Franchisee Complaints: FTC Drops New Guidance That Safeguards Franchise Owners Against Unfair Practices By Franchisors

In a landmark move, the Federal Trade Commission (FTC) has launched a comprehensive initiative that addresses franchisee complaints as well as unjust and misleading practices within the franchise industry.

In a nutshell, this pivotal action aims to preserve the franchise business model (the greatest business model ever invented) as a viable pathway to small business ownership.

FTC Franchise Guidance focuses On Franchisee Complaints Not Being Addressed

The FTC’s multi-pronged approach includes a couple of key components. Read their policy statement.

First off, the FTC has issued a stern warning to franchisors, declaring that contractual provisions prohibiting franchisees from communicating with government entities are unlawful. It emphasizes the critical role of franchisee reports and voluntary interviews in FTC investigations.

So, by safeguarding franchisees ability to voice concerns without fear of retribution, the FTC aims to enhance its capacity to protect franchisee interests. This is good stuff. Good timing too. Why?

Because the IFA is leaning into more franchise business regulation too.

Update: A Statement On The FTC”S Franchise Warning From The IFA’s Matthew Haller

“The IFA agrees with bipartisan leaders in Congress that franchising democratizes the American Dream of business ownership.”

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Haller continues, “The FTC’s actions today are contrary to the reality that the vast majority of franchise relationships are working and that franchising continues to grow each year. We have long supported greater transparency and visibility in the franchise sales process, and IFA encourages the FTC to focus on improving the Franchise Rule by adopting IFA’s 2024 Responsible Franchising policy recommendations, which seek to empower prospective franchisees with the best information possible and clarify both parties’ obligations as part of a franchise agreement.”

So there’s that. Matt doesn’t sound all that happy about the FTC’s Franchise Guidance. About their warning to franchisors.

Franchisee Complaints: Franchisors And Illegal Collection Of Fees

Next, the FTC staff-through the new FTC Franchise Guidance, has released crucial guidance clarifying that franchisors cannot legally impose or collect fees that were not previously disclosed to franchisees.

This addresses widespread complaints about escalating payment processing and technology fees, as well as unexpected charges for training, marketing, and property improvements.

The guidance unequivocally states that such “junk fees” are illegal and can significantly impact a franchise’s profitability.

Finally, the FTC Franchise Guidance include a policy statement warning that franchisors’ use of contract provisions, including non-disparagement clauses that prohibit franchisees’ communications with the government, violate the law. Speaking of contracts and all things FDD…

The things named above are illegal.

Furthermore, 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.

So if you’re a franchisee who thinks your franchisor is breaking the law, you can report them immediately.*

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*I’m not an attorney, so don’t mistake that for legal advice.

Franchise Industry Professionals Shared Their Concerns

This new FTC Franchise Guidance comes partly from franchisee/franchise industry professional concerns heard (via comments) by the FTC.

Specifically, in response to a 2023 Request for Information (RFI), the FTC received over 2,000 comments from various stakeholders.

In fact, I provided a couple of comments. One of them was focused on how I’d like to see the FDD simplified. I can’t remember the other one.

Note: I suggest reading the Issue Spotlight portion of the FTC’s guidance.

That’s because it summarizes the primary concerns and complaints raised by franchisees.

Additionally, FTC staff conducted an analysis of Small Business Administration loan default data, revealing that certain franchisors may present higher investment risks than others. You’ll find some franchisors names when you click the link above, including a complaint-laden food franchise concept I wrote about.

Statement About FTC Franchise Guidance From The FTC Chair, Lina M. Kahn

FTC Chair Lina M. Khan emphasized the significance of these actions, stating, “Franchising offers Americans the opportunity to build their own businesses, but we’ve heard troubling reports of unfair practices going unreported due to fear of retaliation. Today’s announcement makes it clear that contractual terms silencing franchisees are not only unfair and unenforceable but also illegal.”

To summarize, these measures taken by the FTC represent a watershed moment in franchise regulation. In a nutshell, it’s a warning to franchisors to not take advantage of franchisees.

It signals the FTC’s commitment to fostering a more transparent, equitable, and sustainable franchise ecosystem.

By addressing key issues such as communication rights and fee transparency, the Commission aims to level the playing field and ensure that franchising remains a viable path to business ownership for today’s entrepreneurs.

FYI: check out the new FTC franchise website. It’s focused on the things mentioned in this post and is where you can submit franchise complaints.

As the franchise landscape continues to evolve, stakeholders are encouraged to stay informed and engaged through the FTC’s new resources and extended comment period.

This proactive approach by the FTC marks a significant step towards creating a more fair franchising environment in the United States for franchisees.

And that’s something that’s needed.

Go franchising!