Over the years, many franchisees, franchisee advocates, and franchisee lawyers have wondered if the Federal Trade Commission (FTC) is really doing anything to regulate franchising. While the International Franchise Association states there are 733,000 franchised outlets in the United States, the FTC assigns less than one person to the task of overseeing franchising. In fact, in a 2019 New York Times story, it was stated that, “Lois Greisman, the associate director of the Division of Marketing Practices [for the FTC], said that the agency had not focused on franchise misconduct or taken any franchise-related enforcement action in years.” Not exactly ‘heavily regulated’ as the industry often claims.
Luckily for franchisee advocates, there is now at least one friend at the FTC, Commissioner Rohit Chopra. As part of his desire to protect small businesses, he has made the franchise industry one of his targets to improve. For AAFD members, we were privileged to have Commissioner Chopra joined our May 15, 2020 AAFD Town Hall call, which can be heard here, with the Commissioner joining at 12:45. He discussed not only the need for improved presale disclosure within the Franchise Rule, but also his desire to have the FTC look at franchise issues after the franchise agreement signing by using Section 5 of the FTC Act, which prohibits “unfair or deceptive acts or practices in or affecting commerce.”
Next, Commissioner Chopra took an opportunity on Monday, August 3, 2020, when the FTC filed a complaint against Yellowstone Capital, and issued a statement, which included the following:
The FTC also has unique responsibilities in the franchise market. Many small businesses in the United States are structured as franchises, and a disproportionate number of them are minority-owned. There are a host of troubling trends and practices in this market, including reports of franchisors engaging in practices that disadvantage their own franchisees. The FTC can tackle these practices through its authority under the FTC Act, as well as through its administration of the Franchise Rule, which is currently under review.
Finally, on Wednesday, August 5, 2020, the Senate Commerce, Science, and Transportation Committee held a hearing on The Oversight of the Federal Trade Commission. Remember, franchising is just a small part of what the FTC oversees. Hearing information, including the webcast can be found here. Start watching at 52:50 for Commissioner Chopra’s opening statement, which includes the following:
Second, the FTC must safeguard operators of franchised businesses from abusive practices by franchisors. Franchised businesses encompass a broad swath of businesses across the economy, from auto repair to real estate to fitness centers to fast food and more. Operators of franchised businesses employ Americans across the country, and they’re also more likely to be minority-owned, compared to other small businesses.
However, there are signs that franchisors may be using the pandemic to impose new policies that are exacting more economic pain on franchise operators. For example, Subway and 7-Eleven franchisees are fighting back against attempts by franchisors to gain more control and implement practices that shift more cost and risk to local business owners.
The FTC administers the Franchise Rule and enforces laws that prohibit unfair business practices by franchisors. This responsibility is critical, given the threats faced by operators of franchised businesses today.
The AAFD, on behalf of its members, is appreciative of the efforts Commissioner Chopra is making to elevate the issues in franchising within the FTC. We look forward to continuing our work with him and hope to engage other commissioners. The franchise industry has gone on for too long with little to no oversight to protect the true investors in the industry, the franchisees.