FTC Takes Action Against Unfair Franchise Practices

WASHINGTON DC — The Federal Trade Commission (FTC) announced a series of recent actions aimed at protecting small business owners from unfair and deceptive practices by franchisors. These actions are intended to ensure that the franchise business model remains a viable path to homeownership.

Policy Statement on Non-Disparagement Clauses

The FTC has issued a policy statement warning franchisors against using contractual clauses such as non-disparagement clauses, which prohibit franchisees from communicating with the government. Such clauses, the FTC says, violate the law. Franchisee reports and voluntary interviews are essential to FTC investigations, and any threat of retaliation against franchisees who report potential violations of the law is illegal.

New guidelines on undisclosed fees

The FTC staff issued new guidance clarifying that franchisors cannot charge franchisees fees that were not previously disclosed. Franchisees have reported increased costs due to undisclosed fees for payment processing, technology, training, marketing, property improvements and other required services. The guidance emphasizes that these “unnecessary fees” are illegal because they increase costs and can mean the difference between a profitable franchise and an unsustainable one.

Addressing franchisee concerns

FTC Chairwoman Lina M. Khan stressed the importance of transparency in the franchising space. “Franchising is an opportunity for Americans to build a business, but the FTC has heard concerns about how unfair practices by franchisors, such as failing to fully disclose fees up front, go unreported for fear of retaliation,” she said. The Commission’s new measures are intended to send a message that prohibiting franchisees from reporting potential violations of the law is both unfair and illegal.

Reopening of the file and the comment period

The FTC also released an Issue Spotlight summarizing key concerns raised by franchisees in response to a 2023 Request for Information (RFI). The agency received more than 2,000 comments from franchisees, franchisors, and other stakeholders. The analysis found that some 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 Request for Information on Franchise Arrangements and Franchisor Business Practices. Interested parties may submit comments online through October 10, 2024.

New FTC Franchise Website

The FTC has launched a new franchise website that consolidates all of its franchising materials into one resource. Current and prospective franchisees and franchisors can use the site to access the latest FTC information and guidance.

These actions by the FTC aim to create a fairer and more transparent franchise environment, protect small business owners and ensure that the franchise model remains a ladder of opportunity for all.

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