FTC seeks public comments on proposal to expand the regulation of earning claims, including financial performance representations regulated by the Franchise Rule
On March 11, 2022, the FTC published an Advance Notice of Proposed Rulemaking, 16 C.F.R. Part 462 (the Notice), to address false, unsubstantiated or otherwise misleading earnings claims in a variety of industries, including the franchise industry. The FTC stated in a press release that, through the proposed new rule, it aims to “challenge bogus money-making claims used to lure consumers, workers, and prospective entrepreneurs into risky business ventures that often turn into dead-end debt traps.”
As franchisors know, and as the Notice acknowledges, the FTC already regulates franchisors’ use of earnings claims through the Franchise Rule, 16 C.F.R Part 436.5(s). The Franchise Rule requires a franchisor to disclose to a prospective franchisee in Item 19 of its Franchise Disclosure Document any “financial performance representations” (FPRs) – defined as “any representation . . . that states . . . a specific level or range of actual or potential sales, income, gross profits, or net profits.” Franchisors may only disclose FPRs if there is a reasonable basis for making such representations and such representations are accurate and not misleading. For each FPR included in Item 19, the Franchise Rule dictates certain information the franchisor must disclose based on whether the FPR pertains to historic performance or future potential performance.
Despite this existing regulation of such earnings claims, the FTC points to two reasons for the proposed rulemaking. First, the FTC believes it is necessary to expand the scope of existing rules regulating the use of earnings claims in the franchise industry (among others) in order to target “[n]umerous different types of enterprises that do not clearly fall under the scope of these existing rules.”
Second, in AMG Capital Mgmt., LLC v. FTC, 141 S. Ct. 1341 (2021), the Supreme Court ruled that the FTC may not seek equitable monetary relief under Section 13(b) of the FTC Act for violations of statutes enforced by the FTC. According to the FTC, the new rule would enable it to seek monetary relief for consumers harmed by deceptive earnings claims, as well as civil penalties against those who make the deceptive claims, under Sections 5 and 19 of the FTC Act, 15 U.S.C. §§ 45(m), 57b.
The new rule could potentially impose new requirements on franchisors regarding FPRs in addition to those requirements that are already set forth in the Franchise Rule. The Notice states that it seeks public comment on the prevalence of earnings claims in a variety of contexts, including franchising. Broadly, it states that the FTC is interested in public comment on:
- Whether a disclaimer can be sufficient to correct a misleading impression from an atypical earnings claim (ie, a claim that does not reflect the experience of the typical purchaser) and, if so, what features such a disclaimer must have
- Whether all or some entities making earnings claims should be required to give recipients specific earnings information
- Whether a rule should address the use of real or purported earnings data or statistics from an industry or professional field in the promotion of money-making opportunities
- Whether and how a rule can most effectively provide clarity on the substantiation a company must possess before making an earnings claim, and whether those who make earnings claims should be required to keep records to demonstrate how they have substantiated the claims
- Whether the rule should address “lifestyle claims” – claims that participating in a money-making opportunity will lead to a material change in lifestyle, such as getting to go on expensive vacations, quitting your job or buying a luxury car
Further, the Notice suggests that the new rule may necessitate an amendment to the Franchise Rule. The FTC specifically solicited public comment asking:
If a rule addressing [false, unsubstantiated, or otherwise misleading earnings claims] is adopted, should the Business Opportunity Rule, the Franchise Rule, or the Telemarketing Sales Rule be amended? Why or why not? If so, how and to what extent?
If you wish to comment on the proposed new rule, comments must be received on or before May 10, 2022 and may be filed online at https://www.regulations.gov.