Federal Trade Commission Cracks Down on Franchise Practices

The Federal Trade Commission has responded to an increase in complaints from commercial franchisees about “unfair and deceptive practices by franchisors,” including hidden franchise fees and contract provisions, by cracking down on these illegal practices.

Food and beverage franchisees represent more than a third of all franchisees nationwide across all industries, making it the largest segment in the country, according to a 2022 FRANData report from market research firm FRANData.

On July 12, the FTC issued a policy statement reminding franchisors that non-disparagement clauses that prohibit franchisees from speaking to government officials are illegal. Even if such clauses are illegal, the FTC study concludes that many franchisees are “reluctant to file reports” or even speak to the Commission anonymously for fear of retaliation from their franchisors.

“The FTC is concerned that franchisees may be reluctant or unwilling to voluntarily discuss or file reports about their experiences with franchisors, even if they believe a violation of the law has occurred,” the FTC’s statement released July 12 said.

In addition to this stern reminder, the FTC issued new guidance explaining that franchisors cannot charge fees to franchisees unless they have been previously disclosed. In other words, hidden or unnecessary franchise fees, including payment processing, technology, training, marketing, and property improvement fees, are prohibited unless they are part of the franchise’s initial disclosure documents.

“Franchising is an opportunity for Americans to build a business, but the FTC has heard concerns about franchisors’ unfair practices, such as not fully disclosing fees up front, that go unreported for fear of retaliation,” FTC Chairwoman Lina M. Khan said in a statement. “Today, the Commission is making clear that contractual provisions prohibiting franchisees from reporting potential violations of the law to the government are unfair, unenforceable, and illegal.”

The FTC also released a document on franchisees’ top concerns in response to a 2023 request for information, which included more than 5,000 complaints from franchisees and franchisors. Common complaints included franchisor deception, fees and royalties, and vendor kickbacks (Dickey’s Barbecue Pit was one of the top franchisors mentioned). Other complaints included fear of retaliation from franchisors and franchise renewal issues (including, Subway was one of the major franchisors mentioned).

“Dickey’s Barbecue’s business model is to sell stores at prices significantly higher than listed, with Dickey’s taking a large cut,” one anonymous complaint said. “Dickey’s will tell franchisees the cost will be $400,000 and sometimes it will cost twice that much.”, “But you won’t know until you’ve already invested a lot. The owner will default on his Small Business Administration loan and the next buyer will come along and pay half, but then default until the restaurant is sold for about 10 percent of the original construction cost.”

The FTC said it would reopen the comment period for the request for information and would collect comments and complaints from franchise stakeholders through Oct. 10.

Contact Joanna at (protected email)