The Federal Trade Commission has responded to an uptick in complaints from business franchisees over “unfair and deceptive practices by franchisors,” including hidden franchise fees and contract provisions, by cracking down on these illegal practices.
Food and beverage franchisees comprise more than a third of all franchisees nationally across all industries, making it the country’s largest segment, according to a 2022 FRANData report by the market research firm.
The FTC released a policy statement on July 12 reminding franchisors that non-disparagement contract clauses that prohibit franchisees from speaking with government officials are illegal. Even though these contract clauses are illegal, the FTC research concludes that many franchisees are “reluctant to file reports” or even speak with the Commission anonymously for fear of retaliation by their franchisors.
“The FTC is concerned that franchisees are reluctant or unwilling to voluntarily discuss or file reports about their experiences with franchisors, even if the franchisees believe a law violation has occurred,” the FTC statement released on July 12 said.
In addition to that stern reminder, the FTC released new guidance explaining that franchisors cannot collect fees from franchisees unless they have been previously disclosed. In other words, hidden franchising fees or junk fees including payment processing, technology, training, marketing, and property improvement fees — are banned unless they are part of the initial franchise disclosure documents.
“Franchising is a chance for Americans to build a business, 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," FTC chair Lina M. Khan said in a statement. "Today the commission is making clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable, and illegal."
The FTC also released a document of top concerns of franchisees in response to a 2023 Request for Information, which included more than 5,000 complaints from franchisees and franchisors. Common complaints included franchisor deception, fees and royalties, and supplier kickbacks (all of which, Dickey’s Barbecue Pit was one of the top franchisors mentioned). Other complaints included fear of retaliation from franchisors and franchise renewal problems (of which, Subway was one of the top franchisors mentioned).
“Dickey’s Barbecue business model involves selling stores at substantially more than quoted with Dickeys getting a big portion of the cut,” one anonymous complaint said. “Dickey’s will tell franchisees the costs will be $400k and it will cost sometimes double that, but you don’t know until you are already heavily invested. Then the owner will default on their Small Business Administration loan and the next buyer comes in and pays half but then they will default until the restaurant is sold for about 10% of the original costs to build.”
The FTC said that it will be reopening the comment period for the Request for Information and will be taking comments and complaints from franchise stakeholders until Oct. 10.
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