Who's Side Is The FTC On?

As reported by columnist Janet Sparks in Franchise Times, October 2009, “The Federal Trade Commission’s 2009 annual report clearly states, 'combating fraud, deception and unfair practices in the marketplace is one of the FTC’s highest priorities’….But in the FTC 2009 report, there is no mention of 'franchising' under its consumer protection section although it lists numerous other categories: identity theft, shop-at-home and catalog sales, Internet services, banks and lenders, prizes and sweepstakes, work-at-home plans and business opportunities.”  After failing in her attempts to contact FTC franchise program director Craig Tregillus, Ms. Sparks utilized the Freedom of Information Act (FOIA) to learn the status of three complaints filed against franchisors:

  • The Coffee Beanery which has been deeply engaged in legal action with two of its franchisees for the past five years.

    Results: No complaints filed and no actions or investigations from the FTC for the past four years.

  • The UPS Store under franchisor Mail Boxes, Etc. which has been engaged in numerous franchisee lawsuits for more than five years, but on a much larger scale involving hundreds of franchisees.

    Results: One complaint brought by a franchisee alleging that MBE will not adhere to the franchise agreement nor participate in arbitration.  He also claims that MBE audited him without using generally accepted accounting principles and then charged him an additional $3000.  The franchisee cites breach of contract as the law violation.  The FTC showed no investigation or enforcement action as a result of the complaint.

  • Cold Stone Creamery, now under Kahala Corp. which is not only involved in litigation with its franchisees but also with the Internal Revenue Service in Arizona, Texas and New Mexico seeking a judicial decision on whether the franchisor or the IRS had the right to the property and equipment of a terminated franchisee.

    Results: This request showed four complaints brought against the franchisor, none resulting in an investigation or enforcement action from the FTC.

Columnist Janet Sparks questions whether:

  1. The FTC is even interested in receiving complaints from owners who claim they are being victimized fraudulent schemes.
  2. The FTC is sending a strong message to franchisors that they have nothing to fear regarding FTC enforcement.

  3. The FTC thinks that the International Franchise Association (IFA) is a self-regulatory body and doesn’t need help from the federal government.

Any objective observer recognizes that the IFA is heavily skewed in favor of franchisors.  It rarely supports any of the critical issues of importance to franchisees:

  • Areas of territorial protection
  • Choice of venue
  • Fair termination provisions
  • Appropriate liquidated damages
  • Independent franchise owners councils

About the author: Stanley Turkel, MHS, ISHC operates his hotel consulting office as a sole practitioner specializing in franchising issues, asset management and litigation support services.  Turkel’s clients are hotel owners and franchisees, investors and lending institutions.  Turkel serves on the Board of Advisors and lectures at the NYU Tisch Center for Hospitality, Tourism and Sports Management.  He is a member of the prestigious International Society of Hospitality Consultants.  His provocative articles on various hotels subjects have been published in the Cornell Quarterly, Lodging Hospitality, Hotel Interactive, Hotel-Online, Blue MauMau, Hotel Resource News, etc.  Don’t hesitate to call 917-628-8549 or email stanturkel@aol.com.

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Comments

Déjà vu the ACCC

Australian franchisees will be most interested in this article about the US regulator.  Janet Sparks’ questions are relevant here;

  1. Is the regulator even interested in receiving complaints
    from owners who claim they are being victimized in fraudulent schemes?
  2. Is the regulator sending a strong message to franchisors that they have nothing to fear regarding regulator enforcement?
  3. Does the regulator think the peak representative body for franchisors is a self-regulatory body and doesn’t need help from the federal government?

I know Franchise Council of Australia often follow IFA.  I now wonder if in this parallel world the Australian Competition and Consumer Commission follow the lead of the FTC?

Media coverage and submissions to all of the Inquires have asked these and more questions regarding the motivation of the regulator.  Even the Federal Committee of Inquiry virtually asked what the hell the regulator had been doing.

Is the US experience that the ‘official‘ numbers of formal complaints are, not surprisingly, very low when faith in the regulator evaporates as its reputation as a lousy disappointment becomes more widespread.  Is the existence of a low complaint count promoted by the IFA and the FTC as suggesting franchising abuse is virtually fiction? I have to wonder whether franchisees in the States are long past Australian franchisees who are found to rarely bother with the regulator?

Thank you Stan; this is important information for those new to the regulator run around.

in my experience and opinion.

  • Is the regulator even interested in receiving complaints from owners who claim they are being victimized in fraudulent schemes?
  • NO. they are not, there have been plenty of complaints to the ACCC about my ex zor, only a couple have been taken on and used in evidience against him, the rest have been told that the ACCC will not do anything about the blatants breaches as they have to choose the strongest case.  for those few that go through to the investigation process the regulator does admit that it looks like they have civil action and to take it on themselves. even though document provided show that the zor has purposely misled the zees before entering the agreement

  • Is the regulator sending a strong message to franchisors that they have nothing to fear regarding regulator enforcement?
  • ABSOLUTELY. By ignoring those people who have complained with evidence of breaches and not even taking it to investigation level, what else could they possibly be saying. On one hand they say they can not and will not give any legal advice regarding the code, on the other hand they choose not to take it to the level in the ACCC where the decision can be made to enforce the flimsy laws set in place that they are supposed to be regulating.

    If any regulator took a real stand to uphold the laws set in place, that they are supposed to be regulating then rogue zors would be concerned. But  here they know that the ACCC will stand back and let the finacially drained zee attempt to uphold the law....  unfortunately with the propagand from both the regulator and the zor about the regulators role, prospective zees feel safer. I hope that prospects find these pages and blogs so that they realize they are NOT safe and that if like me they belived the zor when they said they would be shooting themselves in the foot if they breached the code becasue the regulator will take action. That zee will know that it is a lie and to be far more cautious.

