The Federal Trade Commission (FTC) announced a series of actions today aimed at addressing concerns about unfair and deceptive practices by franchisors. The measures are intended to ensure that the franchise business model remains an opportunity for honest small business owners.
Among the actions, the FTC issued a policy statement warning that certain contract provisions used by franchisors, including non-disparagement clauses that prevent franchisees from communicating with the government, violate the law. The statement highlights that franchisee reports and voluntary interviews are essential for FTC investigations, and any reluctance or inability to file reports can hinder the agency's efforts to protect franchisees. Retaliation against franchisees for reporting potential legal violations is deemed unlawful.
Additionally, FTC staff released new guidance clarifying that franchisors cannot impose and collect fees from franchisees if those fees were not previously disclosed. In response to a request for information from the FTC, franchisees reported increasing payment processing and technology fees, as well as undisclosed fees for training, marketing, property improvement, or other required services. The guidance specifies that imposing such undisclosed "junk fees" is illegal.
"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."
The FTC also released an Issue Spotlight summarizing top concerns raised by franchisees in response to a 2023 Request for Information (RFI). Over 2,000 comments were received from various stakeholders. The spotlight includes an analysis of Small Business Administration loan default data indicating that some franchisors may present riskier investments than others.
To continue engagement on these topics, the FTC has reopened the comment period for its 2023 RFI related to franchise agreements and franchisor business practices. Stakeholders can submit comments until October 10, 2024.
All resources related to these announcements are available on the newly launched FTC franchise website. This site serves as a comprehensive resource for prospective and current franchisees and franchisors seeking updated information on franchising regulations.
The Commission voted 3-2 in favor of adopting the policy statement. Commissioners Melissa Holyoak and Andrew N. Ferguson dissented and issued their own statements.
The Federal Trade Commission works to promote competition while protecting and educating consumers. More information on consumer topics can be found at consumer.ftc.gov.
