# Petition — Exxon Corp. v. Federal Trade Commission

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1981
- **Citation:** 454 U.S. 816

## Text

| 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.

I.

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

la

iv

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

Vv

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

9

12

15, 16

vi
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.

2
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.

4

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).

5

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

7

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-

10

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).

11

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.

12

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).

13

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)

14

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.

15

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

16

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);

17

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

18

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

19

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

21

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-
e

Statutes and Regulation Involved.
A. Federal Trade Commission Aet
B. Disclosure Requirements and Prohibitions

Concerning Franchising and Business inl
tunity Ventures ay

Page
la

2a

7a

21a

la

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.

2a
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-

8a

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.,

4a

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).

5a

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.]

6a

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

7a
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]

8a
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.

9a
APPENDIX E
A.
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

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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).

(C) The Commission shall, 30 days before the publi-
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.

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(C) Except as required for the disposition of ex
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

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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

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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.

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(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—

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(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.

(C) A determination, rule, or ruling of the Commis-
sion described in paragraph (3) (B) (i) or (ii) may be

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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-

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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

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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
(C) any person who has entered into a contract or any
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-

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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.

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B.

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

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(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.

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(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;

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(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.

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(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).

(c) To make any oral, written or visual representation
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;
or

(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;
or

(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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385007_2088%3A1. Public record. Not legal advice.