A new era of enforcement? FTC commences first Franchise Rule lawsuit in over a decade against Burgerim
The Federal Trade Commission’s Franchise Rule requires franchisors to give prospective franchisees certain material information on the franchisor, including expected costs and legal obligations of the business, legal matters, certain financial performance representations, and statistics on franchised businesses, among other information. Franchisors across the country follow the Franchise Rule (16 CFR Part 436) when putting together their Franchise Disclosure Documents, and the failure to provide adequate information in one form or another has formed the basis of numerous civil lawsuits over the years. Despite this precedent, however, the Federal Trade Commission (FTC) has not brought suit for a violation of the Franchise Rule in over a decade. That changed in early February 2022, however, when the FTC brought its first lawsuit since 2007 against Burgerim, a fast food burger chain, for violations of the Franchise Rule.
The FTC’s complaint against Burgerim alleges that the company targeted veterans as potential franchisees, claiming that the opportunity was a “business in a box” that could be operated with little to no business experience. Burgerim also offered discounts to veterans who purchased more than one location. The great majority of the approximately 1,500 franchisees who paid up to $70,000 in franchise fees were never able to open restaurants, however; some franchisees could not secure a location, and some were unable to obtain loans to finance the significant costs of opening a Burgerim franchise. Burgerim’s intentional underselling of the investment and experience needed to open a franchise also contributed to the illusory marketing. When franchisees attempted to obtain a refund, they found that these promised refunds were unattainable despite multiple requests. Burgerim’s franchise disclosure document was also missing material information such as the names of the franchisor’s principals, contact information for prior franchisees, or written financial performance representations (to supplement the verbal financial performance representations made in numerous circumstances), among other information. In its complaint, the FTC seeks an injunction against Burgerim, monetary damages, and civil penalties of up to $46,517 for each violation of the Franchise Rule.
McDonald Hopkins will continue to follow the case closely, as this complaint could signal a new era of more aggressive enforcement of franchise regulations at the FTC. FTC Chair Lina Khan noted that the action “reflects a renewed commitment across the agency to protecting franchisees from illegal practices.” The FTC also recently launched a special online reporting tool to report potentially fraudulent franchise businesses to the FTC, which is accessible here. In the meantime, both franchisors and franchisees should carefully review the Franchise Rule and their franchise disclosure documents to ensure compliance.