"If It's Not Broken, Don't Fix Break It"' The FTC Targets The Franchise Business Model

• Jurisdiction: United States,Federal
• Law Firm: Foley & Lardner
• Subject Matter: Corporate/Commercial Law, Antitrust/Competition Law, Intellectual Property, Antitrust, EU Competition , Trademark, Franchising
• Author: Mr Michael Lockerby and Timothy J. Patterson
• Published date: 13 April 2023

Historically, the Federal Trade Commission (FTC) has shied away from regulating the substance of franchisor-franchisee relationships. A recent FTC press release, however, suggests this may soon change. If so, it is by no means clear that such a change would be beneficial for franchisors, franchisees, or consumers who patronize franchised businesses.

The FTC's March 10, 2023 press release seeks public comment on "franchise agreements and franchisor business practices, including how franchisors may exert control over franchisees and their workers." The relatively short time period for public comment (only 60 days) suggests that the FTC may already be contemplating significant new regulation of franchisor business practices and the terms of franchise agreements - as does some of the rhetoric of the press release. For example, the press release cites "growing concern around unfair and deceptive practices in the franchise industry." It claims that "the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized, and the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers." Finally, the press release asserts that the FTC's request for information "will begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers."

Regardless of just what changes the FTC may have in mind, franchising has certainly long been no stranger to FTC regulation. The FTC shares responsibility for civil antitrust enforcement with the U.S. Department of Justice Antitrust Division and also promotes consumer protection. Section 5 of the FTC Act empowers the FTC to regulate "unfair methods of competition" and "unfair or deceptive acts or practices." 15 U.S.C. ' 45. To the extent franchise agreements contain pricing or other provisions that are problematic under federal antitrust law, they may also constitute "unfair methods of competition" under Section 5 of the FTC Act. To the extent franchise systems engage in advertising claimed to be false or misleading, they may run afoul of FTC regulations that identify the circumstances in which advertising claims about a franchise system's own goods and services (or those of a competitor) are "unfair" or "deceptive."

Franchising itself has been specifically regulated by the FTC since 1979, when the original Franchise Rule (16 C.F.R. Part 436) took effect. It requires the disclosure of certain information in...