Unfairness in the franchise relationship is among the key factors that lead to franchisee failures. Without the information, support and legal protections they need, franchisees can struggle to earn a reasonable profit, and they can face substantial losses when their franchises fail. A recent congressional report discusses potential solutions to the current unfairness in franchising—including what franchisors, federal regulators and state authorities can do to help protect franchisees. Here, franchise lawyer Jeffrey M. Goldstein summarizes some of the most notable recommendations from the report:
What Franchisors Can Do
After discussing various issues that present unnecessary, and often unreasonable, risks for franchisees, the report makes a simple observation: “All of the problems detailed in this report could be fixed by the franchise corporations and their trade association, the International Franchise Association (IFA).” Franchising is unfair only because franchisors choose to make it so. If franchisors developed (and adhered to) best practices for ensuring fairness in the franchise relationship, they could cure all of the issues that present unnecessary risks for franchisee failures.
What Federal Authorities Can Do
As noted in the report, there have been several attempts to legislatively address the unfairness in franchising over the past few decades. By and large, these efforts have failed, often never making it out of committee. The report concludes that “Congress should strengthen laws to improve the franchise process from inception to the end of the contract term and provide adequate funding for agencies charged with ensuring fair treatment.”
The report also recommends that the Federal Trade Commission (FTC) and Small Business Administration (SBA) do more to protect franchisees. The FTC and SBA are the two federal agencies primarily responsible for overseeing the franchise industry—although the strength of their oversight is limited. The report suggests that these agencies take several steps, including:
- Mandating affirmative financial performance representations in Item 19 of the Franchise Disclosure Document (FDD);
- Establishing licensing requirements and fiduciary responsibilities for franchise brokers, consultants and salespeople;
- Banning non-disparagement and mandatory arbitration clauses in franchise agreements;
- Banning certain disclaimers and contract provisions that allow for modification of franchisees’ obligations through updates to franchisors; Operations Manuals;
- Establishing protections for franchisees with limited English proficiency; and,
- Making FDDs publicly available through the FTC’s website.
What State Authorities Can Do
At present, only a minority of states have franchise relationship and disclosure laws. The report recommends that more states adopt similar laws in order to, “provide franchise owners with another layer of legal protection.”
When are Things Going to Change?
These are all good, and actionable, recommendations. So, when are things going to change? Unfortunately, not any time soon. Franchisors are not going to voluntarily relinquish the leverage they hold over their franchisees, and getting Congress, the FTC, the SBA or state legislatures to make major changes presents its own set of challenges. For now, franchisees need to work with what they have, and this means performing thorough due diligence, negotiating their franchise agreements, and asserting the rights they have available when their franchisors engage in unfair franchise practices.
Request a Free Consultation with Franchise Lawyer Jeffrey M. Goldstein
Jeffrey M. Goldstein is a national franchise lawyer who has been exclusively representing franchisees and dealers for more than 30 years. To request a free consultation with Mr. Goldstein, call the Goldstein Law Firm at 202-293-3947 or submit your information online today.
