation of property, or restraint

of trade, or (B) which was brought by a present or

former franchisee or franchisees and which involves or

involved the franchise relationship; Provided, however,

That only material individual civil actions need be so

listed pursuant to this subparagraph (4) (ii), including

any group of civil actions which, irrespective of the ma-

teriality of any single such action, in the aggregate is

material;

(iii) Is subject to any currently effective State or Fed-

eral agency or court injunctive or restrictive order, or is

a party to a proceeding currently pending in which such

order is sought, relating to or affecting franchise activi-

ties or the franchisor-franchisee relationship, or involv-

ing fraud (including violation of any franchise law, or

unfair or deceptive practices law), embezzlement, fraudu-

lent conversion, misappropriation of property, or restraint

of trade.

Such statment shall set forth the identity and location

of the court or agency; the date of conviction, judgment,

or decision; the penalty imposed; the damages assessed;

the terms of settlement or the terms of the order; and the

date, nature, and issuer of each such order or ruling. A

franchisor may include a summary opinion of counsel as

to any pending litigation, but only if counsel’s consent to

the use of such opinion is included in the disclosure state-

ment.

(5) A statement disclosing who, if any, of the per-

sons listed in paragraphs (a) (2) and (a) (3) of this

section at any time during the previous 7 fiscal years

has:

(i) Filed in bankruptey;

(ii) Been adjudged bankrupt;

(iii) Been reorganized due to insolvency ; or

24a

(iv) Been a principal, director, executive officer, or

partner of any other person that has so filed or was

so adjudged or reorganized, during or within 1 year

after the period that such person held such position in

such other person. If so, the name and location of the

person having so filed, or having been so adjudged or

reorganized, the date thereof, and any other material

facts relating thereto, shall be set forth.

(6) A factual description of the franchise offered to

be sold by the franchisor.

(7) A statement of the total funds which must be

paid by the franchisee to the franchisor or to a person

affiliated with the franchisor, or which the franchisor

or such affiliated person imposes or collects in whole

or in part on behalf of a third party, in order to obtain

or commence the franchise operation, such as initial

franchise fees, deposits, downpayments, prepaid rent,

and equipment and inventory purchases. If all or part

of these fees or deposits are returnable under certain

conditions, these conditions shall be set forth; and if

not returnable, such fact shall be disclosed.

(8) A statement describing any recurring funds re-

quired to be paid, in connection with carrying on the

franchise business, by the franchisee to the franchisor

or to a person affiliated with the franchisor, or which

the franchisor or such affiliated person imposes or col-

lects in whole or in part on behalf of a third party, in-

cluding, but not limited to, royalty, lease, advertising,

training, and sign rental fees, and equipment or in-

ventory purchases.

(9) A statement setting forth the name of each per-

son (including the franchisor) the franchisee is directly

or indirectly required or advised to do business with by

the franchisor, where such persons are affiliated with

the franchisor.

25a

(10) A statement describing any real estate, services,

supplies, products, inventories, signs, fixtures, or equip-

ment relating to the establishment or the operation of

the franchise business which the franchisee is directly

or indirectly required by the franchisor to purchase, lease

or rent; and if such purchases, leases or rentals must be

made from specific persons (including the franchisor),

a list of the names and addresses of each such person.

Such list may be made in a separate document delivered

to the prospective franchisee with the prospectus if the

existence of such separate document is disclosed in the

prospectus.

(11) A description of the basis for calculating, and,

if such information is readily available, the actual amount

of, any revenue or other consideration to be received by

the franchisor or persons affiliated with the franchisor

from suppliers to the prospective franchisee in consider-

ation for goods or services which the franchisor requires

or advises the franchisee to obtain from such suppliers.

(12) (i) A statement of all the material terms and

conditions of any financing ar-angement offered directly

or indirectly by the franchisor, or any person affiliated

with the franchisor, to the prospective franchisee; and

(ii) A description of the terms by which any pay-

ment is to be received by the franchisor from (A) any

person offering financing to a prospective franchisee;

and (B) any person arranging for financing for a pros-

pective franchisee.

(18) A statement describing the material facts of

whether, by the terms of the franchise agreement or

other device or practice, the franchisee is:

(i) Limited in the goods or services he or she may

offer for sale;

(ii) Limited in the customers to whom he or she may

sell such goods or services;

(iii) Limited in the geographic area in which he or

she may offer for sale or sell goods or services ; or

(iv) Granted territorial protection by the franchisor,

by which, with respect to a territory or area, (A) the

franchisor will not establish another, more than any

fixed number of, franchises or company-owned outlets,

either operating under, or selling, offering, or distribut-

ing goods, commodities or services, identified by any

mark set forth under paragraph (a) (1) (iii) of this sec-

tion; or (B) the franchisor or its parent will not estab-

lish other franchises or company-owned outlets selling

or leasing the same or similar products or services under

a different trade name, trademark, service mark, ad-

vertising or other commercial symbol.

(14) A statement of the extent to which the fran-

chisor requires the franchisee (or, if the franchisee is a

corporation, any person affiliated with the franchisee) to

participate personally in the direct operation of the

franchise.

(15) A statement disclosing, with respect to the fran-

chise agreement and any related agreements:

(i) The term (i.e., duration of arrangement), if any,

of such agreement, and whether such term is or may

be affected by any agreement (including leases or sub-

leases) other than the one from which such term arises;

(ii) The conditions under which the franchisee may

review or extend;

(iii) The conditions under which the franchisor may

refuse to renew or extend;

(iv) The conditions under which the franchisee may

terminate;

(v) The conditions under which the franchisor may

terminate;

27a

(vi) The obligations (including lease or sublease ob-

ligations) of the franchisee after termination of the

franchise by the franchisor, and the obligations of the

franchisee (including lease or sublease obligations) af-

ter termination of the franchise by the franchisee and

after the expiration of the franchise;

(vii) The franchisee’s interest upon termination of the

franchise, or upon refusal to renew or extend the fran-

chise, whether by the franchisor or by the franchisee;

(viii) The conditions under which the franchisor may

repurchase, whether by right of first refusal or at the

option of the franchisor (and if the franchisor has the

option to repurchase the franchise, whether there will

be an independent appraisal of the franchise, whether

the repurchase price will be determined by a predeter-

mined formula and whether there will be a recognition

of goodwill or other intangibles associated therewith in

the repurchase price to be given the franchisee) ;

(ix) The conditions under which the franchisee may

sell or assign all or any interest in the ownership

of the franchise, or of the assets of the franchise

business ;

(x) The conditions under which the franchisor may

sell or assign, in whole or in part, its interest under

such agreements;

(xi) The conditions under which the franchisee may

modify ;

(xii) The conditions under which the franchisor may

modify ;

(xiii) The rights of the franchisee’s heirs or personal

representative upon the death or incapacity of the fran-

chisee ; and

(xiv) The provisions of any covenant not to compete.

28a

(16) A statement disclosing, with respect to the fran-

chisor and as to the particular named business being

offered :

(i) The total number of franchises operating at the

end of the preceding fiscal year ;

(ii) The total number of company-owned outlets op-

erating at the end of the preceeding fiscal year;

(iii) The names, addresses, and telephone numbers

of (A) The 10 franchised outlets of the named fran-

chise business nearest the prospective franchisee’s in-

tended location; or (B) all franchisees of the franchisor,

or (C) all franchisees of the franchisor in the State in

which the prospective franchisee lives or where the pro-

posed franchise is to be located, Provided, however, That

there are more than 10 such franchises. If the number

of franchisees to be disclosed pursuant to paragraph

(a) (16) (iii) (B) or (C) of this section exceeds 50, such

listing may be made in a separate document delivered

to the prospective franchisee with the prospectus if the

existence of such separate document is disclosed in the

prospectus ;

(iv) The number of franchises voluntarily terminated

or not renewed by franchises within, or at the conclusion

of, the term of the franchise agreement, during the pre-

ceding fiscal year;

(v) The number of franchises reacquired by purchase

by the franchisor during the term of the franchise agree-

ment, and upon the conclusion of the term of the fran-

chise agreement, during the preceding fiscal year;

(vi) The number of franchises otherwise reacquired

by the franchisor during the term of the franchise agree-

ment, and upon the conclusion of the term of the fran-

chise agreement, during the preceding fiscal year;

(vii) The number of franchises for which the fran-

chisor refused renewal of the franchise agreement or

other agreements relating to the franchise during the

preceding fiscal year; and

(viii) The number of franchises that were canceled

or terminated by the franchisor during the term of the

franchise agreement, and upon conclusion of the term

of the franchise agreement, during the preceding fiscal

year.

With respect to the disclosures required by paragraphs

(a) (16) (v), (vi), (vii), and (viii) of this section, the

disclosure statement shall also include a general categori-

zation of the reasons for such reacquisitions, refusals to

renew or terminations, and the number falling within

each such category, including but not limited to the fol-

lowing: failure to comply with quality control standards,

failure to make sufficient sales, and other breaches of

contract.

(17) (i) If site selection or approval thereof by the

franchisor is involved in the franchise relationship, a

statement disclosing the range of time that has elapsed

between signing of franchise agreements or other agree-

ments relating to the franchise and site selection, for

agreements entered into during the preceding fiscal year;

(ii) If operating franchise outlets are to be provided

by the franchisor, a statement disclosing the range of

time that has elapsed between the signing of franchise

agreements or other agreements relating to the fran-

chise and the commencement of the franchisee’s business,

for agreements entered into during the preceding fiscal

year.

With respect to the disclosures required by paragraphs

(a) (17) (i) and (ii) of this section, a franchisor may

at its option also provide a distribution chart using

meaningful classifications with respect to such ranges

of time.

(18) If the franchisor offers an initial training pro-

gram or informs the prospective franchisee that it in-

tends to provide such person with initial training, a

statement disclosing:

(i) The type and nature of such training;

(ii) The minimum amount, if any, of training that

will be provided to a franchisee; and

(iii) The cost, if any, to be borne by the franchisee

for the training to be provided, or for obtaining such

training.

(19) If the name of a public figure is used in con-

nection with a recommendation to purchase a fran-

chise, or as a part of the name of the franchise opera-

tion, or if the public figure is stated to be involved with

the management of the franchisor, a statement disclos-

ing:

(i) The nature and extent of the public figure’s in-

volvement and obligations to the franchisor, including

but not limited to the promotional assistance the public

figure will provide to the franchisor and to the fran-

chisee ;

(ii) The total investment of the public figure in the

franchise operation; and

(iii) The amount of any fee or fees the franchisee

will be obligated to pay for such involvement or assist-

ance provided by the public figure.

(20) (i) A balance sheet (statement of financial posi-

tion) for the franchisor for the most recent fiscal year,

and an income statement (statement of results of opera-

tions) and statement of changes in financial position

for the franchisor for the most recent 3 fiscal years.

31a

Such statements are required to have been examined in

accordance with generally accepted auditing standards

by an independent certified or licensed public accountant.

Provided, however, That where a franchisor is a sub-

sidiary of another corporation which is permitted under

generally accepted accounting principles to prepare fi-

nancial statements on a consolidated or combined state-

ment basis, the above information may be submitted for

the parent if (A) the corresponding unaudited financial

statements of the franchisor are also provided, and (B)

the parent absolutely and irrevocably has agreed to guar-

antee all obligations of the subsidiary;

(ii) Unaudited statements shall be used only to the

extent that audited statements have not been made, and

provided that such statements are accompanied by a

clear and conspicious disclosure that they are unaudited.

Statements shall be prepared on an audited basis as soon

as practicable, but, at a minimum, financial statements

for the first full fiscal year following the date on which

the franchisor must first comply with this part shall

contain a balance sheet opinion prepared by an inde-

pendent certified or licensed public accountant, and fi-

nancial statements for the following fiscal year shall be

fully audited.

(21) All of the foregoing information in paragraph

(a) (1) through (20) of this section shall be contained

in a single disclosure statement or prospectus, which

shall not contain any materials or information other

than that required by this part or by State law not pre-

empted by this part. This does not preclude franchisors

or franchise brokers from giving other nondeceptive in-

formation orally, visually, or in separate literature so

long as such information is not contradictory to the in-

formation in the disclosure statement required by para-

graph (a) of this section. This disclosure statement

shall carry a cover sheet distinctively and conspicuously

showing the name of the franchisor, the date of issuance

of the disclosure statement, and the following notice im-

printed thereon in upper and lower case bold-face type

of not less than 12 point size:

Information for Prospective Franchises Required by

Federal Trade Commission

To protect you, we’ve required your franchisor to give

you this information. We haven’t checked it, and don’t

know if it’s correct. It should help you make up your

mind. Study it carefully. While it includes some infor-

mation about your contract, don’t rely on it alone to

understand your contract. Read all of your contract

carefully. Buying a franchise is a complicated invest-

ment Take your time to decide. If possible, show your

contract and this information to an advisor, like a lawyer

or an accountant. If you find anything you think may be

wrong or anything important that’s been left out, you

should let us know about it. It may be against the law.

There may also be laws on franchising in your state.

Ask your state agencies about them.

FEDERAL TRADE COMMISSION,

Washington, D.C.

Provided, That the obligation to furnish such disclosure

statement shall be deemed to have been met for both the

franchisor and the franchise broker if either such party

furnishes the prospective franchisee with such disclosure

statement.

(22) All information contained in the disclosure state-

ment shall be current as of the close of the franchisor’s

most recent fiscal year. After the close of each fiscal

year, the franchisor shall be given a period not exceeding

90 days to prepare a revised disclosure statement and,

following such 90 days, may distribute only the revised

33a

prospectus and no other. The franchisor shall, within a

reasonable time after the close of each quarter of the

fiscal year, prepare revisions to be attached to the dis-

closure statement to reflect any material change in the

franchisor or relating to the franchise business of the

franchisor, about which the franchisor or franchise

broker, or any agent, representative, or employee thereof,

knows or should know. Each prospective franchisee shall

have in his or her possession, at the “time for making of

disclosures,” the disclosure statement and quarterly revi-

sion for the period most recent to the “time for making

of disclosures” and available at that time. Information

which is required to be audited pursuant to paragraph

(a) (20) of this section is not required to be audited for

quarterly revisions, Provided, however, That the unaudi-

ted information be accompanied by a statement in im-

mediate conjunction therewith that clearly and conspicu-

ously discloses that such information has not been aud-

ited.

(23) A table of contents shall be included within the

disclosure statement.

(24) The disclosure statement shall include a comment

which either positively or negatively responds to each

disclosure item required to be in the disclosure statement,

by use of a statement which fully incorporates the in-

formation required by the item. Each disclosure item

therein must be preceded by the appropriate heading, as

set forth in Note 3 of this part.

(b) To make any oral, written, or visual representa-

tion to a prospective franchisee which states a specific

level of potential sales, income, gross or net profit for that

prospective franchisee, or which states other facts which

suggest such a specific level, unless:

34a

(1) At the time such representation is made, such rep-

resentation is relevant to the geographie market in which

the franchise is to be located;

(2) At the time such representation is made, a reason-

able basis exists for such representation and the fran-

chisor has in its possession material which constitutes a

reasonable basis for such representation, and sueh mate-

rial is made available to any prospective franchisee and

to the Commission or its staff upon reasonable demand.

Provided, further, That in immediate conjunction with

such representation, the franchisor shall disclose in a

clear and conspicuous manner that such material is avail-

able to the prospective franchisee; and Provided, however,

That no provision within paragraph (b) of this section

shall be construed as requiring the disclosure to any

prospective franchisee of the identity of any specific fran-

chisee or of information reasonably likely to lead to the

disclosure of such person’s identity; and Provided, fur-

ther, That no additional representation as to a prospec-

tive franchisee’s potential sales, income, or profits may

be made later than the “time for making of disclosures” ;

(3) Such representation is set forth in detail along

with the material bases and assumptions therefor in a

single legible written document whose text accurately,

clearly and concisely discloses such information, and none

other than that provided for by this part or by State law

not preempted by this part. Each prospective franchisee

to whom the representation is made shall be furnished

with such document no later than the “time for making

of disclosures”; Provided, however, That if the represen-

tation is made at or prior to a “personal meeting” and

such meeting occurs before the “time for making of dis-

closures”, the document shall be furnished to the pros-

pective franchisee to whom the representation is made

at that “personal meeting” ;

85a

(4) The following statement is clearly and conspicu-

ously disclosed in the document described by paragraph

(b) (8) of this section in immediate conjunction with

such representation and in not less than twelve point

upper and lower-case boldface type:

Caution

These figures are only estimates of what we think you

may earn. There is no assurance you'll do as well. If

you rely upon our figures, you must accept the risk of

not doing as well.

(5) The following information is clearly and conspicu-

ously disclosed in the document described by paragraph

(b) (3) of this section in immediate conjunction with

such representation:

(i) The number and percentage of outlets of the named

franchise business which are located in the geographic

markets that form the basis for any such representation

and which are known to the franchisor or franchise

broker to have earned or made at least the same sales,

income, or profits during a period of corresponding

length in the immediate past as those potential sales, in-

come, or profits represented ; and

(ii) The beginning and ending dates for the corre-

sponding time period referred to by paragraph (b) (5)

(i) of this section, Provided, however, That any fran-

chisor without prior franchising experience as to the

named franchise business so indicate such lack of experi-

ence in the document described in paragraph (b) (3) of

this section.

Except, That representations of the sales, income or prof-

its of existing franchise outlets need not comply with

this paragraph (b).

to a prospective franchisee which states a specific level

36a

of sales, income, gross or net profits of existing outlets

(whether franchised or company-owned) of the named

franchise business, or which states other facts which sug-

gests such a specific level, unless:

(1) At the time such representation is made, such

representation is relevant to the geographic market in

which the franchise is to be located;

(2) At the time such representation is made, a rea-

sonable basis exists for such representation and the

franchisor has in its possession material which consti-

tutes a reasonable basis for such representation, and such

material is made available to any prospective franchisee

and to the Commission or its staff upon reasonable de-

mand, Provided, however, That in immediate conjunction

with such representation, the franchisor discloses in a

clear and conspicuous manner that such material is avail-

able to the prospective franchisee; and Provided, further,

That no provision within paragraph (c) of this section

shall be construed as requiring the disclosure to any

prospective franchisee of the identity of any specific

franchisee or of information reasonably likely to lead to

the disclosure of such person’s identity; and Provided,

further, That no additional representation as to the sales,

income, or gross or net profits of existing outlets

(whether franchised or company-owned) of the named

franchise business may be made later than the “time for

making of disclosures” ;

(3) Such representation is set forth in detail along

with the material bases and assumptions therefor in a

single legible written document which accurately, clearly

and concisely discloses such information, and none other

than that provided for by this part or by State law not

preempted by this part. Each prospective franchisee to

whom the representation is made shall be furnished with

such document no later than the “time for making of

disclosures”, Provided, however, That if the representa-

87a

tion is made at or prior to a “personal meeting” and such

meeting occurs before the “time for making of disclo-

sures,” the document shall be furnished to the prospec-

tive franchisee to whom the representation is made at

that “personal meeting” ;

(4) The underlying data on which the representation

is based have been prepared in accordance with generally

accepted accounting principles;

(5) The following statement is clearly and conspicu-

ously disclosed in the document described by paragraph

(e) (3) of this section in immediate conjunction with such

representation, and in not less than twelve point upper

and lower case boldface type:

CAUTION

Some outlets have [sold] [earned] this amount. There

is no assurance you'll do as well. If you rely upon our

figures, you must accept the risk of not doing as well.

(6) The following information is clearly and conspicu-

ously disclosed in the document described by paragraph

(e) (3) of this section in immediate conjunction with such

representation :

(i) The number and percentage of outlets of the

named franchise business which are located in the geo-

graphic markets that form the basis for any such repre-

sentation and which are known to the franchisor or fran-

chise broker to have earned or made at least the same

sales, income, or profits during a period of corresponding

length in the immediate past as those sales, income, or

profits represented ; and

(ii) The beginning and ending dates for the corre-

sponding time period referred to by subparagraph (6)

(i), Provided, however, That any franchisor without prior

franchising experience as to the named franchise business

38a

so indicate such lack of experience in the document de-

scribed in paragraph (c) (3) of this section.

(d) To fail to provide the following information

within the document(s) required by paragraphs (b) (3)

and (c) (8) of this section whenever any representation

is made to a prospective franchisee regarding its poten-

tial sales, income, or profits, or the sales, income, gross

or net profits of existing outlets (whether franchised or

company-owned) of the named franchise business:

(1) A cover sheet distinctively and conspicuously

showing the name of the franchisor, the date of issuance

of the document and the following notice imprinted

thereon in upper and lower case boldface type of not less

than twelve point size:

INFORMATION FOR PROSPECTIVE FRANCHISEES

ABOUT FRANCHISE [SALES] [INCOME]

[PROFIT] REQUIRED BY THE FEDERAL TRADE

COMMISSION.

To protect you, we’ve required the franchisor to give

you this information. We haven’t checked it and don’t

know if it’s correct. Study these facts and figures care-

fully. If possible, show them to someone who can advise

you, like a lawyer or an accountant. Then take your time

and think it over.

If you find anything you think may be wrong or any-

thing important that’s been left out, let us know about it.

It may be against the law.

There may also be laws on franchising in your State.

Ask your State agencies about them.

FEDERAL TRADE COMMISSION,

Washington, D.C.

(2) A table of contents.

Provided, however, That each prospective franchisee to

whom the representation is made shall be notified at the

“time for making of disclosures” of any material change

(about which the franchisor, franchise broker, or any of

the agents, representatives, or employees thereof, knows

or should know) in the information contained in the doc-

ument(s) described by paragraph (b) (3) and (c) (3) of

this section.

(e) To make any oral, written, or visual representa-

tion for general dissemination (not otherwise covered by

paragraphs (b) or (c) of this section) which states a

specific level of sales, income, gross or net profits, either

actual or potential, of existing or prospective outlets

(whether franchised or company-owned) of the named

franchise business or which states other facts which

suggest such a specific level, unless:

(1) At the time such representation is made, a rea-

sonable basis exists for such representation and the fran-

chisor has in its possession material which constitutes a

reasonable basis for such representation and which is

made available to the Commission or its staff upon rea-

,sonable demand;

(2) The underlying data on which each representation

of sales, income or profit for existing outlets is based have

been prepared in accordance with generally accepted ac-

counting principles;

(3) In immediate conjunction with such representa-

tion, there shall be clearly and conspicuously disclosed the

number and percentage of outlets of the named franchise

business which the franchisor or the franchise broker

knows to have earned or made at least the same sales,

income, or profits during a period of corresponding

length in the immediate past as those sales, income, or

profits represented, and the beginning and ending dates

for said time period;

40a

(4) In immediate conjunction with each such repre-

sentation of potential sales, income or profits, the fol-

lowing statement shall be clearly and conspicuously dis-

closed :

CAUTION

These figures are only estimates; there is no assurance

you'll do as well. If you rely upon our figures, you must

accept the risk of not doing as well.

