New FTC Franchise Guidance: What small businesses need to know
On July 12, the Federal Trade Commission (FTC) announced new actions to address growing concerns about unfair and deceptive practices by franchisors that impact their franchisees. Operating a franchise is a pathway to small business ownership for many aspiring entrepreneurs, and a fair franchise agreement benefits both the small business franchisee and the franchisor. However, franchise agreements are often written by and largely benefit the franchisor at the expense of the franchisee, who doesn’t have the leverage needed to bargain for more favorable terms. Fortunately, the FTC is required to protect franchisees from unfair methods of competition and unfair and deceptive practices. Read on to learn more about the FTC’s new guidance and actions.
New guidance
The FTC released a policy statement noting that franchisees must be allowed to communicate with the FTC about potential legal violations without the threat of consequences to their business. However, many franchisees can be reluctant or unwilling to discuss or file reports about their franchisors due to fear of retaliation. This policy statement makes it clear that provisions included in a franchise agreement or other documents may not restrict franchisees’ communications with the FTC and other state and federal agencies about potential legal violations. It also clarifies that a franchisor’s use of implicit or explicit threats to sue or retaliate against a franchisee who reports potential violations of the law to the government is an unfair practice.
Franchise Fees
Additionally, the FTC released new guidance explaining that franchisors cannot lawfully impose and collect undisclosed fees from franchisees. The franchise rule requires franchisors to disclose certain fees in a Franchise Disclosure Document (FDD), and a failure to disclose those fees in the FDD violates the rule. This includes new fees through updated operating manuals that were not previously specified in the FDD and included in the franchise agreement. This guidance makes clear that it is illegal for franchisors to impose undisclosed junk fees—fees that raise costs and may make the difference between a profitable franchise and an unsustainable one.
Make your voice heard
The FTC is reopening the comment period related to franchise agreements and franchisor business practices. Franchisees can share their experience by filling out the comment form. Furthermore, franchisees can report any unfair practices or violations to the FTC here.
Learn more
To learn more about the FTC’s work to level the playing field for small business franchisees, read their summary of the new actions and their franchise guidance.