Business Blog
The FTC frowns on franchise falsehoods: A reminder to franchisors
Benjamin Franklin famously declared, “When you’re good to others, you’re best to yourself.” Maybe he was giving general advice about being a nice person. But it’s also possible the United States’ widely acknowledged father of commercial franchising was tipping his hat to fellow franchisors looking to build their businesses. In other words, when you’re good to your franchisees, you’re best to your own business.
It goes without saying that Benjamin Franklin would have encouraged franchisors to comply with the FTC Act and the FTC’s Franchise Rule, which includes comprehensive instructions on disclosures franchisors must make and missteps to avoid. After all, franchisors who violate either may be liable, and civil penalties, among other things, are on the table. So, make sure you read the Rule carefully and understand your obligations.
Wondering where to begin? Check out the Rule and associated guidance at http://www.ftc.gov/franchise.
Curious what it looks like when the FTC alleges a company broke the rules? Check out today’s settlement with Qargo Coffee, a coffee franchise, and several of its officers. In this case, the FTC claims the defendants violated the Franchise Rule in two key ways. First, the FTC says they failed to provide required Financial Disclosure Documents (FDDs) to some franchisees. Second, to the extent they provided FDDs, the FTC says they were missing important information.
The FTC also says the defendants violated the FTC Act in two ways. First, by misrepresenting how long it would take potential franchisees to open their coffee stores. And second, by withholding key information about the business history and experience of the officers.
To resolve the case, the defendants have agreed to tell the truth to future franchisees, comply with the Franchise Rule, and give existing franchisees an opportunity to cancel their contracts without penalty. And, if people choose to cancel, the order prohibits the defendants from enforcing or threatening to enforce any noncompete provisions against them. There’s also a monetary judgment – $1,258,575 – which was suspended based on inability to pay, but which the defendants will have to pay immediately if it turns out they lied on sworn financial statements supplied to the FTC during settlement talks.
Are you a franchisor? Today’s the day to do a compliance check. Don’t find yourself in Qargo’s situation. Understand the requirements of the Rule, and make sure you’re following them. Because, as Mr. Franklin might remind us, “An investment in knowledge always pays the best interest.”
Are you a potential franchisee? Check out our Franchise Fundamentals series: