Since the coronavirus pandemic was first declared an emergency here in the United States, we’ve been making slow, but steady progress and we’re now starting to see the fruits of those efforts. Oh, not with regard to COVID. I’m talking about the FTC Franchise Rule and government efforts to clamp down on abusive franchisors, and eliminate some of the bad apples within franchising.
Last month, the Federal Trade Commission referred a complaint against Burgerim to the U.S. Department of Justice, which promptly filed suit against the wayward franchisor in a four-count indictment. DOJ alleged false and misleading representations to potential franchisees; non-disclosure of required information in the FDD; inaccurate or non-disclosure of required Financial Performance Representations; and claims and representations contradicting required disclosures, each of which stands in direct violation of the FTC Franchise Rule.
Less than a week later, Joseph Smith, the CEO of New York Bagel, pleaded guilty in federal court to wire fraud and conspiracy with regard to the sale of franchises to operate New York Bagel stores. He and a co-conspirator, who previously pleaded guilty, swindled potential franchisees of investments ranging from $7,500 to over $44,000 by understating startup costs, overstating the number of franchises operating and exaggerating the financial success of existing franchises—standard fare for unscrupulous franchise systems.
Interestingly, these federal actions came a few months after a critical report by U.S. Sen. Catherine Cortez-Masto (D-Nev.) on the abuses a number of brands were perpetrating against potential and existing franchisees. Her report called for significant reforms to the franchising industry and enhanced enforcement of the FTC Franchise Rule, especially as relates false information, a lack of FDD transparency, and unfair and deceptive contracts.
Thirdly, a civil lawsuit for $900 million was filed against McDonald’s earlier this month by a third-party company that developed a fix for the ongoing problems with the company’s oft-broken ice cream machines. In the suit, Kytch Inc. alleged the Golden Arches prohibited franchisees from using their one-time fix in order to keep the repair revenue flowing through the machine manufacturer and into corporate pockets. Whether that’s the reality or just an allegation remains to be seen, but the suit is moving forward.
And, in the aggregate, this kind of news sets an important – and informative – backdrop for elected officials and franchisees to acknowledge. The vast majority of franchisors are smart, honest and successful businesses that deal fairly and openly with their franchisees. But laws aren’t written for the law-abiding. They are written for those who do harm, who game the system, and who abuse their position of power at the expense of others.
For the better part of the past decade, Dunkin’ franchisees have enjoyed a strong, collaborative relationship, and we hope it continues on that trajectory for years to come. But, relationships can change over time, and changes are sometimes beneficial to some, while detrimental to others.
Dunkin’, which over a year ago was sold to Inspire Brands – backed by the private equity firm Roark Capital Group – recently acquired 31 stores in the Ohio market. It marks the first time since 2016, Dunkin’ has owned any of its units. As a unit owner, Dunkin’ – and Inspire – may develop a different view of the business, which may impact the relationship it has with other owners,
Franchisees should wonder if that transaction is beneficial to them, or if Dunkin’s move to exercise their right of first refusal in Ohio raises caution signs. Only time will tell which will prevail, but the ever-changing role between corporate and franchisees underscores the old adage that “an ounce of prevention is worth a pound of cure.”
Toward that end, the effort by the FTC to get a stronger handle on franchising and prevent abusive behavior by franchisors is more important than ever. The FTC’s recent launch of a website where franchisees can directly report fraud is a critical first step, but many more steps are needed to level that playing field. Sen. Cortez-Masto continues her work to protect the franchise-owner community from corporate predators and we owe it to her, and our franchise industry, to do all we can to help.
One way is for franchisees to join their colleagues at the CFA Lobby Day Forum in Washington, D.C. on June 22 to speak with members of Congress and tell their story. A franchisee invests significant resources – often a life savings – to build a business with the hope of success. Congress needs to ensure that laws are in place to protect franchisees from the unscrupulous. Together, we can make that happen.
Perhaps Henry Ford said it best, “If everyone is moving forward together then success takes care of itself.”