In the long-simmering conflict between franchisors and franchisees, the federal government has intervened in favor of smaller companies.
In a business relationship that has become fundamental to American commerce, franchisors – such as McDonald's and Jiffy Lube – license the use of their concept to individual entrepreneurs who provide start-up capital and may own one or more locations.
On Friday, the Federal Trade Commission issued a policy statement and guidelines for its employees warning franchisors against prohibiting their franchisees from speaking with government officials or imposing fees that are not disclosed in documents for prospective franchisees.
In a press release, the Commission said it was acting in response to “growing concerns about unfair and deceptive practices by franchisors” and wanted to ensure that the franchise business model remains an option for honest small business owners to own their own business.
The agency has been scrutinizing the industry, which includes 800,000 companies, since it issued a request for information early last year that asked several questions about the relationship between franchisees and franchisors. Around the same time, the Government Accountability Office released a report that found that franchisees lack control over key business decisions and that they are often unaware of all the risks they face before purchasing a license.
A central theme emerged from the more than 2,200 comments posted in response to the FTC's request: a majority of franchisees wanted changes to the regulations governing the industry, while a majority of franchisors did not.
In a detailed “Issue Spotlight” that accompanies the agency's policy statement and guidelines, it has identified the 12 most common complaints from franchisees. These include dissatisfaction with unilateral changes to manuals that govern business operations, non-compete clauses that prevent operators from starting new ventures, and misrepresentations in franchise sales documents about expected time commitment and return on investment.
The agency did not address all of these questions; it failed to update the franchise rules, which specify what franchisors must disclose to prospective franchisees and have remained essentially unchanged since 2007. Proposing new rules at the end of a president's term is risky because they can be repealed if the party changes in the White House.
But the agency was responding to concerns raised by many franchisees that broad non-disparagement clauses could prevent them from filing complaints with regulators or participating in government investigations. Franchisees must have the freedom to do so without fear of retaliation, the agency said.
The FTC's two conservative members, Andrew Ferguson and Melissa Holyoak, voted against adopting this policy statement, each issuing their dissenting opinion, claiming that the statement overstates the law and could burden businesses.
In line with the Biden administration's efforts to curb so-called junk fees, the FTC also clarified that franchisors cannot demand new payments – such as technology or marketing surcharges – if they are not listed in the documents franchisees signed when they purchased the business.
Eventually, the agency resumed its request for information and said its review of the franchise rules was ongoing.
John Motta, a Dunkin' Donuts franchisee and president of the Coalition of Franchisee Associations, said the undisclosed fees have been one of the biggest annoyances for members of his group.
“Overall, I think the ruling will be good for franchisees,” he said. “For franchisors who are good and transparent and work with franchisees, there should be no impact.”
Matthew Haller, president and CEO of the International Franchise Association, said the policy statement was a search for a solution to a problem.
“There is no evidence that franchisors are silencing their franchisees' voices with regulators,” Haller wrote in an email. “In fact, franchisees continue to vote with their wallets by opening additional locations within existing brands.”
In the months before the FTC's announcement, the International Franchise Association published a set of principles for “responsible franchising” and recommended that franchisors use a clearer format for pre-sale disclosure documents. But that framework did not go as far as the Coalition of Franchisee Associations' “Franchisee Bill of Rights,” which included, among other things, the freedom to buy from any supplier that met the brand's standards.
The FTC's recent announcements did not bring any new enforcement actions. In 2022, the agency initiated the first case in 16 years under the Franchise Rule, accusing a burger chain of making false promises to franchise buyers. The chain was ordered to pay $56 million in fines and restitution that year.
The agency also monitors mergers between large franchise brands. In March, it welcomed the cancellation of Choice Hotels' takeover attempt at Wyndham Hotels & Resorts. The franchisees had protested against this because they feared that a mega-brand in the mid-range and budget segment could weaken the negotiating power of the hotel operators.