Earlier this year, we questioned whether franchising was in the crosshairs of federal regulators and legislators. It appears that the answer may be a resounding yes.
Hit #1 appeared in September 2020, when Rohit Chopra, one of five commissioners on the Federal Trade Commission (FTC), declared on Twitter that “[franchise] regulators must stop unfair, deceptive, and discriminatory practices that target franchisees and their employees” and three House of Representative members wrote a letter to the Chairman of the FTC urging the agency to step up investigations of franchisor practices as a result of recent abuses by a relatively small number of franchisors in the sale of their franchises.
Hit #2 occurred when the FTC held a virtual workshop on its Franchise Rule (16 C.F.R. § 436) on November 10, 2020 to respond to the FTC’s 2019 request for comments about the current Franchise Rule and to provide guidance on the possible updating of the Franchise Rule, including the possible mandatory inclusion of Financial Performance Representations (FPRs) in Franchise Disclosure Documents (FDDs).
Here’s Hit #3. In April 2021, U.S. Senator Catherine Cortez Masto of Nevada issued an 87-page report, “Strategies to Improve the Franchise Model: Preventing Unfair and Deceptive Franchise Practices” which, according to the report, “highlights four areas where franchise complaints are most problematic, including (1) unfair and deceptive contracts that give nearly all control to the franchise corporation; (2) a lack of honesty and transparency in the financial disclosure documents; (3) costly kickbacks and overpriced goods; and (4) fees charged for limited or no actual benefit” and concludes that these characteristics “are the hallmarks of a franchise model that operates to strip small business owners of their wealth.”
The report recommends that Congress, state governments and franchisors, as the case may be, take the following actions:
The report generously acknowledges that “there are good franchise corporations out there that provide profits to investors, living wage jobs, and support for the community” and that “franchises contribute millions of dollars to state and local economies.” The compliments are short-lived however and pale in comparison to the details provided in the report about the very real harm caused by some admittedly less than scrupulous franchisors.
Only time will tell if any of the changes demanded in the report are adopted by Congress, state governments or franchisors.