Provided, however, That if such representation is not

based on actual experience of existing outlets of the

named franchise business, that fact also should be dis-

closed ;

(5) No later than the earlier of the first personal

meeting” or the “time for making of disclosures,” each

prospective franchisee shall be given a single, legible

written document which accurately, clearly and concisely

sets forth the following information and materials (and

none other than that provided for by this part or by

State law not preempted by this part) :

(i) The representation, set forth in detail along with

the material bases and assumptions therefor;

(ii) The number and percentage of outlets of the

named franchise business which the franchisor or the

franchise broker knows to have earned or made at least

the same sales, income or profits during a period of corre-

sponding length in the immediate past as those sales,

income, or profits represented, and the beginning and

ending dates for said time period;

(iii) With respect to each such representation of sales,

income, or profits of existing outlets, the following state-

ment shall be clearly and conspicuously disclosed in im-

mediate conjunction therewith, printed in not less than 12

point upper and lower case boldface type:

4la

CAUTION

Some outlets have [sold] [earned] this amount. There

is no assurance you'll do as well. If you rely upon our

figures, you must accept the risk of not doing as well.

(iv) With respect to each such representation of po-

tential sales, income, or profits, the following statement

shall be clearly and conspicuously disclosed in immediate

conjunction therewith, printed in not less than 12 point

upper and lower case boldface type:

CAUTION

These figures are only estimates. There is no assurance

that you'll do as well. If you rely upon our figures, you

must accept the risk of not doing as well.

(v) If applicable, a statement clearly and conspicu-

ously disclosing that the franchisor lacks prior franchis-

ing experience as to the named franchise business;

(vi) If applicable, a statement clearly and conspicu-

ously disclosing that the franchisor has not been in busi-

ness long enough to have actual business data;

(vii) A cover sheet, distinctively and conspicuously

showing the name of the franchisor, the date of issuance

of the document, and the following notice printed thereon

in not less than 12 point upper and lower case boldface

type:

INFORMATION FOR PROSPECTIVE FRANCHISEES

ABOUT FRANCHISE [SALES] [INCOME]

[PROFIT] REQUIRED BY THE FEDERAL

TRADE COMMISSION

To protect you, we’ve required the franchisor to give

you this information. We haven’t checked it and don’t

know if it’s correct, Study these facts and figures care-

fully. If possible, show them to someone who can advise

you, like a lawyer or an accountant. If you find any-

42a

thing you think may be wrong, or anything important

that’s been left out, let us know about it. It may be

against the law. There may also be laws about fran-

chising in your State. Ask your State agencies about

them.

FEDERAL TRADE COMMISSION,

Washington, D.C.

(viii) A table of contents;

(6) Each prospective franchisee shall be notified at

the “time for making of disclosures” of any material

changes that have occurred in the information contained

in this document.

(f) To make any claim or representation which is

contradictory to the information required to be disclosed

by this part.

(g) To fail to furnish the prospective franchisee with

a copy of the franchisor’s franchise agreement and re-

lated agreements with the documents, and a copy of the

completed franchise and related agreements intended to

be executed by the parties at last 5 businss days prior

to the date the agreements are to be executed.

Provided, however, That the obligations defined in par-

agraphs (b) through (g) of this section shall be deemed

to have been met for both the franchisor and the fran-

chise broker if either such person furnishes the prospec-

tive franchisee with the written disclosures required

thereby.

(h) To fail to return any funds or deposits in accord-

ance with any conditions disclosed pursuant to paragraph

(a) (7) of this section.

§ 486.2 Definitions.

As used in this part, the following definitions shall

apply:

43a

(a) The term “franchise” means any continuing com-

mercial relationship created by any arrangement or ar-

rangements whereby:

(1) (i) (A) a person (hereinafter franchisee“) offers,

sells, or distributes to any person other than a “fran-

chisor” as hereinafter defined), goods, commodities, or

services which are:

(1) Identified by a trademark, service mark, trade

name, advertising or other commercial symbol designat-

ing another person (hereinafter “franchisor’’) ; or

(2) Indirectly or directly required or advised to meet

the quality standards prescribed by another person (here-

inafter “franchisor”) where the franchisee operates un-

der a name using the trademark, service mark, trade

name, advertising or other commercial symbol designating

the franchisor; and

(B) (1) The franchisor exerts or has authority to

exert a significant degree of control over the franchisee’s

method of operation, including but not limited to, the

franchisee’s business organization, promotional activities,

management, marketing plan or business affairs; or

(2) The franchisor gives significant assistance to the

franchisee in the latter’s method of operation, including,

but not limited to, the franchisee’s business organization,

management, marketing plan, promotional activities, or

business affairs; Provided, however, That assistance in

the franchisee’s promotional activities shall not, in the

absence of assistance in other areas of the franchisee’s

method of operation, constitute significant assistance; or

(ii) (A) A person (hereinafter franchisee“) offers,

sells, or distributes to any person other than a “franchi-

sor (as hereinafter defined), goods, commodities, or

services which are:

(1) Supplied by another person (hereinafter “fran-

chisor”), or

44a

(2) Supplied by a third person (e.g., a supplier) with

whom the franchisee is directly or indirectly required to

do business by another person (hereinafter “fran-

chisor”’) ; or

(3) Supplied by a third person (e.g., a supplier) with

whom the franchisee is directly or indirectly advised to

do business by another person (hereinafter “franchisor” )

where such third person is affiliated with the franchisor;

and

(B) The franchisor:

(1) Secures for the franchisee retail outlets or ac-

counts for said goods, commodities, or services; or

(2) Secures for the franchisee locations or sites for

vending machines, rack displays, or any other product

sales display used by the franchisee in the offering, sale,

or distribution of said goods, commodities, or services;

(3) Provides to the franchisee the services of a per-

son able to secure the retail outlets, accounts, sites or

locations referred to in paragraph (a) (1) (ii) (B) (2)

and (2) above; and

(2) The franchisee is required as a condition of ob-

taining or commencing the franchise operation to make

a payment or a commitment to pay to the franchisor,

or to a person affiliated with the franchisor.

(3) Exemptions. The provisions of this part shall not

apply to a franchise:

(i) Which is a “fractional franchise” ; or

(ii) Where pursuant to a lease, license, or similar

agreement, a person offers, sells, or distributes goods,

commodities, or services on or about premises occupied

by a retailer-grantor primarily for the retailer-grantor’s

own merchandising activities, which goods, commodities,

or services are not purchased from the retailer-grantor

45a

or persons whom the lessee is directly or indirectly (A)

required to do business with by the retailer-grantor or

(B) advised to do business with by the retailer-grantor

where such person is affiliated with the retailer-grantor;

(iii) Where the total of the payments referred to in

paragraph (a) (2) of this section made during a period

from any time before to within 6 months after com-

mencing operation of the franchisee’s business, is less

than $500; or

(iv) Where there is no writing which evidences any

material term or aspect of the relationship or arrange-

ment.

(4) Exclusions. The term “franchise” shall not be

deemed to include any continuing commercial relation-

ship created solely by:

(i) The relationship between an employer and an em-

ployee, or among general business partners; or

(ii) Membership in a bona fide “co-operative associa-

tion” ; or

(iii) An agreement for the use of a trademark, serv-

ice mark, trade name, seal, advertising, or other com-

mercial symbol designating a person who offers on a

general basis, for a fee or otherwise, a bona fide service

for the evaluation, testing, or certification of goods, com-

modities, or services;

(iv) An agreement between a licensor and a single li-

censee to license a trademark, trade name, service mark,

advertising or other commercial symbol where such li-

cense is the only one of its general nature and type to

be granted by the licensor with respect to that trade-

mark, trade name, service mark, advertising, or other

commercial symbol.

46a

(5) Any relationship which is represented either oral-

ly or in writing to be a franchise (as defined in this

paragraph (a) (1) and (2) of this section) is subject to

the requirements of this part.

(b) The term “person” means any individual, group,

association, limited or general partnership, corporation,

or any other business entity.

(e) The term “franchisor” means any person who

participates in a franchise relationship as a franchisor,

as denoted in paragraph (a) of this section.

(d) The term “franchisee” means any person (1)

who participates in a franchise relationship as a fran-

chisee, as denoted in paragraph (a) of this section, or

(2) to whom an interest in a franchise is sold.

(e) The term “prospective franchisee” includes any

person, including any representative, agent, or employee

of that person, who approaches or is approached by a

franchisor or franchise broker, or any representative,

agent, or employee thereof, for the purpose of discussing

the establishment, or possible establishment, of a fran-

chise relationship involving such a person.

(f) The term “business day” means any day other

than Saturday, Sunday, or the following national holi-

days: New Year’s Day, Washington’s Birthday, Memo-

rial Day, Independence Day, Labor Day, Columbus Day,

Veterans’ Day, Thanksgiving, and Christmas.

(g) The term “time for making of disclosures” means

ten (10) business days prior to the earlier of (1) the

execution by a prospective franchisee of any franchise

agreement or any other agreement imposing a binding

legal obligation on such prospective franchisee, about

which the franchisor, franchise broker, or any agent,

representative, or employee thereof, knows or should

know, in connection with the sale or proposed sale of a

franchise, or (2) the payment by a prospective fran-

47a

chisee, about which the franchisor, franchise broker, or

any agent, representative, or employee thereof, knows or

should know, of any consideration in connection with the

sale or proposed sale of a franchise.

