02-004003RX Bryan Yamhure And Henry Yamhure vs. Department Of Agriculture And Consumer Services Status: Closed DOAH Final Order on Wednesday, January 7, 2004.

Summary: Rules 5J-10.001 (3)(b) and (4) are invalid excercises of delegated legislative authority because they modify, enlarge and contravene the statutes implemented.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

BRYAN YAMHURE and )

HENRY YAMHURE, )

)

Petitioners, )

)

vs. ) Case No. 02 - 4003RX

)

DEPARTMENT OF AGRICULTURE )

AND CONSUMER SERVICES, )

)

Respondent. )

______________ ________________)

FINAL ORDER

Robert E. Meale, Administrative Law Judge of the Division

of Administrative Hearings, conducted the final hearing in

Tallahassee, Florida, on November 15, 2002.

APPEARANCES

For Petitioner: Paul R. Ezatoff

Katz, Kutter, Alderman, Bryant

& Yon, P.A.

Post Office Box 1877

Tallahassee, Florida 32302 - 1877

For Respondent: William N. Graham, Senior Attorney

Raymond C. Conklin, Senior Attorney

Department of Agriculture

and Consumer Services

Mayo Building, Suite 520

407 South Calhoun Street

Tallahassee, Flor ida 32399 - 0800

STATEMENT OF THE ISSUE

The issue is whether Rule 5J - 10.001, Florida Administrative

Code, constitutes an invalid exercise of delegated legislative

authority, pursuant to Section 120.52(8), Florida Statutes.

PRELIMINARY STATEMENT

By Petit ion to Determine Invalidity of Existing Rule filed

October 15, 2002, Petitioners challenged Rule 5J - 10.001, Florida

Administrative Code. The petition alleges that Petitioner Bryan

Yamhure has owned at least ten percent of Premier Travel

International, Inc ., Travelease International, Inc., and Brylec,

Inc. The petition alleges that Petitioner Henry Yamhure

previously owned ten percent or more of Premier Travel

International, Inc.

The petition alleges that Respondent issued an

Administrative Complaint on J uly 26, 2002, alleging, in part,

that each Petitioner was individually liable for alleged

violations by Premier Travel International, Inc., of the Sale of

Business Opportunities Act, Chapter 559, Part VIII, Florida

Statutes.

The petition alleges that, i n DOAH Case No. 02 - 3374,

Respondent's Amended Administrative Complaint relies on Rules

5J - 10.001(3) and (4), Florida Administrative Code. The petition

concludes that Petitioners are substantially affected by Rule

5J - 10.001, Florida Administrative Code.

T he petition alleges that Rule 5J - 10.001, Florida

Administrative Code, is an invalid exercise of delegated

legislative authority because the rule, which cites Section

570.07(23), Florida Statutes, exceeds the rulemaking authority

granted Respondent; in the rule, Respondent has exceeded its

grant of rulemaking authority by adopting definitions broader

than those established by statute; the rule enlarges, modifies,

and contravenes the law implemented; the rule is arbitrary and

capricious; the rule is not suppo rted by competent substantial

evidence; and Rule 5J - 10.001(4) creates an unconstitutional

irrebuttable presumption.

The petition seeks an order declaring Rule 5J - 10.001,

Florida Administrative Code, to be invalid and awarding

Petitioners their reasonable costs and attorneys' fees, pursuant

to Section 120.595(3), Florida Statutes.

In the Prehearing Stipulation filed November 14, 2002, the

parties stipulated to numerous facts. At the hearing,

Petitioners and Respondent called no witnesses. Petitioners

off ered into evidence three exhibits: Petitioners Exhibits 1 - 3.

Respondent offered into evidence two exhibits: Respondent

Exhibits 1 - 2. All exhibits were admitted. Additionally, the

Administrative Law Judge took official notice of the

Administrative Comp laint in DOAH Case No. 02 - 3374, the Amended

Administrative Complaint in DOAH Case No. 02 - 3374, the Immediate

Final Cease and Desist Order issued by Respondent on July 26,

2002, the rulemaking package accompanying the adoption of Rule

5J - 10.001 in 1995 and filed by Respondent with the Secretary of

State, and Section 570.07, Florida Statutes (Supp. 1994).

The court reporter filed the transcript on December 10,

2002. The parties filed their proposed final orders on

December 24, 2002.

FINDINGS OF FACT

1. Pur suant to Sections 559.801(2) and 559.813(2), Florida

Statutes, Respondent has exclusive administrative jurisdiction

over the Sale of Business Opportunities Act, Chapter 559, Part

VIII, Florida Statutes, and shares judicial enforcement over the

Act with the Florida Department of Legal Affairs and the

applicable office of the state attorney. (Unless stated

otherwise, all references to "Sections" shall be to Florida

Statutes, all references to the "Act" shall be to the Sale of

Business Opportunities Act, and all references to "Rules" shall

be to the Florida Administrative Code.)

