FTC Cracks Down on Unfair Franchise Practices: What It Means for Investors and Franchise Owners
By Waylon Cunningham
(Multibagger) - The U.S. Federal Trade Commission (FTC) has announced a series of actions targeting "unfair and deceptive practices" imposed on U.S. franchisees by their brand owners, such as unexpected fees not outlined in franchise contracts and provisions that discourage franchisees from communicating with regulators.
The FTC's declaration did not name specific companies, but it addresses issues that have strained relationships between franchisees and major brands like McDonald's (NYSE:) and Subway. These actions are poised to reshape the franchise landscape and could have significant implications for investors and franchise owners alike.
"Franchising is a chance for Americans to build a business," said FTC Chair Lina Khan. "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."
Key Actions by the FTC:
- Policy Statement: Issued to warn brand owners that it is illegal to discourage franchisees from reporting unfair practices or potential legal violations through non-disparagement clauses or threats of retaliation.
- Solicitation of Comments: The agency is seeking a new round of comments from franchisees, brand owners, and other stakeholders.
- New Guidance: Prohibits "undisclosed junk fees"—hidden costs that brand owners charge franchisees but are not outlined in franchise contracts. These fees often appear through sudden changes to the operating manual, a rulebook that franchisees must follow to stay compliant.
The International Franchise Association, representing franchising companies, criticized the FTC's actions as "contrary to the reality that the vast majority of franchise relationships are working and that franchising continues to grow each year."
The Impact on Franchisees and Brand Owners
The FTC's actions are a direct response to a growing number of complaints from franchisees. For example, the National Owners Association, representing McDonald's franchisees, has voiced concerns over the "dictatorial" climate imposed by the burger chain. They claim McDonald's unilaterally imposes new costs and uses non-disparagement clauses to silence critics.
The FTC noted that franchise-related complaints have surged over the past three years, according to an analysis by the U.S. Government Accountability Office. The agency's statement emphasized that contractual terms prohibiting franchisees from reporting potential law violations are "unfair, unenforceable, and illegal."
Analysis: What This Means for You
For Investors:
- Increased Scrutiny: Brands like McDonald's and Subway may face heightened regulatory scrutiny, which could impact their stock performance and profitability.
- Risk Assessment: Investors should closely monitor these developments, as increased regulatory actions could lead to higher compliance costs for franchisors.
For Franchise Owners:
- Empowerment: Franchisees are now better protected against unfair practices, fostering a more transparent and equitable business environment.
- Legal Clarity: The FTC's clear stance provides franchisees with the legal backing to report unfair practices without fear of retaliation.
In summary, the FTC's crackdown on unfair franchise practices aims to create a more transparent and fair business environment. Investors should remain vigilant about the potential impacts on major brands, while franchise owners can take solace in the enhanced protections and clearer legal framework provided by these new guidelines.