Antitrust Regulator Tells Chains: Back Off Your Franchisees

In the long-simmering conflict between franchisers and franchisees, the federal government has weighed in on behalf of the smaller guys.

In a business relationship that has become fundamental to American commerce, franchisers — brands like McDonald’s and Jiffy Lube — license the right to operate their concept to individual entrepreneurs, who provide start-up capital and may own one location or many.

On Friday, the Federal Trade Commission issued a policy statement and staff guidance that cautioned franchisers not to restrict their franchisees’ ability to speak to government officials or to tack on fees that weren’t disclosed in documents provided to prospective franchise buyers.

In a news release, the commission said it was acting amid “growing concern about unfair and deceptive practices by franchisers — to ensure that the franchise business model remains a ladder of opportunity to owning a business for honest small business owners.”

The agency has been scrutinizing the industry, which includes 800,000 business establishments, since issuing a request for information early last year that asked several questions about the franchisee-franchiser relationship. Around the same time, the Government Accountability Office issued a report finding that franchisees lacked control over crucial business decisions and that they often did not understand all the risks they faced before purchasing a license.

Across the more than 2,200 comments posted in response to the F.T.C. request, a central theme emerged: A majority of franchisees wanted changes to the rules that governed the industry, while a majority of franchisers did not.

In a lengthy “issue spotlight” accompanying its policy statement and guidance, the agency identified 12 top complaints from franchisees. They include dissatisfaction with unilateral changes to manuals that govern how the business must operate, noncompete clauses that prevent operators from starting new ventures, and misrepresentations in franchise sales documents about expected time requirements and investment returns.

The agency did not address all of those issues; it stopped short of trying to update the Franchise Rule, which governs what franchisers must disclose to prospective franchisees, and has been substantially unchanged since 2007. Proposing new rules at the end of a presidential term is risky, since they can be overturned if the White House changes parties.

But the agency did respond to concerns, voiced by many franchisees, that broad nondisparagement clauses could prevent them from filing complaints with regulators or taking part in government investigations. Franchisees must be free to do so without fear of retaliation, the agency said.

The F.T.C.’s two conservative members, Andrew Ferguson and Melissa Holyoak, voted against adopting that policy statement and issued separate dissents saying that the statement overstated the law and that it could burden businesses.

Also, in line with the Biden administration’s effort to curtail what it calls junk fees, the F.T.C. clarified that franchisers could not demand new payments — such as surcharges for technology or marketing — if they weren’t detailed in the documents that franchisees signed when they bought the business.

Finally, the agency reopened its request for information and noted that its review of the Franchise Rule was continuing.

John Motta, a Dunkin’ Donuts franchisee who is chairman of the Coalition of Franchisee Associations, said undisclosed fees had been one of the greatest irritants for his group’s members.

“Overall, I think the ruling will be good for franchisees,” he said. “For the franchisers that are good and transparent and work with franchisees, there should be no effect on them.”

Matthew Haller, the president and chief executive of the International Franchise Association, said the policy statement was a solution in search of a problem.

“There is no evidence that franchisers are silencing franchisees’ voices in speaking to regulators,” Mr. Haller wrote in an email. “In fact, franchisees continue to vote with their pocketbooks by adding more locations within existing brands.”

In the months leading to the F.T.C.’s announcement, the International Franchise Association released a set of principles for “responsible franchising,” recommending that franchisers adopt a clearer format for presale disclosure documents. That framework didn’t go as far as the Coalition of Franchisee Associations’ “franchisee bill of rights” did, which included items like the freedom to buy from any vendor that met the brand’s standards.

The latest announcements from the F.T.C. did not come with any new enforcement actions. In 2022, the agency brought the first case in 16 years under the Franchise Rule, accusing a burger chain of making false promises to franchise purchasers. The chain was ordered this year to pay $56 million in monetary awards and penalties.

The agency has also been keeping an eye on the mergers of large franchise brands. In March, it commended the termination of Choice Hotels’ attempt to take over Wyndham Hotels & Resorts, which franchisees had protested over concerns that a megabrand in the midscale and budget segment could decrease the bargaining power of hotel operators.