Franchise Attorneys Weigh In On FTC Inquiry as Wait for Action Begins | Franchise News
The Federal Trade Commission may not have taken any action in the month after a comment period on franchising closed, but there has been plenty of speculation.
On March 10, the FTC made a request for information on franchise agreements and franchisor business practices, including how franchisors exert control over franchisees and their workers. Specifically, the agency was interested in how franchisors disclose certain aspects and contractual terms of the franchise relationship.
The comment period on the matter closed June 8, with 5,291 comments submitted and 2,216 posted to the online docket for reading.
In reviewing the comments made to the FTC, attorneys Aaron-Michael Sapp and Allison Grow Ryan, who represent franchisors at Chicago-based Cheng Cohen, noted that much of the feedback was anonymous and anecdotal. In an email to Franchise Times, Sapp and Grow said that it’s important to remember the FTC has not issued a proposed rule.
“All it has done at this stage is request information,” they said. “It remains to be seen if the FTC will attempt federal regulation of the franchise relationship. And even if it does, it’s anyone’s guess how sweeping those regulations would be and what sort of exemptions might be included.”
Allison Grow Ryan, Cheng Cohen attorney
Rather than create new regulations, though, Sapp and Grow Ryan found that several commenters, including the International Franchise Association, asked the FTC to respond to the submitted comments by continuing its focus on improving the Franchise Rule. The rule covers what franchisors are required to disclose to franchisees, and the FTC has announced it’s considering changes.
“These commenters suggested that the FTC’s rule’s requirements are antiquated and do not reflect the way business information is currently conveyed,” Sapp and Grow said. “They believe the FDD could be presented in a way that would be more helpful to franchisees.”
Cheng Cohen’s attorneys also noted how some comments expressed concern about regulations on the franchise relationship that could harm model.
Cheng Cohen attorney Aaron Michael Sapp
That was the message from the International Franchise Association and CEO Matthew Haller, who cautioned against major regulatory action.
Related: Franchise Industry Weighs In on FTC’s Request for Comment
“Uniform restrictions applied across hundreds of thousands of franchised businesses, operating across over three hundred industries, would make it impossible for those businesses to compete with non-franchised businesses not stifled by such restrictions,” Haller said in a statement. “We urge the commission to focus its efforts in improving the Franchise Rule to provide prospective franchisees a better opportunity to conduct due diligence.”
Haller also said the IFA is troubled that the focus of the request will yield “incomplete and anecdotal accounts of franchise relationships rather than a holistic picture of franchising as it exists across the nearly 800,000 franchised businesses operating today.”
Not all are convinced the FTC will use the comments to take action, though. Robert Zarco, an attorney at Zarco Einhorn Salkowski with 36 years of experience in franchisee representation, is doubtful rule-making will happen anytime soon.
attorney Robert Zarco of Zarco Einhorn Salkowski
“There’s not going to be any rule or law that is changed as a result of this,” Zarco said. “That takes a long time to do, and I don’t think it will be done before the end of this presidential term.”
The request does allow the FTC to review several concerns from franchisees, such as unexpected fees.
“A big concern is a franchisor imposing a substantial number of new initiatives and requirements that are costing the franchisees more money that was being disclosed in the FDD,” Zarco said. “These initiatives and fees that are being imposed are typically at such levels that they are commercially unreasonable. Meaning a franchisee isn’t going to be able to obtain a reasonable return on investment from that financial contribution.”
Mark Dady, an attorney at Dady & Gardner who represents franchisees, though, feels the commission will take some kind of action with the comments.
“Since 2019 they’ve been asking for public comment and haven’t done anything with that yet,” Dady said. “Then you have the non-compete question they’ve been looking at. So, what I suspect is they’re using the RFI and the comments to either create a new rule, amend one of the existing rules, or use the information to clarify existing things, maybe some existing practices that are unfair trade practices.”
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Mark Dady, a franchise industry attorney at Dady & Gardner
Regardless of what action may be taken by the commission, Dady said he was pleased with the request, as it allows franchisees to provide input on several subjects.
“I was happy to see that they were asking about things my clients and I care about,” Dady said. “I represent a lot of associations, for example, and I was happy to see a question regarding how franchisors handle franchisees being part of associations.
“I expect the FTC will look at the public comments filed and consider more disclosure requirements or additional things found to be unfair and/or deceptive,” Dady continued. “I think it will be interesting to see what they do. I don’t think the model is in need of a wholesale rewrite, but I do think there’s room for improvement.”
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