Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures

FEDERAL TRADE COMMISSION

16 CFR Part 436

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 16, 1998, the Commission published a notice in the

Federal Register soliciting comments on a petition filed by Navistar

International Transportation 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 Navistar International

Transportation Corporation.

EFFECTIVE DATE: November 23, 1998.

FOR FURTHER INFORMATION CONTACT:

Myra Howard, Attorney, PC-H-238, Federal Trade Commission, Washington,

D.C. 20580, (202) 326-2047.

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 Navistar International Transportation Corporation.

On April 16, 1998, the Commission published a notice in the Federal

Register soliciting comments on a petition filed by Navistar

International Transportation Corporation (``Navistar''). Navistar

manufactures heavy-duty and medium-duty trucks, truck parts, and

military tractors, and enters into distributorship agreements with

businesspeople throughout the United States to sell and service

Navistar'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. Sec. 553, and invited public comment during a 60-day

period ending June 15, 1998. 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 requires franchisors to provide

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 Navistar 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

not in particular that Navistar has only about 450 dealers; that

prospective Navistar dealers usually have years of experience in truck

or other heavy duty equipment sales; that investment costs for Navistar

dealerships are approximately $1 million; and that prospective dealers

participate in an extensive application and approval process, lasting

anywhere from four months to a year, 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 eight 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 Navistar

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

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franchises is not necessary to prevent the unfair or deceptive acts or

practices to which the Rule 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

Navistar International Transportation Corporation.

It is so ordered.

By the Commission.

Issued: November 10, 1998.

List of Subjects in 16 CFR Part 436

Trade practices and franchising.

Donald S. Clark,

Secretary.

[FR Doc. 98-31203 Filed 11-20-98; 8:45 am]

BILLING CODE 6750-01-M