FTC seeks public comment on franchisor control over franchisees and their workers

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The International Franchise Association, plus six other major business organizations, urged the FTC to extend the deadline for public comments on the FTC’s proposed rules changes affecting franchise agreements and franchisor business practices.  In response, the FTC has added 30 additional days to the comment period. The new comment period deadline is June 8, 2023.

In a franchise relationship, franchisees typically pay a fee in exchange for a business format or system developed by a franchisor, the right to use the franchisor’s trademark for a specific number of years, and assistance. Owning a franchise comes with defined costs, franchisor controls, and contractual obligations.

The Federal Trade Commission (FTC) enforces a number of laws and rules that apply to the franchisor-franchisee relationship. One such law is Section 5 of the FTC Act, 15 U.S.C. § 45, which prohibits both unfair methods of competition and unfair or deceptive acts and practices in or affecting commerce; these authorities may apply to and prohibit certain contract terms. The FTC also enforces the Franchise Rule. The Franchise Rule is a pre-sale disclosure rule, which requires franchisors to provide prospective purchasers of franchises specified material information they need to weigh the risks and benefits of such an investment.

The FTC is seeking a Request for Information (RFI) regarding the means by which franchisors exert control over franchisees and their workers. Specifically, the FTC is interested in how franchisors disclose certain aspects and contractual provisions of the franchise relationship whether it be in Franchise Disclosure Documents, franchise agreements, operating manuals, or elsewhere. In addition, this Request for Information seeks information about the scope, application, and effect of certain contractual provisions and aspects of the franchise relationship.

In the RFI, the FTC seeks public comment on the following topics, among others:

  • The ability of franchisees to negotiate the terms of franchise agreements and operating manuals.
  • Provisions that restrict a franchisee from hiring employees of the franchisor or other franchisees (often described as “no-poach” provisions).
  • Provisions that require that the franchisee provide employee training, and whether costs are borne by the franchisor or the franchisee.
  • Provisions that require franchisees to purchase or lease goods, services, real estate, or other items related to establishing or operating a franchised business, either from the franchisor, its designee, or suppliers approved by the franchisor, or under the franchisor’s specifications.
  • Provisions that mandate franchisees to maintain certain hours of operation.
  • Do franchisors retaliate against franchisees for participating in non-franchisor endorsed or sponsored franchisee associations? If so, how?
  • Do franchisors receive payment or other consideration from third parties (e.g., suppliers, vendors) related to the purchase of goods or services from those third parties by franchisees?
  • What portion of a franchisee’s non-labor operating costs are determined by the franchisor?
  • To what extent, if any, are franchisors marketing their franchises using languages other than English?

The FTC encourages members of the public, including franchisors, franchisees, current and past employees of franchisors and franchisees, government entities, economists, attorneys, academics, and consumers to comment on any issues or concerns they believe are relevant or appropriate for our consideration and to submit written data, empirical research, views, facts, and opinions addressing this RFI. Comments may be submitted at www.regulations.gov and must be received no later than May 9, 2023. Your comment – including your name and your state – will be placed on the public record, including, to the extent practicable, on the regulations.gov website.

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