FTC Petition Receives National News Coverage

On May 18 the Service Employees International Union petitioned the Federal Trade Commission to investigate the franchise industry. The request for investigation offers an extensive review of franchise agreements and franchise disclosure documents for 14 of the country’s largest franchise systems. The review finds a profound power imbalance in the industry, documenting how franchise agreements often allow franchisors to terminate franchisees for minor violations, and how franchisors often provide inadequate financial information to prospective franchisees. The filing elicited a flurry of news coverage, some of which is detailed below.

Politico (behind paywall):

The petition cited studies, surveys and articles accusing major franchisors of misrepresenting financial performance prospects to potential franchisees. The document asserted that franchisors retaliate unfairly against franchisees who join associations to lobby for fairer terms — some contracts ban participation in such associations outright — and often terminate franchise contracts on slender pretexts after franchisees have made an enormous cash investment.

Although the franchisor-franchisee relationship is regulated almost entirely at the state level, the FTC’s Franchise Rule and Business Opportunity Rule police the transparency of agreements between franchisors and franchisees. The petition asserts that “franchisees often enter into the relationship on the basis of inadequate or misleading financial performance information.”

Bloomberg noted some of the specifics of the FTC petition, which extensively documents the imbalance of power in franchising:

 The petition focuses on two main points: Franchisors aren’t required to share much financial information with prospective franchisees, and once a franchisee buys into a system, she has little power in her relationship with the corporate franchise system. The SEIU’s research into 14 major franchise chains, including Burger King, Great Clips, and Dunkin’ Donuts, found that each franchisor reserved the right to terminate a store owner’s franchise license for any violation of the system’s operating manual. All 14 chains also reserved the right to change the operating manual unilaterally.

The International Business Times:

… the union has drawn attention to what it portrays as the plight of franchisees. Last month, the SEIU released a poll highlighting the frustrations of franchise operators, and it has backed legislation in California that would rein in the ability of franchisers to terminate contracts with franchisees. In a Monday press call, Scott Courtney, assistant to the president of the SEIU, said the union’s goal of boosting wages in fast food is not possible “without reforming” the franchise model as a whole.

The Hill:

… Franchised businesses employ an estimated 9.1 million people and have consistently added jobs faster than non-franchised businesses in recent years, according to the petition. But unlike traditional small businesses, the SEIU said there’s an imbalance of contractual power in the franchise business model that favors the corporate leadership and places individual operators in financially uncertain situations.

… The SEIU alleges in its petition that franchisors are retaliating against franchisee owners who criticize corporate business practices, unfairly terminating and refusing to renew franchise contracts, interfering when franchisees try to transfer or sell their stores and forcing franchisees to make unreasonably costly capital upgrades.

And as Reuters pointed out, the press announcement, which featured a current and former McDonald’s franchisee, follows already building discontent from McDonald’s franchisees:

… A small but influential survey published in April suggested that relations between McDonald’s U.S. franchisees and the fast-food giant had hit a new low.

Franchisees complained in the anonymous poll that requirements for renovations and other upgrades, such as McDonald’s new “Create Your Taste” custom burger program, burden them with substantial debt.

Keep coming back to We Are Main Street as the FTC considers the petition and the potential action it will take.