Citing evidence of a dramatic power imbalance between the nation’s top franchisors and their franchisees, the Service Employees International Union petitioned the Federal Trade Commission on May 18 to launch an investigation into the franchise sector and issue recommendations for curbing ”abusive and predatory” practices by franchisors.
The request for investigation marshals evidence from an extensive review of franchise agreements and disclosure documents for 14 of the country’s largest franchise systems. The review found that franchise agreements are consistently one-sided, often allowing franchisors to terminate franchisees for minor violations of thousands of pages of ever-changing rules and to refuse to renew franchise agreements for any reason or no reason at all.
The 32-page petition also contends that franchisors often provide inadequate information on the main issue of concern to potential franchisees: the financial performance of franchised units. This makes it all but impossible for many potential franchisees to make an informed decision on whether to invest.
The petition calls on the FTC to use its investigative authority to compel top franchise companies to turn over information about their franchising practices. In addition to unfair terminations and nonrenewals and poor financial disclosure, the petition asks the FTC to investigate franchisors’ unreasonable capital expenditure demands; retaliation against operators who join franchisee associations; and arbitrary denial of franchisees’ requests to sell or transfer their business.
Franchise operators from major chains including McDonald’s and 7-Eleven voiced their support for a federal investigation during a May 18 media call, describing experiences in the franchise sector that underscore the urgent need for balance and fairness in the industry.
José Quijano, a former Vice President at McDonald’s Corp. and current McDonald’s franchisee from Puerto Rico, spoke about McDonald’s franchisees on the island collectively losing control of their businesses overnight in 2007. That was when McDonald’s unilaterally installed the South American investment firm Arcos Dorados as the region’s new franchisor and empowered it to make its own rules in place of McDonald’s while also allowing Arcos to add new stores in the market that actively compete with local franchisees.
Jas Dhillon, a 7-Eleven franchisee from Los Angeles, echoed concerns about franchisors’ unchecked power. “The franchise sector bills itself as a path to the American Dream, but the truth is that franchisors like 7-Eleven and others have made this business into a trap,” said Dhillon. “Franchisors hold all the power, and so they can churn through one operator to the next, leaving us with nothing while their profits continue to soar.”
Kathryn-Slater Carter, a former McDonald’s operator from California, described losing her business last year after she spoke out about the need to reform the franchise industry.
“Just like that, McDonald’s took away a business that my husband and I had spent our lives building together,” said Slater-Carter. “We had nowhere to turn – we were voiceless. Companies like McDonald’s have left franchisees no choice but to stand together and demand change, and that’s why I am supporting the call for an FTC investigation. The industry needs reform now.”
“The substantial evidence of pervasive franchisor abuses presented in the petition demonstrates an urgent need to reform the growing franchise sector—for the benefit of workers and franchisees alike,” said Scott Courtney, assistant to the president of SEIU. “An FTC investigation could help curb harmful and predatory franchisor practices, giving franchisees space to create good jobs and grow the economy.”