United States:
The FTC Initiates Rare Enforcement Action In Case Against Franchisor Burgerim
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The FTC filed suit against California fast food franchisor
Burgerim in early February. The case is the FTC’s first major
enforcement action against a franchisor in about a decade.
The Federal Trade Commission (FTC) took the unusual step of
filing a civil action against a franchisor earlier this month.
The complaint was filed in a federal court in
Los Angeles against California-based fast food concept Burgerim.
The complaint alleges that Burgerim sold franchises to more than
1,500 purchasers using false promises in violation of the Federal
Trade Commission Act (FTC Act) and the Franchise Rule.
The FTC has not taken major action against a franchisor since
2013. According to the complaint, Burgerim targeted purchasers with
limited franchise experience. Burgerim also allegedly offered
discounts to buyers of multiple franchises and promised refunds if
purchasers could not secure financing. However, Burgerim downplayed
the financial risks and complexity involved with purchasing
franchises and touted the investment opportunity as a
“business in a box.” Despite these assurances, most
buyers were never able to open Burgerim restaurants even after
paying up to $70,000 in franchise fees. Burgerim founder and CEO
Oren Loni then reportedly fled the country in 2019. The FTC now
seeks an injunction, monetary damages, and penalties of up to
$46,517 for each violation of the Franchise Rule.
Although the facts and circumstances of this case were
especially egregious, the FTC has signaled a more aggressive
approach towards heightened federal regulation against franchisors
more broadly. The Biden administration has appointed several new
FTC officials, and United States Senator Catherine Cortez Masto
(D-Nevada) recently proposed legislation in 2021 requiring
additional financial disclosures for franchisors who qualify for
Small Business Administration loans.
The FTC’s Allegations Against Burgerim
The FTC alleges Burgerim violated two key federal franchise
laws—Section 5(a) of the FTC Act (15 U.S.C. § 45(a)) and
the Franchise Rule (i.e., FTC Trade Regulation Rule,
“Disclosure Requirements and Prohibitions Concerning
Franchising” codified at 16 C.F.R. Part 436).
Section 5(a) of the FTC Act prohibits business practices in or
affecting commerce that are unfair or deceptive to consumers.
Deceptive practices under Section 5(a) include misrepresentations
and other conduct likely to mislead potential franchisees. In its
complaint, the FTC alleges Burgerim violated Section 5(a) by
reneging on its promise to provide franchise fee refunds. Burgerim
allegedly promised buyers a refund on franchise fees where a
franchisee could not secure a restaurant location or financing.
According to the complaint, qualifying franchisees could not obtain
refunds from Burgerim despite franchisees making repeated requests
over many months.
The Franchise Rule requires franchisors to provide consumers
with material information in order to weigh the risks and benefits
of purchasing a franchise. Under the Franchise Rule, franchisors
must disclose required information in a Franchise Disclosure
Document or “FDD.” An FDD must include information about
the franchisor, the franchised business, and the franchise
agreement. The FTC alleges Burgerim failed to disclose required
information in its FDD, such as: (i) the identities of Burgerim
management personnel; (ii) the contact information of all former
Burgerim franchisees that ceased operations during the previous
fiscal year; and (iii) the revenue Burgerim received from
franchisees. The FTC also alleges that Burgerim misrepresented the
financial performance expectations of existing Burgerim
franchises.
The Burgerim Case Signals a Shift in Franchisor Regulation
The FTC’s suit against Burgerim comes after extensive
state-level actions against the company. In 2020, the company was
barred from selling franchises in Indiana, Washington, and Maryland
based on violations of local franchise laws. In 2021, the
California Financial Protection and Innovation Commissioner also
issued a cease and desist order against Burgerim.
The FTC’s case also signals a more deliberate approach by
federal officials to regulate franchisors. The Burgerim complaint
is the first major action against a franchisor in years, following
several new appointments to the FTC in 2021. These appointments
include Lisa Khan as FTC Chair. The FTC also recently introduced a
new franchise-specific whistleblower option for consumers to report
deceptive business practices.
The Bottom Line
The FTC’s civil action against Burgerim shows federal
officials are more focused on stringently regulating the franchise
industry in general. This shift is clear in light of the FTC’s
new appointments, and the introduction of new proposed franchise
legislation in Congress.
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guide to the subject matter. Specialist advice should be sought
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