Fast-food franchises offer standardized food choices to consumers across the country and the world. But there has to be some oversight into the franchisor-franchisee relationship. In fact, the Federal Trade Commission (FTC) is tasked with investigating and regulating franchises. Previously, their primary focus fell on the presale financial disclosures that the law requires franchisors to provide to franchisees prior to signing their franchise agreement.
Recently, several fast-food franchise owners asked the FTC for additional oversight. It appears that the FTC will be investigating several franchises, but why?
Fast-Food Franchisees Send Petition to the FTC
Three franchisee advocates recently asked the FTC to investigate what they claim are abuses by franchisors. A Subway operator, advocate Keith Miller, and the National Coalition of Associates of 7-Eleven Franchisees sent a petition (the “Petition”) asking for greater scrutiny over:
- Subway, a fresh sandwich restaurant;
- Dickey’s Barbecue Pit, a fast-casual barbeque chain; and
- 7-Eleven, one of the largest franchise systems in the world.
Among other things, the petition states:
“Franchise agreements reflect a profound imbalance of contractual, economic and market power in favor of the franchisor and fail to give due regard to the legitimate business interests of the franchisee.”
But what do they mean by imbalances of power regarding fast-food franchises?
The FTC Might Investigate Certain Practices
Based in part on the allegations contained in the Petition, the FTC is likely to investigate certain common practices, including:
“Take-it-or-leave-it” contracts. Also sometimes called a contract of adhesion, this type of contract leaves little to no room for negotiation. One party makes the offer – the franchisor – and the franchisee is not allowed to make a counteroffer.
Non-compete Clauses. This type of clause is sometimes called a covenant not to compete. People buying into a fast-food franchise might have to agree not to engage in any competition with the franchisor.
Repair Restrictions. Some franchisors might unfairly restrict the franchisee’s ability to repair certain equipment. For example, McDonald’s ice cream machines are notoriously untrustworthy. However, McDonald’s requires franchisees to have repairs made by the machine makers instead of allowing them to make simple repairs themselves.
Exclusionary Clauses. This type of contract provision can limit the operators of the fast-food franchises from rights or remedies to problems that arise.
While there could be nine franchises involved in the investigation, the most well-known are likely certain well-known fast-food franchises.
- Subway. This sandwich chain is one of the largest franchises and the largest restaurant chain by the number of units. Reportedly, Subway’s new franchise agreement requires increases the royalty rate while imposing new, expensive requirements.
- Dickey’s Barbecue Pit. Although in operation for 80 years, Dickey’s didn’t begin franchising until 1994. According to a spokesperson, management at Dickey’s intends to cooperate with the FTC’s investigation. However, the spokesperson also stated that they were unaware of any complaints.
- McDonald’s. As mentioned above, McDonald’s fast-food franchises tend to have cantankerous ice cream machines. Franchisees and McDonald’s management have battled over maintenance and repair of the machines because of repair restrictions contained in franchise agreements.
- 7-Eleven. This long-standing franchise sells prepared food in its convenience stores, making it a type of fast-food franchise. It’s also well-known for being open 24/7. However, 7-Eleven management has been requiring its franchisees to remain open 24 hours even when severely understaffed. A new franchise contract also requires a large franchise renewal fee, and provisions that franchisees find objectionable.
As with any other legal document, a franchise agreement should be reviewed by an attorney before it is signed. Provisions that seem okay in the early days of the business could later prove to be costly or prohibitive.