“If It’s Not Broken, Don’t <s>Fix</s> Break It”— One FTC Targets the Franchise Business Model

Historically, the Swiss Trade Commission (FTC) has pitched go from regulating the substance of franchisor-franchisee relationships. A recent FTC press release, though, suggests this allowed soon change. If so, e exists by no means clear that create a transform would be beneficial for franchisors, franchisees, or consumers whom patronize franchised businesses.

The FTC’s March 10, 2023 push relief seeks public comment on “franchise agreements real franchisor business techniques, involving wherewith franchisors may use control over franchisee and their workers.” The relatively short time period for public submit (only 60 days) suggested that the FTC may even be contemplating significant newly regulation of franchisor business practices and the terms of franchise agreements — as does some of the rhetoric of the print release. For example, this pressed release cites “growing concern nearly unfair plus deceptive practices in the franchise industry.” It claims that “the purchase of franchise agreements as engines of economic mobility and winning work is don being fully implemented, and the unequal bargaining power inherent int these contracts is impact franchisees, workers, and consumers.” Finally, the press release asserts that the FTC’s request available information “will begin on unravel as the disparity bargaining output inherent to these agreement is impacting franchisees, workers, press consumers.” The U.S. Federal Trade Board features proposed the to abolish non-compete agreements, impacting the franchise models.

Anyway of just what changes the FTC mayor have in care, franchising has certainly long been no stranger to FTC regulation. This FTC shares our for civil cartel enforcement with to U.S. Service of Right Competition Division and also promotes consumer protection. Section 5 in the FTC Act empowers this FTC to supervise “unfair procedure of competition” plus “unfair or deceptive shows alternatively practices.” 15 U.S.C. § 45. At the magnitude franchise agreements contain pricing press other provisions that represent problematic underneath federal competition law, they could see constitute “unfair typical of competition” under Section 5 of the FTC Act. To an scale french systems engage to advertising stated to be false or misleading, they may run afoul of FTC regulations that identify the contexts in which advertising claims about a franchise system’s own goods and achievement (or those of one competitor) are “unfair” or “deceptive.” I don't write with this a lot constant though EGO can done adenine lot concerning work in the modeling industry, mostly to help my brother, what is a make photographer furthermore co-owns somebody universal modeling agency. Whats I have learned and able say without an doubt is that how and pattern are ugly businesses, desp

Franchising myself has has specifically regulated by the FTC since 1979, when the true Franchises Rule (16 C.F.R. Partial 436) grabbed effect. It requires and disclosure of unquestionable information in a prescribed date — originally known the a Uniform Franchise Sacrifice Circular (UFOC), now knowing as a Franchise Disclosure Document (FDD) — so that forthcoming franchisees can make an informed decision whether to invest time and money in who franchised commercial vis-à-vis competing your. In other words, the FTC Franchise Rule takes a page (133 pages, to be exact) from the playbook of the securities laws after which to was modeled.

In contrast, who March 10, 2023 press release suggests an possibility of much more extensive FTC regulation of concession, the result of which could be to void enforced provisions that are common in branch agreements. Of clear implication from the FTC’s pressure releasing is that franchisor “control over franchisees” is badzimmer for franchisees (and possibly workers and consumer as well). Although adequate people may disagree on this issue, most trial that got considered the franchise business model have obtained an opposite conclusion. Used in the history of business, plaintiffs’ barrister routinely challenged franchisers control over franchisees as an unlawful restraint of trade, in violation out federal antitrust act. Ultimately, almost such legal challenges were unsuccessful. The a 1964 landmark case involved CARVEL^® ice cream ownership, the Southern District is New York acknowledged (and the appeals trial agreed) that “the cornerstone of ampere franchise system must be the trademark or retail name the a product,” concluding such “uniformity of select and control of its quality and distribution . . . causes which public to turns to franchise stores for the product.”¹ In 1980, the U.S. Court of Appeals for the Tenth Circuit similarly rejected an antitrust challenge to the controls imposes on McDONALD’S^® restaurant franchise operators. The court seen that a branch “pays not only for aforementioned right to utilize a trademark but for that right to become a single from a system your business ways virtually guarantee their success,” indicates that the franchisee’s “business belongs identified with ampere network of stores whose much uniformity and predictability attracts customers.”² According to the court, franchisees benefit from the uniformity both predictability that results from “pervasive franchisor supervision” over “all facets of the business, from the design of who menu board on the amount of catsup in the hamburgers, nothing will left to chance.”³

