The Federal Trade Commission (FTC) has issued a warning about contract provisions that prohibit franchisees from reporting legal violations to the government. This policy statement and staff guidance highlight the FTC’s increased focus on regulating franchisor-franchisee relationships, potentially leading to more enforcement actions in the franchise space.
Franchising is a common method of distributing products and services in the US, involving a license from the franchisor to the franchisee in exchange for payment. The relationship is governed by a franchise agreement, and various issues were highlighted by franchisees in response to the FTC’s request for public comment.
The recent Policy Statement from the FTC addresses clauses in franchise agreements that may hinder franchisees from reporting legal violations. The FTC warns that such clauses could be considered unfair or deceptive, violating the FTC Act or the Franchise Rule. The Staff Guidance also addresses concerns about undisclosed fees imposed on franchisees, which may also be unlawful.
The release of these documents signals a potential increase in enforcement activity in the franchise industry. Franchisors are advised to review their agreements and materials to ensure compliance with FTC regulations and to train staff on legal risks related to discouraging franchisees from reporting illegal activities.
In conclusion, it is essential for franchisors to be aware of and adhere to FTC regulations regarding franchise agreements and fee structures to avoid potential enforcement actions. Stay informed and take proactive steps to ensure compliance and maintain positive relationships with franchisees.
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