Franchisors beware: The Federal Trade Commission is making it very easy for franchisees to file fraud complaints against you. In publicizing its fraud reporting tool – aptly named ReportFraud.FTC.gov – the FTC has fired another warning shot that it is ramping up enforcement efforts against you.
The new weapon in the FTC's arsenal is directed specifically to the franchise industry. The FTC did this by adding a new bullet point option in its reporting form that says "franchise." Consumers follow a series of prompts to provide details about the franchisor and what they claim the franchisor did wrong, including some suggestions such as "unfair or unreasonable contract terms" or "misleading statements during the sales process." The FTC told the Franchise Times that this new reporting option is a "big deal" because it will go directly "to the franchise team, not get lost in the fraud pile."
This franchise-specific website complaint form comes on the heels of the FTC's letters served like subpoenas on franchisors, putting them on notice of what the FTC considers to be unfair and deceptive trade practices under the threat of $43,792 penalties per violation.
If these two actions are not enough to make you nervous, the FTC's announcement that it was adding a franchise-specific question in its complaint form was part of a press release last week titled, "FTC Sues Burger Franchise Company That Targets Veterans and Others With False Promises and Misleading Documents." The U.S. Department of Justice had just sued fast-food chain Burgerim and its owner on the FTC's behalf for allegedly selling franchises to more than 1,500 consumers for $50,000 to $70,000 franchise fees and then failing to refund the money when the franchisees could not open restaurants, despite promising to do so. The lawsuit claims that the franchisor made false promises and withheld material information that should have been in its Franchise Disclosure Document.
In announcing the lawsuit, the FTC said it was making it easier for other franchisees to file complaints "to help us root out deception and other illegal conduct in the franchise industry." The press release is available at https://www.ftc.gov/news-events/press-releases/2022/02/ftc-sues-burger-franchise-company-targets-veterans-others-false.
We advise you not to panic, as cases like Burgerim are the exception and an example of wide-spread fraud alleged within the franchise system. But it certainly bears repeating during what appears to be an increasing focus on franchisors that you need to make sure you are complying with all applicable state and federal laws and the FTC Franchise Rule, including Item 19 regarding financial performance representations. This may not stop franchisees from filing complaints with the FTC, but you will at least have a solid foundation for your defense if the FTC or its law enforcement partners come calling.
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