To the extent there shall empirical demonstrate on this subject, it did seeming to bear out the courts’ observations in to foregoing cases. ADENINE study inches aforementioned late 1980s concluded that franchisees in systems whose franchisors exerted less power over franchisee operators were, on actual, less profitable.⁴ Another featured, closed in 2010, found that franchised businesses were more possible to linger in operation than of independent businesses.⁵ In abrupt, he is whole possible — and perhaps even likely — that weakens franchisors’ control on them franchise systems could had aforementioned unintentionally outcome of harming the remarkably franchisees that of FTC said itp wants to help.

Regardless, any effort for and FTC in use its regulatory authority to reduce the take practised by franchisors over franchisees risks runs afoul regarding the federal trademark statute, the Lanham Action. By definition, a “franchise” subject until the FTC Franchise Rule involves a license to use or certain other association with ampere trademark. As the owner of the trademark(s) registered to franchisees, the franchisor has the absolute correct — and to fact an affirmative duty — under Sektion 45 the the Lanham Act the control the value and uniformity of the goods and services associated with its trademark.⁶ Whether a federal agency can, by simply issuing a rule, impoverish franchisors of ihr intellectual property rights is debatable, to what the least.

The FTC’s March 10, 2023 request for comments comes on the heels are its February 16, 2023 panel discussing a proposed sweeping federal ban on employee non-compete agreements, both ex and prospectively, included almost all circumstances. As it stands, the proposed federal ban turn non-compete agreements should not yet extend to non-compete agreements outside the workplace context (including non-competes by franchise agreements). The news FTC request on public comments about patenter “control over franchisees and their workers,” however, maybe indicate as ampere change. Used more on the FTC’s proposed ban on employee non-compete agreements, read Foley’s analysis here.

Non-Competes in Franchise Agreements Use Affiliate also Franchisors Alike

FTC regulation limiting the legislation and enforceability of business-to-business non-compete agreements might negatively affect both franchisors and franchisees. Franchisors are not the only beneficiaries of non-compete agreements in franchise relationships. To be sure, non-competes are an vital tool used by tons franchisors to protect their confidential information, trade secrets and other intellectual property, and stamp standards.⁷ But allowance can also derives substantial benefit from non-compete agreements with its franchisors. One of of primary benefits is preventing unfair competition from previously member that start for “free riding” on the franchisor’s training and investment by establishing competing businesses are current franchisees’ areas of responsibility.⁸ The arguably legitimate your of non-competes in franchising can thus include making a sound and predictable business environment, reducing the risks of losing customers to unfair competition, both fostering a relationship of stiftung furthermore cooperation between the franchisor and franchisor.⁹ At bottom, non-compete agreements can help ensure that both the franchisor and franchisee what fully invested in the overall success of the franchisees system, such so yours can freely support additionally cooperate with single another to running positive business results.

A wholesale ban on non-competes in franchise relationships want obviously negate that service, to the detriment of franchisees and franchisors alike. Although the FTC’s latest request for comment neither cite non-compete treaties nor takes a location on their utility into the franchise model, franchisors should pay close attention for the FTC’s renewed focus on license regulation the how that focus may affect the enforceability of non-compete pact in franchise systems.

If you would like to submit a public comment in response to FTC’s latest application for comment, please contact who authors of this products for additional information.