On April 20th, Lydia DePillis from the New York Times wrote “Franchisers, Facing Challenges to Business Model, Punch Back” – a thorough piece on the years’ long troubles franchisees have had to face with bullying franchisors in an environment with little state and federal policy regulations and enforcement – until recently. We thank Ms. DePillis for highlighting the conflicts from two notable franchisee organizations that can help pave the path for a more inclusive and fair franchising model.
At AAFD, our mission began and continues to support franchise owners and our member chapters in matters that empower their businesses – sometimes that includes legal battles with their franchisors and at other times, it includes introducing and supporting policies to improve the power imbalance inherent in franchising.
Senator Catherine Cortez Masto (NV) has championed the causes in the United States Senate, introducing two pieces of legislation to provide more transparency in SBA loans. In addition, she released an 87-page report in April 2021 outlining many issues in the franchise industry.
At the same time, Burgerim, a franchise system whose franchisees have had an AAFD franchisee chapter, saw many franchisees lose their businesses and life savings when the franchisor left the country with all the money they had invested in the franchise. This after the company made false promises on high revenue projections which influenced franchisees to seek more stores with loans from the SBA.
In 2021, Rep. Jan Schakowsky (IL-9) called on the Government Accountability Office (GAO) to write a report on the inadequacies of the Federal Trade Commission’s Franchise Rule and the lack of enforcement by the FTC of the Rule. She also introduced legislation that would give franchisees a private right of action on Franchise Rule violations.
In 2022, the AAFD’s BrightStar owners chapter initiated a legal battle with their franchisor regarding the insertion of a ‘Call Option’ in their renewal franchise agreement. It would have given the franchisor, at its sole discretion, the right to terminate the franchise agreement and acquire the franchisee’s assets at a predetermined price, that may be at less than fair market value and prevent resale in the open market.
Similarly, other franchisee networks supported by AAFD are facing unilateral efforts by franchisors to dramatically alter the traditional business model, often to the detriment of system franchisees, including Line-X, Clean Juice, Solar Grids as well as others. While these disputes are not yet settled, these situations highlight the need to look at contractual terms, especially when forced upon during a franchise renewal when the franchisee has the tough choice to sign a new agreement with worse terms or be restricted from making a living due to a non-compete clause. And in this regard, AAFD has supported FTC’s proposed rule to ban non-compete clauses and requested the ban extend to franchise agreements.
Cell Phone Repair Independent Owners Association, another AAFD member chapter, has been entangled in a legal battle with their franchisor on non-compete clauses, forced supplier contracts, and kickbacks on franchisee purchases from those vendors, artificially driving up the costs to franchisees and profiting their franchisor.
We strive to bring a more balanced business model in our industry and have led efforts in educating our policymakers and urging the Federal Trade Commission to use its broad authority to address unfair and deceptive business practices enforced by franchisors.
On March 10, the FTC announced a Request for Information and requested the submission of public comment on franchise agreements and franchisor business practices. We urge all franchisees to participate and submit comments. Tell your story, this is an opportunity of a lifetime to comment to the FTC on issues that impact your franchise. The comment period will close on June 8, 2023.
We will continue our advocacy efforts to push state and federal regulators to look at any practices in the franchise business model that are unfair or deceptive, and will continue efforts to pass state and federal legislation that protect the integrity of the franchise business model and the investment and equity earned by its primary investors, the franchisees. It’s time for franchisees to engage and drive the franchise industry.