US FTC issues warning to franchisors over unfair business practices

By Waylon Cunningham

(Reuters) – A U.S. trade regulator on Friday announced a suite of actions taking aim at “unfair and deceptive practices” it said are illegally imposed on U.S. franchisees by their brand owners, such as requiring new fees not outlined in franchise contracts, or using contract provisions to discourage franchisees from speaking with regulators.

The U.S. Federal Trade Commission’s declaration that these practices are illegal did not name any specific companies as being in violation of the law, but in doing so it took a stance on issues that have inflamed tensions in recent years between companies and operators at major brands like McDonald’s (NYSE:) and Subway.

“Franchising is a chance for Americans to build a business,” said FTC Chair Lina Khan in a statement. “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.”

The International Franchise Association, a trade group that speaks on behalf of franchising companies, criticized the FTC’s actions on Friday as “contrary to the reality that the vast majority (of) franchise relationships are working and that franchising continues to grow each year.”

Among the actions taken by the FTC was issuing a policy statement warning brand owners that it is illegal to discourage franchisees from speaking with regulators about unfair practices or potential law violations through non-disparagement contract clauses, or any threat of retaliation.

Relatedly, the agency said it was soliciting a new round of comments from franchisees, brand owners and other stakeholders.

The agency also released new guidance that prohibits “undisclosed junk fees” — echoing language used to describe hidden fees imposed on consumers — that brand owners charge to franchisees, but which are not outlined in franchise contracts. As an example, the FTC said brand owners sometimes introduced these costs through on-the-fly changes to the operating manual, a sort of rulebook that franchisee owners must abide by to stay in compliance with their brand owners.

In response to a request for public comments on franchisor business practices last year, the agency received 5,200 comments, including some from McDonald’s franchisees.

The National Owners Association, comprised of several hundred McDonald’s franchisees, said in its comment that “the current climate is dictatorial and there is zero room for negotiation” with McDonald’s. The burger chain unilaterally imposes new costs on franchise owners by making changes to the McDonald’s operating manual, then uses non-disparagement clauses to silence critics, said the franchisee advocacy group, which formed in 2018.

Asked for comment, McDonald’s referred Reuters to the International Franchise Association’s statement.

The FTC said the number of franchise-related complaints submitted to the agency had increased significantly over the past three years, citing an analysis by the U.S. Government Accountability Office published last year.

“Today the Commission is making clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable, and illegal,” the FTC statement said.