The U.S. Federal Trade Commission late last week expanded its ongoing assessment of franchising, with another request for public comment.
On March 10, the FTC announced it was seeking feedback on franchise agreements and franchisor business practices, including how franchisors exert control over franchisees and their employees. The FTC is looking to find how franchisors disclose certain aspects and contractual terms of the franchise relationship, according to a press release.
The comment period, open for 60 days, is open to all interested parties, but the FTC noted its especially looking for feedback from franchisors, franchisees, government entities, economists, attorneys, academics and franchise employees. Those interested can submit comments at regulations.gov.
In particular, the FTC is looking for responses to the following subjects:
- Franchisees’ ability to negotiate the terms of franchise agreements before signing, and the ability of franchisors to unilaterally make changes to the franchise system after franchisees join.
- Franchisor’s enforcement of non-disparagement, goodwill or similar clauses.
- The prevalence and justification for certain contract terms in franchise agreements.
- Franchisors’ control over the wages and working conditions in franchised entities, other than through the terms of franchise agreements.
- Payments or other consideration franchisors receive from third parties related to franchisees’ purchase of goods or services from those third parties.
- Indirect effects on franchisee labor costs related to franchisor business practices
- The pervasiveness and rationale for franchisors marketing their franchises using languages other than English.
“I think they’re asking some good questions,” said Adam Wasch, a partner at Greenspoon Marder and co-chair of the Franchise Law Practice Group. “Certainly, there are issues related to control, rebates and unilateral changes that are important to the FTC, that are impacting the franchisee and franchisor relationship. I think it’s certainly worth taking a look at, but I also feel the questions seem geared to protect franchisees.”
Wasch said many of the issues brought up by the FTC, though, are things franchisees should already consider when they approach an agreement.
“I get the sense that there’s a push by franchisee folks to achieve some fairness and balance in the industry,” Wasch said. Franchisees need to be made aware of potential risks in a franchise agreement, he said. “They’re things that should be disclosed in the FDD and are in the FDD,” Wasch said.
Greenspoon Marder Partner and Franchise Law Practice Group Co-Chair Adam Wasch
“I think this is another situation where franchisors will be active in explaining their position, and try to assure the FTC that the Franchise Rule works,” Wasch said. “That the disclosures provided give them the business risks that they need to make an educated and informed decision. My hope is that this is more of a fact-finding mission than an attempt to change the structure for the franchise relationship.”
In the announcement, the FTC’s Office of Policy Planning Director Elizabeth Wilkins said the agency’s goal is to “unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers and consumers.”
“Amidst growing concern around unfair and deceptive practices in the franchise industry, the FTC hopes to hear from a broad range of stakeholders about how the franchise relationship is working,” said Samuel Levine, director of the FTC’s Bureau of Consumer Protection. “This cross-agency effort will inform our policy and enforcement efforts as we work to ensure a fair marketplace for franchisees.”
The announcement brought praise from the American Association of Franchisees and Dealers, with the organization releasing a joint statement. Providing comment in the statement were AAFD CEO and Chair Robert Purvin and Director of Public Affairs and Engagement Keith Miller.
“The AAFD applauds the FTC’s ‘solicitation for public comments on provisions of franchise agreements and franchisor business practices,’” Miller and Purvin said in the statement. “We are encouraged by the effort to include the fairness of contract terms and looking at post and presale disclosure issues, including the proliferation of kickbacks driving up costs to franchisees.”
A lack of oversight over franchising has paved the way for more “bad actors,” Miller told Franchise Times.
AAFD Director of Public Affairs and Engagement Keith Miller
“This request for information by them is very significant because it goes way beyond the current Franchise Rule,” he said. “The Franchise Rule is specific to franchising, but the FTC has a lot more authority than just the rule itself.”
The FTC has been seeking public comment on the Franchise Rule, which establishes what franchisors are required to disclose to franchisees, since 2019. The FTC is considering a number of changes to the rule, with the goal of eliminating deceptive practices that can negatively impact franchisees and employees.
The FTC is also seeking comment until April 19 on a proposed rule to ban noncompete clauses for workers in some situations. The FTC is requesting information on whether that proposed rule should also apply to noncompete clause between franchisors and franchisees.
Michael Layman, the vice president of government relations and public affairs for the International Franchise Association, said the group has a lot of questions about what the FTC is looking to do with these comment requests.
“It’s clear that the franchising community has become an area of interest to the commission, from this RFI, to the non-compete rule making proceedings, and the review of the Franchise Rule,” Layman said. “We’ll certainly be responding to the request and hope they are interested in a balanced perspective from both franchisees and franchisors.”