[Federal Register Volume 76, Number 236 (Thursday, December 8, 2011)]
[Rules and Regulations]
[Pages 76815-76865]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30597]
[[Page 76815]]
Vol. 76
Thursday,
No. 236
December 8, 2011
Part II
Federal Trade Commission
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16 CFR Part 437
Business Opportunity Rule; Final Rule
Federal Register / Vol. 76 , No. 236 / Thursday, December 8, 2011 /
Rules and Regulations
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FEDERAL TRADE COMMISSION
16 CFR Part 437
RIN 3084-AB04
Business Opportunity Rule
AGENCY: Federal Trade Commission (FTC or Commission).
ACTION: Final rule.
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SUMMARY: The Commission is adopting final amendments to its Trade
Regulation Rule entitled ``Disclosure Requirements and Prohibitions
Concerning Business Opportunities'' (``Business Opportunity Rule'' or
``Rule''). Among other things, the Business Opportunity Rule has been
amended to broaden its scope to cover business opportunity sellers not
covered by the interim Business Opportunity Rule, such as sellers of
work-at-home opportunities, and to streamline and simplify the
disclosures that sellers must provide to prospective purchasers. The
final Rule is based upon the comments received in response to an
Advance Notice of Proposed Rulemaking (``ANPR''), an Initial Notice of
Proposed Rulemaking (``INPR''), a Revised Notice of Proposed Rulemaking
(``RNPR''), a public workshop, a Staff Report, and other information
discussed herein. This document also contains the text of the final
Rule and the Rule's Statement of Basis and Purpose (``SBP''), including
a Regulatory Analysis.
DATES: The provisions of the final Rule will become effective on March
1, 2012.
ADDRESSES: Requests for copies of the final Rule and the SBP should be
sent to Public Reference Branch, Room 130, Federal Trade Commission,
600 Pennsylvania Avenue NW., Washington, DC 20580. The complete record
of this proceeding is also available at that address. Relevant portions
of the proceeding, including the final Rule and SBP, are available at
http://www.ftc.gov.
FOR FURTHER INFORMATION CONTACT: Christine M. Todaro, (202) 326-3711,
Division of Marketing Practices, Room H-286, Bureau of Consumer
Protection, Federal Trade Commission, 600 Pennsylvania Avenue NW.,
Washington, DC 20580.
SUPPLEMENTARY INFORMATION: The final Rule modifies the interim Business
Opportunity Rule in two significant ways. First, the final Rule
contains an expanded definition of ``business opportunity'' aimed at
extending the scope of the Rule to business opportunities previously
not covered, such as work-at-home programs. Second, although the final
Rule's scope is broader than the interim Business Opportunity Rule, the
compliance burden is reduced. Specifically, in contrast to the
extensive disclosures previously required, the final Rule now requires
that business opportunity sellers provide prospective customers with a
substantially simplified and streamlined one-page disclosure document.
The final Rule also adds affirmative prohibitions on misrepresentations
and omissions, as well as disclosure requirements for sales conducted
in Spanish and other languages besides English.
Statement of Basis and Purpose
Key Terms and Abbreviations Used Throughout This Statement of Basis and
Purpose
``Amended Franchise Rule'' refers to the amended Franchise Rule
published at 72 FR 15444 (Mar. 30, 2007) and codified at 16 CFR 436.
``ANPR'' refers to the Trade Regulation Rule on Franchising and
Business Opportunity Ventures: Advanced Notice of Proposed
Rulemaking, 62 FR 9115 (Feb. 28, 1997).
``Initial Proposed Disclosure Document'' refers to the original
version of the Disclosure Document that was proposed in the INPR in
2006.
``INPR'' refers to the Initial Notice of Proposed Rulemaking for the
Business Opportunity Rule, 71 FR 9054 (Apr. 12, 2006).
``Interim Business Opportunity Rule'' refers to the Business
Opportunity Rule, codified at 16 CFR 437 that is currently in effect
and is the subject of these amendment proceedings.
``IPBOR'' refers to the Initial Proposed Business Opportunity Rule,
which was proposed in the INPR in 2006.
``Macro Report'' refers to Macro International, Inc.'s report to the
FTC on the Disclosure Form, available at http://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.
``Original Franchise Rule'' refers to the original Franchise Rule
published at 43 FR 59614 (Dec. 21, 1978).
``RNPR'' refers to the Revised Notice of Proposed Rulemaking for the
Business Opportunity Rule, 73 FR 16110 (Mar. 26, 2008).
``RPBOR'' refers to the Revised Proposed Business Opportunity Rule,
which was proposed in the RNPR in 2008.
``Staff Report'' refers to FTC staff's Staff Report to the Federal
Trade Commission and Proposed Revised Trade Regulation Rule (16 CFR
Part 437). The Staff Report is available at http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf.
``Workshop'' refers to the June 1, 2009, public workshop held in
Washington, DC, to discuss the proposed Disclosure Document and
other aspects of the Business Opportunity Rule.
``Workshop Notice'' refers to the Federal Register Notice announcing
the Workshop, 74 FR 18712 (Apr. 24, 2009).
I. Introduction
A. Overview of the Franchise Rule and the Evolution of the Interim
Business Opportunity Rule
1. The Franchise Rule
On December 21, 1978, the Commission promulgated a Trade Regulation
Rule entitled ``Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures'' (the ``Original
Franchise Rule''), to address deceptive and unfair practices in the
sale of franchises and business opportunity ventures.\1\ The Original
Franchise Rule covered, in a single Code of Federal Regulations part,
both franchises and certain business opportunity ventures. With
franchises, the franchisee sells goods or services that are associated
with the franchisor's trademark, and the franchisee is subject to
significant control by, or receives significant assistance from, the
franchisor. The franchisee typically distributes goods or services
supplied by the seller or an affiliate and receives accounts or
locations in which to conduct the business. By contrast, business
opportunities often do not involve a trademark. Vending machines or
rack display routes are typical examples of business opportunities.
Based upon the original rulemaking record, the Commission found that
unfair and deceptive practices were widespread in the sale of
franchises and business opportunities, causing serious economic harm to
consumers.
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\1\ 43 FR 59614 (Dec. 21, 1978).
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The Commission adopted the Original Franchise Rule to prevent
unfair and deceptive practices in the sale of franchises and business
opportunities through pre-sale disclosure of specified items of
material information. The purpose of the Original Franchise Rule was
neither to regulate the substantive terms of a franchise or business
opportunity agreement nor to regulate the relationship between the
seller and the buyer. Rather, it was to ensure that sellers disclose
material information to prospective buyers. The Original Franchise Rule
was posited on the notion that a fully informed prospective buyer can
determine whether a particular offering is in his or her best interest.
The Original Franchise Rule required extensive disclosures on a
score of specified topics, such as, information about the seller; the
business background of the seller's principals and their litigation and
bankruptcy histories; the terms and conditions of
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the offer; statistical analyses of existing franchised and company-
owned outlets; information about prior purchasers, including the names
and addresses of at least 10 purchasers nearest the prospective buyer;
and audited financial statements.
The Commission recognized that requiring these extensive
disclosures would likely impose significant compliance costs on
businesses covered by the Original Franchise Rule. It therefore sought
to strike the proper balance between prospective purchasers' need for
pre-sale disclosure and the burden imposed on those selling business
ventures covered by the Rule. To achieve this balance, the Commission
limited the scope of the Original Franchise Rule's coverage in three
significant ways.
First, the Original Franchise Rule covered only those opportunities
that required a purchaser to make a payment of at least $500 within the
first six months of operation. In transactions where a purchaser may
incur high financial losses if the seller withholds material
information, the benefit for prospective purchasers of the Original
Franchise Rule's pre-sale disclosure requirements outweighs the
sellers' cost to make those disclosures. By contrast, when the
investment required to purchase a business opportunity is comparatively
small, prospective purchasers face a relatively small financial risk.
In such circumstances, compliance costs may outweigh the benefits of
pre-sale disclosure. Therefore, the Original Franchise Rule did not
reach opportunities that charged lower fees.
Second, the ``inventory exemption'' excluded certain types of
payments from the Original Franchise Rule's $500 minimum cost
threshold. The ``inventory exemption'' is the franchise industry's
shorthand term for the Commission's determination that, as a matter of
policy, voluntary purchases of reasonable amounts of inventory at bona
fide wholesale prices for resale do not count toward the required
threshold payment. An important consequence of this policy
determination was to eliminate from Original Franchise Rule coverage
many pyramid marketing plans because purchasers of such plans typically
do not make a required payment of or exceeding $500, but instead make
voluntary purchases of inventory in reasonable amounts and at bona fide
wholesale prices for resale.
Third, in addition to franchise opportunities, the Commission
focused the Original Franchise Rule on the types of business
opportunities that the record showed were likely to result in
significant consumer injury, such as vending machines, rack displays,
and similar opportunities, which frequently were sold through deceptive
conduct. A feature common to these types of opportunities was the
promise of assistance in securing locations or accounts. Thus, the
Commission incorporated this characteristic into the Original Franchise
Rule's definitional elements to ensure coverage of demonstrably
injurious schemes. Other forms of assistance that business opportunity
sellers frequently offer--such as training and the buy-back and resale
of goods assembled by the purchaser (an element of many craft assembly
opportunities) did not bring a business opportunity within the scope of
the Original Franchise Rule's coverage.
In addition to these limits on the scope of the Original Franchise
Rule's coverage--driven by balancing prospective purchasers' need for
pre-sale disclosure against the burden imposed on business opportunity
sellers--another aspect of the Original Franchise Rule's language
further limited the scope of coverage. Specifically, the Original
Franchise Rule provided that a business opportunity was covered only if
the purchaser of the opportunity sells goods or services directly to
end-users other than the business opportunity seller. The effect of
this limitation was to exclude many work-at-home opportunities--such as
envelope stuffing and craft assembly ventures--from Original Franchise
Rule coverage. In those opportunities, the purchaser typically performs
work for the seller or produces various goods for the seller, who then
purportedly distributes them to end-users.
In 1995, as part of its systematic review of FTC rules, the
Commission published in the Federal Register a request for comment on
the Original Franchise Rule to determine its continued effectiveness
and impact.\2\ Based upon the comments received during the rule review,
the Commission tentatively determined to retain the Original Franchise
Rule, but sought additional comment on possible amendments. To that
end, in February 1997, the Commission published an ANPR, seeking
comment on various issues, including whether the Commission should
separate the disclosure requirements for business opportunities from
those for franchises.\3\
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\2\ 60 FR 17656 (Apr. 7, 1995).
\3\ 62 FR 9115 (Feb. 28, 1997).
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Based upon comments responding to the ANPR, the Commission found
that the Original Franchise Rule continued to serve a vital purpose and
that pre-sale disclosure was necessary to protect purchasers of
franchises and business opportunities from fraudulent and deceptive
sales practices. At the same time, however, the Commission agreed with
the overwhelming view of the commenters who suggested that there are
material differences between franchises and business opportunities and
that these two types of distinct business arrangements require separate
disclosure approaches. For example, many of the Original Franchise
Rule's pre-sale disclosures, in particular those pertaining to the
structure of the parties' relationship, do not apply to the sale of
most business opportunities because those sales typically involve
comparatively simple contracts. In addition, the Commission recognized
that the Original Franchise Rule's detailed disclosure obligations may
create barriers to entry for legitimate business opportunity
sellers.\4\ Accordingly, in 1999, the Commission announced its
intention to conduct a separate rulemaking proceeding for business
opportunity sales.\5\
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\4\ 64 FR 57296 (Oct. 22, 1999).
\5\ Id.
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2. The Interim Business Opportunity Rule
Much of the information revealed by the Commission's regulatory
review of the Original Franchise Rule highlighted the differences
between franchises and business opportunity ventures, and the distinct
regulatory challenges presented by these two types of offerings--that
franchises typically are expensive and involve complex contractual
licensing relationships, while business opportunity sales are generally
less costly and involve comparatively simple purchase agreements that
pose less of a financial risk to purchasers. Based on the record
amassed during the review proceeding, the Commission concluded that the
Original Franchise Rule's extensive disclosure requirements imposed
unnecessary compliance costs on both business opportunity sellers and
buyers, and determined to bifurcate the Original Franchise Rule into
two separate parts--one covering the sale of business format franchises
\6\ and one to govern the sale of business opportunities. Accordingly,
in the ANPR, the Commission solicited
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comment on several proposed regulatory modifications, including the
creation of a separate trade regulation rule governing the sale of
business opportunities.\7\
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\6\ The industry term ``business format franchise'' specifically
refers to franchises in which franchisees operate under a common
trademark or other commercial symbol and are required to adhere to
the specific business format or method of doing business prescribed
by the franchisor. Business format franchises are commonly called
``franchises'' by the general public, and the two terms are used
interchangeably here.
\7\ 62 FR at 9115. In response to the ANPR, the Commission
received 166 written comments. The staff also held six public
workshops on the issues raised in the comments, three of which
specifically addressed business opportunities.
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Subsequently, the Commission completed all procedural steps
prescribed by Section 18 of the FTC Act to finalize the Amended
Franchise Rule, along with a Statement of Basis and Purpose, in March
2007.\8\ At that time, the Amended Franchise Rule--no longer covering
business opportunities--was codified at Part 436 in Title 16 of the
CFR. The Original Franchise Rule with all definitional elements and
references regarding business format franchising deleted, was retained
and redesignated as Part 437. Part 437 was titled the ``interim
Business Opportunity Rule.'' \9\ The interim Business Opportunity Rule
contained no new substantive disclosure requirements or prohibitions,
and in all material respects was substantially identical to the
Original Franchise Rule. Until the final Rule becomes effective, Part
437 governs sales of non-franchise business opportunities.\10\
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\8\ 72 FR 15444 (Mar. 30, 2007).
\9\ For example, references to ``franchisor'' and ``franchisee''
used in the Original Franchise Rule were changed in the interim
Business Opportunity Rule to ``business opportunity seller'' and
``business opportunity purchaser,'' and the Original Franchise
Rule's definition of ``franchise'' was changed to ``business
opportunity.'' See id.
\10\ 73 FR 16111, 16112 (Mar. 26, 2008).
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B. Rule Amendment Proceedings
1. Initial Notice of Proposed Rulemaking and Initial Proposed Business
Opportunity Rule
In 2006, having determined that a separate business opportunity
rule was necessary, the Commission published an Initial Notice of
Proposed Rulemaking (``INPR''), announcing its intention to proceed
with its proposal for a separate Business Opportunity Rule (the
``initial proposed Business Opportunity Rule'' or ``IPBOR'').\11\ The
INPR proposed to amend the interim Business Opportunity Rule by
updating it, streamlining it, and expanding its scope of coverage.\12\
The IPBOR contained an expansive definition of ``business opportunity''
that encompassed business opportunities previously covered by the
Original Franchise Rule as well as work-at home, medical billing, and
multi-level marketing (MLM) \13\ operations. It also eliminated the
$500 threshold for Rule coverage.\14\
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\11\ 71 FR 19054 (Apr. 12, 2006).
\12\ The INPR also specified the process the Commission would
follow in amending the Business Opportunity Rule. Pursuant to the
Commission's Rules of Practice, 16 CFR 1.20, the Commission
determined to use a modified version of the rulemaking process set
forth in section 1.13 of those Rules. Specifically, the Commission
announced that it would publish a Notice of Proposed Rulemaking,
with a 60-day comment period, followed by a 40-day rebuttal period.
In addition, pursuant to Section 18(c) of the FTC Act, the
Commission announced that it would hold hearings with cross-
examination and rebuttal submissions only if an interested party
requested a hearing. The Commission also stated that, if requested
to do so, it would contemplate holding one or more informal public
workshops in lieu of hearings. Finally, pursuant to 16 CFR 1.13(f),
the Commission announced that staff would issue a Report on the
Business Opportunity Rule (``Staff Report''), which would be subject
to additional public comment. 71 FR at 19079-80.
\13\ Multi-level marketing is one form of direct selling, and
refers to a business model in which a company distributes products
through a network of distributors who earn income from their own
retail sales of the product and from retail sales made by the
distributors' direct and indirect recruits. Because they earn a
commission from the sales their recruits make, each member in the
MLM network has an incentive to continue recruiting additional sales
representatives into their ``down lines.'' See Peter J. Vander Nat &
William W. Keep, Marketing Fraud: An Approach to Differentiating
Multilevel Marketing from Pyramid Schemes, 21 J. Pub. Pol'y &
Marketing 140 (Spring 2002).
\14\ Promoters of business opportunities were able to evade
coverage under the Original Franchise Rule and the interim Business
Opportunity Rule by pricing their offerings opportunities below
$500, the monetary threshold of coverage.
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Streamlining the interim Business Opportunity Rule and tailoring it
to fit business opportunities (as opposed to business format
franchises) has been a primary focus of this proceeding. Both the
Original Franchise Rule and the interim Business Opportunity Rule
require extensive disclosures covering over twenty specified topics. In
the INPR, the Commission recognized that these extensive disclosure
requirements entail disproportionate compliance costs for sellers of
comparatively low-cost business opportunity ventures.\15\ Therefore,
the Commission proposed to mitigate the compliance burden by
simplifying and streamlining the disclosure requirements.\16\
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\15\ 71 FR at 19057.
\16\ Id.
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Specifically, the INPR proposed a one-page business opportunity
pre-sale disclosure document (the ``initial proposed disclosure
document'') with only six required material disclosures.\17\ The
initial proposed disclosure document was intended to provide
prospective purchasers with essential material information they could
use in making a purchase decision. The INPR proposed to require sellers
to use the exact form and language set forth by the Commission and to
include information regarding (1) the seller; (2) earnings claims; (3)
legal actions involving the offered business and its key personnel; (4)
the existence of cancellation or refund policies; (5) the number of
cancellation or refund requests; and (6) references.\18\
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\17\ 71 FR at 19091.
\18\ 71 FR at 19068.
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In response to the INPR, the Commission received more than 17,000
comments, the overwhelming majority of which came from individuals
active in the MLM industry.\19\ MLM companies, their representatives
and trade associations, as well as individual participants in various
MLM plans, expressed grave concern about the burdens the IPBOR would
impose on them and urged the Commission to exclude them from the scope
of the IPBOR, to implement various safe harbor provisions, and to
reduce the required disclosures.\20\ The Commission also received
approximately 187 comments, primarily from individual consumers or
consumer groups, in favor of the IPBOR.\21\ Only a handful of comments
came from non-MLM companies and industry groups, expressing various
concerns about obligations that the IPBOR would impose upon them.\22\
None of the comments addressed the form of the initial proposed
disclosure document.
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\19\ Comments responding to the INPR are available at http://www.ftc.gov/os/comments/businessopprule/index.shtm. References to
INPR comments are cited herein as: Name of the commenter-INPR (e.g.,
Avon-INPR).
\20\ Thousands of comments were form letters submitted by
participants in various MLM programs. 73 FR at 16113.
\21\ Numerous letters came from individuals having negative
experiences with various MLMs. 73 FR at 16113 n.37.
\22\ 73 FR at 16113.
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2. The Revised Notice of Proposed Rulemaking and Revised Proposed
Business Opportunity Rule
Based on an extensive review of the comments received in response
to the INPR and the Commission's law enforcement history, the
Commission issued a revised Notice of Proposed Rulemaking (``RNPR'') on
March 28, 2008, that set forth a revised proposed Rule (the ``Revised
Proposed Business Opportunity Rule'' or ``RPBOR'') that was more
narrowly tailored than the IPBOR.\23\
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\23\ Id. at 16110.
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In the RNPR, the Commission recognized that there were two main
problems with the IPBOR's breadth of coverage. First, the IPBOR would
have unintentionally swept in numerous commercial arrangements,
including
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retail product distribution, training and/or educational organizations,
where there was little or no evidence that fraud was occurring.\24\
Recognizing this legitimate concern, the Commission, in the RNPR,
proposed to narrow the definition of ``business opportunity.''
Specifically, the RPBOR provided that the ``required payment'' prong of
the business opportunity definition would not include payments for the
purchase of reasonable amounts of inventory at bona fide wholesale
prices; \25\ eliminated as an element of the business opportunity
definition the making of an earnings claim; \26\ and narrowed the types
of ``business assistance'' that would trigger the business opportunity
definition to just those types of assistance that are the hallmark of
business opportunity fraud: Location, account, and ``buy-back''
assistance.\27\
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\24\ Id. As one commenter described it, the IPBOR would have
swept in traditional arrangements for distribution of ``food and
beverages, construction equipment, manufactured homes, electronic
components, computer systems, medical supplies and equipment,
automotive parts, automotive tools and other tools, petroleum
products, industrial chemicals, office supplies and equipment, and
magazines.'' IBA-INPR at 5; see also Timberland-INPR (noting that
numerous manufacturers structure their retail distribution in this
manner).
\25\ This amendment was based on concerns raised by some
commenters that if a ``required payment'' did not exclude the
purchase of inventory, many traditional product distribution
arrangements could be brought within the scope of the Rule. 73 FR at
16113.
\26\ This amendment was based on concerns raised by some
commenters that a broad range of commercial arrangements easily
would fall under the business opportunity definition if the company
made some representation about sales or profits sufficient to
constitute an earnings claim. Id. at 16114; see also infra Section
III.A.3.
\27\ Id. at 16123. The Commission eliminated two additional
types of assistance that would have triggered the Rule's strictures
and disclosure obligations--tracking payments and providing
training.
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Second, the Commission determined that the IPBOR was unworkable
with respect to MLMs and would have imposed greater burdens on the MLM
industry than other types of business opportunity sellers without
sufficient countervailing benefits to consumers. After careful
consideration of the record, the Commission decided to narrow the scope
of the RPBOR to avoid broadly sweeping in all sellers of MLM
opportunities. This decision was based on the overwhelming majority of
the approximately 17,000 comments that argued that the IPBOR failed to
differentiate between unlawful pyramid schemes--which the Commission
intended to cover--and legitimate companies using an MLM model.
Finally, the RPBOR eliminated two disclosures that would have been
required by the IPBOR--information about legal actions pertaining to a
business opportunity seller's sales personnel, and the number of
cancellation or refund requests the seller received.\28\ Eliminating
the disclosure of legal actions involving sales employees was based on
the Commission's recognition that the burden of collecting litigation
histories for every sales person was not outweighed by the
corresponding benefit to prospective purchasers.\29\ With respect to
the disclosure of the number of cancellation or refund requests
received, the Commission determined that such disclosure was not
useful, and further, may have had the perverse effect of discouraging
legitimate businesses from offering refunds.\30\
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\28\ Id. at 16125.
\29\ Id.
\30\ Id.
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The RNPR sought public comment on issues relevant to the
Commission's consideration of the RPBOR, including whether the RPBOR
would adequately accomplish the Commission's stated purpose of
protecting consumers against fraud and, if it did not, what
alternatives the Commission could consider.\31\ In contrast to the
INPR, which generated more than 17,000 comments, the Commission
received fewer than 125 comments and rebuttal comments in response to
the RNPR.\32\ Again, however, the vast majority of commenters were from
the MLM industry, but this time they supported the Commission's
proposal to narrow the scope of the Business Opportunity Rule, albeit
with suggestions for fine-tuning.\33\ It is noteworthy that only one
comment came from a business opportunity seller.\34\ The Commission
also received comments from two consumer groups \35\ and approximately
twelve individuals \36\ who expressed their disappointment that the
FTC's proposed rule would exclude MLMs from coverage.
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\31\ Id. at 16133.
\32\ Comments responding to the RNPR are available at http://www.ftc.gov/os/comments/bizoprevised/index.shtm. References to RNPR
comments are cited herein as: Name of commenter-RNPR.
\33\ Some commenters suggested changes to the language of
certain definitions proposed in the RNPR to ensure that the multi-
level marketing industry was not inadvertently swept into the ambit
of the rule. See, e.g., DSA-RNPR; Babener-RNPR; IBA-RNPR.
\34\ Planet Antares-RNPR.
\35\ The two consumer groups are the Consumer Awareness
Institute (``CAI'') and Pyramid Scheme Alert (``PSA'').
\36\ Some letters came from individuals having negative
experiences with MLMs.
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3. Consumer Testing of Disclosure Document and Public Workshop
In the RNPR, the Commission announced that it had retained a
consultant to assess the proposed disclosure document, with the
objective of achieving the proper format and content for communicating
material information to consumers. Following publication of the RNPR,
Macro International, Inc. (``Macro''), the FTC's consultant, conducted
extensive consumer testing of the initial proposed disclosure document
that resulted in substantial improvement to both the layout and the
wording of the form.\37\ The Commission made Macro's report as well as
the revised proposed Business Opportunity Disclosure Document
(``revised proposed disclosure document'') \38\ public in a Federal
Register Notice (``Workshop Notice'') that also announced a one-day
public workshop in Washington, DC.\39\ The Workshop Notice focused on
whether the revised proposed disclosure document was an effective means
of conveying material information to prospective purchasers of business
opportunities. The Workshop Notice also sought comment to further
develop the public record on issues that had been raised in the
comments received in response to the RNPR. Five individuals who
represented a range of interests in the proposed Rule were chosen to
participate as panelists, including a federal law enforcer, a state law
enforcer, a consumer advocate, the general counsel of a national multi-
level marketing company, and a former director of the FTC's Bureau of
Consumer Protection.\40\ Staff convened the public workshop with these
five panelists in Washington, DC, on June 1, 2009. At the conclusion of
the workshop discussion of the revised proposed disclosure document,
panelists and audience members were invited to express their views
about other issues related to the RPBOR.\41\ Following
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robust discussion on various topics, the Commission received follow-up
written comment from six individuals and entities.\42\
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\37\ A copy of the expert's report to the FTC, ``Design and
Testing of Business Opportunity Disclosures,'' (``Macro Report'') is
available at http://www.ftc.gov/bcp/workshops/bizopps/disclosure-form-report.pdf.
\38\ The version of the revised proposed disclosure document
that was tested by Macro inadvertently omitted the phrase ``or pay
any money'' from the conclusion of the penultimate sentence of the
revised proposed disclosure document. Macro determined that this
omission had no effect on the results of its testing. See Macro
Report at 2.
\39\ See 74 FR 18712 (Apr. 24, 2009).
\40\ Commission staff selected individuals as panelists based
upon their comments, backgrounds, and interest in the subject
matter.
\41\ A copy of the transcript of the June 1, 2009 workshop is
available at http://www.ftc.gov/bcp/workshops/bizopps/index.shtml.
References to the transcript from the June 2009 Business Opportunity
Rule public workshop are cited herein as: Name of commenter, June 09
Tr at page no. (e.g., Jost, June 09 Tr at 12).
\42\ Comments received in response to the Workshop Notice are
available at http://www.ftc.gov/os/comments/bizoprulerevwrkshp/index.shtm. References to workshop comments are cited herein as:
Name of commenter-Workshop.
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4. Staff Report
Pursuant to the Rule amendment process announced in the INPR, the
Commission's Bureau of Consumer Protection issued a Staff Report on the
Business Opportunity Rule in November 2010.\43\ The Staff Report
explained in detail the history of the Rule amendment proceeding and
summarized the issues raised during the various notice and comment
periods, particularly those raised in response to the RNPR. It also
addressed the public workshop discussion and subsequent comments, as
well as additional issues that the staff raised on its own initiative,
based on the Commission's law enforcement experience.
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\43\ See Bureau of Consumer Protection, Staff Report to the
Federal Trade Commission and Proposed Revised Trade Regulation Rule
(16 CFR Part 437) (Nov. 2010) (``Staff Report''). The Staff Report
is available at http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf. In November, the
Commission published a notice in the Federal Register announcing the
availability of, and seeking comment on, the Staff Report. See 75 FR
68559 (Nov. 8, 2010).
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Twenty-seven comments were submitted in response to the Staff
Report,\44\ including eleven comments submitted by consumer group
Consumer Awareness Institute (``CAI''). The Commission also received
comments from the Department of Justice (``DOJ''), the Direct Selling
Association (``DSA''), MLM companies,\45\ one franchise lead generator,
a consumer group named Pyramid Scheme Alert (``PSA''), and ten
individuals. A few commenters suggested changes to some of the Rule's
definitions and the scope of coverage,\46\ while others encouraged the
Commission to adopt the Rule as recommended in the Staff Report.\47\
The majority of comments submitted by individuals, and the comments
submitted by CAI and PSA, opposed the Commission's decision to narrow
the scope of the Rule to avoid broadly sweeping in MLMs.\48\ In
crafting the final Rule, the Commission has carefully considered the
comments received in response to the Staff Report and throughout the
Rule amendment proceeding.\49\
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\44\ Comments received in response to the Staff Report are
available at http://www.ftc.gov/os/comments/bizoppstaffreport/index.shtm. References to Staff Report comments are cited herein as:
Name of commenter--Staff Report.
\45\ Comments on behalf of the MLM industry were submitted by
Tupperware and Primerica.
\46\ E.g., Dub-Staff Report; Tupperware-Staff Report.
\47\ DOJ-Staff Report; Primerica-Staff Report; DSA-Staff Report.
\48\ E.g., CAI-Staff Report; PSA-Staff-Report; O'Handley-Staff
Report; Brooks-Staff Report; Johnson-Staff Report.
\49\ The Staff Report comments addressing specific provisions of
the Rule are discussed within the substantive discussions on the
relevant provisions. The comments regarding MLMs are discussed in
Subsection C.1.c below, addressing the Commission's decision to
exclude MLMs from coverage.
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C. Overview of the Final Rule
The final Rule significantly modifies the scope, disclosure
requirements, and prohibitions of the interim Business Opportunity
Rule. This proceeding was, in major part, prompted by the recognition
that the interim Business Opportunity Rule's extensive disclosure
requirements are ill-suited to many business opportunities and place
unnecessary compliance costs on both business opportunity sellers and
buyers. Similarly, commenters have observed that business opportunities
and business format franchises are distinct business arrangements that
pose very different regulatory challenges. To account for these
differences, to avoid unnecessary compliance burdens, and to ensure
that consumers are best protected against deceptive practices in the
sale of business opportunities, the Commission has amended the interim
Rule to:
(1) Expand its scope to cover many business opportunities that were
not covered under the interim Business Opportunity Rule;
(2) Streamline pre-sale disclosures;
(3) Prohibit various specific misrepresentations and other
misleading practices often engaged in by fraudulent business
opportunity sellers; and
(4) Require that for offers conducted in Spanish or other languages
besides English, that the disclosures be provided in the same language
as the offer is made. The sections that follow describe these four
aspects of the final Rule.
1. Scope of the Final Rule
The definition of ``business opportunity'' dictates the scope of
coverage under the final Rule. To ensure appropriate coverage, this
definition has been crafted to capture the sale of business
opportunities that historically have been associated with deceptive
practices. As discussed below, the final Rule (1) extends coverage to
those types of opportunities that previously were not covered under the
Original Franchise Rule and the interim Business Opportunity Rule; (2)
continues to cover business opportunities that previously were covered
under the Original Franchise Rule and interim Business Opportunity
Rule; and (3) avoids broadly sweeping in MLMs and certain other types
of arrangements that are not characterized by the deceptive and unfair
practices the final Rule aims to prevent.
a. The Final Rule Covers Many Business Opportunities That Previously
Escaped Coverage
The final Rule includes an expansive definition of ``business
opportunity'' aimed at extending the scope of the Rule to certain
business opportunities--namely work-at-home opportunities such as
envelope-stuffing, product assembly, and medical billing--that often
were not covered by the interim Business Opportunity Rule. The
Commission's law enforcement experience and complaint data show that
these types of business opportunities are sources of prevalent and
persistent problems. These opportunities, however, often escaped
coverage of the Original Franchise Rule and the interim Business
Opportunity Rule due to the following two limitations: (1) A minimum
payment threshold set at $500; and (2) coverage was limited to business
opportunities in which products were sold directly to third party end-
users, rather than back to the business opportunity seller.\50\ Each
limitation is discussed below.
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\50\ 73 FR at 16112.
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First, the Original Franchise Rule and the interim Business
Opportunity Rule covered only business opportunity ventures costing
$500 or more. Ventures such as product assembly, medical billing, and
envelope stuffing, however, often require payments of less than $500
and thus were not covered by the interim Business Opportunity Rule.\51\
[[Page 76821]]
Some commenters asserted that setting the threshold for coverage at a
specific dollar amount simply provides scam operators a means to
circumvent the Rule, noting that sellers of business opportunities may
charge less than $500 to skirt the interim Business Opportunity Rule's
disclosure requirements.\52\ The Commission has concluded that the
scope of the final Rule should be broad enough to reach business
opportunities that the Commission's law enforcement history and
consumer complaints show are a widespread and persistent problem,
regardless of the price at which they are offered. Accordingly, the
final Rule eliminates the monetary threshold.
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\51\ See, e.g., FTC v. Med. Billers Network, Inc., No. 05 CIV
2014 (RJH) (S.D.N.Y. 2005) ($200-$295 fee); FTC v. Sun Ray Trading,
No. Civ. 05-20402-CIV-Seitz/Bandstra (S.D. Fla. 2005) ($160 fee);
FTC v. Wholesale Mktg. Group, LLC, No. 05 CV 6485 (N.D. Ill. 2005)
($65 to $175 registration fees); FTC v. Vinyard Enters., Inc., No.
03-23291-CIV-ALTONAGA (S.D. Fla. 2003) ($139 fee); FTC v. Leading
Edge Processing, Inc., 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2002) ($150
fee); FTC v. Healthcare Claims Network, Inc., No. 2:02-CV-4569 MMM
(AMWx) (C.D. Cal. 2002) ($485 fee); FTC v. Stuffingforcash.com,
Corp., No. 92 C 5022 (N.D. Ill. 2002) ($45 fee); FTC v. Kamaco
Int'l, No. CV 02-04566 LGB (RNBx) (C.D. Cal. 2002) ($42 fee); FTC v.
Medicor LLC, No. CV01-1896 (CBM) (C.D. Cal. 2001) ($375 fee); FTC v.
SkyBiz.com, No. 01-CV-0396-EA (X) (N.D. Okla. 2001) ($125 fee); FTC
v. Para-Link Int'l, No. 8:00-CV-2114-T-27E (M.D. Fla. 2000) ($395 to
$495 fee); see also Consumer Fraud in the United States: The Second
FTC Survey (October 2007) at 48, available at http://www.ftc.gov/opa/2007/10/fraud.pdf (indicating a median payment for work-at-home
schemes of $200).
\52\ See 71 FR at 19079 (citing comments submitted in earlier
proceedings by NCL, SBA Advocacy, Finnigan, and Purvin).
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A second limitation to the Original Franchise Rule and the interim
Business Opportunity Rule's scope of coverage was the requirement that
the purchaser of the opportunity had to sell goods or services directly
to third party end-users--someone other than the business opportunity
seller. The effect of this limitation was to exclude most work-at-home
opportunities--such as envelope stuffing and craft assembly ventures--
from coverage. Promoters of these types of opportunities often tell
prospective purchasers that they (1) will work directly for the seller
or a third party the seller identifies or (2) will produce various
goods for the seller, who will then purportedly distribute the goods to
end-users or retail markets.\53\ In order to reach these types of
business opportunities, coverage of the final Rule is not limited to
transactions where the purchaser of the opportunity sells goods or
services directly to individuals other than the business opportunity
seller.
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\53\ E.g., FTC v. Darling Angel Pin Creations, Inc., No. 8:10-
cv-00335-JSM-TGW (M.D. Fla. Feb. 2010); FTC v. Indep. Mktg. Exch.
Inc., No. 1:10-cv-00568-NLH-KMW (D.N.J. Feb. 2010); FTC v. Preferred
Platinum Svcs. Network LLC, No. 3:10-cv-00538-MLC-LHG (D.N.J. Feb.
2010).
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b. The Final Rule Continues To Cover Those Types of Opportunities
Covered Under the Original Franchise Rule and the Interim Business
Opportunity Rule
In addition to those types of business opportunities that often
evaded coverage under the Original Franchise Rule and Interim Business
Opportunity Rule, the final Rule continues to cover the types of
business opportunities that previously had been covered, such as
vending machine opportunities, rack display opportunities, and similar
arrangements. The Commission's law enforcement experience demonstrates
that sales of these types of opportunities are fraught with unfair and
deceptive practices, in particular, false or unsubstantiated earnings
claims. Indeed, such practices are widespread in promotion and sale of
such business opportunities. Since 1995, the Commission has brought
over 80 law enforcement actions \54\ in connection with more than ten
law enforcement sweeps \55\ that targeted business opportunity scams
involving the sale of vending machines,\56\ rack displays,\57\ public
telephones,\58\ Internet kiosks,\59\ and 900-number ventures,\60\ among
others. These persistent scams will continue to be covered under the
final Rule.
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\54\ In bringing these FTC law enforcement actions, the FTC
partnered with sister federal agencies--such as the DOJ and the
United States Postal Inspection Service--and with the various state
attorneys general, including the District of Columbia. Thus, these
``sweeps'' entailed many more actions besides those brought by the
FTC.
\55\ E.g., Project Fal$e Hope$, see FTC News Release: Federal,
State Law Enforcers Complete Bogus Business Opportunity Sweep (Dec.
12, 2006), available at http://www.ftc.gov/os/caselist/projectfalsehopes.shtm; Project Biz Opp Flop, see FTC News Release:
Criminal and Civil Enforcement Agencies Launch Major Assault Against
Promoters of Business Opportunity and Work-at-Home Schemes (Feb. 22,
2005), available at http://www.ftc.gov/opa/2005/02/bizoppflop.htm;
Project Busted Opportunity, see FTC News Release: State, Federal Law
Enforcers Launch Sting on Business Opportunity, Work-at-Home Scams
(June 20, 2002), available at http://www.ftc.gov/opa/2002/06/bizopswe.shtm; Project Biz-illion$, see FTC News Release: State-
Federal Crackdown on Phony Business Opportunities Intensifies (March
6, 2000), available at http://www.ftc.gov/opa/2000/03/biz.shtm;
Operation Money Pit, see FTC News Release: ``Operation Money Pit''
Targets Fraudulent Business Opportunity Schemes (Feb. 20, 1998),
available at http://www.ftc.gov/opa/1998/02/moneypit.shtm; Project
Vend Up Broke, see FTC News Release: FTC Announces ``Operation Vend
Up Broke'' (Sept. 3, 1998), available at http://www.ftc.gov/opa/1998/09/vendup2.shtm; Project Trade Name Games, see FTC News
Release: Display Racks for Trade-Named Toys and Trinkets rre Lastest
in Business Opportunity Fraud Schemes (Aug. 5, 1997), available at
http://www.ftc.gov/opa/1997/08/tradenam.shtm; Operation Missed
Fortune FTC News Release: Operation Missed Fortune (Nov. 13, 1996),
available at http://www.ftc.gov/opa/1996/11/misdfort.shtm; Project
Telesweep, see FTC News Release: Major State-Fed Crackdown Targets
Business Opportunity Scam ``Epidemic'' (July 18, 1995), available at
http://www.ftc.gov/opa/1995/07/scam.shtm. Recent law enforcement
sweeps ``Operation Bottom Dollar'' and ``Operation Short Change,''
challenged, among other things, ``work-at-home'' opportunities. See
FTC News Release: FTC Cracks Down on Scammers Trying to Take
Advantage of the Economic Downturn (Feb. 17, 2010), available at
http://www.ftc.gov/opa/2010/02/bottomdollar.shtm; FTC News Release:
FTC Targets Scams Spawned by Economic Downturn (July 1, 2009),
available at http://www.ftc.gov/opa/2009/07/shortchange.shtm.
\56\ See, e.g., United States v. Lifestyle Vending, Inc., No.
CV-06-6421 (E.D.N.Y. 2006); FTC v. Am. Entm't Distribs., Inc., No.
04-22431-CIV-Huck (2004); FTC v. Inspired Ventures, Inc., No. 02-
21760-CIV-Jordan (S.D. Fla. 2002); FTC v. Essex Mktg. Group, Inc.,
No. 2:02-cv-03415-TCP-AKT (E.D.N.Y 2002); United States v. Univend,
LLC, No. 02-0433-P-L (S.D. Ala. 2002); FTC v. Pathway Merch., Inc.,
No. 01-CIV-8987 (S.D.N.Y. 2001); United States v. Photo Vend Int'l,
Inc., No. 98-6935-CIV-Ferguson (S.D. Fla. 1998); FTC v. Hi Tech Mint
Sys., Inc., No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); FTC v. Claude A.
