The “Significant Control or Assistance” Element
The amended Rule covers business arrangements where the franchisor “will exert or has the authority to exert a significant degree of control over the franchisee’s method of operation, or provide significant assistance in the franchisee’s method of operation.”
When Is Control or Assistance Significant?
The more franchisees reasonably rely upon the franchisor’s control or assistance, the more likely the control or assistance will be considered “significant.” Franchisees’ reliance is likely to be great when they are relatively inexperienced in the business being offered for sale or when they undertake a large financial risk. Similarly, franchisees are likely to reasonably rely on the franchisor’s control or assistance if the control or assistance is unique to that specific franchisor, as opposed to a typical practice employed by all businesses in the same industry.
Further, to be deemed “significant,” the control or assistance must relate to the franchisee’s overall method of operation – not a small part of the franchisee’s business. Control or assistance involving the sale of a specific product that has, at most, a marginal effect on a franchisee’s method of operating the overall business will not be considered in determining whether control or assistance is “significant.” Significant types of control include:
- site approval for unestablished businesses;
- site design or appearance requirements;
- hours of operation;
- production techniques;
- accounting practices;
- personnel policies;
- promotional campaigns requiring franchisee participation or financial
- restrictions on customers; and
- locale or area of operation.
Significant types of assistance include:
- formal sales, repair, or business training programs;
- establishing accounting systems;
- furnishing management, marketing, or personnel advice;
- selecting site locations;
- furnishing systemwide networks and website; and
- furnishing a detailed operating manual.
To a lesser extent, the following factors will be considered when determining whether “significant control or assistance” is present in a relationship:
- a requirement that a franchisee service or repair a product (except warranty work);
- inventory controls;
- required displays of goods; and
- on-the-job assistance with sales or repairs.
What Activities Do Not Constitute Significant Control or Assistance?
Promotional activities, in the absence of additional forms of assistance, will not be deemed “significant.” This includes furnishing a distributor with point-of sale advertising displays, sales kits, product samples, and other promotional materials intended to help the distributor in making sales. It also includes providing advertising in such media as radio and television, whether provided solely by the franchisor or on a cooperative basis with franchisees.
In addition, the following items do not constitute significant control or assistance, as a matter of Commission policy :
- trademark controls designed solely to protect the trademark owner’s legal
- ownership rights in the mark under state or federal trademark laws (such as
- display of the mark or right of inspection);
- health or safety restrictions required by federal or state law or regulations;
- agreements between a bank credit interchange organization and retailers or
- member banks for the provision of credit cards or credit services; and
- assisting distributors in obtaining financing to be able to transact business.
CREDIT: The content of this post has been copied or adopted from the Federal Trade Commission’s Franchise Rule Compliance Guide.