FTC Ponders Whether Franchise Rule Needs Changing

For 40 years, the Federal Trade Commission has been tasked with enforcing a rule that ensures potential franchisees have the required information needed to determine whether purchasing a franchise is a sound decision. Now, it is inquiring in a public setting whether the rule needs to be changed for a changing world.

FTC Notice

In February, the FTC released a notice informing citizens of a public comment period for proposed changes to the Franchise Rule. Enacted in 1979, the Franchise Rule stands as the first line of defense between potential franchisees and franchisers, providing an equitable playing field through which both sides of a prospective partnership can sort out various details and inquiries before proceeding.

A variety of concerns are at the center of this debate, with differing opinions from franchisees, franchisers, and legal firms tasked with representing both sides. Some franchisees, for example, are nervous about any proposed changes to the rule, concerned that various rights and guarantees could be jettisoned in the process.

Resolve Long-Standing Problems

However, other groups tasked with representing franchisees (one notable example is NCASEF) believe that the rule is ripe for revisions, hoping it will address long-standing problems. Some concerns include the treatment of franchisees as employees rather than allied business owners and the general skewing of franchise agreements in favor of franchisers.

Legal firms tasked with representing franchisees and franchisers have reservations about changes to the Franchise Rule. Many franchisor attorneys point out that the current iteration of the Franchise Rule is already substantially complex, with changes potentially further complicating the task of representing clients.

These firms also note that prior changes to the Franchise Rule in 2007 led to much worry and volatility, but ultimately resulted in no substantial changes. The combination of uncertainty, precedent, and potential for major changes in the rule create distinct and diverging possibilities, none of which are considered appealing to firms that base their expertise on being well-versed on current regulations and procedure.

Clearly Defined Roles

Despite these concerns shared by lawyers, other associations remain bearish on the potential for positive reform. The American Hotel and Lodging Association recently submitted comments to the FTC regarding proposed changes, noting that “franchisees and franchisers have clearly defined roles and responsibilities which provides tremendous value” to the majority of hotels that operate as franchises and function in many respects as independent small businesses. As of 2019, the AHLA represents more than 4 in 5 franchised hotel businesses, with more than 20,000 members.

While the period for comments from the public has ended, the process of debate will likely continue for some time. The previous round of revisions to the Franchise Rule occurred over a decade, involving thousands of franchisers and franchisees, as well as members of Congress and other relevant agencies.

Regardless of what actions may be taken by the FTC, Congress or other groups associated with the consensus-based process of compiling recommendations, most franchise-based businesses will not realistically see any changes for several years at a minimum. As such, franchisees, franchisers and the firms that represent them can take solace in the status quo regarding the Franchise Rule remaining for the foreseeable future.