SEIU Petitions Federal Watchdog to Launch Investigation into Franchise Industry

Citing evidence of a dramatic power imbalance between the nation's top franchisors and their franchise operators, the Service Employees International Union petitioned the Federal Trade Commission Monday to launch an investigation into the franchise sector and issue recommendations for curbing "abusive and predatory" practices by franchisors in the $800 billion industry.

"Franchised businesses represent a large and growing segment of the nation's businesses," the petition reads. "Yet, unlike traditional small businesses, most franchises reflect a profound imbalance of contractual power that favors the franchisor and places franchisees in a financially precarious situation."

The 32-page petition calls on the FTC to invoke its authority to issue civil investigative demands that would compel top franchise companies to turn over information about their relationships with franchisees.

The request for investigation contains evidence from an extensive review of franchise agreements at 14 of the largest franchise systems in the country finding that franchise agreements are consistently one-sided, often allowing franchisors to terminate franchisees for minor violations of one of thousands of pages of ever-changing rules.

The petition details five franchisor practices that are particularly harmful and appear endemic to the sector:

1. Incomplete or misleading financial performance representations made to prospective franchisees;
2. Unreasonable capital expenditure demands tied to renewal of franchise agreements;
3. Retaliation against operators who join franchisee associations;
4. Unfair termination or nonrenewal of franchise agreements;
5. Arbitrary denial of franchisees' requests to sell or transfer their business

Franchise operators from major chains including McDonald's and 7-Eleven voiced their support for a federal investigation Monday, describing how their experiences in the franchise sector underscore the urgent need for balance and fairness in the industry.

Jose 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 about 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 franchisor, empowered to make its own rules in place of McDonald's while also actively competing as a franchise operator itself by adding new stores in the market.

"We enjoyed a good relationship with McDonald's until we developed the Puerto Rican market and it became very profitable," said Luis Moyett , a McDonald's franchisee who opened his first store in Puerto Rico in 1981. "McDonald's then broke off its contact with us, and inserted a foreign sub-franchisor that makes its own rules. That company degraded services, abandoned the advertising cooperative, stopped paying to the joint advertising fund, opened its own restaurants close to ours and took our customers away."

Moyett added, "McDonald's decided to make a financial experiment in Puerto Rico at our expense. We don't know whether we are a pilot plan for things to come in the U.S. mainland, but this experiment is destroying our livelihoods."

Jas Dhillon, a 7-Eleven franchisee from Los Angeles, 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," said Dhillon. "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."

And Kathryn-Slater Carter, a former McDonald's operator from California, described losing her business last year after she spoke out about the need to reform the franchise industry.

"Just like that, McDonald's took away a business that my husband and I had spent our lives building together," said Slater-Carter. "We had nowhere to turn - we were voiceless. Companies like McDonald's have left franchisees no choice but to stand together and demand change and that's why I am supporting the call for an FTC investigation. The industry needs reform now."

The call for change comes as the franchise industry grows. Franchised businesses represent a large and expanding segment of the nation's economy, making up almost 11 percent of businesses with employees, employing an estimated 9.1 million people, and consistently adding jobs faster than non-franchised businesses in recent years.

"The substantial evidence of pervasive franchisor abuses presented in the petition demonstrates an urgent need to reform the growing franchise sector--for the benefit of workers and franchisees alike," said Scott Courtney, assistant to the president of SEIU. "An FTC investigation could help curb harmful and predatory franchisor practices, giving franchisees space to create good jobs and grow the economy."

In addition to filing the petition, SEIU is supporting efforts by franchisees in California to pass the Small Business Investment Protection Act, a bill that protects franchisees against unfair terminations, allows franchisees to monetize their equity when franchisors refuse to renew franchise agreements, and protects franchisees' ability to sell or transfer their units. The State Assembly passed the bill with overwhelming support last week.

In California and beyond, the franchise sector faces heightened scrutiny. More than one in six franchise loans made over a 20-year period has ended in failure, according to a recent analysis of data from the U.S. Small Business Administration. A recent poll by FranchiseGrade.com revealed more than half of franchisees say they can't earn a living from their businesses. And a recent survey of McDonald's franchisees by Janney Capital Markets found record-low confidence among franchisees in the company's 6-month business outlook.