2. The Act governs the sale or lease of certain business

opportunities in Florida. Sections 559.803 and 559.804

respectively require sellers of covered business opportunities

to pr ovide timely disclosures to prospective purchasers and to

file annual disclosure statements with Respondent prior to

advertising or offering covered business opportunities for sale.

3. More relevant to this case, Section 559.801 sets forth

the definitions that establish the coverage of the Act:

559.801 Definitions. -- For the purpose of

ss. 559.80 - 559.815, the term:

(1)(a) "Business opportunity" means the

sale or lease of any products, equipment,

supplies, or services which are sold or

leased to a purcha ser to enable the

purchaser to start a business for which the

purchaser is required to pay an initial fee

or sum of money which exceeds $500 to the

seller, and in which the seller represents:

1. That the seller or person or

entity affiliated with o r referred by the

seller will provide locations or assist the

purchaser in finding locations for the use

or operation of vending machines, racks,

display cases, currency or card operated

equipment, or other similar devices or

currency - operated amusement ma chines or

devices on premises neither owned nor leased

by the purchaser or seller;

2. That the seller will purchase any

or all products made, produced, fabricated,

grown, bred, or modified by the purchaser

using in whole or in part the supplies,

se rvices, or chattels sold to the purchaser;

3. That the seller guarantees that

the purchaser will derive income from the

business opportunity which exceeds the price

paid or rent charged for the business

opportunity or that the seller will refund

al l or part of the price paid or rent

charged for the business opportunity, or

will repurchase any of the products,

equipment, supplies, or chattels supplied by

the seller, if the purchaser is unsatisfied

with the business opportunity; or

4. That the seller will provide a

sales program or marketing program that will

enable the purchaser to derive income from

the business opportunity, except that this

paragraph does not apply to the sale of a

sales program or marketing program made in

conjunction with the licensing of a

trademark or service mark that is registered

under the laws of any state or of the United

States if the seller requires use of the

trademark or service mark in the sales

agreement.

For the purpose of subparagraph 1., the term

"assist t he purchaser in finding locations"

means, but is not limited to, supplying the

purchaser with names of locator companies,

contracting with the purchaser to provide

assistance or supply names, or collecting a

fee on behalf of or for a locator company.

( b) "Business opportunity" does not

include:

1. The sale of ongoing businesses

when the owner of those businesses sells and

intends to sell only those business

opportunities so long as those business

opportunities to be sold are no more than

five i n number;

2. The not - for - profit sale of sales

demonstration equipment, materials, or

samples for a price that does not exceed

$500 or any sales training course offered by

the seller the cost of which does not exceed

$500; or

3. The sale or lease of laundry and

drycleaning equipment.

(2) "Department" means the Department of

Agriculture and Consumer Services.

(3) "Purchaser" includes a lessee.

(4) "Seller" includes a lessor.

4. An important question in this case is the extent to

wh ich the Act addresses affiliates of a seller. In fact, the

Act does so only once. In describing the various disclosure

requirements imposed upon a "seller," Section 559.803 mentions

an affiliate in Section 559.803(1), which requires the

disclosure of "th e name of any parent or affiliated company that

will engage in business transactions with the purchasers or who

takes responsibility for statements made by the seller." In

describing the annual filings, Section 559.805 does not mention

"affiliates." Nor do the main enforcement provisions of the Act

mention "affiliates." Section 559.809 prohibits 14 specified

acts by "sellers". Section 559.813(2)(a) specifies five

violations by "a seller or any of the seller's principal

officers or agents" that may resul t in the penalties set forth

in Section 559.813(2)(b).

5. In connection with the sale or lease of business

opportunities, Respondent has adopted three rules at Chapter

5J - 10, Florida Administrative Code. Petitioners have

challenged, in its entirety, Rul e 5J - 10.001, which supplies

several definitions.

6. Rule 5J - 10.001 states:

5J - 10.001 Definitions.

The definitions contained in Section

559.801, Florida Statutes, and the following

apply:

(1) “Initial Fee or sum of money,” as used

in Section 559. 801(1)(a), F.S., shall

include the total funds paid by the

purchaser to the seller, including all

monies paid for deposits, down payments,

prepaid rents, equipment costs, materials,

samples, products, training, services or

inventory purchases.

(2) “Mater ial change” shall include any

fact, circumstance, or set of conditions

which has a substantial likelihood of

influencing a purchaser or a reasonable

prospective purchaser in the making of a

significant decision relating to a named

business opportunity or w hich has any

significant financial impact on a purchaser

or prospective purchaser.

(3) “Sales program or marketing program”

means:

(a) A written or oral procedure or plan

provided by the seller to a purchaser of a

business opportunity concerning prod ucts,

equipment, supplies, services or training

that the seller represents will be provided

on how to sell or market the product or

service; or

(b) Where the seller provides to the

purchaser the following devices, techniques,

training or materials whic h will assist the

purchaser in deriving income from the

business opportunity:

1. Sales or display equipment or

merchandising devices;

2. Specific sales or marketing

techniques; or

3. Sales, marketing or advertising

materials which are intended for use by the

purchaser to influence a consumer to

purchase a product or service.

(4) “Seller” includes any person who has an

ownership interest of 10% or greater in an

entity which sells or leases business

opportunities.

Specific Authority 57 0.07(23) FS. Law

Implemented 559.801, 559.803, 559.805 FS.

History – New 11 - 15 - 94, Amended 6 - 4 - 95.

7. Respondent adopted Rule 5J - 10.001 effective

November 15, 1994, and amended it effective June 4, 1995. The

specific authority cited for the rule, Section 570.07(23),

provides only that Respondent "shall have and exercise the

following functions, powers, and duties: To adopt rules

pursuant to ss. 120.536(1) and 120.54 to implement provisions of

law conferring duties upon it." However, in 1997, the

Legislat ure adopted Section 559.813(8), which broadens

Respondent's rulemaking authority under the Act by providing:

"The department has the authority to adopt rules pursuant to

chapter 120 to implement this part."

8. In defining "seller" in Rule 5J - 10.001(4), R espondent

relied on the Federal Trade Commission (FTC) regulations at 16

Code of Federal Regulation (CFR) Part 436 (collectively, the

"Franchise Rule"). In particular, Respondent relied on 16 CFR

436.2, explaining in a response to an interrogatory that Ru le

5J - 10.001(4) "was intended to clarify the identity of persons

sufficiently affiliated with the sale of a business opportunity

by virtue of their share ownership (16 C.F.R. 436.2) upon whom a

duty should be imposed to make the required statutory

disclosu res in the sale of a business opportunity."

9. In 16 CFR Sections 436.2(a)(1)(i) and (ii), the FTC

identifies two types of franchises covered under the FTC Act:

the package and product franchise and the business opportunity.

As the name implies, the bus iness opportunity described in 16

CFR Section 436.2(a)(1)(ii) bears the closer resemblance to the

Act.

10. Under 16 CFR Section 436.2(a), both types of

franchises require an arrangement and, more importantly, "any

continuing commercial relationship." For the business

opportunity, 16 CFR Section 436.2(a)(1)(ii)(A) requires that a

franchisee offer, sell, or distribute to a person other than the

franchisor goods or services that are supplied by the

franchisor, supplied by a third person with whom the franchi sor

requires the franchisee to do business, or supplied by an

affiliate of the franchisor with whom the franchisee is advised

by the franchisor to do business. In addition, for the business

opportunity, 16 CFR Section 436.2(a)(1)(ii)(B) requires that the

franchisor secure for the franchisee retail outlets or accounts,

locations or sites for product sales displays (such as vending

machines or rack displays), or the services of a person to

secure these retail outlets, accounts, locations or sites.

11. Also, 16 CFR Section 436.2(i) defines an "affiliated

person" as a person that "directly or indirectly controls, or is

controlled by, or is under common control with, a franchisor";

that "directly or indirectly owns, controls, or holds with power

to vote, 10 per cent or more of the outstanding voting securities

of a franchisor"; or that "has, in common with a franchisor, one

or more partners, officers, directors, trustees, branch

managers, or other persons occupying similar status or

performing similar functions."

12. However, the definitions in 16 CFR Section 436.2 apply

only to terms "used in this part," and 16 CFR Part 436 does not

cover enforcement and liability issues -- only disclosures and

definitions, including coverage definitions. In fact, the sole

purpos e of the affiliate definition in 16 CFR Section 436.2 is

to explain the disclosure requirements set forth in 16 CFR

Sections 436.1(a)(7) (total funds required to be paid to

franchisor or its affiliates), 436.1(a)(8) (recurring funds

required to be paid to franchisor or its affiliates),

436.1(a)(9) (names of affiliates with which franchisee is

required or advised to do business), 436.1(a)(11) (basis for

calculating actual revenue to be received by franchisor or its

affiliates), 436.1(a)(12) (financing condit ions offered by

franchisor or its affiliates), and 436.1(a)(14) (extent to which

franchisee -- or, if a corporate, franchisee's affiliates -- to

participate directly in the franchised operation). Nowhere in

the Franchise Rule does the affiliate definition bro aden the

scope of the persons liable for violations of the federal law.

