Franchise sellers are fond of telling franchise buyers that they can feel safe buying a franchise because franchising is a “highly regulated” industry.
For decades, franchise sales videos have touted the protection afforded to franchisees because “franchising is a highly regulated industry, with severe penalties for non-compliance.”
Top franchisee attorneys are debunking this myth in a forum hosted on UnhappyFranchisee.Com (IS FRANCHISING HIGHLY REGULATED? Top Franchisee Attorneys Weigh In).
Attorney Cary Ichter, a partner in the commercial litigation practice with Ichter Thomas, LLC, contends that “There is, for all practical purposes, no franchise regulation on the Federal level because the FTC has nullified its own regulations through its lack of enforcement and by not allowing for a private right of action…”
In other words, while the FTC has established franchise regulations regarding the sale of franchises, it neither enforces them nor allows others to enforce them by using violations in civil lawsuits.
In some cases, the FTC Franchise Rule can be used to perpetuate the illusion that the government is actively monitoring and “regulating” the behavior of franchisors, misleading franchise buyers into thinking there is a degree of protection and oversight that doesn’t exist.
There is, for all practical purposes, no franchise regulation on the Federal level
by Cary Ichter
There is, for all practical purposes, no franchise regulation on the Federal level because the FTC has nullified its own regulations through its lack of enforcement and by not allowing for a private right of action… even when its regulations have been clearly violated.
Regulations having to do with selling franchises typically come from the FTC Franchise Rule and the FTC apparently doesn’t have the resources to enforce that rule, or even go after franchises that are out there pulling some sort of scam. The FTC, as far as I can tell, doesn’t do much of anything to enforce franchising regulations.
I pursued the FTC for years to take action against a franchisor who had clearly violated the FTC Franchise Rule on a number of occasions and continued to do so. After I won the first arbitration award against this irreputable franchisor, I went to the FTC and said “We won this already, and we have a prepackaged case for you.” We still couldn’t get them to take a look at it.
“I provided the judgment against the franchisor, as well as verified, documented complaints made by a number of franchisees. The only response I could get from the FTC was one guy on the phone who said “Yeah, I’m interested in that.” I sent him all the information and for months and months and months the only thing I could get out of him was “It’s sitting on my boss’s desk.”
“So, the government doesn’t have the resources to go after franchisors (even when the evidence is presented to them) who violate The Franchise Rule, but they don’t allow others to sue on the basis of those violations. The FTC Rule doesn’t allow for what’s known as a “private cause of action.”
If you violate the FTC rule generally people think that means they can sue the franchisor because the franchisor has, for example, made an earnings claim that is completely unreasonable and has no basis in fact. The franchisee relied on that claim in making the determination to buy the franchise. Since that franchisor violated the law, the franchisee thinks that means they can sue the franchisor for that violation. It caused them harm. They’ve been damaged. They should be able to have the law enforced. Well, the FTC rule says that there is no “private cause of action” ie the franchisee cannot sue the franchisor for those kind of violations. If Franchise Rule violations have been made, the franchisee is directed to file a complaint the FTC but, in our experience, the FTC will do nothing.
“Effectively, they have nullified the law. If an agency of the government has been charged with enforcement and it’s neither capable of enforcing the law nor willing to provide a private right of action, it is effectively nullifying the law.
“And that’s the situation we’re operating within.”
Cary Ichter is a Partner in the Commercial Litigation practice with Ichter Thomas, LLC. A trial lawyer who primarily handles commercial disputes, Cary has more than 20 years litigating franchise disputes involving some of the nation’s largest franchise brands. Cary’s recent wins include judgements totaling several million dollars on behalf of former Legacy Academy franchise owners. See more about Cary Ichter in our Franchise Attorney Directory.
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