The recent Federal Trade Commission action is not a cause to panic, according to a panel of legal experts hosted by the International Franchise Association on Thursday.
The video conference was held nearly two weeks after the FTC issued a policy statement warning that a franchisor using contract provisions, including non-disparagement clauses that prohibit an owner’s communication with government agencies, violates the law. The FTC’s action was in response to public comments received when the commission held a request for information.
Over the course of the comment period last year, 5,291 comments were submitted. According to the FTC, franchisees reported ever-increasing payment processing and technology fees that put a hardship on the owners. In response, the FTC issued the policy statement as a way to address “unfair” and “deceptive” practices by franchisors.
The statement emphasizes that franchisee reports and voluntary interviews are a critical part of FTC investigations, and reluctance by franchisees or an inability to file reports and discuss their experiences may hamper the agency’s work to protect owners.
The FTC made clear that it is illegal for franchisors to impose undisclosed junk fees or fees that raise costs and may make the difference between profitable and unsustainable franchises.
Mark Dady, who represents franchisees at Dady & Gardner.
In addressing the FTC’s statement on reporting to regulators, attorney Mark Dady of Dady & Gardner said, “I don’t think the sky is falling, to be real clear.”
In regards to the confidentiality portion of the FTC’s statement, Dady said that’s on par with existing policy.
“I don’t think that franchisors have the ability to prevent franchisees to speak with regulators, and I don’t think that’s what most franchisors are attempting to do,” Dady said. “I think most of these provisions are standard confidentiality and non-disclosure types.”
He continued, “Since the FTC is trying to get info from franchisees to understand the current state of franchising, I think it’s just a reminder to franchisees that if you want to talk, we’re here.”
Related: Franchise Attorneys Weigh In On FTC Inquiry as Wait for Action Begins
Also joining the conversation was David Koch, an attorney at Plave Koch, who said the franchise community shouldn’t overreact to the FTC’s statement.
“The policy statement is basically just a warning,” Koch said. “It’s not a warning of anything new. The notion that you can’t prevent franchisees or other parties from talking to regulators or reporting potential violations of the law has always been improper. It’s important to understand that a policy statement isn’t binding, it can’t be the basis for an enforcement action. They’re just telling you what they’re thinking in this area.”
David Koch of Plave Koch
Koch said for franchisors considering what they should do, looking over their contract language is a good step. If the language includes anything related to reporting violations, Koch said to address it, but if no such wording is included, companies don’t need to respond. They can, however, add language clarifying that a clause isn’t intended to limit reporting to regulators.
“Maybe it’s not required, but I do see in a small number of these confidentiality provisions, when talking about responding to subpoenas or something like that, there are some exceptions,” Dady said. “Those that say ‘this isn’t intended to prevent you from speaking with the government.’”
The panelists also discussed the FTC’s wording on fees. Dady said it too was meant as a warning to franchisors, rather than a new rule.
“When you’re seeing a lot of things like technology fees coming about and other ones being introduced, the FTC is saying, ‘we’ve heard some complaints and we’re reminding folks that this is the law and this is our view,’” Dady said. “It’s reminding folks that if you want to charge the franchisee a fee, it has to be in the FDD.”
IFA General Counsel Sarah Davies said ongoing advances in technology can result in changing fees, and noted the importance of educating franchisees on any changes taking place.
“It highlights an issue with the current disclosure regime,” Davies said. “These are such long-term contracts, they’re 10-, 15- and 20-year contracts. Franchisors can’t predict what innovations and updates are going to be required for the system so they can stay competitive in the industry. It’s a change management issue, it’s how franchisors communicate those changes with franchisees and how they demonstrate why certain things are being implemented.”
IFA General Counsel Sarah Davies
Also brought up in Thursday’s webinar was the U.S. Supreme Court’s decision in the Loper Bright Enterprises V. Raimondo case, which overturned the Chevron deference doctrine. In doing so, the Supreme Court effectively reduced the power of federal agencies to interpret laws.
The subject was highlighted during the conversation in relation to a previous FTC decision on non-compete agreements. Nearly two months ago, the FTC announced a new ban on non-compete agreements at the national level, except for those between franchisors and franchisees.
In its May decision, the FTC found the relationship between a franchisor and franchisee more similar to those between two businesses than between an employer and employee. However, attorneys in the days following noted how franchisors still have to deal with it on the corporate side with senior management officials.
In the weeks that followed, the ban was partially blocked in a federal court in Texas and upheld in another court in Pennsylvania. Koch said because of the back and forth occurring now, it’s possible that the subject could go to the Supreme Court.
“The Loper decision comes into play because a large component of the case is the commission’s interpretation of its own authority to issue the rule,” Koch said. “Now, you would assume that the Supreme Court will say that no deference should be given to the FTC on that conclusion.”
The FTC is continuing to seek opinions on franchising, with a request for information open until October 10. Comments can be submitted at regulations.gov.