New GAO report on franchising reveals need for further education with franchisees
An April 2023 report on the Federal Trade Commission’s oversight of franchising by the Government Accountability Office (GAO) has concluded that franchise owners could use additional education and outreach by the FTC to assist with franchising issues. Generally, the FTC is the federal agency tasked with administering and enforcing the Franchise Rule – the federal rule that outlines the various information franchisors need to include in the Franchise Disclosure Document (FDD) provided to prospective franchisees. The FTC is also the only party that can section 5 of the FTC Act (11 U.S.C. § 45(a)(1)), which prohibits unfair or deceptive acts in connection with commerce. The GAO conducted this study to generally review how the FTC oversees franchising in practice, discuss challenges franchise owners reported in operating franchises, and review the FTC’s efforts to educate franchisees.
The GAO reviewed the FTC’s Franchise Rule, the FTC’s Franchise Rule Compliance Guide, and other material available on the FTC’s website. The GAO also conducted nine discussion groups with 44 franchise owners across industries and 25 other stakeholders (including regulators, attorneys, and franchisors) and analyzed franchise-related complaint data from 2018-2022. The discussion groups in particular revealed certain challenges that may not be evident through FTC complaints. These challenges included:
- Operations – a franchisor may require a franchisee to maintain open hours at certain times, even if the business is not profitable at those times, and franchisor may need to make certain changes to their businesses to maintain their position in the market.
- Fees – franchisee fees must be paid regardless of the individual franchisee’s profitability, and certain franchisors may use the franchise fees as they deem appropriate.
- Required vendors – franchisors may require franchisees to use certain vendors that may not reflect market prices to maintain brand quality or consistency, and franchisees may receive lower pricing due to the franchisor’s purchasing power.
- Territories – there may be internal competition between franchisees and corporate-owned stores or other franchisees without an agreement for an exclusive area for a franchisees.
- Renewals – franchisees may lose their initial investment if an agreement is terminated for a variety of reasons, and franchisees may be required to pay a significant amount for an early termination.
The GAO also explored various challenges that first-time franchise owners may face, including challenges in interpreting a complex and lengthy FDD, language barriers, and a general lack of awareness about the FTC’s consumer resources for franchisees. The FTC has also received a relatively low number of complaints since the amendment of the Franchise Rule in 2008; the FTC has opened 11 franchise-related investigations and taken one enforcement action. Generally, the GAO found that the FTC uses complaints to target its enforcement efforts, but complaints may not reflect the full extent of franchising concerns before or after a franchise contract is executed. The GAO’s discussion groups revealed that franchisees may not be aware of their ability to file a complaint, may fear retaliation, or may fear that efforts to file a complaint may not be effective. The FTC has since modified its website to help make the process for submitting a complaint clearer and has begun outreach efforts around the complaint process.
Overall, the GAO’s report recommended that the FTC enhance its education efforts around the importance of reviewing and understanding the FDD, continue to publicize the FTC’s consumer guide with prospective franchisees, and improve awareness around and understanding of the FTC’s complaint process. These efforts – when coupled with the continuing education and awareness work of franchisors, franchise professionals, and advocacy groups – should provide benefits for all stakeholders that interact with franchise-related businesses in the future.