Responding to a request by Congress, the U.S. General Accounting Office (GAO) examined various issues associated with the regulation of franchises and business opportunity ventures and prepared a report on its findings. The new report builds on the GAO's earlier report addressing enforcement of the Franchise Rule by the Federal Trade Commission (FTC) and discusses various matters pertaining to franchise relationship issues. This special Franchise Handbook Series looks at the findings of the new report.

To better understand how the FTC used its resources to carry out franchise and business opportunity investigations, we attempted to determine how long it took FTC staff to process and close investigations using the number of hours they billed for each of the 322 investigations opened over a six-year period (1993-1999).

However, information on hours billed was available for only 217 (65 percent) of the 332 investigations FTC opened throughout the period. The 217 investigations included 125 that were closed with no further legal actions and 92 that resulted in cases being filed.

For the 125 investigations that FTC closed with no further legal action, FTC staff billed from one to 3,367 hours, with an average time of 228 hours and a median time of 64 hours. For the 92 investigations for which FTC filed cases, FTC staff billed from two to 5,738 hours, with an average time of 887 hours and a median time of 628 hours.

According to FTC staff, the overwhelming majority of the investigations for which few or no hours were billed involved business opportunities. The staff added that the reasons why staff may not have charged any or few hours include that:

FTC staff told us that FTC does not have specific written criteria or standards to measure whether it carried out its investigations in a timely manner. According to FTC staff, the amount of time it takes FTC staff to complete an investigation depends on several factors.

Those factors include the facts and complexity of the case, the degree of cooperation obtained from the targets of the investigation, and the competing demands of the staff responsible for the investigation.

Similar to its complaint and investigation data, most of the cases FTC filed in court for violations of the Franchise Rule and/or section 5 of the FTC Act involved business opportunities.

From 1993 through 2000, FTC filed 162 cases in court for violations of the Franchise Rule and/or section 5 of the FTC Act. Of those, 142 (88 percent) involved business opportunities and 20 (12 percent) involved franchises.

Not all of the investigations that FTC opened resulted in cases being filed in court. According to FTC staff, limited resources and other law enforcement priorities prevented FTC from pursing every meritorious investigation involving franchises and business opportunities.

The staff added that FTC generally pursues those court cases that it believes have the greatest likelihood of financial recovery for franchise and business opportunity purchasers, or have the greatest deterrent effect for potential violators.

Among the other criteria FTC uses to decide which cases to pursue are whether the problem is an isolated event or part of a pattern or practice; whether there is a viable, meaningful remedy; and whether there are alternatives to federal intervention.

All litigated cases have resulted in such relief as court injunctions, civil penalties against franchisors or monetary redress for investors.

We reviewed a sample of files for business opportunity and franchise investigations FTC closed without taking further legal action to determine why FTC closed those investigations.

We reviewed all 79 files for investigations FTC closed from 1997 through 1999 for which it took no further legal action. Specifically, we attempted to gather information on the date the investigation was opened, the reasons for closing it and the date it was closed.

Our results showed that while supervisory approval had been obtained for the opening and subsequent closing of each of the investigations, only two of the 79 files contained documents showing the reasons the investigations were closed.

Thus, it was not clear why FTC did not take further legal action on the other 77 business opportunity and franchise investigations that it closed during the period. FTC staff told us that it is likely these investigations were closed either because of a lack of sufficient evidence of wrongdoing or because the subject was out of business.

However, the FTC staff did not have any documentation to support their explanation. According to the Comptroller General's Standards for Internal Control in the Federal Government, all transactions and other "significant" events need to be clearly documented, and the documentation should be readily available for examination.

During our review, we informed FTC staff that our report would likely contain a recommendation that FTC develop and implement procedures to require FTC staff to document the reasons why franchise and business opportunity investigations are closed.

At that time, FTC staff told us that there was little, if any, historical value in reviewing past closed investigations of this type. The staff added that FTC staff have always been required to justify a recommendation to close an investigation in oral discussions with the assistant or associate directors who have responsibility for approving such requests.

However, after further consideration, FTC staff determined that documenting the oral discussions was not unreasonable.

Accordingly, in June 2001, the Associate Director for the Bureau of Consumer ProtectionÕs Division of Marketing Practices issued a memorandum to all Marketing Practices staff to inform them of revised procedures related to franchise and business opportunity investigations that are closed without filing an action in court.

More specifically, the revised procedures specify that each and every Matter Update Notice closing a franchise or business opportunity investigation must state the reason or reasons why the investigation is being closed.

FTC also modified its Matter Update Notice to include check boxes setting forth the most common reasons for closure.

FTC uses various means, such as law enforcement summits and conference calls, to communicate and coordinate its franchise and business opportunity enforcement activities with the states.

Regulatory officials from the nine states with franchise and business opportunity disclosure laws had mixed views about the effectiveness of the FTC's efforts.

Generally, state business opportunity regulatory officials viewed FTC's communication and coordination efforts as being more effective than did the state franchise regulatory officials we contacted.

This may be due in large part to the fact that FTC's communication and coordination efforts with state regulatory agencies during 1998 and 2000 focused on business opportunity issues.

In its 1998 annual report, FTC commented, "The Commission works closely with other federal agencies, states and local authorities in a variety of coordinated law enforcement efforts and task forces, including individual cases involving fraud and deceptive advertising, efforts to boost industry compliance with rules and regulations, and consumer and law enforcement training programs."

FTC also reported that by sharing information and resources, joint efforts effectively target issues that have direct impact on consumers.