13. On July 26, 2002, Respondent filed an Administrative

Complaint against Petitioners and three allegedly related

corporations and transmitted the matter to the Division of

Administ rative Hearings (DOAH) for a formal hearing. This

proceeding was designated DOAH Case No. 02 - 3374. At the same

time, Respondent imposed an Immediate Final Cease and Desist

Order ordering that Petitioners and three allegedly related

corporations discontin ue the sale of business opportunities in

Florida. (The First District Court of Appeal later stayed the

enforcement of this order.) On October 11, 2002, Respondent

served an Amended Administrative Complaint. The undersigned

Administrative Law Judge compl eted the hearing in DOAH Case

No. 02 - 3374 on November 25, 2002. As of the date of this final

order, the parties have not yet filed their proposed recommended

orders.

14. In the Administrative Complaint, Amended

Administrative Complaint, and Immediate Fi nal Cease and Desist

Order, Respondent relies on Rules 5J - 10.001(3) and (4), but not

Rules 5J - 10.001(1) and (2). With respect to Rule 5J - 10.001(3)

("Sales or Marketing Program Rule"), Respondent alleges that the

business opportunities are covered by the A ct because of the

presence of a "sales program or marketing program." With

respect to Rule 5J - 10.001(4) ("Seller Rule"), Respondent alleges

that Petitioners are liable as owners of one or more named

corporations that are "sellers" who have violated the Ac t.

15. With respect to Rules 5J - 10.001(1) and (2),

respectively, the regulatory definitions of an "initial fee or

sum of money" or "material change" play no significant role in

DOAH Case No. 02 - 3374. For this reason, Petitioners are not

substantially a ffected by these rules, and the Conclusions of

Law below determine that Petitioners lack standing to challenge

Rules 5J - 10.001(1) and (2), which are not further discussed in

this final order.

CONCLUSIONS OF LAW

16. The Division of Administrative Hearings has

jurisdiction over the subject matter. Sections 120.56(1) and

(3).

17. Section 120.56(1) provides: "Any person substantially

affected by a rule . . . may seek an administrative

determination of the invalidity of the rule on the ground that

the rule is an invalid exercise of delegated legislative

authority." As to the Sales or Marketing Program Rule and

Seller Rule, Petitioners have amply demonstrated standing. In

reliance upon these rules, Respondent ordered that Petitioners

discontinue the sale of business opportunities in Florida and

continues to prosecute Petitioners and their allegedly related

corporations. However, Petitioners have failed to show how they

are substantially affected by the remaining rules.

18. The burden of proof is on Petitio ners to show that the

Sales or Marketing Rule and Seller Rule are invalid exercises of

delegated legislative authority. Grove Isle, Ltd. v. Department

of Environmental Regulation , 454 So. 2d 571, 573 (Fla. 1st DCA

1984). For proposed rules, Section 120.5 6(2)(a) now imposes the

burden of proof upon agencies, after a preliminary showing by

the rule challenger. The absence of a similar provision in

Section 120.56(3), which applies to existing rules, reveals the

Legislative intent not to disturb the longstan ding imposition of

the burden of proof on the challenger to an existing rule.

19. Section 120.52(8) defines what is an "invalid exercise

of delegated legislative authority":

"Invalid exercise of delegated legislative

authority" means action which goes bey ond

the powers, functions, and duties delegated

by the Legislature. A proposed or existing

rule is an invalid exercise of delegated

legislative authority if any one of the

following applies:

(a) The agency has materially failed to

follow the applicab le rulemaking procedures

or requirements set forth in this chapter;

(b) The agency has exceeded its grant of

rulemaking authority, citation to which is

required by s. 120.54(3)(a)1.;

(c) The rule enlarges, modifies, or

contravenes the specific pr ovisions of law

implemented, citation to which is required

by s. 120.54(3)(a)1.;

(d) The rule is vague, fails to

establish adequate standards for agency

decisions, or vests unbridled discretion in

the agency;

(e) The rule is arbitrary or capricio us;

(f) The rule is not supported by

competent substantial evidence; or

(g) The rule imposes regulatory costs on

the regulated person, county, or city which

could be reduced by the adoption of less

costly alternatives that substantially

accomplis h the statutory objectives.

