FTC Warns Franchisors About Junk Fees

The Federal Trade Commission (FTC) warned franchisors Friday (July 12) that non-disparagement clauses and the imposition of previously undisclosed fees are against the law.

The regulator highlighted these practices in a policy statement and a guidance released Friday, the FTC said in a press release.

“Franchising is a chance for Americans to build a business, but the FTC has heard concerns about how unfair franchisor practices, like a failure to fully disclose fees upfront, go unreported thanks to a fear of retaliation,” FTC Chair Lina M. Khan said in the release. “Today the commission is making clear that contractual terms prohibiting franchisees from reporting potential law violations to the government are unfair, unenforceable and illegal.”

The policy statement released Friday said franchisors’ use of non-disparagement clauses, goodwill, confidentiality clauses and other contract provisions that prohibit franchisees from communicating with the government violate the law.

The new guidance released the same day explained that it is illegal for franchisors to impose and collect fees that were not previously disclosed to franchisees. The guidance comes in response to franchisees’ reports to the FTC that they are facing rising fees for payment processing and technology and undisclosed fees for training, marketing, property improvement, and other products or services required by the franchisor, the release said.

The FTC also released Friday an Issue Spotlight that summarizes top concerns raised by franchisees in response to the regulator’s 2023 request for information on this topic. The top three concerns include unilateral changes to franchise operating manuals, franchisor misrepresentations and deception, and fees and royalties.

In addition, the FTC said Friday is reopening the comment period for that request for information related to franchise agreements and franchisor business practices, aiming to continue its engagement with market participants. Interested franchise stakeholders can submit comments until Oct. 10.

The FTC said in June that its lawsuits resulted in over $324 million in refunds to consumers in 2023. That total includes money returned to consumers because of all FTC cases, whether the refund program was administered by the FTC, other federal agencies or the defendants.