Lawyers push FTC to investigate franchises

Franchisee advocates are pushing FTC to investigate the business model./Photo: Shutterstock

Arguing that franchisees are often forced into “shocking one-sided franchise deals,” a trio of franchisee advocates have formally called on the United States Federal Trade Commission to investigate franchising.

The official request comes from metro operator and franchisee advocate Keith Miller and the National Coalition of Associates of 7-Eleven Franchisees, a group of convenience store chain operators. The investigation would focus on nine leading franchises, including the Subway sub-chain, Dickey’s quick barbecue concept as well as 7-Eleven.

“Franchisees invest a substantial amount of their own money, take out loans … and take on long-term obligations for franchise businesses to support themselves and their families,” the petition says. “But for far too many franchisees, the promise of entrepreneurial success gives way to shocking one-sided franchise deals and one-sided decision-making by franchisors, building on a relationship that is more like an investment in a company. employment relationship than an arm’s length business partnership. ”

The request, which was officially filed this week, comes as the FTC itself has signaled that it plans to take a closer look at franchise agreements.

In a memo to staff last week, FTC President Lina Khan said one of the agency’s policy priorities would focus on ‘take it or leave it’ contracts that impose various unfair practices or misleading. Among the provisions mentioned are non-competition clauses, restitution restrictions and exclusion clauses in contracts.

In particular, repair restrictions have come under more scrutiny lately amid controversy over McDonald’s ice cream machines, which often don’t work and operators have to go through the manufacturer for repairs.

“We have seen how abuse of market power and consumer protection concerns can emerge when unilateral contractual arrangements are imposed by dominant firms,” Khan wrote. “Consumers, workers, franchisees and other market participants are at a significant disadvantage when they are unable to freely negotiate terms and conditions. “

Khan’s comments and the request for investigation add to a growing push for more franchise regulation, following a number of controversies that highlight what many say is a one-sided relationship that often puts franchisees at a disadvantage.

This includes the controversies in the eight franchises that Miller and the 7-Eleven Coalition want the FTC to investigate.

Subway is the largest US franchise by number of units and the largest restaurant chain by equal measure, but its franchisees have closed more than 5,000 establishments since 2016. Its development officers, who were historically responsible for selling the franchises and royalty sharing, have come under scrutiny for their sales tactics over the years and more recently for terminating some franchisees and taking over their restaurants.

The company itself has also been criticized more recently by franchisees for a new franchise agreement. This agreement, which operators must sign if they wish to continue operating after the expiration of their old agreements, requires them to pay a higher royalty rate of 10%. They also have the choice to stay at 8% as part of a deal that presents what operators see as more onerous and costly requirements.

In a statement, Subway said it was focusing on operator profits. “Franchise profitability is a top priority and central to our business model,” the company said. “We work hand in hand with our dedicated network of franchisees to provide them with the tools and support they need to grow their business and ensure long-term success. “

Dickey’s Barbecue Pit, meanwhile, has terminated a number of its franchisees while others have closed following its own rapid expansion in previous years. Operators complained about the channel’s use of its advertising funds, among other things.

At 7-Eleven, one of the world’s two largest franchises, operators recently complained about the company’s demands that operators remain open 24 hours a day, even though many franchisees cannot find ready workers. to occupy the stores during the night.

The convenience store chain has a long history of controversy with its franchisees on a range of issues, including some of its franchise terms and the price of gasoline.

The investigation request also concerns five other companies, including hotel chains IHG Hotels and Resorts and Choice Hotels, as well as The UPS Store, computer repair chain Experimax, Supercuts and Massage Envy.

“Franchise agreements reflect a profound imbalance of contractual, economic and market power in favor of the franchisor and do not take due account of the legitimate business interests of the franchisee,” the petition states.

Representatives for 7-Eleven and Dickey’s did not respond to requests for comment.

The inquiry request asks the FTC to demand 115 pieces of information or documents from different franchisors on a range of issues, including ownership, operating rules, gas sales, supply chain relationships, company and franchisee financial data and cost metrics. .

This is not the FTC’s first request to investigate franchising. The group has sent out several letters over the past three years and the Service Employees International Union made a similar request for a franchise investigation in 2015.

The FTC regulates franchises, requiring them to compile a massive prospectus for potential buyers, known as the Franchise Information Document. But it almost never investigates or punishes violations of these regulations, leaving it to a combination of civil lawsuits and a patchwork of state regulations.

But this year’s FTC is expected to take a closer look at franchise regulation under the Biden administration, and pressure has been on the agency to step up its enforcement of franchise agreements.

U.S. Senator Catherine Cortez-Masto, a Democrat from Nevada, called for more oversight of franchises this summer after she released a report detailing potentially illegal practices among these companies.

Khan’s comments certainly seem to suggest that the agency is receptive to the idea. “Consumers, workers, franchisees and other market participants are at a significant disadvantage when they are unable to freely negotiate terms and conditions,” Khan wrote.

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