A grant of rulemaking authority is necessary

but not sufficient to allow an agency to

adopt a rule; a specific law to be

implemented is also required. An agency may

adopt only rules that implement or interpret

the specific po wers and duties granted by

the enabling statute. No agency shall have

authority to adopt a rule only because it is

reasonably related to the purpose of the

enabling legislation and is not arbitrary

and capricious or is within the agency's

class of powers and duties, nor shall an

agency have the authority to implement

statutory provisions setting forth general

legislative intent or policy. Statutory

language granting rulemaking authority or

generally describing the powers and

functions of an agency shall b e construed to

extend no further than implementing or

interpreting the specific powers and duties

conferred by the same statute.

20. Section 120.56(3)(b) provides: "The administrative

law judge may declare all or part of a rule invalid. The rule

or pa rt thereof declared invalid shall become void when the time

for filing an appeal expires."

21. Petitioners' first contention in their proposed final

order is that Section 570.07(23) does not authorize Respondent

to adopt rules implementing the Act because these statutory

provisions are in different chapters. The last sentence of the

flush language of Section 120.52(8) prohibits a construction of

statutory language granting rulemaking authority or describing

the powers and functions of an agency as extendi ng any further

than implementing or interpreting the specific powers and duties

conferred by the "same statute." As Petitioners point out, the

"same statute" does not likely encompass a statutory provision

in a different chapter.

22. However, Section 559 .813(8), which is in the same part

as the other statutory provisions on which Respondent relies,

was enacted in 1997 to grant Respondent the "authority to adopt

rules pursuant to chapter 120 to implement this part." The

Legislature presumably intended the explicit authorization of

Section 559.813(8) to adopt rules to implement the Act to

satisfy the same - statute requirement. This requirement

apparently exists merely to assure that agencies do not rulemake

in one area in reliance upon statutes in another a rea that the

Legislature never intended to be used for such a purpose.

23. It is irrelevant that Section 559.813(8) was not in

existence when Respondent adopted the Sales and Marketing

Program Rule and Seller Rule. The determination of whether an

agenc y has exceeded its grant of rulemaking authority should not

be limited to the facts in existence at the time of the adoption

of the rule, but should extend at least to the time of the

filing of the rule challenge. To limit the facts to those in

existence at the time of the adoption of the rule would ignore

later Legislative enactments granting the necessary rulemaking

authority and would only add needlessly to regulatory costs, as

an agency would be required to readopt the same rule, this time

citing the n ew rulemaking authority.

24. Petitioners contend in their proposed final order that

Section 559.813(8) is unavailable to Respondent because Section

120.52(8)(b) requires that the rule cite to the grant of

rulemaking authority. The main prohibition of Sec tion

120.52(8)(b) forbids an agency from exceeding its grant of

rulemaking authority. The dependent clause attached to the end

of this prohibition refers to the citation requirement contained

in Section 120.54(3)(a)1. This reference to the citation

requi rement contained in Section 120.54(3)(a)1 does not elevate

this procedural requirement to a higher level than other

procedural requirements. If a challenger wishes to rely on a

deficient citation as a basis for invalidating a rule, the

challenger must pro ceed under Section 120.52(8)(a), which

provides that procedural deficiencies may invalidate a rule only

if the deficiencies are "material." Applicable to all

subsections of Section 120.52(8), the last sentence of Section

120.56(1)(c) elaborates upon this materiality requirement in

rule challenges based on procedural defects:

The failure of an agency to follow the

applicable rulemaking procedures or

requirements set forth in this chapter shall

be presumed to be material; however, the

agency may rebut this p resumption by showing

that the substantial interests of the

petitioner and the fairness of the

proceedings have not been impaired.

25. The record demonstrates that the procedural defect of

omitting the citation to Section 559.813(8) has not impaired the

substantial interests of either Petitioner and has not impaired

the fairness of any proceeding. Petitioners could not possibly

have been affected by this harmless omission. The omission is

likely due to the enactment of Section 559.813(8) after the

adopt ion of the Sales or Marketing Rule and Seller Rule, not due

to some attempt by Respondent to conceal its authority and

undermine the fairness of administrative proceedings. Under

these circumstances, invalidating the rule due to the absence of

the correct statutory citation is unwarranted under Section

120.52(8)(b).

26. Petitioners contend in their proposed final order that

the Sales or Marketing Program Rule and Seller Rule are

unauthorized by even Section 559.813(8) because Respondent is

not implementin g the Act by adopting this rule. This contention

is correct as to the Seller Rule and the second half of the

Sales or Marketing Program Rule (Rule 5J - 10.001(3)(b)), but the

deficiencies of these rules are better covered in the following

paragraphs. As fo r the first half of the Sales or Marketing

Program Rule (Rule 5J - 10.001(3)(a)), Respondent clearly

exercised the authority provided in Section 559.813(8) to

implement Section 559.801(1)(a)4, which provides that a sale of

a business opportunity takes place if the seller represents that

it will provide a sales program or marketing program.

