Franchise networks operate on a foundation of trust and mutual benefit, but issues can arise that challenge this relationship. To protect themselves and their brands, franchisors must be proactive in adapting to the ever-changing environment, addressing franchisee concerns and ensuring transparency and fair business practices.
Below is a list of the top 12 concerns frequently referenced by franchisees, which was published last month by the Federal Trade Commission (FTC). The list was received in response to the FTC’s 2023 Request For Information (RFI) surrounding franchise agreements and franchisor practices.
- Unilateral changes to franchise operating manuals
- Franchisor misrepresentations and deception
- Fees and royalties
Note: The FTC has recently issued new guidance stating that franchisors must disclose all fees in their Franchise Disclosure Documents (FDD). Imposing fees not listed in the FDD, including through updates to operating manuals, is considered unlawful. This is in line with the Franchise Rule and Section 5 of the FTC Act, which prohibits such undisclosed practices as unfair and deceptive. Recent opinions from Washington and California reinforce this stance, urging franchisors to review their practices to avoid legal violations. For franchisees, this means any undisclosed fee adjustments could be challenged as unfair practices.
- Franchise supply restrictions and vendor kickbacks
- Actual and feared retaliation
- Non-competes and no-poach clauses
- Franchise renewal problems
- Franchisor refusal to negotiate contract terms
- Franchise Disclosure Document issues
- Private equity takeovers
- Marketing fund transparency
- Liquidated damages clauses and early termination fees
Further, the FTC announced in July that it is reopening the comment period for this 2023 RFI related to franchise agreements and franchisor practices until October 10, 2024.
By understanding and proactively addressing top franchisee concerns, franchisors can protect their brand, foster positive relationships with franchisees, and ensure the stability and growth of their franchise network. Maintaining transparency, fairness, and open communication is key to mitigating potential issues and building a successful franchise system.
Please consult your franchisor legal counsel before making any policy and procedure changes. If you have questions on any of the topics listed above, please contact your GBQ advisor.
