The FTC Is Taking Aim At 'Unfair And Deceptive Practices By Franchisors'

Franchising has long been a bridge for aspiring entrepreneurs to open restaurants and food-related businesses. Many franchisees expand to multiple locations involving building leases, employee hiring, marketing, franchise fees, and ongoing royalty payments. Though franchisee-franchisor relations are subject to oversight by the Federal Trade Commission (FTC), recent actions by the government agency highlight concerns within the overall industry, including food franchises.

A news release from the FTC on July 12 states ongoing issues with "unfair and deceptive practices by franchisors" and reveals new guidelines and policies addressing issues such as "undisclosed junk fees." Those fees are reportedly widespread, covering creeping costs for things like required marketing and services, technology that franchisees may have been forced to accept, payment processing, property upgrades, and more. The new commission policies also clamp down on contract clauses that thwart participation in FTC investigations and reporting, sometimes referred to as "gag clauses." In addition to broader restrictions, it is now specifically illegal for franchise contracts to include language that prevents franchisees from reporting potential legal violations.

Food franchises are by no means the only businesses affected by these changes, but they comprise a considerable slice of the U.S. franchise industry, as much as 30%, per Franchise Direct. They're also responsible for an estimated 60% of direct franchise employment. This may explain specific language in an FTC document that highlights food or food-related franchises such as Subway, Dickey's Barbecue Pit, and Edible Arrangements.

The FTC produced an Issue Spotlight document that includes a list of the top 12 franchisee concerns expressed to the agency. At least three food businesses noted the lack of transparency in marketing funds. The report singled out an anonymous remark by an assumed Subway franchisee who stated, "I would like Subway Franchisor looked into. They do not have transparency with what they do with the advertising fees." According to the FTC, the pooled marketing approach is not universally embraced, with franchisees citing concerns over high advertising fees, some of which go to a "brand fund" rather than targeting local customers.

In addition to marketing fund transparency, issues frequently raised by Dickey's Barbecue Pit franchisees include things such as fees and royalties, franchise disclosure documents, and franchisor misrepresentations. Dickey's franchisees also, along with Edible Arrangements, weighed in on franchise supply restrictions and vendor kickbacks. In particular, many who express frustration in this area point to forced buying from approved suppliers, which routinely charge higher fees than those available in the open market.

In a post-pandemic landscape, which has included restaurant evictions and bankruptcy filings by even the most seasoned franchisees, the new increased FTC protections are likely welcomed by many food franchise businesses. That's especially true for smaller franchisees who potentially benefit less from things like brand fund marketing, which can give uneven advantage to large nationwide franchise operators.