The most important of Petitioners'

contentions in their proposed final order is

that the Sales and Marketing Program Rule

and Seller Rule enlarge, modify, or

contravene the statutes purportedly

implemented.

27. Without a doubt, the Seller Rule enlarges, modifies,

and even contravenes the Act. Not a single provision of the Act

offers the slightest support for the Seller Rule, which

unlawfully broadens the scope of potent ial liability for

violations of the Act from actual sellers to many, if not most,

owners of sellers.

28. As Respondent uses it in DOAH Case No. 02 - 3374, the

Seller Rule pierces the corporate veil by identifying the

corporate seller as a mere alter ego of its significant owners --

without regard to any acts or omissions of the owners besides

their status as owners. In other words, the sole criterion for

piercing the corporate veil is extent of ownership. Prior to

the adoption of the Administrative Procedure Act, agencies

lacked the authority to pierce the corporate veil. Roberts Fish

Farm v. Spencer , 153 So. 2d 718 (Fla. 1963). Even when

considered by courts, piercing the corporate veil requires more

than mere ownership. See , e.g. , Dania Jai - Alai Palace v . Sykes ,

450 So. 2d 1114 (Fla. 1984).

29. Respondent argues that the Legislature intended to

leave to Respondent the discretion of identifying the persons

who would qualify as sellers because Section 559.801(4) defines

a seller as "including" a lessor. T he Act reveals two facts

relevant to this contention. First, the Legislature added

lessors under the definition of sellers to extend the scope of

the Act to persons who were marketing business opportunities in

a leasing transaction that was not otherwise covered by the Act.

Second, the Legislature chose to redefine a seller so as to

avoid the necessity of adding "lessor" after "seller" and adding

"leasing" to "purchasing" or "selling" each time "seller,"

"purchasing," or "selling" occurred in the Act.

3 0. In no way does this modest addition to the Act justify

Respondent's attempt in the Seller Rule penetrate the

noncompliant seller (or lessor) and impose liability upon the

individual owners of the seller (or lessor). It is simply

impossible that the Le gislature, when deciding to cover lessors

under the Act, intended also to cover all owners of at least 10

percent of the noncompliant seller (or lessor) -- even passive,

noncontrolling persons, such as minority owners, holders of debt

that converted to equit y, and devisees of relatively small

ownership interests.

31. In adopting the Seller Rule, Respondent's reliance

upon the Franchise Rule was probably not misplaced at the time.

As noted above, Respondent explains that the purpose of the

Seller Rule was to ensure that the required disclosures would be

meaningful. After all, if an unsavory seller creates a new

entity for the sale of business opportunities, disclosure

limited to the new entity is less meaningful than disclosure

that extends to the unsavor y seller. The Franchise Rule clearly

uses the concept of affiliates to broaden the disclosure

requirement under the FTC Act.

32. However, two problems arise here. First, regardless

of how sensible it would be to broaden the concept of the seller

for d isclosure purposes, as is done by the Franchise Rule, the

Act does not justify even such a limited broadening of the

disclosure requirement in Florida. The Act uses "affiliate"

only in Section 559.801(1)(a)1, which covers the seller's

representations that it or its affiliate will provide locations

or help the purchaser find locations for vending machines,

racks, display cases, or similar equipment.

33. Second, even if the Act authorized a broadening of the

concept of the seller for disclosure purposes, Respondent has

wandered far from its original intent to broaden disclosure.

The Seller Rule goes beyond the Franchise Rule by extending

liability for violations of the Act to most owners of the

sellers -- again, strictly on the basis of ownership, not

culpa bility. Although courts have so extended the reach of the

Franchise Rule, they have not done so with respect to all

owners, only owners whose involvement in the unlawful activities

merits punishment. See , e.g. , Federal Trade Commission v. Amy

Travel Serv ice, Inc. , 875 F.2d 564 (7th Cir. 1989).

34. As noted above, the Sales or Marketing Program Rule

divides into two parts: Rules 5J - 10.001(3)(a) and (b). The

former does not enlarge, modify, or contravene the Act, but the

latter does.

35. Rule 5J - 10.001( 3)(b) enlarges, modifies, and

contravenes the Act because it unlawfully shifts the focus from

ongoing or future services from the seller to the purchaser to

the present, possibly one - time, delivery of goods or services,

likely at the closing at which the p urchaser acquires the

business opportunity.

36. Rule 5J - 10.001(3)(a) clearly incorporates the element

of ongoing or future services when it describes the goods and

services "that the seller represents will be provided . . .."

By contrast, Rule 5J - 10.001 (3)(b) describes only goods and

services that "the seller provides . . .." Even though these

goods and services "will assist" the purchaser in the future,

Rule 5J - 10.001(3)(b) covers only goods and services that the

seller "provides." It is true that the Sales or Marketing Rule

defines only "a sales or marketing program," and the statutory

language states that the seller "will" provide such a program.

But the difference in focus between Rule 5J - 10.001(3)(a)

(ongoing or future transactions) and Rule 5J - 10. 001(3)(b)

(present or one - time transaction) invites misapplication,

especially if Respondent seeks the misapplication under a

deference principle.

37. This difference in focus between the two parts of the

Sales or Marketing Program Rule highlights an impo rtant feature

of the Act. As noted above concerning the Franchise Rule, the

common requirement imposed upon both package and product

franchises and business opportunities is a "continuing

commercial relationship." The Act incorporates this requirement

by defining a business opportunity in Section 559.801(1)(a)1 - 4

in terms of the support that the seller "represents" that it

will supply the purchaser after the purchase of the business

opportunity. Section 559.801(1)(a)1 covers the representation

that the s eller "will" provide locations or help the purchaser

find locations for vending machines, racks, display cases, and

similar equipment. Section 559.801(1)(a)2 covers the

representation that the seller "will" purchase products made by

the purchaser using su pplies or services sold to the purchaser.

Section 559.801(1)(a)3 covers the representation that the seller

"will" refund the purchase price if the purchaser is unsatisfied

with the business opportunity or that the purchaser "will"

derive income from the b usiness opportunity in excess of the

purchase price. Section 559.801(1)(a)4 covers the

representation that the seller "will" provide a "sales program

or marketing program."

38. The focus on an ongoing business relationship reflects

an important feature o f the Act, as well as the Franchise Rule,

Both the Act and the Franchise Rule are consumer - protection laws

and regulations. Recognizing that unsophisticated persons may

be purchasing business opportunities, often from sophisticated

sellers, these consumer - protection laws and regulations address

the potentially exploitative situation in which the presumably

unsophisticated purchaser completes a relatively large degree of

his obligations by paying at closing for the business

opportunity, and the presumably s ophisticated seller completes a

relatively large degree of his obligations by supplying goods

and services into the future. This mismatching of the time of

performance leaves the purchaser vulnerable; if the seller

performed all of his obligations at clos ing, the transaction

would not be so risky and thus not so deserving of protective

legislation and regulation.

39. Rule 5J - 10.001(3)(b) materially modifies Section

559.801(1)(a)4 by turning the focus from the future, probably

ongoing, performance by the s eller to the present, possibly one -

time, performance. This seemingly subtle change in some cases

may extend coverage to transactions not covered under Section

559.801(1)(a)4 and in other cases may fail to extend coverage to

transactions covered under Sect ion 559.801(1)(a)4. Ignoring the

purpose of this section and the Act to cover the ongoing

business relationship, which is expressed as a "continuing

commercial relationship" under the Franchise Rule, Rule

5J - 10.001(3)(b) enlarges, modifies, and contravene s Section

559.801(1)(a)4.

40. However, Rule 5J - 10.001(3)(a) does not enlarge,

modify, or contravene Section 559.801(1)(a)4 or the Act.

Nothing in this first part of the Sales or Marketing Program

Rule opposes any part of the Act.

41. Petitioners also co ntend that the rule is arbitrary

and capricious, the rule is not supported by competent

substantial evidence, and the Seller Rule creates an

unconstitutional irrebuttable presumption. A discussion of

these issues would not change the result.

42. Section 120.595(3) provides, in part:

If the court or administrative law judge

declares a rule or portion of a rule invalid

pursuant to s. 120.56(3), a judgment or

order shall be rendered against the agency

for reasonable costs and reasonable

attorney's fees, unle ss the agency

demonstrates that its actions were

substantially justified or special

circumstances exist which would make the

award unjust. An agency's actions are

"substantially justified" if there was a

reasonable basis in law and fact at the time

the ac tions were taken by the agency.

43. In Department of Insurance v. Florida Bankers'

Association , 764 So. 2d 660 (Fla. 1st DCA 2000), the court

remanded an attorneys' fee award for the insufficiency of the

record and the findings of fact.

44. The Seller Rule was inspired by the Franchise Rule.

However, either due to sloppy draftsmanship or an aggressive

enforcement philosophy, Respondent drafted, and in DOAH Case

No. 02 - 3372 used, the Seller Rule so that it extended the

liability for violations of the Act to many, if not most, owners

of noncompliant entities, even if those owners were not

themselves guilty of any acts or omissions besides the act of

ownership. Petitioners' broad - based attack on the Seller Rule

necessitated that Respondent provide in th is record all

available facts justifying the adoption of the rule. Therefore,

no purpose would be served by giving Respondent an opportunity

to present additional facts showing that its adoption of the

rule was substantially justified. No reasonable fact ual

justification exists for the Seller Rule.

