Is it a new day for enforcement of the FTC Franchise Rule by the Federal Trade Commission? There have been some recent activities that may indicate that they plan to become more aggressive about enforcement against franchisors for violations of the FTC Franchise Rule.
In October 2021, the FTC issued a warning letter to a very large number of franchisors and sellers of business opportunity. Some recipients of the letter were understandably concerned despite the fact that the letter stated that receiving the letter did not mean that the FTC was singling out the recipient or indicating that the recipient had done anything wrong. However, the letter included a warning in bold print that the company was being put on notice that unfair or deceptive practices in violation of the FTC rule would subject the company to civil penalties of $43,782 per violation.
Recently, a new complaint portal for franchisees was created by the FTC on its website. With a few clicks on the FTC home page, a franchisee can get to a button specifically called FRANCHISE through which a franchisee can provide up to 3,500 characters to lodge a formal complaint with the FTC.
Finally, on February 8, 2022, the FTC announced that the Department of Justice filed suit, on behalf of the FTC, against the franchisor of a fast-food chain Burgerim, accusing the franchisor and its owner of enticing more than 1,500 consumers to purchase franchises using false promises while withholding information required by the Franchise Rule. The complaint alleges that franchisor made false promises about refunds and failed to make legally required disclosures to the prospective franchisee as required by the FTC’s Franchise Rule. “Burgerim promised consumers, including veterans, the American dream, only to leave them in a nightmare of debt and deceit,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “For other franchisees facing predatory practices, we are making it easier for them to tell us about what happened. Visit ReportFraud.FTC.gov and file a report to help us root out deception and other illegal conduct in the franchise industry.”
It remains to be seen if this means we are going to see a continuing pattern of greater enforcement of the FTC Franchise Rule. As we have always advised our franchisor clients, even during times when FTC enforcement has been rare, the best protection against any claim of violations of the FTC Franchise Rule is to work with franchise counsel to prepare Franchise Disclosure Documents in full compliance with the franchise rule and to conduct all franchise sales activities in compliance with the Rule.