Blanc, Jr., No. 2:92-CV-129-WCO (N.D. Ga. 1992); see also FTC News
Release: FTC Announces ``Operation Vend Up Broke'' (Sept. 3, 1998),
available at http://www.ftc.gov/opa/1998/09/vendup2.shtm (FTC and 10
states announce 40 enforcement actions against fraudulent vending
business opportunities).
\57\ See, e.g., United States v. Elite Designs, Inc., No. CA 05
058 (D.R.I. 2005); United States. v. QX Int'l, No. 398-CV-0453-D
(N.D. Tex. 1998); FTC v. Carousel of Toys, No. 97-8587-CIV-Ungaro-
Benages (S.D. Fla. 1997); FTC v. Raymond Urso, No. 97-2680-CIV-
Ungaro-Benages (S.D. Fla. 1997); FTC v. Infinity Multimedia, Inc.,
No. 96-6671-CIV-Gonzalez (S.D. Fla. 1996); FTC v. O'Rourke, No. 93-
6511-CIV-Ferguson (S.D. Fla. 1993); see also FTC News Release:
Display Racks for Trade-Named Toys and Trinkets are the Latest in
Business Opportunity Fraud Schemes (Aug. 5, 1997), available at
http://www.ftc.gov/opa/1997/08/tradenam.htm (FTC and 8 states filed
18 enforcement actions against sellers of bogus display
opportunities that use trademarks of well-known companies).
\58\ See, e.g., FTC v. Advanced Pub. Commc'ns Corp., No. 00-
00515-CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Ameritel Payphone
Distribs., Inc., No. 00-0514-CIV-Gold (S.D. Fla. 2000); FTC v.
ComTel Commc'ns Global Network, Inc., No. 96- 3134-CIV-Highsmith
(S.D. Fla. 1996); FTC v. Intellipay, Inc., No. H92 2325 (S.D. Tex.
1992).
\59\ See, e.g., FTC v. Bikini Vending Corp., No. CV- S-05-0439-
LDG-RJJ (D. Nev. 2005); FTC v. Network Serv. Depot, Inc., No. CV-S0-
05-0440- LDG-LRL (D. Nev. 2005); United States v. Am. Merch. Tech.,
No. 05-20443-CIV-Huck (S.D. Fla. 2005); FTC v. Hart Mktg. Enter.
Ltd., Inc., No. 98-222-CIV-T-23 E (M.D. Fla. 1998); see also FTC v.
FutureNet, Inc., No. CV-98-1113 GHK (BQRx) (C.D. Cal. 1998); FTC v.
TouchNet, Inc., No. C98-0176 (W.D. Wash. 1998).
\60\ See, e.g., FTC v. Bureau 2000 Int'l, Inc., No. 2:96-cv-
01473-WMB-RC (C.D. Cal. 1996); FTC v. Genesis One Corp., No. CV-96-
1516-MRP (MCX) (C.D. Cal. 1996); FTC v. Innovative Telemedia, Inc.,
No. 96- 8140-CIV-Ferguson (S.D. Fla. 1996); FTC v. Ad-Com Int'l, No.
96-1472 LGB (VAP) (C.D. Cal. 1996).
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c. The Final Rule Avoids Broadly Sweeping in MLMs
The final Rule's definition of business opportunity avoids broadly
sweeping in all sellers of MLM opportunities.\61\ The decision in the
RPBOR to exclude MLMs from the scope of the Rule's coverage was based
on the overwhelming majority of the approximately 17,000 comments that
argued that the IPBOR failed to differentiate between unlawful pyramid
[[Page 76822]]
schemes--which the Commission intended to cover--and legitimate
companies using an MLM model.
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\61\ See 73 FR at 16120.
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As detailed more fully in the RNPR, several common themes emerged
from the numerous comments submitted by the MLM industry. Many
commenters suggested that the low economic risks of participating in a
typical MLM do not justify imposing burdensome regulations that would
threaten to strangle the MLM industry.\62\ These commenters focused on
the low fees--often less than $100--that top MLM companies charge
prospective distributors for the right to sell their products, and on
the relatively low risk that consumers would lose money on large
purchases of inventory.\63\ In addition, industry commenters contended
that the various disclosure requirements were ill-suited for the MLM
business model and that many of the disclosure obligations would show
direct selling companies in a distorting negative light.\64\ For
example, according to one commenter, the requirement to disclose prior
legal actions would cast successful and long-established companies in a
worse light than fly-by-night frauds simply because larger companies
with more sales representatives and more years of operation are likely
to get involved in a larger number of lawsuits.\65\ Moreover, industry
commenters uniformly asserted that the cost of compliance with the
IPBOR would be extremely high for them--first, from the burden of
developing, providing and keeping records of proposed disclosures, and
second, from the impaired ability to recruit prospective
distributors.\66\ Finally, industry commenters argued that unlike
traditional business opportunities, the MLM industry is not permeated
with fraud.\67\
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\62\ Id. at 16114.
\63\ Id.
\64\ Id. at 16115.
\65\ Id.
\66\ Id. at 16116.
\67\ Id. at 16114.
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In contrast to the overwhelming majority of comments that opposed
regulating MLMs through the Business Opportunity Rule, only a small
minority of commenters were in favor of a rule that would cover MLMs.
These commenters included two consumer groups, CAI and PSA, a few
consumer advocates, individuals who regretted becoming involved in
MLMs, and other MLM participants.\68\ Many of the consumer advocates
contended that the MLM industry is comprised primarily of pyramid
schemes masquerading as legitimate companies.\69\ The commenters also
asserted that MLMs deceptively market their distributorships as a low-
risk opportunity with high earnings potential, when in fact, the costs
of participating in an MLM can be high and the earnings comparatively
small.\70\
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\68\ Id. at 16116.
\69\ CAI-INPR at 2 (``I can certify that MLM (sic) are not
direct selling programs, but chain selling programs''); CAI-INPR
Rebuttal of DSA Comments at 3 (``The Direct Selling Association
(DSA), recently taken over by chain sellers now promotes chain
selling (pyramid marketing)--even more than legitimate direct
selling''); see also Brooks-INPR at 2 (``In my opinion, most MLM
firms operate in a deceptive or fraudulent manner'').
\70\ PSA-INPR at 3-4; Brooks-INPR at 4; Johnson-INPR at 1.
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In the RNPR, the Commission concluded that although there is
significant concern that some pyramid schemes may masquerade as
legitimate MLMs, assessing the incidence of such practices is difficult
and indeed, determining whether an MLM is a pyramid scheme requires a
fact-intensive, case-by-case analysis. Further, the record developed
was insufficient as a basis for crafting MLM disclosures that would
effectively help consumers make an informed decision about the risks of
joining a particular MLM.
Based on the record and the Commission's law enforcement
experience, the RNPR announced the Commission's determination that it
would not be practicable to apply the requirements of the proposed Rule
to MLM companies. Drawing on its law enforcement experience, the
Commission acknowledged that some MLMs do engage in unfair or deceptive
acts or practices, including operating pyramid schemes or making
unsubstantiated earnings claims that cause consumer harm. The
Commission, however, was not persuaded that workable, meaningful
disclosures could be devised that would help consumers identify a
fraudulent pyramid scheme. This being the case, the Commission decided
that the proposed Rule was too blunt an instrument to alleviate fraud
in the sale of MLMs. The Commission therefore determined to continue to
challenge unfair or deceptive practices in the MLM industry through law
enforcement actions alleging violations of Section 5 of the FTC Act and
not through the Business Opportunity Rule. The Staff Report's
recommendations were consistent with this decision.\71\
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\71\ Staff Report at 20.
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In response to the Staff Report, the Commission received 24
comments addressing the Commission's decision to narrow the scope of
the Rule to avoid broadly sweeping in MLMs. Specifically, 19 comments
opposed the Commission's decision,\72\ one commenter agreed with the
decision to narrow the scope of the Rule, but suggested modifying the
Rule to contain bright line exemptions and to clarify the definition of
``required payment,'' \73\ and two commenters advocated that the
Commission adopt the Rule as recommended.\74\
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\72\ These included eleven comments submitted by consumer group
CAI, as well as comments submitted by PSA and seven individuals. In
addition, two individuals submitted comments supporting the
statistical analysis provided by CAI President, Jon Taylor. See
McKee-Staff Report; Ashby-Staff Report.
\73\ Tupperware-Staff Report.
\74\ DSA-Staff Report; Primerica-Staff Report.
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Commenters opposing the decision to avoid sweeping MLMs within the
scope of the Rule's coverage set forth the same basic premise--that
MLMs frequently misrepresent the level of earnings achieved by their
distributors and therefore, should be subject to regulation.\75\ More
specifically, many of the commenters advocated that the MLM industry
should be required to disclose the average income of their
participants.\76\ The Commission has carefully considered the comments
submitted in response to the Staff Report on the issue of MLMs. While
some of the commenters provided an analysis of the MLM industry with
concrete examples of the types of problems that exist within that
industry,\77\ many did not. Instead, many commenters expressed in
general terms their low opinion of MLMs and their general opinion that
MLMs should be regulated.\78\ More to the point, none of the commenters
provided persuasive arguments for why the Business Opportunity Rule is
the proper vehicle to address the problems they identified within the
MLM industry.
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\75\ See, e.g., O'Handley-Staff Report (``I personally believe
that this industry is a borderline scam at best and needs MORE
oversight than everyone else-NOT LESS.''); Welling-Staff Report (``I
find it amazing that * * * the MLM industry has little or no
regulations.'').
\76\ See, e.g., Barrett-Staff Report (FTC should ``demand
truthful disclosure of income potentials for MLM''); Brooks-Staff
Report (MLMs should produce ``actual, verifiable data concerning the
earnings and losses of their distributors''); CAI-Staff Report at 7-
3 (advocating for the disclosure of ``information supporting
earnings claims'').
\77\ See, e.g., CAI-Staff Report (reporting research on the MLM
industry and quoting representations made by various MLMs).
\78\ See, e.g., Craig-Staff Report (there is ``ample evidence of
problems with MLM to warrant inclusion in the rule''); Afoa-Staff
Report (commenting on personal experience with one MLM).
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Before discussing the comments in further detail, however, one
point in the rulemaking record requires clarification. Several comments
focused on the
[[Page 76823]]
following language contained in the Staff Report: ``Two key problems
emerged with the IPBOR's breadth of coverage. First, the IPBOR would
have unintentionally swept in numerous commercial arrangements where
there is little or no evidence that fraud is occurring.'' \79\ The
commenters suggest, incorrectly, that the quoted language reveals a
finding by the Commission that there is little or no evidence of fraud
occurring within the MLM industry.\80\ This language, however, referred
to a passage from the RNPR that addressed traditional product
distribution arrangements, not MLMs.\81\ The Commission has not made a
finding that there is little or no evidence of fraud within the MLM
industry; to the contrary, it has specifically recognized, through its
own law enforcement experience, that some MLMs may be pyramid schemes
in masquerade and may make false and unsubstantiated earnings
claims.\82\
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\79\ See, e.g., CAI-Staff Report at 1, 10-41; PSA-Staff Report.
\80\ CAI-Staff Report at 10-41; PSA-Staff Report (``The basis of
the exclusion appears to be the extraordinary claim that there is
insufficient evidence of widespread fraud in the multi-level
marketing field.'').
\81\ Indeed, the language quoted by CAI and PSA contains a
footnote referencing the section of the RNPR that discussed
traditional product distribution arrangements. See Staff Report at
30 (citing 73 FR at 16113).
\82\ See 73 FR at 16119; see also Staff Report at 20.
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In any event, the comments submitted in response to the Staff
Report do not persuade the Commission that the Business Opportunity
Rule is the proper tool to address these problems.\83\ Two of the
affirmative disclosure requirements illustrate the difficulty in
applying the Rule to MLMs: (1) The disclosure of substantiation for
earnings claims; and (2) the disclosure of references.
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\83\ Indeed, one commenter recommended a completely separate set
of disclosures for MLM opportunities, further suggesting that the
Business Opportunity Rule is a poor fit for the MLM industry. See
Johnson-Staff Report (recommending that the FTC convert its consumer
education on investing with an MLM into a series of disclosures that
would be MLM-specific).
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First, as the Commission has acknowledged, the varied and complex
structure of MLMs makes it exceedingly difficult to make an accurate
earnings disclosure and likely would require different disclosures for
different levels of participation in the company. For instance, it
would be difficult to craft an accurate earnings disclosure that would
account for ``inactive'' participants that use their distributorship as
a ``buyers club'' and are interested only in purchasing goods at a
wholesale price for their own use.\84\ This problem appears to be
unique to MLMs and, so far as the Commission is aware, does not arise
in other forms of business opportunities.
---------------------------------------------------------------------------
\84\ See 73 FR at 16120.
---------------------------------------------------------------------------
Furthermore, it may be difficult to determine retail income if the
MLM is not in a position to verify the extent to which a distributor
has resold the product at retail, is warehousing the product, or bought
the product for his or her own personal consumption. Even where the MLM
has policies in place purportedly to ensure that a portion of its
distributors' income is derived from retail sales, these policies could
go unenforced, or even where ostensibly enforced, could be circumvented
by distributors who may have an incentive to ``inflate'' their retail
sales by ``certifying'' that such sales occurred in order to qualify
for higher levels of commissions. In light of these difficulties, and
because the comments submitted in response to the Staff Report did not
refute these findings, the Commission continues to believe that
developing a standard, useful, and understandable earnings disclosure
that would apply to both the MLM industry and the other business
opportunities covered by the Rule remains elusive.\85\
---------------------------------------------------------------------------
\85\ While CAI presented its proposal for an earnings
disclosure, it is clear that the disclosure would be specific to
MLMs and would have no application to the other types of business
opportunities addressed by the Rule. See CAI-Staff Report at 7-33.
---------------------------------------------------------------------------
Second, the reference disclosure required under the final Rule
would make little sense in the MLM context. As the Commission has
previously recognized, those prior purchasers appearing on the
reference list likely would stand to receive a financial benefit if
they could convince a prospect to enroll into their downline.\86\ Under
these circumstances, information provided by such a reference might not
be a reliable indicator of the potential risk and rewards of enrollment
in the MLM.
---------------------------------------------------------------------------
\86\ See 73 FR at 16121.
---------------------------------------------------------------------------
In response to the Staff Report, the Commission received one
comment attempting to refute this reasoning. The commenter argued that,
contrary to the Commission's view, prior purchasers would have little
incentive to misrepresent the success of the MLM because that incentive
would exist only if the prospective purchaser would become part of the
prior purchaser's downline, which the commenter implies would not
always be the case.\87\ The commenter further argued that the fact that
the prospective purchaser had received the disclosure document would
indicate that the prospective purchaser had already been recruited, and
therefore would be unlikely to face further recruitment by the prior
purchaser.\88\
---------------------------------------------------------------------------
\87\ Brooks-Staff Report at 8.
\88\ Id.
---------------------------------------------------------------------------
The Commission finds these arguments unpersuasive. To the extent
there is any financial incentive for a reference to puff or exaggerate
the benefits of buying into a business, that reference obviously cannot
provide a disinterested opinion to the prospect. The MLM model is
inherently structured to create financial incentives for distributors
to recruit prospects into their downlines.\89\ Thus, those financial
incentives are present whenever a potential recruit enquires into the
business. To illustrate the point, even dissatisfied distributors have
an incentive to refrain from disparaging the MLM because any losses
they have suffered could potentially be recouped by the recruitment of
the prospect into their downline. Whether they are ultimately
successful in their attempt to woo a recruit from another distributor
is immaterial; they have every incentive to try.\90\
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\89\ Multi-level marketing is a business model in which a
company distributes products through a network of distributors who
earn income from their own retail sales of the product and from
retail sales made by the distributors' direct and indirect recruits.
Because they earn a commission from the sales their recruits make,
each member in the MLM network has an incentive to continue
recruiting additional sales representatives into their ``down
lines.'' See Vander Nat & Keep, supra note 13.
\90\ Comments submitted in response to the Staff Report did not
refute these arguments, but actually bolstered them. For instance,
one commenter noted that MLM recruiters will often pretend they are
wealthy when they are not, simply to entice others to join the MLM.
See O'Handley-Staff Report at 2; see also CAI-Staff Report at 5
(noting that in MLMs, ``every major victim is of necessity a
perpetrator (recruiter) because to have any hope of recouping their
ongoing investments * * * they must recruit others to do what they
have done'').
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Thus, the Commission continues to believe that the final Rule's
reference disclosure would not provide prospective MLM participants
with an accurate account of the MLM experience or with information
necessary to make an informed purchasing decision. Moreover, these
challenges appear to be unique to MLMs, and as far as the Commission is
aware, are not inherent in the other types of business opportunities
addressed by the final Rule.
Accordingly, while the Commission recognizes that problems may
exist within the MLM industry, it continues to find that the Business
Opportunity Rule is not the appropriate vehicle through which to
address them. Rather, the Commission will continue to challenge unfair
or deceptive practices in the MLM industry through Section 5 of the FTC
Act. Thus, the final Rule has
[[Page 76824]]
been crafted to avoid broadly sweeping in MLMs.\91\
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\91\ The final Rule, however, does not explicitly exempt MLMs
from coverage, but instead contains a narrow definition of
``business opportunity.'' As discussed in Section III.A.3 infra, the
final Rule's definition of ``business opportunity'' eliminates two
types of business assistance that previously would have triggered
the Rule's coverage of MLMs: (1) Tracking or paying commissions or
other compensation for recruitment or sales; and (2) providing
generalized training or advice for the business. The final Rule is
thus more narrowly tailored to those types of deceptive business
assistance representations that are the hallmark of fraudulent
business opportunity schemes: location, account, and ``buy back''
assistance. 73 FR at 16123.
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2. Streamlined Disclosure Requirements
Although the scope of coverage is broader, the compliance burden is
lighter under the final Rule than under the interim Business
Opportunity Rule. In contrast to the voluminous disclosures that
business opportunity sellers are required to make under the interim
Business Opportunity Rule, the final Rule has significantly streamlined
the disclosures to focus on the types of information most material to
business opportunity purchasers: (1) The seller's identifying
information; (2) whether the seller makes an earnings claim; \92\ (3)
whether the seller, its affiliates, or key personnel, have been
involved in any legal actions; \93\ (4) whether the seller has a
cancellation or refund policy; and (5) a list of purchasers who have
bought the business opportunity within the previous three years. The
final Rule also requires the disclosure of supplementary information
that substantiates earnings claims, identifies legal actions, and
states the material terms of the seller's cancellation or refund
policy. These disclosures are consistent with the Commission's
experience concerning common practices in the sale of business
opportunities, and the types of information most meaningful to
prospective purchasers.\94\ For example, the Commission's experience
demonstrates that earnings claims are highly relevant to consumers in
making their investment decisions and are often the single most
decisive factor in such decisions. Furthermore, the presence of a legal
action against the seller or its key personnel may warn the purchaser
of potential risk associated with the business opportunity. Information
about the seller's cancellation or refund policy is relevant to
consumers when weighing their investment risks. Finally, providing the
contact information for prior purchasers will allow prospective
purchasers to discuss the business opportunity with other purchasers
prior to committing themselves to the business opportunity venture.
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\92\ If the business opportunity seller indicates that it does
make earnings claims, then it must complete a separate earnings
claim statement setting forth the earnings claim, the number and
percentage of purchasers who achieved the represented level of
earnings, the date range during which the represented earnings were
achieved, and additional information.
\93\ If the business opportunity seller indicates that it or its
affiliates or key personnel have been subject to legal actions, then
it must complete a separate attachment setting forth the full
caption of each action, and may choose to include a brief 100-word
description of the action.
\94\ To fully develop the rulemaking record on business
opportunities, in the ANPR, the Commission solicited comment about
what pre-sale disclosures would ensure that business opportunity
purchasers receive material information necessary to make an
investment decision and prevent fraud in the sale of business
opportunities. 62 FR at 9121, Questions 15 & 16.
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These streamlined disclosure requirements strike the appropriate
balance by providing consumers with material information in a
straightforward and focused document that will allow them to make
informed purchasing decisions. At the same time, the streamlined form
eases the compliance burden currently imposed on business opportunity
sellers. Like the Original Franchise Rule and the interim Business
Opportunity Rule, the final Rule is posited on the notion that a fully
informed consumer is in a better position to determine whether a
particular offering is in his or her best interest when sellers are
required to disclose to them material information. Consumers should be
protected against receiving inaccurate information and self-serving
unsubstantiated statements from business opportunity sellers.
Accordingly, the final Rule requires that business opportunity sellers
disclose just the types of information that the Commission has
determined are most material to potential purchasers in making a
purchasing decision: The seller's identifying information; whether the
seller makes an earnings claim, and if so, the substantiation for that
claim; whether the seller offers a refund or cancellation policy, and
if so, the material terms of that policy; whether the seller or its
affiliates and key personnel have been the subject of prior legal
actions; and the names and business telephone numbers of prior
purchasers to contact. The Commission has determined that these
streamlined disclosure requirements will provide potential purchasers
with the tools they need to protect themselves from false claims, while
at the same time minimizing compliance costs for legitimate business
opportunity sellers.
3. Express Prohibitions
In addition to mandating disclosures to prospective purchasers, the
final Rule includes prohibitions on sellers from engaging in a number
of deceptive practices, which were absent from the interim Business
Opportunity Rule. In drafting the final Rule, the Commission relied
heavily on its experience in addressing a wide array of deceptive and
unfair business opportunity practices through law enforcement actions
under the Original Franchise Rule, the interim Business Opportunity
Rule, and Section 5 of the FTC Act. The Commission also relied on the
staff's analysis of consumer complaints submitted to the FTC. By far,
the most frequent allegations in Commission business opportunity cases
pertain to false or unsubstantiated earnings claims.\95\ False
testimonials or fictitious references and misrepresentations concerning
the profitability of locations, availability of support and assistance,
nature of the products or services sold, prior success of the seller or
locator, full extent of investment costs, and refund policies are also
prevalent in Commission business opportunity cases.\96\ These alleged
material misrepresentations or omissions also were frequently mentioned
in complaints to the Commission submitted by business opportunity
purchasers.\97\
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\95\ See, e.g., FTC v. Darling Angel Pin Creations, Inc., No.
8:10-cv-00335-JSM-TGW (M.D. Fla. Feb. 2010) (representing likely
earnings of $500 per week); FTC v. Route Wizard, Inc., No. 1:06-cv-
00815-KD-B (S.D. Ala. 2006) (representing that purchasers could earn
$3,000 a month); FTC v. Bus. Card Experts, Inc., No. 06-CV-4671
(PJS/RLE) (D. Minn. 2006) (claiming likely earnings of $150,000 in
first year); FTC v. Richardson d/b/a Mid-South Distribs., No. CV-06-
S-4754-NW (N.D. Ala. 2006) (representing likely earnings of over
$2,000 a month or $65,000 a year); FTC v. Accent Mktg., Inc., et
al., No. 02-405-CB-M (S.D. Ala. 2002) (representing likely earnings
of $3,200 per month to $16,000 per month).
\96\ See, e.g., FTC v. Bus. Card Experts, Inc., No. 06-CV-4671
(PJS/RLE) (D. Minn. 2006) (used paid references); FTC v. Route
Wizard, Inc., No. 1:06-cv-00815-KD-B (S.D. Ala. 2006)
(misrepresented location assistance); FTC v. Richardson d/b/a Mid-
South Distribs., No. CV-06-S-4754-NW (N.D. Ala. 2006) (promised
high-traffic, high-profit locations); FTC v. Am. Entm't Distribs.,
Inc., No. 04-22431-Civ-Martinez (S.D. Fla. 2004) (used fictitious
references, misrepesented locations); FTC v. Fidelity ATM, Inc., No.
06-81101-Civ-Hurley/Hopkins (S.D. Fla. 2004) (misrepresented level
of support or assistance); FTC v. Accent Mktg., Inc., et al., No.
02-405-CB-M (S.D. Ala. 2002) (misrepresented that references
purchased the business venture or would provide reliable
descriptions of their experience); FTC v. Associated Record
Distribs., Inc., No. 02-21754-CIV-Graham/Garber (S.D. Fla. 2002)
(misrepresented business assistance and that references either
purchased the business venture or would provide reliable
descriptions of their experience).
\97\ In 2010, the Commission logged over 12,000 complaints
against franchises, business opportunities, and work-at-home
schemes. See Consumer Sentinel Network Databook (March 2011) at 76,
available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf.
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[[Page 76825]]
Therefore, among other things, under the final Rule, business
opportunity sellers are prohibited from misrepresenting: (1) Earnings;
(2) the cost, efficacy, nature, or central characteristics of the
business opportunity or the goods or services sold to the purchaser as
part of the business opportunity; (3) their cancellation or refund
policies; (4) promised assistance; (5) the calculation and distribution
of commissions, bonuses, incentives, premiums, or other payments from
the seller; (6) the likelihood of finding locations for equipment or
accounts for services; (7) that the business opportunity is an offer of
employment; (8) territorial exclusivity or more limited territorial
protections; (9) endorsements; and (10) references. The final Rule also
prohibits business opportunity sellers from failing to make promised
refunds, and from assigning to any purchaser a purported exclusive
territory that has been sold to another purchaser.
The final Rule prohibits entities covered by the Rule from engaging
in the specific acts or practices identified as deceptive or unfair
through the Commission's law enforcement experience, as well as the
rulemaking record. Engaging in any of those acts or practices is a
violation of both the final Rule and Section 5 of the FTC Act.\98\ Of
course, the Commission, under Section 5, also may challenge any conduct
that is not enumerated in the final Rule if the Commission determines
that such conduct constitutes an unfair or deceptive act or practice.
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\98\ 15 U.S.C. 57a(d)(3).
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4. Disclosures in Spanish or Other Languages Besides English
The Commission's law enforcement history demonstrates that some
business opportunities are marketed primarily to Spanish speaking
consumers.\99\ Based on this experience, the Staff Report discussed the
limited utility of English-language disclosures for business
opportunities marketed in Spanish. Specifically, the staff questioned
whether the disclosure document could be made more effective by
translating it into Spanish and requiring that when a business
opportunity is marketed in Spanish, the disclosure document and any
disclosures required by the Rule be provided in Spanish. The Staff
Report further suggested that when a business opportunity seller
purposefully reaches out to a particular population by marketing in the
foreign language spoken by members of that community, all of the
disclosures required by the Rule should be accessible and
comprehensible to each of those potential purchasers. The Staff Report
recommended, therefore, that because the Commission has specific law
enforcement experience with business opportunities marketed in Spanish,
a Spanish translation of the disclosure document was necessary to
attach as an appendix to the final Rule. It further recommended that
where the business opportunity is marketed in a language other than
Spanish, the business opportunity seller should be required to
translate the disclosure document into the language of the sale and
provide all the disclosures required by the Rule in that language.
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\99\ E.g., FTC v. Zoilo Cruz, No. 3:08-cv-01877-JP (D. P.R.
2008) (envelope stuffing scheme marketed in Spanish-language
newspapers and on a Web site available in Spanish and English); FTC
v. Integrity Mktg. Team, Inc., No. 07-cv-61152 (S.D. Fla. 2007)
(envelope stuffing scheme marketed in Spanish-language classified
advertisements); FTC v. Hispanexo, Inc., No. 1:06-cv-00424-JCC-TRJ
(E.D. Va. 2006) (assistance in starting a construction, gardening,
or cleaning business marketed through Spanish-language television
and radio stations); FTC v. Juan Matos, No. 06-61429-CIV-Altonaga
(S.D. Fla. 2006) (craft assembly business marketed through Spanish-
language advertisements); FTC v. Nat'l Vending Consultants, Inc.,
CV-S-05-0160-RCJ (PAL) (D. Nev. 2005) (deceptively marketed vending
machine business opportunities--with many marketing efforts
specifically targeting Spanish-speaking consumers); FTC v. Amada
Guerra, No. 6:04-CV-1395 (M.D. Fla. 2004) (product assembly scheme
telemarketed to Spanish-speaking consumers); FTC v. USS Elder
Enter., Inc., No. SACV-04-1039 AHS (Anx) (C.D. Cal. 2004) (work at
home assembly scheme offered through Spanish-language newspapers and
magazines); FTC v. Esteban Barrios Vega, No. H-04-1478 (S.D. Tex.
2004) (deceptive product assembly opportunity marketed through
Spanish-language newspaper and magazine advertisements).
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It is the long-held policy of the Commission that disclosures
required by Commission orders, rules, or guides should be made in the
predominant language used in the related advertisement or sales
material.\100\ Upon consideration of this policy, the staff's
recommendation, and the rationale for the staff's recommendation, the
Commission agrees with the staff's recommendation. Accordingly, the
final Rule contains a new provision, Sec. 437.5, which specifies the
disclosure requirements for sales conducted in Spanish or other
languages besides English.
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\100\ FTC Enforcement Policy Statement Concerning Clear and
Conspicuous Disclosures in Foreign Language Advertising and Sales
Materials, 16 CFR 14.9.
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II. The Legal Standard for Amending the Rule
The Commission is amending 16 CFR Part 437 pursuant to Section 18
of the FTC Act, 15 U.S.C. 57a et seq., and Part 1, subpart B of the
Commission's Rules of Practice.\101\ This authority permits the
Commission to promulgate, modify, and repeal trade regulation rules
that define with specificity acts or practices that are unfair or
deceptive in or affecting commerce within the meaning of Section
5(a)(1) of the FTC Act, 15 U.S.C. 45(a)(1).
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\101\ 16 CFR 1.7, 5 U.S.C. 551 et seq.
---------------------------------------------------------------------------
The Commission's Rules of Practice further provide that if the
Commission determines to promulgate a rule, it shall adopt a Statement
of Basis and Purpose (``SBP''), which must address four factors: (1)
The prevalence of the acts or practices addressed by the rule; (2) the
manner and context in which the acts or practices are unfair or
deceptive; (3) the economic effect of the rule, taking into account the
effect on small businesses and consumers; and (4) the effect of the
rule on state and local laws.\102\ In this section, the Commission
summarizes its findings regarding each of these factors.\103\
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\102\ Rules of Practice, 16 CFR 1.14(a)(1)(i)-(iv). In addition,
in accordance with 16 CFR 1.14(a)(1)(v), the regulatory analysis is
provided at Section V of this Statement of Basis and Purpose.
\103\ Support in the record for each factor is set forth in the
substantive discussion of each provision of the final Rule.
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A. Prevalence of Acts or Practices Addressed by the Rule
The Commission promulgated the Original Franchise Rule in 1978
based upon its finding of prevalent deception in the offer and sale of
franchises and business opportunity ventures, leading to significant
consumer injury. Since 1995, when the Commission commenced a regulatory
review of the Original Franchise Rule to ensure that the Original
Franchise Rule continued to serve a useful purpose, the Commission has
sought comment several times to ascertain the need for a separate trade
regulation rule to address widespread fraud in the sale of business
opportunities.\104\
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\104\ See 60 FR at 17657; 62 FR at 9117; 71 FR at 19084; 73 FR
at 16133; 74 FR at 18172; 75 FR at 68559.
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Throughout the Rule amendment proceedings, the Commission has
described its experience in combating a wide array of business
opportunity fraud through law enforcement actions. Indeed, the
Commission's law enforcement experience in conducting numerous sweeps
of the business opportunity industry demonstrates that deceptive and
unfair practices in the sale of business opportunities are not only
prevalent but persistent.\105\
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\105\ Since 1995, the Commission has conducted more than 18 law
enforcement sweeps to combat deceptive business opportunity
programs, many with other law enforcement partners. E.g., Operation
Bottom Dollar (2010); Operation Short Change (2009); Project Fal$e
Hope$ (2006); Project Biz Opp Flop (2005); Project Busted
Opportunity (2002); Project Telesweep (1995); Project Biz-illion$
(1999); Operation Money Pit (1998); Project Vend Up Broke (1998);
Project Trade Name Games (1997); and Operation Missed Fortune
(1996). In addition to joint law enforcement sweeps, the Commission
also targeted specific business opportunity ventures such as
envelope stuffing (Operation Pushing the Envelope, see FTC News
Release: Agencies ``Pushing the Envelope'' to Protect Consumers
(Dec. 16, 2003), available at http://www.ftc.gov/opa/2003/12/pushenvelope.shtm); medical billing (Operation Dialing for
Deception, see FTC News Release: FTC Sweep Protects Consumers from
``Dialing for Deception'' (Apr. 15, 2002), available at http://www.ftc.gov/opa/2002/04/dialing.shtm and Project Housecall, see FTC
News Release: Bogus Business Opportunity Scams Targeted by FTC (Jan.
28, 1998), available at http://www.ftc.gov/opa/1998/01/housecal.shtm); seminars (Operation Showtime, see Operation ``Show
Time'' Targets Seminars Selling Fraudulent Business Opportunities
and Investments (May 5, 1998), available at http://www.ftc.gov/opa/1998/05/showtime.shtm); Internet-related services (Net Opportunities
1998); vending machines (Operation Yankee Trader, see FTC News
Release: Operation ``Yankee Trader'' Targets Bogus Vending Machine
Business Opportunities (Sept. 11, 1997), available at http://www.ftc.gov/opa/1997/09/still.shtm); and 900 numbers (Project
Buylines, see FTC News Release: Newest Business Opportunity Fraud Is
For 900-Number Lines, Warns Federal Trade Commission (March 7,
1996), available at http://www.ftc.gov/opa/1996/03/buyline.shtm).
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[[Page 76826]]
The Commission has amended the interim Rule to address the sale of
deceptive work-at-home schemes, where unfair and deceptive practices
have been both prevalent and persistent. These schemes prey upon stay-
at-home parents, the physically disabled, those who do not speak
English, and others who cannot obtain employment outside of the home.
Sellers of fraudulent work-at-home opportunities deceive their victims
with promises of an ongoing relationship in which the seller will buy
the output that business opportunity purchasers produce, often
misrepresenting to purchasers that there is a market for the
purchasers' goods and services. In addition, the Commission's law
enforcement experience demonstrates that fraudulent work-at-home
opportunity sellers frequently invent undisclosed conditions and
limitations for rejecting the work performed by purchasers and refusing
to buy back the goods the purchasers produce. Similarly, these sellers'
promises of continuing support and assistance frequently prove empty,
leaving work-at-home opportunity purchasers with no help in figuring
out how to assemble misshapen components into finished products.
Finally, as the Commission's cases and complaint data demonstrate, con
artists who promote fraudulent work-at-home schemes frequently dupe
consumers with false earnings claims.
Since 1990 the Commission has brought over 75 work-at-home
cases.\106\ These actions have targeted a variety of schemes, ranging
from envelope stuffing and craft assembly programs, to technology-
driven opportunities and medical billing plans.\107\
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\106\ Many of these cases were brought in connection with law
enforcement sweeps of fraudulent work-at-home and related employment
opportunities, including Operation Bottom Dollar (2010); Operation
Short Change (2009); Project Fal$e Hope$ (2006); Project Biz Opp
Flop (2005); Project Homework (2001); Operation Top Ten Dot Con, see
FTC News Release: Law Enforcers Target ``Top 10'' Online Scams (Oct.
31, 2000), available at http://www.ftc.gov/opa/2000/10/topten.shtm;
and Operation Missed Fortune, see FTC News Release: FTC, State
Enforcers Target Get-Rich-Quick Self-Employment Schemes (Nov. 13,
1996), available at http://www.ftc.gov/opa/1996/11/misdfort.shtm.
\107\ See, e.g., FTC v. Real Wealth, Inc., 10-CV-0060-W-FJG
(W.D. Mo. 2010) (envelope stuffing); FTC v. Darling Angel Pin
Creations, Inc., No. 8:10-cv-00335-JSM-TGW (M.D. Fla. 2010) (craft
assembly); FTC v. The Results Group L.L.C, No. CV 06 2843 PHX JAT
(D. Ariz. 2006) (work-at-home involving becoming a Web-based
affiliate); FTC v. Mazzoni & Son, Inc., No.1:06CV2385 (N.D. Ohio
2006) (medical billing).
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Data compiled by the Commission demonstrate the prevalence of work-
at-home opportunities that do not deliver the represented level of
earnings. Indeed, the Commission's 2005 consumer fraud survey revealed
that work-at-home plans from which the respondents who had purchased
them did not earn at least half the level of promised earnings ranked
fifth in terms of the estimated number of victims and third in terms of
estimated number of incidents reported during the year.\108\ According
to the survey, an estimated 2.4 million individuals experienced work-
at-home fraud, and there were an estimated 3.8 million incidents during
the one year period surveyed.\109\
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\108\ See Consumer Fraud in the United States: The Second FTC
Survey (October 2007) at 22, available at http://www.ftc.gov/opa/2007/10/fraud.pdf (studying consumer experience with a variety of
products and services, including weight-loss products, foreign
lotteries, and prize promotions, among others).
\109\ Id.
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Consumer complaints, survey data, and the Commission's law
enforcement experience convince the Commission that deception is
prevalent in work-at-home offers. The final Rule's disclosure
requirements and prohibitions provide potential work-at-home purchasers
with the tools they need to protect themselves from false claims.
In addition to work-at-home opportunities, the final Rule also
covers the same types of business opportunities that previously were
covered under the Original Franchise Rule and the interim Business
Opportunity Rule, such as opportunities involving vending machines,
rack displays, Internet kiosks, and the like, which, as the
Commission's experience demonstrates, have been a persistently fertile
ground for fraud and deception.\110\ The Commission has conducted
numerous law enforcement sweeps that targeted a wide variety of
business opportunity scams involving the sale of vending machines, rack
displays, and other opportunities covered by the Original Franchise
Rule and the interim Business Opportunity Rule.\111\ Consumer complaint
data indicates that these types of business opportunities continue to
be a significant source of consumer injury.\112\
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\110\ See id. at 16 (reporting that an estimated 800,000
individuals were victims of business opportunity fraud during the
year surveyed).
\111\ E.g., Project Fal$e Hope$ (2006) (vending machine and rack
display opportunities); Project Biz Opp Flop (2005) (vending machine
opportunities); Project Busted Opportunity (2002) (vending machine
and rack display opportunities); Project Biz-illion$ (1999);
Operation Money Pit (1998) (rack display opportunities); Project
Vend Up Broke (1998) (vending machine opportunities); Project Trade
Name Games (1997) (rack display opportunities); Operation Missed
Fortune (1996); Project Telesweep (1995) (vending machine and rack
display opportunities); see also supra note 55.
\112\ See Consumer Sentinel Network Databook (March 2011) at p.
76, available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf (reporting that in 2010, over 12,000
complaints were filed against franchises, business opportunities,
and work-at-home schemes).
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B. Manner and Context in Which the Acts or Practices Are Deceptive or
Unfair
The final Rule has been carefully crafted to address common
deceptive or unfair practices engaged in by fraudulent business
opportunity sellers.\113\ By far, the most frequent allegations in the
Commission's business opportunity cases pertain to inducing consumers
to pay significant amounts of money by means of false or
unsubstantiated earnings claims.\114\ This is followed by inducement
through false testimonials or fictitious references and by
misrepresentations concerning: The profitability of locations; the
availability of assistance; the nature of the products or services
being sold; the prior success of third-party entities in finding
successful locations; the full extent of
[[Page 76827]]
the investment costs; and refund policies.\115\ The numerous business
opportunity complaints that consumers submit to the Commission each
year consistently reference these same concerns. The disclosure
requirements under the final Rule address each of these deceptive or
unfair practices.
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\113\ An act or practice is deceptive under Section 5(a) if it
involves a material representation or omission that is likely to
mislead consumers, acting reasonably under the circumstances, to
their detriment. See FTC Policy Statement on Deception, appended to
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984). An act or
practice is unfair under Section 5 if: (1) It causes or is likely to
cause substantial injury to consumers; (2) the harm to consumers is
not outweighed by any countervailing benefits; and (3) the harm is
not reasonably avoidable by consumers. See FTC Policy Statement on
Unfairness, appended to In re International Harvester, 104 F.T.C.
949, 1062 (1984). See 15 U.S.C. 45(n).
\114\ See supra note 95.
\115\ See supra note 96.
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1. Earnings Claims
In the Commission's experience, earnings claims are highly material
to consumers in making their investment decisions and typically are the
single most decisive factor in such decisions. Earnings claims lie at
the heart of business opportunity fraud, and are typically the
enticement that persuades consumers to invest their money. In the
overwhelming majority of the Commission's more than 245 cases against
business opportunity sellers, the business opportunity seller has lured
unsuspecting consumers through false or deceptive earnings
representations. These claims have taken the form of purported
historical earnings statistics (e.g., ``Our operators have earned
$100,000 a year''), as well as wild and unsupported earnings
projections (e.g., ``You will earn $100,000 in your first year'').
Promoters of work-at-home opportunities frequently dupe consumers with
false earnings claims. For example, in one recent envelope-stuffing
case brought under Section 5 of the FTC Act, the defendants promised
purchasers weekly earnings ranging from $1,200 to $4,400.\116\ In
another case targeting Spanish-speaking consumers, the defendants
promised that purchasers could earn $1,400 per week stuffing envelopes
from home.\117\ Often earnings claims are express, but may be implied.
Sellers often convey these false and unsubstantiated earnings claims
orally, although it is not unusual for such claims to be in writing.
Nor is it unusual for these false earnings claims to contradict
inconspicuous disclaimers the seller has hidden in contracts or other
printed materials. At any rate, false or unsubstantiated earnings
claims are inherently likely to mislead consumers. Certainly, no aspect
of the sales transaction is more material than the level of earnings a
purchaser can reasonably expect. Moreover, prospective purchasers
reasonably interpret earnings claims at face value. Thus, false or
unsubstantiated earnings claims are deceptive and unlawful under
Section 5 of the FTC Act.\118\
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\116\ FTC v. Global U.S. Resources, No. 10-CV-1457 (RNC) (D.
Conn. 2010).
\117\ FTC v. Zoilo Cruz, No. 3:08-cv-01877-JP (D.P.R. 2008).
\118\ See FTC Policy Statement on Deception, appended to
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
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Under the Original Franchise Rule and the interim Business
Opportunity Rule, the Commission sought to ensure the accuracy and
reliability of earnings claims, both written and oral, express or
implied, by prohibiting sellers from making an earnings claim, unless
the seller possessed a reasonable basis for the claim, along with
written substantiation for the claim, at the time the claim was made.
Sellers were also required to provide prospective purchasers with a
separate earnings claims statement that set forth the claim and the
substantiation for that claim. The final Rule continues to address
false and deceptive earnings claims by requiring business opportunity
sellers to disclose whether they make an earnings claim. Sellers who
make earnings claims must attach to the required disclosure document an
earnings claim statement setting forth the earnings claim, the number
and percentage of purchasers who achieved the represented level of
earnings, the date range during which the represented earnings were
achieved, and other information. These disclosure requirements are
designed to help consumers identify and evaluate an earnings claim, if
one is made, or to arouse suspicion if an earnings claim is made orally
but is disclaimed in writing. The final Rule, in Sec. 437.6(d), also
prohibits misrepresenting ``the amount of sales, or gross or net income
or profits a prospective purchaser may earn, or that prior purchasers
have earned.''
2. References
The use of paid references or ``shills'' is a common practice in
the sale of fraudulent business opportunities. In many of the
Commission's cases against fraudulent business opportunity sellers, the
defendants had offered to provide prospective purchasers with
purportedly independent references, who in reality were nothing more
than paid shills--individuals who were compensated by the defendants to
claim that they were successful operators of defendants' business
ventures.\119\ The business opportunity sellers, however, had not
disclosed to prospective purchasers that the references were paid or
otherwise received a benefit for providing a favorable account of the
opportunity. The use of fictitious references is an objectionable, but
very effective means of misleading consumers about a highly material
fact--whether other purchasers have actually achieved earnings as the
seller represents, and whether those purchasers' overall experience of
operating the business has been positive. When the information a
reference provides on these questions is fictitious, a prospective
purchaser has no way of knowing the information is false and
unreliable. Thus, the use of fictitious references--shills--is a
deceptive practice.\120\
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\119\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); U.S. v. Vaughn, No. 01-20077-01-KHV (D.
Kan. 2001); FTC v. Hart Mktg. Enter. Ltd., Inc., No. 98-222-CIV-T-23
E (M.D. Fla. 1998); FTC v. Inetintl.com, No. 98-2140 (C.D. Cal.
1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez
(S.D. Fla. 1996); FTC v. Allstate Bus. Consultants Group, Inc., No.
95-6634-CIV-Ryskamp (S.D. Fla. 1995).
\120\ See FTC Policy Statement on Deception, appended to
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
---------------------------------------------------------------------------
The Original Franchise Rule and the interim Business Opportunity
Rule sought to remedy this deceptive practice by requiring business
opportunity sellers to provide prospective purchasers with the names
and contact information for at least 10 current purchasers of the
opportunity. The final Rule continues to remedy this deceptive practice
by requiring a business opportunity seller to disclose a list of all
prior purchasers of the business opportunity during the previous three
years. The disclosure of prior purchasers is instrumental in preventing
fraud because it enables prospective purchasers to independently verify
the seller's claims. The final Rule also, in Sec. 437.6(q), prohibits
misrepresenting that any person has purchased a business opportunity,
or that any person can provide an independent assessment of the
offering, when such is not the case.
3. Refund Policies
Fraudulent business opportunity sellers often offer prospective
purchasers the right to cancel or to seek a whole or partial refund,
but when a purchaser seeks to cancel, he finds there are hidden
limitations or conditions on the refund policy. More often, the seller
simply ignores the purchaser's request. Thus, refund offers are
frequently just illusory, and misleading. Cancellation or refund offers
are material to prospective purchasers because they purport to reflect
the potential risk of the proposed transaction, and may create the
impression that the business opportunity offer is either risk free or a
low financial risk. Purchasers reasonably interpret a refund policy to
be, in fact, as stated. Thus, representing
[[Page 76828]]
an illusory refund policy is deceptive under Section 5 of the FTC Act.
Moreover, the failure to honor refund promises is an unfair
practice in violation of Section 5(n) of the FTC Act.\121\ It often
results in substantial injury to business opportunity purchasers that
they cannot reasonably avoid.\122\ Moreover, the record is devoid of
any evidence suggesting that this harm is outweighed by any
countervailing benefits.
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\121\ An act or practice is unfair if it ``causes or is likely
to cause substantial injury to consumers which is not reasonably
avoidable by consumers themselves and not outweighed by
countervailing benefits to consumers or to competition.'' 15 U.S.C.
5(n).
\122\ See, e.g., In re Orkin Exterminating Co., 108 F.T.C. 263
(1986), aff'd, Orkin Exterminating Co. v. FTC, 849 F.2d 1354 (11
Cir. 1988).
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To remedy this practice, under the Original Franchise Rule and the
interim Business Opportunity Rule, it was a violation for a seller to
fail to refund a purchaser's funds, in certain instances. The final
Rule continues to address this practice. Under Sec. 437.3(a)(4) of the
final Rule, a seller is not required to have a refund or cancellation
policy. The seller, however, is required to disclose whether it has
either a refund or cancellation policy, and if so, the seller must
disclose, in an attachment to the disclosure document, the material
terms of the policy. Moreover, Sec. 437.6(k) prohibits any
misrepresentation of a seller's refund or cancellation policies, and
Sec. 437.6(l) prohibits failure to provide a refund or cancellation
when the purchaser has satisfied the terms and conditions disclosed.
4. Legal Actions
The Commission's law enforcement experience amply demonstrates that
fraudulent business opportunity sellers often operate through multiple
related affiliates, or use, sequentially or simultaneously, a variety
of corporate identities in order to obscure their negative reputation
or to avoid alerting consumers of the potential for fraud. This
subterfuge is designed to mislead, and actually does mislead
prospective business opportunity purchasers about a crucially material
fact: The reliability and trustworthiness of the seller with whom the
consumer is transacting. It is not unreasonable for a consumer to
believe that a seller is as represented; the consumer is not obliged to
suspect an apparently legitimate seller has a history of fraud hidden
behind multiple defunct or impossible to trace corporate entities.
Thus, it is a deceptive practice and a violation of Section 5 for a
seller to obfuscate past activities that would alert a prospective
purchaser of a likelihood of fraud.\123\
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\123\ See FTC Policy Statement on Deception, appended to
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984).
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One of the key indicia of a seller's reliability and
trustworthiness is whether there have been law enforcement actions or
lawsuits for fraud and similar infractions targeting that seller.
Accordingly, under the Original Franchise Rule and the interim Business
Opportunity Rule, the Commission required sellers to disclose certain
legal actions in which they or their principals have been involved.
Similarly, the final Rule requires a business opportunity seller to
disclose any legal actions that the seller, its affiliates, and certain
key personnel have been involved in during the previous ten years
involving misrepresentation, fraud, securities law violations, or
unfair or deceptive practices, including violations of any FTC Rule.
Knowledge of such legal actions against the seller and other key
persons associated with the seller is material to a prospective
purchaser's decision to go forward with the transaction.
These disclosure requirements are tailored to address common
deceptive or unfair practices in the sale of business opportunities, as
demonstrated by the Commission's extensive law enforcement experience
with business opportunity fraud. In addition to these disclosures, the
final Rule requires sellers to disclose certain identifying information
about themselves and expressly prohibits a variety of material
misrepresentations and omissions that the Commission's experience
demonstrates to be most commonly associated with deceptive and unfair
practices in the sale of business opportunities.
C. The Economic Effect of the Rule
At every stage of the Rule amendment proceeding, the Commission
solicited comment on the economic impact of the Rule, as well as the
costs and benefits of each proposed Rule amendment. In issuing the
final Rule, the Commission has carefully considered the comments
received and the costs and benefits of each amendment. As discussed
throughout this SBP, the final Rule's disclosure requirements and
specific prohibitions will provide a substantial benefit to consumers
weighing the risks of investing their money in specific business
opportunity offers. In particular, the mandated disclosures will help
consumers evaluate the earnings claims made by a seller, investigate
the litigation history of the seller, identify the seller's refund or
cancellation policy, and check on the experiences of other purchasers.
By providing consumers with access to this information before money
changes hands, the final Rule will substantially reduce economic harm
caused by misleading sales practices.
The Commission has attempted to reduce sellers' compliance costs
wherever possible. In general, compliance with the final Rule's
disclosure requirements is significantly less burdensome than with the
Original Franchise Rule or the interim Business Opportunity Rule. Most
notably, the final Rule streamlines the more than 20 separate
categories of disclosures required by the interim Business Opportunity
Rule to just five. The final Rule also employs specific prohibitions in
place of affirmative disclosures wherever possible in an attempt to
further reduce compliance costs.
A variety of other amendments have been made in an attempt to
reduce compliance costs for business opportunity sellers. For example,
in the RNPR, the Commission eliminated the requirement that sellers
disclose the litigation histories of their sales personnel, recognizing
that such disclosure would place a burden on business opportunity
sellers that would not be outweighed by countervailing benefits to
prospective purchasers.\124\ The final Rule also does not require
sellers with prior legal actions against them to detail the nature of
the legal action, but rather, permits sellers to provide a brief 100-
word description of the case if they so choose. Also, in an attempt to
reduce compliance costs, the final Rule permits sellers to comply with
the cancellation or refund disclosure requirement by attaching to the
disclosure document a copy of a pre-existing document--such as a
company brochure--that details the seller's cancellation or refund
policy. The final Rule also provides sellers with a less burdensome
means of complying with the reference disclosure requirement: In lieu
of a list of the 10 prior purchasers nearest the prospect, a seller may
provide a prospect with a national list of all purchasers. For example,
a seller making disclosures online could simply maintain an electronic
list of purchasers that it updates periodically. This would enable the
seller to avoid having to tailor the disclosure to each prospective
[[Page 76829]]
purchaser, thereby further reducing compliance costs.
---------------------------------------------------------------------------
\124\ 73 FR at 16126. The Commission's decision to narrow the
Rule so that MLMs would not be burdened with unworkable disclosure
requirements was similarly prompted by concern that any potential
benefits would be outweighed by compliance costs. Id. at 16119-21.
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D. The Effect of the Rule on State and Local Laws
Section 437.9(b) of the final Rule provides that the Commission
does not intend to preempt state or local business opportunity laws,
except to the extent that they conflict with the Rule. A law does not
conflict with the Rule if it affords prospective purchasers equal or
greater protection, such as a requirement for registration of
disclosure documents or more extensive disclosures.
Although state laws offering equal or greater protections are not
preempted, Sec. 437.6(c) of the final Rule, which addresses extraneous
materials, prohibits sellers from providing disclosures required under
state law in the same document with the disclosures required under the
final Rule. One of the main goals of revising and tailoring the
disclosure requirements for business opportunity sellers is to simplify
and streamline the disclosures into a single-page document. The
Commission has determined, therefore, that allowing business
opportunity sellers to mix federal and state disclosures into one
document would be a means for sellers to present lengthy and confusing
information to prospective purchasers, and would be contrary to the
Commission's goal of requiring sellers to provide a simple, clear, and
concise disclosure document.\125\
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\125\ 73 FR at 16128.
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III. Section-by-Section Analysis of Part 437
The final Rule is divided into ten sections. Section 437.1 defines
19 key terms employed in the Rule's text. Section 437.2 establishes the
business opportunity seller's obligation to furnish prospective
purchasers with material information in the form of a written basic
disclosure document. Section 437.3 specifies the content and form of
the disclosure document. Section 437.4 sets forth the requirements that
business opportunity sellers must follow if they elect to make
representations regarding earnings. Section 437.5 addresses sales
conducted in Spanish or other languages besides English, and the
disclosure requirements for those sales. Section 437.6 prohibits a
number of specific deceptive claims and other deceptive practices in
connection with business opportunity sales. Section 437.7 sets forth
the Rule's recordkeeping provisions. Section 437.8 expressly exempts
from the Rule those business arrangements that are covered by the
Amended Franchise Rule. Finally, two administrative sections--437.9 and
437.10--address other laws, rules, and orders, and severability. The
sections that follow discuss each of these rule provisions in turn.
A. Section 437.1: Definitions
The final Rule begins with a list of defined terms in alphabetical
order. In several instances, the final Rule's definitions closely track
those contained in the interim Business Opportunity Rule or the
Commission's interpretations of the Original Franchise Rule.\126\ These
include the definitions for the terms ``action,'' ``affiliate,''
``disclose or state,'' ``earnings claim,'' ``person,'' and ``written or
in writing.'' In addition, the final Rule includes definitions for the
terms ``business opportunity,'' ``designated person,'' ``exclusive
territory,'' ``general media,'' ``new business,'' ``prior business,''
``providing locations, outlets, accounts, or customers,''
``purchaser,'' ``quarterly,'' ``required payment,'' and ``seller,''
each of which was proposed in the IPBOR and, in certain circumstances,
modified in the RPBOR and the proposed Final Rule attached to the Staff
Report. Finally, the final Rule includes two new definitions that were
recommended in the Staff Report: (1) ``Material'' and (2) ``signature
or signed.'' \127\ Each definition, including the record support for
the definition and the Commission's analysis, is addressed below.
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\126\ See 16 CFR 437.1; Final Interpretive Guides
(``Interpretive Guides'') accompanying the Original Franchise Rule,
44 FR 49966 (Aug. 24, 1978).
\127\ At the same time, the final Rule eliminates nine of the
interim Business Opportunity Rule's terms and their definitions,
which are no longer necessary: ``prospective business opportunity
purchaser,'' ``business day,'' ``time for making of disclosures,''
``fractional business opportunity,'' ``business opportunity
broker,'' ``sale of a business opportunity,'' ``cooperative
association,'' ``fiscal year,'' and ``personal meeting.''
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1. Section 437.1(a): Action
The term ``action'' appears in Sec. 437.3(a)(3), which requires
business opportunity sellers to disclose material information about the
business opportunity seller's litigation history.\128\ Specifically,
Sec. 437.3(a)(3) of the final Rule requires the disclosure of material
information about certain civil or criminal actions within the previous
ten years involving the business opportunity seller, its directors, and
certain key employees,\129\ as well as its affiliates or prior
businesses. Information about litigation history based on allegations
of misrepresentation, fraud, securities law violations, or unfair or
deceptive practices is highly material to assessing investment risk.
Discovering that a seller has a history of violating laws and
regulations is perhaps the best indication that a particular business
opportunity is a high-risk investment.
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\128\ Section 437.3(a)(3) requires disclosure of ``any civil or
criminal action for misrepresentation, fraud, securities law
violations, or unfair or deceptive practices, including violations
of any FTC Rule.''
\129\ The final Rule covers ``any sales managers, or any
individual who occupies a position or performs a function similar to
an officer, director, or sales manager of the seller.'' See Sec.
437.3(a)(3)(i)(c).
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The definition of ``action'' is intended to make clear that
disclosures involving prior litigation include not only civil actions
brought before a court but also matters before arbitrators.\130\ It
also is intended to make clear that an ``action'' includes all
government actions, including criminal matters and actions brought to
enforce FTC Rules, as well as administrative law enforcement actions,
such as cease and desist orders or assurances of voluntary
compliance.\131\
---------------------------------------------------------------------------
\130\ 71 FR at 19061.
\131\ Id.
---------------------------------------------------------------------------
During the Business Opportunity workshop, a panelist representing
the DOJ suggested that bankruptcy is another type of legal action that
should be disclosed to potential purchasers because a bankruptcy filing
could be a red flag warning of potential risk associated with a
business opportunity.\132\ A panelist from the Maryland Attorney
General's Office disagreed, arguing that this additional disclosure
would not benefit potential business opportunity purchasers because, in
his experience, fraudulent business opportunities do not typically file
for bankruptcy protection.\133\ Instead, in that panelist's experience,
fraudulent business opportunity promoters shutter their premises and
reopen as an entirely new fraudulent entity. Another panelist posited
that disclosure of the existence of a bankruptcy by the business
opportunity or its key personnel was not likely to identify fraudulent
or problematic business opportunities that would not already be
identified through the existing proposed categories of legal
actions.\134\
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\132\ Jost, June 09 Tr at 32. A second panelist (Taylor, June 09
Tr at 35), and a commenter (Brooks-Workshop comment) agreed that
existence of a bankruptcy might be relevant to a potential
purchaser.
\133\ Cantone, June 09 Tr at 37.
\134\ MacLeod, June 09 Tr at 33.
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The Commission has determined not to include bankruptcy as a type
of legal action that a business opportunity seller must disclose. The
Commission's law enforcement experience indicates that when targeted by
law enforcement,
[[Page 76830]]
rather than file for bankruptcy, fraudulent business opportunity
sellers tend to vanish and then simply reopen under new company
names.\135\ Thus, there is little meaningful correlation between filing
for bankruptcy and promoting a fraudulent business opportunity. Yet,
many legitimate businesses have been forced by circumstances to seek
the protection of bankruptcy courts. Therefore, bankruptcy filing would
not seem to be a reliable marker for potential fraud, and would not
likely help business opportunity purchasers avoid being defrauded.
Therefore, the final Rule's definition of action does not contain
reference to bankruptcy.\136\
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\135\ See, e.g., FTC v. Nat'l Vending Consultants, Inc., CV-S-
05-0160-RCJ-PAL (D. Nev. 2005); FTC v. USA Beverages, Inc., CV-05-
61682 (S.D. Fla. 2004); FTC v. Allstate Bus. Distribution Ctr.,
Inc., CV-00-10335AHM (C.D. Cal. 2001); FTC v. O'Rourke, No. 93-6511-
Civ-Gonzalez (S.D. Fla. 1993); FTC v. Inv. Dev., Inc., 1989 U.S.
Dist. LEXIS 6502 (E.D. La. June 7, 1989).
\136\ Similarly, the scope of 437.3(c)(3)(i) has remained
unchanged and does not require the disclosure of bankruptcy filings.
---------------------------------------------------------------------------
Finally, the Staff Report noted that some state administrative
proceedings result in parties entering into assurances of voluntary
compliance, while other states refer to such orders as assurances of
discontinuance. The staff recommended, therefore, adding ``assurance of
discontinuance'' to the categories of legal actions enumerated in the
proposed definition. The Commission agrees with the staff's
recommendation and the final Rule's definition of ``action'' now
includes that phrase. Accordingly, Sec. 437.1(a) of the final Rule
defines ``action'' as follows: ``A criminal information, indictment, or
proceeding; a civil complaint, cross claim, counterclaim, or third
party complaint in a judicial action or proceeding; arbitration; or any
governmental administrative proceeding, including, but not limited to,
an action to obtain or issue a cease and desist order, an assurance of
voluntary compliance, and an assurance of discontinuance.''
The definition of ``action,'' as recommended in the Staff Report,
received no comment, and the final Rule adopts this definition of
``action'' as recommended.
2. Section 437.1(b): Affiliate
The term ``affiliate'' appears in several sections of the final
Rule, most notably in Sec. 437.3(a)(3), which requires a business
opportunity seller to disclose not only litigation in which the seller
was named as a party, but any litigation naming any of the seller's
``affiliates'' or prior businesses. Section 437.1(b) of the final Rule
defines the term ``affiliate'' to mean: ``An entity controlled by,
controlling, or under common control with a business opportunity
seller.'' This definition also covers litigation involving a parent or
subsidiary of the business opportunity seller.
The definition of ``affiliate,'' as proposed in the INPR and RNPR,
and recommended in the Staff Report, received no comment, and the final
Rule adopts this definition of ``affiliate'' as recommended.
3. Section 437.1(c): Business Opportunity
The definition of ``business opportunity'' delineates the scope of
the Rule's coverage. Under the final Rule, a ``business opportunity''
is a commercial arrangement that possesses three required elements.
First, a seller must solicit a prospective purchaser to enter into a
new business.\137\ Second, the prospective purchaser of the business
opportunity must make a ``required payment.'' \138\ And third, the
seller must represent that the seller or one or more designated persons
will provide any of three types of business assistance: (1) Providing
locations for the purchaser's use or operation of equipment, displays,
vending machines, or similar devices; (2) providing outlets, accounts,
or customers to the prospective purchaser; or (3) buying back any or
all of the goods or services that the purchaser makes, including
providing payment for such services as, for example, stuffing envelopes
from the purchaser's home.
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\137\ Section 437.1(j) defines ``new business'' as ``a business
in which the prospective purchaser is not currently engaged, or a
new line or type of business.''
\138\ See Sec. 437.1(p) (defining ``required payment'').
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Because this section triggers the strictures and requirements of
the Rule, the definition of ``business opportunity,'' and in
particular, its specification of the types of ``business assistance''
that characterize a covered business, has generated substantial comment
throughout this proceeding. After careful consideration of the amassed
record, the Commission has crafted the final Rule's business
opportunity definition to ensure that it is broad enough to encompass
many business opportunities that historically were not covered under
the Original Franchise Rule or the interim Business Opportunity Rule,
but which have routinely been shown to be associated with unfair or
deceptive practices.\139\ At the same time, the definition of
``business opportunity'' has been narrowly tailored to avoid
inadvertently sweeping in other business arrangements, such as
traditional product distribution. This has been accomplished primarily
through narrowing the types of business assistance that will trigger
the Rule's coverage from the five categories originally proposed in the
IPBOR to the three categories described above.
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\139\ As discussed supra in Section I.C, the definition of
business opportunity no longer excludes transactions falling below a
minimum monetary payment threshold nor does it require that the
purchaser of the opportunity sell goods or services directly to end-
users other than the business opportunity seller. These changes
extend the scope of coverage to many business opportunities that
previously escaped coverage.
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Consistent with the approach proposed in the RPBOR, the final
Rule's definition of business opportunity eliminates two types of
business assistance that under the IPBOR would have triggered the
Rule's strictures and disclosure obligations: (1) Tracking or paying,
or purporting to track or pay, commissions or other compensation; and
(2) providing other advice or training assistance. The sections below
describe the evolution of the business opportunity definition,
including the rationale for eliminating these types of assistance from
the definition of business opportunity.
In the IPBOR, the proposed definition of ``business opportunity''
was designed to be broad enough to cover the sale of virtually any type
of business opportunity, including two types in particular that
historically had fallen outside the scope of the Original Franchise
Rule--work-at-home and pyramid marketing opportunities.\140\ As
explained more fully in the INPR, the Commission's law enforcement
experience and consumer complaints demonstrate that these two types of
opportunities are sources of prevalent and persistent problems,\141\
which the Commission has traditionally challenged under Section 5 of
the FTC Act.\142\
---------------------------------------------------------------------------
\140\ 71 FR at 19059.
\141\ In 2010, pyramid schemes generated approximately 2,000
consumer complaints, while work-at-home schemes generated over 8,000
complaints. See Consumer Sentinel Network Databook (March 2011) at
76, 79, available at http://ftc.gov/sentinel/reports/sentinel-annual-reports/sentinel-cy2010.pdf.
\142\ Many of these schemes fell outside the ambit of the
Original Franchise Rule because: (1) The purchase price was less
than $500, the minimum payment necessary to trigger coverage; (2)
required payments were primarily for inventory, which did not count
toward the $500 monetary threshold; (3) the scheme did not offer
location or account assistance; or (4) the scheme involved the sale
of products to the business opportunity seller rather than to end-
users. See 71 FR at 19055, 19059.
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In order to reach these two types of opportunities, the INPR
proposed a broad definition of ``business opportunity'' comprised of
three
[[Page 76831]]
elements: (1) A solicitation to enter into a new business; (2) payment
of consideration, directly or indirectly through a third party; and (3)
the making of either an ``earnings claim'' or an offer to provide
``business assistance.'' \143\ The IPBOR's definition of ``business
assistance'' included assistance in the form of ``tracking or paying,
or purporting to track or pay, commissions or other compensation based
upon the purchaser's sale of goods or services or recruitment of other
persons to sell goods or services.'' \144\ The Commission noted that
many pyramid schemes offer this type of assistance, purporting to
compensate participants not only for their own product sales but also
for sales made by their participants' downline recruits.\145\ Under the
IPBOR, ``business assistance'' also included providing other advice or
training assistance.\146\
---------------------------------------------------------------------------
\143\ See 71 FR at 19087.
\144\ Id.
\145\ Id. at 19063 & n.106.
\146\ Id. at 19087 (IPBOR Sec. 437.1(c)(v)).
---------------------------------------------------------------------------
In response to the INPR, many commenters argued that the IPBOR
would have unintentionally swept in numerous commercial arrangements
where there is little or no evidence that fraud is occurring.\147\
Several commenters contended that the IPBOR would have regulated a wide
range of legitimate and traditional product distribution arrangements
that were not associated with the types of fraud that business
opportunity laws are designed to remedy. For example, one commenter
suggested that the IPBOR could be read to cover product distribution
through retail stores simply because the retailer pays for inventory
and the manufacturer provides sales training to its retail
accounts.\148\ The commenter suggested that its business operations
would meet the IPBOR's definition of business opportunity because: (1)
The ``payment'' prong of the definition did not exempt voluntary
purchases of inventory; and (2) providing retail staff with sales
training would have satisfied the ``business assistance'' prong of the
definition.\149\ Other commenters noted that even if a company provided
no ``business assistance,'' it easily could have fallen under the
``business opportunity'' definition if the company made some
representation about sales or profits sufficient to constitute an
earnings claim.\150\
---------------------------------------------------------------------------
\147\ See 73 FR at 16113-14.
\148\ Timberland-INPR at 2.
\149\ Id.
\150\ IBA-INPR at 4; see also PMI-INPR at 3.
---------------------------------------------------------------------------
Other commenters in response to the INPR argued that the IPBOR
would have been broad enough to cover other types of commercial
arrangements, such as bona fide educational programs offered by
colleges and universities, the sale of certain books by publishers or
book stores, and even the relationship between newspapers and
independent carriers who distribute the newspapers to homes and
businesses.\151\ Recognizing the unintended overbreadth of the Rule to
sweep in these types of commercial arrangements as well as the
unworkability of applying the Rule to MLMs, the Commission proposed the
RPBOR with a narrower definition of ``business opportunity.'' The RPBOR
``business opportunity'' definition narrowed the types of ``business
assistance'' that would trigger Rule coverage by deleting from the Rule
text: (1) Tracking payments or commissions and (2) providing other
advice or training assistance.\152\ The RPBOR definition also
eliminated the ``earnings claim'' element from the definition.\153\ But
for this modification, any business or commercial arrangement that made
an earnings claim could have been a ``business opportunity,'' as
defined by the Rule. To avoid transforming common commercial
transactions into ``business opportunities,'' some commenters suggested
narrowing the definition of ``earnings claim.'' \154\ In the RNPR,
however, the Commission determined that the better approach to address
concerns about overbreadth was to tailor the substantive scope of the
Rule, in part, by unlinking the definition of ``business opportunity''
from the making of an earnings claim.\155\ The Staff Report recommended
that the Commission adopt this modification in the final Rule. No
comments received in response to the Staff Report addressed this
change.
---------------------------------------------------------------------------
\151\ Venable-INPR at 2-3; NAA-INPR at 1-3.
\152\ In addition, the RPBOR clarified that a ``required
payment'' does not include payments for the purchase of reasonable
amounts of inventory at bona fide prices. The final Rule
incorporates this clarification.
\153\ 73 FR at 16124.
\154\ Id.
\155\ Id.
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In the RNPR, the Commission solicited comment as to whether the
narrowed Rule would adequately reach the field of business opportunity
promoters who are likely to engage in unfair or deceptive practices,
and conversely, queried whether the newly-proposed narrowing of the
definition, and, hence, the scope of the RPBOR's coverage, was
sufficient to exclude from the rule traditional distributor
relationships \156\ that had been inadvertently swept into the
IPBOR.\157\
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\156\ For example, commenters to the INPR noted that the IPBOR
would cover ``manufacturers, suppliers and other traditional
distribution firms that have relied on the bona fide wholesale price
exclusion to avoid coverage'' under the Rule. Sonnenschein-INPR at
1-2. The Cosmetic, Toiletry and Fragrance Association posited that
the IPBOR would cover the relationship between a manufacturer and an
independent contractor who sells the product to beauty supply
companies, salons, and others. CTFA-INPR; see also LHD&L-INPR at 2
(noting that the IPBOR could cover the relationship between a
manufacturer and a regional distributor of products).
\157\ 73 FR at 16133.
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The majority of comments in response to the RNPR focused on whether
the revisions to the proposed Rule would capture MLMs.\158\ The
majority of commenters applauded the Commission's decision to narrow
the scope of the rule, while others expressed concern that the MLM
industry would continue to be subject to the RPBOR despite the more
narrowed definition of ``business opportunity.'' \159\ For example,
some commenters expressed concern that the buy-back provision, set
forth in Sec. 437.1(c)(3)(iii), would sweep in MLM companies that
offer to buy back their distributors' unused inventory.\160\ These
commenters suggested amending this provision to strike the word
``provides'' from Sec. 437.1(c)(3)(iii), so that the definition of
``business opportunity'' would clearly not encompass a return of unused
materials or merchandise.\161\
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\158\ DSA-RNPR. In addition, the Commission received more than
40 comments from various MLMs that expressed support and concurrence
with DSA's comments. See, e.g., Big Ear-RNPR; Jafra Cosmetics-RNPR;
Lia Sophia-RNPR; Longaberger-RNPR; Princess House-RNPR; Shaklee-
RNPR. Some commenters expressed disappointment that the Commission
proposed to exclude MLMs from coverage by the Rule. See, e.g., CAI-
RNPR; Durand-RNPR; PSA-RNPR; Aird-RNPR (Rebuttal); Parrington-RNPR.
As previously noted, the Commission decided to narrow the scope of
the Rule to avoid broadly sweeping in MLMs.
\159\ See, e.g., DSA-RNPR; Avon-RNPR; Bates-RNPR; IBA-RNPR; MMS-
RNPR; Mary Kay-RNPR; Melaleuca-RNPR; Primerica-RNPR; Pre-Paid Legal-
RNPR; IDS-RNPR; Tupperware-RNPR; Venable-RNPR.
\160\ DSA requires that its members offer to buy back, at 90% of
the salesperson's cost, all resalable inventory and other sales
materials. DSA-INPR at 35.
\161\ DSA-RNPR at 6 n.14 (noting that ``the buy-back provision
is the cornerstone of the DSA's self regulatory regime and a
valuable protection for individual direct sellers''); Mary Kay-RNPR
at 6; Babener-RNPR; Melaleuca-RNPR.
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The Commission is not persuaded that such a change is necessary. In
the RNPR, the Commission made clear that Sec. 437.1(c)(3)(iii) was
intended to capture work-at-home business opportunities in which the
seller provides the purchaser with some supplies and the purchaser
converts those supplies into a product
[[Page 76832]]
or other ``good'' for repurchase by the seller or other person.\162\ As
the Staff Report noted, it would require a labored reading of this
section to suggest that the word ``provides'' means ``to return unused
inventory the purchaser bought from the seller but was not able to
sell.'' \163\ Moreover, the Commission has explicitly stated that this
provision ``would not include the offer to buy back inventory or
equipment needed to start a business.'' \164\
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\162\ See 73 FR at 16123.
\163\ Staff Report at 34.
\164\ See 71 FR at 19062.
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In addition, some commenters argued that Sec. 437.1(c)(3)(i) would
inadvertently cover entities that offer, at no cost to purchasers, the
use of office space and equipment for the operation of the purchasers'
business.\165\ These commenters were concerned that such offers could
be construed under Sec. 437.1(c)(3)(i) to be providing ``locations for
the use or operation of equipment * * * on premises neither owned nor
leased by the purchaser.'' In the RNPR, the Commission stated that this
provision was intended to capture fraudulent vending machine and rack
display schemes,\166\ as well as schemes where a purchaser is forced to
lease office space, telephones and other equipment for operation of his
or her business.\167\ Noting that the Commission did not intend to
capture the incidental use of office space and equipment that the
purchaser does not own, lease, or control, and for which the purchaser
makes no payment, the Staff Report recommended a slight modification to
Sec. 437.1(c)(3)(i), amending it to state: ``provide locations for the
use or operation of equipment, displays, vending machines, or similar
devices, owned, leased, controlled, or paid for by the purchaser.''
\168\
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\165\ For example, Primerica, an MLM that sells insurance
products and services, requires that its regional managers provide
at no cost to ``downline'' sales agents the use of office space,
supplies, and equipment (such as computers and printers) for the
operation of his or her business. Primerica noted that, as a
practical matter, it must require this assistance, as the regulatory
structure in which Primerica operates necessitates that regional
managers exercise compliance oversight functions with respect to the
agents in their downlines. Primerica-RNPR; see also Avon-RNPR;
Tupperware-RNPR.
\166\ 73 FR at 16123 (citing FTC v. Am. Entm't Distribs., No.
04-22431-CIV-Martinez (S.D. Fla. 2004); FTC v. Advanced Pub.
Commc'ns Corp., No. 00-00515-CIV-Ungaro-Benages (S.D. Fla. 2000);
FTC v. Ameritel Payphone Distribs., Inc., No. 00-0514-CIV-Gold (S.D.
Fla. 2000); FTC v. Mktg. and Vending Concepts, No. 00-1131 (S.D.N.Y.
2000)).
\167\ FTC v. Equinox, Int'l, No. CV-S-99-0969-JAR-RLH (D. Nev.
1999).
\168\ The Staff Report recommended that the Commission strike
the final clause of this provision of the RPBOR--``on premises
neither owned or leased by the purchaser''--noting that the clause
is superfluous, as a buyer would never need a seller's assistance in
identifying locations that the buyer already owns or leases. The
Commission agrees, and the final Rule does not include this
language.
---------------------------------------------------------------------------
No comments responding to the Staff Report addressed this proposal.
The Commission adopts the change recommended in the Staff Report. This
change clarifies that the third prong of the ``business opportunity''
definition is triggered only when the seller offers to provide the
purchaser, directly or through an intermediary, with locations in which
to place equipment, displays, vending machines, or similar devices that
the purchaser controls. This change will not compromise the long-
standing coverage of the Rule, and will allow legitimate sellers to
offer beneficial assistance to purchasers, at no cost to those
purchasers.\169\
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\169\ In the final Rule, a non-substantive change was made to
the definition of ``business opportunity'' proposed in the Staff
Report--the colon and number signaling the first element of the
definition was moved. This change simply makes the sentence
structure parallel.
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4. Section 437.1(d): Designated Person
The term ``designated person'' appears in the definition of
``business opportunity'' to ensure coverage over those transactions in
which a seller refers a purchaser to a third party for the provision of
business locations, accounts, or assistance such as buy-back services,
as specified in Sec. 437.1(c)(3). That section makes clear that in
order to fall within the scope of the business opportunity definition,
the business assistance being offered need not be provided to the
purchaser by the seller directly. Rather, a seller who represents that
business assistance may or will be provided by a third party, such as a
locator or a supplier, will still be covered by the Rule. Section
437.1(c)(3) uses the term ``designated person'' to refer to any third
parties who would provide business assistance to a business opportunity
purchaser and to close a potential loophole. For example, a fraudulent
vending machine route seller would not be able to circumvent the final
Rule by representing to a prospective purchaser that a specific locator
will place machines for the purchaser.\170\ The referral to a third
party would be sufficient to bring the transaction within the ambit of
the Rule.\171\ Section 437.1(d) of the final Rule defines the term
``designated person'' to mean ``any person, other than the seller,
whose goods or services the seller suggests, recommends, or requires
that the purchaser use in establishing or operating a new business.''
\172\
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\170\ The Commission's law enforcement experience demonstrates
that closing this potential loophole is necessary. For example, in
FTC v. Greeting Cards of Am., Inc., No. 03-60746-CIV-Gold (S.D. Fla.
2003), the FTC alleged that the business opportunity seller
represented that a third party locator would secure locations for
the prospective purchaser, and the locator failed to do so.
\171\ See 71 FR at 19064.
\172\ This approach is consistent with the Amended Franchise
Rule's analogous definitional elements, extending the scope of that
rule's coverage to reach transactions in which the franchisor
provides to the franchisee the services of a person able to secure
the retail outlets, accounts, sites, or locations. See 16 CFR
436.1(j).
---------------------------------------------------------------------------
One commenter argued that the proposed definition of ``designated
person'' was overbroad and that its application would result in many
multi-level marketing opportunities being swept into the Rule.\173\ For
instance, if an MLM company requires its managers to provide the use of
office space, equipment and supplies, and general business advice to
new agents (and presumably to describe these types of assistance to
prospective purchasers as part of a sales pitch),\174\ one could argue
that the company would be covered by the Rule.\175\ The commenter
offered several suggested revisions to resolve this problem, one of
which was to specify that ``designated person'' does not include
entities that receive no payment from the purchaser in order to receive
the services provided.\176\ The Staff Report noted that alternate
resolutions were more appropriate--namely the modification to the
definitions of ``business opportunity'' and ``providing locations,
outlets, accounts, or customers,'' and recommended, therefore, that the
definition of ``designated person'' be adopted in the form proposed in
the RNPR. No comments in response to the Staff Report addressed this
definition, and the final Rule adopts the definition as recommended.
---------------------------------------------------------------------------
\173\ Primerica-RNPR at 11.
\174\ The MLM company compensates managers for this service;
there is no cost to down-line agents. Primerica-RNPR at 11.
\175\ Id.
\176\ Id. at 13.
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5. Section 437.1(e): Disclose or State
Section 437.1(e) of the final Rule defines ``disclose or state'' to
mean ``to give information in writing that is clear and conspicuous,
accurate, concise, and legible.'' \177\ The purpose of this definition
is to ensure that a prospective purchaser will receive complete
information in a form that a prospective purchaser easily can read. For
example, the furnishing of a disclosure document without punctuation or
appropriate
[[Page 76833]]
spacing between words would not be ``clear.'' Similarly, required
information such as the number and percentage of prior purchasers who
obtained a represented level of earnings would not be ``conspicuous''
if set in small type, printed in a low-contrast ink, or buried amid
extraneous information.
---------------------------------------------------------------------------
\177\ See FTC Policy Statement on Deception, appended to
Cliffdale Associates, Inc., 103 F.T.C. 110, 174 (1984) (discussing
the standard for clear and conspicuous disclosures).
---------------------------------------------------------------------------
The proposed definition of ``disclose or state'' received no
comment. The final definition, therefore, is adopted as proposed.
6. Section 437.1(f): Earnings Claim
The final Rule's key feature is the disclosure document, which
provides a potential purchaser of a business opportunity with five
items of material information, including written disclosure of all
``earnings claims'' made by the seller, before the purchaser pays any
money or executes a contract. This will allow a potential purchaser to
compare a seller's written representations with any oral
representations made. The term ``earnings claim'' is defined in the
final Rule as ``any oral, written, or visual representation to a
prospective purchaser that conveys, expressly or by implication, a
specific level or range of actual or potential sales, or gross or net
income or profits.'' \178\ This intentionally broad definition will
cover all variations of earnings representations that the Commission's
law enforcement experience shows are associated with business
opportunity fraud.\179\
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\178\ This definition is substantially similar to the Amended
Franchise Rule's definition of ``financial performance
representation,'' which is the Amended Franchise Rule's equivalent
of an earnings claim. See 16 CFR 436.1(e).
\179\ 71 FR at 19065.
---------------------------------------------------------------------------
For illustrative purposes, the definition includes two examples of
communications that constitute earnings claims. The first of these
examples describes common types of potentially fraudulent earnings
claims: ``A chart, table, or mathematical calculation that demonstrates
possible results based upon a combination of variables.'' This example
is intended to clarify that sales matrices that purport to show income
from an array of ``vends'' per day from a vending machine, for example,
would constitute an ``earnings claim'' under the final Rule.\180\
---------------------------------------------------------------------------
\180\ Id.
---------------------------------------------------------------------------
The second example incorporates the principle, as expressed in the
Interpretive Guides to the Original Franchise Rule, that ``any
statements from which a prospective purchaser can reasonably infer that
he or she will earn a minimum level of income'' constitute an earnings
claim.\181\ Given the prevalence of earnings claims in business
opportunity sales, the Commission believes that a broad earnings
disclosure requirement is necessary to prevent fraud. Therefore, the
final Rule is not limited to express earnings claims, but also includes
implied claims. Indeed, such implied claims are at least as likely to
mislead prospective purchasers as express claims.\182\ The final Rule's
definition includes three specific examples illustrative of this type
of earnings claim, as follows: ``Earn enough to buy a Porsche,'' ``earn
a six-figure income,'' and ``earn your investment back within one
year.'' Each of these three illustrative examples implies a minimum
value--the cost of the lowest priced Porsche in the first example; at
least $100,000 in the second; and an amount equal to the purchaser's
initial investment in the third. Accordingly, this language makes clear
that these types of representations are indistinguishable from direct,
express earnings claims.
---------------------------------------------------------------------------
\181\ 44 FR at 49982.
\182\ Interpretive Guides, 44 FR 49966.
---------------------------------------------------------------------------
Some commenters have argued that the definition of ``earnings
claim'' is overly broad and that the Commission should narrow the
definition.\183\ Earnings claims, however, lie at the heart of business
opportunity fraud and typically entice consumers into investing their
money. The Commission has determined that narrowing the definition of
``earnings claim'' could allow business opportunity sellers to avoid
disclosing critical information to prospective purchasers. Accordingly,
the definition of ``earnings claim,'' as proposed in the RPBOR and
recommended in the Staff Report, is adopted without change.
---------------------------------------------------------------------------
\183\ 73 FR at 16124.
---------------------------------------------------------------------------
7. Section 437.1(g): Exclusive Territory
This term is defined because it is referenced in Sec. 437.6(n),
which prohibits misrepresentations concerning territory exclusivity.
Representations about exclusive territories are material because they
purport to assure a potential purchaser that he or she will not face
competition from other purchasers of the same business opportunity in
his or her chosen location, or from the seller offering the same goods
or services through alternative channels of distribution.\184\
Exclusive territory promises go to the viability of the business
opportunity and to the level of risk entailed in the purchase.\185\
Indeed, misrepresentations about territories have commonly been made by
business opportunity sellers to lure consumers into believing that a
purchase poses little financial risk.\186\
---------------------------------------------------------------------------
\184\ See 71 FR at 19065.
\185\ Id.
\186\ E.g., FTC v. Vendors Fin. Serv., Inc., No. 98-1832 (D.
Colo. 1998); FTC v. Int'l Computer Concepts, Inc., No. 1:94CV1678
(N.D. Ohio 1994); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D.
Fla. 1993); FTC v. Am. Safe Mktg., No. 1:89-CV-462-RLV (N.D. Ga.
1989).
---------------------------------------------------------------------------
Section 437.1(g) of the final Rule defines the term ``exclusive
territory'' as ``a specified geographic or other actual or implied
marketing area in which the seller promises not to locate additional
purchasers or offer the same or similar goods or services as the
purchaser through alternative channels of distribution.'' This
definition reflects the common industry practice of establishing
geographically delimited territories--such as a city, county, or state
borders--as well as other marketing areas, such as those delineated by
population.\187\ The definition includes both representations that
other business opportunity purchasers will not be allowed to compete
with a new purchaser within the territory, as well as representations
that the business opportunity seller itself or other purchasers will
not compete with the new purchaser through alternative means of
distribution, such as through Internet sales.
---------------------------------------------------------------------------
\187\ 71 FR at 19065.
---------------------------------------------------------------------------
The definition also covers implied marketing areas, such as
representations that the seller or other operators will not compete
with the purchaser, without delineating a specific territory, or
stating a vague or undefined territory, such as ``in the metropolitan
area'' or ``in this region.'' If untrue, any of these kinds of
representations can mislead a prospect about the likelihood of his or
her success.\188\
---------------------------------------------------------------------------
\188\ Id.
---------------------------------------------------------------------------
The definition of ``exclusive territory'' received no comment.
Accordingly, the definition of ``exclusive territory,'' as proposed in
the RNPR and recommended in the Staff Report, is adopted without
change.
8. Section 437.1(h): General Media
The term ``general media'' appears in Sec. 437.4(b), which
prohibits business opportunity sellers from making unsubstantiated
earnings claims in the ``general media.'' \189\ Section 437.1(h) of
[[Page 76834]]
the final Rule defines ``general media'' to mean: ``Any instrumentality
through which a person may communicate with the public, including, but
not limited to, television, radio, print, Internet, billboard, Web
site, commercial bulk email, and mobile communications.'' \190\ Due to
the explosive growth of advertising through mobile devices, the Staff
Report recommended adding the phrase ``mobile communications'' to the
list of instrumentalities enumerated in the definition.\191\
---------------------------------------------------------------------------
\189\ This provision is based on an analogous provision in the
Amended Franchise Rule, 16 CFR 436.1(e). The Commission has
challenged allegedly unsubstantiated earnings claims made through
the general media in numerous cases, e.g., FTC v. Wealth Sys., Inc.,
No. CV 05 0394 PHX JAT (D. Ariz. 2005); United States v. Am. Coin-Op
Servs., Inc., No. 00-0125 (N.D.N.Y. 2000); United States v. Cigar
Factory Outlet, Inc., No. 00-6209-CIV-Graham-Turnoff (S.D. Fla.
2000); United States v. Emily Water & Beverage Co., Inc., No. 4-00-
00131 (W.D. Mo. 2000); and United States v. Greeting Card Depot,
Inc., No. 00-6212-CIV-Gold (S.D. Fla. 2000).
\190\ See Interpretive Guides, 44 FR at 49984-85 (earnings
claims made ``for general dissemination'' include ``claims made in
advertising (radio, television, magazines, newspapers, billboards,
etc.) as well as those contained in speeches or press releases'').
The Commission notes that the Interpretive Guides recognize several
exemptions to the general media claim, such as claims made to the
press in connection with bona fide news stories, as well as claims
made directly to lending institutions. Id. The Commission has
proposed that future Compliance Guides to the new Business
Opportunity Rule retain these standard general media claims
exemptions. See 71 FR at 19065.
\191\ Staff Report at 42-43.
---------------------------------------------------------------------------
The definition of general media recommended in the Staff Report
received no comment. The Commission has determined to adopt the staff's
recommendation and has therefore modified the definition of general
media to include mobile communications. Moreover, the definition of
general media is not intended to contain an exhaustive list of
instrumentalities, and other current (and future) types of mass
communication could also fall within the general media definition.
9. Section 437.1(i): Material
The term ``material'' is used in several sections of the final
Rule.\192\ Section 437.3(a)(4) of the final Rule requires sellers that
offer refunds and cancellations to ``state all material terms and
conditions of the refund or cancellation policy in an attachment to the
disclosure document.'' The term ``material'' is also used in other
provisions of the Rule. For example, under Sec. 437.2 (the obligation
to furnish written documents), it is a violation of the Rule for the
seller to fail to disclose the ``material'' information specified in
Sec. 437.3. Section 437.3, in turn, specifies the items of
``material'' information that must be disclosed. The definition of
``material'' at Sec. 437.1(i) was added to the final Rule because some
workshop participants expressed concern that Sec. 437.3(a)(4) as
originally proposed would not provide sellers with sufficient guidance
about the types of information that should be disclosed.\193\ In the
Staff Report, the staff recommended that ``material'' be defined to
mean as ``likely to affect a person's choice of, or conduct regarding,
goods or services.'' \194\ This definition is consistent with the
definition of ``material'' used in the Telemarketing Sales Rule
(``TSR'').\195\
---------------------------------------------------------------------------
\192\ See Sec. Sec. 437.1, 437.2, 437.3, 437.4, 437.6, 437.7,
and 437.8.
\193\ Morrissey, June 09 Tr at 41; Taylor, June 09 Tr at 43;
Cantone, June 09 Tr at 47.
\194\ Under the TSR, the Commission requires sellers to disclose
all material terms and conditions of the seller's refund policy if
the seller makes a representation about the refund policy. See 16
CFR 310.3(a)(1)(iii).
\195\ See 16 CFR 310.2(q) (defining ``material'' to mean
``likely to affect a person's choice of, or conduct regarding, goods
or services or a charitable contribution''); see also FTC Policy
Statement on Deception, appended to Cliffdale Associates, Inc., 103
F.T.C. 110, 174 (1984) (defining ``material'' misrepresentation or
practice to mean ``one which is likely to affect a consumer's choice
of or conduct regarding a product'').
---------------------------------------------------------------------------
The definition of ``material'' recommended in the Staff Report
received one comment.\196\ The commenter expressed concern that the
definition could be used by sellers as a potential loophole. The
commenter suggested that the definition effectively would permit a
seller to avoid disclosing the information required by the Rule by
arguing that such information is not likely to affect a buyer's
decision.\197\ The commenter further stated that if the Commission
retained the recommended definition, the Rule should contain the
following language: ``Even though this Rule imposes various
requirements for specific disclosures, sellers are permitted to
dispense with any disclosures which would not be likely to affect a
buyer's choice of, or conduct regarding goods or services.'' \198\
---------------------------------------------------------------------------
\196\ Dub-Staff Report.
\197\ Id. at 2-3.
\198\ Id. at 2.
---------------------------------------------------------------------------
The Commission disagrees with the commenter. The final Rule
mandates the disclosure of certain types of information, which the
Commission has determined are material to a purchaser's investment
decision.\199\ The language the commenter proposes does nothing to
close any perceived loophole. The Commission is not persuaded that the
commenter's suggested change will improve clarity. In fact, it may
obscure the definition. The Commission is persuaded by the Staff Report
that a definition of ``material'' is necessary and adopts the
definition as recommended.
---------------------------------------------------------------------------
\199\ See supra Section I.C.2 discussing the five substantive
disclosure items and why they are material to consumers.
---------------------------------------------------------------------------
10. Section 437.1(j): New Business
The term ``new business'' appears in the first of three
definitional elements of the term ``business opportunity.'' \200\
Section 437.1(j) of the final Rule defines ``new business'' as a
``business in which the prospective purchaser is not currently engaged,
or a new line or type of business.'' Because it is reasonable to assume
that a veteran businessperson may need the final Rule's protections as
much as a novice,\201\ the latter language of the definition covers the
sale of business opportunities to persons who may already be involved
in some type of business other than that which is being offered by the
seller.\202\
---------------------------------------------------------------------------
\200\ The first of the three definitional elements of a
``business opportunity'' is a ``solicitation to enter into a ``new
business.'' Section 437.1(c)(1). This element distinguishes the sale
of a business opportunity from the ordinary sale or products and
services. 71 FR at 19066.
\201\ 71 FR at 19066.
\202\ For example, an existing tire business owner could
purchase a vending machine route, or a beverage vending machine
route owner could purchase an envelope stuffing opportunity.
---------------------------------------------------------------------------
The proposed definition of ``new business'' received no comment.
Accordingly, the Commission adopts the definition of ``new business,''
as proposed in the RNPR and recommended in the Staff Report.
11. Section 437.1(k): Person
Section 437.1(k) of the final Rule defines the term ``person,'' a
term used in many of the final Rule's definitional or substantive
provisions.\203\ The Staff Report recommended that the term be defined
as ``an individual, group, association, limited or general partnership,
corporation, or any other entity.'' \204\
---------------------------------------------------------------------------
\203\ E.g., Sec. Sec. 437.1; 437.6(q).
\204\ This definition is consistent with the definition of the
term ``person'' in both the interim Business Opportunity Rule and
the Amended Franchise Rule. See 16 CFR 436.1(n); interim Business
Opportunity Rule 437.2(b).
---------------------------------------------------------------------------
The Commission received no comments related to the proposed
definition of ``person.'' The Commission adopts the definition of
``person'' as recommended in the Staff Report, with one slight
modification. To clarify that the term encompasses entities that are
businesses, the Commission added the word ``business'' to the last
clause of the definition. Accordingly, the final Rule defines the term
as ``an individual, group, association, limited or general partnership,
corporation, or any other business entity.'' \205\ The term ``person''
is to be read broadly to refer to natural persons, businesses,
associations, and other business entities. Where the Rule refers to a
natural person only, it uses the term ``individual.'' \206\
---------------------------------------------------------------------------
\205\ This definition is consistent with the definition of the
term ``person'' in the TSR. See 16 CFR 310.2(v).
\206\ 71 FR at 19066.
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[[Page 76835]]
12. Section 437.1(l): Prior Business
The final Rule requires sellers to disclose certain civil and
criminal actions against them, including actions against a ``prior
business of the seller.'' \207\ Section 437.1(l) of the final Rule
defines ``prior business'' to mean:
---------------------------------------------------------------------------
\207\ Sec. 437.3(a)(3).
---------------------------------------------------------------------------
(1) A business from which the seller acquired, directly or
indirectly, the major portion of the business' assets; or
(2) Any business previously owned or operated by the seller, in
whole or in part.
This definition is intended to include not only an entity from
which a seller acquired the major portion of the seller's assets, but
also businesses that the seller previously owned or operated.\208\ A
broad definition of ``prior business'' is necessary to capture all of a
seller's prior operations.\209\ The Commission's law enforcement
experience shows that sellers of fraudulent business opportunities
frequently ply their trade through multiple companies simultaneously or
sequentially, disappearing in order to avoid detection, and then
reemerging in some new form or in a different part of the country under
new names.\210\ The definition thus requires a more complete disclosure
of the seller's business history.
---------------------------------------------------------------------------
\208\ The definition of prior business is broader than the
definition of ``predecessor'' found in the Amended Franchise Rule,
which covers only an entity from which a seller acquired the major
portion of the seller's assets. See 16 CFR 436.1(p).
\209\ 71 FR at 19066.
\210\ E.g., FTC v. Nat'l Vending Consultants, Inc., No. 05-0160
(D. Nev. 2005); FTC v. Joseph Hayes, No. 4:96CV06126 SNL (E.D. Mo.
1996); FTC v. O'Rourke, No. 93-6511-CIV-Ferguson (S.D. Fla. 1993);
FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. La. 1989).
---------------------------------------------------------------------------
The final definition of ``prior business'' differs from the
definition included in the RPBOR.\211\ The Staff Report recommended
that the definition eliminate a reference to the prior businesses of
the seller's key personnel. Namely, the second prong of the original
definition defined prior business to include businesses owned or
operated by both the seller and the seller's key personnel.\212\ The
Commission agrees that this change is necessary for two reasons. First,
Sec. 437.3(a)(3)(i)(B) requires disclosure of legal actions pertaining
to a prior business ``of the seller,'' and so including the seller's
key personnel in the definition of ``prior business'' is confusing.
Second, Sec. 437.3(a)(3)(i)(C) separately requires disclosure of legal
actions pertaining to the seller's key personnel, namely, ``the
seller's officers, directors, sales managers, or by any other
individual who occupies a position or performs a function similar to
that of an officer, director, or sales manager of the seller.'' The
change, therefore, does not affect the scope of the required disclosure
of legal actions, but rather clarifies a term that is otherwise
confusing and somewhat redundant. Accordingly, the Commission adopts
the definition of ``prior business'' with the modification recommended
by the staff.
---------------------------------------------------------------------------
\211\ Proposed Sec. 437.1(k) of the RPBOR would have defined
``prior business'' to mean:
(1) A business from which the seller acquired, directly or
indirectly, the major portion of the business' assets, or
(2) Any business previously owned or operated by the seller, in
whole or in part, by any of the seller's officers, directors, sales
managers, or by any other individual who occupies a position or
performs a function similar to that of an officer, director, or
sales manager of the seller.
\212\ Id.
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13. Section 437.1(m): Providing Locations, Outlets, Accounts, or
Customers
The definition of ``providing locations, outlets, accounts, or
customers'' relates to the third prong of the ``business opportunity''
definition, which sets forth the types of assistance the seller
represents it will provide to the purchasers of its business
opportunity.\213\ The Commission's law enforcement history shows that
fraudulent business opportunity sellers often falsely promise to assist
purchasers in obtaining key elements necessary for the success of the
proposed business: A source of customers, locations, outlets, or
accounts. For example, deceptive representations concerning location
assistance are the hallmark of fraudulent vending machine and rack
display opportunities,\214\ while deceptive representations concerning
the provision of accounts or customers are typical of medical billing
schemes.\215\ In such schemes, the seller itself may purport to secure
locations, outlets, accounts, or customers, or may represent that third
parties will do so. Therefore, the final Rule defines ``providing
locations, outlets, accounts, or customers'' as:
---------------------------------------------------------------------------
\213\ See Sec. 437.1(c)(3).
\214\ E.g., FTC v. Am. Entm't Distribs., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Advanced Pub. Commc'ns Corp., No.
00-00515-CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Ameritel
Payphone Distribs., Inc., No. 00-0514-CIV-Gold (S.D. Fla. 2000); FTC
v. Mktg. and Vending Concepts, No. 00-1131 (S.D.N.Y. 2000).
\215\ E.g., FTC v. Mediworks, Inc., No. 00-01079 (C.D. Cal.
2000); FTC v. Home Professions, Inc., No. 00-111 (C.D. Cal. 2000);
FTC v. Data Med. Capital, Inc., No. SACV-99-1266 (C.D. Cal. 1999);
see also FTC v. AMP Publ'ns, Inc., No. SACV-00-112-AHS-ANx (C.D.
Cal. 2000).
furnishing the prospective purchaser with existing or potential
locations, outlets, accounts, or customers; requiring, recommending,
or suggesting one or more locators or lead generating companies;
providing a list of locator or lead generating companies; collecting
a fee on behalf of one or more locators or lead generating
companies; offering to furnish a list of locations; or otherwise
assisting the prospective purchaser in obtaining his or her own
locations, outlets, accounts, or customers, provided, however, that
advertising and general advice about business development and
training shall not be considered as ``providing locations, outlets,
accounts, or customers.'' \216\
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\216\ The proposed definition was intended to capture offers to
provide locations that have already been found, as well as offers to
furnish a list of potential locations; and includes not only
directly furnishing locations, but also ``recommending to
prospective purchaser specific locators, providing lists of locators
who will furnish the locations, and training or otherwise assisting
prospects in finding their own locations.'' 71 FR at 19066.
The proviso, underscored above, has been added to the definition
put forth in the RNPR. As originally proposed in the INPR, the
definition ended immediately after the clause ``otherwise assisting the
prospective purchaser in obtaining his or her own locations, outlets,
accounts, or customers.'' In the RNPR, however, the Commission stated
that in interpreting this unqualified clause, it would ``continue to
apply its longstanding analysis, which considers the kinds of
assistance the seller offers and the significance of that assistance to
the prospective purchaser (e.g., whether the assistance is likely to
induce reliance on the part of the prospective purchaser).'' \217\ In
the RNPR, the Commission solicited comment on three issues related to
the ``otherwise assisting'' clause of the definition: (1) Whether the
``otherwise assisting'' clause adequately covered all of the business
opportunity arrangements that should be within the scope of the rule;
(2) whether inclusion of the ``otherwise assisting'' clause in the
definition would cause traditional product distribution arrangements,
educational institutions, or how-to books to be subject to the Rule;
and (3) whether the clause would result in the inclusion of multi-level
marketing relationships that otherwise would not be covered by the
Rule.\218\
---------------------------------------------------------------------------
\217\ 73 FR at 16124.
\218\ Id. at 16133.
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The majority of commenters who addressed this definition in
response to the RNPR focused on when the ``otherwise assisting'' clause
of the definition would be triggered. Commenters from the MLM industry
[[Page 76836]]
were concerned that various types of optional or no-cost assistance
that MLM companies frequently offer their sales representatives could
be considered to be ``otherwise assisting.'' \219\ These include such
things as general advice and training about how to succeed in a new
business venture,\220\ general advertising for the purpose of promoting
the MLM's products or services,\221\ occasional ad hoc referrals from
consumers who contact the company directly,\222\ and optional business
tools, such as web templates and links to corporate Web sites that some
MLM companies offer for sale to its sales representatives.
Additionally, one commenter expressed concern that because of this
open-ended clause, sellers of general training services, such as
training on how to start a new business and advice about how to obtain
customers, would be covered by the Rule.\223\
---------------------------------------------------------------------------
\219\ E.g., DSA-RNPR at 5 (tools are intended to maintain brand
uniformity and promote effective customer service).
\220\ E.g., Primerica-RNPR at 5 (provides advice and training
about how to identify potential customers and how to make effective
sales presentations); Tupperware-RNPR at 4 (provides training about
how new representatives can develop own customer bases); Venable-
RNPR.
\221\ DSA-RNPR at 4 (5/27/2008); Primerica-RNPR at 6.
\222\ E.g., Avon-RNPR at 3 (noting that this practice is
designed to help potential customers find a sales representative,
not to help sales representatives find potential customers); Mary
Kay-RNPR at 7 (suggesting that merely providing the ability to
search for a sales associate on the company's Web site should not
trigger the ``providing locations'' factor of the ``business
opportunity'' definition); DSA-RNPR at 5; Melaleuca-RNPR at 2.
\223\ Venable-RNPR at 2.
---------------------------------------------------------------------------
Commenters made a number of suggestions to cure what they perceived
to be the overbreadth of this provision. Some commenters suggested
omitting the word ``customers'' from the ``otherwise assisting''
provision and the corresponding provisions of the ``business
opportunity'' definition.\224\ Other commenters recommended that the
definition distinguish customers from ``near customers'' so as to
exclude the provision of potential customers or businesses that the
seller obtains from publicly available records.\225\ Others suggested
adding a statement that no-cost general business advice is not
``providing customers.'' \226\ Another commenter suggested adding a new
clause to the definition of business opportunity that would create an
exception when the assistance offered by the seller is limited to
advice or training.\227\ Some commenters suggested eliminating the
concept of ``potential customers'' from the scope of the ``otherwise
assisting'' language.\228\ Finally, one commenter suggested revising
the definition of ``business opportunity'' to require that the seller's
assistance in providing outlets, accounts or customers be a ``material
inducement'' to the purchaser.\229\
---------------------------------------------------------------------------
\224\ DSA-RNPR at 5; Venable Rebuttal-RNPR at 3; Primerica-RNPR
at 5.
\225\ Venable-RNPR.
\226\ Primerica-RNPR at 8; Tupperware-RNPR at 6; Avon-RNPR; Mary
Kay-RNPR.
\227\ Pre-Paid Legal-RNPR.
\228\ Mary Kay-RNPR at 7 (as an alternative Mary Kay suggests
that in the commentary to the Final Rule, the Commission make clear
that passing on ad hoc referrals of customers who contact the
company directly would not trigger this provision).
\229\ Melaleuca-RNPR.
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The Staff Report noted a concern with narrowing the definition in
the ways the commenters suggested, because it would allow promoters of
fraudulent schemes to craft their sales pitches carefully to evade the
Rule. The staff disagreed with commenters who recommended excising the
word ``customers'' from the definition or diluting it in some fashion.
Instead, the Staff Report recommended that the Commission continue its
long-standing policy of analyzing the significance of assistance in the
context of the of the specific business opportunity, focusing on
whether the seller's offer is ``reasonably likely to have the effect of
inducing reliance on [the seller] to provide a prepackaged business.''
\230\
---------------------------------------------------------------------------
\230\ Staff Advisory Opinion 95-10, Business Franchise Guide
(CCH) ] 6475 (1995).
---------------------------------------------------------------------------
While urging that the word ``customers'' remain in the definition,
the Staff Report did recommend new qualifying language to address the
concern that the definition could be read more broadly than intended.
Specifically, the Staff Report recommended adding a short proviso to
the ``otherwise assisting'' clause as follows: ``provided, however,
that advertising and general advice about business development and
training shall not be considered as `providing locations, outlets,
accounts, or customers.' '' \231\
---------------------------------------------------------------------------
\231\ For example, this new proviso was designed to make clear
that giving advice about how to demonstrate products, complete
product order forms and how to process returns (Tupperware-RNPR); or
providing product advertising in the general media and training in
customer and business development (Primerica-RNPR), would not be
considered as ``providing locations, outlets, accounts, and
customers.''
---------------------------------------------------------------------------
The language recommended in the Staff Report received two comments.
DOJ strongly agreed that ``customers'' should remain in the definition,
noting that the allure of a business opportunity is the purported ready
cash flow to the purchaser, which can come either from locations or
customers, depending on the nature of the opportunity being
offered.\232\ DOJ also agreed with the staff's recommendation to
include the proviso, but objected to further narrowing of coverage,
arguing that any loophole would be vigorously exploited by fraudulent
business opportunity sellers.\233\ Tupperware similarly encouraged the
Commission to adopt the proviso as recommended, stating that the
proviso will allow businesses to continue to provide general business
advice and training without the risk of inadvertently falling under the
aegis of the Rule.\234\
---------------------------------------------------------------------------
\232\ DOJ-Staff Report at 1-2.
\233\ Id. at 2.
\234\ Tupperware-Staff Report at 2.
---------------------------------------------------------------------------
The Commission is persuaded by the Staff Report's recommendation
not to eliminate the word ``customers'' from the ``otherwise
assisting'' clause of the definition, and to add qualifying language to
the definition to tailor coverage more appropriately. Providing the
prospective purchaser with assistance in obtaining customers is a
feature common to many business opportunities and should be included in
the definition. For instance, in the cases the Commission has brought
against medical billing opportunities, it is typical for sellers to
offer to provide assistance to the potential purchaser in finding
customers for the medical billing service.\235\ Although the RNPR made
clear that the ``otherwise assisting'' provision of the definition was
not intended to apply to advertising, no-cost offers of general
business advice, and training described by the various commenters,\236\
the qualifying language is necessary to prevent the definition from a
broader reading than the Commission intends. The final Rule, therefore,
contains the proviso recommended in the Staff Report.
---------------------------------------------------------------------------
\235\ See, e.g., FTC v. Med. Billers Network, Inc., No. 05-CV-
2014 (S.D.N.Y. 2005); FTC v. Med.-Billing.com, Inc., No. 3-
02CV0702CP (N.D. Tex. 2002); FTC v. Electronic Med. Billing, Inc.,
No. SACV02-368 AHS (C.D. Cal. 2002); see also FTC v. Star Publ'g
Group, Inc., No. 00cv-023D (D. Wyo. 2000) (offering to everything
necessary to earn money processing HUD refunds); FTC v. AMP Publ'ns,
Inc., SACV-00-112-AHS-Anx (C.D. Cal. 2000) (offering to provide list
of companies in need of consumer's home-based computer services).
\236\ 73 FR at 16123.
---------------------------------------------------------------------------
14. Section 437.1(n): Purchaser
The final Rule defines the term ``purchaser'' to mean ``a person
who buys a business opportunity.'' By operation of the definition of
``person,'' \237\ a natural person, as well as any other entity, would
qualify as a business opportunity purchaser. The definition of
``purchaser'' received no
[[Page 76837]]
comment, and the final Rule includes the definition as proposed.
---------------------------------------------------------------------------
\237\ Section 437.1(k).
---------------------------------------------------------------------------
15. Section 437.1(o): Quarterly
To ensure accuracy and reliability of disclosures, Sec. 437.3
(instructions for completing the disclosure document) requires sellers
to revise their disclosures at least ``quarterly.'' \238\ The
definition of ``quarterly'' sets forth a bright line rule that is easy
to follow and that ensures uniformity of disclosures: ``Quarterly''
means ``as of January 1, April 1, July 1, and October 1.'' Thus, the
final Rule requires sellers to update their disclosure by those
specific dates each year. The definition of ``quarterly'' received no
comment, and the final Rule includes the definition as proposed.
---------------------------------------------------------------------------
\238\ Section 437.3(b) requires that until a seller has at least
10 purchasers, the list of references must be updated monthly.
---------------------------------------------------------------------------
16. Section 437.1(p): Required Payment
Under the final Rule's definition of ``business opportunity,'' the
Rule reaches only those opportunities where the prospective purchaser
of a business opportunity makes a ``required payment'' to the seller.
Section 437.1(p) of the final Rule defines a ``required payment'' to
mean:
all consideration that the purchaser must pay to the seller or an
affiliate, either by contract or by practical necessity, as a
condition of obtaining or commencing operation of the business
opportunity. Such payment may be made directly or indirectly through
a third party. A required payment does not include payments for the
purchase of reasonable amounts of inventory at bona fide wholesale
prices for resale or lease.
The final definition of ``required payment'' is the same as proposed in
the RNPR and is substantially similar to that employed in the Amended
Franchise Rule. It differs in that it includes language that reaches
situations where a payment is made directly to a seller or indirectly
through a third party. The RPBOR included this definition because
without such a modification, fraudulent business opportunity sellers
could circumvent the Rule by requiring payment to a third party with
which the seller has a formal or informal business relationship.\239\
---------------------------------------------------------------------------
\239\ 73 FR at 16122.
---------------------------------------------------------------------------
The last sentence of the definition excludes payments for
reasonable amounts of inventory at bona fide wholesale prices.\240\
This effectuates the Commission's determination articulated in the
RNPR, that traditional product distribution arrangements should not be
covered by the Business Opportunity Rule.\241\ Manufacturers,
suppliers, and other traditional distribution firms ``have relied
solely on the bona fide wholesale price exclusion to avoid coverage as
a franchise.'' \242\
---------------------------------------------------------------------------
\240\ The inventory exemption was originally set forth by the
Commission in its 1979 Final Interpretative Guide to the Franchise
Rule. 44 FR at 49967. The rationale for excluding payments for
inventory was to exclude ``[a]gency relationships in which
independent agents, compensated by commission, sell goods or
services'' (e.g., insurance salespersons). Id at 49967-68.
\241\ 73 FR at 16122.
\242\ Id.
---------------------------------------------------------------------------
The IPBOR had eliminated this inventory exemption in an attempt to
bring pyramid schemes that engaged in ``inventory loading'' within the
ambit of the Rule.\243\ Several commenters contended that the IPBOR
would have regulated a wide range of legitimate and traditional product
distribution arrangements that were not associated with the types of
fraud that business opportunity laws are designed to remedy. For
example, one commenter suggested that the IPBOR could be read to cover
product distribution through retail stores simply because the retailer
pays for inventory.\244\ This commenter suggested that its business
operations would meet the IPBOR's definition of business opportunity
because, among other reasons, the ``payment'' prong of the definition
did not exempt voluntary purchases of inventory.\245\
---------------------------------------------------------------------------
\243\ 71 FR at 19055. Inventory loading occurs when a company's
incentive program forces recruits to buy more products than they
could ever sell, often at inflated prices. If this occurs throughout
the company's distribution system, the people at the top of the
pyramid reap substantial profits, even though little or no product
moves to market.
\244\ 73 FR at 16113-14.
\245\ Id.
---------------------------------------------------------------------------
Because the application of the IPBOR to these types of arrangements
was unintended, the RPBOR narrowed the definition of ``business
opportunity'' by clarifying that a ``required payment'' does not
include payments for the purchase of reasonable amounts of inventory at
bona fide wholesale prices.\246\ Moreover, in the RNPR, the Commission
determined that challenging deceptive pyramid schemes in targeted law
enforcement actions brought under Section 5 of the FTC Act is a more
cost-effective approach than attempting to address pyramid schemes
through the elimination of the inventory exemption as proposed in the
IPBOR.\247\
---------------------------------------------------------------------------
\246\ Id. at 16114.
\247\ 73 FR at 16122.
---------------------------------------------------------------------------
In response to the RNPR, MLM industry commenters urged the
Commission to expand the inventory exemption additionally to exempt
sales of business materials, supplies, and equipment to purchasers on a
not-for-profit basis.\248\ Commenters stated that the MLM business
model often requires that new sales representatives purchase materials,
supplies, or equipment to facilitate his or her sales to
consumers.\249\ At least one commenter also noted that individuals
sometimes pay to become sales consultants solely to obtain the products
that are part of the company's sales kit for personal use at less than
retail cost.\250\ These commenters argued that without expanding the
exemption, MLMs would be swept within the scope of the Rule.\251\
---------------------------------------------------------------------------
\248\ Commenters suggested various ways to expand the exemption.
See DSA-RNPR at 4 (recommending that the exemption include
``business materials, supplies, and equipment sold on a not-for-
profit basis''); Mary Kay-RNPR at 2 (same); Avon-RNPR at 2
(exemption should extend to ``sales aid or kits at cost'');
Tupperware-RNPR at 4 (required payment should not include payments
for the purchase of reasonable amounts of inventory at bona fide
wholesale prices, which may be used for resale, lease or display, or
payments for products for personal use). Also, one commenter
expressed concern that under the proposed definition, voluntary
payments made to third parties unaffiliated with the seller for
items or equipment to be used in a purchaser's business could be
considered a ``required payment.'' See IBA-RNPR at 4. The Commission
disagrees. By its very words, the definition is not intended to
capture payments of the type described by the commenter, as such
payments are not made directly or indirectly to the seller.
\249\ DSA-RNPR at 4; Tupperware-RNPR at 2 (explaining that it
requires purchase of a starter Business Kit that contains a
selection of Tupperware products sold below retail value for
demonstration at parties); Mary Kay-RNPR at 4 (initial sales kit,
sold to consultant at below cost, is used to demonstrate products to
customers); Avon-RNPR at 2 (sales kits, which explain business
fundamentals and provide necessary equipment such as sales
brochures, sales receipts, a tote bag, and product samples, are sold
to independent sales representatives without a profit).
\250\ Tupperware-RNPR at 2 (products in starter Business Kit
sold to sales consultants for $79 or $129 have retail value of $350
and $550 respectively).
\251\ DSA-RNPR; Mary Kay-RNPR; Tupperware-RNPR; Pre-Paid Legal-
RNPR.
---------------------------------------------------------------------------
The Staff Report noted these concerns, but opined that they were
misplaced and that the suggested changes to the definition of
``required payment'' were unnecessary.\252\ The staff recognized,
however, that without making the changes suggested by the commenters,
some MLM companies could indeed meet the ``required payment'' prong of
the business opportunity definition.\253\ But, as noted previously, in
order to be covered by the Rule, an entity must meet each of the three
definitional components of the term ``business opportunity.'' \254\
Meeting one prong is insufficient to come within the scope of the Rule.
[[Page 76838]]
Furthermore, the other clarifications and changes to the definitions of
``business opportunity'' and ``providing locations, outlets, accounts,
or customers'' under the final Rule tailor coverage appropriately, and
make the additional suggested changes to the ``required payment''
definition unnecessary. Accordingly, the Staff Report recommended that
the definition of ``required payment'' be adopted in the form proposed
in the RNPR.\255\
---------------------------------------------------------------------------
\252\ Staff Report at 58.
\253\ Id. at 57.
\254\ Id. Those components are: (1) A solicitation to enter into
a new business; (2) a required payment made to the seller; and (3) a
representation that the seller will provide assistance in the form
of securing locations, securing accounts, or buying back goods
produced by the business. Id. at n.186.
\255\ Id.
---------------------------------------------------------------------------
Moreover, the Commission is concerned that expanding the exemption
as the commenters suggested would create enforcement problems. For
example, when a ``required payment'' includes both an inventory and
non-inventory component, it would be difficult to determine whether
non-inventory products--such as sales kits or display-related
materials--were, in fact, being sold to purchasers at less than the
seller's cost. Finally, the suggested changes could have the unintended
effect of allowing some fraudulent business operators to be excluded
from the Rule's coverage.\256\
---------------------------------------------------------------------------
\256\ For example, in United States v. Universal Adver., Inc.,
No. 1:06-cv-152-DAK (D. Utah 2006), the fraudulent business
opportunity seller told purchasers they could earn significant money
by signing up business owners to pay monthly fees to display their
business cards in rack display ``profit centers.'' In that case, the
entire purchase cost went towards the rack display profit centers,
which could be characterized as ``display-related materials.''
---------------------------------------------------------------------------
In response to the Staff Report, the Commission received one
comment addressing the ``required payment'' definition. The commenter
set forth the same suggestion it had provided in response to the RNPR--
that a ``required payment'' should not include situations where the
seller agrees to buy back from the purchaser any unused inventory
within 12 months of purchase for at least 90 percent of the purchaser's
cost.\257\ The commenter, a large MLM company, continued to argue that
incorporating this change into the definition of ``required payment''
would assist in creating regulatory certainty that the Rule would not
cover this situation. The commenter disagreed with one of the
justifications given in the Staff Report for urging no modification of
the definition--namely, that satisfying the ``required payment''
definition, by itself, is insufficient to bring an entity within the
scope of the Rule. The commenter argued that legitimate companies that
might satisfy the ``required payment'' prong have too much at stake to
rely on one of the other two prongs of the ``business opportunity''
definition to avoid coverage under the Rule.\258\
---------------------------------------------------------------------------
\257\ Tupperware-Staff Report at 3.
\258\ Id.
---------------------------------------------------------------------------
This argument is not persuasive. The definition of ``required
payment'' already excludes payments for the purchase of inventory at
bona fide wholesale prices. To the extent that the business opportunity
seller offers inventory at prices above wholesale, such a payment would
generate profit to the seller. If the Rule were modified to exempt
payments for inventory not just at wholesale but also retail prices,
such a change would give sellers an incentive to structure their
payment schemes to require only payment for inventory, in order to
avoid coverage by the Rule. Moreover, granting an exemption to sellers
that offer to buy back some percentage of unused inventory within 12
months is problematic in light of the Commission's experience that
fraudulent business opportunity sellers could go out of business,
change names, or disappear during that time.\259\ Accordingly, the
final Rule incorporates the definition of ``required payment'' as
recommended in the Staff Report.
---------------------------------------------------------------------------
\259\ See DOJ-Staff Report at 2 (noting that many business
opportunities begin and end within a short period of time).
---------------------------------------------------------------------------
17. Section 437.1(q): Seller
The final Rule defines the term ``seller'' to mean: ``A person who
offers for sale or sells a business opportunity.'' Like the
``purchaser'' definition, it contemplates that both natural persons and
entities may be business opportunity sellers.\260\ The definition of
``seller'' is unchanged from the INPR, received no comment, either in
response to the RNPR or the Staff Report, and the final Rule adopts the
definition as recommended in the Staff Report.
---------------------------------------------------------------------------
\260\ 71 FR at 19067.