45. Under Section 120.595(3), a reasonable basis "in law

and fact" at the time of the adoption of the Seller Rule is

necessary for Respondent to avoid liability for attorneys' fees

and costs under the "substan tially justified" defense.

Regardless of the state of the factual record, there was, as a

matter of law, no reasonable basis for Respondent to have

adopted the Seller Rule. This extension of liability or even

disclosure is unsupported by the Act. Even p rior to the

Administrative Procedure Act, Florida law prohibited agencies

from piercing the corporate veil. And even the Franchise Rule,

which is no legal basis for rule promulgation in Florida,

provides no support for a rule that broadens the scope of

pe rsons liable for violations of the law to owners of at least

ten percent of a noncompliant entity.

46. However, nothing in Petitioners' attack on the Seller

Rule necessitated that Respondent provide in this record any

special circumstances that would make an award of attorneys'

fees unjust. Such special circumstances could be of a factual

nature.

47. Perhaps Petitioners would argue that, by failing to

present such evidence in the main hearing, after having ample

notice of Petitioners' claim for attorne ys' fees under Section

120.595(3), Respondent waived its right to present such evidence

in a subsequent hearing. That seems a harsh result, especially

given the relatively recent enactment of this attorneys' fee

provision and the relative scarcity of case s interpreting this

statute and establishing practical litigation procedures for its

implementation. In any event, Petitioners did not present their

evidence concerning the amount of attorneys' fees or costs, so

an additional hearing may be necessary on t his issue, and the

special - circumstances issue should not significantly lengthen

the time required for hearing.

48. The adoption of the invalid portion of the Sales or

Marketing Program Rule was substantially justified. Resolution

of the challenge to the second part of that rule presented a

number of difficult legal issues.

ORDER

It is

ORDERED that:

1. Rule 5J - 10.001(3)(b) and Rule 5J - 10.001(4), Florida

Administrative Code, are invalid exercises of delegated

legislative authority.

2. The remainder of the rule challenge is dismissed.

3. The Administrative Law Judge reserves jurisdiction to

determine whether, under Section 120.595(3), Florida Statutes,

special circumstances exist with respect to the adoption of Rule

5J - 10.001(4), Florida Administra tive Code, that would make an

award of attorneys' fees and costs unjust and, if not, the

amount of reasonable attorneys' fees and costs. If the parties

are unable to resolve these issues within 45 days after the date

of this Final Order, Petitioners shall file a notice advising

the Administrative Law Judge of this fact and requesting that he

set a hearing on these issues.

DONE AND ORDERED this 30 day of December, 2002, in

Tallahassee, Leon County, Florida.

_____________________ ______________

ROBERT E. MEALE

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apal achee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 30 day of December, 2002.

COPIES FURNISHED:

Honorable Charles H. Bronson

Commissioner of Agriculture

Department of Agricult ure and

Consumer Services

The Capitol, Plaza Level 10

Tallahassee, Florida 32399 - 0810

Richard Ditschler, General Counsel

Department of Agriculture and

Consumer Services

The Capitol, Plaza Level 10

Tallahassee, Florida 32399 - 0810

Brenda D. Hyatt , Bureau Chief

Bureau of License and Bond

Department of Agriculture

407 South Calhoun Street

Mail Station 38

Tallahassee, Florida 32399 - 0800

Paul R. Ezatoff

Katz, Kutter, Alderman, Bryant

& Yon, P.A.

Post Office Box 1877

Tallahassee, Florida 32302 - 18 77

William N. Graham, Senior Attorney

Raymond C. Conklin, Senior Attorney

Department of Agriculture

and Consumer Services

Mayo Building, Suite 520

407 South Calhoun Street

Tallahassee, Florida 32399 - 0800

Carroll Webb, Executive Director

Joint Administ rative Procedures Committee

120 Holland Building

Tallahassee, Florida 32399 - 1300

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this Final Order is

entitled to judicial review pursuant to Section 120.68, Florida

Statutes. Revie w proceedings are governed by the Florida Rules

of Appellate Procedure. Such proceedings are commenced by

filing the original notice of appeal with the Clerk of the

Division of Administrative Hearings and a copy, accompanied by

filing fees prescribed by l aw, with the District Court of

Appeal, First District, or with the District Court of Appeal in

the Appellate District where the party resides. The notice of

appeal must be filed within 30 days of rendition of the order to

be reviewed.