A warning to franchisors? FTC Reporting Tool Adds Franchise-Specific Complaint Section – Corporate/Commercial Law



United States: A warning to franchisors? FTC Reporting Tool Adds Franchise-Specific Complaint Section

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Franchisors beware: The Federal Trade Commission makes it very easy for franchisees to file fraud complaints against you. By publicizing its fraud reporting tool – aptly named ReportFraud.FTC.gov – the FTC has fired another warning shot that it is stepping up its enforcement efforts against you.

The new weapon in the FTC’s arsenal is aimed specifically at the franchise industry. The FTC did this by adding a new bulleted option in its reporting form that says “deductible”. Consumers follow a series of prompts to provide details about the franchisor and what they claim the franchisor did wrong, including some suggestions such as “unfair or unreasonable contract terms” or “misleading statements during the process of sale”. The FTC told the Franchise Times that this new reporting option is a “big deal” because it will go directly “to the franchise team, and not get lost in the fraud pile.”

This franchise-specific website complaint form follows FTC letters served as subpoenas to franchisors advising them of what the FTC considers unfair and deceptive business practices under threat of $43,792 penalties per violation.

If those two actions aren’t enough to make you nervous, the FTC’s announcement that it was adding a franchise-specific question to its complaint form was part of a press release last week titled “FTC Sues Burger Franchise Company That Targets Veterans and Others With False Promises and Misleading Documents.” The US Department of Justice had just sued the fast-food chain Burgerim and its owner on behalf of the FTC for allegedly selling franchises to more than 1,500 consumers for franchise fees of $50,000 to $70,000, then failing to return the money when franchisees could not open restaurants, despite promising to do so. The lawsuit claims the franchisor made false promises and withheld material information that should have been in its franchise disclosure document.

Announcing the lawsuit, the FTC said it made it easier for other franchisees to file complaints “to help us eliminate deception and other illegal behavior in the franchise industry.” The press release is available at https://www.ftc.gov/news-events/press-releases/2022/02/ftc-sues-burger-franchise-company-targets-veterans-others-false.

We advise you not to panic, as cases like Burgerim are the exception and an example of alleged large-scale fraud within the franchise system. But it certainly bears repeating during what appears to be a growing focus on franchisors that you must ensure that you comply with all applicable state and federal laws and the FTC Franchise Rule, including Section 19 regarding statements of financial performance. This may not prevent franchisees from filing complaints with the FTC, but you will at least have a solid basis for your defense if the FTC or its law enforcement partners come calling.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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