Ian Fleming famously wrote, “Once is happenstance. Twice is coincidence. Three times is enemy action.” Although we aren’t quite talking enemy action here, we are seeing heightened Federal Trade Commission (FTC) interest in issues involving franchises.
First, in 2020, the FTC hosted a workshop, “Reviewing the Franchise Rule.” Second, in 2022, we saw the FTC (along with the Department of Justice) bring an action against Burgerim alleging violations of the FTC’s Franchise Rule as well as of the FTC Act. That litigation is ongoing and is one of the first such actions filed in many years. And then, third, quietly on a Friday afternoon, the agency issued a request for information (RFI) on “franchise agreements and franchisor business practices, including how franchisors may exert control over franchisees and their workers.”
As background, the Franchise Rule is quite limited in nature – it generally requires certain disclosures of information to prospective franchise purchasers before they invest. Of course, through the FTC Act, the agency can exert far more authority over franchises that can far exceed the limited reach of the rule.
Given the FTC’s expanded interest of late in issues involving workers (such as the non-compete rulemaking), we thought this somewhat unusual RFI warranted a deeper dive. The RFI is not connected with any rulemaking; it is instead a broad request regarding industry practices that may be unfair or deceptive. The press release quotes an FTC official as stating, “This RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers and consumers.”
The RFI, which was issued without commission vote, spells out a variety of areas of interest to the agency. And it covers quite a wide range of topics and questions, including:
- The ability of franchisees to negotiate terms of franchise agreements.
- The ability of franchisors to make unilateral changes to the franchise system.
- The prevalence of agreement provisions that restrict or relate to various wage or hiring issues.
- The existence (and enforcement) of terms that relate to non-disparagement and goodwill issues.
- Allegations regarding retaliation against franchises.
- Information regarding a variety of financial relationships and activities.
It is worth noting that the FTC materials on this RFI request are – to put it mildly – not exactly framed in a neutral fashion. The focus on control and unequal bargaining power certainly suggests that the starting point for this review reflects deep agency concerns with the franchise model and its impact on franchisees. And notably, the press release and RFI do not make clear what the agency will be using this information for, but certainly options could include using this information to initiate a broad Magnuson-Moss Warranty Act rulemaking on franchise issues that would go far beyond the current limited rule.
And it is also worth noting that franchise issues were frequently raised by former FTC Commissioner Chopra when he was at the agency. This included TV appearances and statements made at meetings of franchisees and dealers where he claimed that the government “hasn’t cared” and raised concerns regarding the “imbalance of power inherent in this business model.” And we have also seen some broader congressional interest in these issues.
It certainly seems that we are heading in the direction of far more FTC engagement and interest in franchise issues, and this is a space we will monitor closely. Comments responsive to the RFI are due May 9.