Franchisees demanding FTC investigation

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Franchisees are urging the FTC to investigate abuses in the franchising industry through an online petition launched by WeAreMainSt.

The problems franchisees face are national: Rising demands for expensive investments; unfair terminations; blocked sales. An investigation by the FTC, which oversees franchising, will show the need for a national solution.

The online campaign supports the request for investigation that SEIU filed with the FTC in May.

“The Franchise system desperately needs reform,” said Kathryn Slater-Carter, a former McDonald’s franchise owner from California’s Bay Area. “The Federal Trade Commission needs to investigate on behalf of the small-business owners whose investments of sweat and savings make franchising work.”

Franchisees can sign the petition here.

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Ruling reveals details of 7-Eleven’s alleged ‘churning’ of franchisees

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A federal judge’s ruling in franchisee litigation provides details on 7-Eleven’s “Operation Philadelphia,” a scheme whose existence the company initially denied and which franchisees say involved targeting for termination outspoken franchisees, South Asian franchisees and those with profitable stores.

Magistrate Judge Joel Schneider noted that witnesses who provided details of 7-Eleven’s alleged “churning” scheme “were privy to 7-Eleven’s internal workings while employed at 7-Eleven.” Schneider’s ruling included the following points:

  • Former 7-Eleven officials provided evidence about “Operation Philadelphia,” centered in the Philadelphia/southern New Jersey area and also known as “Operation Take Back,” and “Project P.” The judge cited former Senior Field Consultant and Market Manager Ian Shehaiber, who stated that the company targeted South Asian franchisees and “franchisees that were opinionated, successful and involved in franchise associations.” In addition, former Field Consultant John Spavlik also stated that 7-Eleven engaged in a practice of targeting franchisees for termination and that this practice originated in 7-Eleven headquarters.
  • 7-Eleven first denied that Operation Philadelphia existed and then admitted its existence but claimed that its purpose was to staff stores after findings of alleged franchisee fraud, rather than to use terminations to retaliate and discriminate against franchisees or to pad revenues.

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Leading franchisors can terminate franchisees at will

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Franchisors of 14 leading brands all give themselves the ability to terminate franchisees virtually at will, according to a Service Employees International Union analysis. This power comes from four provisions, common to the franchise agreements of major franchisors across several industries, from McDonald’s to Jazzercise, from 7-Eleven to Holiday Inn.

The four provisions, contained in SEIU’s recent petition urging the Federal Trade Commission to investigate the franchising industry, are:

Catchall provisions, which essentially allow franchisors to terminate franchisees for any violation of the franchise agreement. For example, Pizza Hut’s agreement states that it may, “subject to the notice and cure provisions described below, terminate this Agreement if…Franchisee breaches any term, covenant, duty or condition of this Agreement…”

Failure to follow the manual: In all 14 agreements, franchisors may terminate for deviating from any of the rules or standards contained in hundreds or even thousands of pages of operating standards, policies, procedures, and manuals. For example, Subway’s franchise agreement states, “we may, at our option and without prejudice … terminate this agreement if: … (v) you fail to comply with your duties under this Agreement or the Operations Manual” after 90 days’ written notice.

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Some franchisees face high termination risks

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A new analysis of Franchise Disclosure Document data shows that franchisees of some of the country’s biggest systems face a worrisome risk of losing their business because their franchisor terminates or refuses to renew their franchise agreement.

Earlier this year, Blue Mau Mau looked at annual franchisee termination rates in the lodging industry and called Motel 6 the “worst of the worst,” with a termination rate of 4.8 percent, and found four other systems with rates above 3 percent per year. A three in a hundred chance every year of losing your business adds up when your franchise agreement lasts for 10 years or longer.

We Are Main Street analyzed the termination rates of the 25 largest franchise systems, including hotels. The analysis also included non-renewals: While many non-renewals are the result of a franchisee’s decision, a franchisor’s refusal to renew is often another way franchisees lose their investment of money and years of effort. The analysis showed that, on average, in each year from 2006 to 2013, nearly 12 percent of the franchisees at cleaning company Coverall lost their businesses to termination or non-renewal. Three other systems have annual termination/non-renewal rates averaging 4 percent or more from 2006 to 2013: RE/MAX (the nation’s largest real estate franchisor by unit count),

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