NCASEF Petitions the FTC to Investigate Franchising and Protect Franchisees

Franchisees in the 7-Eleven system have known for a long time that franchisors don’t always act in their operators’ best interest. That was clear in the recent National Coalition survey, which showed a tremendous lack of trust between franchisees and franchisor. Now, this organization, with the support of other franchisee groups, has petitioned the U.S. Federal Trade Commission (FTC) to investigate 7-Eleven and other top chains in the industry.

This petition, which we prepared with the help of with Keith Miller of Franchisee Advocacy Consulting, has been endorsed by 10 other independent franchise associations. It asks the FTC to compel 9 major franchise chains to respond to a staggering 115 requests for information in 14 categories, including supply chain, advertising funds and financial performance representations.

We are pleased to say the petition has received the attention of members of the political, trade and local news media, including the Dallas Morning News, Yahoo! Finance, Convenience Store News and The Hill.

It is our hope our petition will prompt the FTC to extend federal regulation of franchising beyond the presale financial disclosures companies are already required to make. “This petition provides the opportunity for the FTC to take a proactive role in assessing the franchise industry,” said Miller, a Subway franchisee who was also part of the team that lobbied for fair franchising legislation in California in 2016. “We are requesting the FTC look broadly at the imbalance of power in our industry today.”

We are not alone in asking the FTC to step up. In April, Nevada Sen. Catherine Cortez Masto released a comprehensive report on franchising, which highlighted problematic areas in the industry and asked for increased Federal Trade Commission oversight. In June, Illinois Rep. Jan Schakowsky sent a letter to the Government Accountability Office (GAO) requesting a study of inadequacies in the current FTC’s Franchise Rule.

Thomas Ayres, a senior attorney with NCASEF law firm Witmer Karp Warner & Ryan, who co-wrote the FTC petition, said, “Franchisors often engage in predatory behavior after franchisees sign their contracts, but the FTC rarely investigates post-sale activities when franchisees are more vulnerable and captive to their franchisors.” 

It is encouraging that the FTC recently launched antitrust investigations of the technology and pharmaceutical sectors. In addition, former FTC Commissioner Rohit Chopra, who was recently sworn in as director of the U.S. Consumer Financial Protection Bureau, has been outspoken about the need to “stop unfair, deceptive and discriminatory practices that target franchisees and their employees.” He made the point as a keynote speaker at this year’s National Coalition convention and previously on CNBC, saying, “We ultimately want to make sure there is a fair playing field for both the franchisor and the franchisee.”

The lack of fairness in franchising was also highlighted in a 2019 report by the Australia Parliamentary Joint Committee on Corporations and Financial Services, which detailed bad behavior by several franchisors—7-Eleven among them.

“An important takeaway from the Australian report is that presale disclosure is an insufficient regulatory response to power imbalances, because it does not curb opportunistic and exploitative practices by some franchisors,” said Eric H. Karp, partner of Witmer Karp Warner & Ryan and former chair of the American Bar Association Forum on Franchising.

Vimal Patel, a franchise owner of Q Hotels in Louisiana, who has filed suit against hotel franchisor IHG, expressed his support for the NCASEF/Franchisee Advocacy Consulting petition. “It’s time the FTC used its authority to look at the fairness and transparency in the franchise industry.”

Attorney Ayres said current business conditions, which have been made worse by the global pandemic, further highlight the need for closer examination of franchising. “The additional strains the pandemic has put on franchisees across all industries has brought into sharper focus the need for further investigation and action.”

The petition recommends the FTC send requests for information to these franchise systems:

  • 7-Eleven
  • Subway
  • The UPS Store
  • IHG Hotels and Resorts
  • Choice Hotels
  • Experimax/Experimac
  • Supercuts
  • Massage Envy
  • Dickey’s Barbecue Pit

A copy of the Petition is available here.