FTC Seeks Public Comment on Franchisors Exerting Control Over Franchisees and Workers

The Federal Trade Commission requests comment on franchise agreements and franchisor business practices, including how franchisors may exert control over franchisees and their workers.

In a franchise relationship, franchisees typically pay a fee in exchange for a business format or system developed by a franchisor, the right to use the franchisor’s trademark for a specific number of years, and assistance. Owning a franchise, however, comes with defined costs, franchisor controls, and contract terms.

The FTC would like to know more about how franchisors may exert control over franchisees and their workers. Specifically, the FTC is interested in how franchisors disclose certain aspects and contractual terms of the franchise relationship, as well as the scope, application, and effect of those aspects and contractual terms. 

“Amidst growing concern around unfair and deceptive practices in the franchise industry, the FTC hopes to hear from a broad range of stakeholders about how the franchise relationship is working, and how it is not,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “This cross-agency effort will inform our policy and enforcement efforts as we work to ensure a fair marketplace for franchisees.”  

“It’s clear that, at least in some instances, the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized,” said Elizabeth Wilkins, Director of the FTC’s Office of Policy Planning. “This RFI will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.”

As part of the Request for Information, the FTC is asking franchisors, franchisees, current and past employees of franchisors and franchisees, government entities, economists, attorneys, academics, consumers, and other interested parties to weigh in on a wide array of issues that affect franchisees and their workers, such as:

• franchisees’ ability to negotiate the terms of franchise agreements before signing, and the ability of franchisors to unilaterally make changes to the franchise system after franchisees join;
• franchisors’ enforcement of non-disparagement, goodwill or similar clauses;
• the prevalence and justification for certain contract terms in franchise agreements;
• franchisors’ control over the wages and working conditions in franchised entities, other than through the terms of franchise agreements;
• payments or other consideration franchisors receive from third parties (e.g., suppliers, vendors) related to franchisees’ purchases of goods or services from those third parties;
• indirect effects on franchisee labor costs related to franchisor business practices; and
• the pervasiveness and rationale for franchisors marketing their franchises using languages other than English.

The public will have 60 days to submit comments at Regulations.gov. Once submitted, comments will be posted to Regulations.gov.

Apart from this Request for Information, the FTC is seeking public comment on a proposed rule to ban noncompete clauses for workers in some situations. As part of that proposed rulemaking, the FTC is interested in public comments on the question of whether that proposed rule should also apply to noncompete clauses between franchisors and franchisees. Comments related to the use of noncompete restrictions in franchise agreements should be submitted as part of the noncompete rulemaking through April 19, 2023. This Request for Information is separate from the noncompete rulemaking proceeding. Similarly, this Request for Information is separate from the Franchise Rule regulatory review. Any comments submitted in response to this Request for Information will not automatically become part of either the noncompete rulemaking proceeding or the Franchise Rule regulatory review record. 

The lead staff attorneys on this matter are Christine M. Todaro and Josh Doan from the FTC’s Bureau of Consumer Protection and Alex Petros from the FTC’s Office of Policy Planning.