Franchises and business opportunity ventures represent large and growing segments of the retail and service sectors in the United States and are rapidly replacing more traditional forms of small business ownership in the U.S. economy. According to the International Franchise Association (IFA), about 75 industries—such as those involving fast food, service, maintenance, and lodging—operate within the franchise format to distribute goods and services to consumers. IFA estimates that there are 1,500 business-format franchises that operate more than 320,000 franchised units in the United States. IFA estimates that these franchises account for 50 percent of all retail sales and generate $1 trillion in sales annually in the United States. Data on the number and overall value of business opportunity ventures were not available, in part, because according to FTC staff, there is no national association or attorney group that represents business opportunities. In 1950, fewer than 100 companies used franchising in their marketing operations, but with the rapid expansion of franchising in the 1960s, federal and state governments began to see the need to protect prospective franchise purchasers. In 1971, FTC announced it would initiate a proceeding concerning the promulgation of a trade regulation rule on franchise sales and pre-sale disclosures. Public hearings on franchising commenced in 1972, and in 1978, FTC issued its final Franchise Rule, which took effect in October 1979. The Rule, which has the full force and effect of federal law, was promulgated in response to widespread evidence of unfair or deceptive acts or practices in connection with the sale of franchises and business opportunities. FTC provided the following distinctions, consistent with the Franchise Rule, between a franchise and a business opportunity: A franchise requires payment of at least $500 for the opportunity to sell trademarked goods and services with significant assistance or control of the franchisor. An example of a franchise is a fast food restaurant chain. To buy a franchise, the prospective purchaser would pay a required fee for the opportunity to sell the chain’s products. In turn, the chain would help the purchaser by (1) arranging for a store location, (2) providing training on how to prepare the products, and (3) providing advertising, among other things. The purchaser would agree to abide by the chain’s standards for cleanliness, quality, uniforms, and so on. A business opportunity requires payment of at least $500 for the opportunity to distribute goods and services of the seller with assistance in the form of locations or accounts. Business opportunities are less structured than franchises and impose fewer ties between the sellers and buyers. An example of a business opportunity is the purchase of vending machine routes, where the purchaser would pay a required fee for the opportunity to sell the company’s products (e.g., soft drinks, snack foods) through vending machines. The purchaser would buy the vending machines and products from the company, and the company would inform the purchaser of specific stores or locations in which to place them. The Franchise Rule is designed to enable prospective franchise and business opportunity owners to protect themselves before investing by providing them with the information needed to assess potential risks and benefits, make meaningful comparisons with other investments, and further investigate the business. This information is contained in detailed disclosure documents that must be provided to prospective purchasers at least 10 business days before they pay any money or legally commit to a purchase. The document includes financial and other information about the seller, the business, and the business relationship, including the name, address, and telephone number of other purchasers; a fully audited financial statement of the seller; the background and experience of the business’ key executives; the seller’s litigation history; the cost of starting and maintaining the business; and the responsibilities the buyer and seller will have to each other once the franchise or business opportunity is bought, including termination and renewal rights. Regarding the latter, the Franchise Rule requires the seller to disclose basic information about its policies and practices, including matters such as termination and renewal rights. However, the Franchise Rule does not prescribe the terms and conditions for carrying out those policies and practices. The Franchise Rule requires disclosures only to prospective purchasers. Franchise and business opportunity sellers do not register or file their disclosure documents with FTC, and FTC generally does not review or approve disclosures, advertising, or agreements. FTC’s Bureau of Consumer Protection enforces the Franchise Rule. According to FTC staff, during fiscal years 1997 through 1999, the Bureau spent an average of 13 workyears, or about 6 percent of its approximately 221 workyears, on Franchise Rule activities and enforcement. In addition to the Franchise Rule, FTC enforces section 5 of the FTC Act, which declares unlawful unfair or deceptive acts or practices in or affecting commerce. Section 5 also provides that FTC does not have authority to declare an act or practice unlawful (FTC’s “unfairness” jurisdiction) unless three specific criteria are met: (1) the act or practice