Lusthaus Law frequently reports on the impact of the Federal Trade Commission’s (FTC) regulations and policies on the franchising industry and the rights and obligations of NY franchisors and franchisees.
Our recent post highlighted the developments with the FTC’s Non-Compete Rule and we received feedback from our clients and audience about how valuable this insight can be. Since the FTC recently issued a new policy statement and guidance on franchising, now is another ideal time to review what’s happening at the Commission and how it can impact your NY franchise.
FTC Aims To Cut Out The Junk From Franchising
The FTC regularly seeks public comment on new initiatives, and thankfully continues to do so for franchising, which helps maintain the strength and integrity of the franchise model. In March 2023, the FTC issued a Request for Information (RFI) on franchisors’ business practices and published their findings earlier this month.
This resulted in new staff guidance prohibiting undisclosed or “junk fees” and limiting contract clauses that constrain franchisees from speaking openly and directly with government agencies.
Franchisees raised their concerns to FTC Chair Lina Khan about franchisors not including certain fees in their franchise disclosure documents (FDD), yet still imposing them on franchisees. The FTC responded in its new Staff Guidance on the Unlawfulness of Undisclosed Fees Imposed on Franchisees:
The Franchise Rule requires franchisors to disclose in the FDD certain fees. If a franchisor fails to disclose those fees in the FDD, such failure is a violation of the Franchise Rule and Section 5 of the FTC Act.
Franchisors who do not comply will face civil penalties. In January 2024, the FTC announced a $1,500 increase (of the maximum penalty) to $51,744 for violations of Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices in or affecting commerce as well as unfair methods of competition.
“Franchising is a chance for Americans to build a business, but the FTC has heard concerns about how unfair franchisor practices, like a failure to fully disclose fees upfront, go unreported thanks to a fear of retaliation,” Khan said. “Today the Commission is making clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable, and illegal.”
The contract provisions Khan referenced are non-disparagement clauses and other contract terms that bar franchisees from communicating openly with government regulators. Commenters revealed in the RFI that franchisees were told they would lose their franchises if they spoke with regulators, which of course, is not legal. With the FTC paying closer attention to franchise relationships, franchisors and franchisees need to know their rights and consult a NY Franchise Lawyer.
Based on the success of the initial round of open comment, the FTC has reopened the public comment period for the RFI until Oct. 10, 2024.
Read the full Staff Guidance here.
A New Level of Insight
Another highlight of the FTC’s announcement was identifying the 12 major risks among commenters (slightly more than half of whom identified as franchisees).
1. Unilateral changes to franchise operating manuals
2. Franchisor misrepresentations and deception
3. Fees and royalties
4. Franchise supply restrictions and vendor kickbacks
5. Actual and feared retaliation
6. Non-competes and no-poach clauses
7. Franchise renewal problems
8. Franchisor refusal to negotiate contract terms
9. Franchise Disclosure Document issues
10. Private equity takeovers
11. Marketing fund transparency
12. Liquidated damages clauses and early termination fees
But the list does not end with just the “what.” It also includes the most frequently referenced franchise systems tied to these concerns. More importantly, the FTC provides further detail and data into each risk. This level of insight can be leveraged by franchisees, especially those preparing to enter franchising or expand their franchise portfolio. Additionally, franchisors can use this list to reassess their own practices and reputation. See the full list of risks.
Franchise stakeholders and even lawyers should be apprised of the FTC’s new guidance, as well as critical dates such as Sept. 4, 2024, when the nationwide final rule banning non-competes is slated to take effect. As previously discussed, the rule is subject to judicial review by a federal judge in Texas. A final ruling is expected by Aug. 30, 2024.
Additionally, all these resources have been streamlined and are now housed on the FTC’s updated Franchise Guidance page, which can help franchisors, franchisees and any current or prospective business owner. Further questions and concerns should be directed to a NY franchise lawyer.
Contact Lusthaus Law
Lusthaus Law’s website is a resource for New York franchisors and franchisees. We have published two downloadable and complimentary e-books and our Insights blog is regularly updated to reflect industry trends and recent achievements in client representation.
Contact us today to learn more about how Lusthaus Law P.C. can help you navigate a clear path for your franchise’s successful future.
