April 30, 2020

Cortez Masto Urges FTC to Protect Franchisees During COVID-19 Pandemic

Las Vegas, Nev. – As many small business franchise owners struggle to survive, U.S. Senator Catherine Cortez Masto (D-Nev.) urged the Federal Trade Commission (FTC) to make changes to the Franchise Rule in response to the COVID-19 pandemic. The senator’s recommendations seek to protect prospective franchisees from inaccurate and outdated performance data, and to protect current franchisees from coercive practices that condition financial relief on disadvantageous changes in their franchise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. 

“I write to urge the Federal Trade Commission (FTC) to provide guidance to franchisors in response to the unpredictable trajectory, scope, and duration of the COVID-19 pandemic and the global economic events taking place. I recommend the FTC makes changes to the Franchise Rule, specifically Financial Performance Representations; Updating Requirements; and Conditions on Pandemic Relief,” the senator wrote in a letter to FTC Chairman Joseph Simons.

Senator Cortez Masto urges Simons to ensure financial performance data is timely and accurately reflects the impact of COVID-19, and to require quarterly reporting so prospective franchisees can make informed decisions before investing in a franchise business. The senator also calls on the FTC to include a provision prohibiting franchisors from conditioning any relief related to COVID-19 on changes to the franchise agreement, operating contract, or on a release of claims.

After hearing accounts of franchisees being pressured into signing new contracts in order to receive financial relief, Senator Cortez Masto held a teleconference to ensure Nevada franchisees were aware of the resources available to help them weather the COVID-19 pandemic and its economic fallout.

Full text of the letter is available here and below:

Dear Chairman Simons,

I write to urge the Federal Trade Commission (FTC) to provide guidance to franchisors in response to the unpredictable trajectory, scope, and duration of the COVID-19 pandemic and the global economic events taking place. I recommend the FTC makes changes to the Franchise Rule, specifically Financial Performance Representations; Updating Requirements; and Conditions on Pandemic Relief.

Financial Performance Representations Must be Timely.

Because of the uncertainty caused by the pandemic, it is not possible to have a reasonable basis for a Financial Performance Representation as currently required by the Rule. Historically based Financial Performance Representations are already known to be unreliable and misleading and I believe that any Financial Performance Representation will be outdated and thus, inaccurate. I recommend that a franchisor that elects to provide a Financial Performance Representation in its Franchise Disclosure Document (FDD) must expressly assume the burden of proving that it has a reasonable basis founded on historic performance. The franchisor must specifically state, in a new stand-alone second paragraph of Item 19, that, in arriving at the representations contained in Item 19, 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. No part of the FDD and any documents required to be signed by the prospective franchisee, shall contain any limitation of the franchisee’s right to rely on said Financial Performance Representation(s).

Require Quarterly Updating Requirement.

Franchisors should be reminded of the obligation to update the FDD quarterly as to any material changes and to notify the prospective franchisee at the time of delivering the FDD of any material change in any Financial Performance Information contained in the FDD. Of course, the Rule’s updating requirements apply to the entire FDD, specifically including Item 21 (financial condition of the franchisor), although Item 21 updates need not be audited. Franchisors should also remember that many state franchise statutes have more strict updating requirements than the FTC does; however other states offer little protection for franchise owners.

Conditions on Pandemic Relief

I recommend that the FTC include a provision finding that it would be an unfair act or practice and thus a violation of Section 5 of the FTC Act (15 U.S.C. §45) for any franchisor to condition any form of relief (including, but not limited to, fee reduction, fee deferrals, or deferrals for required store upgrades) granted to a franchisee on account of the COVID-19 pandemic or the related economic downturn on the franchisee agreeing to material changes in the franchise agreement, operating contract, or on a general release of claims.

Thank you for considering my request for the FTC to proactively protect current and future franchise owners from inaccurate and outdated information as well as coerced acceptance of contract changes.