FTC Requests Public Comment on Franchisor-Franchisee Relationships

What Happened: On March 10, the FTC announced that it is seeking public comment on franchise agreements and franchisor business practices, specifically as they pertain to how franchisors exert control over franchisees and their workers. The agency is seeking clarity on the unequal bargaining power it believes is inherent in franchisor contracts and that ultimately impacts franchisees, workers, and consumers.

The Full Story: The FTC is asking franchisors, franchisees, current and past employees of such businesses, government entities, economists, attorneys, academics, consumers and other interested parties to weigh in on issues that affect franchisees and their workers. The agency has highlighted its particular interest in how a franchisor may control a franchisee through operating manuals, disclosure documents or contractual terms, including: the extent to which a franchisee has the ability to negotiate contractual terms of a franchise agreement or whether such agreements are presented as a take-it-or-leave-it contract, franchisors’ abilities to make unilateral changes to operating manuals and enforcement of certain non-disparagement or goodwill clauses.

The agency is further seeking insight into provisions that restrict franchisees from hiring employees of the franchisor or other franchisees (also known as “no-poach” provisions), provisions that impose maximum or minimum prices or otherwise limit franchisee discretion to price products and services, and provisions that restrict or do not restrict the territory or sites where the franchisee may operate its business and/or a franchisor or its successors-in-interest from competing with a franchisee by one or more means within a designated area.

Finally, the agency is requesting comment on certain franchisor business practices, including the use of languages other than English to market their franchises, how franchisors control the wages, hours and working conditions in franchised entities and whether such practices—exercised through the terms of franchise agreements or by other means—affect franchisees, consumers, workers and competition.

The opportunity to submit public comment is open through May 9, 2023. 

While this request for public comment is specific to the franchisor-franchisee relationship, it underscores both the FTC’s and DOJ’s continued focus on the labor market. In November 2022, the FTC and DOJ filed an amicus brief related to no-hire and no-solicitation provisions in franchise agreements, citing the agencies’ position that no-poach provisions in contracts with independently-owned franchises can be horizontal restraints that should be subject to the strict per se treatment rather than a “rule of reason” analysis.

Relatedly, on January 5, the FTC proposed a new rule to ban noncompete clauses for workers in some situations and is seeking public comment through April 19, 2023. In the FTC’s March 10 announcement, however, the agency specifically iterated their desire for public comment submissions on whether the proposed rule should also apply to noncompete clauses between franchisors and franchisees. The agency has had its eye on the use of noncompete agreements in franchise agreements since 2014 when members of Congress asked the Department of Labor and the FTC to investigate Jimmy John’s alleged use of such agreements, calling them anticompetitive. The FTC stated that while public comments in response to this narrowed request should be submitted as part of the noncompete rulemaking proceeding, they would not necessarily become part of the noncompete rulemaking proceeding or the regulatory review record for the Franchise Rule. The Franchise Rule is a pre-sale disclosure rule, enforced by the FTC, that requires franchisors to provide specific material information to prospective purchasers to allow them to weigh the risks and rewards of investing in the franchise. In 2022, the FTC took its first enforcement action under the Franchise Rule in over a decade when it filed suit against the fast-food chain and franchisor Burgerim for using misleading sales practices and false promises to sell more than 1,500 franchises. Though the Franchise Rule is currently under regulatory review, the FTC’s request for public comment regarding franchisor-franchisee relationships is not related to the Franchise Rule regulatory review process.

Why It Matters: The FTC and DOJ under the Biden Administration have made clear that they are prioritizing investigations of inequality and antitrust violations in the labor market and are committed to protecting workers. In the last two years, both agencies have enthusiastically introduced new rules and guidelines related to the labor market and brought civil and criminal charges against companies as a result of alleged antitrust violations that impede on employee mobility or suppress employee wages. The FTC’s narrow request for public comment related to franchises underscores the agency’s continued desire to hone in on select key industries within the labor market and ferret out all shades of unfair or anticompetitive practices.