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The FTC is taking a harder look at franchise practices

The agency is seeking comments on franchise business practices and the control they exert over franchisees and their employees, potentially setting the stage for changes in franchise regulations.
FTC franchises
The FTC is taking a harder look at franchise rules in light of some recent problems at brands such as Burgerim. / Photo by Jon Springer.

The U.S. Federal Trade Commission last week asked the public for comments on franchise business practices, potentially setting the stage for a substantial push to regulate the business model.

The commission, which is the federal agency primarily responsible for oversight of franchises, has made a “request for information,” or RFI, asking the public for comment on a variety of practices over franchise contracts, including the use of rebates from vendors, various practices regarding franchise agreements and influence on wages and labor costs.

In the process, FTC officials made some of their most pointed comments on the potential challenges in the franchise sector.

“It’s clear that, at least in some instances, the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized,” Elizabeth Wilkins, director of the FTC’s office of policy planning, said in a statement. “The RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers and consumers.”

The FTC has been taking a harder look at franchises in the past couple of years, particularly after Joe Biden was elected president. It comes as the commission is preparing to update its franchise rule and follows highly publicized issues regarding franchises.

The agency filed a lawsuit against Burgerim and its founder Oren Loni, last year, accusing them of violating numerous federal disclosure rules that led an estimated 1,500 people to invest in the brand, most of which never so much as opened a location before Loni shut the company down and left the country. It was the first time in more than a decade that the commission took action against a franchise over broken rules.

Members of Congress had been pushing the agency in this direction in recent years, arguing that oversight of franchises has been inadequate. Advocates have likewise pushed the agency to investigate the practices of some high-profile franchises, including the sub sandwich giant Subway, the convenience store giant 7-Eleven and the fast-casual barbecue chain Dickey’s.

“Amidst growing concern about unfair and deceptive practices in the franchise industry, the FTC hopes to hear from a broad range of stakeholders about how the franchise relationship is working, and how it is not,” Samuel Levine, director of the FTC’s Bureau of Consumer Protection, said in a statement. “This cross-agency effort will inform our policy and enforcement efforts as we work to ensure a fair marketplace for franchisees.”

The FTC said it wants to know how franchisors “may exert control over franchisees and their workers.” It is specifically interested in the contractual terms of the relationship and the effect of those terms.

The RFI is asking a wide swath of parties connected with franchises, including franchisors, franchisees, governments, economists, attorneys, academics, consumers and others to weigh in on franchises. Among the topics it is asking about:

  • Franchisees’ ability to negotiate the terms of the franchise agreement before signing and franchisors’ ability to make changes after franchises join;
  • Franchisors’ enforcement of non-disparagement, goodwill or similar clauses in the franchise agreement. Some franchisors include clauses that keep franchisees from speaking out against the brand;
  • The prevalence and justification for “certain contract terms in franchise agreements;”
  • Franchisors’ control over wages and working conditions in franchisees’ businesses beyond terms in the franchise agreement;
  • Payments franchisors receive from vendors. Such rebates can sometimes drive up the cost of operators’ food and paper that it wipes out the advantage of group purchasing;
  • Indirect effects of franchisor practices on franchisees’ labor costs;
  • The rationale for franchisors marketing their franchises in languages other than English.

Comments can be made to Regulations.gov for the next 60 days, after which the comments will be posted to the site.

The request for information is separate from another proposed rule expected to impact franchises, the use of noncompete clauses for workers in some situations. As part of that process, the FTC is examining whether to make that rule applicable to franchisors and franchisees.

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