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Antitrust Regulator Tells Chains: Back Off Your Franchisees

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After a yearlong inquiry, the Federal Trade Commission warned brands not to gag their small business operators or charge them extra fees.In the long-simmering conflict between franchisers and franchisees, the federal government has weighed in on behalf of the smaller guys.In a business relationship that has become fundamental to American commerce, franchisers — brands like McDonald’s and Jiffy Lube — license the right to operate their concept to individual entrepreneurs, who provide start-up capital and may own one location or many.On Friday, the Federal Trade Commission issued a policy statement and staff guidance that cautioned franchisers not to restrict their franchisees’ ability to speak to government officials or to tack on fees that weren’t disclosed in documents provided to prospective franchise buyers.In a news release, the commission said it was acting amid “growing concern about unfair and deceptive practices by franchisers — to ensure that the franchise business model remains a ladder of opportunity to owning a business for honest small business owners.”The agency has been scrutinizing the industry, which includes 800,000 business establishments, since issuing a request for information early last year that asked several questions about the franchisee-franchiser relationship. Around the same time, the Government Accountability Office issued a report finding that franchisees lacked control over crucial business decisions and that they often did not understand all the risks they faced before purchasing a license.Across the more than 2,200 comments posted in response to the F.T.C. request, a central theme emerged: A majority of franchisees wanted changes to the rules that governed the industry, while a majority of franchisers did not.We are having trouble retrieving the article content.Please enable JavaScript in your browser settings.Thank you for your patience while we verify access. If you are in Reader mode please exit and log into your Times account, or subscribe for all of The Times.Thank you for your patience while we verify access.Already a subscriber? Log in.Want all of The Times? Subscribe. More

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    Restaurant Chain Franchises Face Scrutiny From the FTC

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    Troubles at the restaurant chain Burgerim highlight concerns about whether franchisees need more protection in their contracts with franchisers.“Making It Work” is a series about small-business owners striving to endure hard times.When Kenneth Laskin flew to California to meet with executives at Burgerim, a start-up chain of restaurants, he was made to feel not just like another prospective franchisee, but like part of a family.The company’s executives, he said, made a point one evening of highlighting their common Jewish faith by praying with him in Hebrew.At the time, in 2017, Mr. Laskin believed he was being offered a plum deal. He paid $50,000 for the right to open up as many Burgerim franchised restaurants as he wanted in Oregon. “I got an entire state,” Mr. Laskin recalled.Today, Burgerim has run into trouble, leaving a trail of financial problems, a lawsuit by the Federal Trade Commission and broader regulatory scrutiny of whether protections for franchisees like Mr. Laskin are adequate.The challenges highlighted by Burgerim come as franchising continues to grow as a way that people are choosing to start small businesses.There has been rising concern about whether franchisees need more protection in their contracts with franchisers. That concern has found a sympathetic ear in the Biden administration and in several state legislatures, and has resulted in multiple proposed limits on franchisers’ powers.In the end, Mr. Laskin opened only one Burgerim restaurant, in Eugene, Ore., which closed in 2020 during the pandemic. Since then, Mr. Laskin has been depleting his savings to pay the bills.Burgerim, which boasted of having inventive high-quality burgers, has been criticized by former franchisees for making grand promises and poor disclosure about business risks. Of the more than 1,500 franchises Burgerim sold, most never opened, the commission said in a lawsuit that the agency filed last year against the company and its founder in U.S. District Court in California.Peter Bronstein, a lawyer for Oren Loni, who was the company’s principal executive in the United States, said that Burgerim made some business mistakes but that it was often trying to help its franchisees succeed. The two sides have been in mediation, according to the court file. Kenneth Laskin believed he got a plum deal to start as many Burgerim franchised restaurants as he wanted in Oregon. He ended up opening only one, which closed during the pandemic.Zack Wittman for The New York TimesEven as the pandemic was still bearing down, the number of franchised establishments in the country grew 2.8 percent in 2021 and 2 percent in 2022. That number is expected to increase an additional 2 percent this year, bringing the total to 805,436 franchises, according to the latest data released by the International Franchise Association, an industry group.As the franchising network expands, so does its contribution to the broader economy. Franchises employed 8.4 million people last year, a 3 percent increase