Rep. Jan Schakowsky reintroduced the Franchisee Freedom Act to Congress on Thursday, aiming to grant small business owners the legal right to address grievances in court when harmed by violations of the Federal Trade Commission’s (FTC) Franchise Rule.
The Franchise Rule is a regulation that requires franchisors to provide prospective franchisees with key information about the franchise opportunity before they enter into a binding agreement or make any payment. The rule is designed to promote transparency and help potential franchisees make informed decisions.
The bill would provide franchisees the ability to pursue legal action and ensure that franchisors are held accountable when they fail to comply with disclosure requirements set out in the rule, according to Schakowsky. There currently is no private right of action for violations of the FTC Franchise Rule, and courts have ruled that since Congress has not explicitly provided for it, none can be implied. The Franchisee Freedom Act seeks to remedy this by establishing that right.
“Franchisors can be a lifeline for those looking to create their own American dream,” Schakowsky said in a statement. “Unfortunately, due to a weak rule and even weaker enforcement of the Federal Trade Commission’s Franchise Rule, that dream can turn into a nightmare, one in which they are under the thumb of a predatory corporation. That is why it is imperative for franchisees that we pass this legislation.”
The legislation addresses a key imbalance in many franchise agreements, which typically allow franchisors to terminate agreements and seek damages, often including substantial liquidated damages for franchisees’ alleged wrongdoings, such as wrongful disclosure of information. However, the opposite scenario—when a franchisor provides incorrect information—is difficult for franchisees to challenge.
“Full and proper disclosure is foundational to the success of franchising,” said Keith Miller, principal at Franchisee Advocacy Consulting. “Franchisees depend on the requirements of the Rule to make investment decisions, decisions that put their financial well-being at substantial risk. Passage of this legislation will give franchisees harmed by violations of their fundamental right to court access to mitigate their claims.”
Miller further explained the need for the Franchisee Freedom Act, noting that the FTC has filed only two actions in the last 17 years, lacking the resources to protect franchisees from violations adequately. He said the legislation also provides additional protection on loan guarantees, including SBA 7(a) loans, as franchisees could seek damages to cover the loan they took out on the franchise. This could save taxpayers money since it is the U.S. government that guarantees the SBA loans to the banks.
Opponents of the legislation have argued that it would create a new cottage industry of litigators, but Miller said most franchisors do follow the law and only the outliers will be subject to lawsuits. Plus, franchisees rarely have the resources to fight their franchisor corporation.
“Most often they will not have the funds to hire the lawyer,” he said. “I believe in many cases, the attorneys hired will have to do these cases on contingency, in full or part. Attorneys usually don’t take cases on contingency unless there is a high likelihood of success, therefore I believe cases will be filed only against franchisors with the most egregious violations.”
The bill has garnered support from the American Association of Franchisees and Dealers and the Coalition of Franchisee Associations, as well as over 25 individual brand associations.
Schakowsky first introduced the Franchisee Freedom Act in early 2022. The bill was referred to the House Committee on the Judiciary and subsequently to the Subcommittee on the Constitution, Civil Rights, and Civil Liberties later that year. Since then, no further actions have been taken on the legislation, according to the Congressional record. With the reintroduction of the bill, Schakowsky aims to revive the effort and push for stronger protections for franchisees across the country.
In July, the FTC initiated measures to address “unfair and deceptive” practices within the franchising sector to enhance protections for franchisees. The agency issued guidance prohibiting franchisors from imposing fees not clearly disclosed in franchise agreements. This action targets “undisclosed junk fees,” such as unexpected charges for payment processing, technology, training, marketing, and property improvements, which can significantly impact a franchisee’s profitability. It also emphasized that contractual clauses preventing franchisees from reporting issues to government authorities are illegal. This move addresses concerns that non-disparagement clauses or threats of retaliation have deterred franchisees from speaking out about unfair practices.
