United States: Auto Manufacturers: Don't Forget the Amended Franchise Rule When Considering New Business Opportunities

As competition intensifies and auto manufacturers and distributors look for new ways to realize value from their brands, they and their counsel would do well to familiarize themselves with the Federal Trade Commission's (FTC) Amended Franchise Rule and the reasons why their clients are exempt to make sure they are not inadvertently creating business ventures subject to federal and state regulations.  Although the federal Automobile Dealer Day in Court Act1 and many state dealer statutes refer to the written agreement between auto manufacturers and dealers as a "franchise," it is not common industry practice to refer to manufacturers as "franchisors" or dealers as "franchisees."  This is likely because most states—even states with franchise laws of general applicability—have adopted industry-specific statutes regulating manufacturer-dealer relations and the exemptions obtained from the FTC by auto manufacturers shortly after the adoption of the FTC Franchise Rule2 in 1979.  But when considering business opportunities that are outside the scope of the traditional manufacturer-dealer relationship, the applicable federal and state regulations could convert the relationship into one of franchisor-franchisee.  If auto manufacturers wish to expand the power of their brand while avoiding the implications of the FTC Franchise Rule, they first need to understand it.    

The FTC Franchise Rule

First adopted by the FTC in 1979, the Franchise Rule broadly defines a "franchise" as "any continuing commercial relationship or arrangement" in which (1) a franchisee obtains a right to operate a business associated with a franchisor's trademark; (2) the franchisor will exert or has authority to exert a significant degree of control over the franchisee's method of operation; and (3) a franchisee agrees to pay a fee to the franchisor.3  Generally speaking, the FTC Franchise Rule requires written disclosure by a franchisor to a prospective franchisee of material information concerning the business opportunity being sold prior to the sale of a franchise in a document that is today called a "Franchise Disclosure Document" or "FDD," and imposes certain requirements on a franchisor before selling a franchise to a prospective franchisee.4

Shortly after the adoption of the FTC Franchise Rule in 1979, participants in already heavily regulated industries sought exemptions under Section 18(g) of the FTC Act, which provides that an exemption to a trade regulation rule may be granted if coverage "is not necessary to prevent the unfair or deceptive act or practice to which the rule relates."5  For example, a group of oil companies and oil jobbers petitioned for and obtained from the FTC an exemption for the entire petroleum industry because the Petroleum Marketers Practices Act (PMPA)6 already imposed pre-sale disclosure requirements and regulated the relationship between franchisors and franchisees in that industry.7

Auto manufacturers also petitioned for exemptions from the FTC Franchise Rule, either individually or through trade associations. For example, at the same time the FTC granted the exemption sought by oil companies and oil jobbers, the FTC also granted exemptions sought by the Automobile Importers of America, Inc. on behalf of its members.8  In granting the exemptions, the FTC found in the record an "absence of significant abuse by franchisors of their relationships with automobile dealer franchisees or prospective franchisees," and noted that the National Automobile Dealers Association supported the petition.9  The FTC also explained that it had "previously determined . . . that the sale of most automobile dealerships does not constitute the sale of a 'franchise' within the meaning of the rule," referring to its ratification of prior staff advisory opinions to the Big Three domestic automobile manufacturers that the manner in which those companies appointed dealers did not constitute a "franchise."10

Finally, the FTC observed that because prospective motor vehicle dealers make "extraordinarily large investments," those investments are, as a practical matter, made by knowledgeable investors and preceded by substantial negotiation so that those investors can make an "informed assessment of the potential risks and benefits of the proposed investment."11  The FTC concluded that the exemptions from the Franchise Rule were appropriate "[b]ecause (i) the transactions, for the most part, are not covered by the rule, (ii) the conditions most likely to lead to consumer abuses are absent from [the] sale of dealerships . . . and (iii) such sales transactions include sufficient disclosure to ensure that the prospective investor is in the position to make an informed decision . . . ."12

2007 Amendment to the Franchise Rule

In 2007, the FTC adopted an Amended Franchise Rule designed to clarify ambiguities, reduce compliance costs, and respond to changes in technology and market conditions in the offer and sale of franchises.  In the Statement of Basis and Purpose (SBP) issued by the FTC in conjunction with its adoption of the Amended Franchise Rule, the FTC explained that because "most of the provisions of the original Rule have been retained in the final amended Rule . . . . all former informer staff advisories remain a source of Rule interpretation, except where this SBP contradicts a staff advisory."13

