On Monday, the U.S. Federal Trade Commission filed a lawsuit against Burgerim and its founder, Oren Loni, saying they violated numerous disclosure rules and misled hundreds of franchises into paying tens of thousands of dollars for a concept most of them couldn’t open.
It was a rare move. The FTC hasn’t taken serious action against a franchise like this in more than a decade. It also came two years after Restaurant Business published its investigation of the problem, and one year after state officials in California levied the heaviest penalty against a franchise in history—at least $56 million.
Yet it signifies just how immense the problem was. An estimated 1,500 people paid anywhere from $10,000 to $70,000 for the right to operate the brand, making it the largest franchise fraud in modern history.
“Burgerim promised consumers, including veterans, the American dream, only to leave them in a nightmare of debt and deceit,” Samuel Levine, director of the FTC’s Bureau of Consumer Protection, said in a statement.
But it also signifies a growing effort on the part of federal officials to look harder at franchising and increase enforcement when necessary. It is the biggest signal yet of a shift in the way such companies are regulated in the U.S.
“It’s a big deal they filed,” said Keith Miller, a franchise advocate who has been pushing agencies to take a closer look at bad franchises. “The FTC isn’t going to stand idly by when there’s cases.”
The FTC has the power to regulate franchises but historically has left that largely to the states, instead simply requiring franchises to publish an extensive document with information on the offering, called the franchise disclosure document, or FDD.
But it has signaled a change in intention lately. Lina Khan, who was appointed chair of the commission last year, has indicated the agency would take a more aggressive stand toward franchising. Advocates for stronger franchise regulations in September urged the agency to investigate the practices of certain franchises, including Subway, 7-Eleven and Dickey’s.
Meanwhile, multiple bills have been introduced that would more heavily scrutinize franchises. U.S. Sen. Catherine Cortez Masto, D-Nev., introduced legislation that would require the U.S. Small Business Administration to publish loan default rates for franchises. There is also an effort to enable franchisees to sue their franchisors, a “private right of action” that they don’t currently have.
“I’ve been doing this for 17 years,” said franchise attorney Jonathan Fortman. “I’ve never seen it like this. The winds are changing.”
At the same time, the Burgerim problem was huge. The brand sold hundreds of prospective franchisees on the idea, many of them veterans or recent immigrants. They handed over life savings and drained accounts to hand it over to the company. The company likely collected some $60 million in franchise fees over three-plus years.
Some operators paid hundreds of thousands only to not get a location open. Those that did often struggled to remain open. It’s difficult to ignore a problem such as this one.
“IFA fully supports the actions by the FTC, DOJ and state regulators in Maryland and California for Burgerim’s violation’s of the fundamental rules that have allowed franchising to be successful,” the International Franchise Association, a franchising trade group, said in a statement.
“Bad actors should always be held accountable. Transparency and disclosure, the foundation of the FTC’s Franchise Rule and state regulation—are essential to the success of the franchise model, and brands should support their franchise owners and ensure both parties clearly understand their obligations.”
It’s uncertain what can ultimately come about with the lawsuit. Miller suggested that the lawsuit could help the government take steps to find Oren Loni, who fled the country in 2019 and abandoned the company and its franchisees, to be extradited to the U.S.
Yet the company itself doesn’t have money. Last year, after the state of California ordered the company to refund operators’ fees and other expenses, Burgerim’s president at the time told them to expect “pennies on the dollar.”
Fortman, for his part, believes it may be too late for Burgerim operators. Yet he also suggested that it sends a signal to other franchises, given that many of the company’s practices have been relatively common. Indeed, the FTC itself debuted a form franchisees can fill out to report fraudulent franchises.
“It’s a huge deal for what I do,” Fortman said. “The practices they describe in that suit, I see in numerous other franchises. It could be very hopeful as the FTC is looking more into fairness in franchising.”