FTC Warns Franchisors of Unfair Practices

Last week, the U.S. Federal Trade Commission (FTC) addressed growing concern about unfair and deceptive practices by franchisors. To ensure that the franchise business model remains a ladder of opportunity to owning a business for honest small business owners, the FTC issued a policy statement that warns franchisors’ use of contract provisions violate the law.

This includes non-disparagement clauses that prohibit franchisees’ communications with the government. 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 also unlawful.

Additionally, the FTC released new guidance, which explained that franchisors cannot lawfully impose and collect fees from franchisees that were not previously disclosed. In response to the FTC’s request for information, franchisees reported ever-increasing payment processing and technology fees that make it difficult to make a living, while others identified undisclosed fees for training, marketing, property improvement, or any other product or service required by the franchisor. The new guidance makes clear that it is illegal for franchisors to impose undisclosed junk fees—fees that raise costs and which may make the difference between a profitable franchise and an unsustainable one.

“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 Lina M. Khan, FTC Chair. “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 the top concerns raised by franchisees in response to a 2023 Request for Information. The FTC received more than 2,000 comments in response to the RFI, including from franchisees, franchisors, and other stakeholders. In turn, the FTC is reopening the comment period for the 2023 RFI related to franchise agreements and franchisor business practices until Oct. 10 at regulations.gov.

Franchise resources also can be found at the newly launched FTC franchise website.