---------------------------------------------------------------------------
18. Section 437.1(r): Signature or Signed
Under Sec. 437.3(a)(6) of the final Rule, business opportunity
sellers are required to attach a duplicate copy of the disclosure
document, which is to be signed and dated by the purchaser. A
designation for the signature and date is included at the bottom of the
disclosure document. The Staff Report recommended adding a definition
of ``signature'' to the Rule to clarify that a signature may include
any electronic or digital form of signature to the extent that such
signatures are valid under applicable law.\261\ The recommended
definition of ``signature'' received no comment.
---------------------------------------------------------------------------
\261\ Staff Report at 59.
---------------------------------------------------------------------------
As recommended in the Staff Report, Sec. 437.1(r) of the final
Rule states: ``Signature or signed'' means ``a person's affirmative
steps to authenticate his or her identity.'' It includes a person's
handwritten signature, as well as an electronic or digital form of
signature to the extent that such signature is recognized as a valid
signature under applicable federal law or state contract law.'' \262\
This definition effectively permits business opportunity sellers to
comply with the Rule electronically, consistent with the Electronic
Signatures in Global and National Commerce Act, 15 U.S.C. 7001,\263\
and is consistent with other rules enforced by the FTC.\264\ For
example, a seller could obtain the digital signature of a purchaser by
providing the disclosure document to the purchaser as a word processing
document and require the purchaser to type his or her name into the
form in the space provided for the signature. Alternatively, the seller
could direct the purchaser to a web page that contains an electronic
version of the disclosure document and require the purchaser to input
his or her name before submitting the web-based form electronically.
---------------------------------------------------------------------------
\262\ This definition is consistent with the definition of
signature in the TSR. See 16 CFR 310.3(a)(3).
\263\ See 71 FR at 19067 n.142.
\264\ See TSR, 16 CFR 310.3(a)(3)(i); Amended Franchise Rule, 16
CFR 436.3(u) (containing similar definitions).
---------------------------------------------------------------------------
19. Section 437.1(s): Written or In Writing
The final Rule, like the version proposed in the INPR, defines the
terms ``written'' or ``in writing,'' which are used throughout the Rule
\265\ as ``any document or information in printed form or in any form
capable of being downloaded, printed, or otherwise preserved in
tangible form and read. It includes: type-set, word processed, or
handwritten documents; information on computer disk or CD-ROM;
information sent via email; or information posted on the Internet. It
does not include mere oral statements.'' This definition is designed to
capture information stored on computer disks, CD-ROMs, or through new
or emerging technologies, as well as information sent via email or
posted on the Internet. Nevertheless, the definition seeks a balance,
attempting to minimize compliance costs while at the same time
preventing fraud. To that end, the definition would make clear that all
electronic media must be in a form ``capable of being downloaded,
printed, or otherwise preserved in tangible form and read,'' thus
ensuring that a prospective purchaser who receives disclosures
electronically can
[[Page 76839]]
read them, share them with an advisor, and retain them for future
use.\266\
---------------------------------------------------------------------------
\265\ E.g., Sec. Sec. 437.2, 437.3(a), 437.4(a).
\266\ 71 FR at 19067.
---------------------------------------------------------------------------
In response to the Staff Report, one commenter expressed concern
that the Rule would be overly burdensome if electronic compliance were
not permitted.\267\ As discussed above, however, the definition of
``written'' or ``in writing'' and the definition of ``signature'' or
``signed'' each makes clear that sellers can comply with the Rule
electronically.\268\ Thus, the Commission adopts the definition as
recommended in the Staff Report.
---------------------------------------------------------------------------
\267\ NG Franchise-Staff Report.
\268\ See also supra note 261.
---------------------------------------------------------------------------
B. Section 437.2: The Obligation To Furnish Written Documents
The next section of the Rule, Sec. 437.2, imposes a core
requirement of the Rule--the obligation of sellers to furnish
prospective purchasers with a single-page disclosure document before
purchasers execute a contract or pay any money. As noted previously,
the disclosure document required under the Original Franchise Rule and
interim Business Opportunity Rule was often extremely lengthy,
cumbersome, and in some ways ill-suited to business opportunity
transactions. Through the INPR and the RNPR, the Commission sought to
simplify and streamline this document in order to make the disclosures
more meaningful to consumers.
The disclosure document mandated by Sec. 437.2 must be furnished
at least seven calendar days before one of two events: Either (1) the
execution of any contract in connection with the business opportunity
sale; or (2) the payment of any consideration to the seller.\269\ This
provision is intended to ensure a uniform standard for determining when
sellers must furnish disclosures before potential purchasers must put
their money at risk. Section 437.2 clarifies that ``payment to the
seller'' refers to payments made either directly to the seller, or
indirectly through a third party, such as a broker, lead generator, or
locator.
---------------------------------------------------------------------------
\269\ Section 437.1(s) allows the disclosure document to be
provided to purchasers electronically, such as by posting in on the
Internet, sending it via email, etc. Providing the disclosure
document through one of these alternative methods does not, however,
relieve the seller of the obligation to obtain and maintain copies
of signed and dated disclosure documents provided to purchasers.
---------------------------------------------------------------------------
The seven calendar-day period was modeled on the Original Franchise
Rule's requirement that sellers furnish prospective purchasers with a
completed copy of the disclosure document at least ten business days
before a potential purchaser pays any fee or executes any agreement in
connection with the sale.\270\ In the INPR, the Commission proposed
shortening the period of time business opportunity sellers would be
required to provide the disclosures to potential purchasers.\271\ The
Commission determined that seven calendar days is sufficient time to
enable a prospective purchaser to review the information contained on
the simplified and streamlined basic disclosure document and any
earnings claims statements, as well as to conduct a due diligence
review of the offering, including contacting references.\272\ The seven
day time period was proposed in the RNPR.\273\
---------------------------------------------------------------------------
\270\ See 71 FR at 19067. When the Original Franchise Rule was
amended, the time period was extended to 14 calendar days. The
interim Business Opportunity Rule maintained the 10 business-day
period. See 72 FR at 15468, 15570.
\271\ See 71 FR at 19067.
\272\ Id.
\273\ See 73 FR at 16134.
---------------------------------------------------------------------------
Only one comment received in response to the RNPR addressed this
provision. The commenter argued, without providing any evidence, that
imposing a ``waiting period'' of any length before a prospective
purchaser signs a binding agreement or makes a payment to a seller
would chill the sale of legitimate business opportunities.\274\ The
Commission is not persuaded by this assertion, as both the Original
Franchise Rule and interim Business Opportunity Rule have waiting
periods in excess of seven days.\275\ Furthermore, a waiting period is
particularly necessary in the sale of business opportunities, where
consumers are often rushed into making investment decisions.\276\ No
Staff Report comments addressed this provision. The Commission
concludes that seven calendar days is sufficient time for purchasers to
review the disclosure information and to conduct due diligence, and
adopts Sec. 437.2 as recommended in the Staff Report.
---------------------------------------------------------------------------
\274\ Planet Antares-RNPR at 13-14.
\275\ See 16 CFR 436.2(a) (fourteen calendar days); Sec.
437.2(g) of the interim Business Opportunity Rule (ten business
days).
\276\ See, e.g., FTC v. Bus. Card Experts, Inc., No. 06-CV-4671
(PJS/RLE) (D. Minn. 2006) (representatives told consumers they must
invest within one or two weeks in order to take advantage of special
``promotional'' rate).
---------------------------------------------------------------------------
C. Section 437.3: Disclosure Document
Section 437.3(a) of the final Rule instructs business opportunity
sellers how to prepare the basic disclosure document, identifies the
categories of required disclosure, and specifies what information must
be included in each of these categories. Section 437.3(a) requires that
sellers provide prospective purchasers with information about the
seller, the seller's litigation history, any cancellation and refund
policy, any earnings claims, and references ``in the form and using the
language set forth in Appendix A'' to the Rule. In addition, the final
Rule adds a clause to Sec. 437.3(a) requiring that if the offer for
sale, sale, or promotion of a business opportunity is conducted in
Spanish, the seller must provide the Spanish version of the disclosure
document (Appendix B to the Rule) and provide any required disclosures
in Spanish. For sales conducted in a language other than English or
Spanish, the seller must use the form and an accurate translation of
the language set forth in Appendix A.
All disclosures, regardless of the language they are in, must be
presented in a ``single written document.'' The Commission concludes
that the single written document requirement is necessary to ensure
that disclosures are not furnished in piecemeal fashion that easily
could be overlooked or lost.\277\ In addition, requiring that the
disclosure information be presented in the specified format will
prevent sellers from circumventing the Rule by presenting damaging
information in a format that is not sufficiently prominent to be
noticed or understood, or that is not readily accessible.\278\ Failure
to follow the form and language of the appropriate disclosure document
would constitute a violation of Section 5 of the FTC Act.\279\
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\277\ 71 FR at 19067.
\278\ See id.
\279\ See Sec. 437.3(a).
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Section 437.3(a)(6) requires that a seller provide the potential
purchaser with two copies of the disclosure document, one of which is
for the prospective purchaser to sign, date, and return to the seller
to maintain in accordance with Sec. 437.7. Section 437.3(b) specifies
that it is an unfair or deceptive practice and a violation of Section 5
of the FTC Act for a seller to fail to update the required disclosures
at least quarterly to reflect changes in the five required categories
of information, provided, however, that the list of references must be
updated monthly, until the seller has 10 purchasers, after which
quarterly updates are required.
The sections that follow discuss the evolution of the disclosure
document's format and substance, the commentary received about the
disclosure document, further revisions to the document recommended in
Staff Report, and the Commission's analysis of the comments and
recommendations.
[[Page 76840]]
1. The Format of the Disclosure Document
a. Background
As noted above, a major goal of this rulemaking has been to
streamline the lengthy disclosure document that was appropriate in the
sale of business format franchises, but ill-suited to the sale of
traditional business opportunities. The interim Business Opportunity
Rule, modeled on the Original Franchise Rule, required sellers to make
more than 20 separate disclosures to potential purchasers.\280\
Requiring sellers to make these extensive disclosures imposes
significant compliance costs on covered businesses, and many of the
disclosures, which are material in the context of franchise sales are
not well-suited to business opportunity sales. The final Rule aims to
strike the proper balance between prospective purchasers' need for pre-
sale disclosure and the burden imposed on those selling business
opportunities.\281\
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\280\ These include but are not limited to information about the
seller; the business background of its principals and their
litigation and bankruptcy histories; the terms and conditions of the
offer; statistical analyses of existing franchised and company-owned
outlets; prior purchasers, including the names and addresses of at
least 10 purchasers nearest the prospective buyer; and audited
financial statements. Additional disclosure and substantiation
provisions apply if the seller chooses to make any financial
performance representations.
\281\ 73 FR at 16130-32.
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Thus, the Commission proposed a single-page disclosure document
both in the INPR and the RNPR. The Commission invited public comment
about the form, including whether the overall presentation of
information could be improved to make it more useful and
understandable, and whether the substantive disclosure sections would
capture the information that would most benefit potential
purchasers.\282\ The Commission received no comments in response to
this request.
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\282\ Id. at 16132-33.
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The Commission engaged a consultant with expertise in document
design and comprehension to evaluate the proposed disclosure document
to ensure that it adequately conveyed to consumers information material
to the prospective business opportunity, and to determine whether the
overall presentation of the information in the proposed document could
be improved to make it more useful and understandable.\283\ Following
publication of the initial proposed disclosure document, the consultant
conducted extensive consumer testing that resulted in the revised
proposed disclosure document that the Commission concluded
substantially improved both the layout and the wording of the
form.\284\
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\283\ See generally Macro Report.
\284\ 74 FR at 18714-15.
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Some of the changes suggested by the consultant included: Changing
the title of the form from ``Business Opportunity Disclosures'' to
``Disclosure of Important Information about Business Opportunity'';
revising the preamble of the disclosure to make it more readable;
adding a description of the Federal Trade Commission for consumers who
may not be familiar with the agency; clarifying that the information on
the form relates specifically to the business opportunity the reader is
being offered; reformatting the sections that address earnings, legal
actions, and cancellation or refund policies, to make those sections
easier to understand; and adding a note below the signature line
stating that the FTC requires that the business opportunity seller give
potential buyers at least seven calendar days before asking him or her
to sign a purchase contract.\285\ A copy of the revised proposed
disclosure document, which incorporated the consultant's suggested
revisions, was included in the Workshop Notice announcing that the FTC
would hold a public workshop on June 1, 2009.\286\
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\285\ See generally Macro Report.
\286\ 74 FR at 18714.
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b. Public Workshop
On June 1, 2009, the staff held a one-day public workshop in
Washington, DC to get public input about the revised proposed
disclosure document.\287\ The Workshop Notice invited interested
parties to submit a request to participate as a panelist.\288\
Ultimately, the workshop featured five panelists who represented a
range of interests in the proposed Rule, including a federal law
enforcer,\289\ a state law enforcer,\290\ a consumer advocate,\291\ the
general counsel of a national multilevel-marketing company,\292\ and a
former director of the FTC's Bureau of Consumer Protection.\293\
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\287\ Id. In response to the RNPR, three commenters (DRA, Planet
Antares, and Johnson) had originally requested a hearing as
permitted in the RNPR (see 73 FR at 16110), but later agreed that a
public workshop would address their issues and concerns more
efficiently.
\288\ The staff received requests to serve as panelists from
eight persons. It extended offers to serve as panelists to each of
these individuals, three of whom declined.
\289\ Kenneth Jost (``Jost''), DOJ, Office of Consumer
Litigation.
\290\ Dale Cantone (``Cantone''), Maryland Attorney General's
Office.
\291\ Jon Taylor (``Taylor''), Consumer Awareness Institute.
\292\ Maureen Morrissey (``Morrissey''), Tupperware.
\293\ William MacLeod (``MacLeod''). Although at the workshop
Mr. MacLeod represented only his own views, he had previously filed
comment to the INPR and RNPR on behalf of Planet Antares, which
markets vending machine businesses.
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Workshop panelists uniformly approved the revised proposed
disclosure document, and applauded the Commission's goal of
streamlining and simplifying the form.\294\ All workshop panelists
believed that the disclosure document generally accomplished the
Commission's stated purposes of streamlining and simplifying the form
to make it more useful to prospective business opportunity purchasers,
although they did have some minor suggestions related both to the
proposed disclosure document and some of the substantive disclosure
requirements, which are discussed below.
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\294\ See, e.g., Jost, June 09 Tr at 12-15 (noting that the
simplicity of the form is the key to it being successful. ``Having a
one page document that focuses on the key issues such as legal
actions, earnings claims, and references will put the most important
information in the hands of the prospective purchaser.''); MacLeod,
June 09 Tr at 18 (same, and commending the staff for engaging a
consumer research expert to copy test the disclosure document);
Cantone, June 09 Tr at 20 (stating that the disclosure document
captures the major components of business opportunity fraud,
including fraudulent earnings claims and false refund offers);
Taylor, June 09 Tr at 23 (noting that the disclosure document is
``easy to understand and short and accomplishes its purposes.'').
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2. Section 437.3(a): Disclosure Requirements
Section 437.3 requires that business opportunity sellers give
prospective purchasers five items of material information, in a basic
disclosure document.\295\ Each required disclosure is intended to help
prospective purchasers make informed investment decisions. First,
sellers must state their name, business address, and telephone number,
the name of the salesperson offering the opportunity, and the date when
the disclosure document is furnished to the prospective purchaser.
Second, sellers must disclose whether or not they make earnings claims
and, if so, must state the claim or claims in a separate earnings
claims statement attached to the basic disclosure
[[Page 76841]]
document.\296\ Third, sellers must disclose prior civil or criminal
litigation involving claims of misrepresentation, fraud, securities law
violations, or unfair or deceptive business practices that involve the
business opportunity or its key personnel.\297\ Fourth, sellers must
disclose any cancellation or refund policy.\298\ Finally, sellers must
provide contact information for at least 10 of their purchasers nearest
to the prospective purchaser's location.\299\ A discussion of the
record pertaining to each of the required substantive disclosures
follows, along with changes made in the final Rule and consistent
amendments made to the disclosure document.\300\ The final disclosure
document is Appendix A to this Notice. The Spanish translation of the
disclosure document is Appendix B to this Notice.
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\295\ Like the Franchise Rule and the interim Business
Opportunity Rule, the final Rule specifies that only sellers of
business opportunities have an obligation to prepare and furnish a
basic disclosure document. Other persons involved in the sale of a
business opportunity--such as brokers, locators, or suppliers--have
no obligation to prepare basic disclosure documents or to furnish
such documents. The ultimate responsibility to ensure that
disclosures are accurately prepared and disseminated rests with the
seller. See 71 FR at 19067.
\296\ Section 437.3(a)(2).
\297\ Section 437.3(a)(3). Key personnel include any of the
business opportunity seller's principals, officers, directors, and
sales managers, as well as any individual who occupies ``a position
or performs a function similar to an officer, director, or sales
manager of the seller.''
\298\ Section 437.3(a)(4). The IPBOR would have required
disclosure of the business opportunity seller's cancellation or
refund request history. Some commenters argued that requiring
disclosure of the seller's refund history would have had the wayward
effect of discouraging legitimate businesses from offering refunds.
Because companies with liberal refund policies were more likely to
have refund requests than those offering no refunds, disclosure of
refund requests could mislead consumers into thinking that a company
offering liberal refunds is less reputable than the company offering
no refunds. The Commission was persuaded by these commenters and
omitted this required disclosure from the RPBOR. See 73 FR at 16126.
\299\ Section 437.3(a)(5).
\300\ In response to the Staff Report, one commenter suggested a
myriad of additional changes to the disclosure document such as
fields for the buyer's contact information and additional fields for
information related to the salesperson. NG Franchise-Staff Report at
4-5. The Commission finds the suggested changes unnecessary.
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a. Section 437.3(a)(1): Identifying Information
The first required disclosure under the final Rule is the seller's
identifying information. Specifically, Sec. 437.3(a)(1) requires that
the seller disclose the name, business address, and telephone number of
the seller, the name of the salesperson offering the opportunity, and
the date when the disclosure document is furnished to the prospective
purchaser.\301\ The Commission has long recognized the materiality of a
business opportunity seller's identifying information. For example,
when the Original Franchise Rule was promulgated, the Commission
concluded that:
---------------------------------------------------------------------------
\301\ Other Commission trade regulation rules similarly require
disclosure of identifying information. E.g., Wool Products Labeling
Rule, 16 CFR 300.14; Fur Products Labeling Rule, 16 CFR 301.43.
The failure to disclose such material information * * * may
mislead the [prospect] as to the business experience of the parties
with whom he or she is dealing and * * * could easily result in
economic injury to the [prospect] because of the * * * dependence
upon the business experience and expertise of the [business
opportunity seller].\302\
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\302\ 43 FR at 59642.
This identifying information is material because it enables a
prospective purchaser to contact the seller and any salesperson for
additional information. This information also enables a prospective
purchaser to perform additional, independent research on the seller and
salesperson. At the same time, for law enforcement purposes, this
disclosure provides a written record of who provided the required
disclosures and when they did so.\303\
---------------------------------------------------------------------------
\303\ The Workshop panelists did not discuss this required
disclosure.
---------------------------------------------------------------------------
b. Section 437.3(a)(2): Earnings Claims
The final Rule permits sellers to make an earnings claim, provided
there is a reasonable basis for the claim and that the seller can
substantiate the claim at the time it is made.\304\ If the seller makes
no earnings claim, Sec. 437.3(a)(2) directs the seller simply to check
the ``no'' box on the disclosure document.\305\ Moreover, Sec.
437.3(1)(4) specifies items of information necessary to substantiate an
earnings claim. If the seller does make an earnings claim, the Rule
requires the seller to check the ``yes'' box and attach to the basic
disclosure document a second document, the earnings claim statement.
The disclosure document advises the prospective purchaser of this
requirement: ``If the statement is yes, [the seller] must attach an
Earnings Claim Statement to this form.'' \306\
---------------------------------------------------------------------------
\304\ This is consistent with analogous provisions in the
Amended Franchise Rule, 16 CFR 436.9, and the interim Business
Opportunity Rule, 437.1(c).
\305\ One workshop panelist commented that an earnings claim is
the most important selling feature of any business opportunity, and
for that reason, sellers should not be permitted to state they make
no earnings claim. Taylor, June 09 Tr at 68. The Commission agrees
that the earnings claim is important to purchasers' investment
decisions, but recognizes that there is an important distinction
between forcing sellers to make an earnings claims and requiring
them to substantiate any claims they choose to make.
\306\ Business opportunity sellers must also make the following
prescribed cautionary statement in close proximity to the ``yes'' or
``no'' check boxes: ``Read this statement carefully. You may wish to
show this information to an advisor or accountant.''
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At the June 1, 2009 workshop, the DOJ representative spoke
approvingly of the form and language of this disclosure, noting that if
a seller had checked the ``no'' box, but had, in fact, made an earnings
claim, the misrepresentation would be in violation of Section 5 of the
FTC Act, and the seller would be subject to civil penalties.\307\ A
couple of workshop panelists, however, found the language confusing and
believed that a potential purchaser reading this disclosure might not
know who should be completing this section of the form--the purchaser,
or the seller.\308\ Two of the panelists had some suggestions for
improving the language of the disclosure.\309\
---------------------------------------------------------------------------
\307\ Jost, June 09 Tr at 56.
\308\ Cantone, June 09 Tr at 55; Taylor, June 09 Tr at 56.
\309\ E.g., Taylor, June 09 Tr at 57; Cantone, June 09 Tr at 57.
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The Staff Report concluded that revisions to the language of the
earnings disclosure were unnecessary. The Commission agrees. The
initial proposed disclosure document, including the earnings
disclosure, underwent substantial revision based upon consumer testing.
Testing of the format and language of the earnings disclosure revealed
that, contrary to the panelists' concerns, consumers did understand the
meaning of the earnings disclosure, and realized that ``a check in the
`No' box would contradict any previous earnings claim that a
salesperson had made.'' \310\ Indeed, the ultimate test for the
effectiveness of the disclosure document is whether, in practice, the
written form helps consumers detect a contradictory oral statement made
by the seller. On that point, the revised proposed disclosure document
proved effective--9 out of 10 participants in the FTC study who heard a
hypothetical oral sales presentation understood that it had included an
earnings claim, and when they subsequently reviewed the disclosure
document, correctly identified a written contradiction of the oral
presentation.\311\ Based on the results of the consumer testing, the
Commission is not persuaded that the workshop panelists' suggestions
would improve the comprehension of the earnings claim disclosure, and
therefore has not adopted any changes to it.
---------------------------------------------------------------------------
\310\ Macro Report at 15.
\311\ Id.
---------------------------------------------------------------------------
c. Section 437.3(a)(3): Legal Actions
Section 437.3(a)(3) addresses deceptive practices in the sale of
business opportunities by requiring sellers to disclose material
information about certain prior legal actions. Specifically, Sec.
437.3(a)(3)(i) requires business opportunity sellers to provide
prospective purchasers with
[[Page 76842]]
information about legal actions of or against the seller, the seller's
affiliates or prior businesses, and certain key personnel that involve
``misrepresentation, fraud, securities law violations, or unfair or
deceptive practices, including violations of any FTC rule.'' Key
personnel include ``any of the seller's officers, directors, sales
managers, or any individual who occupies a position or performs a
function similar to an officer, director, or sales manager of the
seller.'' \312\ If the seller has such information to disclose, it must
check the ``yes'' box on the disclosure document. If there are no
actions to disclose, the seller must check the ``no'' box.
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\312\ In the RNPR, the Commission solicited comment on whether
this provision adequately captures the types of individuals whose
litigation history should be disclosed. It received no comments
responsive to that request. In addition, in the RNPR, the Commission
determined that it would not be appropriate to require the
disclosure of legal actions involving the seller's sales employees,
which would have been required under the IPBOR. The Commission
reasoned that the burden of collecting the litigation histories for
every sales person was not outweighed by the corresponding benefit
to prospective purchasers. 73 FR at 16126.
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Comments on this section centered on two main issues.\313\ First,
some expressed concern that the legal action disclosure might unfairly
tarnish the image of a seller who had meritless lawsuits filed against
it. Second, the DOJ focused on enhancing the government's ability to
prosecute violations of the Rule, and to that end, made recommendations
to revise the form of the disclosure.\314\ In addition, DOJ submitted a
comment in response to the INPR advising the Commission to add to the
title of the disclosure document a citation to the legal authority
requiring the seller to provide the basic disclosure document.\315\ The
final Rule incorporates this suggestion.
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\313\ In addition, discussion at the workshop focused on whether
a seller's bankruptcy history should be considered a legal action
and required to be disclosed. As noted in Section III.A.1,
discussing the definition of ``action,'' the Commission has
determined not to require the disclosure of bankruptcy actions.
\314\ See 73 FR at 16125.
\315\ Id.
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(1) Legal Action Disclosure Permits a Brief Description
Section 437.3(a)(3)(ii) requires that if the seller has litigation
to disclose pursuant to Sec. 437.3(a)(3)(i), it must provide an
attachment to the disclosure document with the full caption of each
legal matter (names of the principal parties, case number, full name of
court, and filing date). The RPBOR would have prohibited a seller from
including any additional information about the legal action including
truthful statements about the nature of the litigation or its ultimate
outcome.\316\ One commenter stated that in some instances, litigation
may be meritless and disposed of by means of short of formal
adjudication--for example through dismissal or settlement of nuisance
lawsuits--and sellers should have the opportunity to provide an
explanation of any disclosed legal actions.\317\ A panelist at the
workshop agreed and also noted that the FTC's expert report on the
consumer testing of the disclosure document revealed that consumers had
very negative reactions to the existence of legal actions against the
seller.\318\ The DOJ panelist, on the other hand, expressed concern
that, if allowed to provide a description of disclosed legal actions,
sellers might craft misleading descriptions.\319\ He stated that he has
seen such abuse in the context of the Franchise Rule,\320\ although he
did acknowledge that it might be unfair to prohibit sellers from
providing an explanation when they have been sued.\321\
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\316\ 73 FR at 16125-26.
\317\ Gary Hailey (``Hailey''), Venable LLP, June 09 Tr at 122.
\318\ MacLeod, June 09 Tr at 124. The panelist also argued that
lawsuits are often overpled and that there may be instances where
some claims (such as constitutional claims) are not really of
particular materiality to a prospective purchaser.
\319\ Jost, June 09 Tr at 125.
\320\ The Amended Franchise Rule requires that legal actions
against franchise sellers be disclosed to potential purchasers. 16
CFR 436.5(c)(3) requires that franchisors summarize, ``the legal and
factual nature of each claim in the action, the relief sought or
obtained, and any conclusion of law and fact,'' and provide
information about damages or settlement terms, terms of injunctive
orders, dates of any convictions or pleas, and the sentence or
penalty imposed. The interim Business Opportunity Rule requires that
sellers disclose only: 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 the settlement or the
terms of the order; and the date, nature, and issuer of each such
ruling. A seller may also 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 statement. Interim
Business Opportunity Rule Sec. 437.1(a)(4)(ii).
\321\ Jost, June 09 Tr at 125.
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The Commission's initial decision not to allow inclusions of
details regarding the nature of each legal action, as is provided in
the Amended Franchise Rule, was prompted by an attempt to minimize
compliance costs to sellers.\322\ Furthermore, the Commission reasoned
that if ``armed with the full caption, a prospective purchaser can seek
additional information if he or she so chooses,'' as ``the public's
ability to review complaints in legal proceedings has become
significantly easier since the advent of the Internet * * * [because]
[m]any legal documents are now routinely posted on court or related Web
sites.'' \323\ The Commission noted that since the disclosure document
itself instructs potential purchasers that the legal actions disclosed
pertain to misrepresentation, fraud, securities law violation, or
unfair or deceptive practices, potential purchasers would have a basic
understanding of the subject matter of the action.\324\
---------------------------------------------------------------------------
\322\ 71 FR at 19069.
\323\ Id. at n.165.
\324\ Id. at 19068.
---------------------------------------------------------------------------
The existence of legal actions against the seller is not
necessarily proof of fraud and that some legal actions may be without
merit. The Commission concludes, however, that the existence of legal
actions of the type enumerated--misrepresentation, fraud, securities
law violations, or unfair or deceptive practices--against the business
opportunity seller or its key personnel is critical to assessing the
financial risk of the proposed investment.\325\ This is highly material
information. Indeed, discovering that a seller has a history of
violating laws and regulations is perhaps the best indication that a
particular business opportunity is a high-risk investment. In fact, in
the Commission's law enforcement experience, business opportunity
promoters routinely have hidden such material information from
prospective purchasers, to the detriment of those purchasers.\326\
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\325\ See supra Section III.A.1.
\326\ E.g., FTC v. Nat'l Vending Consultants, Inc., No. CV-S-05-
0160-RCJ-PAL (D. Nev. 2005) (failure to disclose guilty plea for
mail fraud of de facto corporate officer); FTC v. Netfran Dev.
Corp., No. 1:05-cv-22223-UU (S.D. Fla. 2005) (failure to disclose
FTC injunction against principal); FTC v. Am. Entm't Distribs.,
Inc., No. 04-22431-Civ-Martinez (S.D. Fla. 2004) (failure to
disclose prior FTC injunction); United States v. We The People Forms
and Serv. Ctrs. USA, Inc., No. CV 04 10075 GHK FMOx (C.D. Cal. 2004)
(failure to disclose prior lawsuits); FTC v. Hayes, No. Civ.
4:96CV02162SNL (E.D. Mo 1996) (failure to disclose prior state fines
and injunctive actions); FTC v. WhiteHead, Ltd, Bus. Franchise Guide
(CCH) ] 10062 (D. Conn. 1992) (failure to disclose fraud action);
FTC v. Inv. Dev. Inc., Bus. Franchise Guide (CCH) ] 9326 (E.D. La.
1989) (failure to disclose insurance fraud convictions).
---------------------------------------------------------------------------
The Staff Report cautioned that if the Rule allowed sellers to
provide a description of the legal action, it would provide an
opportunity for dishonest sellers to misrepresent or mischaracterize
such actions, including their ultimate outcomes.\327\ Nevertheless, the
Staff Report acknowledged that legitimate sellers potentially could be
harmed if not afforded the opportunity to address in writing the legal
action they are
[[Page 76843]]
required to disclose.\328\ The staff recommended, therefore, that Sec.
437.3(a)(3)(ii) be revised to add the following sentence: ``For each
action, the seller may also provide a brief accurate statement not to
exceed 100 words that describes the action.'' No comments to the Staff
Report addressed this revision.
---------------------------------------------------------------------------
\327\ Staff Report at 75.
\328\ As the Commission previously noted in the RNPR, however,
nothing in the Rule would prevent the seller from speaking with the
consumer to explain the nature or outcome of any legal action
disclosed on the form. 73 FR at 16125.
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Upon consideration of the record, the staff's recommendation, and
the rationale for that recommendation, the Commission adopts Sec.
437.3(a)(3)(ii) as recommended in the Staff Report. Non-compliance with
the restriction of this provision (i.e., statements that exceed the
word limitation or that mischaracterize the action or its outcome) is a
violation of the Rule.
(2) Amendment to the Disclosure Document
The DOJ panelist advocated for a small amendment to the ``Legal
Actions'' section of the proposed disclosure document published prior
to the Workshop. Specifically, the DOJ panelist recommended adding the
phrase ``including violation of an FTC Rule'' after the phrase ``or
unfair or deceptive act or practice * * *,'' to make clear to business
opportunity sellers that a violation of an FTC Rule is an unfair or
deceptive practice.\329\
---------------------------------------------------------------------------
\329\ Jost, June 09 Tr at 36.
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The Staff Report agreed that this recommended addition to the
``Legal Actions'' section of the disclosure document would assist
enforcement efforts by eliminating any significant question as to
whether the defendant had actual or implied knowledge that violation of
an FTC rule is an unfair and deceptive practice, and recommended that
the disclosure document include this language.\330\ No comments to the
Staff Report addressed this addition.
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\330\ The DOJ, upon request of the FTC, has the authority to
seek civil penalties for violations of trade regulation rules issued
pursuant to the FTC Act, but to obtain such penalties, the
government must prove ``actual knowledge or knowledge fairly implied
on the basis of objective circumstances that such act is unfair or
deceptive and is prohibited by such rule.'' See 15 U.S.C. 56(a)(1);
45(m)(1)(A).
---------------------------------------------------------------------------
Upon consideration of the record and the rationale for the
recommendation, the Commission adopts the staff's recommendation.
Accordingly, Sec. 437.3(a)(3)(i) of the final Rule requires disclosure
of any civil or criminal action for misrepresentation, fraud,
securities law violations, or unfair or deceptive practices,
``including violations of any FTC Rule.'' The disclosure documents
provided as Appendix A and Appendix B have also been revised to include
this language.
d. Section 437.3(a)(4): Cancellation or Refund Policy
Section 437.3(a)(4) pertains to a common practice among fraudulent
business opportunity sellers: offering prospective purchasers an
illusory right to cancel or to seek a whole or partial refund.\331\ The
Rule does not require any seller to offer cancellation or a refund;
however, if the seller does offer a refund or the right to cancel the
purchase, it must ``state the material terms of the refund or
cancellation policy in an attachment to the disclosure document.''
\332\ The disclosure requirement is complemented by a prohibition, at
Sec. 437.6(l), against failing ``to provide a refund or cancellation
when the purchaser has satisfied the terms and conditions pursuant to
Sec. 437.3(a)(4).'' The disclosure requirement is also complemented by
prohibitions on other misrepresentations.\333\
---------------------------------------------------------------------------
\331\ See, e.g., FTC v. AMP Publ'n., Inc., No. SACV-00-112-AHS-
ANx (C.D. Cal. 2001); FTC v. Home Professions, Inc., No. SACV 00-111
AHS (Eex) (C.D. Cal. 2001); FTC v. Innovative Prods., No. 3:00-CV-
0312-D (N.D. Tex. 2000); FTC v. Encore Networking Servs., No. 00-
1083 WJR (AIJx) (C.D. Cal. 2000); FTC v. Mediworks, Inc., No. 00-
01079 (C.D. Cal. 2000). Indeed, allegations that business
opportunity sellers misrepresented their refund policies rank among
the top 10 complaint allegations in Commission business opportunity
cases brought under Section 5. See 71 FR 19069.
\332\ The Commission adopted a similar approach in the TSR. 16
CFR 310.3(a)(1)(iii) (if a seller makes a representation about a
refund policy, it must disclose ``a statement of all material terms
and conditions of such policy'').
\333\ See Sec. 437.6.
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As discussed below, the Commission adopts the staff's
recommendation that sellers be required to state the ``material'' terms
of the refund or cancellation policy, and the term ``material'' is now
included in the final Rule provision. Under the final Rule, a seller
that offers a cancellation or refund policy must check the ``yes'' box
on the disclosure document and also must attach to the disclosure
document a written description of its policy. To minimize compliance
costs, the seller may comply with this requirement by attaching to the
disclosure document a copy of a pre-existing document that details the
seller's cancellation or refund policy. For example, a seller may
detail its refund policy in a company brochure. If it does, the seller
need only attach to the disclosure document the particular page setting
forth the refund policy. As in the other examples, if no cancellation
or refund is offered, then the seller need only check the ``no'' box.
Workshop panelists raised two issues related to the disclosure of
refund and cancellation policies. First, panelists questioned whether
information about the percentage of purchasers requesting and obtaining
refunds should be part of the disclosure, and second, whether Sec.
437.3(a)(4) should specify particular terms of a refund policy that
must be disclosed to potential purchasers. The sections that follow
address each of these concerns.
(1) Percentage of Purchasers Requesting and Obtaining Refunds
One panelist stated that information concerning the percentage of
purchasers requesting and obtaining refunds would be relevant
information to potential purchasers.\334\ Another panelist disagreed,
arguing that requiring disclosure of this information might have the
unintended consequence of harming purchasers by discouraging sellers
from offering refunds.\335\ The Commission previously considered this
issue. The IPBOR would have required a seller that had a cancellation
or refund policy to disclose the number of purchasers who had asked to
cancel or who had sought a refund in the two previous years.\336\ In
the INPR, the Commission specifically sought comment on the proposed
disclosure of the seller's refund history, particularly on the likely
effect this disclosure might have on the willingness of sellers to
offer refunds.\337\ Based upon arguments articulated in the comments to
the INPR, the Commission concluded that this disclosure would not be
useful to consumers, and that disclosure of refund history could be
unduly prejudicial to business opportunities that offer and liberally
provide refunds to prior purchasers.\338\ Indeed, a prospective
purchaser might compare the refund requests of a fraudulent seller with
no refund policy against a legitimate seller with a liberal refund
policy and inaccurately conclude that the legitimate seller offers a
riskier business venture. The requirement, therefore, could create a
perverse incentive to discontinue refund policies.\339\ The Commission
concluded that disclosure of refund history would not reliably remedy
deception on this issue, and it was eliminated in the RPBOR.\340\
---------------------------------------------------------------------------
\334\ Taylor, June 09 Tr at 48. One commenter agreed. Brooks-
Workshop comment.
\335\ MacLeod, June 09 Tr at 50.
\336\ 71 FR at 19088 (IPBOR Sec. 437.3(a)(5)).
\337\ Id. at 19070.
\338\ 73 FR at 16126.
\339\ Id. at 16115.
\340\ Id. at 16126.
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[[Page 76844]]
Panelists in favor of requiring the disclosure of seller's refund
histories presented no arguments other than those previously considered
by the Commission. Accordingly, the final Rule does not require this
disclosure.
(2) Information To Be Disclosed About Refund and Cancellation Policies
Although workshop participants agreed that information about a
seller's cancellation and refund policies is an important component of
a potential purchaser's evaluation of a business opportunity, they were
universally concerned that Sec. 437.3(a)(4) did not contain enough
specificity about what information must be disclosed to potential
purchasers and suggested that additional guidance from the Commission
was necessary.\341\ The panelist from the Maryland Attorney General's
Office thought the Rule should specify that all material terms of a
refund policy must be disclosed, because in the context of business
opportunity sales, it has been his experience that the requirements to
obtain a refund are often so onerous that as a practical matter, no one
is ever eligible.\342\ Some panelists felt the Rule should identify
specific information to be disclosed. For example, one commenter noted
that the period of time a seller has to exercise a right to
cancellation or refund, or any conditions on return of unsold goods are
material and should be required to be disclosed to potential
purchasers.\343\ One panelist suggested that the DSA Code of Ethics'
refund requirements might serve as a model to identify types of
information that should be disclosed to potential purchasers.\344\
---------------------------------------------------------------------------
\341\ See June 09 Tr at 39-53.
\342\ Cantone, June 09 Tr at 47 (providing as an example a
company offering a 100% buy-back for vending machines and noting the
company's failure to disclose that the cost of sending back the
vending machine would be borne by the purchaser, and would often
exceed any refund due, thereby rendering any potential refund
worthless).
\343\ Taylor, June 09 Tr at 43.
\344\ Morrissey, June 09 Tr at 45. The Commission has reviewed
applicable provisions of the DSA Code of Ethics, but does not find
them applicable. DSA dictates the specific terms of its members'
refund policies. The RPBOR, by contrast, did not specify the
requirements of a seller's refund or cancellation policy, or even
whether the seller must have such policies. Instead, it attempted to
ensure that if such policies existed, potential purchasers were
aware of how they can exercise their rights under those policies.
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After considering these comments, the Staff Report recommended
modifying Sec. 437.3(a)(4) to track closely a similar disclosure
requirement in the TSR.\345\ The TSR requires that if the seller or
telemarketer makes a representation about a refund, cancellation,
exchange, or repurchase policy, it must provide the purchaser with a
statement of all material terms and conditions of its policy.\346\
Requiring the disclosure of all material terms of a refund or
cancellation policy most effectively accomplishes the Commission's
stated purpose of ensuring that potential purchasers are provided with
information that would assist them in assessing the financial risk
associated with the offer. Indeed, the commentary to the IPBOR
indicates that the Commission, in fact, intended to require sellers to
disclose all material terms of refund and repayment policies to
prospective purchasers.\347\
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\345\ Specifically, in describing its approach regarding refund
and cancellation policy disclosures, the Commission noted that it
``adopted the same approach in the TSR.'' 71 FR at 19069 n.166
(citing 16 CFR 310.3(a)(1)(iii) (if a seller makes a representation
about a refund policy, it must disclose ``a statement of all
material terms and conditions of such policy'')).
