Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures

FEDERAL TRADE COMMISSION

Disclosure Requirements and Prohibitions Concerning Franchising

and Business Opportunity Ventures

AGENCY: Federal Trade Commission.

ACTION: Grant of petition for exemption.

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SUMMARY: On April 15, 1996, the Commission published a notice in the

Federal Register soliciting comments on a petition filed by

Freightliner Corporation. The Commission now grants the petition and

determines that the provisions of 16 CFR Part 436 shall not apply to

the advertising, offering, licensing, contracting, sale or other

promotion of truck dealerships by Freightliner Corporation.

EFFECTIVE DATE: December 27, 1996.

FOR FURTHER INFORMATION CONTACT: Myra Howard, Attorney, PC-H-238,

Federal Trade Commission, Washington, D.C. 20580, (202) 326-2047.

[[Page 68267]]

SUPPLEMENTARY INFORMATION:

Before the Federal Trade Commission

Order Granting Exemption

In the Matter of a Petition for Exemption from the Trade

Regulation Rule Entitled ``Disclosure Requirements and Prohibitions

Concerning Franchising and Business Opportunity Ventures'' filed by

Freightliner Corporation.

On April 15, 1996, the Commission published a notice in the Federal

Register soliciting comments on a petition filed by Freightliner

Corporation (``Freightliner''). Freightliner manufactures heavy-duty

and medium-duty trucks, truck parts, and military tractors, and enters

into distributorship agreements with business people throughout the

United States to sell and service Freightliner's trucks and parts. The

petition 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'' (``Franchise

Rule'').

In accordance with Section 18(g), the Commission conducted an

exemption proceeding under Section 553 of the Administrative Procedure

Act, 5 U.S.C. 553, and invited public comment during a 60-day period

ending June 14, 1996. No comments were received. After reviewing the

petition, the Commission has concluded that the Petitioner's request

should be granted.

The statutory standard for exemption requires the Commission to

determine whether application of the Trade Regulation Rule to the

person or class of persons seeking exemption is ``necessary to prevent

the unfair or deceptive act or practice to which the rule relates.'' If

not, an exemption is warranted.

The abuses that the disclosure remedy of the Franchise Rule is

designed to prevent are most likely to occur, as the Statement of Basis

and Purpose of the Rule notes, in sales where three factors are

present:

(1) A potential investor has a relative lack of business

experience and sophistication;

(2) The investor has inadequate time to review and comprehend

the unique and often complex terms of the franchise agreement before

making a major financial commitment; and

(3) A significant information imbalance exists in which the

prospective franchisee is unable to obtain essential and relevant

facts known to the franchisor about the investment.

The pre-sale disclosures required by the Franchise Rule are

designed to negate the effect of any deceptive acts or practices where

these conditions are present. The Rule provides investors with the

material information they need to make an informed investment decision

in circumstances where they might otherwise lack the resources,

knowledge, or ability to obtain the information, and thus protect

themselves from deception.

Where the conditions that create a potential for deception in the

sale of franchises are not present, however, a regulatory remedy

designed to prevent deception is unnecessary. Our review of the record

in this proceeding persuades us that an exemption is warranted for that

reason. The Petitioner has convincingly shown that the conditions that

create a potential for a pattern or practice of abuse are absent; thus,

there is no likelihood of unfair or deceptive acts or practices in the

appointment of its truck dealership franchises.

The petition demonstrates that potential Freightliner dealers are

and will continue to be a select group of highly sophisticated and

experienced businesspeople; that they make very significant

investments; and that they have more than adequate time to consider the

dealership offer and obtain information about it before investing. We

note in particular that Freightliner has a relatively small number of

dealers, approximately 232; that prospective Freightliner dealers

usually have years of experience in truck or other heavy duty equipment

sales; that investment costs for Freightliner dealerships are

approximately $4 million; and that prospective dealers participate in

an extensive application and approval process, during which time a good

deal of information is exchanged between the parties.

As a practical matter, investments of this size and scope typically

involve knowledgeable investors, the use of independent business and

legal advisors, and an extended period of negotiation that generates

the exchange of information necessary to ensure that investment

decisions are the product of an informed assessment of the potential

risks and benefits. The Commission has reviewed the potential for

unfair or deceptive acts or practices in connection with the licensing

of motor vehicle dealership franchises on six prior occasions since

1980, and found no evidence or likelihood of a significant pattern or

practice of abuse by any of the Petitioners. If any such evidence

exists, it has not yet been brought to the Commission's attention in

this or any of the prior proceedings.

Thus, both the record in this proceeding and all prior experience

to date with other Franchise Rule exemptions for automobile dealerships

support the conclusion that Petitioner's licensing of new truck dealers

accomplishes what the Rule was intended to ensure. The conditions most

likely to lead to abuses are not present in the licensing of

Freightliner dealerships, and the process generates sufficient

information to ensure that applicants will be able to make an informed

investment decision. For these reasons, the Commission finds that the

application of the Franchise Rule to Petitioner's licensing of truck

dealer franchises is not necessary to prevent the unfair or deceptive

acts or practices to which the Rules relates.

Accordingly, the Commission has determined that the provisions of

16 CFR Part 436 shall not apply to the advertising, offering,

licensing, contracting, sale or other promotion of truck dealerships by

Freightliner Corporation.

It is so ordered.

Issued: December 6, 1996.

By the Commission.

Donald S. Clark,

Secretary.

[FR Doc. 96-32900 Filed 12-26-96; 8:45 am]

BILLING CODE 6750-01-M