from 2021.There is historical evidence, according to the International Franchise Association, that the first U.S. franchise dates back to Ben Franklin, who created a network of printing partnerships.Franchising took root in the American business landscape in the decades following World War II, with the growth of franchised brands like Howard Johnson’s hotels.Sam Falk/The New York TimesToday a fundamental symbiosis drives the business model: Franchisees pay an upfront fee to an franchiser like Dunkin’ Donuts or Applebee’s, which gets them access to all of that brand’s suppliers, advertising and technology. The franchisee can lean on these established systems to get their business up and running quickly rather than having to start from scratch. And the franchiser, in turn, receives the franchising fee, typically tens of thousands of dollars, in addition to a regular royalty payment from the franchisee.“Franchising has always been an on-ramp for the middle class to open their own business,” said Charlie Chase, the chief executive of FirstService Brands, a franchiser of home renovation and painting services.Over the years, Mr. Chase, who has served on the board of directors of the International Franchise Association, said he had helped hundreds of successful franchisees get their start. “We have created a lot of millionaires,” he said.Still, Mr. Chase said he was concerned about how some franchisees were being pushed into businesses without understanding all of the risks.He blames aggressive internet advertising for some of this (Mr. Laskin learned about Burgerim from a Facebook advertisement, for example), and also a network of third-party brokers that often push prospective franchisees to buy multiple franchises at a time.The Federal Trade Commission, under the leadership of Lina Khan, is looking broadly at industry practices including disclosure and issues such as franchisers’ unilaterally changing the terms of an agreement with a franchisee.“Franchising can be a good business model, but it can also lead to a lot of harm,” Elizabeth Wilkins, the director of the commission’s Office of Policy and Planning, said. “We are concerned about instances where the promise does not match with reality. We believe there is a significant gap that is worth our investigation.”In the case against Burgerim,  federal officials said that the company executives told franchisees they would refund their franchise fees if their business did not open, but that many people never got their money back. Mr. Bronstein, the lawyer for Mr. Loni, said offering refunds “was not the best way to run a business.”In the years since the 2008 financial crisis and mortgage meltdown, regulators have bolstered protections for consumers by improving disclosure by banks and banning certain fees they can charge. But small businesses, including franchisees, have not benefited from the same extensive regulatory scrutiny.“There is a view in the consumer protection world that small businesses do not get the same level of protections as other consumers,” Samuel Levine, the director of the F.T.C.’s Bureau of Consumer Protection, said. “Yet, consumers and small businesses, including franchisees, face many of the same challenges. That is something we are trying to address.”The F.T.C., under the leadership of Lina Khan, above, is looking broadly at industry practices at franchises including disclosure about business risks. Saul Loeb/Agence France-Presse, via Getty ImagesAs part of that effort, the Federal Trade Commission is looking at how to apply laws like the Robinson-Patman Act, an antitrust law that prevents large corporations from using discriminatory pricing to take advantage of small businesses. The agency also has proposed a rule banning noncompete clauses in employment contracts and may consider limiting the use of noncompete clauses in franchise agreements.When Mr. Laskin bought a franchise, he was not looking to become a millionaire, but rather to build a stable middle-class life.He opened his sole Burgerim store in Oregon in September 2019.But the problems started soon after his grand opening, Mr. Laskin said. Burgerim had not established a reliable food distribution system in Oregon, he said, forcing Mr. Laskin to fend for himself to supply his restaurant. In trying to help new locations get off the ground, the company never collected royalties from the franchisees, which limited its ability to support its restaurant network over the long term, Mr. Bronstein said. Still, he added, there are many Burgerim restaurants that operated successfully.Mr. Laskin kept the business going during the pandemic by offering take out. But he couldn’t find people to work during the lockdowns, which meant he and his wife ran the entire operation themselves.Mr. Laskin, who has severe back pain from years of restaurant work, hoped a franchise would offer him the chance to delegate work to employees and spare his back.But some days, Mr. Laskin would return from the burger restaurant at night unable to walk the final few yards up his driveway because of the pain from standing on his feet all day.The Burgerim leadership, Mr. Laskin said, provided no support during the pandemic.A Burgerim restaurant in Walnut Creek, Calif., last year.Gado/Getty ImagesHe closed his restaurant in May 2020 and moved to Florida. Mr. Laskin, 57, said that his back problems limited the type of work he can do and that it had been difficult finding work after his burger business closed.The struggles of the former Burgerim franchisees were brought to light in 2020 by the publication Restaurant Business, which focuses on the food service industry, in a series of articles.Some franchisees say improving disclosure or increasing regulations on fee structures will not be a panacea in rooting out the industry’s troubled actors.