FTC Announces Revised Proposal For Business Opportunities Rule
By Jason Hicks
In April 2006, the FTC sought comment on a proposed trade regulation rule governing business opportunities that was separate from and more expansive than the FTC franchise disclosure rule. For example, the FTC's franchise disclosure rule applies to opportunities that require a buyer to make a payment of at least $500 within the first six months, but under the inventory exception, voluntary purchases of reasonable amounts of inventory at bona fide wholesale prices do not count toward the $500 threshold. The Business Opportunity Rule, as originally proposed, did not contain such an "inventory exception."
Given the breadth of the original Business Opportunity Rule, many manufacturers and distributors were concerned that it would include traditional distribution networks that were previously exempt from franchise laws. One commenter on the rule feared that it "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." We wrote about the issues with the proposed Business Opportunity Rule here, here and here.
On March 18, 2008, the FTC announced a revised notice of proposed rulemaking that modified the proposed Business Opportunity Rule. The revised proposed rule narrows the definition of a "business opportuinty." Among other things, the revised rule excludes from coverage distribution arrangements in which the only required payment is for reasonable amounts of inventory at bona fide wholesale prices. The FTC explained:
For businesses that still fall within the revised definition of a "business opportunity," the revised rule streamlines and eliminates some of the disclosure requirements in the original proposed rule. The FTC is accepting comments on the revised Notice of Proposed Rulemaking through May 27, 2008.
If you have further questions about the scope of the revised rule or wish to comment on the revised rule, contact Jason Hicks or the Womble Carlyle attorney with whom you work.
Given the breadth of the original Business Opportunity Rule, many manufacturers and distributors were concerned that it would include traditional distribution networks that were previously exempt from franchise laws. One commenter on the rule feared that it "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." We wrote about the issues with the proposed Business Opportunity Rule here, here and here.
On March 18, 2008, the FTC announced a revised notice of proposed rulemaking that modified the proposed Business Opportunity Rule. The revised proposed rule narrows the definition of a "business opportuinty." Among other things, the revised rule excludes from coverage distribution arrangements in which the only required payment is for reasonable amounts of inventory at bona fide wholesale prices. The FTC explained:
The changes to the IPBOR’s definition of “business opportunity” are three-fold. First, the RPBOR definition includes a prong limiting coverage to opportunities for which “the prospective purchaser makes a required payment” for the purchase of the business opportunity. This change will exclude from the definition business relationships in which the only required payment is for inventory at bona fide wholesale prices. Second, the RPBOR definition eliminates two types of “business assistance” that formerly would have triggered the Rule’s strictures and disclosure obligations, namely tracking paymentsand providing training. Third, the RPBOR no longer links the definition of “business opportunity” to the making of an earnings claim. Each of these changes is discussed in detail below.
For businesses that still fall within the revised definition of a "business opportunity," the revised rule streamlines and eliminates some of the disclosure requirements in the original proposed rule. The FTC is accepting comments on the revised Notice of Proposed Rulemaking through May 27, 2008.
If you have further questions about the scope of the revised rule or wish to comment on the revised rule, contact Jason Hicks or the Womble Carlyle attorney with whom you work.
