Holding franchisors accountable for illegal practices

Holding franchisors accountable for illegal practices

lfair

August 3, 2022 | 10:05AM

Holding franchisors accountable for illegal practices



By

Samuel Levine, Director, FTC Bureau of Consumer Protection






We often talk about homes, cars, and education as the largest purchases people will ever make. But for many consumers, the cost of buying a franchise is the financial commitment of a lifetime. Some prospective franchisees may be sophisticated entrepreneurs. But many others are hard-working people who sink their life savings – or take on substantial debt – to buy a franchise. The FTC’s Franchise Rule requires franchisors to make key disclosures upfront before people make a major investment. What’s more, the FTC Act prohibits material misrepresentations about any business opportunity, including franchises. But what happens if franchisors don’t honor the requirements of the Rule or mislead franchisees with deceptive claims? Consumers may have avenues of recourse they hadn’t considered.

C ertainly there have been franchise success stories, but there also are examples of companies that have pocketed franchisees’ fees and then failed to deliver. For example, the Department of Justice has filed suit on the FTC’s behalf against fast food chain Burgerim , alleging that the defendants made millions from selling franchises while setting franchisees up to fail. The pending complaint charges that the company violated the FTC Act and the Franchise Rule by deceptively pitching the opportunity as “a business in a box,” promising franchisees help that never happened, omitting key information from the Franchise Disclosure Document, and saying things in those documents that contradicted what they told prospective franchisees .

What can franchisees do if they believe franchisors have engaged in illegal conduct? Neither the FTC Act nor the Franchise Rule creates a private right of action that allows a consumer to sue a franchisor under those laws. However, the Franchise Rule prohibits practices the FTC has determined are unfair or deceptive, and franchisees may be able to use state statutes that prohibit unfair or deceptive practices to challenge conduct that violates the Franchise Rule or truth-in-advertising standards. Of course, state law will determine whether a franchisee may bring a claim for a franchisor’s misrepresentations or omissions, but let’s be clear: There is nothing in the FTC Act or the Franchise Rule that would preclude franchisees from exercising their legal rights. Simply put, the FTC Act and the Franchise Rule impose no roadblock to consumers seeking justice under state law.

Thinking of sinking your heart, soul, and savings into a franchise? Don’t make a move without reading A Consumer’s Guide to Buying a Franchise . If you spot a questionable business practice by a franchisor, tell us about it at  ReportFraud.FTC.gov .

And franchisors, given the FTC’s commitment to protecting franchisees from illegal conduct, how do your practices measure up to the mandatory standards explained in the Franchise Rule , the Franchise Rule Compliance Guide ,  and Amended Franchise Rule FAQs ?