FTC proposal could have far reaching ramifications for future franchise agreements

On Behalf of | May 5, 2023 | Franchisor Law

Under new leadership in the Federal Trade Commission, regulators have taken a critical look at an area of law that for the most part has been the exclusive purview of states to regulate, franchise agreements. On March 10th, 2023, the FTC released a notice for public comment regarding how franchisors exercise control through their agreements over both franchisees and their workers.

Specifically, the FTC is interested in feedback regarding deceptive and unfair business practices that franchisees or workers have experienced due to the franchise relationship. The government is also separately seeking responses as to whether it should ban noncompete clauses from being honored in franchise agreements, effectively releasing franchisees to freely compete against their franchisor.

Response to FTC proposal prompting action in the franchise industry

This notice for comment has drawn the attention of many industries that rely on the franchise model to operate. The initial comment period for the FTC’s first inquiry has already been extended thanks to the efforts of the International Franchise Association (IFA) and an assortment of other interested parties who desired a greater amount of time to issue a response to the FTCs notice.

The IFA has been spearheading the response to the FTC’s inquiry, responding to both of the questions put forth by the Commission in opposition to the proposals. In a response on behalf of nearly 300 interested parties, the IFA argued that the new proposals would widely disrupt many industries across the economy that rely on the franchise model to exist.

Specifically, the proposal to ban noncompete clauses has drawn industry ire because it would disrupt the existing relationship for franchisors who are placing their intellectual property and industry trade secrets in the hands of franchisees who need them to succeed.

Further publications by the FTC focus on franchises

On April 28th, 2023, the FTC released a consumer alert publication as part of a new blog series discussing the franchise business model. This first document outlines many myths that consumers may believe about owning a franchise. This represents a further move by the FTC in their examination of the franchise model for industries.

Where the FTC will go with their final decision on these proposed rulings is unclear at the moment. While those representing franchisor interests are opposed to the changes that are being considered, the FTC has not released a final decision on the either questions that they sought comment on. The additional publications by the FTC do make clear however, that the franchise model remains a priority for the Commission.