Federal Officials Take Action to Protect Franchisees from Illegal Fees and Franchisor Retribution

The FTC released new guidance mandating that franchisors cannot collect fees that were not previously disclosed. Federal officials have heard from franchisees about increasing payment processing and technology fees as well as surprise training, marketing, and property improvement fees that weren’t clearly stated by the franchisor. The FTC called these “undisclosed junk fees,” or expenses that inflate costs and may make a difference in profitability and loss.

Another move includes a policy statement emphasizing the illegality of contractual language that prevents franchisees from talking to the government. The FTC stated it’s been concerned for several years about current and former operators being reluctant to file reports or speak with officials about their experiences with certain franchisees. The Commission has heard franchisees fear retribution for speaking out, even when doing so anonymously.

Additionally, the FTC released a “Franchise Issue Spotlight” that provides an in-depth analysis of concerns surrounding the franchise business model and focuses on issues raised in academic literature, responses to a Request for Information issued by the FTC in March 2023, and ongoing efforts.

Keith Miller, principal at Franchisee Advocacy Consulting, described the measures as a “monumental step toward better franchising practices.” He noted that even though franchising is a favorable business model with many reputable brands, there has been a lack of oversight that has allowed some to exploit it. Miller also stated that franchisors imposing undisclosed fees in the FDD undermine the document’s purpose. The unexpected costs hurt franchisee margins, particularly during inflationary periods. Although they appear small, Miller said these fees can amount to millions and hurt operators and customers.

Federal Trade Commission cracks down on ‘deceptive and unfair’ franchising practices

Subway and Dickey’s Barbecue Pit were both named in documents listing complaints about deceptive franchising practices, including hidden fees

The Federal Trade Commission has responded to an uptick in complaints from business franchisees over “unfair and deceptive practices by franchisors,” including hidden franchise fees and contract provisions, by cracking down on these illegal practices. 

The FTC released a policy statement on July 12 reminding franchisors that non-disparagement contract clauses that prohibit franchisees from speaking with government officials are illegal. Even though these contract clauses are illegal, the FTC research concludes that many franchisees are “reluctant to file reports” or even speak with the Commission anonymously for fear of retaliation by their franchisors.

“Dickey’s Barbecue business model involves selling stores at substantially more than quoted with Dickeys getting a big portion of the cut,” one anonymous complaint said. “Dickey’s will tell franchisees the costs will be $400k and it will cost sometimes double that, but you don’t know until you are already heavily invested. Then the owner will default on their Small Business Administration loan and the next buyer comes in and pays half but then they will default until the restaurant is sold for about 10% of the original costs to build.”

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