    If you are new to buying a franchise please take note: the regulators do not take action even for the blatantly obvious, you are alone.

    in my experience and opinion.

  • Is the regulator even interested in receiving complaints from owners who claim they are being victimized in fraudulent schemes?
  • NO. they are not, there have been plenty of complaints to the ACCC about my ex zor, only a couple have been taken on and used in evidience against him, the rest have been told that the ACCC will not do anything about the blatants breaches as they have to choose the strongest case.  for those few that go through to the investigation process the regulator does admit that it looks like they have civil action and to take it on themselves. even though document provided show that the zor has purposely misled the zees before entering the agreement

  • Is the regulator sending a strong message to franchisors that they have nothing to fear regarding regulator enforcement?
  • ABSOLUTELY. By ignoring those people who have complained with evidence of breaches and not even taking it to investigation level, what else could they possibly be saying. On one hand they say they can not and will not give any legal advice regarding the code, on the other hand they choose not to take it to the level in the ACCC where the decision can be made to enforce the flimsy laws set in place that they are supposed to be regulating.

    If any regulator took a real stand to uphold the laws set in place, that they are supposed to be regulating then rogue zors would be concerned. But  here they know that the ACCC will stand back and let the finacially drained zee attempt to uphold the law....  unfortunately with the propagand from both the regulator and the zor about the regulators role, prospective zees feel safer. I hope that prospects find these pages and blogs so that they realize they are NOT safe and that if like me they belived the zor when they said they would be shooting themselves in the foot if they breached the code becasue the regulator will take action. That zee will know that it is a lie and to be far more cautious.

    If you are new to buying a franchise please take note: the regulators do not take action even for the blatantly obvious, you are alone.

    When will you people get it?

    There is no regulator.

    You swallow whole the job description of an "agency" that does nothing and then you wonder why nothing happens - and you call that a regulator?

    Gimme a break! No wonder it is so bloody easy to take your money and provide nothing in return.

    Of course there isn’t, he’s in China

    I'm glad we cleared that up. 

    I enjoyed this little document from China. New Franchise Regulations in China

    I am sure that the introduction of anything like this would be very well received everywhere.

    well well my ex

    would not have even got the franchise approved under those regulations, and if by any remote chance they did they  would be compensateing a very high proportion of the zee's.  It would be well recieved across the board except for rogues and the fca :)

    well well my ex

    would not have even got the franchise approved under those regulations, and if by any remote chance they did they  would be compensateing a very high proportion of the zee's.  It would be well recieved across the board except for rogues and the fca :)

    Richard has been right all along

    the FTC directive is to simply publish a format for an FDD, not to police it.

    Regulator directives

    That regulators do not police anything much is probably not the real problem. That people are either deliberately led to believe, or naively believe that regulators actively police breaches of law probably contribute enormously to the chaos.  Governments don't like to confuse the little folk with technical reasoning so they confuse 'em with silence.

    Anyone want to clarify anything at Wiki on regulators?

    FTC Actions

    The FTC's legal actions are largely directed against business opportunity frauds - it is an easy lawsuit.  The biz op scammers fail to have a disclosure document and after a couple of years there is enough complaints about them that the FTC shuts the barn door after the horses have left.

    What do you expect for free?

    Expectations

    It is the same here; soft targets.  I just didn't think it was free.  I though people paid taxes for these agencies to go after soft targets.

    FTC - Z'or to Z'ee Transition Scenario

    The What If Scenario:

    A Franchisor strips away all of its
    assets and becomes a pure play “franchisee” owned system.  The trademark itself, as an intangible asset, is in essence the “Franchisor”. 
    After restructuring its organizational structure, as a "Franchisee" owned system, the Trademark is sold off to the highest bidder.  Obviously, "Franchisor" consent is not required here.  The investor is only concerned with the cash flows of the system and is not interested in managing/servicing the system as Franchisor.  To remedy the investor's management concerns, a non-exclusive global license agreement is signed with the “predecessor”
    Franchisor to “service” the system, globally, as a Master Franchisee/Licensee/Servicer.  This separation in ownership would allow the
    “predecessor” Franchisor to maintain its business as usual candor in its new role as the
    largest/master Franchisee within the “system”. 
    The transaction would be similar to a sale-leaseback structure in the context of real estate ownership.  The Franchisor maintains its "Wholly Franchisee Owned" status.  In the following year, the FDD is filed/registered by the successor Franchisor entity but it is still drafted by the current Master Franchisee, on behalf of the successor Franchisor. 

    The What If Question(s):

    Would this type of licensing effect (sale-leaseback) by-pass the FTC regulatory environment as a
    Franchisee controlling the system?  Does it become business as usual without the same regulatory concerns as a "Franchisor"?  Would this allow anti-trust concerns to be overlooked since a "franchisee" is considered to be an independent contractor that is allowed to own other brands and businesses?  Is it possible for the FDD to create reverse confusion in identifying the true Franchisor since the people selling the "franchises" are same as the ones employed by the predecessor Franchisor?  Would full disclosure apply to the Master Franchisee drafting the FDD on behalf of the single member Franchisor?

    But for........

    I like the But For Method:

    But for my franchisor I would be making money.
    .

    Re: But for...

    I like the But For Method too...

    But for my franchisees being so poor, this franchising business would be smooth and the future blue sky.

    As a business model do you

    think that model would excite investors to confidence?

    need to put them back in their place

    But the governments are getting too many kickbacks to consider this.