The American fast food industry has been jolted by several recent strikes, protests, and lawsuits. Now, the industry may need to brace itself for the enhanced scrutiny of the FTC. The Service Employees International Union (“SEIU”) has petitioned the FTC to launch an investigation into what the SEIU terms the “abusive and predatory” practice of franchisers toward franchisees.
In its petition, SEIU outlined six U.S. franchisor practices it said appeared endemic and “particularly harmful. The franchisors targeted by the petition include: 7-Eleven; Ameriprise Financial Services; Applebee’s; Burger King; Comfort Inn, Dunkin’ Donuts; Great Clips; Holiday Inn; Jackson Hewitt Tax Service; Jazzercise; McDonald’s; Pizza Hut; Subway; and Taco Bell. SEIU states that the 14 chains comprise a total of over 94,000 franchised units, representing nearly 14 percent of the franchised units in the country. In its research, SEIU examined termination provisions in all 14-franchise agreements, determining overall franchisors are allowed to terminate franchisees virtually at will. The petition accuses franchisers of misleading prospective franchisees about the financial performance of other franchisees, tying contract renewals to unreasonable capital-spending demands, retaliating against store owners who join franchise associations, unjustly terminating agreements and denying franchisees’ requests to sell off or transfer their businesses.
However, not everyone agrees with SEIU’s views regarding franchisers. The International Franchise Association (“IFA”), the top lobby for franchisers, has said the petition calls for the “FTC to develop a solution for a problem that doesn’t exist.” According to Steve Caldeira, CEO and president of IFA, “Once again, the Service Employees International Union is manufacturing a crisis as part of its increasingly expensive public relations campaign, now estimated to be more than $33 million, to destroy the time-tested franchise model in order to fill in its own depleted membership.” Caldeira was also quick to point out that America’s 780,000 franchises make significant contributions to the U.S. economy, growing faster than the U.S. economy for five consecutive years and employ nearly 8.9 million workers. He added, “SEIU’s petition amounts to nothing more than asking the FTC to develop a solution for a problem that doesn’t exist.” Mr. Caldeira concluded by saying that for 40 years the FTC’s Franchise Rule has been a strong defense against abuses that may occur in pre-contractual disclosure to prospective franchisees. He stressed that franchisees are highly satisfied and have a high level of trust in their franchisors, knowing they have remedies in place through their “mutually-agreed upon contracts, through the courts and through many state laws if and when issues may arise between the parties.”
Even still, many franchisees have come out in support of the SEIU petition. José Quijano, a former vice president at McDonald’s Corp. and current McDonald’s franchisee from Puerto Rico, spoke on behalf of all Puerto Rican McDonald’s operators. He told how McDonald’s franchisees on the island collectively lost control of their businesses overnight in 2007 after the company unilaterally installed the South American investment firm Arcos Dorados as the region’s new sub-franchisor, empowered to make its own rules in place of McDonald’s while also actively competing as a franchise operator itself by adding its own new stores in the market.
Jas Dhillon, a 7-Eleven franchisee from Los Angeles and member of the Coalition of Franchisee Associations, echoed concerns raised by McDonald’s franchisees regarding the unchecked power of franchisors. Dhillon described how South Asian immigrant franchise operators at 7-Eleven have been targeted for abuse by the company, facing threats and intimidation, with many ultimately losing their business altogether after the company decided to resell their stores in a churning program revealed by a management whistleblower to other higher-paying operators. “The franchise sector bills itself as a path to the American Dream, but the truth is that franchisors like 7-Eleven and others have made this business into a trap,” Dhillon explained to SEIU. “Franchisors hold all the power, and so they can churn through one operator to the next, leaving us with nothing while their profits continue to soar.”
In addition to the supporting franchisees, the Coalition of Franchisee Associations (“CFA”) has said:
The CFA board of directors has received a copy of the petition and is reviewing it. The CFA’s primary focus is franchise relationship legislation that is enacted by elected officials in a public process and open to participation by all of franchising’s stakeholders. Should the Federal Trade Commission decide to take any action regarding the petition, CFA will actively participate in good faith to serve the interests of franchisees and to protect the critically important business model of franchising.
While it remains to be seen whether or not the FTC will investigate the franchisors detailed in the SEIU petition, it appears both sides are prepared to hunker down over the franchisor-franchisee battle.