On March 10, the Federal Trade Commission (the “FTC”) issued a Request for Information (“RFI”) to learn more about “the means by which franchisors exert control over franchisees and their workers.” The RFI focuses on two aspects of the franchisor-franchisee relationship: the means by which the franchisors disclose restrictions and requirements on their franchisees (e.g., in franchise agreements, manuals); and the scope and effects of the requirements and restrictions themselves. Specific questions cover six broad categories: bargaining power between franchisors and franchisees; provisions of franchise agreements that may be detrimental to franchisees; franchisor business practices regarding organizing activity, wages, and working conditions; payments to franchisors from third parties for franchisee purchases; indirect effects of franchisee labor costs; and the effect of language barriers on the effectiveness of disclosures and other communications.
The RFI marks the third effort by the FTC to examine any inequities in franchisor business practices or the agreements themselves. In 2019 the FTC launched a regulatory review of the Franchise Rule, which governs the disclosures that franchisors must make to prospective franchisees before the franchise purchase occurs. The review is still underway. And on January 5, 2023, the FTC proposed a rule that would ban nearly all employment noncompetition agreements and would require the rescission of existing noncompetes. We have discussed the FTC’s proposal in two prior alerts and in a Vedder OnDemand webinar. Although the proposed rule would not ban restrictions imposed by franchisors on franchisees, Chair Lina Khan requested comments specifically on whether to address franchises in the rule, stating that “in some cases [franchise agreements] may raise concerns that are analogous to those raised by noncompetes between employers and workers.”
With its RFI, the FTC has begun to move its simmering uneasiness with franchisor-franchisee relations away from the back burner. Whether this will become a priority for the agency may depend on the nature of the comments and information received, but not necessarily. This FTC has not hesitated to move very quickly to address what individual Commissioners believe to be unfair competitive practices, as demonstrated by its issuance of proposed rules banning noncompetes even in the absence of much prior experience with or public comment about them at the FTC. Franchisors and franchisees alike may wish to review their agreements—particularly their restrictions on competition and means of allocating revenue between the parties—in order to comment meaningfully on any forthcoming FTC proposed rules, and to plan for alternative means of reaching their business goals.