The FTC expressly incorporated into the Amended Franchise Rule the exemption that it had granted to oil companies and oil jobbers more than 25 years earlier, adding language declaring that the rule shall not apply if "[t]he franchise relationship is covered by the Petroleum Marketing Practices Act, 15 U.S.C. 2801."14  Explaining in the SBP its rationale for adopting this language, and responding to commenters who asked whether this exemption would extend to ancillary businesses at gas stations (like car washes and convenience stores), the FTC declared that it "intends that it be clear that the PMPA exemption should be read broadly to cover other branded services and products (such as a car wash or mart) sold to the prospective franchisee under the same franchise agreement as the gasoline station."15  Although the FTC recognized "as a practical matter" that this broad exemption was warranted because it may be impossible to tease out exempt and non-exempt business lines in a single franchise agreement, the FTC warned that separate or subsequent sales of a restaurant or convenience store franchise to a gasoline station owner fall outside the exemption.16

The Amended Franchise Rule also expressly incorporated portions of the rationale that informed the exemptions granted to auto manufacturers by adopting two new "sophisticated investor exemptions."  The "large franchise investment" exemption provides that the rule does not apply if "[t]he franchisee's initial investment, excluding any financing received from the franchisor or an affiliate and excluding the cost of unimproved land, totals at least $1,143,100 and the prospective franchisee signs an acknowledgment verifying the grounds for the exemption."17  The "large franchisee" exemption provides that the rule does not apply if  "[t]he franchisee . . . is an entity that has been in business for at least five years and has a net worth of at least $5,715,500."18  Explaining in the SBP its rationale for adopting these exemptions, the FTC expressly noted that the sophistication of large investors  had been one of the reasons for granting the exemptions sought by the Automobile Importers of America more than 25 years earlier.19

Realizing Brand Value In The 21st Century

Unlike oil companies and oil jobbers, auto manufacturers and distributors do not enjoy an industry-wide categorical exemption from the FTC Franchise Rule.  As the FTC observed in 1980, "most" arrangements between manufacturers and dealers do not meet the definition of a "franchise," significantly because auto manufacturers do not "sell" their dealerships like traditional franchisors or otherwise charge dealers a fee for the right to use the manufacturer trademarks in selling new cars.20  Most (if not all) manufacturers also have obtained exemptions from the rule under Section 18(g) of the FTC Act.  And given the significant investment typically involved in acquiring a dealership, the "large investment exemption" would seem to cover most of the agreements between manufacturers and dealers.  Nevertheless,  as the automobile and transportation industries continue to evolve and respond to ever changing technologies, and auto manufacturers look to develop new business opportunities to capitalize on brand value, they must take care to ensure that they do not inadvertently extend beyond the recognized exemptions.  Especially with respect to business ventures outside of the traditional auto dealership or ancillary dealership businesses, auto manufacturers and distributors should keep in mind that potential franchise compliance issues lurk in the background.

1.   15 U.S.C. § 1221.

2.   16 C.F.R. Part 436.  In 2007, the FTC added part 437 to the Franchise Rule to regulate the sale of "business opportunities," which are similar to franchises.  Many states also regulate the sale of "business opportunities" separate and apart from, or instead of, franchise relationships.  To the extent that an automobile manufacturer creates a business outside the scope of the traditional dealership arrangement, they and their counsel should be familiar with the applicable federal and state franchise and business opportunity statutes.  

3.   16 C.F.R. § 436.1(h).

4.   Id., § 436.2.

5.  15 U.S.C. § 57a(g).

6.  15 U.S.C. § 2801 et seq.

7.  45 Fed. Reg. 51765 (Aug. 5, 1980).

8.  45 Fed. Reg. 51763 (Aug. 5, 1980).

9.  Id. at 51764.

10.  Id. at 51764, 51765 n.4.

11.  Id. at 51764.

12.  Id.

13.  72 Fed. Reg. 15444, 15449 (Mar. 20, 2007).

14.  16 C.F.R. § 436.8(a)(4).

15.  72 Fed. Reg. at 15522.

16.  Id.

17. 16 C.F.R. § 436.8(a)(5)(i).  The threshold amount for the "large franchise investment" exemption was $1 million when the Amended Franchise Rule was adopted in 2007.   Under 16 C.F.R. § 436.8(b), the FTC adjusts the thresholds for exemptions to the Amended Franchise Rule every four years based on the consumer price index. 

18. 16 C.F.R. § 436.8(a)(5)(ii).

19.  72 Fed. Reg. at 15523.

20.  Even though auto manufacturers do not ordinarily charge an explicit fee in exchange for licensing their brands, there may be challenges based on other costs associated with an established business being the functional equivalent of a franchise fee.  See e.g. Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128, 135 (7th Cir. 1990) (investment in excess inventory may constitute an indirect franchise fee).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions