Part 1 of 2 articles
In response to the FTC staff’s 2023 Request for Information (RFI), the Commission gathered 5,291 comments, of which 2,216 were made publicly available. The majority of commenters were franchisees, while a smaller segment identified as franchisors or other stakeholders. Based on the feedback received, a report was published that outlines the twelve primary concerns raised by franchisees.
This 12-Issue Spotlight report comes as no surprise to us, as many of these topics have been central to our advocacy efforts for years, it’s noteworthy that many concerns strongly align with the AAFD’s Franchisee Bill of Rights.
The AAFD has been a leading advocate for franchisee rights and fair franchising practices since its founding in 1992. In June of 1996, the American Association of Franchisees and Dealers House of Delegates adopted and published the Franchisee Bill of Rights with the intent to promote awareness and acceptance of these rights among the franchising community and the public.
Having collaborated closely with franchisees, franchisors, State and Federal regulators to tackle these challenges, we have a lot to say about the concerns raised by franchisees in response to the FTC’s RFI. In this article, we will discuss the first six issues outlined in the report and provide our perspective on each one. Let’s delve deeper into each of the first 6 spotlight issues. We will analyze how they correspond with the Franchisee Bill of Rights.
Analysis of the Spotlight Issues, 1 to 6
- Unilateral changes to franchise operating manuals.
This was the top concern raised to the FTC by franchisees. Items flagged included new add-on services, extending operating hours, even adding a liquidated damages clause. The use of the operating manual has gone far beyond normal operations for many franchises, where the operating manual is used to change the terms of the contract.
FRANCHISEE BILL OF RIGHTS: The right to reasonable restraints upon the franchisor’s ability to require changes within the franchise system.
- Franchisor misrepresentation and deception. Many franchisees reported that they felt the franchisor misrepresented the franchise during the sales process, including start-up costs and sales, revenue, and profit data. Franchisees not only use this data in their decision to purchase the franchise, but also to finance the franchise. These misrepresentations and deceptions can be catastrophic financially to the franchisee.
FRANCHISEE BILL OF RIGHTS: The right to full disclosure from the franchisor, including the right to earnings data available to the franchisor which is relevant to the franchisee’s decision to enter or remain in the franchise relationship.
- Fees and royalties. In this section the FTC discussed that excessively high fees may make the franchise unsustainable for the franchisee. This also reiterates the issue with new or undisclosed fees as previously discussed in the staff guidance on undisclosed junk fees.
- Franchise supply restrictions and vendor kickbacks. When buying a franchise, one of the key benefits often discussed is the group purchasing power the franchisee will receive. But reality has become that suppliers are often limited, and franchisors are receiving revenue from vendors based on franchisee purchases, inflating the costs of goods and services above free market prices.
FRANCHISEE BILL OF RIGHTS: The right to competitive sourcing of inventory, product, service and supplies
- Actual and feared retaliation. Simply put, franchisees are afraid to speak out about their problems with their franchisor. Non-disparagement and confidentiality clauses have a chilling effect on franchisees speaking out, even when going to the government. This was also discussed above in the Policy Statement. In response to this, the FTC has created a web page specifically for franchisees with resources and a link to file complaints. They have also reopened the Request for Information through October 10, 2024.FACT: For AAFD members, we see this fear in forming new chapters or getting franchisees to join chapters and is in the FBOR with “The right to associate with other franchisees”.
FRANCHISEE BILL OF RIGHTS: The right to associate with other franchisees.
- Non-competes and no-poach clauses. The non-compete clauses severely restrict the rights of a franchisee approaching the end of their franchise term. We see these non-competes as handcuffs on franchisees at renewal where franchisors often have new contracts much different than the franchisee originally bought into. The choice is to sign a new onerous contract or be restricted from making a living in their field of ability for 2 years. The FTC brought up comments of how these non-competes unfairly limit competition in the marketplace.
FRANCHISEE BILL OF RIGHTS: The right to engage in a trade or business, including a post-termination right to compete.
The franchise business model is experiencing remarkable growth, boasting an estimated 800,000 outlets and generating over $850 billion in revenue*. While franchising presents excellent opportunities, concerns about unfair practices also have continued to appear. Franchisees should consider joining organizations like the AAFD, which advocate for fair and reasonable franchise agreements while striving to protect franchisee rights.
It is essential for all stakeholders in the franchising industry to stay informed about the issues highlighted by the FTC. Franchisees must be well-informed and prepared to tackle these challenges.
In our upcoming article, we will delve into six other critical issues affecting franchisees, providing a comprehensive analysis and actionable insights to empower them in their business endeavors.
* This information comes from research conducted by FRANDATA and published by IFA -https://www.franchise.org/sites/default/files/2024-02/2024%20Franchising%20Economic%20Report.pdf
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Keith is the AAFD preeminent voice for political action in support of franchisee rights at both the Federal and State level. Keith has been an active leader and voice for franchisee causes over the past twenty plus years, with a growing track record of bringing franchisee friendly legislation introduced and adopted throughout the USA. Keith is also a multi-unit Subway franchisee, and understands the challenges and opportunities that come with being in business for oneself. He is passionate about protecting the interests of franchisee business owners, and will work tirelessly to ensure that they are treated fairly under the law.
The AAFD is a national non-profit trade association representing the rights and interests of franchisees and independent dealers throughout the United States. The AAFD’s mission is to achieve Total Quality Franchising. We do this by promoting fair and equitable franchising and dealer practices and empowering effective independent franchise associations. We also provide members with programs, services and products which enhance their individual businesses and careers.