Franchisees Furious Over Fees, Rules and Unaware They Can Complain

Complaints by franchisees, or the operator of a particular location, about the way franchisers dictate operating procedures have become highly inflamed lately, with a new report from the Government Accountability Office suggesting that they may be even more disgruntled than regulatory filings suggest.

The gist of the complaints is that franchisers are squeezing franchisees for more and more fees on services that used to be covered by the original agreement, according to an analysis by the New York Times. 

In other complaints, NYT reported that hotel franchisees, squeezed by lost revenue during pandemic lockdowns, “say they have also been hurt by the hotel brands’ loyalty programs, which require the hotelier to rent rooms at a reduced rate.”

Several states have been legislatively active on the issue, but franchises have been successful in blocking state legislation that would help franchise owners, the NYT reports.

Chief among the GAO’s three key recommendations was a greater push to improve franchise owners’ awareness and understanding of the complaint process offered by the Federal Trade Commission, which oversees franchisers.

In its examination, the GAO said that eight of nine discussion groups (with 44 franchise owners, selected to represent a variety of industry types) had franchise owners who said they were “generally unaware” of FTC’s guide and “didn’t know they could file a complaint.”

By enhancing its efforts to educate prospective franchise owners on the importance of the disclosure document and more broadly publicizing its guide, FTC could improve prospective franchise owners’ ability to make informed decisions.

Presently, the FTC’s Franchise Rule requires franchisers to disclose in writing certain information to prospective franchisees to allow them to compare the risks and benefits of purchasing a franchise.

FTC also publishes a guide for prospective franchise owners that highlights challenges they may face and key aspects of the disclosure. However, according to some stakeholders GAO interviewed, prospective franchise owners do not always fully read the disclosure, even though it contains information essential for decision-making.

According to the FTC, franchising enables prospective owners to purchase the right to operate a branch of a branded business. Franchise owners pay a fee to the franchisor, and in return receive the right to use the franchisor’s name and to operate using its business model for a specified number of years.

Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices in or affecting commerce, and the Franchise Rule provide FTC with authority to oversee certain aspects of franchising.

GAO found that from 2018 through 2022, there were 5,900 franchise-related complaints, representing less than 1 percent of all complaints received.

Franchise enforcement activities have been limited since the FTC amended the Franchise Rule in July 2008.

FTC has opened 11 franchise-related investigations and took one enforcement action while closing five others. The remaining six investigations were still open and were nonpublic.

According to FTC, the five closed investigations did not meet the agency’s criteria for pursuing enforcement action.

In the one that it did take action, Burgerim sold more than 1,500 Burgerim franchises, charging between $50,000 and $70,000 in franchise fees. However, a large majority of franchisees were never able to open restaurants.

Further, the action alleges that the company promised that if franchisees were unable to open a restaurant, they would be refunded their franchise fee, but many did not receive a refund.