FTC issues policy statement on franchisor’s use of contract provisions to suppress a franchisee’s allegations of violations of law
On July 12, 2024, the Federal Trade Commission (FTC) issued a policy statement to make clear its view that provisions included in franchise agreements, or other contractual documents between franchisors and franchisees, may not restrict franchisees’ communications with the FTC or any other state or federal law enforcer or regulator about potential law violations. The FTC is concerned that franchisees are reluctant or unwilling to voluntarily discuss or file reports about their experiences with franchisors, even if the franchisees believe a violation of law has occurred. Franchisee advocates have stated that franchisees fear retribution for speaking out against the franchisor.
Typically, a written contractual agreement – often called a “Franchise Agreement” – is entered into between a franchisee and franchisor. The Franchise Agreement also typically references, incorporates, or attaches the franchisor’s Operating Manual. Once signed, the Franchise Agreement remains in effect for a specified period of time stated in the agreement. As part of the Franchise Disclosure Document required by the FTC’s Franchise Rule, franchisors must provide prospective franchisees with copies of all contracts, including the Franchise Agreement, at least fourteen (14) days before the prospective franchisee signs any contract or makes any payment to the franchisor or an affiliate of the franchisor.
The FTC stated in its policy statement that it has seen contract provisions that may restrict current and former franchisees from speaking about potential law violations. These provisions may take the form of non-disparagement clauses “franchisee shall not disparage the brand in any way," confidentiality or non-disclosure clauses “franchisee is prohibited from sharing any information about the franchise or their experience," goodwill clauses “franchisee shall not engage in any conduct that may tarnish the goodwill of the brand," and other similar clauses. These clauses are sometimes included in the Franchise Agreement or may be entered into post-sale, including at termination of the franchise relationship.
To the extent, such clauses, as drafted, impair or prohibit the free communication about potential law violations with a government agency acting within its statutory mandate, the FTC views such clauses as void and unenforceable and in violation of Section 5 of the FTC Act. These limitations undermine the government’s ability to police the marketplace and the ability of prospective and existing franchisees to protect themselves, and are thus likely to cause substantial harm. Further, the use of implicit or explicit threats to sue or otherwise retaliate against a franchisee who reports potential law violations to the government is also an unfair practice.