\346\ 16 CFR 310.3(a)(1)(iii).
\347\ See 71 FR 19069-70.
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Therefore, upon consideration of the record, the Commission adopts
the staff's recommendation. Accordingly, the penultimate sentence of
Sec. 437.3(a)(4) of the final Rule has been clarified to read: ``If
so, state all material terms and conditions of the refund or
cancellation policy in an attachment to the disclosure document.'' As
discussed in Section III.A.9., the final Rule includes a definition of
``material'' similar to the definition used in the TSR. Specifically,
Sec. 437.1(i) defines, in relevant part, ``material'' to mean ``likely
to affect a person's choice of, or conduct regarding, goods or
services.'' Examples of material terms and conditions may include, for
example, the period of time the purchaser has to cancel a purchase or
request a refund; the specific steps necessary to cancel a purchase or
request a refund; any fees or penalties incurred for cancellation; and
where unused inventory must be returned to and by what method. The
Commission declines to enumerate in the final Rule what terms are
material, as materiality may vary depending on the circumstances of the
opportunity and the refund or cancellation policy.
e. Section 437.3(a)(5): References
(1) Background
The interim Business Opportunity Rule required the disclosure of
prior purchasers' name, street address, city, state, and telephone
number.\348\ In the INPR, the Commission concluded that prospects could
readily contact a prior purchaser if provided with the prior
purchaser's name, city, state, and telephone number, and that this
approach enables prospects to contact references while minimizing the
intrusion into prior purchasers' privacy.\349\ Accordingly, neither the
IPBOR, nor the RPBOR would have required sellers of business
opportunities to disclose prior purchasers' street address to potential
purchasers.\350\ As discussed below, the final Rule requires that
sellers disclose only prior purchasers' name, state, and telephone
number. Like the IPBOR and the RPBOR, the final Rule limits the
disclosure of references to those who purchased the business
opportunity within the three years prior to the date of the disclosure
document. Moreover, the final Rule requires the seller to disclose this
information by listing each prior purchaser (if fewer than 10), or
listing at least the 10 prior purchasers nearest to the prospective
purchaser's location. In order to minimize compliance costs, the final
Rule also provides sellers with an alternative disclosure option--in
lieu of a list of the 10 prior purchasers nearest the prospect, a
seller may furnish a prospect with a national list of all
purchasers.\351\ In the INPR, the Commission noted that this option
would allow the seller to maintain a master list of purchasers that
could be updated periodically, which would allow the seller to avoid
having to tailor the disclosure to each prospective purchaser.\352\ A
seller that chooses this option must insert into the reference section
of the disclosure document the words ``See Attached List,'' and attach
a list of the references to the disclosure document.\353\
---------------------------------------------------------------------------
\348\ 72 FR 15565.
\349\ 71 FR at 19071 n.180.
\350\ 71 FR at 19088; 73 FR at 16135.
\351\ See Sec. 437.3(5)(i).
\352\ 71 FR at 19071. In the RNPR, the Commission solicited
comment on whether giving sellers the ability to provide prospective
purchasers with a national list was a viable option. It received no
comments responsive to that request.
\353\ Sellers that provide the disclosure document
electronically would be permitted to attach the national list of
references in electronic form as well.
---------------------------------------------------------------------------
Notwithstanding the fact that most of the information required by
the reference disclosure is often available in the public domain, in
crafting this section of the Rule, as discussed infra, the Commission
considered potential privacy concerns raised by the use of prior
purchaser information.\354\ To address these concerns, Sec.
437.3(a)(5)(ii) requires that the disclosure document state the
following language clearly and in immediate conjunction with the list
of references: ``If you buy a business opportunity from the seller,
your
[[Page 76845]]
contact information can be disclosed in the future to other buyers.''
---------------------------------------------------------------------------
\354\ 71 FR at 19071.
---------------------------------------------------------------------------
(2) Privacy Concerns Raised in the Record
In response to the INPR, a number of commenters, primarily from the
MLM industry, expressed concern that the reference disclosure
requirement raised privacy and security concerns.\355\ The Commission,
however, was and is not persuaded that privacy concerns outweigh the
benefits of this disclosure. The Commission finds that disclosure of
prior purchasers is important to prevent fraud because it enables
prospects to evaluate the seller's claims based on information from an
independent source with relevant experience.\356\ Furthermore, the
required reference disclosures include no sensitive personal
information whatsoever--no social security numbers, birth dates,
financial account information, or even street addresses.\357\
---------------------------------------------------------------------------
\355\ See 73 FR at 16126.
\356\ See id.
\357\ See id.
---------------------------------------------------------------------------
Following publication of the RNPR, one commenter continued to argue
that the disclosures enumerated in Sec. 437.3(a)(5) would raise
privacy and data security concerns.\358\ The commenter articulated
three main concerns: (1) That requiring the seller to ``store
purchasers' personal information in a single location or document
creates a target ripe for theft and improper disclosure;'' (2) that
requiring disclosure of information of prior purchasers conflicts with
the FTC's Privacy of Consumer Information Rule (``Privacy Rule'' or
``GLB Privacy Rule''),\359\ promulgated under the Gramm-Leach-Bliley
Act (``GLB'') \360\ because it does not allow those prior purchasers of
the business opportunity the right to opt out of having their contact
information disclosed to potential purchasers;\361\ and (3) that the
mandatory disclosure of references violates privacy obligations under
the California Constitution.\362\ The Commission is not persuaded by
any of these contentions.\363\
---------------------------------------------------------------------------
\358\ Planet Antares-RNPR at 18-21.
\359\ 16 CFR Part 313.
\360\ 15 U.S.C. 6801 et seq.
\361\ The Commission received a few comments in response to the
INPR in support of allowing individual business opportunity
purchasers to opt out of having their contact information disclosed.
The comment submitted by the DOJ however, urged the Commission to
reject any opt-out believing it would be an easy matter for sellers
to talk purchasers into opting out, describing to them what a hassle
it becomes for those who do not opt out because of all the demand
that arises for their time and attention. The Commission agreed with
DOJ and after analyzing all of the commentary to Sec. 437.3(a)(5),
declined to make any changes to that section. See 73 FR at 16126-27.
\362\ Planet Antares-RNPR at 20.
\363\ This same commenter argues that the required reference
information constitutes trade secrets that should be afforded
special protections, but offers no support for this contention. Id.
at 14.
---------------------------------------------------------------------------
First, the Commission rejects the argument that the disclosure of
references creates an unnecessary risk of theft or improper disclosure.
As an initial matter, the Commission notes that a similar reference
disclosure has been required for business opportunities and business
format franchises covered by the Original Franchise Rule for more than
25 years, and it is required under the interim Business Opportunity
Rule as well.\364\ Moreover, the information to be collected and stored
is not sensitive (e.g., no financial information, social security
numbers, dates of birth, or street addresses). The commenter has not
explained, nor does the Commission understand, why the information
would be particularly attractive to thieves.
---------------------------------------------------------------------------
\364\ 16 CFR 437.1(a)(16)(iii).
---------------------------------------------------------------------------
Second, the Commission is not persuaded that Sec. 437.3(a)(5)
creates potential conflicts with the GLB Privacy Rule, because the
protections afforded by the Privacy Rule likely do not extend to the
contact information of business opportunity purchasers. Congress
enacted GLB to protect personal financial information of individual
consumers, but excluded from the ambit of the law the protection of
information pertaining to businesses. The Privacy Rule requires that a
``financial institution'' provide, under specified circumstances,
notice to its consumers and customers of its privacy policies and
practices,\365\ including the consumers' right to opt out of having
their personal information shared with third parties.\366\ For purposes
of the Privacy Rule, a consumer is an individual who obtains financial
products or services for personal, family or household purposes.\367\
The Commission need not consider the limited circumstances where a
business opportunity seller might be considered a financial
institution, because the Privacy Rule is aimed at protecting the non-
public personal financial information of consumers, not
businesses.\368\
---------------------------------------------------------------------------
\365\ 73 FR at 16127.
\366\ 16 CFR 313.1(a)(3).
\367\ 16 CFR 313.3(e). Similarly, a customer is a consumer with
a continuing relationship with the financial institution. See 16 CFR
313.3(h).
\368\ See 16 CFR 313.1(b) (expressly stating that the Privacy
Rule ``does not apply to information about companies or about
individuals who obtain financial products or services for business,
commercial, or agricultural purposes''). Indeed, federal law often
focuses on privacy concerns affecting individuals, not businesses.
See, e.g., the Fair Credit Reporting Act (``FCRA'') 15 U.S.C.
1681(a)(4) (requiring various protections for consumer information,
including provisions addressing identity theft). There is no
comparable statute that protects business information.
---------------------------------------------------------------------------
The commenter argues that business opportunity operators should be
considered consumers for purposes of the Privacy Rule, and thus should
have the right to opt out of having their contact information disclosed
to potential purchasers.\369\ The commenter's interpretation is
contrary to both prior Commission policy, and the plain meaning of the
language of the Privacy Rule. As the Commission has previously stated,
by investing in a business opportunity, purchasers are entering the
world of commerce and embarking upon the establishment of a
business.\370\ Financing a business venture is not ``primarily for
personal, family, or household purposes.'' \371\ This interpretation is
consistent with previous Commission guidance in an analogous
situation,\372\ and with the Commission's interpretation of
``consumer'' in the context of other rules it enforces.\373\
---------------------------------------------------------------------------
\369\ The commenter argues that the purchase of a business
opportunity might be intended to ``provide a revenue stream'' to a
purchaser and ``not necessarily a source of employment.'' Planet
Antares-RNPR at 18-21. The Commission finds this distinction
immaterial to the analysis.
\370\ 73 FR at 16127 & n.210.
\371\ The Commission has not issued guidance about the meaning
of ``personal, family, or household purposes'' because the plain
meaning of the language seems abundantly clear. Courts'
interpretations of this phrase when used in other consumer
protection laws are instructive. See, e.g., In re Runski, 102 F.3d
744, 747 (4th Cir. 1996) (noting in the bankruptcy context that
courts have uniformly concluded that debt incurred for a business
venture or with a profit motive does not fall into the category of
debt incurred for ``personal, family, or household purposes'').
\372\ See ``Frequently Asked Questions for the Privacy
Regulation,'' Question B-2 (Dec. 2001), http://www.ftc.gov/privacy/glbact/glb-faq.htm (Privacy Rule does not apply when a financial
institution makes a business loan to a sole proprietor; although an
individual, a sole proprietor is not a ``consumer'' for purposes of
the Privacy Rule where the financing is not for personal, family, or
household purposes).
\373\ See, e.g., Preservation of Consumer's Claims and Defenses,
16 CFR 433.1(b); Credit Practices, 16 CFR 444.1(d).
---------------------------------------------------------------------------
Similarly, the reference disclosure is not in conflict with the
California Constitution. A cause of action for invasion of privacy
under the California Constitution exists only when a person has a
reasonable expectation of privacy, which cannot exist if the person has
been expressly informed that his or her contact information will be
shared with prospective purchasers.\374\
---------------------------------------------------------------------------
\374\ When personal information has been released without
consent, a cause of action for invasion of privacy exists under the
California Constitution only if: (1) the individual had a reasonable
expectation that the information would be kept private, and (2)
disclosure of the information is serious in nature, scope, and or
potential impact to cause an ``egregious breach of social norms.''
See Pioneer Elecs., Inc. v. Olmstead, 40 Cal. 4th 360, 370-71
(2007). Even when these criteria are met, the individual's privacy
interest must be weighed against legitimate and important competing
interests. Id. When measured against this standard, disclosure of
purchaser information pursuant to proposed Sec. 437.3(a)(5) would
not give rise to a privacy action. First, the disclosure document
plainly notifies potential purchasers that their reference
information will be provided to subsequent purchasers, thus they
have no reasonable expectation that their information will be kept
private. Second, the reference disclosure includes no sensitive
personal information whatsoever, and the value to potential
purchasers of information about prior purchasers outweighs any
potential detriment to those prior purchasers.
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[[Page 76846]]
Privacy concerns relating to the reference disclosure were also
articulated at the June 1, 2009 workshop. A panelist representing a
large MLM company stated that at least some of its representatives
expressed concern that under the proposed Rule, their addresses and
home telephone numbers could be provided to persons they did not know.
The panelist noted that representatives often use their home telephone
number as their business number, and that the same telephone number is
also used by other family members, including children. The panelist
wondered if additional safeguards to protect purchasers' privacy could
be taken and suggested requiring potential purchasers to contact a
seller's references through a centralized telephone number to be
administered by the seller.\375\ The DOJ panelist opposed this
suggestion, arguing that communications with prior purchasers could be
subject to manipulation by the seller.\376\
---------------------------------------------------------------------------
\375\ Morrissey, June 09 Tr at 87.
\376\ Jost, June 09 Tr at 88.
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The Commission does not believe that requiring sellers to provide
and administer a centralized phone number to screen references is
necessary or advisable. The Commission agrees with DOJ's comment that
such a system may invite manipulation. It would also create an
unjustified financial and administrative burden for sellers. As noted
above, the Commission does not view the disclosure of a purchaser's
name, state, and telephone number as creating privacy or security
concerns, as this information is often available in the public domain.
The required disclosure does not include street address information,
and therefore, does not provide a ``road map'' to a purchaser's
residence, as the commenter suggests. Moreover, potential purchasers
are notified in writing, prior to the time of purchase that their
reference information will be available to subsequent purchasers.
Purchasers who have privacy concerns, therefore, can take steps to
minimize personal exposure, such as, for example, designating a
separate phone number for business purposes.
Nonetheless, the Staff Report noted that the disclosure of
information some may consider private must be weighed against the
benefits of providing that information to potential purchasers. After
considering the purpose of providing reference information, the Staff
Report concluded that the disclosure of the city where the reference is
located is not necessary. The staff recommended, therefore, that the
city where previous purchasers reside be eliminated from Sec.
437.3(a)(5)(i), and correspondingly, from the ``References'' section of
the disclosure document.
No comments in response to the Staff Report addressed this
recommended modification. The Commission agrees with the staff's
recommendation. Accordingly, both Sec. 437.3(a)(5)(i) of the final
Rule and the related section of the disclosure document have been
revised to eliminate references to the city where prior purchasers
reside. The Commission reiterates, however, that this amendment is
intended to alleviate privacy concerns, and it does not relieve a
seller of its obligation to provide a list of the ten purchasers within
the past three years that are nearest to the potential purchaser as an
alternative to providing the full list of all prior purchasers.
f. Section 437.3(a)(6): Receipt
Section 437.3(a)(6) sets forth a receipt requirement for the
disclosure document. This requirement is designed to document proper
disclosure by the seller. Specifically, the seller must attach a
duplicate copy of the disclosure document, which is to be signed and
dated by the purchaser. A designation for the signature and date is
included at the bottom of the disclosure document.\377\ The Commission
believes that the receipt requirement is especially important to prove
proper disclosure with respect to electronic documents. A seller
furnishing disclosures online, either through email or access to a Web
site, has the burden of establishing that the prospect was actually
able to access the electronic document.\378\ Completion and submission
of the receipt serves that purpose. The final Rule does not impose any
particular method of transmitting the receipt. In order to minimize
compliance costs, sellers should have flexibility to determine the best
method to comply with this provision of the Rule.\379\ Accordingly,
Sec. 437.3(a)(6) would permit the seller to inform the prospective
purchaser how to return the signed receipts, for example, by sending
the receipt to a street address, to an email address, or by facsimile.
---------------------------------------------------------------------------
\377\ As noted previously, the Commission engaged a consultant
with expertise in document design and comprehension to evaluate the
initial proposed disclosure document. One of the changes suggested
by the consultant included adding a note below the signature line of
the disclosure document stating that the FTC requires that all
business opportunity sellers give the prospective purchaser at least
seven calendar days before asking him or her to sign a purchase
contract. A copy of the revised proposed disclosure document, which
incorporated this change, was attached as Appendix A to the Federal
Register Notice announcing the June 1, 2009 workshop. See 74 FR at
18715.
\378\ 71 FR at 19072.
\379\ Id.
---------------------------------------------------------------------------
As noted above, the Staff Report recommended adding a new
definition of ``signature'' or ``signed'' to make clear that the term
``signature'' or ``signed'' includes not only a person's handwritten
signature, but also an electronic or digital form of signature to the
extent that such signature is recognized as a valid signature under
applicable federal law or state contract law.\380\ The receipt
requirement received one comment. The commenter noted that the
requirement that a purchaser be provided with a second copy of the
disclosure document appears inconsistent with the Rule's recognition
that the disclosure document can be provided to potential purchasers
through electronic media.\381\ The Commission disagrees with the
commenter. Some sellers may post their disclosure document on their Web
sites, and update it as needed. The requirement to provide a copy of
the electronic disclosure ensures that the prospective purchaser will
retain the document in a static format. This can be accomplished as
easily through electronic means as it can through paper. In fact,
allowing electronic distribution should greatly reduce sellers'
compliance costs over the long run, especially costs associated with
printing and distributing disclosure documents. Nevertheless, the final
Rule enables sellers to determine for themselves whether it is most
efficient and cost-effective to provide the disclosure document to
prospective purchasers electronically or in printed form. Accordingly,
the Commission adopts the receipt provision as recommended in the Staff
Report, with one non-substantive modification: the reference to a
``disclosure page'' has
[[Page 76847]]
been changed to ``disclosure document'' to conform it to the title of
Sec. 437.3.
---------------------------------------------------------------------------
\380\ See Sec. 437.1(r).
\381\ Quixtar-INPR at 27.
---------------------------------------------------------------------------
3. Section 437.3(b): Updating the Disclosure Document
To ensure that a seller's disclosures are current, Sec. 437.3(b)
requires sellers to update their disclosures at least quarterly.
Modeled on the Original Franchise Rule and interim Business Opportunity
Rule,\382\ the provision states that it would be a violation of the
Rule and Section 5 of the FTC Act for a seller to fail to update the
disclosures to reflect any material changes in the information
presented in the basic disclosure document on at least a quarterly
basis. The Commission has concluded that quarterly updating strikes the
right balance between the need for accurate disclosure and the costs
and burdens more frequent updating would entail.\383\
---------------------------------------------------------------------------
\382\ 16 CFR 436.7(b) and interim Business Opportunity Rule
Sec. 437.1(a)(22).
\383\ 71 FR at 19072.
---------------------------------------------------------------------------
Section 437.3(b) includes a proviso that would require more
frequent updating in one respect: the list of references. Specifically,
a seller is required to update the list of references monthly until
such time that it is able to include the full list of 10 references.
This is particularly necessary for start-up opportunities that may have
few or no prior references when they commence business opportunity
sales. The Commission has concluded that prospective purchasers'
ability to contact at least 10 references in their due diligence
investigations of business opportunity offers outweighs any costs of
more frequent updating until the list of 10 is compiled.\384\
---------------------------------------------------------------------------
\384\ Id.
---------------------------------------------------------------------------
No comments were directed to the requirement of updating the
disclosures, and the final Rule contains Sec. 437.3(b) as recommended
in the Staff Report.
D. Section 437.4: Earnings Claims
Section 437.4 of the final Rule addresses earnings claims, and is
similar to the parallel sections of the Amended Franchise Rule and the
interim Business Opportunity Rule.\385\ Like both of those rules, the
final Rule requires disclosure of earnings information only if a
business opportunity seller chooses to make a claim about potential
earnings to prospective purchasers.
---------------------------------------------------------------------------
\385\ See 16 CFR 436.9 and interim Business Opportunity Rule
Sec. Sec. 437.1(b), (c) and (e).
---------------------------------------------------------------------------
Like the analogous provisions of the Amended Franchise Rule and the
interim Business Opportunity Rule, Sec. 437.4(a) requires a seller
making an earnings claim to: (1) Have a reasonable basis for the claim
at the time the claim is made; (2) have in its possession written
materials that substantiate the claim at the time the claim is made;
(3) make the written material available to the prospect and the
Commission upon request; and (4) furnish the prospect with an earnings
claim statement. Section 437.4(b) sets forth disclosure and other
requirements for sellers making earnings claims in the general media.
In Sec. 437.4(c), the final Rule addresses the use of industry
financial statistics or data to suggest or imply a likely level of
earnings. Finally, Sec. 437.4(d) requires that sellers notify
prospects in writing of any changes in earnings information before the
prospect enters into a contract or provides any consideration to the
seller, directly or indirectly through a third party.\386\ Each of
these requirements is discussed in the following sections.
---------------------------------------------------------------------------
\386\ The Amended Franchise Rule contains similar requirements.
See 16 CFR 436.1(d)(2) and 436.1(e)(6) (each prospective franchisee
to whom the representation is made shall be notified of any material
change in the information contained in the earnings claims
document).
---------------------------------------------------------------------------
1. Section 437.4(a)(1)-(3): Substantiation for Earnings Claims
As noted throughout this proceeding, the making of false or
unsubstantiated earnings claims is the most prevalent problem in the
offering of business opportunities. To address this problem, Sec.
437.4(a)(1) of the final Rule permits sellers to make an earnings claim
provided there is a reasonable basis for the claim at the time the
claim is made.\387\ Further, Sec. 437.4(a)(2) requires sellers that
make earnings claims to have in their possession written substantiation
for their earnings claims, and Sec. 437.4(a)(3) requires sellers to
make that written substantiation available to the prospective
purchaser, or to the Commission, upon request. Requiring that a
prospective purchaser can obtain and review, or have his or her own
advisor review, substantiation for earnings claims increases the
likelihood that sellers will make claims only for which they have a
reasonable basis.
---------------------------------------------------------------------------
\387\ As discussed in the INPR, the Commission did not propose a
``geographic relevance'' requirement because that prerequisite is
subsumed in the ``reasonable basis'' requirement. See 71 FR at 19072
n.185.
---------------------------------------------------------------------------
2. Section 437.4(a)(4): Earnings Claim Statement
Section 437.4(a)(4) prescribes the content of the earnings claim
statement, which must be provided to a prospect if a seller elects to
make a representation about potential earnings. To ensure ease of
review, each earnings claim statement must be a single written
document. The document must be titled ``EARNINGS CLAIM STATEMENT
REQUIRED BY LAW'' in capital, bold type letters. This ensures that the
prospective purchaser can readily determine from the face of the
document the importance of its text. The title is followed by the name
of the person making the claim, and the date of the claim. After the
title and identifying information, the Rule requires the seller to
state the specific earnings claim or claims. The final Rule does not
specify any particular format or formula for an earnings claim. This is
intended to allow flexibility in presenting earnings information in the
manner that is appropriate for each opportunity, provided that any such
claim has a reasonable basis and that there is written substantiation
for the claim at the time it is made.\388\
---------------------------------------------------------------------------
\388\ 71 FR at 19072.
---------------------------------------------------------------------------
The final Rule also requires a seller making an earnings claim to
disclose the beginning and ending dates when the represented earnings
were achieved.\389\ This information is material because a prospective
purchaser cannot begin to evaluate an earnings representation without
knowing how recently the supporting data was collected. For example, a
seller may have conducted a survey of purchasers of its business
opportunity in 2009. The Rule would not necessarily prohibit the use of
that survey information in 2010, but the prospect should be made aware
of the applicable time period in order to assess the relevance of the
claim to current market conditions. Similarly, a prospect may
reasonably give greater weight to a survey of purchasers over an
extended period of time (for example, over a three-year period), than a
more limited survey (for example, over a three-month period).\390\
---------------------------------------------------------------------------
\389\ Section 437.4(a)(4)(iv).
\390\ 71 FR at 19072.
---------------------------------------------------------------------------
Further, this section of the Rule requires the disclosure of the
number and percentage of all purchasers who purchased the business
opportunity prior to the end of the represented time period who have
achieved at least the claimed earnings during that period. This
information is material because it enables the prospect to determine
whether the claimed earnings of prior purchasers are typical.\391\ For
example, a seller may claim that purchasers have average earnings of
$50,000 a year. Even if true, this statement may not reflect the
experience of the typical purchaser because a few purchasers with
unusually high earnings could skew the average. Thus, the number and
[[Page 76848]]
percentage of purchasers earning $50,000 a year might actually be very
low.\392\
---------------------------------------------------------------------------
\391\ Id.
\392\ Id.
---------------------------------------------------------------------------
In addition, this section of the final Rule requires a seller
making an earnings claim to disclose any characteristics that
distinguish purchasers who achieved at least the represented level of
earnings from those characteristics of the prospective purchasers.\393\
For example, a survey of ice cream vending route purchasers operating
only in the South may not be readily applicable to other regions, such
as the North. Similarly, a survey limited to large urban areas may not
be applicable to smaller, rural areas. Distinguishing characteristics
of purchasers who achieved a represented level of earnings is material
information because it enables a prospect to assess the relevance of an
earnings claim to his or her particular market.\394\
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\393\ Section 437.4(a)(4)(vi).
\394\ 71 FR at 17073.
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Finally, the Rule requires a seller making an earnings claim to
disclose to the prospective purchaser that written substantiation for
the claim will be made available upon request.\395\ As noted above,
requiring that a prospective purchaser can obtain and review, or have
his or her own advisor review, substantiation for earnings claims
increases the likelihood that sellers will make claims only for which
they have a reasonable basis.\396\ This requirement balances the
prospective purchaser's need for material information with the
necessity of minimizing the seller's compliance costs. Thus, a seller
need only provide such substantiation upon request.
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\395\ Section 437.4(a)(4)(vii).
\396\ See, e.g., 16 CFR 436.1(b)(2); 436.1(c)(2).
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In the RNPR, the Commission solicited comment on various aspects of
the earnings claim statement including: (1) Whether the requirement
that sellers disclose the number and percentage of prior purchasers
that achieved at least the stated level of earnings would create
difficulties for sellers, or whether there were alternative approaches
that could limit any such difficulties; and (2) whether the requirement
that sellers disclose any materially different characteristics of prior
purchasers that attained at least the stated level of earnings
adequately covered the relevant earnings information that should be
disclosed.\397\
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\397\ 73 FR at 16133.
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No comments were received in response to the Commission's specific
questions, nor were any comments directed to this provision. The Staff
Report recommended that Sec. 437.4(a) be adopted in the form proposed
in the RPBOR, but sought additional comment on Sec. Sec.
437.4(a)(4)(iv) and (v), which require any business opportunity seller
that makes an earnings claim to identify the beginning and ending dates
of the time period when those earnings were achieved (Sec.
437.4(a)(4)(iv)) and the number and percentage of all purchasers who
purchased the opportunity before the ending date and who achieved those
earnings in that time period (Sec. 437.4(a)(4)(v)).\398\ Section
437.4(a)(4)(v) specifies that in calculating the number and percentage
of purchasers who attained at least the represented level of earnings,
the business opportunity seller must include all purchasers who
purchased the opportunity prior to the ending date of the time period
on which the representation is based. The Staff Report solicited
comment on whether the results of such a calculation, which would
include the experience of those who purchased the business opportunity
toward the end of the stated time period, present consumers with a
realistic picture of their likely earnings with the business
opportunity. In addition, the Staff Report sought comment on whether
this calculation would present prospective purchasers with information
that would be useful in making an informed purchasing decision, and
questioned whether there were alternative approaches that might be more
useful.
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\398\ Section 437.4(b)(3) requires similar disclosures,
calculated in the same way, in conjunction with any earnings claim
made in the general media.
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Only one comment received in response to the Staff Report addressed
these provisions. Specifically, DOJ agreed that any substantiation for
earnings must be calculated using the number of all purchasers of the
opportunity prior to the ending date of the time period for which the
earnings representation is based, noting that:
In reality, many business opportunities begin and end in a short
period of time, constantly reinventing themselves to avoid
association with previous failures. Requiring inclusion of all
purchasers who purchased before the ending date in any statistics in
an earning claims document is necessary to force the seller to have
the document be at all representative of the business as a whole.
Any wiggle room in this regard will be exploited to create a
document based on non-representative sellers.\399\
\399\ DOJ-Staff Report at 2.
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The Commission agrees and the final Rule includes Sec. 437.4(a)(4) as
recommended in the Staff Report.
3. Section 437.4(b): Earnings Claims in the General Media
Section 437.4(b) addresses the making of earnings claims in the
general media, such as on television, radio, the Internet, in
newspapers, etc. Specifically, a seller can make an earnings claim in
the general media provided the seller: (1) Has a reasonable basis for
the claim at the time the claim is made; (2) has written material that
substantiates the claim at the time the claim is made; and (3) states
in immediate conjunction with the claim the beginning and ending date
when the represented earnings were achieved and the number and
percentage of those who have achieved the represented earnings in the
given time period. These requirements are necessary to prevent
deceptive and misleading earnings representations in advertisements, as
well as to enable a prospect to assess the typicality of any advertised
earnings claim.\400\
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\400\ E.g., FTC v. Inspired Ventures, Inc., No. 02-21760-CIV-
Jordan (S.D. Fla. 2002); FTC v. MegaKing, Inc., No. 00-00513-CIV-
Lenard (S.D. Fla. 2000).
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The Commission received no comments about this provision. Based on
the record as a whole and its enforcement experience, the Commission
concludes that the requirements of Sec. 437.4(b) are necessary to
prevent misleading earnings representations, and the final Rule
includes this provision as recommended in the Staff Report.
4. Section 437.4(c): Dissemination of Industry, Financial, Earnings, or
Performance Information
Section 437.4(c) is intended to address a prevalent practice among
business opportunity sellers--the use of real or purported industry
statistics in the marketing of business opportunity ventures. The
Commission's law enforcement experience reveals that it is common for
vending machine business opportunity promoters, for example, to tout
what are purported to be industry-wide vending sales statistics. A
matrix of potential earnings based upon an industry-average sliding
scale of ``vends per day'' is typical.\401\ The use of such industry
statistics in the promotion of a business opportunity creates the
impression that the level of sales or earnings is typical in the
industry, and
[[Page 76849]]
implies that the prospective purchaser will achieve similar
results.\402\
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\401\ E.g., FTC v. Tashman, 318 F.3d 1275 (11th Cir. 2003); FTC
v. Nat'l Vending Consultants, Inc., No. CV-S-05-0160-RCJ-PAL (D.
Nev. 2005); FTC v. Inspired Ventures, Inc., No. 02-21760-CIV-Jordan
(S.D. Fla. 2002); FTC v. Inv. Dev. Inc., No. 89-0642 (E.D. La.
1989).
\402\ 71 FR at 19073.
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To prevent deceptive use of such earnings claims, Sec. 437.4(c),
as proposed in the RNPR, prohibited the use of industry financial,
earnings, or performance information ``unless the seller has written
substantiation demonstrating that the information reflects the typical
or ordinary financial, earnings, or performance experience of
purchasers of the business opportunity being offered for sale.'' \403\
---------------------------------------------------------------------------
\403\ 73 FR at 16135.
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In response to the RNPR, one commenter noted that this provision
would prohibit sellers from using industry statistics in ways that
could assist potential purchasers in making informed decisions.\404\
For example, hypothetically, the performance experience of prior
purchasers of a business opportunity might contrast favorably against
the industry average and, if so, that information might help a
prospective purchaser assess the value of the investment against other
proposed businesses.
---------------------------------------------------------------------------
\404\ Planet Antares-RNPR at 25.
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The Staff Report noted that there may be a limited number of
situations in which providing industry statistics may be beneficial to
potential purchasers, but expressed concern that industry statistics
can be, and have been, used to imply to potential purchasers that their
likely earnings with the promoted business opportunity will match the
industry averages.\405\
---------------------------------------------------------------------------
\405\ Staff Report at 99.
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The Staff Report recommended a small change to Section 437.4(c) to
state that it is an unfair or deceptive practice to ``disseminate
industry financial, earnings, or performance information unless the
seller has written substantiation demonstrating that such information
reflects, or does not exceed, the typical or ordinary financial,
earnings, or performance experience of purchasers of the business
opportunity being offered for sale.'' The Commission received no
comments on this provision.
The Commission concludes that the recommended change is warranted.
Section 437.4(c) of the final Rule thus includes the staff's
recommended language. Accordingly, under the final Rule, a seller can
use industry information only if it is able to measure the performance
of existing purchasers of that seller's offered business opportunity
and document that those existing purchasers' typical performance equals
or exceeds the average performance of purchasers of other business
opportunities available in the industry. A start-up business
opportunity with no or very limited prior sales, therefore, probably
would not be able to use industry statistics because it would lack a
sufficient basis to demonstrate that the industry statistics reflect
the typical or ordinary experience of the start-up's prior purchasers.
5. Section 437.4(d): Material Changes in Earnings Claim Statement
Section 437.4(d) addresses post-disclosure changes in earnings
information. It prohibits any seller making an earnings claim from
failing to notify the prospective purchaser, before the prospect enters
into a contract or pays any consideration, of any material change that
has occurred and that calls into question the relevance or reliability
of the information contained in its earnings claim statement. For
example, ``[s]uch material changes include the issuance of a new survey
or other facts that would lead the seller to conclude that a prior
survey is no longer valid.'' \406\ In crafting Sec. 437.4(d), the
Commission was cognizant of the high degree of materiality of earnings
information for prospective purchasers, but attempted to minimize
compliance costs during the time before the prospective purchaser
enters into a contract or pays any consideration.\407\ In the RNPR, the
Commission explained that ``[t]he proposal would not require a seller,
for example, to prepare a revised earnings claim statement immediately,
but would simply require written notification of the change.'' \408\ No
comments in response to the RNPR or the Staff Report were directed at
this provision. The Commission finds that Sec. 437.4(d) strikes the
right balance between accurate disclosure to prevent deception and the
compliance costs that would result from a more frequent than quarterly
updating requirement of the full earnings claim document. The final
Rule includes this provision as recommended in the Staff Report.
---------------------------------------------------------------------------
\406\ Id. at 100.
\407\ Id.
\408\ 71 FR at 19073.
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E. Section 437.5: Sales Conducted in Spanish or Other Languages Besides
English
On its own initiative, the staff recommended in the Staff Report
adding a provision that would require sellers to provide the disclosure
document and the disclosures required by the Rule to potential
purchasers in the same language that the seller uses to market the
business opportunity. This recommendation was based, in part, on a
long-standing Commission enforcement policy, which advises that where a
Commission order, rule, or guide requires the clear and conspicuous
disclosure of certain information in an advertisement or sales material
appearing in a non-English language publication, the disclosures should
be made in the predominant language of the publication in which the
advertisement or sales material appears.\409\ This policy is the result
of the Commission's recognition that ``with increasing intensity,
advertisers are making special efforts to reach foreign language-
speaking consumers.'' \410\ Under the policy, failure to provide the
required disclosures either in the predominant language of the
publication or of the target audience could result in a civil penalty
or other law enforcement proceeding for violating the terms of any
applicable Commission order or rule.\411\
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\409\ FTC Enforcement Policy Statement Concerning Clear and
Conspicuous Disclosures in Foreign Language Advertising and Sales
Materials, 16 CFR 14.9(a). In the case of any other advertisement or
sales material, the Commission policy states that the disclosures
should appear in the language of the target audience.
\410\ Id.
\411\ Id.
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The staff's recommendation to address foreign-language sales also
is based on its belief that when a business opportunity seller
purposefully reaches out to a particular population by marketing in the
foreign language spoken by members of that community, all of the
disclosures required by the Rule should be accessible and
comprehensible to each of those potential purchasers.\412\ Accordingly,
the Staff Report recommended that business opportunity sellers be
required to provide the disclosure document to potential purchasers in
the language the seller uses to conduct the offer for sale, sale, or
promotion of the business opportunity.
---------------------------------------------------------------------------
\412\ Staff Report at 101.
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The Staff Report sought public comment about whether this
requirement adequately promotes the Commission's goal of ensuring that
potential purchasers be provided with information necessary to make an
informed purchasing decision. It also solicited comment on what
alternatives, if any, the Commission should consider, and the costs and
benefits of each alternative.
In response to the Staff Report, the Commission received one
comment addressing the disclosure requirements for foreign-language
sales. Specifically, DOJ agreed with the staff's
[[Page 76850]]
recommendation that the required disclosures should be made in the same
language as the sale, noting that the disclosures should be ``as
comprehensible to would-be buyers as is the [seller's] sales pitch.''
\413\
---------------------------------------------------------------------------
\413\ DOJ-Staff Report at 2.
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After consideration of the record, the Commission's long-standing
policy, and the rationale behind the staff's recommendation, the
Commission agrees that an English disclosure document for business
opportunities marketed in Spanish and other foreign languages may have
little utility for the targeted prospects. Accordingly, the final Rule
contains disclosure requirements for sales conducted in Spanish or
other languages besides English.
Because the Commission's law enforcement history demonstrates that
fraudulent business opportunities have specifically targeted Spanish-
speaking communities,\414\ the Staff Report recommended that the Rule
contain a Spanish translation of the basic disclosure document as
Appendix B. In the Staff Report, the staff solicited comment on whether
the Spanish translation of the disclosure document was adequate to
convey to Spanish-speaking potential purchasers the meaning of the
required disclosures, or whether different word choices would make the
disclosures more meaningful. No comments addressed these issues. Based
on its law enforcement experience with business opportunity sellers
specifically targeting Spanish-speaking consumers, the Commission
agrees that a Spanish translation of the disclosure document is
appropriate. Accordingly, a Spanish version of the disclosure document
is included as Appendix B to the final Rule.
---------------------------------------------------------------------------
\414\ See supra note 99 and accompanying text. DOJ also
commented that in its experience, business opportunities have been
pitched to the Spanish community. See DOJ-Staff Report at 2.
---------------------------------------------------------------------------
Although business opportunities may be marketed in dozens of
languages besides English and Spanish, the Commission's law enforcement
experience does not suggest that there are other particular languages
in which business opportunity sales are conducted. Moreover, the record
is silent as to whether translations into other languages are
necessary. Therefore, the Commission has determined not to provide
translations of the disclosure document into other languages. Under
Sec. 437.5(b), should a business opportunity seller use a language
other than English or Spanish, the seller would be responsible for
obtaining an accurate translation of the disclosure document.
The Commission adopts the language proposed in the Staff Report,
with one slight modification. Namely, Sec. 437.5 of the final Rule
makes clear that all earnings disclosures required by Sec. 437.4--
rather than those identified only in Sec. 437.4(a)--must be made in
the language in which the business opportunity sales are conducted.
Section 437.5 of the final Rule, entitled ``Sales conducted in Spanish
and other languages besides English'' requires:
(a) If the seller conducts the offer for sale, sale, or promotion
of a business opportunity in Spanish, the seller must provide the
disclosure document required by Sec. 437.3(a) in the form and language
set forth in Appendix B to this part, and the disclosures required by
Sec. Sec. 437.3(a) and 437.4 must be made in Spanish; and
(b) If the seller conducts the offer for sale, sale, or promotion
of a business opportunity in a language other than English or Spanish,
the seller must provide the disclosure document required by Sec.
437.3(a) using the form and an accurate translation of the language set
forth in Appendix A to this part, and the disclosures required by
Sec. Sec. 437.3(a) and 437.4 must be made in that language.
Section 437.3(a) has been revised to conform with this
requirement.\415\
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\415\ Section 437.3 of the final Rule makes it an unfair or
deceptive act or practice for any seller to fail to disclose to a
prospective purchaser material information required by Sec. Sec.
437.3 and 437.4 in a single written document in the form and using
the language set forth in Appendix A to the Rule; or if the offer
for sale, sale, or promotion of a business opportunity is conducted
in Spanish, in the form and using the language set forth in Appendix
B to the Rule; or if the offer for sale, sale, or promotion of a
business opportunity is conducted in a language other than English
or Spanish, using the form and an accurate translation of the
language set forth in Appendix A to the Rule.
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F. Section 437.6: Other Prohibited Practices
Section 437.6 of the final Rule prohibits sellers from engaging in
a number of deceptive practices, whether directly or through a third
party, that are common in the sale of fraudulent business opportunity
ventures. Violation of any provision of this section would be a
violation of the Rule and an unfair or deceptive act or practice in
violation of Section 5 of the FTC Act. Each of these prohibitions is
discussed below.
