WASHINGTON, D.C. — The Federal Trade Commission (FTC) has announced a series of recent actions aimed at protecting small business owners from unfair and deceptive practices by franchisors. These measures are intended to ensure that the franchise business model remains a viable path to business ownership.
Policy Statement on Non-Disparagement Clauses
The FTC issued a policy statement warning franchisors against using contract provisions like non-disparagement clauses, which prohibit franchisees from communicating with the government. Such clauses, the FTC said, violate the law. Franchisee reports and voluntary interviews are vital for FTC investigations, and any threat of retaliation against franchisees for reporting potential law violations is unlawful.
New Guidance on Undisclosed Fees
FTC staff released new guidance clarifying that franchisors cannot impose fees on franchisees that were not previously disclosed. Franchisees have reported rising costs due to undisclosed fees for payment processing, technology, training, marketing, property improvement, and other required services. The guidance emphasizes that these “junk fees” are illegal as they raise costs and can make the difference between a profitable and an unsustainable franchise.
Addressing Franchisee Concerns
FTC Chair Lina M. Khan highlighted the importance of transparency in franchising. “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,” she said. The Commission’s new measures aim to make clear that prohibiting franchisees from reporting potential law violations is both unfair and illegal.
Issue Spotlight and Comment Period Reopening
The FTC also released an Issue Spotlight summarizing the top concerns raised by franchisees in response to a 2023 Request for Information (RFI). The agency received over 2,000 comments from franchisees, franchisors, and other stakeholders. The analysis revealed that certain franchisors present riskier investments based on Small Business Administration loan default data.
To continue engaging with market participants, the FTC is reopening the comment period for the 2023 RFI related to franchise agreements and franchisor business practices. Interested parties can submit comments until October 10, 2024, online.
New FTC Franchise Website
The FTC has launched a new franchise website, providing a single resource for all of its franchising materials. Current and prospective franchisees and franchisors can use the site to access the latest information and guidance from the FTC.
These actions by the FTC aim to create a fairer and more transparent franchising environment, protecting small business owners and ensuring that the franchise model remains a ladder of opportunity for all.
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