(h) The term “fractional franchise” means any rela-

tionship, as denoted by paragraph (a) of this section, in

which the person described therein as a franchisee, or

any of the current directors or executive officers thereof,

has been in the type of business represented by the fran-

chise relationship for more than 2 years and the parties

anticipated, or should have anticipated, at the time the

agreement establishing the franchise relationship was

reached, that the sales arising from the relationship

would represent no more than 20 percent of the sales in

dollar volume of the franchisee.

(i) The term “affiliated person” means a person (as

defined in paragraph (b) of this section) :

(1) Which directly or indirectly controls, is controlled

by, or is under common control with, a franchisor; or

(2) Which directly or indirectly owns, controls, or

holds with power to vote, 10 percent or more of the out-

standing voting securities of a franchisor; or

(3) Which has, in common with a franchisor, one or

more partners, officers, directors, trustees, bi nch man-

agers, or other persons occupying similar status or per-

forming similar functions.

(j) The term “franchise broker’ means any person

other than a franchisor or a franchisee who sells, offers

for sale, or arranges for the sale of a franchise.

(k) The term “sale of a franchise“ includes a con-

tract or agreement whereby a person obtains a franchise

or interest in a franchise for value by purchase, license,

or otherwise. This term shall not be deemed to include

the renewal or extension of an existing franchise where

48a

there is no interruption in the operation of the fran-

chsed business by the franchisee, unless the new contracts

or agreements contain material changes from those in

effect between the franchisor and franchisee prior there-

to.

(1) A “cooperative association” is either (1) an asso-

ciation of producers of agricultural products authorized

by section 1 of the Capper-Volstead Act, 7 U.S.C. 291;

or (2) an organization operated on a cooperative basis

by and for independent retailers which wholesales goods

or furnishes services primarily to its member-retailers.

(m) The term “fiscal year’ means the franchisor’s

fiscal year.

(n) The terms “material,” “material fact,” and “ma-

terial change” shall include any fact, circumstance, or

set of conditions which has a substantial likelihood of

influencing a reasonable franchisee or a reasonable pros-

pective franchisee in the making of a significant decision

relating to a named franchise business or which has any

significant financial impact on a franchisee or prospec-

tive franchisee.

(o) The term “personal meeting“ means a face-to-

face meeting between a franchisor or franchise broker

(or any agent, representative, or employee thereof) and

a prospective franchisee which is held for the purpose

of discussing the sale or possible sale of a franchise.

§ 436.8 Severability.

If any provision of this part or its application to any

person, act, or practice is held invalid, the remainder of

the part or the application of its provisions to any per-

son, act, or practice shall not be affected thereby.

NoTE 1.—The Commission expresses no opinion as to

the legality of any practice mentioned in this part. A

provision for disclosure should not be construed as con-

49a

donation or approval with respect to the matter required

to be disclosed, nor as an indication of the Commission’s

intention not to enforce any applicable statute.

NoTE 2.—By taking action in this area, the Federal

Trade Commission does not intend to annul, alter, or

affect, or exempt any person subject to the provisions

of this part from complying with the laws or regulations

of any State, municipality, or other local government

with respect to franchising practices, except to the ex-

tent that those laws or regulations are inconsistent with

any provision of this part, and then only to the extent

of the inconsistency. For the purposes of this part, a

law or regulation of any State, municipality, or other

local government is not inconsistent with this part if the

protection such law or regulation affords any prospective

franchisee is equal to or greater than that provided by

this part. Examples of provisions which provide protec-

tion equal to or greater than that provided by this part

include laws or regulations which require more complete

record keeping by the franchisor or the disclosure of

more compiete information to the franchisee.

Note 3.— [As per § 436.1 (a) (24) of this part]:

DISCLOSURE STATEMENT

Pursuant to 16 CFR 436.1 et seq., a Trade Regula-

tion Rule of the Federal Trade Commission regarding

Disclosure Requirements and Prohibitions Concerning

Franchising and Business Opportunity Ventures, the

following information is set forth on [name of fran-

chisor] for your examination:

1. Identifying information as to franchisor.

2. Business experience of franchisor’s directors and

executive officers.

8. Business experience of the franchisor.

4. Litigation history.

50a

Bankruptcy history.

Description of franchise.

Initial funds required to be paid by a franchisee.

8. Recurring funds required to be paid by a fran-

chisee.

9. Affiliated persons the franchisee is required or ad-

vised to do business with by the franchisor.

10. Obligations to purchase.

11. Revenues received by the franchisor in considera-

tion of purchases by a franchisee.

12. Financing arrangements.

18. Restriction of sales.

14. Personal participation required of the franchisee

in the operation of the franchise.

15. Termination, cancellation, and renewal of the

franchise.

16. Statistical information concerning the number of

franchises (and company-owned outlets).

17. Site selection.

18. Training programs.

19. Public figure involvement in the franchise.

20. Financial information concerning the franchisor.

2 =

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.