On July 12, 2024, the Federal Trade Commission (“FTC”) made it clear that they have their eyes on franchising, and want to know more. The FTC took a “suite of actions” targeted at addressing franchisee concerns within franchising, including reopening the 2023 Request for Information on Franchise Agreements and Business Practices (“RFI”), adopting a Policy Statement on franchisor’s use of non-disparagement and other similar clauses (“Policy Statement”), releasing guidance on undisclosed fees, and more.
Open Again – 2023 Request for Information
The 2023 RFI (which is separate from the FTC’s required review of the FTC Franchise Rule) has been reopened, and will remain open until October 10, 2024. The RFI was initially open from March 9, 2023 to June 8, 2023. The FTC received nearly 5,300 comments (with more than 2,200 publicly available). In this update, the FTC has published an Issue Spotlight summarizing the comments received, of which more than half were from franchisees. At its core is the top 12 issues concerning franchisees:
- Unilateral changes to franchise operating manuals
- Franchisor misrepresentations and deception
- Fees and royalties
- Franchise supply restrictions and vendor kickbacks
- Actual and feared retaliation
- Non-competes and no-poach clauses
- Franchise renewal problems
- Franchisor refusal to negotiate contract terms
- Franchise Disclosure Document issues
- Private equity takeovers
- Marketing fund transparency
- Liquidated damages clauses and early termination fees
While it is possible that the FTC will work to take actions on all of these issues, the Policy Statement and Guidance seem to focus more heavily on issues # 1, 3 and 5 above.
Policy Statement on Franchisors’ Use of Certain Contract Provisions
The FTC (in a divided 3-2 vote) adopted the Policy Statement, which states that franchisors, through an agreement, clause or otherwise “may not restrict franchisee’s communications with the Commission or any other state or federal law enforcement or regulator about potential law violations.” As explained by the FTC:
These provisions may take the form of non-disparagement clauses (“franchisee shall not disparage the brand in any way”), confidentiality or non-disclosure clauses (“franchisee is prohibited from sharing any information about the franchise or their experience”), goodwill clauses (“franchisee shall not engage in any conduct that may tarnish the goodwill of the brand”), and similar clauses.
Commissioners Melissa Holyoak and Andrew Ferguson issued dissents to the Statement of Policy, noting that it “does not explain what franchisors looking to stay on the right side of the law should do,” and critiquing whether the Policy Statement aims to be “a type of informal law.” Regardless, the FTC makes it clear that clauses that prohibit a franchisee from reporting potential law violations to the government are unfair, and that franchisees should feel free to speak with the FTC about their concerns.
Undisclosed Fees Unlawful
In addition, the FTC staff published Guidance on the Unlawfulness of Undisclosed Fees Imposed on Franchisees (“Guidance”). In the Guidance, the FTC staff confirms that franchisors cannot impose or collect a fee which was not disclosed in the franchisor’s FDD and franchise agreement. While the Guidance outlines certain instances where a new fee was enforced without any prior disclosure, it does not explore the level of required disclosure for fees, which has recently been a focus of some state regulators, including those in California and Washington.
Franchise Guidance Website
Finally, the FTC has launched a Franchise Guidance website, featuring links to all of the FTC’s publications and actions regarding franchising, including all actions discussed above.
It is as important as ever to stay on top of these updates and actions as they develop. If you have any questions regarding these developments, please do not hesitate to contact us.