Letter to FTC Calls Out 'Coercive Practices' in COVID-19 Relief
U.S. Senator Catherine Cortez Masto is urging the Federal Trade Commission to modify its Item 19 franchise disclosure rule in light of COVID-19.
A letter to the Federal Trade Commission urges changes to the Franchise Rule in response to the COVID-19 pandemic, in part to stop "coercive practices" by franchisors as they offer financial relief to franchisees.
From U.S. Senator Catherine Cortez Masto (D-Nev.), the April 30 letter seeks to "protect prospective franchisees from inaccurate and outdated performance data, and to protect current franchisees from coercive practices that condition financial relief on disadvantageous changes in their franchise agreements."
She did not specify any franchisors that were imposing such conditions.
Keith Miller, a long-time advocate for franchisee rights and an operator of three Subway shops in California, said he advised the senator on the letter. "When this whole pandemic started, I started thinking, wait a minute. How are these disclosures valid right now? And I'm not saying people are trying to lie or whatever," he said.
"What's an average unit volume right now in a chain? We don't know where it is now much less where it will be," he said. "So, from an Item 19 disclosure, don't you at least have to note something that these numbers are pre-pandemic crisis?"
He said he's seen three systems so far that have predicated their financial relief to franchisees on accepting what he called overly broad and harmful contract changes.
"These franchisees have their backs against the walls in some cases, and they literally can't pay," he said. And in exchange for relief, "What are you going to do? You're going to sign the agreement because you don't have any choice. I'm not sure if a ton of it is going on, but a bunch of it is going on."
The past chair of the Coalition of Franchisee Associations, Miller's firm is called Franchisee Advocacy Consulting.
He noted the Franchise Rule is currently under review, along with other FTC regulations. "I'd like it to be adopted, obviously," he said about the proposed changes, noting, however, that President Trump's administration is working to reduce regulations, not increase them.
"I don't know we'll be able to change it with this administration, but it's part of that education. All is not perfect in this industry."
David Kaufmann, attorney with Kaufmann Gildin & Robbins and an expert on franchise law who wrote New York's franchise statute, called the letter "a political stunt. There are too many people in politics these days who are following the adage, never let a good crisis go to waste. And so they're trying to get things now under the guise of COVID-19, that they haven't gotten because it doesn't make sense," he said. "Item 19 is strictly historical."
He also refuted the letter's claim over franchisee coercion. "I'm always amused when franchisors offer to do something for franchisees that franchisees don't have to accept, and later that franchisor offer of assistance is deemed to be coercion.
"Don't make franchisors out to be wicked and evil, because they're giving so much at great expense and asking only for a release in return," he said. "COVID-19 has not changed the business landscape into a charity."
In the letter, addressed to FTC Chairman Joseph Simons, Cortez Masto wrote financial performance representations are "already known to be unreliable and misleading," and the uncertainties around COVID-19 call for quarterly updates.
"The franchisor must specifically state, in a new stand-along second paragraph of Item 19," that it has considered "the effects of both the COVID-19 pandemic and the global economic conditions and that it assumes the burden of proving that the representations have a reasonable basis under the circumstances," the letter says.
In a May 4 webinar, unrelated to the letter itself but on the topic of disclosure, DLA Piper attorney Sandy Wall said under the current Franchise Rule a franchisor must update its franchise disclosure document "when there is a material change" and do so in a "reasonable time" at the end of each fiscal quarter, but defines neither 'material' nor 'reasonable.'
Meanwhile, the franchise registration states that address this issue require updates "promptly" to "30 days after the material change" to "30 days after the fiscal quarter in which the change occurred," she said. "So, unfortunately there is no definitive answer as to when the FDD must be updated to disclose a material change."