“Transparency is a great thing, but I am not sure more disclosure is going to change any outcomes,” said Greg Flynn, the founder and chief executive of Flynn Restaurant Group, the largest franchisee in the country with 2,400 locations and 73,000 employees, operating brands like Taco Bell, Pizza Hut and Panera.“There are a lot of stories of franchisees buying into a system and then it goes badly for them,” he added. “I would just suggest that they might have had a similar experience outside of a franchise system.”Mr. Laskin says it is not just bad timing or circumstances that were to blame. “The system is fundamentally crippled,’’ he said. “There is too much secrecy. It shouldn’t be this difficult.” More

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    Franchisers, Facing Challenges to Business Model, Punch Back

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    Discontented franchisees have found allies among state legislators and federal regulators in pushing for new laws and rules, but change has been slow.When you visit a McDonald’s, a Jiffy Lube or a Hilton Garden Inn, you may assume you’re visiting one business. More likely, you’re actually visiting two: the operator of that particular location, known as the franchisee, and the larger company that owns the intellectual property behind it, or the franchiser.Conflict is inherent in that relationship, but it has hit a boil in recent months, as franchisees say they’re being squeezed out of the profits their business generates through new fees, required vendors and constraints on their ability to sell.On Monday, the Government Accountability Office released a report finding that franchisees “do not enjoy the full benefit of the risks they bear,” citing interviews with dozens of small-business owners who said they lacked control over basic operations that determined their ability to earn a profit.They’ve found a sympathetic ear in the Biden administration and in several state legislatures, giving rise to a growing wave of proposals to limit the power of franchisers.Franchisers have been largely successful in heading off new laws and rules, which the chief executive of McDonald’s, Chris Kempczinski, has described as an existential threat.“The reality is that our business model is under attack,” he said in February at the convention of the International Franchise Association, a trade group for franchisers, franchisees and franchise suppliers. “If you’re not paying attention to these pieces of legislation because you think they don’t impact you, think again.”The chief executive of McDonald’s says the franchising industry’s business model is “under attack” because of a push for new laws and rules.Haiyun Jiang/The New York TimesFranchising has been a feature of American capitalism for decades, allowing brands to grow quickly using investment from entrepreneurs who commit their own capital in exchange for a business plan and a logo that consumers might recognize. The Federal Trade Commission requires franchisers to disclose factors including start-up costs and the company’s financial performance to those considering buying a franchise, and some state laws govern considerations like transfer rights.But much of the relationship is largely unregulated — changes a franchiser can make to contracts, for example, and which vendors can be required.Keith Miller, a Subway franchisee in California who has become an advocate for franchisee rights, said the lack of oversight had given rise to an increasing number of disputes. “There’s more of a squeeze on the franchisees than ever,” he said. Franchisees’ royalty payments used to cover things like marketing, new menus and sales tools, he added, but “now you seem to have to pay for your services.”The franchise industry says that its business model remains beneficial to individual owners, and that additional regulation would protect substandard franchisees at everyone else’s expense. Matthew Haller, chief executive of the International Franchise Association, cited a 2021 survey by the market research firm Franchise Business Review in which 82 percent of franchisees said they supported their corporate leadership.But legislative battles at the state level reflect rising tension.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. A bill in New Jersey that would limit those loyalty programs, as well as rebates that brands can collect from vendors that franchisees are required to use, faces fierce opposition from the American Hotel and Lodging Association. In a statement, the association’s chief executive, Chip Rogers, said the bill would “completely undermine the foundation of hotel franchising by limiting a brand’s ability to enforce brand standards.”Laura Lee Blake, the chief executive of the 20,000-member Asian American Hotel Owners Association, said hoteliers had reached desperation. “There comes a point when you’ve tried and tried to meet with the franchisers to ask for changes, and they refuse to listen,” she said.In Arizona, legislation introduced to enhance franchisees’ ability to sell their businesses and prevent retaliation from franchisers if they band together in associations has also faced resistance. The bill was approved by two committees in February and March, but the International Franchise Association hired two lobbying firms to fight it. In a Republican caucus meeting, opponents attacked the legislation as a “sledgehammer” that would bring the government into private business relationships. The bill’s sponsor, Representative Anastasia Travers, a freshman Democrat, said she was taken aback by how quickly opposition snowballed, and ultimately gave up on it for the 2023 session.