1. Section 437.6(a): Disclaiming Any Required Disclosure
Section 437.6(a) prohibits a business opportunity seller from
disclaiming, or requiring ``a prospective purchaser to waive reliance
on, any statement made in any document or attachment that is required
or permitted to be disclosed under this Rule.'' \416\ The purpose of
this provision is to preserve the reliability and integrity of pre-sale
disclosures. Otherwise, the Rule's very purpose would be undermined by
signaling to prospects that they cannot trust or rely on the Rule's
mandated disclosures.\417\
---------------------------------------------------------------------------
\416\ This provision is parallel to the anti-disclaimer
prohibition in the Amended Franchise Rule. See 16 CFR 436.9(h).
\417\ 71 FR at 19073.
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule includes Sec.
437.6(a) as recommended in the Staff Report.
2. Section 437.6(b): Making Inconsistent or Contradictory Claims
Section 437.6(b) prohibits sellers from making any representation,
whether orally, visually, or in writing, that is inconsistent with or
that contradicts any statement made in the basic disclosure document or
in any earnings claim disclosures required by the Rule.\418\ Without
this prohibition, a seller, for example, would be free to show a
prospect a graph with earnings information, even though the seller's
disclosure document states that it does not make an earnings
claim.\419\ The Commission's law enforcement experience shows that this
is a prevalent problem.\420\ This provision, like the anti-disclaimer
provision, is necessary to preserve the reliability and integrity of
the required disclosures.
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\418\ This provision is similar to the Amended Franchise Rule's
prohibition against making statements that contradict any required
disclosure. See 16 CFR 436.9(a).
\419\ 71 FR at 19074.
\420\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Inspired Ventures, Inc., No. 02-
21760-CIV-Jordan (S.D. Fla. 2002); FTC v. Mortgage Serv. Assocs.,
Inc., No. 395-CV-1362 (AVC) (D. Conn. 1995); FTC v. Tower Cleaning
Sys., Inc., No. 965844 (E.D. Pa. 1996).
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule includes Sec.
437.6(b) as recommended in the Staff Report.
3. Section 437.6(c): Including Extraneous Materials in Disclosure
Document
Section 437.6(c) prohibits the inclusion of any additional
information in the disclosure document that is not explicitly required
or permitted by the Rule. This prohibition is intended to preserve the
clarity, coherence, readability, and utility of the disclosures by
ensuring that the seller does not
[[Page 76851]]
clutter the disclosure document with extraneous materials that may
overwhelm purchasers, distracting them from the required
disclosures.\421\ To facilitate a prospective purchaser's ability to
maneuver through an electronic version of the disclosure document, this
provision expressly permits the use of common navigational tools, such
as scroll bars and internal links that facilitate review of an
electronic document. The provision prohibits, however, other electronic
features--such as audio, video, animation, or pop-up screens--that may
distract attention from the core disclosures.\422\
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\421\ Indeed, in response to the INPR, DOJ urged the Commission
to exclude state disclosures from the proposed form. In DOJ's
experience, ``[p]urveyors of fraudulent business opportunities will
seek every opportunity to water down this document with extraneous
information to hide any negative information it may contain.'' 73 FR
at 16128. The Commission's experience supports DOJ's conclusions.
\422\ This is the same approach used in the Amended Franchise
Rule. See 16 CFR 436.6(d).
---------------------------------------------------------------------------
The prohibition on including extraneous materials extends to
information required or permitted by state law. One important goal of
revising and tailoring the disclosure requirements for business
opportunity sellers is to simplify and streamline the disclosures into
a single-page document. Accordingly, the Commission has concluded that
allowing business opportunity sellers to mix federal and state
disclosures into one document would be an invitation to sellers to
present lengthy and confusing information to prospective
purchasers.\423\ Such a result would be contrary to the Commission's
goal of providing a simple, clear, and concise disclosure document.
State laws offering equal or greater protections are not preempted by
the final Rule. The final Rule only prohibits any sellers from
providing any disclosures required under state law together with the
disclosures required under the final Rule. No comments received in
response to the RNPR or the Staff Report were directed to this
provision, and the final Rule includes Sec. 437.6(c) as recommended in
the Staff Report.
---------------------------------------------------------------------------
\423\ See 73 FR at 16128.
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4. Section 437.6(d): Making False Earnings Claims
As previously noted, the making of deceptive earnings claims is the
most prevalent problem in the offer and sale of business opportunities.
Accordingly, Sec. 437.6(d) prohibits sellers from misrepresenting the
amount of sales, or gross or net income or profits a prospective
purchaser may earn or that prior purchasers have earned. This
prohibition complements the final Rule's earnings substantiation
requirements in Sec. 437.4. Thus, both unsubstantiated and false
earnings claims are prohibited by the Rule.
No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule includes Sec. 437.6(d) as
recommended in the Staff Report.
5. Section 437.6(e): Misrepresentations Regarding the Law as to
Earnings Claims and the Identity of Other Business Opportunity
Purchasers
Section 437.6(e) prohibits sellers from stating that any law or
regulation prohibits seller from furnishing earnings information. This
provision is intended to address a recurring problem identified in the
rulemaking record--that sellers often misrepresent that federal law or
the FTC prohibits the making of earnings claims.\424\ In effect,
prohibiting these types of misrepresentations ensures that prospective
purchasers are not misled into believing that earnings information is
unavailable to them as a matter of law.\425\ In addition, the RPBOR
added a second proposed prohibition to Sec. 437.6(e) that would
prevent sellers from misrepresenting that any law or regulation
prohibits a seller from disclosing to prospective purchasers the
identity of other purchasers of the business opportunity. The
Commission proposed this change in response to a request from DOJ,
which noted that in its experience, fraudulent business opportunity
sellers frequently deflect potential purchasers' requests for the
contact information of current distributors by falsely claiming that
the law forbids disclosing those identities.\426\ The Commission is
convinced that the prohibition is appropriate because it will help
consumers understand that if the seller supplies no references, it is
because none exist, or because the seller chooses not to make such
information available in contravention of the Rule.\427\
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\424\ In the Amended Franchise Rule, the Commission addressed
this problem in the context of sales of business format franchises
through a new requirement that franchise sellers include a specific
preamble in the financial performance section of their disclosures.
Among other things, the preamble makes clear that franchisors can
make financial performance information available, assuming they have
a reasonable basis for their claims. See 16 CFR 436.5(s)(1).
Although the same problem exists in the sale of business
opportunities, the Commission, in an effort to streamline the
business opportunity disclosure document and reduce compliance
costs, proposed this different approach for the Business Opportunity
Rule, believing it sufficient to address deceptive business
opportunity sales. The Commission noted that ``whereas the Franchise
Rule seeks to encourage franchisors to make earnings claims, no such
encouragement is needed in the business opportunity field, where
such claims are all too common.'' 71 FR at 19075 n.211.
\425\ 71 FR at 19075.
\426\ 73 FR at 16127.
\427\ Id.
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No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule contains Sec. 437.6(e) as
recommended in the Staff Report.
6. Section 437.6(f): Failing To Provide Written Substantiation for
Earnings Claims
Section 437.6(f) prohibits a seller who makes an earnings claim
from failing to provide written substantiation to prospective
purchasers, and to the Commission, upon request.\428\ Rather than
mandating that business opportunity sellers routinely include
documentation for earnings claims--which could be voluminous--in the
earnings claim statement itself, the final Rule's requirement is
intended to reduce compliance costs by requiring only that such
materials be provided when requested. Purchasers could then review the
documentation if they so choose. Therefore, although substantiation for
earnings claims must exist, in writing, at the time any such claims are
made, that substantiation need be provided to potential purchasers (or
to the Commission) only upon request.
---------------------------------------------------------------------------
\428\ The Amended Franchise Rule and the interim Business
Opportunity Rule have similar requirements. See 16 CFR
436.5(r)(3)(v); 437.1(b)(2); and 437.1(c)(2).
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule contains Sec. 437.6(f) as
recommended in the Staff Report.
7. Section 437.6(g): Misrepresenting Commissions or Other Payments From
the Seller
Section 437.6(g) prohibits sellers from misrepresenting how or when
commissions, bonuses, incentives, premiums, or other payments from the
seller to the purchaser will be calculated or distributed. The
Commission's law enforcement experience shows that these kinds of
misrepresentations underlie deceptive work-at-home opportunities, where
prospective purchasers rely on the seller as the source of income, or
where the seller manages the system's cash flow.\429\ The
[[Page 76852]]
Commission concluded that absent this prohibition, the Rule would not
address false promises about the compensation sellers will provide
post-sale.\430\
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\429\ E.g., FTC v. Indep. Mktg. Exch., Inc., No. 10-CV-00568-
NLH-KMW (D.N.J. 2010); FTC v. Preferred Platinum Servs. Network,
Inc., No.10-CV-00538-MLC-LHG (D.N.J. 2010); FTC v. Sun Ray Traders,
Inc., No. 05-20402-CIV-Seitz/Bandstra (S.D. Fla. 2005); FTC v.
Castle Publ'g, No. A03CA 905 SS (W.D. Tex. 2003); FTC v. Trek
Alliance, Inc., No. 02-9270 SJL (AJWx) (C.D. Cal. 2002); FTC v.
Terrance Maurice Howard, No. SA02CA0344 (W.D. Tex. 2002); FTC v.
Am.'s Shopping Network, Inc., No. 02-80540-CIV-Hurley (S.D. Fla.
2002).
\430\ 71 FR at 19075.
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule contains Sec. 437.6(g) as
recommended in the Staff Report.
8. Section 437.6(h): Misrepresenting Costs, Performance, Efficacy or
Material Characteristics of Business Opportunity
A common complaint of victims of business opportunity fraud arises
from misrepresentations about the costs or the performance, efficacy,
nature, or central characteristics of a business opportunity offered to
a prospective purchaser, or the goods or services needed to operate the
business opportunity. For example, a seller may misrepresent the total
costs involved in purchasing or operating a business opportunity.\431\
In other instances, a seller may misrepresent the quality of goods
offered by the business opportunity seller, either for use in operating
the business (e.g., vending machines) or for ultimate resale to
consumers (e.g., novelty items).\432\ Section 437.6(h) makes such
deception actionable as a violation of the final Rule.
---------------------------------------------------------------------------
\431\ E.g., FTC v. World Traders Ass'n, Inc., No. CV05 0591 AHM
(CTx) (C.D. Cal. 2005); FTC v. Castle Publ'g, No. A03CA 905 SS (W.D.
Tex. 2003); FTC v. End70 Corp., No. 3 03CV-0940N (N.D. Tex. 2003);
FTC v. Darrell Richmond, No. 3:02-3972-22 (D.S.C. 2003); FTC v.
Carousel of Toys USA, Inc., No. 97-8587 CIV-Ungaro-Benages (S.D.
Fla. 1997); FTC v. Parade of Toys, Inc., No. 97-2367-GTV (D. Kan.
1997); FTC v. Telecomm. of Am., Inc., No. 95-693-CIV-ORL-22 (M.D.
Fla. 1995). Pre-sale disclosure of cost information is a remedial
approach taken in many Commission trade regulation rules. E.g., 900
Number Rule, 16 CFR 308.3(b); TSR, 16 CFR 310.3; Funeral Rule, 16
CFR 453.2.
\432\ E.g., FTC v. Kitco of Nev., 612 F. Supp. 1282 (D. Minn.
1985); FTC v. Associated Record Distribs., Inc., No. 02-21754-CIV-
Graham/Garber (S.D. Fla. 2002); FTC v. Home Professions, Inc., No.
00-111 (C.D. Cal. 2000); FTC v. Worldwide Mktg. & Distrib. Co., No.
95-8422-CIV-Roettger (S.D. Fla. 1995); see also FTC v. Med. Billers
Network, No. 05 CV 2014 (RJH) (S.D.N.Y. 2005).
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule contains Sec. 437.6(h) as
recommended in the Staff Report.
9. Section 437.6(i): Misrepresenting Post-Sale Assistance
Section 437.6(i) prohibits business opportunity sellers from
misrepresenting any material aspect of assistance it represents it will
provide to purchasers.\433\ The Commission's enforcement experience
shows that misrepresentation of post-sale assistance offered to a
prospective purchaser is an element common to many business opportunity
frauds targeted in Commission cases.\434\ Also, consumer complaints
about misrepresentations concerning the type and amount of assistance
promised but not received are among the top categories of reported
deceptive business opportunity practices.\435\ The Commission has
concluded that the best way to address this deceptive practice is
through a direct prohibition.\436\
---------------------------------------------------------------------------
\433\ 71 FR at 19075 n.216.
\434\ The Commission has recognized that promises of assistance
made to induce prospects to purchase a franchise are material,
especially to those prospects with ``little or no experience at
running a business.'' 43 FR at 59676-77; see, e.g., FTC v. Am.
Entm't Distribs., Inc., No. 04-22431-CIV-Martinez (S.D. Fla. 2004);
FTC v. USS Elder Enter., Inc., No. SA CV-04-1039 AHS (ANx) (C.D.
Cal. 2004); FTC v. Kitco of Nev., 612 F. Supp. 1282 (D. Minn. 1985);
FTC v. Leading Edge Processing, Inc., No. 6:02-CV-681-ORL-19 DAB
(M.D. Fla. 2003); FTC v. Darrell Richmond, No. 3:02-3972-22 (D.S.C.
2003); FTC v. Elec. Med. Billing, Inc., No. SA02-368 AHS (ANX) (C.D.
Cal. 2003); FTC v. Transworld Enters., Inc., No. 00 8126-CIV-Graham
(S.D. Fla. 2000); FTC v. Advanced Pub. Commc'ns Corp., No. 00-00515-
CIV-Ungaro-Benages (S.D. Fla. 2000); FTC v. Hi Tech Mint Sys., Inc.,
No. 98 CIV 5881 (JES) (S.D.N.Y. 1998); United States v. QX Int'l,
Inc., No. 398-CV-0453-D (N.D. Tex. 1998).
\435\ 71 FR at 19075 n.218.
\436\ 71 FR at 19075.
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule contains Sec. 437.6(i) as
recommended in the Staff Report.
10. Section 437.6(j): Misrepresenting Locations, Outlets, Accounts, or
Customers
Section 437.6(j) prohibits sellers from misrepresenting ``the
likelihood that a seller, locator, or lead generator will find
locations, outlets, accounts, or customers for the purchaser.''
Fraudulent business opportunity sellers often promise that the seller
or some other third party will find locations or outlets for
purchasers' equipment, or accounts or customers for the purchasers'
services.\437\ Such representations include claims that a particular
locator is successful in finding locations, as well as representations
that the seller or other third party has already found and entered into
contracts with location owners or customers.\438\ The Commission has
found that these types of representations are material to a prospective
purchaser, because they foster the expectation that a profitable market
exists for the goods or services the purchaser will sell.\439\
---------------------------------------------------------------------------
\437\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); FTC v. Int'l Trader, No. CV-02-02701 AHM
(JTLx) (C.D. Cal. 2002); FTC v. Elec. Processing Servs., Inc., No.
CV-S-02-0500-L.H.-R.S. (D. Nev. 2002); FTC v. Home Professions,
Inc., No. SACV 00-111 AHS (Eex) (C.D. Cal. 2001); FTC v. Encore
Networking Servs., No. 00-1083 WJR (AIJx) (C.D. Cal. 2000); FTC v.
AMP Publ'n, Inc., No. SACV-00-112-AHS-ANx (C.D. Cal. 2001); FTC v.
Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez (S.D. Fla.
1996).
\438\ E.g., FTC v. Hart Mktg. Enters. Ltd., No. 98-222-CIV-T-23
E (M.D. Fla. 1998); FTC v. Vendors Fin. Servs., Inc., No. 98-1832
(D. Colo. 1998); FTC v. Hi Tech Mint Sys., Inc., No. 98 CIV 5881
(S.D.N.Y. 1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-
Gonzalez (S.D. Fla. 1996).
\439\ 71 FR at 19076.
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No comments received in response to the RNPR or the Staff Report
addressed this provision, and the final Rule contains Sec. 437.6(j) as
recommended in the Staff Report.
11. Section 437.6(k): Misrepresenting Cancellation or Refund Policy
Section 437.6(k) prohibits a seller from misrepresenting, directly
or through a third party, the terms and conditions of any cancellation
or refund policy. This prohibition does not compel any seller to offer
a cancellation or a refund, nor does it dictate the terms and
conditions under which a seller may offer such relief. Rather, it
simply ensures that any cancellation or refund offer a seller makes
before the sale is truthful and accurate. The Commission's law
enforcement experience demonstrates that, in many instances, business
opportunity sellers falsely claim that they permit a purchaser to
cancel the purchase, guarantee a 100% refund, or promise to buy back
some or all of the products sold to a purchaser.\440\ These
representations have lured prospective purchasers into believing that
the investment is either low-risk or even risk-free.\441\
---------------------------------------------------------------------------
\440\ E.g., FTC v. Med. Billers Network, No. 05 CV 2014 (RJH)
(S.D.N.Y. 2005); FTC v. Castle Publ'g, No. A03CA 905 SS (W.D. Tex.
2003); FTC v. Am.'s Shopping Network, Inc., No. 02-80540-CIV-Hurley
(S.D. Fla. 2002); FTC v. Home Professions, Inc., No. SACV 00-111 AHS
(Eex) (C.D. Cal. 2001); FTC v. Encore Networking Servs., No. 00-1083
WJR (AIJx) (C.D. Cal. 2000).
\441\ 71 FR at 19076.
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No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(k) as recommended in the Staff Report.
12. Section 437.6(l): Failing To Provide a Refund or Cancellation
Section 437.6(l) prohibits a seller from failing to cancel a
purchase or make a refund when the purchaser has qualified for such
relief under the seller's
[[Page 76853]]
cancellation or refund policy.\442\ As noted above, Sec. 437.6(k)
prohibits a seller from misrepresenting, pre-sale, the seller's
cancellation or refund policy. Section 437.6(l) complements that
section and is intended to address sellers' post-sale conduct,
prohibiting the seller from failing to honor cancellation or refund
requests when purchasers have satisfied all the terms and conditions
disclosed in the seller's disclosure document for obtaining such
relief.\443\ In the Commission's experience, the failure of business
opportunity sellers to make promised refunds or to honor cancellation
policies ranks high among issues raised by business opportunity
purchasers.\444\
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\442\ This is consistent with the interim Business Opportunity
Rule approach. See 16 CFR 437.1(h).
\443\ E.g., FTC v. AMP Publ'ns, Inc., No. SACV-00-112-AHS-ANx
(C.D. Cal. 2001) (failure to honor 90-day money back guarantee); FTC
v. Star Publ'g Group, Inc., No. 00-023 (D. Wyo. 2000) (failure to
honor 90-day refund policy).
\444\ 73 FR at 19076.
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No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(l) as recommended in the Staff Report.
13. Section 437.6(m): Misrepresenting Business Opportunity as an
Employment Opportunity
Section 437.6(m) prohibits business opportunity sellers from
misrepresenting a business opportunity as an employment opportunity.
The Commission's law enforcement experience demonstrates that some
business opportunity sellers lure unsuspecting consumers by falsely
representing that they are offering employment when, in fact, they are
offering vending, work-at-home, or other business opportunities. For
example, in some instances consumers have responded to advertisements
seeking sales executives, only to discover that the ``position''
requires them to purchase equipment or products from the seller and, in
turn, to sell those products.\445\ The Commission concludes that this
prohibition is necessary to protect consumers against false
representations of employment opportunities.
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\445\ See, e.g., FTC v. Trek Alliance, Inc., No. 02-9270 SJL
(AJWx) (C.D. Cal. 2002) (defendants placed ads in ``Help Wanted''
sections of newspaper offering salaried position); FTC v. Leading
Edge Processing, Inc., No. 6:02-CV-681-ORL-19 DAB (M.D. Fla. 2003)
(defendants sent emails to job seekers who posted their resumes on
job Web sites, falsely representing the availability of jobs and
guaranteeing a steady stream of work); FTC v. David Martinelli, Jr.,
No. 3:99 CV 1272 (D. Conn. 2000) (defendants sent unsolicited emails
falsely offering a $13.50 per hour position processing applications
for credit, loans, or employment).
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(m) as recommended in the Staff Report.
14. Section 437.6(n): Misrepresenting the Exclusivity of Territories
Section 437.6(n) prohibits misrepresentations about the terms of
any territorial exclusivity or limited territorial protection offered
to a prospective purchaser.\446\ In the Commission's experience, false
or misleading promises about territories are a common deceptive
practice reported by business opportunity purchasers.\447\ The
Commission has stated that representations about territorial
exclusivity or more limited territorial protections are material
because they often induce a prospective purchaser into believing that
he or she will not be competing for customers with the seller or other
purchasers, thereby increasing the purchaser's likelihood of
success.\448\
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\446\ 71 FR at 19076. In some instances, a business opportunity
seller may offer a prospect an exclusive territory, in which no
other person has the right to compete within the territory. In other
instances, a seller may offer a more limited protection. For
example, the seller may prohibit other purchasers from operating in
the territory, but reserve to itself the ability to conduct
telemarking or Internet sales in the territory. Regardless of the
scope of the territorial protection, Sec. 437.6(n) prohibits
business opportunity sellers from misrepresenting the nature of the
territory.
\447\ Id. at 19065.
\448\ Id. at 19075.
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No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(n) as recommended in the Staff Report.
15. Section 437.6(o): Assigning a Purported Exclusive Territory to
Another Purchaser
Section 437.6(o) prohibits a seller from assigning a single
``exclusive'' territory to more than one purchaser. This prohibition
complements Sec. 437.6(n), which prohibit sellers from misrepresenting
territories. It is intended to address sellers' post-sale conduct, and
prohibits the seller from failing to honor its promises regarding
exclusive or protected territories. Consumer complaints indicate, and
the Commission's law enforcement experience confirms, that fraudulent
business opportunity sellers often sell the same purportedly exclusive
territory to several unsuspecting purchasers.\449\ In these
circumstances, purchasers who have been lured to invest in an
opportunity on the basis of promises of an exclusive territorial lock
on their market find that their chances of success are materially
reduced by competition from the other purchasers.
---------------------------------------------------------------------------
\449\ E.g., FTC v. Am. Safe Mktg., No. 1:89-CV-462-RLV (N.D. Ga.
1989).
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(o) as recommended in the Staff Report.
16. Section 437.6(p): Misrepresenting Third Party Endorsements or Other
Affiliation
Section 437.6(p) prohibits business opportunity sellers from
misrepresenting that ``any person, trademark or service mark holder, or
governmental entity, directly or indirectly benefits from, sponsors,
participates in, endorses, approves, authorizes, or is otherwise
associated with the sale of the business opportunity or the goods or
services sold through the business opportunity.'' \450\ The
Commission's enforcement experience indicates that business opportunity
frauds often lure consumers by misrepresenting that their opportunities
have been approved or endorsed by a government agency or well-known
third party.\451\ In other instances, business opportunity sellers
falsely claim that their opportunities are sponsored by or associated
with a charity, or that a charity will benefit from a percentage of
sales.\452\ The Commission has concluded that such claims are material
to a purchaser because an alleged endorsement or shared-profit
arrangement may create the impression that the opportunity is
legitimate or that the affiliation will enhance sales and profits.\453\
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\450\ Cf. TSR, 16 CFR 310.3(a)(vii) (prohibiting
misrepresentations concerning ``affiliation with, or endorsement or
sponsorship by, any person or government entity'').
\451\ E.g., FTC v. Streamline Int'l, No. 01-6885-CIV-Ferguson
(S.D. Fla. 2001) (misrepresented FDA approval); FTC v. Star Publ'g
Group, Inc., No. 00-023 (D. Wyo. 2000) (misrepresented HUD
approval); FTC v. Bus. Opportunity Ctr., Inc., No. 95 8429-CIV-Zloch
(S.D. Fla. 1995) (misrepresented FDA approval); see also FTC v.
Hawthorne Commc'ns, No. 93-7002 AAH (JGX) (C.D. Cal. 1993) (order
restricting use of testimonials and endorsements in the sale of
business opportunities).
\452\ E.g., FTC v. Global Assistance Network for Charities, No.
96-2494 PHX RCB (D. Ariz. 1996).
\453\ 71 FR at 19077.
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No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(p) as recommended in the Staff Report.
17. Section 437.6(q): Misrepresenting References (the Use of
``Shills'')
Section 437.6(q) addresses one of the most pernicious practices
common in fraudulent business opportunity sales--
[[Page 76854]]
the use of ``shill'' references to lure unsuspecting consumers to
invest in a business opportunity.\454\ The Commission has brought many
actions against business opportunity sellers who provided prospects
with the names of individuals they falsely claimed were independent
prior purchasers or independent third parties, but who, in fact, were
paid by the seller to give favorable false reports confirming the
seller's claims, especially their earnings claims.\455\ The use of paid
shills to give false reports induces prospective purchasers into
believing that the opportunity is a safe and lucrative investment.
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\454\ See id. at n.236 (``After earnings claims, false
testimonials and shill references are the most common Section 5
allegations in Commission business opportunities cases.'')
\455\ E.g., FTC v. Am. Entm't Distribs., Inc., No. 04-22431-CIV-
Martinez (S.D. Fla. 2004); United States v. Vaughn, No. 01-20077-01-
KHV (D. Kan. 2001); FTC v. Hart Mktg. Enters. Ltd., No. 98-222-CIV-
T-23 E (M.D. Fla. 1998); FTC v. Inetintl.com, No. 98-2140 (C.D. Cal.
1998); FTC v. Infinity Multimedia, Inc., No. 96-6671-CIV-Gonzalez
(S.D. Fla. 1996); FTC v. Allstate Bus. Consultants Group, Inc., No.
95-6634-CIV-Ryskamp (S.D. Fla. 1995).
---------------------------------------------------------------------------
To address this deceptive practice, Sec. 437.6(q) contains two
related prohibitions. First, it prohibits any seller from
misrepresenting that any person ``has purchased a business opportunity
from the seller.'' This prevents a seller, for example, from claiming
that a company employee, locator, or other third party is a prior
purchaser of the opportunity, when that is not the case. Second, the
provision prohibits a seller from misrepresenting that any person--such
as a locator, broker, or organization that purports to be an
independent trade association--``can provide an independent or reliable
report about the business opportunity or the experiences of any current
or former purchaser.'' Providing a prospect with a list of brokers who
are paid to give favorable reports, for example, would violate this
provision because any statement a person on such a list makes would not
be independent and reliable.\456\
---------------------------------------------------------------------------
\456\ E.g., FTC v. Affiliated Vendors Ass'n, Inc., No. 02-CV-
0679-D (N.D. Tex. 2002); FTC v. Raymond Urso, No. 97-2680-CIV-
Ungaro-Benages (S.D. Fla. 1997); see also 71 FR at 19077 n. 238.
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.6(q) as recommended in the Staff Report.
18. Section 437.6(r): Failing To Disclose Consideration Paid to or
Prior Relationship With Prior Purchaser
Section 437.6(r) is intended to complement the prohibition in Sec.
437.6(q) regarding the use of ``shills.'' Section 437.6(r) prohibits a
seller from failing to disclose payments to individuals identified as
references, as well as any personal relationships the seller has with
such individuals. Such prohibitions are necessary because an individual
with a personal relationship with the seller, or who has been paid for
his or her assessment of an opportunity, is likely to be biased, and
any story of success or high earnings from any such person is
suspect.\457\ The final Rule clarifies that the term ``consideration''
is to be interpreted broadly to include not only direct cash payments,
but indirect financial benefits, such as forgiveness of debt, as well
as other tangible benefits such as equipment, services, and
discounts.\458\
---------------------------------------------------------------------------
\457\ Indeed, the Commission has long held that the failure to
disclose compensation paid to an endorser is a deceptive practice in
violation of Section 5. See 71 FR at 19077; see also Guides
Concerning the Use of Endorsements and Testimonials in Advertising,
16 CFR 255 (Oct. 15, 2009).
\458\ 71 FR at 19078.
---------------------------------------------------------------------------
The RPBOR modified slightly the language of this provision to make
clear that the information that must be disclosed to a potential
purchaser is not only the payment of any consideration to the reference
by the seller, but also the existence of any relationship between the
seller and the reference.\459\ Therefore, the RPBOR added clarifying
language to the opening clause of Sec. 437.6(r) so that it prohibits a
failure to disclose any consideration paid, any personal relationship,
or other past or current business relationship other than as the
purchaser of the business opportunity being offered.
---------------------------------------------------------------------------
\459\ 73 FR at 16128, 16136.
---------------------------------------------------------------------------
No comments, either in response to the RNPR or the Staff Report,
addressed this provision. Because the Commission finds that the small
clarification to Sec. 437.6(r) more accurately identifies the
information that must be disclosed to a potential purchaser, the
Commission adopts Sec. 437.6(r) in the final Rule in the form
recommended in the Staff Report.
G. Section 437.7: Record Retention
Section 437.7 establishes the minimal record retention requirements
necessary to document compliance and permit effective Rule enforcement.
This section applies to both the business opportunity seller and its
principals, to ensure that records required by the Rule are not
destroyed if the seller goes out of business or otherwise ceases
operations.\460\ As detailed below, sellers and their principals must
keep, and make available to the Commission, the following five types of
records for a period of three years:
---------------------------------------------------------------------------
\460\ 71 FR at 19078.
---------------------------------------------------------------------------
(1) Section 437.7(a): Each materially different version of all
documents required by the Rule;
(2) Section 437.7(b): Each purchaser's disclosure receipt;
(3) Section 437.7(c): Each executed written contract with a
purchaser;
(4) Section 437.7(d): Each oral or written cancellation or refund
request received from a purchaser; and
(5) Section 437.7(e): All substantiation upon which the seller
relies from the time an earnings claim is made.
The Commission finds that these limited recordkeeping requirements
strike the right balance, requiring no more than necessary for
effective law enforcement, while minimizing compliance costs.\461\
Moreover, records can be retained electronically, helping to further
minimize compliance costs.
---------------------------------------------------------------------------
\461\ Id.
---------------------------------------------------------------------------
No comments received in response to the RNPR or the Staff Report
were directed to this provision, and the final Rule contains Sec.
437.7 as recommended in the Staff Report.
H. Section 437.8: Franchise Exemption
Section 437.8 is designed to eliminate potential overlap between
the final Rule's scope of coverage and that of the Amended Franchise
Rule, so that no business would face duplicative compliance
burdens.\462\ Accordingly, Sec. 437.8 exempts from the final Rule's
coverage those business opportunities that: (1) Satisfy the
definitional elements of the term ``franchise'' under the Amended
Franchise Rule; (2) entail a written contract between the seller and
the business opportunity buyer; and (3) require the buyer to make a
payment that meets the Amended Franchise Rule's minimum payment
requirement. These criteria were designed to accomplish two ends: to
ensure that certain categories of businesses ``carved out'' from the
Amended Franchise Rule are not inappropriately subjected to coverage by
the Business Opportunity Rule; \463\ and, simultaneously, to obviate
[[Page 76855]]
any loophole that could be exploited by certain other types of business
opportunities that are exempt from the Amended Franchise Rule but that
should be regulated by the Business Opportunity Rule.
---------------------------------------------------------------------------
\462\ Id.; see also 15 U.S.C. 57a(g) (authorizing the Commission
to exempt persons or classes from all or part of rule coverage).
\463\ For example, businesses exempt from Amended Franchise Rule
coverage pursuant to the exemption for fractional franchises would
not be subject to coverage by the Business Opportunity Rule because
such businesses would meet the criteria of Sec. 437.8. This is an
appropriate result because the same rationale underlying exemption
of these types of businesses from the Amended Franchise Rule would
also dictate that they not be covered by the Business Opportunity
Rule--i.e., the franchisor is not likely to deceive the prospective
franchisee or to subject the prospective franchisee to significant
investment risk. Therefore, imposing the requirements of either the
Amended Franchise Rule or the Business Opportunity Rule would not be
justified. See 71 FR at 19078.
---------------------------------------------------------------------------
On the other hand, certain businesses carved out of Amended
Franchise Rule coverage should not escape regulation by the final
Rule--specifically, those exempt from the Amended Franchise Rule's
coverage due to the minimum payment exemption \464\ or the oral
agreement exemption.\465\ The Commission has concluded that while these
two exemptions are warranted in the franchise context to ensure that
the significant disclosure costs imposed by the Amended Franchise Rule
are cost-justified, they do not apply to the final Rule, with its
significantly lighter disclosure burden.\466\
---------------------------------------------------------------------------
\464\ 16 CFR 436.2(a)(3)(iii).
\465\ 16 CFR 436.2(a)(3)(iv).
\466\ 71 FR at 19078.
---------------------------------------------------------------------------
In the RNPR, the Commission solicited comment on whether the
exemption was overly broad or overly narrow.\467\ In response to the
RNPR, some commenters, primarily from the MLM industry, suggested
limitations on the Rule by granting a safe harbor to exempt firms that
require very low registration fees; \468\ firms that offer refunds on
inventory purchases; \469\ firms that are publicly-traded; \470\ firms
that have a high net worth; \471\ or firms that are members of a self-
regulatory body, such as the DSA.\472\ These are not novel suggestions;
each also was made in response to the INPR.\473\ In the RNPR, the
Commission concluded that none of these factors is determinative of
whether a company is, in fact, a pyramid scheme or otherwise engaged in
deceptive conduct. Furthermore, the Commission noted that the effort to
craft a workable rule using these criteria could undermine law
enforcement efforts, as it would, at least in the case of minimum
payment thresholds, provide scam operators with a means to circumvent
the Rule.\474\ The Staff Report recommended that the Commission not
expand the exemptions beyond those identified in the RPBOR. The
Commission adopts Sec. 437.8 as recommended in the Staff Report.
---------------------------------------------------------------------------
\467\ 73 FR at 16133.
\468\ See, e.g., Babener-RNPR; Pre-Paid Legal-RNPR.
\469\ See, e.g., Pre-Paid Legal-RNPR; Tupperware-RNPR; IBA-RNPR.
\470\ Id.
\471\ See, e.g., IBA-RNPR.
\472\ See, e.g., DSA-RNPR.
\473\ 73 FR at 16119-20. Moreover, none of the commenters
offered any new rationale for expanding the proposed categories of
exemption that had not previously been considered by the Commission.
\474\ Id. at 16120.
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I. Section 437.9: Outstanding Orders; Preemption
1. Section 437.9(a): Effect on Prior Commission Orders
Section 437.9(a) addresses the effect the Rule may have on
outstanding Commission orders. The Commission recognizes that the final
Rule significantly changes the disclosure obligations for those sellers
who are now under order in prior Commission actions. To enable business
opportunity sellers to take advantage of the final Rule's reduced
disclosure obligations, as well as to reduce any potential conflicts
between existing orders and the final Rule, Sec. 437.9(a) permits
persons under order to petition the Commission for relief consistent
with the provisions of the new Rule. Under the RPBOR, business
opportunities required by FTC or court order to follow the Franchise
Rule, 16 CFR Part 436, would have been permitted to petition the
Commission to amend the order so that the business opportunity could
follow the provisions of the Business Opportunity Rule instead.\475\
---------------------------------------------------------------------------
\475\ Id. at 16136 (RPBOR Sec. 437.8(a)).
---------------------------------------------------------------------------
Although no comments received in response to the RNPR addressed
this provision, the Staff Report noted that while the Commission could
modify an FTC administrative order, it would not have the authority to
modify any order entered by a court.\476\ In the case of a court order,
the Commission could, however, stipulate to an amendment of the order
by the court to allow the business opportunity to follow the provisions
of the Business Opportunity Rule. The Staff Report recommended,
therefore, that Sec. 437.9(a) be revised to add the phrase ``or to
stipulate to an amendment of the court order'' as follows: ``A business
opportunity required by prior FTC or court order to follow the
Franchise Rule, 16 CFR part 436, may petition the Commission to amend
the order or to stipulate to an amendment of the court order so that
the business opportunity may follow the provisions of this part.''
---------------------------------------------------------------------------
\476\ Staff Report at 127.
---------------------------------------------------------------------------
In addition, the Staff Report noted that the first sentence of
Sec. 437.9(a) proposed in the RPBOR was superfluous, and recommended
deleting it. No comments in response to the Staff Report were directed
at this provision. Upon consideration of the staff's recommendation and
the rationale for that recommendation, the Commission has decided to
modify the text of this provision in the manner recommended in the
Staff Report. As the Commission has stated previously, all
determinations under this provision regarding the amendment of orders
will be made on a case-by-case basis.
2. Section 437.9(b): Preemption
Section 437.9(b) adopts a preemption policy similar to that
embodied in the Amended Franchise Rule.\477\ It provides that the
Commission does not intend to preempt state or local business
opportunity laws, except to the extent of any conflict with the Rule.
Further, a law does not conflict if it affords prospective purchasers
equal or greater protection, such as a requirement for registration of
disclosure documents or more extensive disclosures.\478\
---------------------------------------------------------------------------
\477\ 16 CFR 436.10. This approach is consistent with other
Commission trade regulation rules. See, e.g., Appliance Labeling
Rule, 16 CFR 305.17; Cooling-Off Rule, 16 CFR 429.2; Mail Order
Rule, 16 CFR 435.3(b)(2).
\478\ Although state laws offering equal or greater protections
are not preempted, Sec. 437.6(c) of the final Rule prohibits
providing state and federal disclosures together in one document.
---------------------------------------------------------------------------
One commenter suggested that the FTC should preempt conflicting
state business opportunity rules, noting its belief that ``enforcement
of a nationwide standard by the FTC is preferable to a patchwork series
of laws and regulations.'' \479\ The Staff Report noted that the
commenter is suggesting that all state laws and regulations that do not
mirror exactly the Business Opportunity Rule would be in conflict with
the Rule, and should therefore be preempted. The Commission has long
recognized that state laws and regulations that afford equal or greater
protections than do FTC trade regulations are not subject to
preemption,\480\ and therefore declines to follow this commenter's
recommendation.
---------------------------------------------------------------------------
\479\ Tupperware-RNPR (5/28/2008). No other comments were
received. At the June 2009 Workshop, however, the panelist from the
Maryland Attorney General's Office expressed appreciation that
states were not preempted from requiring that business opportunity
sellers provide information in addition to that required by the
proposed Rule. Cantone, June 2009 Tr at 20.
\480\ See, e.g., Mail Order Rule, 16 CFR 435.3(b)(2) (rule does
not preempt state or local laws that afford equal or greater
protections).
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J. Section 437.10: Severability
Finally, Sec. 437.10 adopts the severability provision recommended
by the Staff Report with one non-substantive change: The Commission
removed the superfluous phrase, ``it is the Commission's intention
that'' from the provision. This provision makes clear that, if any part
of the Rule is held
[[Page 76856]]
invalid by a court, the remainder will still be in effect.\481\ No
comments received in response to the RNPR or the Staff Report were
directed to this provision.
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\481\ This provision is comparable to the severability provision
in the Amended Franchise Rule, 16 CFR 436.11, as well as the
severability provisions in other Commission rules. See, e.g., TSR,
16 CFR 310.9.
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IV. Paperwork Reduction Act
The Commission is submitting the final Rule and a Supplemental
Supporting Statement to the Office of Management and Budget (OMB) for
review under the Paperwork Reduction Act (PRA), 44 U.S.C. 3501-21. The
final Rule amends a trade regulation rule governing business
opportunity sales. The final Rule covers those business opportunities
currently covered by the interim Business Opportunity Rule (and
formerly covered by the Original Franchise Rule, as explained above),
as well as certain others not covered by the interim Business
Opportunity Rule, such as sellers of work-at-home programs. The final
Rule requires business opportunity sellers to disclose specified
information and to maintain certain records relating to business
opportunity sales transactions. The currently approved estimate for the
disclosure and recordkeeping burden under the interim Business
Opportunity Rule is 16,750 hours for business opportunity sellers. That
estimate was based on an estimated 2,500 business opportunity sellers.
As discussed below, the final Rule reduces the existing burden on
business opportunity sellers by streamlining disclosure requirements to
minimize compliance costs.
