Today, the Federal Trade Commission and its staff took a suite of actions to address growing concern about unfair and deceptive practices by franchisors—to ensure that the franchise business model remains a ladder of opportunity to owning a business for honest small business owners.
Among the actions being announced today by the FTC include a policy statement that warns that franchisors’ use of contract provisions, including non-disparagement clauses that prohibit franchisees’ communications with the government, violate the law. The statement emphasizes that franchisee reports and voluntary interviews are a critical part of FTC investigations and franchisees’ reluctance or inability to file reports and discuss their experiences may hamper the agency’s work to protect franchisees. Threats of retaliation against a franchisee for reporting potential law violations to the government are unlawful.
FTC staff also released new guidance explaining that franchisors cannot lawfully impose and collect fees from franchisees that were not previously disclosed. In response to the FTC’s request for information, franchisees reported ever increasing payment processing and technology fees that make it difficult to make a living, while others identified undisclosed fees for training, marketing, property improvement, or any other product or service required by the franchisor. Today’s staff guidance makes clear that it is illegal for franchisors to impose undisclosed junk fees—fees that raise costs and which may make the difference between a profitable franchise and an unsustainable one.
“Franchising is a chance for Americans to build a business, but the FTC has heard concerns about how unfair franchisor practices, like a failure to fully disclose fees upfront, go unreported thanks to a fear of retaliation,” said FTC Chair Lina M. Khan. “Today the Commission is making clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable, and illegal.”
Today FTC staff also released an Issue Spotlight summarizing the top concerns raised by franchisees in response to a 2023 Request for Information. The FTC received more than 2,000 comments in response to the RFI, including from franchisees, franchisors and other stakeholders. The Issue Spotlight also describes staff analysis of Small Business Administration loan default data, finding that certain franchisors appear to present riskier investments than others.
Finally, to facilitate continued engagement with all market participants on these topics, FTC staff is reopening the comment period for the 2023 Request for Information (RFI) related to franchise agreements and franchisor business practices. Interested franchise stakeholders can submit comments to the Commission until October 10, 2024 online at regulations.gov.
All of these franchise resources can be found at the newly launched FTC franchise website. Prospective and current franchisees and franchisors can use the website as a single resource for the FTC’s latest franchising materials.
The Commission voted 3-2 to adopt the policy statement. Commissioners Melissa Holyoak and Andrew N. Ferguson voted no and each issued dissenting statements.
