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The competition to attract qualified franchisees is fierce. Franchisors must distinguish their offerings from those of other franchisors, as well as from other investment opportunities, to attract qualified franchisees. There are a variety of methods for marketing a franchise, each of which has its benefits and drawbacks. For instance, a franchisor could travel the country, exhibiting at trade shows and franchise conventions. The cost for exhibiting at a trade show may be prohibitive — the exhibition fee, travel, hotel, meals and the like — while the benefit, having an opportunity to speak directly with a prospect, who may be a “tire kicker,” is low. Alternatively, a franchisor may decide that the best use of his marketing budget is to create general awareness by advertising in any number of business newspapers, periodicals or trade magazines targeted at specific industries or demographic groups. An increasing number of franchisors are advertising on the Web, both on their own Web sites and third-party commercial sites, such as bison.com, while more progressive marketers are utilizing electronic media, including bulk e-mail solicitations, pop-up ads and banner ads as an alternative or simply as an adjunct to traditional marketing methods. At some point in the development of each franchise system, each franchisor wrestles with the issue of whether to make an earnings claim. An earnings claim is any oral, written or visual representation of sales, profits or costs from which a prospective franchisee can ascertain the likely results of a franchised business. Estimates vary, but a minority of franchisors make an earnings claim ranging from as few as 5 percent to as many as 20 percent of franchisors. Earnings claims are not prohibited under the Federal Trade Commission Rule on Franchising or applicable state franchise registration and disclosure law. However, the FTC rule and applicable state law set forth certain standards that must be met in order for a franchisor to properly make an earnings claim. The FTC rule requires that a franchisor have a reasonable basis for making an earnings claim, that the basis for the earnings claim be available for review by the FTC, and that the earnings claim be set forth in a separate earnings claim document to be delivered to prospective franchisees. As a practical matter, however, since the FTC permits franchisors to satisfy the rule by delivering a disclosure document conforming to the Uniform Franchise Offering Circular format prescribed by the North American Securities Administrators Association, most earnings claims are set forth in Item 19 of the UFOC. The FTC issued a staff advisory opinion on Jan. 29, applying the FTC rule to earnings claims made through electronic communications such as bulk e-mails, pop-up ads and banner ads. This article examines the advice given by the FTC in that advisory opinion. The FTC considered several issues in addressing the electronic delivery of earnings claims. The first issue considered by the FTC was whether making an earnings claim utilizing electronic delivery triggers the general media earnings claim disclosures prescribed by the FTC rule, or whether the rule’s earnings claim requirements may be satisfied by franchisors through the subsequent delivery to a prospective franchisee of a UFOC that includes information supporting the earnings claim. The FTC rule states that it is an unfair or deceptive act or practice for a franchisor to make an earnings claim unless the franchisor can substantiate the earnings claim and provide prospective franchisees with an earnings claim document. It is incumbent upon counsel to recognize that an earnings claim does not need to be targeted toward a specific prospective franchisee. An earnings claim may be made on an indirect basis through the general media such as newspapers, magazines, television, radio or electronic media. The FTC noted that it is clear that the electronic delivery of an earnings claim is a general media claim under the FTC rule, which states that “We fail to see any practical or policy difference between advertisements placed in traditional media — print, radio and television — and advertisements placed on a franchisor’s Web site or on a third party’s Web site, where they will be seen by the general public.” Moreover, the FTC stated that there is no reason to draw any distinction among the various types of electronic ads, such as pop-up ads or banner ads. Thus, a franchisor that intends to make an electronic general media earnings claim must have a reasonable basis for making the claim and must disclose the number and percentage of its franchisees that have attained the results claimed. In addition, the financial information underlying the claim is required to have been prepared in accordance with Generally Accepted Accounting Principles. In addition, any general media claim, including one delivered through electronic means, must contain the following legend in a clear and conspicuous manner: “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.” In order to satisfy the disclosure obligations set forth in the FTC rule, a franchisor who makes an electronic earnings claim must deliver to the prospective franchisee a UFOC containing the complete earnings claim at the earliest of the first personal meeting between franchisor and prospective franchisee or the signing of any binding agreement or payment of consideration by the franchisee. The FTC next considered whether bulk e-mail messages containing earnings claims are general media claims under the FTC rule. The FTC analyzed this issue by focusing on whether an earnings claim contained in an e-mail is a point-of-sale communication, noting that the statement of basis and purpose of the FTC rule distinguishes between direct point-of-sale earnings claims and indirect general media earnings claims. A point-of-sale earnings claim is one made during the course of discussions between a franchisor and franchisee; i.e., the prospective franchisee has already indicated that it is interested in pursuing the particular franchise opportunity. The FTC noted that once the prospective franchisee has entered into the franchise sales process, it is reasonable for the franchisee to solicit e-mail messages from the franchisor. As a result, any responsive message would be a direct point-of-sale communication and, to the extent that any such communication contained an earnings claim, the franchisor would be required to deliver a UFOC with a completed Item 19 disclosing all salient facts surrounding the claim. The FTC contrasted point-of-sale e-mails containing earnings claims with unsolicited bulk e-mails containing earnings claims, stating that the latter are a form of general media advertising under the FTC rule because their wide distribution is intended to spur interest in the franchisor’s concept. The FTC noted that this would be the result even if an unsolicited bulk e-mail is targeted to a specific e-mail address, likening this practice to a magazine, containing an earnings claim, being sent to a subscriber, and stating that “(t)he mere fact that a message is sent to specific individuals alone does not mean that those individual recipients are buyers who have expressed interest in a franchise offer.” The FTC then turned its attention to considering what it called a more difficult issue, the proper treatment of e-mail messages to individuals who had previously expressed a modicum of interest in the franchisor’s concept. The FTC found that logic dictates a distinction between those who have previously expressed an interest in a particular franchise and those who have expressed an interest in franchising generally. Following from this distinction, the FTC stated that an e-mail sent by a franchisor to a person who had previously expressed interest to the franchisor is analogous to a point-of-sale communication, as the e-mail is intended to further the franchise sales process. On the other hand, an e-mail sent to a person who has expressed an interest in franchising generally would be considered a general media advertisement, since the person may be a prospective franchisee, an academic or a supplier to the franchise industry such as an attorney, accountant or consultant. In conclusion, the FTC’s advice should serve as a reminder for franchisors to review their franchise sales literature, both hard copies and electronic copies, to see if an earnings claim is being made and to update any such claim so that it is consistent with current financial performance. In addition, counsel should be mindful of distinguishing whether any electronic communication by its franchisor clients would be characterized as point-of-sale or general media so that the franchisor is able to properly advise its client as to its disclosure obligations. One final note of caution: While the FTC’s advisory opinion is not binding upon the FTC, it was written by members of the staff charged with enforcing the FTC rule.

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