The Federal Trade Commission (“FTC”) has taken a renewed interest in the Franchise Rule and the relationships between franchisors and franchisees. In March 2023, the FTC requested comments from franchisors and franchisees. On July 12, 2024, the FTC took three distinct actions to showcase some of what it learned from those comments and its current priorities. These actions also perhaps signal where it will focus its rulemaking efforts in the future.
- New FTC Policy Regarding Contract Provisions that Limit Franchisee Communications with Government Agencies
The FTC announced a new policy regarding contract provisions that the FTC asserts can be used to prevent franchisees from reporting illegal activity by franchisors to government agencies. Submitted comments from franchisees sparked concerns that some franchisors are chilling communications between franchisees and government agencies through contract terms or other tactics. In response, the FTC issued a policy that declares (a) confidentiality clauses, (b) goodwill clauses (provisions that prohibit franchisees from taking actions that damage the franchisor’s goodwill), (c) non-disparagement clauses (provisions that prohibit franchisees from making negative statements about the franchisor) are void and unenforceable to the extent they impair or prohibit free communication about potential law violations with an administrative agency.
Franchisors may or may not have these kinds of clauses in their franchise agreements, termination agreements, transfer agreements, and settlement agreements. Even if these clauses are in those agreements, franchisors may not have intended to chill reporting. Franchisors may want to consider adding language in new agreements that clarifies that the provisions do not prevent the franchisees from communicating in government investigations. However, this should be done cautiously and carefully. There may be situations where confidentiality is the essence of the agreement – such as in a settlement agreement. Franchisors should discuss this new FTC policy with their attorneys before making any changes to these clauses in their agreements.
- New FTC Staff Guidance on Undisclosed Fees in Franchising
The FTC issued a staff opinion, which is not a binding interpretation of law, that declares it is unlawful for franchisors to impose fees on franchisees if those fees were not disclosed in the Franchise Disclosure Document. The staff guidance is aligned with the comments and actions of state franchise regulators, especially in California and Washington.
Imposing new fees on franchisees without a clear provision in the franchise agreement has always been a questionable practice. However, one motivation for doing so that is in our view understandable is to adapt the system of operations to keep up with market trends and opportunities. These may emerge sooner than the end of a 5-to-10-year franchise term, whereupon the franchisor can add a new fee in the renewal franchise agreement to address the development. For example, new technologies have been introduced rapidly. Implementing a Technology Fee that was not in the franchise agreement may be tempting to justify if its use is to support technologies that improve the franchisee and customer experience.
Nonetheless, even if the franchisor can demonstrate the benefit of a new fee that was not previously disclosed in the FDD, the FTC guidance suggests it cannot be done. Franchisors still have options to avoid situations that hurt the brand, the franchisee, and the franchisor. First, some fee provisions can be drafted to increase the fee upon inflation or introduction of new goods and services. Second, if your brand does not yet have a Technology Fee, strongly consider adding in the franchise agreement the right to add one in the future (perhaps subject to a maximum amount). Third, consider a shorter term of the agreement to allow you to make updates quicker. Fourth, invest in strong franchisee relationships. When there is not an agreement provision allowing for a fee that may legitimately be needed in the system, having the trust of your franchisees allows you to ask them to voluntarily pay it if you can demonstrate the value it will be to their business.
- New Franchise Guidance Website
The FTC released a new website titled “Franchise Guidance,” which can be found here: https://www.ftc.gov/news-events/features/franchise-guidance. The website represents a focus on educating prospective franchisees and seeking input from current franchisees. Its content includes the policy statement and staff guidance mentioned above. There is also a new spotlight page citing the most common issues reported to the FTC in its March 2023 requests for information. (Note that these 12 key issues are likely the ones that will continue to be the focus of the FTC’s future rulemaking).
Some of the older materials available on the website are a blog series explaining Franchise Fundamentals and a Consumer’s Guide to Buying a Franchise. Each of these materials focuses on the risks associated with franchising – both those inherent in the model and those stemming from irresponsible or fraudulent businesses.
We will likely see this website develop into a hub of pro-franchisee content and the place where new FTC guidance and policies are announced. Franchisors should be aware of the issues the FTC is highlighting so they can be prepared to address questions from prospective franchisees about the risks and benefits of franchising.
Manning Fulton attorneys are ready to help you navigate this new guidance as you address franchisee relationships and disclosure obligations.