causes or is likely to cause substantial injury to consumers, (2) the injury is not outweighed by countervailing benefits to consumers or to competition, and (3) the act or practice is not reasonably avoidable by consumers. According to FTC staff, in exercising its authority, FTC brings “deception” cases in many consumer protection fields, including the sale of franchises and business opportunities. In general, only FTC, not private parties, can enforce violations of the Franchise Rule or FTC Act. The FTC Act provides FTC with a broad range of remedies for violations, including injunctions, civil penalties, and refund of money to franchise and business opportunity purchasers. Also, in 1998, in conjunction with the National Franchise Council (NFC), FTC approved, on a trial basis, an Alternative Rule Enforcement Program to resolve technical or minor violations of the Franchise Rule that otherwise would be referred to the Department of Justice for civil penalty action. Franchisors FTC refers to the program are trained in Franchise Rule compliance and are monitored for a period of years. Moreover, potentially injured consumers are notified about the Franchise Rule violation and have the opportunity to resolve any claim, and possibly seek redress, against the franchisor through mediation. Violations involving fraud or unfair or deceptive business practices are not candidates for the program. As of April 2001, nine companies had been referred to the Alternative Rule Enforcement Program. States also have a role in regulating the sale of franchises and business opportunities. California passed the first franchise disclosure law in 1970. Today, 15 states have specific franchise disclosure laws and 24 states have specific business opportunity disclosure laws that are designed to protect prospective purchasers. Like the federal Franchise Rule, these state laws require franchise and business opportunity sellers to provide each prospective purchaser with a pre-sale disclosure document containing financial and other information. Unlike the Franchise Rule, some of these state laws require franchisors and business opportunities to file their disclosure documents with a designated state agency to review for accuracy and/or completeness. In 1995, as part of its continuing review of trade regulation rules, FTC announced that it was beginning to explore the need to revise the Franchise Rule. In October 1999, FTC published proposed revisions to the Rule, which focus exclusively on the sale of franchises. According to FTC, the proposed revisions would reduce inconsistencies in federal and state disclosure requirements governing franchise sales, address changes in the marketing of franchises—such as the sale of franchises through the Internet—and provide expanded disclosures concerning franchise relationships. FTC intends to conduct a separate rulemaking proceeding for business opportunities once it has completed the Franchise Rule review process because FTC views business opportunities as distinct business arrangements that require separate disclosure requirements. For example, FTC staff noted that many of the current Franchise Rule’s pre- sale disclosures do not apply to the sale of most business opportunities, which typically involve fairly simple contracts or purchase agreements. Because of pending comment periods and subsequent FTC review and approval activities, FTC staff told us they could not provide specific information on when the revised Rule would be issued. FTC’s Franchise Rule only addresses how a franchise or business opportunity is sold to a prospective purchaser. It generally does not regulate the nature of the agreement a prospective franchise or business opportunity venture purchaser may sign or changes in the relationship after the initial contract has been signed. FTC staff told us that FTC generally lacks the authority to intervene in private franchise contracts and related relationship issues. Rather, these issues are generally considered matters of contract law that traditionally have been governed at the state level. Currently, 17 states have enacted franchise relationship laws of general applicability to govern the franchise relationship after the agreement has been signed. These laws vary in their scope, with Iowa’s relationship law recognized as the most comprehensive. State franchise relationship laws generally provide for a private right of action that permits franchisees to bring lawsuits for violations under their respective state’s particular law. States that do not have specific disclosure or relationship laws have other laws to protect consumers, such as general consumer protection or fraud statutes. These other laws give parties the right to file a lawsuit directly in state court. (App. II lists the states that have business opportunity disclosure, franchise disclosure, and/or franchise relationship laws.) Currently, federal laws governing franchise relationships are specifically limited to the automobile and petroleum industries. Under the Automobile Dealers Day in Court Act of 1956, a franchise automobile dealer can bring an action in U.S. District Court against its automobile manufacturer to recover damages caused by the manufacturer’s failure to act in good faith in (1) performing or complying with any of the terms or provisions of the franchise agreement or (2) terminating, canceling, or not renewing the franchise.