In the RNPR, Commission staff estimated there were approximately
3,050 business opportunity sellers covered by the RPBOR. This figure
consisted of an estimated 2,500 vending machine, rack display, and
other opportunity sellers currently covered by the interim Business
Opportunity Rule, and an estimated 550 work-at-home opportunity
sellers, which would be newly covered entities under the final Rule.
Because the final Rule is no different than the RPBOR regarding the
types of entities to which it applies, and the Commission received no
information suggesting the need to update these prior estimates, the
Commission retains them for the final Rule. Additionally, Commission
staff estimates that approximately 174 of those sellers market business
opportunities in Spanish and that approximately 79 of the 3,050
business opportunity sellers market in languages other than English or
Spanish.\482\
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\482\ To estimate how many of the 3,050 sellers market business
opportunities in languages other than English, staff relied upon
2009 United States Census Bureau (``Census'') data. Calculations
based upon a recent Census survey reveal that approximately 5.7% of
the U.S. population speaks Spanish or Spanish Creole at home and
speak English less than ``very well.'' Calculations based upon that
same survey reveal that approximately 2.6% of the U.S. population
speaks a language other than Spanish, Spanish Creole, or English at
home and speak English less than ``very well.'' Staff therefore
projected that 5.7% of all entities selling business opportunities
market in Spanish or Spanish Creole and 2.6% of all entities selling
business opportunities market in languages other than English,
Spanish and Spanish Creole. http://factfinder.census.gov/servlet/STTable?_bm=y&-geo_id=01000US&-qr_name=ACS_2009_1YR_G00_S1601&-ds_name=ACS_2009_1YR_G00_&-_lang=en&-redoLog=false.
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A. Disclosure Requirements
As discussed below, the final Rule is designed to streamline and
substantially reduce the quantity of information business opportunity
sellers are required to disclose under the interim Business Opportunity
Rule. The final Rule impacts sellers differently, depending upon
whether they are currently covered by the interim Business Opportunity
Rule and what language they use to market the business opportunities.
1. Mandatory Disclosures
For the 2,500 vending machine, rack display, and other business
opportunity sellers currently covered by the interim Business
Opportunity Rule, the final Rule substantially reduces the disclosures
from more than 20 categories of information to five--the seller's
identifying information, earnings claims, lawsuits, refund and
cancellation policies, and prior purchasers. This streamlining also
will minimize compliance costs for the 550 business opportunity sellers
that will be newly subject to the Rule. Business opportunity sellers
must disclose whether or not they make earnings claims. The decision to
make an earnings claim, however, is optional. While the disclosures of
references and earnings claims retain, for the most part, the interim
Business Opportunity Rule requirements, the required disclosure of
lawsuits is reduced from the interim Business Opportunity Rule.\483\
---------------------------------------------------------------------------
\483\ See supra Section III.C.2.
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The final Rule imposes one additional requirement that was not
present in either the interim Business Opportunity Rule or the RPBOR,
which was introduced in the Staff Report. For business opportunities
marketed in Spanish, Sec. 437.5 of the final Rule requires that
sellers provide potential purchasers with the Spanish version of the
disclosure document (Appendix B to the Rule) and provide all other
required disclosures in Spanish. For sales conducted in a language
other than English or Spanish, the final Rule requires that sellers
make the required disclosures in the same language as the sale, using
the form and an accurate translation of the language set forth in
Appendix A, as well as any additional required disclosures. As
discussed in the Statement of Basis and Purpose, this translation
requirement is supported by long-standing Commission policy, the
Commission's law enforcement experience, the rulemaking record, and the
rationale supporting staff's recommendation.
2. Incorporation of Existing Materials
The final Rule reduces collection and dissemination costs from
those imposed by the interim Business Opportunity Rule, by permitting
sellers to reference in their disclosure documents materials already in
their possession. For example, a seller need not repeat its refund
policy in the text of the disclosure document, but may incorporate its
contract or brochures, or other materials that already provide the
necessary details.
3. Use of Electronic Dissemination of Information
The final Rule defines the term ``written'' to include electronic
media. Accordingly, all business opportunities covered by the final
Rule are permitted to use the Internet and other electronic media to
furnish disclosure documents. Allowing this distribution method should
greatly reduce sellers' compliance costs over the long run, especially
costs associated with printing and distributing disclosure documents.
As a result of this proposal, the Commission expects sellers'
compliance costs will decrease substantially over time.
4. Use of Computerized Data Collection Technology
Finally, because of advances in computerized data collection
technology, the Commission anticipates that the costs of collecting
information and recordkeeping requirements imposed by the final Rule
will be minimal. For example, a seller can easily maintain a
spreadsheet of its purchasers, which can be sorted by location. This
would enable a seller to easily comply with the reference disclosure
requirement (at least 10 prior purchasers in the last three years who
are located nearest to the prospective
[[Page 76857]]
purchaser, or, if there are not 10 prior purchasers, then all prior
purchasers). In the alternative, the final Rule permits a seller to
maintain a national list of purchasers.
B. Recordkeeping Requirements
Section 437.7 of the final Rule prescribes recordkeeping
requirements necessary for effective enforcement of the Rule.
Specifically, sellers of a covered business opportunity, and their
principals, must retain for at least three years the following types of
documents: (1) Each materially different version of all documents
required by the Rule; (2) each purchaser's disclosure receipt; (3) each
executed written contract with a purchaser; and (4) all substantiation
upon which the seller relies for each earnings claim made. The final
Rule requires that these records be made available for the Commission's
inspection, but does not otherwise require their production. As
previously noted, because of advances in computerized data collection
technology, the Commission anticipates that the costs of collecting
information and recordkeeping requirements imposed by the final Rule
will be minimal.
C. Estimated Hours Burden and Labor Cost
For the RNPR, the Commission submitted the RPBOR and associated
documentation under the PRA for OMB review.\484\ The Commission did not
receive any public comments regarding staff's PRA burden estimates. The
instant burden estimates differ from those previously submitted in the
RNPR in two respects: (1) They account for the final Rule's requirement
that sellers must provide the disclosure document and other required
disclosures to potential purchasers in the same language the seller
uses to market the business opportunity; \485\ and (2) they incorporate
the one hour recordkeeping burden estimate included in the currently
approved interim Business Opportunity Rule's burden estimates under the
PRA.
---------------------------------------------------------------------------
\484\ 73 FR at 16129.
\485\ As discussed within the Statement of Basis and Purpose,
this requirement was not present in the RNPR. Rather, it was
recommended in the Staff Report, and ultimately adopted in the final
Rule.
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Through the Staff Report, the Commission sought comment on the new
foreign language disclosure requirement, including the usefulness and
sufficiency of the added foreign language disclosure requirement. The
Staff Report, however, did not address the associated PRA burden.\486\
The Commission received just one comment on the new disclosure
translation requirement.\487\
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\486\ See Bureau of Consumer Protection, Staff Report to the
Federal Trade Commission and Proposed Revised Trade Regulation Rule
(16 CFR Part 437) (Nov. 2010) (``Staff Report''), available at
http://www.ftc.gov/os/fedreg/2010/october/101028businessopportunitiesstaffreport.pdf. In November, the
Commission published a notice in the Federal Register announcing the
availability of, and seeking comment on, the Staff Report. See 75 FR
68559 (Nov. 8, 2010).
\487\ DOJ Staff Report at 2. The comment, from the Office of
Consumer Litigation, U.S. Department of Justice, registered strong
support for the requirement.
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1. Estimated Hours Burden: 10,533
The estimated 2,500 vending machine, rack display, and related
opportunity sellers currently covered by the interim Business
Opportunity Rule (and, previously, the Original Franchise Rule) will
have a disclosure document that needs merely streamlining and updating
to comply with the final Rule. Thus, FTC staff estimates that these
businesses likely will require no more than 3 hours to complete those
tasks. Conversely, staff estimates that for existing businesses that
were not covered by the interim Business Opportunity Rule but will be
covered by the final Rule, e.g., work-at-home opportunities,
approximately 5 hours will be required to prepare a new disclosure
document. Staff further estimates that the total hours required in the
first year to develop a disclosure document will be 10,250 [(2,500
entities x 3 hours per entity) + (550 entities x 5 hours per entity)].
In addition, all these businesses likely will require approximately one
hour per year to file and store records, for a total of 3,050 hours
[3,050 entities x 1 hour per entity]. Accordingly, the estimated total
hours burden for the first year of implementation of these amendments
would be 13,300 hours [10,250 hours + 3,050 hours]. Commission staff
estimates that in subsequent years, the 3,050 existing businesses will
require no more than approximately two hours to update the disclosure
document [6,100 total hours] and approximately one hour to file and
store records [3,050 total hours], for a total of 9,150 hours [6,100
hours + 3,050 hours] per year to meet the final Rule requirements.
Thus, cumulative average annual burden for affected sellers, based
on a prospective three-year OMB clearance is 10,533 hours [((13,300
hours) + 18,300 hours (2 years x 9,150 hours per year)) / 3].
2. Estimated Labor Cost: $2,633,333
Labor costs are determined by applying applicable wage rates to
associated burden hours. Commission staff assumes that an attorney
likely would prepare or update the disclosure document at an estimated
hourly rate of $250. As noted above, Commission staff estimates that
13,300 hours will be needed to prepare, file, and store the disclosure
document and required records in the first year, for a total cost of
$3,325,000 [13,300 hours x $250 per hour].
As noted above, Commission staff expects that there will be a
reduction in the annual hours burden after the first year to
approximately 9,150 hours. Accordingly, staff estimates that the labor
cost burden for subsequent years will be reduced to $2,287,500 [9,150
hours x $250 per hour]. Thus, the average annual cost is approximately
$2,633,333 [(($3,325,000) + ($2,287,500 x 2)) / 3], when averaged over
a prospective three-year OMB clearance. Should disclosure or
recordkeeping obligations be performed by clerical staff, the total
labor costs would be significantly less.
3. Estimated Capital and Other Non-Labor Costs: $3,068,838
Business opportunity sellers must also incur costs to print and
distribute the single-page disclosure document, plus any attachments.
These costs vary based upon the length of the attachments and the
number of copies produced to meet the expected demand. Commission staff
estimates that 3,050 business opportunity sellers will print and mail
approximately 1,000 disclosure documents per year at a cost of $1.00
per document, for a total cost of $3,050,000. This is a conservative
estimate because Commission staff anticipates that these costs will be
reduced by many business opportunity sellers electing to furnish
disclosures electronically, e.g., via email or the Internet.
For sales conducted in a language other than English and Spanish,
the final Rule requires that sellers use the form appearing in Appendix
A and accurately translate it into the language used for sale. Thus,
sellers marketing in languages other than English or Spanish will incur
costs to translate the disclosure document, and these sellers may also
need to translate the other required disclosures that may be attached
to the disclosure document. Commission staff estimates that sellers
marketing business opportunities in languages other than English and
Spanish will incur a cost of
[[Page 76858]]
approximately $6,705 to translate the disclosure document in the first
year. This figure is based upon Commission staff's estimate that it
will cost approximately 17.5 cents to translate each word into the
language the sellers use to market the opportunities.\488\ There are
485 words in Appendix A. Therefore, the total cost burden to translate
the disclosure document is approximately $6,705 [79 sellers x (17.5
cents per word x 485 words)]. In subsequent years, the existing
business opportunities sellers will not incur additional costs to
translate the Appendix A as it will already have been translated during
the first year. The 174 sellers marketing business opportunities in
Spanish will not incur any additional costs to translate Appendix A, as
a Spanish version of that document is provided for them, as Appendix B
to the final Rule.
---------------------------------------------------------------------------
\488\ 17.5 cents is staff's estimate of the current market
translation rate per word.
---------------------------------------------------------------------------
Commission staff estimates that in the first year, sellers
marketing business opportunities in languages other than English will
incur a total cost burden of approximately $27,672 [(79 sellers + 174
sellers) x (17.5 cents per word x 625 words)] to translate their
responses to the five mandatory disclosures required in the disclosure
document. This estimate is based upon assumptions that all sellers
marketing business opportunities in languages other than English: (1)
Are marketing in both English and another language; (2) are not
incorporating any existing materials into their disclosure document;
(3) have been the subject of civil or criminal legal actions; (4) are
making earnings claims; (5) have a refund or cancellation policy; and
(6) because of all of the above assumptions, require approximately 625
words (approximately 2.5 standard, double-spaced pages) to provide the
required information. In reality, because it is unlikely that all such
assumptions will apply to every seller marketing business opportunities
in languages other than English, the cost burden will likely be much
lower. In subsequent years, due to the final Rule's requirement that
sellers must update their disclosures, Commission staff estimates that
sellers may incur an additional cost burden of $11,069 [253 sellers x
(17.5 cents per word x 250 words--approximately one standard, double-
spaced page)] to translate the updates.
Therefore, cumulative average cost for affected sellers, based on a
prospective three-year OMB clearance, to print and distribute the
disclosure document and any attachments and to translate both the
disclosure document and the additional required disclosures would be
$3,068,838 [(($3,050,000 x 3) + $6,705 + $27,672 + ($11,069 x 2)) / 3].
V. Regulatory Analysis and Regulatory Flexibility Act
Under Section 22 of the FTC Act, 15 U.S.C. 57b, the Commission must
issue a regulatory analysis for a proceeding to amend a rule only when
it: (1) Estimates that the amendment will have an annual effect on the
national economy of $100,000,000 or more; (2) estimates that the
amendment will cause a substantial change in the cost or price of
certain categories of goods or services; or (3) otherwise determines
that the amendment will have a significant effect upon covered entities
or upon consumers. The Commission has determined that the final Rule
will not have such an annual effect on the national economy, on the
cost or prices of goods or services sold through business
opportunities, or on covered businesses or consumers. As noted in the
Paperwork Reduction Act discussion above, the Commission staff
estimates each business affected by the Rule will likely incur only
minimal compliance costs.
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601-612,
requires an agency to provide an Initial Regulatory Flexibility
Analysis (``IRFA'') with a proposed rule and a Final Regulatory
Flexibility Analysis (``FRFA'') with the final rule, if any, unless the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities.\489\
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\489\ See 5 U.S.C. 603-605.
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The FTC does not expect that the final Rule will have a significant
economic impact on a substantial number of small entities and this
document serves as notice to the Small Business Administration of the
agency's certification of no significant impact. The abbreviated
disclosure and recordkeeping requirements of the final Rule are the
minimum necessary to give consumers the information they need to
protect themselves and permit effective enforcement of the Rule.
Companies previously covered by the interim Business Opportunity Rule
will experience a reduction in their compliance burden, while companies
not previously covered will have minimal new disclosure obligations. As
such, the economic impact of the final Rule will be minimal. In any
event, the burdens imposed on small entities are likely to be
relatively small.
In the RNPR, the Commission provided notice to the Small Business
Administration of the agency's certification of no significant impact.
Nonetheless, the Commission determined that it was appropriate to
publish an IRFA in order to inquire into the impact of the proposed
Rule on small entities. Based on the IRFA set forth in the Commission's
earlier notice of proposed rulemaking, a review of the public comments
submitted in response to that notice and additional information and
analysis by Commission staff, the Commission submits this FRFA.
A. Need for and Objectives of the Final Rule
The Commission's law enforcement experience provides ample evidence
that fraud is pervasive in the sale of many business opportunities
marketed to consumers. Yet, the Commission believes that the current
requirements of the interim Business Opportunity Rule are more
extensive than necessary to protect prospective purchasers of business
opportunities from deception. The pre-sale disclosures provided by the
final Rule will give consumers the information they need to protect
themselves from fraudulent sales claims, while minimizing the
compliance costs and burdens on sellers.
The objective of the final Rule is to provide consumers considering
the purchase of a business opportunity with material information they
need to investigate the offering thoroughly so they can protect
themselves from fraudulent claims, while minimizing the compliance
burdens on sellers. The legal basis for the final Rule is Section 18 of
the FTC Act, 15 U.S.C. 57a, which authorizes the Commission to
promulgate, modify, and repeal trade regulation rules that define with
specificity acts or practices in or affecting commerce that are unfair
or deceptive within the meaning of Section (5)(a)(1) of the FTC Act, 15
U.S.C. 45(a)(1).
B. Significant Issues Raised by Public Comments, Summary of Agency's
Assessment of These Issues, and Changes, if Any, Made in Response
In crafting the final Rule, the Commission has carefully considered
the comments received throughout the Rule amendment proceeding. Section
III of this document provides a more detailed discussion of the
comments received by the Commission and the Commission's response to
those comments.
In sum, in response to INRP, the Commission received more than
17,000 comments, the overwhelming majority
[[Page 76859]]
of which came from the MLM industry. The MLM industry urged the
Commission to exclude MLM plans from the scope of IPBOR due to the
burdens imposed on them through the IPBOR and the IPBOR's failure to
differentiate between unlawful pyramid schemes and legitimate companies
using an MLM model. In consideration of the comments received in
response to the INPR, and a reassessment of the Commission's law
enforcement history, the Commission subsequently issued a RNPR, in
which the Commission decided to narrow the scope of the IPBOR to avoid
broadly sweeping in all sellers of MLM plans. In addition, the
Commission proposed a more narrowed definition of ``business
opportunity'' and also eliminated two required disclosures--information
about legal actions pertaining to a business opportunity seller's sales
personnel, and the number of cancellation or refund requests the seller
received. The Commission received fewer than 125 comments and rebuttal
comments in response to RNPR addressing these changes. The Commission
received written comment from six individuals and entities following
the public workshop held by the Commission. Finally, the Commission
received 27 comments in response to the Staff Report. Many of those
comments opposed the Commission's decision to narrow the scope of the
Rule to avoid broadly sweeping in the MLMs.
C. Description and an Estimate of the Number of Small Entities to Which
the Final Rule Will Apply, or Explanation Why No Estimate Is Available
The final Rule primarily applies to ``sellers'' of business
opportunities, including vending, rack display, medical billing, and
work-at-home (e.g., craft assembly, envelope stuffing) opportunities.
The Commission believes that many of these sellers fall into the
category of small entities. Determining the precise number of small
entities affected by the final Rule, however, is difficult due to the
wide range of businesses engaged in business opportunity sales. The
staff estimates that there are approximately 3,050 business opportunity
sellers, including some 2,500 vending machine, rack display, and
related opportunity sellers and 550 work-at-home opportunity sellers.
Most established and some start-up business opportunities would likely
be considered small businesses according to the applicable Small
Business Administration (``SBA'') size standards.\490\ The FTC staff
estimates that as many as 70% of business opportunities, as defined by
the Rule, are small businesses.
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\490\ Since October 2000, SBA size standards have been based on
the North American Industry Classification System (``NAICS''), in
place of the Standard Industrial Classification (``SIC'') system. In
general, a company in a non-manufacturing industry is a small
business if its average annual receipts are $7 million or less. See
http://www.sba.gov/content/summary-size-standards-industry.
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D. Description of the Projected Reporting, Recordkeeping, and Other
Compliance Requirements of the Final Rule, Including an Estimate of the
Classes of Small Entities That Will Be Subject to the Requirements, and
the Type of Professional Skills That Will Be Necessary To Comply
As discussed in the Paperwork Reduction Act analysis of this notice
(Section IV), the final Rule will impose compliance requirements (e.g.,
disclosure) and minor recordkeeping requirements on those entities
covered by the final Rule. Specifically, the final Rule imposes
disclosure and recordkeeping requirements, within the meaning of the
Paperwork Reduction Act, on the ''sellers'' of business opportunities
and their principals.
The disclosure and recordkeeping requirements are fewer in number
and lesser in extent than requirements currently applicable to such
entities now covered by the interim Business Opportunity Rule and
formerly covered by the Original Franchise Rule. Section 437.2 of the
final Rule requires ``sellers'' of covered business opportunities to
provide potential purchasers with a one-page disclosure document, as
specified by Sec. 437.3 and Appendix A and if applicable, Appendix B,
at least seven calendar days before they sign a contract or pay any
money toward a purchase. For business opportunities marketed in
Spanish, Sec. 437.5 of the final Rule requires that sellers provide
potential purchasers with the Spanish version of the disclosure
document (Appendix B to the Rule) and provide any required disclosures
in Spanish. For sales conducted in a language other than English or
Spanish, the final Rule requires that sellers use the form and an
accurate translation of the language set forth in Appendix A.
Section 437.7 of the final Rule prescribes recordkeeping
requirements necessary for effective enforcement of the Rule.
Specifically, sellers of a covered business opportunity, and their
principals, must retain for at least three years the following types of
documents: (1) Each materially different version of all documents
required by the Rule; (2) each purchaser's disclosure receipt; (3) each
executed written contract with a purchaser; and (4) all substantiation
upon which the seller relies for each earnings claim made. The final
Rule requires that these records be made available for inspection by
the Commission, but does not otherwise require production of the
records.
Commission staff assumes that sellers will hire an attorney to
complete, update, file, and store the disclosure documents. If
applicable, sellers may require translation services to comply with the
disclosure requirements.
E. Steps the Agency Has Taken in the Final Rule To Minimize Any
Significant Economic Impact of the Final Rule on Small Entities,
Consistent With Applicable Statutory Objectives, Including the Factual
and Legal Basis for the Alternatives Adopted and Those Rejected
As discussed throughout this document, the Commission has attempted
to reduce compliance costs wherever possible. Compliance with the final
Rule's disclosure requirements is significantly less burdensome than
with the interim Business Opportunity Rule. The final Rule's disclosure
and recordkeeping requirements are designed to impose the minimum
burden on all affected business opportunity sellers, regardless of
size. In formulating the final Rule, the Commission has taken a number
of significant steps to minimize the burdens it would impose on large
and small businesses. These include: (1) Limiting the required pre-sale
disclosure to a one-page document, with check boxes provided to
simplify disclosure responses; (2) allowing the disclosure to refer to
information in other existing documents to avoid needless duplication;
(3) permitting the disclosure document itself to be furnished in
electronic form to minimize printing and distribution costs; and (4)
employing specific prohibitions in place of affirmative disclosures
whenever possible. Moreover, because the majority of sellers covered by
the final Rule are already required to comply with the Commission's
interim Business Opportunity Rule and the business opportunity laws in
22 states, FTC staff anticipates that the final Rule will drastically
reduce their current compliance costs, while imposing exceedingly
modest ongoing compliance costs on all covered sellers. Consequently,
the Commission believes that the final Rule will not have a
[[Page 76860]]
significant economic impact upon small businesses.
The final Rule requires business opportunity sellers to provide
only five affirmative disclosures in a one-page disclosure document.
This is a significant reduction from the more than 20 disclosures now
required by the Commission's interim Business Opportunity Rule, with
which many business opportunity sellers are now obligated to comply.
VI. Final Rule Language
List of Subjects in 16 CFR Part 437
Reporting and recordkeeping requirements, Trade practices.
By direction of the Commission.
Donald S. Clark,
Secretary.
For the reasons set forth in the preamble, the Federal Trade
Commission amends title 16, Code of Federal Regulations, by revising
part 437 to read as follows:
PART 437--BUSINESS OPPORTUNITY RULE
Sec.
437.1 Definitions.
437.2 The obligation to furnish written documents.
437.3 The disclosure document.
437.4 Earnings claims.
437.5 Sales conducted in Spanish or other languages besides English.
437.6 Other prohibited practices.
437.7 Record retention.
437.8 Franchise exemption.
437.9 Outstanding orders; preemption.
437.10 Severability.
Appendix A to Part 437--Disclosure of Important Information About
Business Opportunity
Appendix B to Part 437--Disclosure of Important Information About
Business Opportunity (Spanish-Language Version)
Authority: 15 U.S.C. 41-58.
Sec. 437.1 Definitions.
The following definitions shall apply throughout this part:
(a) Action means a criminal information, indictment, or proceeding;
a civil complaint, cross claim, counterclaim, or third party complaint
in a judicial action or proceeding; arbitration; or any governmental
administrative proceeding, including, but not limited to, an action to
obtain or issue a cease and desist order, an assurance of voluntary
compliance, and an assurance of discontinuance.
(b) Affiliate means an entity controlled by, controlling, or under
common control with a business opportunity seller.
(c) Business opportunity means a commercial arrangement in which:
(1) A seller solicits a prospective purchaser to enter into a new
business; and
(2) The prospective purchaser makes a required payment; and
(3) The seller, expressly or by implication, orally or in writing,
represents that the seller or one or more designated persons will:
(i) Provide locations for the use or operation of equipment,
displays, vending machines, or similar devices, owned, leased,
controlled, or paid for by the purchaser; or
(ii) Provide outlets, accounts, or customers, including, but not
limited to, Internet outlets, accounts, or customers, for the
purchaser's goods or services; or
(iii) Buy back any or all of the goods or services that the
purchaser makes, produces, fabricates, grows, breeds, modifies, or
provides, including but not limited to providing payment for such
services as, for example, stuffing envelopes from the purchaser's home.
(d) Designated person means any person, other than the seller,
whose goods or services the seller suggests, recommends, or requires
that the purchaser use in establishing or operating a new business.
(e) Disclose or state means to give information in writing that is
clear and conspicuous, accurate, concise, and legible.
(f) Earnings claim means any oral, written, or visual
representation to a prospective purchaser that conveys, expressly or by
implication, a specific level or range of actual or potential sales, or
gross or net income or profits. Earnings claims include, but are not
limited to:
(1) Any chart, table, or mathematical calculation that demonstrates
possible results based upon a combination of variables; and
(2) Any statements from which a prospective purchaser can
reasonably infer that he or she will earn a minimum level of income
(e.g., ``earn enough to buy a Porsche,'' ``earn a six-figure income,''
or ``earn your investment back within one year'').
(g) Exclusive territory means a specified geographic or other
actual or implied marketing area in which the seller promises not to
locate additional purchasers or offer the same or similar goods or
services as the purchaser through alternative channels of distribution.
(h) General media means any instrumentality through which a person
may communicate with the public, including, but not limited to,
television, radio, print, Internet, billboard, Web site, commercial
bulk email, and mobile communications.
(i) Material means likely to affect a person's choice of, or
conduct regarding, goods or services.
(j) New business means a business in which the prospective
purchaser is not currently engaged, or a new line or type of business.
(k) Person means an individual, group, association, limited or
general partnership, corporation, or any other business entity.
(l) Prior business means:
(1) A business from which the seller acquired, directly or
indirectly, the major portion of the business' assets; or
(2) Any business previously owned or operated by the seller, in
whole or in part.
(m) Providing locations, outlets, accounts, or customers means
furnishing the prospective purchaser with existing or potential
locations, outlets, accounts, or customers; requiring, recommending, or
suggesting one or more locators or lead generating companies; providing
a list of locator or lead generating companies; collecting a fee on
behalf of one or more locators or lead generating companies; offering
to furnish a list of locations; or otherwise assisting the prospective
purchaser in obtaining his or her own locations, outlets, accounts, or
customers, provided, however, that advertising and general advice about
business development and training shall not be considered as
``providing locations, outlets, accounts, or customers.''
(n) Purchaser means a person who buys a business opportunity.
(o) Quarterly means as of January 1, April 1, July 1, and October
1.
(p) Required payment means all consideration that the purchaser
must pay to the seller or an affiliate, either by contract or by
practical necessity, as a condition of obtaining or commencing
operation of the business opportunity. Such payment may be made
directly or indirectly through a third party. A required payment does
not include payments for the purchase of reasonable amounts of
inventory at bona fide wholesale prices for resale or lease.
(q) Seller means a person who offers for sale or sells a business
opportunity.
(r) Signature or signed means a person's affirmative steps to
authenticate his or her identity.
It includes a person's handwritten signature, as well as an
electronic or digital form of signature to the extent that such
signature is recognized as a valid signature under applicable federal
law or state contract law.
(s) Written or in writing means any document or information in
printed form or in any form capable of being downloaded, printed, or
otherwise
[[Page 76861]]
preserved in tangible form and read. It includes: type-set, word
processed, or handwritten documents; information on computer disk or
CD-ROM; information sent via email; or information posted on the
Internet. It does not include mere oral statements.
Sec. 437.2 The obligation to furnish written documents.
In connection with the offer for sale, sale, or promotion of a
business opportunity, it is a violation of this Rule and an unfair or
deceptive act or practice in violation of Section 5 of the Federal
Trade Commission Act (``FTC Act'') for any seller to fail to furnish a
prospective purchaser with the material information required by
Sec. Sec. 437.3(a) and 437.4(a) of this part in writing at least seven
calendar days before the earlier of the time that the prospective
purchaser:
(a) Signs any contract in connection with the business opportunity
sale; or
(b) Makes a payment or provides other consideration to the seller,
directly or indirectly through a third party.
Sec. 437.3 The disclosure document.
In connection with the offer for sale, sale, or promotion of a
business opportunity, it is a violation of this Rule and an unfair or
deceptive act or practice in violation of Section 5 of the FTC Act, for
any seller to:
(a) Fail to disclose to a prospective purchaser the following
material information in a single written document in the form and using
the language set forth in appendix A to this part; or if the offer for
sale, sale, or promotion of a business opportunity is conducted in
Spanish, in the form and using the language set forth in appendix B to
this part; or if the offer for sale, sale, or promotion of a business
opportunity is conducted in a language other than English or Spanish,
using the form and an accurate translation of the language set forth in
appendix A to this part:
(1) Identifying information. State the name, business address, and
telephone number of the seller, the name of the salesperson offering
the opportunity, and the date when the disclosure document is furnished
to the prospective purchaser.
(2) Earnings claims. If the seller makes an earnings claim, check
the ``yes'' box and attach the earnings statement required by Sec.
437.4. If not, check the ``no'' box.
(3) Legal actions. (i) If any of the following persons has been the
subject of any civil or criminal action for misrepresentation, fraud,
securities law violations, or unfair or deceptive practices, including
violations of any FTC Rule, within the 10 years immediately preceding
the date that the business opportunity is offered, check the ``yes''
box:
(A) The seller;
(B) Any affiliate or prior business of the seller; or
(C) Any of the seller's officers, directors, sales managers, or any
individual who occupies a position or performs a function similar to an
officer, director, or sales manager of the seller.
(ii) If the ``yes'' box is checked, disclose all such actions in an
attachment to the disclosure document. State the full caption of each
action (names of the principal parties, case number, full name of
court, and filing date). For each action, the seller may also provide a
brief accurate statement not to exceed 100 words that describes the
action.
(iii) If there are no actions to disclose, check the ``no'' box.
(4) Cancellation or refund policy. If the seller offers a refund or
the right to cancel the purchase, check the ``yes'' box. If so, state
all material terms and conditions of the refund or cancellation policy
in an attachment to the disclosure document. If no refund or
cancellation is offered, check the ``no'' box.
(5) References. (i) State the name, state, and telephone number of
all purchasers who purchased the business opportunity within the last
three years. If more than 10 purchasers purchased the business
opportunity within the last three years, the seller may limit the
disclosure by stating the name, state, and telephone number of at least
the 10 purchasers within the past three years who are located nearest
to the prospective purchaser's location. Alternatively, a seller may
furnish a prospective buyer with a list disclosing all purchasers
nationwide within the last three years. If choosing this option, insert
the words ``See Attached List'' without removing the list headings or
the numbers 1 through 10, and attach a list of the references to the
disclosure document.
(ii) Clearly and conspicuously, and in immediate conjunction with
the list of references, state the following: ``If you buy a business
opportunity from the seller, your contact information can be disclosed
in the future to other buyers.''
(6) Receipt. Attach a duplicate copy of the disclosure document to
be signed and dated by the purchaser. The seller may inform the
prospective purchaser how to return the signed receipt (for example, by
sending to a street address, email address, or facsimile telephone
number).
(b) Fail to update the disclosures required by paragraph (a) of
this section at least quarterly to reflect any changes in the required
information, including, but not limited to, any changes in the seller's
refund or cancellation policy, or the list of references; provided,
however, that until a seller has 10 purchasers, the list of references
must be updated monthly.
Sec. 437.4 Earnings claims.
In connection with the offer for sale, sale, or promotion of a
business opportunity, it is a violation of this Rule and an unfair or
deceptive act or practice in violation of Section 5 of the FTC Act, for
the seller to:
(a) Make any earnings claim to a prospective purchaser, unless the
seller:
(1) Has a reasonable basis for its claim at the time the claim is
made;
(2) Has in its possession written materials that substantiate its
claim at the time the claim is made;
(3) Makes the written substantiation available upon request to the
prospective purchaser and to the Commission; and
(4) Furnishes to the prospective purchaser an earnings claim
statement. The earnings claim statement shall be a single written
document and shall state the following information:
(i) The title ``EARNINGS CLAIM STATEMENT REQUIRED BY LAW'' in
capital, bold type letters;
(ii) The name of the person making the earnings claim and the date
of the earnings claim;
(iii) The earnings claim;
(iv) The beginning and ending dates when the represented earnings
were achieved;
(v) The number and percentage of all persons who purchased the
business opportunity prior to the ending date in paragraph (a)(4)(iv)
of this section who achieved at least the stated level of earnings;
(vi) Any characteristics of the purchasers who achieved at least
the represented level of earnings, such as their location, that may
differ materially from the characteristics of the prospective
purchasers being offered the business opportunity; and
(vii) A statement that written substantiation for the earnings
claim will be made available to the prospective purchaser upon request.
(b) Make any earnings claim in the general media, unless the
seller:
(1) Has a reasonable basis for its claim at the time the claim is
made;
(2) Has in its possession written material that substantiates its
claim at the time the claim is made;
(3) States in immediate conjunction with the claim:
[[Page 76862]]
(i) The beginning and ending dates when the represented earnings
were achieved; and
(ii) The number and percentage of all persons who purchased the
business opportunity prior to the ending date in paragraph (b)(3)(i) of
this section who achieved at least the stated level of earnings.
(c) Disseminate industry financial, earnings, or performance
information unless the seller has written substantiation demonstrating
that the information reflects, or does not exceed, the typical or
ordinary financial, earnings, or performance experience of purchasers
of the business opportunity being offered for sale.
(d) Fail to notify any prospective purchaser in writing of any
material changes affecting the relevance or reliability of the
information contained in an earnings claim statement before the
prospective purchaser signs any contract or makes a payment or provides
other consideration to the seller, directly or indirectly, through a
third party.
Sec. 437.5 Sales conducted in Spanish or other languages besides
English.
(a) If the seller conducts the offer for sale, sale, or promotion
of a business opportunity in Spanish, the seller must provide the
disclosure document required by Sec. 437.3(a) in the form and language
set forth in appendix B to this part, and the disclosures required by
Sec. Sec. 437.3(a) and 437.4 must be made in Spanish.
(b) If the seller conducts the offer for sale, sale, or promotion
of a business opportunity in a language other than English or Spanish,
the seller must provide the disclosure document required by Sec.
437.3(a) using the form and an accurate translation of the language set
forth in appendix A to this part, and the disclosures required by
Sec. Sec. 437.3(a) and 437.4 must be made in that language.
Sec. 437.6 Other prohibited practices.
In connection with the offer for sale, sale, or promotion of a
business opportunity, it is a violation of this part and an unfair or
deceptive act or practice in violation of Section 5 of the FTC Act for
any seller, directly or indirectly through a third party, to:
(a) Disclaim, or require a prospective purchaser to waive reliance
on, any statement made in any document or attachment that is required
or permitted to be disclosed under this Rule;
(b) Make any claim or representation, orally, visually, or in
writing, that is inconsistent with or contradicts the information
required to be disclosed by Sec. Sec. 437.3 (basic disclosure
document) and 437.4 (earnings claims document) of this Rule;
(c) Include in any disclosure document or earnings claim statement
any materials or information other than what is explicitly required or
permitted by this Rule. For the sole purpose of enhancing the
prospective purchaser's ability to maneuver through an electronic
version of a disclosure document or earnings statement, the seller may
include scroll bars and internal links. All other features (e.g.,
multimedia tools such as audio, video, animation, or pop-up screens)
are prohibited;
(d) Misrepresent the amount of sales, or gross or net income or
profits a prospective purchaser may earn or that prior purchasers have
earned;
(e) Misrepresent that any governmental entity, law, or regulation
prohibits a seller from:
(1) Furnishing earnings information to a prospective purchaser; or
(2) Disclosing to prospective purchasers the identity of other
purchasers of the business opportunity;
(f) Fail to make available to prospective purchasers, and to the
Commission upon request, written substantiation for the seller's
earnings claims;
(g) Misrepresent how or when commissions, bonuses, incentives,
premiums, or other payments from the seller to the purchaser will be
calculated or distributed;
(h) Misrepresent the cost, or the performance, efficacy, nature, or
central characteristics of the business opportunity or the goods or
services offered to a prospective purchaser;
(i) Misrepresent any material aspect of any assistance offered to a
prospective purchaser;
(j) Misrepresent the likelihood that a seller, locator, or lead
generator will find locations, outlets, accounts, or customers for the
purchaser;
(k) Misrepresent any term or condition of the seller's refund or
cancellation policies;
(l) Fail to provide a refund or cancellation when the purchaser has
satisfied the terms and conditions disclosed pursuant to Sec.
437.3(a)(4);
(m) Misrepresent a business opportunity as an employment
opportunity;
(n) Misrepresent the terms of any territorial exclusivity or
territorial protection offered to a prospective purchaser;
(o) Assign to any purchaser a purported exclusive territory that,
in fact, encompasses the same or overlapping areas already assigned to
another purchaser;
(p) Misrepresent that any person, trademark or service mark holder,
or governmental entity, directly or indirectly benefits from, sponsors,
participates in, endorses, approves, authorizes, or is otherwise
associated with the sale of the business opportunity or the goods or
services sold through the business opportunity;
(q) Misrepresent that any person:
(1) Has purchased a business opportunity from the seller or has
operated a business opportunity of the type offered by the seller; or
(2) Can provide an independent or reliable report about the
business opportunity or the experiences of any current or former
purchaser.
(r) Fail to disclose, with respect to any person identified as a
purchaser or operator of a business opportunity offered by the seller:
(1) Any consideration promised or paid to such person.
Consideration includes, but is not limited to, any payment, forgiveness
of debt, or provision of equipment, services, or discounts to the
person or to a third party on the person's behalf; or
(2) Any personal relationship or any past or present business
relationship other than as the purchaser or operator of the business
opportunity being offered by the seller.
Sec. 437.7 Record retention.
To prevent the unfair and deceptive acts or practices specified in
this Rule, business opportunity sellers and their principals must
prepare, retain, and make available for inspection by Commission
officials copies of the following documents for a period of three
years:
(a) Each materially different version of all documents required by
this Rule;
(b) Each purchaser's disclosure receipt;
(c) Each executed written contract with a purchaser; and
(d) All substantiation upon which the seller relies for each
earnings claim from the time each such claim is made.
Sec. 437.8 Franchise exemption.
The provisions of this Rule shall not apply to any business
opportunity that constitutes a ``franchise,'' as defined in the
Franchise Rule, 16 CFR part 436; provided, however, that the provisions
of this Rule shall apply to any such franchise if it is exempted from
the provisions of part 436 because, either:
(a) Under Sec. 436.8(a)(1), the total of the required payments or
commitments to make a required payment, to the franchisor or an
affiliate that are made
[[Page 76863]]
any time from before to within six months after commencing operation of
the franchisee's business is less than $500, or
(b) Under Sec. 436.8(a)(7), there is no written document
describing any material term or aspect of the relationship or
arrangement.
Sec. 437.9 Outstanding orders; preemption.
(a) A business opportunity required by prior FTC or court order to
follow the Franchise Rule, 16 CFR part 436, may petition the Commission
to amend the order or to stipulate to an amendment of the court order
so that the business opportunity may follow the provisions of this
part.
(b) The FTC does not intend to preempt the business opportunity
sales practices laws of any state or local government, except to the
extent of any conflict with this part. A law is not in conflict with
this Rule if it affords prospective purchasers equal or greater
protection, such as registration of disclosure documents or more
extensive disclosures. All such disclosures, however, must be made in a
separate state disclosure document.
Sec. 437.10 Severability.
The provisions of this part are separate and severable from one
another. If any provision is stayed or determined to be invalid, the
remaining provisions shall continue in effect.
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[FR Doc. 2011-30597 Filed 12-7-11; 8:45 am]
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