“Time has not been my friend,” Ms. Travers said.A similar bill in Arkansas, which the International Franchise Association initially said would be “the most extreme franchise regulation of any state,” was amended to strip entire sections, including one that would have prevented franchisers from imposing any requirement that “unreasonably changes” the financial terms of the relationship as a condition of renewal or sale.After the bill was slimmed down — leaving provisions such as one restoring the existing statute, which had been rendered ineffective by a subsequent law, and another requiring the franchiser to establish material cause before terminating the franchise — the industry group withdrew its opposition, allowing swift passage.A Subway location in New York. “There’s more of a squeeze on the franchisees than ever,” said Keith Miller, a Subway franchise owner in California.Carlo Allegri/ReutersIn an email to supporters before the votes, the franchise association’s vice president for state and local government relations, Jeff Hanscom, credited the Arkansas agribusiness giant Tyson Foods for being “instrumental in negotiating this outcome.” Tyson Foods did not respond to a request for comment.At the federal level, franchisers may face greater challenges.The Biden administration is moving on two fronts. One is the Federal Trade Commission, which issued a request in March for information about the ways in which franchisers control franchisees. The initiative could result in additional guidance or rules — putting the industry on high alert.The second front is the National Labor Relations Board, which has proposed making it easier for franchisers to be designated as “joint employers” that would be liable for the labor law violations of franchisees if they exerted significant control over working conditions. Franchisers maintain that this would “destroy” the business model, because it would subject them to unacceptable risks.Franchisers attribute the flurry of activity to union influence. The Service Employees International Union, in particular, has long fought to get McDonald’s designated as a joint employer so it would be easier to mount an organizing effort across the chain, rather than store by store.Robert Zarco, a Miami lawyer retained by an association of 1,000 McDonald’s owners, said that to avoid the joint-employer designation, and the extra liability it would bring, franchisers could choose to weaken their grip on franchisee operations.“If the company wants to not be considered a joint employer, it’s very simple to fix,” he said. “Unwind all those excessive controls that they have implemented that are outside of protecting the brand and the product and service quality.”The franchise association’s federal lobbying spending hit a high of $1.24 million in 2022, alongside millions more spent in recent years on federal elections, and doesn’t include money spent by the individual franchise brands.The high stakes are evident in other ways, as well.The Franchise Times, a 30-year-old independent trade publication with six editorial employees, writes about day-to-day events in the industry: acquisitions, executive leadership changes, technology trends. When strife arises, such as lawsuits and bankruptcies, it writes about those, too.The publication’s legal columnist, Beth Ewen, wrote several stories this year about Unleashed Brands, a portfolio of franchises that has drawn lawsuits from franchisees. In response, the company published a markup of one of Ms. Ewen’s stories in red pen font with “DEBUNKED” stamped across the top. (The organization had given similar treatment to an article about the company by The New York Times. Both publications stand by their reporting, and Unleashed did not ask for corrections.)In March, a new website popped up at the address “NoFranchiseTimes.com.” Its front page was devoted to an attack on what it called “editorial bias,” “denigrating the businesses that support their publication.”It called for the publication’s advertisers — which include law firms, vendors and brands — to cancel their purchases.Michael Browning Jr., the chief executive of Unleashed Brands and a member of the International Franchise Association’s board, emailed the trade group’s membership saying that while he had not created the website, he supported its message and thought the group should revoke The Franchise Times’s membership. Mr. Browning did not respond to a request for further comment.The association declined to revoke the membership, and the publication says its advertising revenue is up from last year. But to Ms. Ewen, a 35-year veteran of business reporting, the episode shows that the industry is trying to divert attention from real problems — and that some members are playing hardball.“They’re trying to hit at our business model and our ability to keep going,” she said. “There’s a lot of people spending a lot of time trying to get us and others to stop doing these stories.” More